Amy Agress - SVP, General Counsel & Corporate Secretary Raj Jain - Principle Financial Officer Jack Abuhoff - Chairman, President & CEO.

Tim Clarkson - Van Clemens & Company Joe Furst - Furst Associates Charlie Pine - Van Clemens & Co. Tim Clarkson - Van Clemens & Company.

Good morning, and welcome to the Innodata Q4 and Fiscal 2017 Results Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Amy Agress. Please go ahead, ma'am..

Thank you, Rely. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and Raj Jain, our Principle Financial Officer. We'll hear from Raj first, who will provide a detailed review of our results for both the fourth quarter and the 12-months ended December 31, 2017.

And then Jack will follow with additional perspective about the business. We'll then take your questions. First, let me qualify the forward-looking statements that are made during the call.

These statements are based largely on our current expectations and are subject to a number of risks and uncertainties including, without limitation, that contracts may be terminated by clients; projected or committed volumes of work may not materialize, that primarily that will nature of contracts with our Digital Data Solutions client and the ability of these clients to reduce, delay or cancel projects; continuing Digital Data Solutions segment revenue concentration in a limited number of clients; inability to replace projects that are completed canceled or reduced; our dependency on content providers in our Media Intelligence Solutions segment; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans, which give rise to requirements for our services; difficulty in integrating and driving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairments of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; and, other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

We undertake no obligation to update forward-looking information and actual results could differ materially. I will now turn the call over to Raj..

Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial performance for the fourth quarter and fiscal 2017. I will start fiscal year 2017 performance and then review the quarterly performance. Jack will later provide additional perspective on the business.

Our revenues in 2017 were 60.9 million compared to 63.1 million in the prior year. In both years, we incurred the one-time costs and charges that we set out in today’s press release. In 2017, these one-time costs and charges amounted to 2.4 million, which were allocated 2.2 million to digital data solutions and 150,000 to Media Intelligence.

In 2016, the one-time cost and charges amounted to 3.2 million of which 2.6 million what allocated to Digital Data Solutions and 600,000 what allocated to Media Intelligence. Excluding the impact of these one-time charges our adjusted EBITDA was 1.7 million in 2017, compared to 2.8 million in 2016.

Our 2017 adjusted EBITDA was comprised 3.5 million in Digital Data Solutions offset by EBITDA losses of 600,000 in IADS and 1.2 million in Media Intelligence. Net loss was 1.7 million in both 2017 and 2016. I’ll now review year-over-year performance excluding the impact of these one-time costs.

Digital Data Solutions revenue were 46.8 million in 2017 compared to 50.6 million in 2016. DDS gross margins were 25% in 2017 versus 26% in 2016. And DDS adjusted EBITDA was 3.5 million or 7% in 2017 versus 4.4 million or 9% in 2016. DDS margin declines were primarily the result of revenue declines.

In our IDS segment revenues increased 4.8 million in 2017, up from 4.3 million in 2016. The increase was driven by incremental revenues from both existing and new customers. Higher revenues coupled with production efficiencies helped reduce the losses of this segment from 1.8 million in 2016 to 600,000 in 2017.

In our Media Intelligence segment, our revenues increased to 9.4 million in 2017 from 8.1 million in 2016. The increase is primarily due to our acquisition of Agility in July 2016. Adjusted EBITDA was a loss of $1.2 million compared to income of $200,000 in the prior year.

Revenues were lower than our planned primarily on account of the transition issues related to the acquired Agility business that we have mentioned in our earlier conference calls. I'll now review key line items and segment performance on a sequential quarterly basis comparing the fourth quarter with the third quarter.

My comparisons will again exclude onetime costs and charges. Total revenues in the fourth quarter were $15.7 million, compared to $15 million in the prior quarter. On a segment basis, this year's revenues were $12 million compared to $11.6 million in the prior quarter.

IDS revenues were $1.3 million or 13% higher than the prior quarter revenues of $1.2 million. Growth came entirely from the -- business. Media and Intelligence revenues rose to $2.3 million from $2.21 million in the third quarter.

On a consolidated basis, gross margins excluding onetime cost and charges increased to $4.9 million or 32% of revenues in the fourth quarter compared to $3.9 million or 26% of revenues in the third quarter, an increase of $1 million. The increase in gross margins primarily reflects the increase in revenues and cost efficiencies.

At the segment level, the gross margins in DDS were $3.5 million or 29% of revenues in the fourth quarter compared to $3.1 million or 27% of revenues in the third quarter. Gross margin in our IADS segment increased to $350,000 from third quarter breakeven.

