Good morning, ladies and gentlemen, and welcome to the Innodata First Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'll turn the conference over to Amy Agress. Please go ahead. .

Thank you. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata; and Mark Spelker, our CFO. We'll hear from Jack first, who will provide perspective about the business, and then Mark will follow with a review of our results for the first quarter. We'll then take your questions. .

First, let me qualify the forward-looking statements that are made during the call. These statements being made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act 1934 as amended, and Section 27A of the Securities Act of 1933 as amended.

Forward-looking statements include, without limitation, any statements that may predict, forecast, indicate or imply future results, performance or achievements.

These statements are based on management's current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, included, without limitation, the expected or potential effects of the novel coronavirus COVID-19 pandemic and the responses of governments, the general population, our clients and the company thereto; the outcome of our application for loan forgiveness for proceeds received under the Paycheck Protection Program established as part of the Coronavirus Aid Relief and Economic Security Act; that contracts may be terminated by clients, projected or committed volumes of work may not materialize; continuing Digital Data Solutions segment reliance on project-based work and the primarily overall nature of such contracts and the ability of these clients to reduce, delay or cancel projects; the likelihood of continued development of the markets, particularly new and emerging markets that are services and solutions support; continuing Digital Data Solutions segment revenue concentration and the limited number of clients; potential inability to replace projects that are completed, canceled or reduced; our dependency on content providers in our Agility segment; a continued downturn in or depressed marketing conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans that could rise to requirements for our services and solutions; difficulty in integrating and deriving 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 growth in existing competitors; our use of and reliance on information technology systems including potential security breaches, cyber attacks, proxy breaches or data breaches that result in the unauthorized disclosure of consumer, client, employee or company information or service interruptions; and 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, including our most recent reports on Form 10-K, 10-Q and 8-K and any amendments thereto.

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We undertake no obligation to update forward-looking information or to announce revisions to any forward-looking statements except as required by the federal securities laws, and actual results could differ materially from our current expectations. Thank you. .

I will now turn the call over to Jack. .

Amy, thank you. Good morning and thank you for joining our call. We're off to a strong start for 2021.

We've delivered 4% sequential and 10% year-over-year revenue growth in Q1, but much more importantly, only 4 months into the year, we believe we have already secured enough new business and late-stage pipeline to meet or exceed our targeted top line growth this year, and we expect this growth to accelerate, driven by expansions in business from new and recently won customers and pipeline growth as our expanding sales force becomes fully productive.

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Operationally, we are executing very well. We have reduced structural costs by $6 million on an annual basis since Q4 2019, allowing us to spend internally generated cash flow on short payback sales and marketing and product enhancement initiatives that, we believe, will lead to growth in future periods.

And we're exceeding our internal operational KPIs and hiring and cost management goals as well. .

Within the pipeline, we're also seeing an increase in deal sizes generally. For example, our pipeline includes a large global technology company that spends tens of millions of dollars on AI initiatives annually. .

We closed a small initial pilot with them about a month ago that went very well, and we're now in discussions with them around several opportunities, a couple of which we hope to close this week. .

In the quarter, we signed an SOW amendment with 1 of the world's leading social media platforms that first became our customer mid-last year. The amendment provides for up to $7 million in AI services in 2021, which, if realized, would constitute a potential revenue expansion of 35x last year's revenue with this customer.

We feel great about how we're helping companies embrace the future through AI, and we're privileged to be working on an ever-expanding set of use cases. Our new customers this quarter include a world-renowned, award-winning fashion brand, which chose our Agility platform for its industry first, AI-powered image recognition capability.

This capability enables our new customer to monitor how its highly recognizable merchandise is featured in global media.

Another new customer is a 125-year-old life insurance company that found our AI-enabled Synodex platform to be instrumental in reducing underwriting costs, a high priority as it seeks to mitigate its COVID exposure and contend with low interest rate environment. .

Still another new customer this quarter is an early stage robotics company backed by prominent VCs. We're helping it build an AI-powered solution for automating warehouse movements and cargo trucking.

It's difficult to predict with any degree of precision our revenue from new customers of our AI data annotation and applied data solutions drop into the quarters. When you win a new customer, there are start-up works such as POCs and pilots, tool testing and calibration with our customer systems and additional specifications discovery.

