Innodata Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2018. Innodata provides data transformation and related technology services, operating through Digital Data Solutions (DDS), Agility PR Solutions (Agility), and Synodex. Effective this quarter, docGenix results were moved from Synodex to DDS; 2017 segment figures were reclassified for comparison.
Financial performance and liquidity
Unless stated otherwise, amounts below are in millions of U.S. dollars.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $14.120 | $14.953 |
| Direct operating costs | $9.894 | $11.723 |
| Selling and administrative expenses | $3.916 | $4.625 |
| Income (loss) before tax | $0.306 | $(1.383) |
| Income tax provision | $0.582 | $0.445 |
| Net loss attributable to Innodata | $(0.268) | $(1.730) |
| Basic and diluted loss per share | $(0.01) | $(0.07) |
| Adjusted EBITDA | $1.334 | $(0.164) |
| Cash provided by operating activities | $1.652 | $1.115 |
Direct operating costs were 70% of revenue, compared with 78% a year earlier. The filing attributes lower operating and administrative costs largely to headcount reductions begun in the second half of 2017. The tax provision exceeded pretax income; management says foreign taxes and losses in U.S. and Canadian entities, which have deferred-tax valuation allowances, contribute to disproportionate effective tax rates.
Revenue by segment: DDS $10.477 million (down about 10%); Synodex $0.981 million (up 43%); Agility $2.662 million (roughly flat). Management attributed the DDS decline mainly to a large project that ended in 2017 and other client volume changes. Adjusted EBITDA was $1.231 million for DDS, $0.007 million for Synodex, and $0.096 million for Agility.
At March 31, cash and cash equivalents were $12.179 million, including $6.4 million held by foreign subsidiaries; working capital was $9.086 million. Current liabilities were $15.348 million. Long-term obligations totaled $6.298 million, including $2.110 million current and $4.188 million long-term; this total includes pension and lease-related obligations. Cash increased $0.772 million from year-end. The company had no bank facility or line of credit.
Investing activities used $0.625 million, primarily for technology and infrastructure capital expenditures; financing activities used $0.301 million for obligation payments. Management expects capital expenditures of approximately $1–$2 million over the next 12 months and believes available cash and internally generated funds will meet financial needs at least through May 2019.
Material changes, outlook, risks, and contingencies
- Revenue fell about 6% year over year, while the net loss narrowed substantially and Adjusted EBITDA improved to $1.334 million. The filing links the earnings improvement chiefly to cost reductions; DDS revenue nevertheless declined.
- Two DDS clients generated approximately 32% of total revenue. Non-U.S. clients accounted for 58% of revenue, and 47% of receivables were due from three clients, creating customer concentration and collection exposure.
- There is no specific earnings or revenue guidance. The company notes that project starts, cancellations, client volume changes, wage inflation, competition, and fourth-quarter holiday overtime can cause operating variability. Synodex revenue is typically seasonal, generally highest in Q4 and lowest in Q3.
- Foreign exchange is a material exposure. The company uses forward contracts; outstanding notional was $11.3 million at quarter-end, and the balance sheet included a $0.189 million derivative liability. Changes in derivative fair value contributed a $0.531 million loss in other comprehensive income during Q1.
- A Philippines labor judgment was recalculated at approximately $6.2 million, plus accrued interest. A U.S. court preliminary injunction bars 97 former employees from pursuing recognition or enforcement against Innodata in the United States while the action is pending. The company warns that substantial recovery could materially affect it.
- Indian tax matters include a contested service-tax classification issue: if the tax authority prevails, revenues of $72.4 million for July 2012–November 2016 could be subject to tax of 12.36%–15%. The company also has approximately $1.0 million of service-tax credits recorded as a receivable, with refunds delayed pending adjudication. Management believes recorded tax liabilities are adequate.
- The company adopted the new revenue-recognition standard in January 2018 with no material impact. It expects the lease standard, effective for it in 2019, to increase reported assets and liabilities, potentially significantly.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether DDS can replace the ended large project and reduce dependence on a small number of major clients.
- Cash generation, working-capital movements, capital spending, and the stated liquidity runway, particularly given the absence of a credit line.
- Developments in the Philippines labor judgment and the Indian tax and service-tax disputes, including possible cash exposure and recovery of the recorded credits.
- Whether cost savings are sustainable and whether Agility’s higher content costs and operating losses improve.
- The impact of foreign-currency movements and the expected balance-sheet effect of adopting lease accounting.