INOD - NASDAQ

Good day, ladies and gentlemen, and welcome to the Innodata to Report Second Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 31, 2025. I would now like to turn the conference over to Amy Agress. Please go ahead.

Thank you, Sergio. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata; and Mariss Espineli, Interim CFO. Also on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective about the business, and then Mariss will follow with a review of our results for the second quarter. We'll then take questions from analysts. Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations, assumptions and estimates and are subject to risks and uncertainties. Actual results could differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information. In addition, during this call, we may discuss certain non-GAAP financial measures. In our earnings release filed with the SEC today as well as in our other SEC filings, which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. Thank you. I'll now turn the call over to Jack.

Thank you, Amy, and good afternoon, everyone. Thank you for joining us. We're very pleased to report that Q2 2025 was another outstanding quarter for Innodata. We beat analysts' expectations across the board on key metrics; revenue, adjusted EBITDA, net income and fully diluted EPS. Revenue grew 79% year-over-year to $58.4 million and adjusted EBITDA grew 375% to $13.2 million, reflecting the operating leverage that's inherent in our model. We also continue to strengthen our balance sheet. Cash increased from $56.6 million at the end of Q1 to $59.8 million at the end of Q2. And a few days after quarter close, we collected an additional $8 million that typically would have been received by June 30. Our $30 million credit facility remains undrawn, giving us flexibility to support future growth. Our business momentum continues to accelerate. As a result, we are raising our full year 2025 revenue growth guidance to 45% or more organic revenue growth, up from the 40% we communicated last quarter. Our forecast reflects significant new deals that have been finalized since our last call as well as several deals that we believe are highly likely to close in the near term. We have a robust pipeline that includes significant dollar values positioning us for strong second half of the year. Many of these deals are not incorporated in our forecast, leaving room for possible further increases. Demand for our services is strong and accelerating, and we are seeing success across a diversity of existing and new customers. I'll talk about our largest customer first. We recently won several new projects with our largest customer and we have others in pipeline that are not yet included in our forecast, but which we think are reasonably likely. Several of these new projects are under the second SOW we reported signing with this customer last quarter. We believe that the second SOW potentially gives us access to an even larger generative AI revenue pool with this customer. With another big tech customer, we were recently awarded a number of significant engagements, and we have additional significant engagements in late-stage pipeline, enabling us to forecast $10 million of revenue from this customer in the second half of this year. It is worth noting that we did just $200,000 of revenue with this customer over the entire trailing 12-month period. So this is a very significant upswing that we believe will inure to our benefit significantly next year. These are just 2 examples. There are more. The traction we are now seeing is exhilarating. We have built a marquee set of customers whose trust we have worked hard to earn and whose demand for our capabilities is expanding. Our big tech customers are at an all-out race towards super intelligence and autonomy, which we believe will be driven to a large degree by high-quality complex training data. We believe we are ideally situated to supply them with this high-quality complex training data. Moreover, we believe we are ideally situated to help them test models, diagnose performance issues and prescribe data mixes required to improve performance. This is a frontier area. We believe that the future of LLM improvements lies not only in scale data, but in smart data, knowing exactly what kinds of post-training data are required to achieve specific improvements in factuality, safety, coherence and reasoning. At the same time, we are positioning ourselves to help enterprises build and manage AI that can act autonomously, often referred to as Agentic AI. This will require simulation training data to capture how humans process multivariant problems. It will also require sophisticated trust and safety monitoring and management. We believe agent-based AI is going to serve as the cornerstone technology that unlocks the full value of large language models and generative AI for enterprises. Moreover, we believe that progress on Agentic AI is likely to soon result in a ChatGPT moment for robotics. Within the next several years, we believe Agentic AI will be served at the edge in hardware devices with which we will commonly interact in many respects in our lives. We believe the market for simulation data services and evaluation services to drive Agentic AI and robotics is likely to dwarf the market for frontier model post-training data. Our growth opportunities are significant and multidimensional. We intend to invest in ways that we believe will enable us to continue our growth path over the next several years. These include short-cycle high-return growth initiatives like custom annotation pipelines, verticalized agent development and expanded global delivery, strategic platform development, especially for LLM testing, safety and real-world deployment. Also advisory and integration services for enterprises building AI native systems, expansion into new domains such as multi-agent systems and robotics and expansion into new markets. We believe now is the time to lean in investing in capabilities that can compound value over the next decade. This year, we intend to substantially increase investments, most of which will be expensed while at the same time beating 2024 adjusted EBITDA. In the second quarter, we incurred approximately $1.4 million of operating expenses that we think of as investments. This largely consisted of new hires in delivery, product innovation, go-to-market expansion and talent acquisition. At the heart of this performance is a simple truth. We are deeply aligned with the most significant technological invention of our era, generative AI. Across the entire life cycle of generative AI model training from pretraining to post-training to evaluation to safety, we're delivering the services that unlock the performance of Gen AI models. I'll now turn the call over to Mariss to go over the financial results, after which Mariss, Aneesh and I will be available to take questions from analysts.

