Amy Agress - SVP, General Counsel & Corporate Secretary Jack Abuhoff - Chairman & CEO AK Mishra - COO.

Tim Clarkson - Van Clemens Capital Chris Beach - Hawksbill Holdings.

Good morning and welcome to the Innodata First Quarter 2018 Earnings Conference 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..

Thank you, Vicky. Good morning everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and AK Mishra our COO. We'll hear from AK Mishra first, who will provide a detailed review of our results for the first quarter. 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 [indiscernible] 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 Agility 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 AK..

Thank you, Amy. Good morning everyone. Thank you for joining us today to review our financial performance for the first quarter of 2018. Total revenues this quarter was $14.1 million compared to $15.7 million last quarter.

In the prior quarter, we had one-time charges of $2.3 million which included $1.1 million restructuring charge and $1.2 million loss contingency reserves. Excluding the impact of these one-time charges, our adjusted EBITDA for quarter one 2018 was $1.3 million compared to $500,000 in the fourth quarter of 2017 an increase of $800,000 or 160%.

The increase in adjusted EBITDA was mainly due to the cost optimization and rationalization that we undertook last year, which we expect will introduce our 2018 cost by approximately $3.5 million.

I will now review key line items and segment performance on a sequential quarterly basis comparing the first quarter of 2018 with the fourth quarter of 2017. There were one-time charges in the prior quarter so my remarks and comparative results will exclude the effect of one-time special charges in the prior quarter as I would indicate.

In addition, in order to simplify nomenclature and align to our business narratives for 2018, we’re making certain changes in our segment reporting. The segment we have previously referred to as Media Intelligent Solutions or MIS, which consisted of our Agility PR Solutions business, we'll hereinafter be referred to simply as Agility segment.

The segment we previously referred to as Innodata Advanced Data Solutions, which consisted of our Synodex and docGenix businesses will consist only of the Synodex business and will be referred to simply as the Synodex segment. Our docGenix business will be subsumed into our Digital Data Solutions or DDS segment.

Now at the segment level, DDS revenues decreased by $1.7 million or 14% to $10.5 million this quarter compared with 12.2 million in the prior quarter. This decrease was due to completion of one-time project in the fourth quarter and seasonal volume fluctuation this quarter on an ongoing engagement.

docGenix revenue which is now included in both quarter one period and for the comparison purpose of our quarter four period, was $132,000 in quarter one and $244,000 in quarter four. Synodex revenue was $1 million compared to $1.1 million in prior quarter. Lower revenue of $100,000 was as a result of volume seasonality.

Agility revenue increased to $2.7 million a 14% improvement over the renewal of $2.3 million in the fourth quarter. This increase was primarily result of one-time additional revenue from one of the Agility’s resellers and the seasonal revenue from our annual Bulldog awards program.

Moving on to gross margin, gross margins in DDS were $3 million or 28% of revenue this quarter compared to $3.6 million or 29% of revenues in the fourth quarter of 2017, a decline of 600,000 or 17% mainly on accounts of lower revenues.

Gross margins in our Synodex segment decreased to $200,000 in the current quarter from $295,000 in the fourth quarter due to lower revenue.

Gross margins in Agility segment were $1.35 million or 50% of the revenues this quarter as compared to 1.1 million or 46% of revenue in the prior quarter, an increase of $250,000 or 24% on account of higher revenues in this quarter. We will now take a look at the selling, general and administrative or SG&A expenses.

SG&A expenses were $3.9 million or 28% of revenue this quarter, as compared to $5.1 million or 32% of revenues in the prior quarter. The 1.2 million or 24% decrease in SG&A expenses were mainly on account of lower professional fees, reversal open allowance for doubtful accounts and lower labor cost.

SG&A expenses for DDS in quarter one 2018 were $2.3 million or 22% as compared to $3.1 million or 25% of revenues in the prior quarter, after excluding one-time restructuring charges, a decrease of 780,000 or 25%. In Synodex, SG&A expenses were approximately $200,000 in both the quarters.

SG&A expenses for Agility were $1.4 million or 53% of revenue this quarter, as compared to $1.8 million or 77% of revenues in the prior quarter, a decrease of $470,000 or 26%. The decrease is attributable to adjustment of allowance for doubtful accounts and accounts of improved accounts receivable and lower headcount.