The timing of these things is oftentimes outside our complete control. In our Agility SaaS business, these things are much more predictable. Revenue starts immediately once the contract is signed.

But what's critical here is that our momentum is building, and it should be sufficient to enable us to meet or beat our growth targets and to accelerate growth over the next few years. .

In addition, this year, in addition to new customer wins, we anticipate sharing with you a variety of new market-facing capabilities together with customer validations.

Yesterday, we announced that we developed and launched new capabilities in generating synthetic data and that we had validated the strength of the solution with a significant new customer win.

Next week, we're planning to release news about an important new capability that will be unveiling in our Agility product that will enable our clients to target and monitor a quickly growing area of the media that is increasingly getting attention. You can watch for this release next week. .

It is worth mentioning also that in the numbers we're announcing today, there is about $1.9 million of costs in the quarter that we are incurring specifically in order to drive accelerated growth. Stated alternatively, these are costs that we would not be incurring if our objective were to run the business flat.

I'm sharing with you our level of growth expenditures because I want you to have visibility on the underlying profit generation capability of our business as well as the operating profit margins generated from incremental business, both of which might otherwise be eclipsed by the investments in growth that we're making. .

We anticipate that our growth in expenditures will continue to be funded through internally generated cash flow and internal resources. From Q4 2019, we reduced our structural costs by approximately $5.8 million per year. These aggressive cost reductions have enabled us to fund our growth expenditures. .

This year, we'll be increasing our investor awareness efforts. We will be participating in investor conferences, starting with Needham's 16th Annual Virtual Technology and Media Conference from May 17 to May 20. I'll now turn the call over to Mark, our CFO. .

Thank you, Jack, and good morning, everybody. Total revenue was $16.0 million in the first quarter of 2021, which represents a 4% increase from $15.3 million in the fourth quarter of 2020. .

Total revenue was $14.5 million in the first quarter of 2020.

Net income was $0.4 million in the first quarter of 2021, or $0.02 per basic share and $0.01 per diluted share compared to a net income of $1.2 million or $0.05 per basic share and $0.04 per diluted share in the fourth quarter of 2020, and a net loss of $0.3 million or $0.01 per basic and diluted share in the first quarter of 2020. .

Cash and cash equivalents were $17.3 million at March 31, 2021, as compared to $17.6 million at December 31, 2020. In addition, with the exception of a $580,000 PPP loan, which we expect will be forgiven, we have no debt. .

Operator, we are ready for questions. .

[Operator Instructions] We'll take our first question from Tim Clarkson with Van Clemens. .

So I was very pleased with the quarter. I thought the results are much more exciting here at around $6 than when it was trading at $9. You guys are really doing it. So just a couple of background questions.

How are we doing in terms of hiring salesmen?.

Tim, thank you for joining today. We're doing very, very well. As you know from our last call, we're on track, first of all, we're -- and our goal is to exit this year with 98 people in our sales area. And that's a pretty substantial increase. We had an average of 15 last year. So we're doing very, very well.

We have 22 people that we've brought on, and we're working on training, and they'll be starting to develop their pipelines within the next month or so. So very much on track. .

I assume the salesmen are performing. .

Well, they're doing what they have to do. We're putting people through a very rigorous training program that we've taken a lot of time to very thoroughly design. And what they need to go through in their first couple of months is training. They have assessments that they take. They have pitches that they have to make, and they're graded on those.

And they're expected to perform. So as they move through that process and more people come on, then eventually, they get to hitting the phones and working relationships. So we see a tremendous amount of investment going into that. We're seeing very good success. We're very happy with the people that we're bringing on.

We're getting rave reviews on the training program. And there's a huge amount of potential for acceleration there as their new pipelines start to contribute to our growth. .

Great.

Can you explain a little bit, you had an announcement yesterday about RPA? And why don't you explain what it does, and how it saves money?.

Sure. So yesterday's announcement was a very important one. What we were describing there is a new capability that we have designed and validated with a customer to generate synthetic data. So synthetic data is an alternative to what you might call real-life data.