In our Media Intelligence gross margins excluding acquisition related amortization expense were $1.1 million in the current quarter or 46% of revenues, up from $860,000 or 39% of revenues. The increase in gross margin in all three segments is due to the increase in revenues and increased cost efficiencies. I'll now drill down to SG&A expenses.

Selling general and administrative or SG&A costs for the quarter were $5.1 million in the fourth quarter compared to $4.4 million last quarter. The increase in SG&A cost is primarily seasonal. At the segment level, SG&A costs were $3.1 million in DDS, $200,000 in IADS and $1.8 million in Media Intelligence in the fourth quarter.

In the third quarter, SG&A costs were $2.7 in DDS, $200,000 in IADS, and $1.5 million Media Intelligence. Our adjusted EBITDA was $500,000 in the current quarter compared to $400,000 in the prior quarter. The current quarter adjusted EBITDA is comprised of $1 million in DDS, $150,000 in IADS, and a loss of $600,000 in Media Intelligence.

Moving to net earnings, we recorded an income tax benefit of $0.5 million in the fourth quarter compared to a tax expense of $300,000 last quarter. After deducting tax expense and minority interest, our net earnings in the fourth quarter were $400,000 compared to a net loss of $700,000 in the third quarter.

Our cash in investment balance was $11.4 million in the fourth quarter compared to $12.5 million in the third quarter. Our CapEx this quarter was $0.5 million compared to $600,000 in the previous quarter. In the first quarter, we expect CapEx to be in the range of $100,000 to $300,000. I will now turn to our foreign hedging program and other items.

At the end of the year, we had approximately $60 million in outstanding forward contracts to hedge a proportion of our exposure for foreign currency denominated revenues and expenses. Based on mark to market, our forward contracts has a notional gain of $350,000 at the end of the fourth quarter. We have evaluated the impact of U.S.

Tax Cuts and Jobs Act that the president signed into law at the end of 2017 on the company. This had included a broad range of provisions many of which significantly differ from those contain in previous U.S. tax loss. One of the revise provisions in the act as a one-time tax on undistributed foreign earnings.

Under the previous tax loss income from foreign subsidiaries, were generally not subject to U.S. tax until the income was distributed to the U.S. Corporation. Under the new lot, the U.S. Corporation generally must include as part of its income the U.S. Corporation pro rata share of the both 1986 historical income of the foreign subsidiaries.

We didn’t evaluation of the new provision with respect to our operations. This provision did not have any cash flow impact on the company as the income resulting from the new provision was offset against are available net operating loss carry forward.

As of the year-end and after taking into account offset against foreign income under the new tax provision, we have about $50 million in net operating loss carry forwards.

In terms of guidance for the first quarter of 2018, we expect our first quarter revenue to be in the range of $13 million to $14.1 million consisting of DDS revenue in the range of 9.8 million to growing 10.6 million. IDS revenue in the range of $1 million to $1.2 million and MIS revenues in the range of $2.2 million to $2.3 million.

Thank you and now I’ll pass the call over to Jack..

Thank you, Raj. Good morning, everyone. Thank you for joining us today. We’re going to provide some additional context for at the quarter’s performance in each of our segments and other announcements we made recently. I’ll start with our core Digital Data Solutions business.

Our fourth quarter revenue is higher than our third quarter revenue by about 4% due to volume increases across the handful of projects. Looking at the year as a whole however, we underperformed on the revenue side. DDS revenue in 2016 was 51 million, but in 2017 it declined to 47 million.

Declines with the direct sales with disappointing sales performance. We failed to book enough new business in 2016 or 2017. When we win the business roughly half of its estimated value, which we record as a booking becomes revenue in that same year and the other half is backlog that we recognize revenue in the following year.

As we exited 2017, our 2018 backlog was roughly 36.5 million, of which 95% we regard as recurring revenue. We saw that our bookings in 2018 were to turn out to be no better that our bookings in 2017. Our 2018 revenue would be about 43 million in 2018.

Based on this, we decided first to align our cost structure to a conservative revenue outlook that did not assume a significant booking improvement. And secondly to put in place a plan to significantly improve sales performance.

Under our cost structure alignment plan we lowered our operating costs by approximately 3.5 million to align with our revenue outlook. This way even with our 2018 bookings performance were not too improved, our adjusted EBITDA excluding onetime costs might nonetheless improve over 2017 as well as 2016.

