Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Innodata Second Quarter 2018 Earnings Conference Call's. Today's conference is being recorded. .

At this time, I'd like to turn the conference over to Amy Agress. Please go ahead, ma'am. .

Thank you, Catherine. 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 first, who will provide a detailed review of our results for the second 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; the primarily at-will nature of contracts with our Digital Data Solutions clients 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 deriving synergies from acquisition, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business 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. .

Thank you. 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 second quarter of 2018. .

Total revenue in quarter 2 of 2018 was $14.3 million compared to $14.1 million in quarter 1 of 2018. Our adjusted EBITDA for this quarter was $1.6 million compared to $1.3 million in the first quarter, an increase of $300,000 or 23%. The increase in adjusted EBITDA was mainly due to higher revenues this quarter combined with lower costs. .

I will now review key line items and segment performance on a sequential quarterly basis, comparing the second quarter of 2018 with the first quarter of 2018. At the segment level, DDS revenues increased by $350,000 or 3% to $10.8 million this quarter compared to $10.5 million in the prior quarter.

This increase was due to revenue from new projects and increased volume from existing projects. .

Synodex revenue was $1 million this quarter, a 3% increase from the prior quarter. Agility revenue decreased by $231,000 from $2.66 million in the first quarter, a 9% reduction, to $2.43 million in this quarter.

This decrease is primarily the result of onetime additional revenue from one of the Agility resellers and seasonal revenue from our annual Bulldog awards program that was recognized in the first quarter. .

Moving on to gross margins. Gross margins in DDS were $3.2 million or 29% of revenue this quarter compared to $3 million or 28% of revenues in the first quarter, an increase of $236,000 or 8% on account of higher revenues and benefiting from our cost reduction initiatives.

Gross margins in our Synodex segment increased to $300,000 in the current quarter from $200,000 in the previous quarter due to realized cost efficiencies.

Gross margins in the Agility segment were $900,000 or 38% of revenue this quarter as compared to $1.1 million or 40% of revenues in the prior quarter, a decrease of $200,000 or 19% on account of lower revenues in this quarter. .

We will now look at the selling, general and administrative or SG&A expenses before the onetime noncash impairment charge, which I will discuss in a moment. SG&A expenses were $3.7 million or 26% of revenue this quarter as compared to $3.9 million or 28% of revenues in the prior quarter.

The $200,000 or 5% decrease in SG&A expenses was mainly on account of labor and other cost savings..

SG&A expenses for DDS segment in the second quarter before the goodwill impairment charge were $2.1 million or 19% of revenue as compared to $2.35 million or 22% of revenues in the prior quarter. The $250,000 decline is primarily from labor and cost reduction initiatives. .

During the 3-month ended June 30, 2018, we recorded a onetime noncash goodwill impairment charge of $675,000 for the DDS segment. We periodically analyze whether any indicators of goodwill impairment have occurred.

As part of this periodic analysis, we compare the company's estimated fair value, as determined based on our stock price, to our net book value. .

A continued decline in our stock price was viewed as a triggering event under ASU 2017-04, which required an assessment for possible goodwill impairment as of June 30, 2018.

Under the provisions of ASU 2017-04, goodwill impairment is recognized based on step 1 of the current guidance which calculates the carrying value in excess of the reporting unit fair value. For the quarter ended June 30, 2018, the company's book value was close to $30 million, which is higher than the market cap of approximately $26 million.

Under the new accounting standard, goodwill impairment was recognized. .

SG&A expenses for Synodex were $170,000 in this quarter and $209,000 in the first quarter, a decrease of 18%. SG&A expenses for Agility were $1.4 million in both the quarters. .

Our adjusted EBITDA for quarter 2 2018 was $1.6 million compared to $1.3 million in the first quarter of 2018, an increase of $300,000 or 23%. This is comprised of $1.67 million adjusted EBITDA from DDS and $120,000 adjusted EBITDA from Synodex, offset by $150,000 adjusted EBITDA loss in Agility. .

For taxes, we recorded an income tax provision of $450,000 this quarter compared to $580,000 last quarter. After deducting tax expenses, minority interest and including the effect of onetime goodwill impairment charge of $675,000, our net loss was $466,000 compared to a net loss of $268,000 in the prior quarter. .

As for the U.S. Tax Cuts and Jobs Act, also called the 2017 tax act, in the fourth quarter of 2017, the company recorded a toll charge of $8.6 million to income tax expense, which we offset against our available net operating loss carryforwards.

In the second quarter of 2018, the company performed the calculation of GILTI, that is global intangible low 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 $11.3 million in net operating loss carryforwards, after taking into account the toll charge of $8.6 million under the new U.S. tax provision. .