Our adjusted EBITDA was $1.3 million this quarter compared to $500,000 in the prior quarter, an increase of $800,000 after excluding one-time restructuring charges and reserves taken in the prior quarter. This increase is comprised of $200,000 EBITDA from DDS, $700,000 adjusted EBITDA from Agility offset by $100,000 adjusted EBITDA loss in Synodex.

Moving on to net earnings. We recorded an income tax provision of $0.6 million this quarter compared with tax benefit of $0.5 million. After deducting tax expenses and minority interest, our net earnings this quarter were $57,000 compared to $400,000 in the prior quarter. Pursuant to the U.S.

Tax Cuts and Jobs Act, 2017 Tax Act and the fourth quarter of 2017, the Company recorded adjustment of $6.4 million to income tax expense pertaining to the toll charges, which we offset against our available net operating loss, carry forwards.

In the first quarter of 2018, the Company performed calculation of GILTI, that is global intangible lower tax income, provisions and concluded that it has no impact on account of the net losses of the Company’s foreign subsidiaries.

At the end of this quarter, we had approximately 15 million in net operating loss carry forwards after taking into account the offset against foreign income under the new tax provision that is 2017 tax act.

Our cash and investment balances were $12.2 million this quarter compared to 11.4 million in the fourth quarter, approximately 48% of the balances were held in United States and the rest were held overseas.

Our CapEx this quarter was 0.6 million compared to 0.5 million in the previous quarter and the second quarter of 2018, we expect our CapEx to be in the range of $500,000 to $700,000. I will now turn to our Forex hedging program and other items.

At the end of this quarter, we had approximately $11.3 million in outstanding forward contracts to hedge a portion of our exposure for foreign currency denominated revenues and expenses based on market to market. Our forward contracts had a notional loss of $190,000 in the end of first quarter.

In terms of guidance for the second quarter of 2018, we expect our second quarter revenue to be in the range of $13.1 million to $13.5 million, consisting of DDS revenues in the range of $9.9 million to $10.1 million. Synodex revenue in the range of 0.9 to 1 million and Agility revenue in the range of $2.3 million to $2.4 million.

Thank you and now I will pass on the call over to Jack..

Thank you, AK. Good morning everyone. Thank you for joining us. Today, I’m going to provide some additional context for the quarter's performance in each of our segments and touch on other announcements we made recently. I will start with our core Digital Data Solutions business.

As anticipated, our DDS revenue declined in Q1 although we came out at the high-end of the guidance we provided in our last call. As AK mentioned, the decline resulted from a one-time project that ended in Q4 and some seasonal volume fluctuations from another client.

Our adjusted EBITDA benefited by approximately $900,000 as a result of the cost reduction that we initiated late last year, which we anticipate reducing our overall 2018 cost base by approximately $3.5 million. We’ve taken the cost reduction to align our cost structure to our revenue outlook in light of disappointing sales performance last year.

The cost reductions have come primarily from consolidating production facilities, aligning support cost and lowering production costs as a result of technology innovation.

This year we’ll be working to improve sales performance, recognizing that ultimately growth unlocks the operating leverage in our business model that will propel earnings and drive shareholder value.

Over the past few years we've invested in R&D around AI and machine learning, figuring out how to best incorporate these technologies into the work that we do to extract, transform and enrich content. These efforts have shown considerable success just as they have contributed to our facilities increased production costs.

We believe that properly messaged to the clients in the market will benefit us on the sell-side as well. For example, just a couple of weeks ago, we demonstrated our new AI and machine learning capabilities to a senior director at one of the largest information companies in the world.

Afterwards, I got an email from him, thanking me and saying that he believes our technology could be likely a "powerful automation solution for his Company" and requesting that we explore further this summer.

In our Synodex business, there was a small decrease in revenue as a result of seasonality in Q4 life insurance applications which give rise to the need for our services, [tend to spike] [ph]. In the quarter, we successfully started new engagement with an existing client that we value at approximately $800,000 per year.

From a revenue perspective, we plugged the hole that otherwise would've been created as a result of one of our other clients curtailing its medically underwritten complex life insurance business, which is the business that our service supports.

From a pipeline perspective, we have several million dollars of opportunities that have accelerated since our last call. We’re working on closing these new deals. I'll turn now to our Agility business.

Our Agility business includes both the Agility subscription-based SaaS products for media targeting, distribution and media monitoring as well as our enterprise media monitoring and analysis solutions. In Q1, our revenues were 2.7 million, an increase of 14% over Q4.