The cost reductions have come primarily from lower production costs, including fixed cost statements from facility consolidation, certain fixed cost savings and support and delivery costs and variable cost savings on production labor that results from technology innovation.

Our $1.2 million restructuring charge consists of servant's costs related to this cost reduction. I think it is important to note that we have no shade costs associated with either sales or marketing or R&D both barriers in which we intend to increase investment overtime.

In addition to the cost takeout, we are focusing on improving our bookings performance, which is the key to unlocking the operating leverage that will propel earnings and drive shareholder value. Towards this end, our board has asked that I take direct responsibility for driving DDS new business.

I believe that we can best reverse the recent course by doubling down on our very successful R&D efforts that focus on AI and machine learning technologies and doing more to put these innovations at the heart of the conversations we have with our customers.

In addition, we will be redoubling our efforts at aligning our services, solutions and go-to-market strategies with the global data awakening, in which enterprises are increasingly looking to incorporate digital data into workflow tools and advanced analytics.

The problem many enterprises report is that they are unprepared to manage the complexities in creating value from raw and disparate datasets. It is towards this challenge that we will seek to align our capabilities in data extraction, transformation and enrichment. I'll now move to our Synodex business.

As we anticipated, we saw continued revenue improvement in Q4 as a result of new engagement and seasonal demand. The IADS segment as a whole was up by 13% over the last quarter and the Synodex business was up 14% over the last quarter.

We're pleased to report Synodex achieved profitability this quarter primarily due to continued improvement in our operating efficiency as a result of technology. In the quarter, we were successful at winning the large opportunity with the current customer that we anticipated to winning our last call.

The annual contract value of this new contract is approximately $800,000 and is expected to start producing revenue in early Q2. As we also anticipated last time, one of our other current accounts has decided to curtail its medically underwritten complex life insurance business which is the portion of their business that our product supports.

As a result, they will no longer require our services after Q1. Fortunately, our new win should offset this loss. Our total pipeline value of opportunities that we're pursuing [has stands] at approximately $50 million in annual contract value, of which about $3.7 million are most active appeared to have budget. Although the progress remains slow.

I'll turn now to our Agility business. Our Agility business includes both Agility subscription-based SaaS products for Media targeting, distribution and media monitoring as well as our enterprise media monitoring and analysis solutions. In Q4, our revenues were $2.3 million, an increase of 6% from Q3.

And we added 72 new customers with total bookings of $980,000 of annual contract value, making this our strongest quarter-to-date in terms of new business generation. In Q4, much like Q2, we continue to see sequential quarterly increases in our leading indicators of new business generation.

Our marketing qualified leads or MQL increased by 20% over Q3 and our demos completed increased by 28% over Q4.

On the customer retention side, as we have been discussing on these calls, when we acquire the Agility database from PR Newswire last year, we inherited a large number of customers that we’re either not using the product and as a result of not renewed or had other acquisition related issues.

We think, we will see the last of these non-engaged, non-renewing customers cycle out in Q1. Excluding these customers, our customer retention has been steadily improving, we expect to be showing net quarterly customer increases beginning in Q2.

In Q4, we completed our engineering integration with our backend systems, which has enabled our engineering team to now shift to new product roadmap features and functions. In Q4, we released an innovative new feature called influencer streams that enables our clients to target and engage with media and influencers via their social media activity.

In the early Q1, we released a new AI powered feature that enables our customers to monitor not just text but also images. This is useful for companies that want, for example, to track their brand references or logo usage and to analyze images based on how compelling, shareable and on-brand they are.

As we move into 2018, we deeply engaged in Board level activity to improve our operating performance. As we announced on December 5, our board formed a special committee to make an in-depth assessment of our segments.

Our IADS and Agility investments have valued offerings and promising opportunities expand to our addressable markets leverage our core assets and capabilities and promote recurring revenue. But each of these has particular challenges and business model, which adds complexity to the company that is already complex.

To provide objective external input, the community retained Angrisani, the turnaround consultant, to validate the course of this charting toward creating improve shareholder value and to evaluate each segments strategy.

In addition, it hired Outsell to perform a market needs assessment to help in consider ways in which the core business might best be aligned to emerging market needs. In our December announcement, we also stated that the Board’s nominating committee would be reviewing, our overall Board composition.

Since that time two of our company directors have indicated they will not be standing for reelection. Determinations have not been made final with respect to others.

The Nominating Committee has undertaken an analysis of skills and experience that could benefit the company based on the current and emerging needs of the businesses and it is presently interviewing candidates.