It has a lot of benefits in terms of overcoming data usage restrictions, simulating conditions that haven't yet been encountered in real life. It's better in terms of statistical -- it helps overcome some statistical problems that real data can have.

So it was a very important technology development for us, and critically we brought this to our first customer who is one of the world's, maybe even the world's largest RPA company, robotics process automation. And they viewed it as exactly what they need in order to extend the capabilities of their systems. .

So we closed that partnership. We did the announcement because it demonstrates both innovation, which is going to be a very important part of our story this year, and it demonstrates customer validation.

And now we turn that release over to our account-based marketing team who goes and finds us other companies who could benefit from synthetic data generation as well. .

Great. Great. So I noticed in the announcement, you mentioned that you needed to have ability to have some skills in 5 different foreign languages.

Maybe you can just talk a little bit about the skill set that's Innodata has that goes into creating artificial intelligence, just some of the different elements?.

Sure. Happy to. It's a very good question. So I think as you know, we started building and working with AI about 5 years ago. We did a lot of work internally with it, and we built some high-performing systems that are working very, very well for us.

We turn those systems into external market-facing capabilities, and we started to bring those to market last year, and we're continuing that this year.

And we're finding that our combination of very high-performing AI stack that has been trained through lots of content development work that we've done, in combination with our global reach in terms of subject matter expertise and humans in the loop that can work with our technology to create high-performing training data for our customers and create very compelling outcomes in terms of applied AI, is really the perfect combination to be competing in the world.

Our customers care, more than anything else, that the AI performs well, and that requires the training data to be of very high quality. That's the business that we've been in for years, creating high-quality training data in multiple languages. So what we're finding is that there's great receptivity to that. .

My lead in the area mentioned to me that he doesn't believe, and I hadn't even thought about this until yesterday. He said, we've never lost the big RFP yet. So we've got a lot, but that we're doing right now, and we're very excited about it. .

Right. One last question here.

I should know this, but what were the growth goals that you had at the beginning of the year?.

So what we said at the beginning of the year was that, looking out, we're wanting to get the company to a point where it's growing at least 20% annually. And we didn't specifically say, will that happen this year, will that happen next year, but that was what we're striving for. Our internal goals are actually even a bit more aggressive than that.

So the good thing is when we look at the strength of our pipeline, what we see right now is that we've got enough business lined up and ready to be closed in order to get to those growth numbers, we think potentially this year, that's huge because we're only 4 months into the year and to have enough pipeline, which we can look at deal-by-deal and forecast and show that kind of growth is -- makes us feel very good.

It demonstrates a huge amount of momentum that we've got going right now. .

Right. Right. One last question, just in terms of valuations. I know that I always like to use price to sales with a company that's growing like Innodata because you've got a lot of noise with the earnings.

And would you be comfortable saying that the companies that you're seeing in the industry are trading at least 3x to 5x sales?.

Yes. We look at people that we're competing with who are trading at 6x sales, frankly, and we're winning deals from them. So what we're very focused on, frankly, is not today's stock price or tomorrow's stock price. We think, ultimately, if we keep winning the way we are, if like Rahul said to me the other day, we haven't lost a major RFP.

And we've got 4 or 5 new major RFPs right now in the works that we're expecting answers on imminently. If we keep at that pace, then the stock market will take care of itself. .

We'll take our next question from Dana Buska with Feltl. .

Congratulations on a nice quarter. I just have a couple of questions around the relationships that you establish with your customers after you win a deal.

Is this something that are kind of one-off? Or are they more -- something that you see as long-term relationships?.

So for the most part, we see them as potentially long-term relationships. And that's especially true among the large tech companies, where they're spending literally tens of millions of dollars, possibly even hundreds of millions of dollars on AI preparedness and AI implementations.

So we feel very, very good about the expansion that we saw in the social media company that we brought in last year. We feel very good about the fact that we've got another big tech company for whom we've just completed a successful pilot.

We're in discussions with them that we think will be consummated over the next several days about starting some new and expanded opportunities with them. And we believe that, if we're successful, which we absolutely intend to be, those will rapidly scale as well.

So in direct answer to your question, we see these as being recurring relationships with a great amount of expansion capabilities among the large customers. .