Included in revenue was $222,000 from the data partner that is nonrecurring in nature, representing an adjustment that we were able to make as a result of the API we put in place last year. The API enables us to verify that our channel partner customers are correctly licensed for the data that we provide to them.

We continue to see the Agility business becoming a sequential quarter growth business with high retention metrics. While this 222,000 should be viewed as nonrecurring it is worth noting that the channel represents an important part of our plan. Our revenues from channel partners were about 950,000 last year.

This year we are expecting channel partner revenue to grow by approximately 75%. In Q1 much like Q4, we continue to see sequential quarterly increases in our leading indicators of customer engagement and new business generation. Our marketing qualified leads or MQL increased by 19% over Q4.

We made some structural changes and personnel changes in our North American Agility sales organization in the quarter, which resulted in some of the bookings we intended for Q1 likely shifting in Q2.

That said, we added 63 new customers and 2 new resellers with total bookings of 1.12 million of annual contract value, making this our strongest quarter to date in terms of overall new business generation.

Our aggregate retention rate measured by ACV to 77% in the quarter with our fast targeting and monitoring platform retention at 60%, and our enterprise level monitoring platform retention at 93%.

As we spoke about previously, we inherited with the Agility acquisition of large number of non-engaged customers of the targeting and media platform in North America. These customers rolling off as affected our retention rate the past year.

The remaining non-engaged customers cycled out in Q1, leaving our confident that prospectively retention rates for this portion of the business will be trending towards our targeted levels of 70% to 75%, resulting in an overall retention rate improvements as well.

In Q1, we released an AI-powered image monitoring module, which enables our customers to monitor images in addition to text. With this module companies that have an interest in tracking when their brand references or logo show up in newspapers, magazines, and social media can now do so.

Our engineering teams are now focused on building and testing two major new product components that will be launched in Q3 of this year. We announced on December 5th, that we've initiated a search for new directors whose experience could help us navigate growth.

On April 18th, we announced that we had through Board action bought three exceptional new directors on to our Board; Dave Atkinson, the former CEO of one of the largest U.S.-based life reinsurers; Brian Kardon, the Chief Marketing Officer of a fast-growing software company; and Doug Manoni, the former CEO of an innovative digital business information and media company.

We’ve also announced that three of our current directors will not be standing for reelection this year. Our special committee a formation which was also announced on December 5th has been proceeding with an in-depth assessment of our segments benefited by the external input of two consultants that are retained.

Both of these components have delivered there analyses to the committee that the present time have no further deliverables to the committee under their current statements of work. Operator, we are now ready for questions..

[Operator Instructions] We will take our first question today from Tim Clarkson with Van Clemens Capital. Please go ahead..

Just wanted to check now, do we expect that your basic fixed cost will go lower as the year trends?.

If you look at the numbers that we're announcing this quarter, you will see that there has been a $900,000 benefit coming in the quarter that is a result of 3.5 million cost base reductions that announced for late last year. So, you should see that $900,000 continuing to benefit the Company per quarter through the year that’s baked into cost base.

In addition to that we're also looking at additional opportunities for creating additional efficiencies. The work that we're continuing to do in AI and machine learning is proving to be very impactful and we see additional opportunity that we're going to be driving through the year that would be in represent cost efficiency in addition to that..

In terms of the AI, the new technology you’re using internally and also using to hopefully get some additional revenues.

What's the potential in terms of that new segment? What did if the committee thinks about where Innodata should be putting its resources?.

I think the committee is doing its work. I won’t be in a position to announce in this form every decision that we are making in advances taking any kinds of actions.

I think it's safe to say though looking into reports that we've got back from the components, which have been very helpful and looking to market ourselves, they're widely regarded, widely reported complexities of creating value from raw and disparate data set that we believe are R&D investment is in the position to affect positively.

We demonstrated that with a couple of very large new customers recently. We're continuing to work and refine those capabilities and just like I mentioned in the prepared remarks, they've been very helpful in terms of enabling us to shed costs from our operations.

We also think that bringing the new capabilities to market in properly packaged way holds promise. So that will be work that we're going to be doing in the course of the year..

Is there a potential for alliances with other people that have skills in AI to work with Innodata or just look more where you’re going to be doing this on your own?.