We also announced, in principle, appears to be as designated, fees to incumbent directors other than fees to the Audit Committee Chairperson will be paid in restricted stock and that both AK Mishra, our Chief Operating Officer, and I will be taking 20% of our salaries in the form of restricted stock.

We believe that this further alliance interest of our directors and executives with our shareholders a large. We’re now working through the details is implementing this program. Operator, we’re ready for questions. .

[Operator Instructions]. And we'll take our first question from Tim Clarkson with Van Clemens & Company. .

Hey, what do you think the net net what do you think about your revenue breakeven is on a typical mix of revenues? What number would it be at right now?.

You mean the breakeven point?.

Yeah. I actually taking out the expenses, yeah. .

So, let's go by segment. Again, I'll give you a range. So, for DDS, it's somewhere from $8 million to $8.5 million. For Synodex, it's like $3.5 million unchanged, and for Media Intelligence, it's close to $10 million. .

Okay, alright.

Now is that quarterly or is that annually then?.

Yes, you're absolutely right. So, for DDS, the number that I had was quarterly, I apologize. So, it's about $34 million on an annual basis. Synodex, what I quoted was annual number $3.5 million and change. And Media Intelligence $10 million and change that's an annual number. .

Okay.

34 and 8 GAAP?.

That is right. .

Right. Okay.

Now what's the story on this legal right off again? I guess we've lost something some deal in the Philippines on some old lawsuit?.

Yes, and that's correct. So, we ended up taking a contingency reserve for a lawsuit in the Philippines. We're continuing to appeal that judgement, but it was appropriate that we take that reserve..

Okay.

Just kind of on a general basis, Jack, what do you think the growth prospects are for the three different businesses then?.

I think that each has interesting opportunities.

I think that if we can continue, the good progress that we've been making on the in the Agility business sales and marketing, the extremely strong median indicators that we're seeing progressed very well just quarter-to-quarter sequentially, that in combination with the improvements that we're forecasting in customer retention as we move through some of the acquisition related issues that we experienced bode very well for a nicely growing business.

Clearly, double digit growth. Market is substantial it's probably $1 billion to $1.5 billion market. And I think we've got the products aligned well to that. In the Synodex business very different industry, very different dynamics there as we know.

But we've got high-quality products high quality customers that we choose breakeven this quarter is long income too long incoming probably certainly for me. But we're there and I think that's gives a strong platform from which to hopefully accelerate.

DDS business has been challenging, I think though there is an opportunity that we’re seeing in -- I’ve come to refer to as the Global Data Awakening. Increasingly, we’ve got enterprises who are looking to using digital data fundamentally in their strategies and their operations, embracing machine learning, embracing artificial intelligence.

And we think that our core capabilities in terms of data extraction, transformation and enrichment may have value to that industry. So, as we think of growth there, there are several things that we are going to be doing. One is aligning our products and our services to that Global Data Awakening.

The second is finding even additional cost savings in how we operate the business and how we can operate the business but virtue of the great work we’ve done in AI and machine learning and taking some of those savings and redirecting into go-to-market capabilities. And then thirdly, making it my focus.

Our best revenue producing years was when I was most focused on the market. And the board has determined, I agree that, I need to go back there and put a whole lot of focus on that and get the bookings up. .

Right, right.

You just have been adding now for a couple of months or you’re starting to see some signs that you can make somethings happen out there?.

I think there’s opportunity. And we’re going to be working hard and I think we’ve got the right plan. There is a lag in the bookings-to-revenue and certainly, even from pipeline to bookings.

So, the progress that we’re making now, I’m hoping that some of that accrues to our benefit in 2018, but it’s certainly, if we can make that progress earlier in the year, it does, otherwise, it lines us up for improvements in 2019.

But the fact is that, as I’ve said just a few minutes ago in 2016 and 2017 sales just wasn’t producing level of booking that we require to continue to grow, I think that we’re going to be doing the things that we need to, in order to reverse that..

Now what, in this last quarter, what percentage of your business would you say was repeatable versus not with more project based?.

Raj you have. .

Yes. It’s close to 80%, like 82%. .

And there is some seasonality from fourth quarter to first quarter typically.

Why is that?.

In the Synodex business, there is some seasonality because life insurance companies towards the end of the year will have sales contests, where their sales folks push real hard to bring in applications and applications are what triggered the need for our service. I think there is less seasonality in other segments of the business. .

[Operator Instructions]. We'll take our next question from Joe Furst with Furst Associates..