Some of the small start-ups we're working with, it will depend on their success rates, obviously. But with large customers and among tech companies and in the companies, we're working with in financial services and insurance and applied health, allied health and things like this, we see lots of greenfield opportunity. .

Okay. Great. One question around -- with your annotation business. One of the things I've been reading about is refreshing data.

And is that something that you are anticipating will be like a recurring revenue stream for you in that area?.

Yes, that's exactly right. So when you build an AI algorithm, the build is not something that is completed. One of the things I'd like to talk about is AI applications are built with data. They're not built through coding and programming the way that conventional applications are. And one of the things about data is there's what's called data drift.

The data is always changing. There are new instances, there are new variables. And the AI needs to be consistently trained around that in order to accommodate that drift and to continually to perform at expectation. And just like you said, that's exactly what gives rise to recurring revenue. .

Okay. Great.

And from a capacity-wise, how do you look at your capacity that you have to be able to handle these contracts? Do you have like unlimited capacity right now? Or is that something that you have to scale as you get more contracts?.

Well, I think one of the things that happened as a result of COVID, frankly, when we had to shift from our model of working with people in large-scale facilities and establish a more variablized, more remote way of working is we built a lot of technologies and tools to enable that.

And the side benefit of that is it dramatically increases our ability to scale. So as we look across the opportunities that we see, and we don't worry about the ability to scale up to support those. .

Okay. Great.

And then with your gross margins, could you talk a little bit about gross margins, and how you see them progressing as your sales increase?.

Yes, sure. So when we think about the business, first of all, as you're aware, there are 3 large contributors to the business. There's the business that we're doing and growing and AI data preparation and applied AI solutions, and then there our platform businesses.

So if we start with our platform businesses, that's where we see the greatest gross margin expansion capability by virtue of the operating leverage you have there. Our Agility business is a true platform business. It's a Rule of 40 business.

We -- when we look out at our projections, we see getting to Rule of 40 sometime mid next year, which is pretty huge for that. Gross margins in that business will continue to track very well, I believe, looking out mid-60s into the 70s and perhaps higher. .

When you look at the Synodex platform business, there, again, we see capabilities to move gross margins into the high 50s, 60s as we look out over our plan. And in the DDS segment, that's probably upper 30s, 40s on a consistent basis.

So depending upon how the revenue comes together, and in what proportion, you'll see gross margins that will be a confluence of that, and will trend up, I believe, into the 40s and 50s. .

We'll take our next question from Joe Furst with Furst Associates. .

Jack, I -- it's great to see your revenue increases and gross margin increases? And what are you doing to and get them more to the bottom line, which so far hasn't been too much?.

Well, 1 of the things that we're going to be doing, Joe, because we see so much opportunity that we're so well aligned for is we're investing very, very heavily back into the company. So in this quarter, $1.9 million could have gone to the bottom line, but instead of sending it to the bottom line, we're recycling it right back into new sales hires.

As I mentioned earlier in the call, we're going from 15 to close to 100 salespeople this year. We're recycling it back into new product that enables us to win new deals.

We're measuring ourselves very much this year on what new business we can book, how that new bookings turns into growth, what new technologies we can come out with, what new technologies and capabilities we can validate in the marketplace? Those are the things we're obsessing over, and I think the investments that we're making in the company are going to provide a short-term return that will be very, very compelling.

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So I will continue, as we move through the year, to share the amount of spend, of new spend in the quarter that is dedicated to those growth initiatives. And we'll be very happy to talk about the return we're getting on that, very happy to talk about how that money is getting spent and where we see that going.

But we see that return as being very compelling right now potentially because we just have such a great market opportunity in front of us. .

[Operator Instructions] We'll take our follow-up from Tim Clarkson with Van Clemens. .

Yes, Jack, just on Joe's question there.

I assume that it's some volume of revenue in the $20 million to $25 million level, you'll start making easily anywhere from 10% to 20% net, right?.

So I think what we're going to do there is we're going to be very mindful of the return that we're getting on the investments that we're making.

I'd like to see us -- frankly, Tim, I'd like to see us thinking about the company in terms of like an underlying EBITDA concept that here's the -- here's the return, here's the EPS that we're getting if we're not investing in our growth the way we are. And here's the return that we're getting for investing in our growth.