I think we’re going to be looking at both options. We think that there can be potentials for alliances with other companies. In addition, we think there may be ways to package this for water addressable markets..

In terms of the Agility business, the PR business, do you believe we'll show some kind of meaningful growth this year in revenue there?.

Yes, I think we’re in good shape with the Agility business. This year, we'll be targeting somewhere between 15% and 20% year-over-year growth, and you haven’t asked but I'll volunteer also in the Synodex business.

We think we’re going to be in a position to show somewhere in the early 15% growth and the benefits of both of those businesses we've talked about often before is that they recurring revenue base.

So when you're able to hold on to your customers have reasonably high retention rate and effectively manage sales and marketing to win new business, the combined effect of that is much better, much more forecastable year-on-year growth, and we’re seeing that opportunity now in both of those businesses.

One thing I didn't mention about Agility but I think maybe worth mentioning is, we've done some great things with the product.

And looking now on G2 Crowd, which is a website that report in this sector, they compare us the two leading providers, very large companies in this sector, and we ranked number one at 17 different criteria that they established, and we ranked number one in 15 of the 17 criteria. So you know we’re doing a real good job there.

I think the market is reporting back favorably to us. We think we’re in a good position to be growing that business now..

How about one last question? In terms of the Board of Directors, will that provide some additional relationships in terms of getting business?.

I think that the relationships that people bring are the components of what they bring to the table. I think on all three of the people that we're bringing on have expressed me their desire to do everything they can do to help contribute to our growth that will likely include relationships, contacts, knowledge, knowhow.

I’m looking forward to there their partnering with us..

[Operator Instructions] And we do have a question and that comes from Chris Beach with Hawksbill Holdings. Please go ahead..

Jack, good morning. I just had question about your optimism regarding both Synodex and Agility relative to the guidance that you put forth in the second quarter.

If I back out the quarter million dollars plus or minus in the first quarter that was one-time in Agility still, I think you still been calling for sequential decrease in revenue in that business? And I guess I’m clear on how that translates into year 15% to 20% growth rate? I mean that would I guess forecast a pretty substantial pickup in business in the third and fourth quarter and maybe have that visibility on that already I don’t know? That’s my first question.

And second question would be is around IADS. I think you mentioned in your prepared comments that Synodex that a lot of several of your opportunity have accelerated. I’m just curious what accelerated means in terms of where they're in the sales funnel. Thank you..

Thanks for the question. Let me start with last one. We talked about before how we the pipeline tends to move slowly in Synodex which is true, but when individual opportunities start to move more quickly, they tend to be a result of our client prospect deciding that they need to move aggressively.

And once they make a decision, you see things pick up quite a bit. So what’s interesting different from our last call is that we've got you know 4 or 4 companies were saying we would like to move forward in the near term conference. So that that's I hope that's helpful.

In terms of Agility business, what I'm trying to do is look a little bit broader from you look at the year as opposed to just the next exceeding quarter. And in the quarter to address your point in the quarter, we saw lots of very strong leading indicators in terms of marketing driven, leading indicators.

And demo opportunity, we were lagging a little bit in the quarter in terms of sales, strength on the North American side because you made some changes there. But when you look at the business as a whole and you look at lot of metrics and how they cascaded into each other, we do think we're in a position to show that 15% to 20% year-on-year growth.

Last year, we did about $9.4 million, this year we're targeting 11. And I think if we can get that under our belt and again get the pieces of the business think that in a way that positive, if we can continue to build upon the fact that, the market is viewing what we’re doing very favorably.

As I mentioned in response to Tim’s question, then I think we've got a winner. I think we're looking out, we got a business that will be growing as that kind of close, that’s where we’re working on..

[Operator Instructions] As there are no other question, so I would like to turn back to Mr. Jack Abuhoff for any additional or closing remarks..

Thank you, operator. So to recap in DDS, we saw the benefits this quarter of the cost reductions that we announced last quarter, they’re expected to respect overall 2018 cost by a 3.5 million. We’re now very focused in the sales side of the equation, but also working on additional operating improvements through technology and automation.

We're hoping to get additional Synodex deals close this quarter. Thanks to some acceleration we've seen recently in the pipeline. In Agility, we had our strongest quarter to date in terms of new business generation as well as some good one-time revenue as a result of now delivering our content to our channel partners through an API.

So thank everybody for joining call today. Look forward to next time..