Thank you, Jack, and good afternoon, everyone. Revenue for Q2 2025 reached $58.4 million, representing a year-over-year increase of 79% and demonstrating strong continuing momentum. Adjusted gross margin was 43% for the quarter, up 32% in Q2 of last year. Our adjusted EBITDA for Q2 2025 was $13.2 million or 23% of revenue compared to $2.8 million or 9% of revenue in the same quarter last year. Net income was $7.2 million in the second quarter, up from loss of $14,000 in the same period last year. In Q2, we were able to utilize the benefit of accumulated net operating losses or NOLCO to partially offset our tax liability. Looking ahead to the coming quarters, barring any changes in the tax environment, we expect our tax rate to be approximately 27% to 28%. Our cash position at the end of Q2 2025 was $59.8 million, reflecting a sequential increase of about $3.2 million, shaped by strong profitability and disciplined cash management. As Jack mentioned, we collected an additional $8 million in early July that in ordinary course would have likely been collected in Q2. We still have not drawn down on our $30 million Wells Fargo credit facility. The amount drawable under this facility at any point in time is determined based on borrowing base formula. I'll reiterate what Jack said, the momentum in our business is nothing short of amazing. We believe we got a tiger by the tail and we're investing with the goal of positioning the company to align with what we project the market needs are going to be over the next few years. In Q2, we incurred approximately $1.4 million of operating costs to build out a variety of technical capabilities to expand our go-to-market as investment toward a future that we believe is truly exciting. Thank you, everyone. Sergio, we're ready for questions.

[Operator Instructions] Your first question comes from George Sutton from Craig-Hallum.

Nice results. Congratulations. So I wondered if we could talk about during the quarter, your largest competitor, Scale AI was a large majority purchased by Meta. And we've had a few of the large tech companies come out and say they would no longer work with Scale AI. These ostensively would be tech companies that you have statements of work with. So I'm just curious if you can kind of give us the after effect of that acquisition as you've seen it.

George, well, thank you for being on the call. So I guess, first, we congratulate Scale for having delivered a great success for their shareholders. And we believe their success and their valuation is a proof point of the key role that data plays [Technical Difficulty]. Before this, we were and continue to very aggressively outreach to market participants and to market our capabilities. We have, in light of this stepped up that effort with certain companies and there are certain conversations that are going on and are now planned to be happening over the next couple of months that I think could be very exciting for us. I don't know that I can get into particulars much beyond that, but I'll reiterate that we do see an opportunity to accelerate our market presence.

Okay. And lastly for me, you throw an interesting nugget about robotics and the attachment to hardware, creating significant -- even more significant opportunities than the large language model training. So can you just walk through how you envision that would work for you and just lay out that opportunity?

Sure. So I think that we tend to read about these technologies somewhat as if they exist in isolation. But the reality is that as large language models become more and more competent and able to interpret ambiguous language and have capabilities to plan and articulate multistep responses to problems. There are technologies that will be added to that capability, enabling those models to invoke external APIs or other tools, enabling for multistep tasks using greater memory and planning capabilities. But when you take that and then you think about deploying that at the edge within devices, what you have is a very capable robot. So I think what this means for us is there's a whole new set of activities, both to train these devices to fine-tune models and to evaluate their performance that together constitutes a market that I believe will exceed that of post -- creating post-training data and evaluating models for frontier model builders. So it's something we're hugely excited about and intend to be investing very significantly in.