Our cash and cash equivalent balances were $11.7 million this quarter compared to $12.3 million in the first quarter. Approximately 50% of the balances were held in the U.S., and the rest were held overseas. .

On CapEx, our CapEx was approximately $600,000 in each of quarter 1 and quarter 2 of 2018. In the third quarter of 2018, we expect our CapEx to be in the range of $500,000 to $600,000. .

I will now turn to our ForEx hedging program and other items. At the end of this quarter, we had approximately $6 million in outstanding forward contracts to hedge a portion of our exposure to foreign currency-denominated revenues and expenses. .

Based on the mark to market, our forward contracts had a notional loss of $250,000 at the end of second quarter.

In terms of guidance for the third quarter of 2018, we expect our third quarter revenue to be in the range of $13.7 million to $14.1 million, consisting of DDS revenue in the range of $10.3 million to $10.4 million, Synodex revenues in the range of $1 million to $1.1 million and Agility revenue in the range of $2.5 million to $2.6 million. .

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

Thank you, AK. Good morning, everyone. Thank you for joining us today. I'm going to provide some general perspective on where we are at the 2018 half year mark and then provide some additional perspective on each of our segment's performance in the quarter. .

We are tracking well to our 2018 plan, which called for cost rationalizing the business to support the balance sheet and positioning each of the segments for growth. As a result, in the first half of the year, we have close to 4x our adjusted EBITDA over the same period last year.

We are forecasting growth for the year in both of our venture businesses, Synodex and Agility, and we think the work we are doing this year in our core DDS business will position us for growth in 2019. .

first, to emphasize the extent to which we have driven costs down; and second, to underscore the leverage that is inherent in our DDS business. .

We are using our Innodata lab, AI and deep learning development to both decrease our costs and position the business for growth. We have reinvigorated our pipeline with a combination of expansion and net new potential engagements which feature our new technologies, resulting in good strategic engagement with our key customers.

Two weeks ago, our second-largest client said that our proposal around AI-driven automation was the best proposal they have ever seen from a vendor. In addition, we are working on value-based partnerships with select clients. Based on a conservative forecast, we believe that.

we will sign 50% more business in 2018 than we did in 2017, which, all things being equal, suggests a possible return to growth in 2019. .

Ironically, despite the progress, accounting rules require that we write off the $675,000 of goodwill we were carrying on our balance sheet in DDS from a small acquisition we made of a professional services firm in the early 2000s.

The trigger for the write-off was that our market cap had fallen to $26 million, which was less than $30 million net book value reflected on our balance sheet. .

In our Synodex business, first half adjusted EBITDA swung from an approximate $700,000 loss last year to positive $150,000 this year. This approximate $850,000 swing was enabled in part by revenue growth of $400,000, which equates to 25% growth. .

In the quarter, we signed 2 new clients. We're approximating the combined revenue value of these 2 new bookings to be about $680,000 of nonrecurring revenue, plus an additional $350,000 to $500,000 of annual recurring revenue.

In terms of near-term pipeline, we are presently focused on 3 clients, who have expressed interest in expanding their programs with us and 2 new large prospects for which we have recently completed pilot programs. .

a subscription-based SaaS offering that public relations professionals use to identify journalists and bloggers who are likely to pick up and amplify their press releases and other media distributions; and a platform-based media monitoring and analysis managed service for large companies who need [ exacting ] information about how their brands and their key business topics are being talked about across social and traditional media channels.

We believe we are on target to achieve growth of approximately 10% or more this year and 20% or more in 2019. Our confidence in the long-term outlook of this business is driven by improvements we are seeing in both subscription renewal rates and by the work we're doing to increase overall new bookings. .

first, to reengineer the acquired products to be world-class; second, to build a high-performing client success team to drive client retention; third, to build a well-oiled lead-generation engine that can funnel increasing number of leads to sales; and fourth, to put in place a sales team that's great at closing the leads barehanded.

While there will always be more work to be done, we can check the box in the first item on the list, reengineering the acquired products. Agility is now ranked in the top quadrant of media intelligence solutions in the marketplace today. .

We can also check the box for the second item in our list, building a high-performing client success team to drive client retention. In terms of contributions by our clients success team, our managed service has enjoyed 90%-plus renewal rates for the last few years, and we expect this to continue.

On the SaaS platform, our renewal rates from the time we acquired the business through Q4 of last year were very low due to a large number of customers that came with the acquisition but, in reality, has not been using the product.

But as these non-engaged customers cycled out, we've seen steady improvements in SaaS renewal rates from 49% in Q4 of last year to 59% in Q1 and now 70% in Q2. We are forecasting steady continued progress in this regard. .

The third item on our list, building out a lead-generation capability, is also showing good success. We generated -- our generated web traffic increased by 57% in Q1 and then another 17% on top of that in Q2. Our marketing qualified leads or MQLs increased by 19% in Q1 and then another 30% in Q2.