We're looking at other things that we can be doing to deploy cash. We're looking at acquisitions. We're looking at all sorts of things.

Right now, there's no opportunity I see that's more compelling in creating new opportunities in this space or new technologies in this space, new capabilities that we can quickly go out, validate and win business with huge new customers. .

That's the best way that we're going to create value. And one of the things that we worked on this year, Nick and I worked very closely together on this. We worked out a 3- and a 5-year plan.

And we said to ourselves, well, what do we need to do from a resource allocation perspective and an execution perspective to take this stock to $30? How do we work backwards from there? What does this look like? And do we have the market opportunities to do that? Right now, when I look at the company, I see that we do have those market opportunities.

I'm very, very excited about those. We're 4 months into the year, and we have enough pipeline if we can close it to hit our numbers. And as we do that, there'll be further expansion in those companies that we're bringing on. We're bringing on new salespeople. They'll create new pipeline. Those create acceleration.

We went into the year with our 2021 plan with 4 deals, 4 big deals that we wanted to win. We've won one, we have a verbal on another, another still we're going to hear, we hope, this week and the fourth is looking good. And as Rahul reminded me, we haven't lost a single RFP there, which is great. .

We've got a new tech company that we did a successful pilot for. We think this week, we're getting new opportunities with that, that has the same potential as the social media company that we've spoken about. So there's -- it's just a greenfield of opportunities that we're going to be going after and investing in. .

Sure. One comment, 1 last question. My clients quite naturally complain about how long it's taken for all this to develop for Innodata.

But I guess the other part of it is that it's going to take the competition, I'm guessing, a number of years to duplicate the kind of skill sets that Innodata has developed digitizing books and doing the kinds of work for [indiscernible] and Thompson and so on.

Isn't that right?.

Well, it is. There used to be 4 companies that cared about high quality data, and they were our customers. But there wasn't a lot of growth you could have within them that we didn't already accomplish, and there wasn't anywhere else to go. As you compare then to now, now everybody that's embracing AI has to care about high quality data.

And all of the systems and all the capabilities we've developed over the years to create high-quality data are applicable, excuse me, to this opportunity. So we think we're in a very privileged position. That privileged position is being validated by the business that we're winning.

The old days, when there were 4 companies to talk to, that's in the rearview mirror. Now it's a very impressive list of companies that we're engaged with, and we're just having a lot of fun, and we're very excited about it, and we see the momentum being created all the time.

I wish there were a financial statement, like a balance sheet or cash flow, that could track momentum, that could demonstrate what's going on right now. There isn't one to my knowledge, which is why I have to qualitatively kind of explain it. We've been in this business for a very long time, and we've seen a lot.

We know services businesses and technology businesses very, very well. This is very exciting momentum, and it bodes very well for our future. .

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

Thank you. So yes, I'll recap with just a few thoughts. We're 4 months into the year, we already have enough new business secured and visible in our late-stage pipeline to meet or exceed our growth targets. As you might imagine, our focus now is getting these deals over the finish line.

Our plan to accelerate growth is very much a function of ramp-up in this newly secured business. It's late-stage pipeline conversions. It's expansions in business from new customers, recently won customers, it's about pipeline growth as this very rapidly expanding sales force starts to become fully productive. .

In this quarter, there's about $1.9 million of costs that we are incurring specifically in order to drive accelerated growth. And we view this as an investment we are making from a capital allocation perspective. We expect that it will have a short payback given how well positioned we are in the market right now, and how we're winning.

And we think we're going to be, ultimately, ideally taking advantage of strong tailwinds in each segment of the business that we seem to now be enjoying. We're able to fund this in large part because we aggressively reduced structural costs by $6 million annualized since Q4 2019. So that's a quick recap.

Thanks, everybody, for joining us today, and look forward to continuing our conversations through the year. .

Ladies and gentlemen, today's conference is available for replay from 2:00 p.m. Eastern Time today to June 5, 2021, at 2:00 p.m. Eastern. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112 using passcode 3925006. Again, the numbers are (719) 457-0820 or 1 (888) 203-1112, passcode 3925006. This concludes today's conference.

You may now disconnect..