Your next question comes from Allen Klee from Maxim Group LLC.

So when you reported last quarter, you kind of said that you thought revenue might be down around 5% in the second quarter. Your actual number was flat -- up very slightly sequential. So you outperformed. So I'm kind of curious like where did the variance come from?

Sure. I'll start and then, Aneesh, do you want to give any additional color. I think that what we were trying to communicate last quarter is revenue was up -- we were up on a run rate basis from our largest customer, and we were, of course, very happy about that. But we wanted to focus our investors on the guidance that we were giving because there are a lot of pluses, puts and takes that get factored into that guidance. And underlying the work that we're doing, there are dependencies on engineering teams that we're working hand in glove with. So it's entirely possible that a quarter could be up or down, and that isn't necessarily something that should be extrapolated out and considered locked and loaded permanently. We weren't anticipating that it would necessarily be down, though, and we're very happy to see that it wasn't. As I said, looking at the largest customer and as well as several -- quite a number actually of other customers, we see an incredible pipeline of opportunity right now. We're very excited about that. And we're only baking into our guidance and our forecast things that we think are highly likely to close within the next really 30 to 60 days. There's a lot beyond that. I think we're going to be winning as well. So I hope that's helpful. Aneesh, anything you want to add to that?

Yes. I think you framed that correctly, Jack. Just to kind of reiterate, Allen, we're not seeing any slowdown with our largest customer. In Q2, we generated approximately $33.9 million of revenue from this account. And as Jack mentioned, we secured several new projects and have additional opportunities in the pipeline that while not yet included in our forecast appear reasonably likely. So again, we feel very bullish and optimistic of our prospects in the back half of the year and remain very excited.

You highlighted -- one of the things you highlighted was the enterprise and the opportunity there. There's a lot of enterprises out there. I'm just curious how you think about the go-to-market to attack it.

Yes, it's a great question. Well, we're attacking it already. And what we're finding is that the interest in the technology and the opportunities to instantiate it into workflows exist across markets. So naturally, we're looking at the markets where we have the most penetration and the most relationships today. But we're also reaching out to companies in markets where we don't have as much reach and we're finding great receptivity. So I think the highlight there is that Agentic AI, as it's proven is going to be the catalyst that unlocks enterprise opportunity. And I think that among enterprises that I talk to and more broadly, they're no longer just looking at this like a frontier technology that's interesting to monitor. They're seeing it as a new economic infrastructure that they're going to need to be embracing and they're going to need to be adopting. And I think that we can play a very significant role in that. When we have conversations with them about the things that we think they need to do and our consultants are working with them to figure out what's the right order of operations and how they gain control of their data in order to harvest these opportunities. We've got a lot of experience, both from working with the large big techs on the frontier model such that we know where things are going and how they can best utilize them and also on all the work we've done historically, taking apart workflows and thinking about how to integrate new technologies into workflows to make them more efficient. So yes, super excited about the opportunities there.

That's great. I'll ask one more, and then I'll jump back in the queue. You highlighted a certain amount of money this quarter that you spent -- operating expenses that you viewed as like investment. Is there any reason to think that the scale of how much you're going to be investing for growth in the second half is going to change meaningfully from where it's been?

Great question, Allen. So we -- as you rightly pointed out, we said we invested about $1.3 million in Q2 across several functional areas, including sales, delivery and product solution capabilities. We anticipate that stepping that up from Q2 to Q3 by approximately another $1.5 million. And the reason for doing that is we see tremendous opportunity in the space and we want to be able to capitalize on that. So we will be making some incremental investments in sales, delivery, solutioning and product to be able to capitalize on what we think is a very significant opportunity right now.

Your next question comes from Hamed Khorsand from BWS Financial.

So my first question was, could you just talk about why you mentioned organic growth and what your intentions are there?