And our sales qualified leads or SQLs increased by 20% -- 28% in Q1 and then another 34% in Q2. .

Importantly, the marketplace, which is valued at over $1.5 billion, leaves us plenty of room for growth. .

Our current opportunity is to cultivate a sales function that can successfully process the increasing number of leads that are being served up to it. We replaced a significant number of our sales headcount in the quarter using a new hiring profile, and we have instituted a new sales process and a new sales incentive structure.

We are confident that the changes we're making will yield the results that we're looking for. .

And despite all the changes that took place in the quarter, we were still able to improve our direct sales force bookings performance by 25% over Q1. Taking both direct sales and channel sales together, we added 85 new customers in the quarter, with total bookings of $850,000. .

Operator, we'll now turn the call over for questions. .

[Operator Instructions] We'll go to Timothy Clarkson with Van Clemens. .

Jack, just wanted to say that there's been some progress, obviously, in terms of the profitability. You're essentially breakeven, marginally profitable now, generating cash. The balance sheet is strong and not deteriorating anymore.

So obviously, the key is growth, and the 2 new divisions are probably going to grow because they're in very dynamic new areas.

But the legacy business, the DDS, what's -- give us some more color on why you think you can that division now because that's where the -- in the near-term, the biggest swing can occur from?.

Tim, thanks for the question. Yes, excellent point. I think that the technologies that we've developed in machine learning, deep learning, artificial intelligence that has helped us to drive the swing in terms of profitability are also helping us reconceptualize the business in a very powerful way.

We see ourselves going from a business that work with people who are enabled by technology and migrating to a business that's all about technology that is enabled by people, and that's a very important reconceptualization. Beyond the fact that it has helped us reduce expenses, it's also helping us build growth and build pipeline.

So we see, as we look forward, that, that same set of technology is going to be very important to us going forward. In addition to that, we see the possibility of value-added customer and partner relationships forming up, again, principally around that technology.

We see opportunities in the enterprise markets, what has been described as the global data awakening, where increasing numbers of enterprises are looking to mine data for strategic advantages. We see a role in helping them manage the vast stores of unstructured data that they're working with.

And our intention is, in order to enable all this, we're going to be reinvesting in strategic and product marketing to improve our go-to-market performance. .

Great.

How many -- how much on these new deals are you involved personally in trying to close the deals?.

I'm involved in a good number of them. I'm not involved in all of them, but a good number. .

[Operator Instructions] We'll hear from Joe Furst with Furst Associates. .

I want to commend you on the progress that you're making. You are making some progress. Unfortunately, over the last 5 years, we've heard all sorts of things about the future looking great, but it never seemed to happen very much, and that you're doing the best you can, I think.

But at what point, especially with DDS, would you decide, "Maybe we just can't do this and we ought to try selling the company?" Because the company, even right now, is got to be worth at least double of what the stock price is. But anyway, what are your thoughts about that? I know one shareholder has raised that question with you before, too.

What are your thoughts about that?.

Sure. So Joe, thanks for the question. As you know, our board appointed a special committee in December, and the job of the special committee is to look at the company through a shareholder value-creation lens.

It did so by working with some outside consultants who were able to provide a perspective on effectively turning around the company operationally and providing a means by which to grow it as well as consultants who were able to look at the wider markets that we operate in and the trends and directions that people are going and help us conceptualize a role for ourselves.

I think where we are now is that -- maybe is looking at how do we take advantage of what's, in some respects, a new company, enabled by new technology, enabled by a new value proposition, having turned the corner on cash losses, having interesting assets in technology. And the committee is exploring all possibilities.

There's nothing sacred, and there's nothing that's off the table. So I think we're going to progress that. We're following a pretty rigorous methodology in order to do so, and we'll be continuing down that road. I hope that's helpful. .

[Operator Instructions] It appears we have no additional questions. I'll turn the floor back over to today's speakers for any additional or closing remarks. .

So thanks, operator. I'll just reiterate a few key takeaways from the quarter. .

Our adjusted EBITDA in the first half of 2018 was close to 4x the first half of 2017. In DDS, we're forecasting a 50% or greater increase in new business sold this year. So even though DDS revenues will likely be down this year over last year, we're setting up DDS well for top line growth in 2019.

And we're forecasting growth this year in both our Synodex and Agility venture businesses. .

So thanks again, everybody, for joining us today. We look forward to reporting continued progress. .

Ladies and gentlemen, today's conference is available for replay from 2 p.m. Eastern time today to August 9, 2018, at 2 p.m. Eastern. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112 using passcode 3375687. .

This concludes today's conference. You may now disconnect..