Good morning gentlemen. Raj just a question for you. If I heard these numbers right and understood the other numbers. You said the breakeven points for the basic business was about $34 million a year and your first quarter estimates are somewhere around between 9.8 and 10.6 even at 10 times if you analyze that that's $40 million.

So that means your basic business would be fairly profitable for next year.

Am I missing something with the numbers?.

Thanks Joe, good morning. No, you're right the math is right. Again, I would be giving high-level numbers. Based on what you just mentioned yeah, the revenue estimate at least for Q1 if you're annualizing that, that's going to be close to $40 million. And at breakeven it is close to $34 million. So, you have the numbers are right.

This does not include any onetime cost and any unforeseen cost that we may have to incur..

Sure. And in the insurance business again, 1 to 1.2 that's roughly $4 million and you said your breakeven about 3.5, so again that is a little bit profitable. And then with the new -- go ahead. .

No, I was just echoing, that is correct. .

Okay. And then the new business is just the slightly less if your breakeven is 10 million and you're doing 2.2 to 2.3 a quarter. I mean that's little bit short, but you can grow that a little bit that would be pretty close to breakeven too. So that's certainly will be much improved for these recent quarters which you've been very disappointing.

So glad to see that and you have more positive outlook. Thanks. .

Good. .

And we'll go to our next question from Charlie Pine with Van Clemens & Co..

Yeah. I have just a couple of things that I wanted to get clarified. I think when you were discussing in your remarks about retention of hiring a turnaround consultant or around that point in the call. You've mentioned that the business when you look at the business you had $36 million bookings for 2018.

And I scribbled down something that said that you're looking at total business of about $43 million.

Were those numbers centered around DDS?.

Hi, Charlie yes. That I was just talking about DDS. .

Alright. The other thing I wanted to ask about is when do you anticipate that you're going to get some kind of finalized list of recommendations from the turnaround consultant and the other organization that you brought in December. .

So, we've gotten written or the board's gotten written recommendations from both of them. And it is continuing to work with them and to meet with them as well. .

Okay.

Have you acted at this point on anything that they presented to you at this juncture?.

So, the answer is yes. I think the we were working with them in conjunction with in parallel with the work we were doing in terms of improving prospective operating performance. So, we were modeling the business and sizing the expense reduction that we needed to do.

And thinking about where in the business that could come out of without having a detrimental effect on future growth. We have worked with them on those plans. .

[Operator Instructions]. And we’ll take another question from Tim Clarkson with Van Clemens & Company..

This isn’t really a question. But I just wanted to put out there that from at least from my point that we really appreciate the contributions of O’Neil that were ongoing over the 2, 3 years and that I know he left on good terms, and I’m guessing you feel good about him too.

So, I just wanted to put that out there, I really appreciate his contributions..

Tim thank you for saying that. I’m sure he’ll be glad to hear that, and I echo exactly what you just said. We appreciate his contributions as well. We had to make some very difficult decisions as we sought to improve operating performance.

They were made with great deliberation but that doesn’t make them hard and I definitely echo your sentiments on that. .

Ladies and gentlemen, this concludes today’s question-and-answer session. At this I’d like to turn the conference back to Mr. Jack Abuhoff for any additional or closing remarks. .

Thank you, operator. So, in closing, in Q4 we saw sequential revenue improvements in all three of our business segments. Synodex is profitable this quarter, as we had anticipated, we closed new large deals worth about [$800,000] this will keep our results at about current levels next year as we work on closing new deals in our pipeline and Agility.

We had our strongest quarter today in terms of new business generation and we think with continued improvements in marketing as well as the underlying customer retention metrics that we’re continuing to see we’re going into 2018 in a good position to deliver sequential quarterly growth.

As I mentioned, our board is very focused on operating performance and shareholder value. We undertake a cost reduction program late last year, which we completed in Q4, which should lower our 2018 costs by about 3.5 million.

We think this is the level of cost shedding we needed to do to be conservative to align to a low case 2019 revenue projection in DDS, while still making and generating free cash flow.

And lastly, our board has retained outside consultants to help it look at the business from both up strategic and shareholder value creation lends and is actively interviewing new directors. Again, thank you, everybody, for joining the call today. .

Today’s conference is available for replay from 2 pm Eastern time today to April 7, 2018 at 2 pm Eastern time. You may access the recording by dialing 719-457-0820 or 1-888-203-1112 using pass code 1067298. Again, the numbers are 719-457-0820 or 1-888-203-1112 pass code 1097298. This concludes today's conference. You may disconnect..