Sure, Hamed. I think we mentioned it to draw attention to the fact that this is organic growth. I think if you look across companies that are reporting and reporting growth, a lot of them are growing inorganically, and that can be a great strategy for them, but it's a different strategy. And I think our strategy and the kind of growth that we're reporting is a testament to the product set and the capabilities that we've developed. And from a risk-adjusted basis, I think that's probably a safer bet for investors. So we're very proud of it. We're very proud of what we've been able to accomplish. And looking ahead to how well aligned we are with what we see as today's market opportunities and tomorrow's likely market opportunities, we think that, that organic growth can continue.

And the organic growth that you're seeing in your business, is that coming with any kind of competitive pressures on pricing or you're able to maintain pricing and capture new customers?

It's a robust market. I think that we expect -- well, just expect we do experience, of course, a competitive environment. But what we're seeing is that the most important thing to our customers isn't our price. It's the quality of our data and the extent now to which we can work hand in glove with them in order to help understand model performance, understand model deficiencies, understand use cases and make recommendations about the data sets that are required to remediate or to extend those capabilities. So it's a holistic service and the investments that they're making are so extraordinary, and there's such a deep desire to win in this race that when we're contributing as well as we are in so many accounts, they become much less price sensitive. Now that having been said, I don't believe that we're the most expensive among our competitive set, but I do think we're among the best. And that's a position that I think if we can sustain that will significantly inure to our benefits from a competitive perspective and a growth perspective.

And lastly, last quarter, you had a series of different customers you were describing and talking about this quarter, I think it sounds a little less. So I'm just trying to understand where are you in terms of those relationships? Have they started up what you were talking about last quarter? And so where do you sit as far as revenue opportunity goes when you look out into year-end '26?

Yes. No, there's actually more opportunity and there's a bigger pipeline today than there was a quarter ago. I just looked at that earnings call and thought that maybe that was a little long and decided stylistically to try to condense it a bit. There's more opportunity. There are things that we talked about last time that have closed and that are now in our forecast. There are things that we're continuing to progress that are real interesting. By memory, I'm thinking about things we talked about. I think there's only one thing that kind of went dormant a little bit, but everything else is either closed, moving forward well, advancing significantly in discussions and that we feel very bullish about.

Your next question comes from Mr. Allen Klee from Maxim Group LLC.

I just had a follow-up. I thought it was really interesting how you said that you can make the data smarter for the customers to get better results. Could you go into that a little bit?

Sure. So -- there are a lot of different dimensions that we use to look at data and analyze data. Our data science team is rapidly expanding. We end up for engineering teams producing what are the equivalent of -- in many cases, the equivalent of white papers with all sorts of mathematical formula and statistical analysis that correlate what we benchmark as a model's performance or identify as a model's deficiency with what data sets are required in order to remediate that. And what that capability has resulted in is that we're no longer just providing data, but we're -- our status, our role has been elevated to sitting at the table with the data scientists who are building these models and figuring it out with them. The journey is about data. And it's about -- as I said in the prepared remarks, it's about not just scale data, but smart data. So being able to do all that deep technical scientific analysis of data of model performance of correlating the data that's required in order to achieve the level of performance that's required. In just the last, I'd say, several months, that's become a problem space that we're getting to occupy, and that's tremendously exciting for us.

There are no further questions at this time. I will now turn the call over to Jack Abuhoff for closing remarks. Please go ahead.

Thank you, operator. So Q2 was a high-performing quarter with 79% year-over-year growth, and we're anticipating a strong second half to the year. In the second half, we anticipate potentially winning major new customers, significantly deepening relationships and further broadening our base. We'll also be continuing to make investments in infrastructure, talent and platforms that we believe are key to continuing our growth trajectory over the years to come. As a result of our successful execution, we're raising our guidance today from 40% to 45% or more organic revenue growth for the year. And yes, I mean, we're humbled by our good fortunes that scale data, our specialty is, we believe, the [ sine qua non ] of the greatest technological innovation of our lifetimes. And with the runway we see ahead, our goal remains to build Innodata into one of the leading AI services companies for this era. So thank you all for your continued support, and we look forward to being with you a quarter from now.