Innodata Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Innodata provides digital content and data services through Content Services (CS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). Results include MediaMiser from its July 2014 acquisition and Bulldog Reporter assets acquired in December 2014; the comparable 2014 quarter did not include these businesses.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $13.8 million | $14.1 million; down 2% |
| Direct operating costs | $11.1 million; 81% of revenue | $10.3 million; 73% of revenue |
| Selling and administrative expenses | $4.1 million | $3.8 million |
| Loss before income taxes | $1.4 million | $5,000 loss |
| Income tax provision | $554,000 | $101,000 |
| Net loss attributable to Innodata | $1.8 million; $(0.07) per diluted share | $189,000 income; $0.01 per diluted share |
| Adjusted EBITDA | $446,000 loss | $896,000 income |
| Operating cash flow | $2.1 million | $4.3 million |
The filing does not present a conventional gross-margin figure. Direct operating costs as a share of revenue rose to 81% from 73%, reflecting weaker revenue without a corresponding reduction in CS production headcount. CS revenue fell 13% to $12.2 million, principally due to lower e-book services for one client. IADS revenue increased to $405,000 from $72,000; MIS revenue was $1.2 million. Segment results show CS and MIS losses of approximately $0.6 million and $0.2 million, respectively, while IADS lost $1.0 million.
At March 31, cash and cash equivalents were $25.4 million, working capital was $24.7 million, and current assets were $36.6 million versus current liabilities of $11.9 million. Long-term obligations totaled $5.3 million, with a further $1.4 million current portion; these include lease, vendor, acquisition-related and pension obligations. Operating cash flow benefited from $3.0 million of working-capital changes, including $2.3 million from receivable collections. Capital expenditures were $186,000. Cash increased $1.2 million during the quarter to $25.4 million.
Material changes and notable items
- Despite only a 2% revenue decline, the company moved from modest prior-year income to a $1.8 million attributable net loss, and Adjusted EBITDA declined by $1.3 million.
- Two clients accounted for 34% of revenue, compared with 31% a year earlier. Non-U.S. clients generated 52% of revenue, up from 43%; 44% of receivables were due from three clients.
- Foreign currency translation reduced comprehensive income by $539,000. The company had $17.2 million of foreign-currency forward-contract notional exposure; it reported a $0.2 million unrealized net hedge loss in MD&A.
- The $554,000 tax provision was recorded despite a pretax loss. The filing cites foreign-jurisdiction tax obligations and valuation allowances on U.S. and MIS deferred tax assets.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects to invest $1.1 million to $1.4 million per quarter in IADS in the immediate future and anticipates $2.5 million to $3.5 million of capital expenditures over the next 12 months. Management believes current cash and internally generated funds will cover needs for the next 12 months, but says IADS investment may be curtailed if funding is insufficient or unattractive.
- IADS has generated minimal revenue and incurred losses since inception. Cumulative net investment was $28.3 million through March 31, 2015. Management intends to continue investing.
- MediaMiser’s acquisition consideration includes up to $4.6 million contingent on revenue and EBITDA targets for April 2016–March 2017; its recorded fair value was approximately $0.5 million. Contractual cash obligations listed total $2.9 million, excluding potential contingent consideration and pension-plan obligations.
- Risks include client and project concentration, at-will or project-based contracts, difficulty replacing or starting projects, wage inflation, foreign-exchange movements, competition, and acquisition integration. Results can fluctuate with project transitions and seasonal facility closures.
- A Philippines employment case involves approximately $8.0 million of claimed back wages and benefits; management believes recovery against Innodata is unlikely, but acknowledges a substantial recovery could materially affect the company. Management also says adverse outcomes of approximately $100,000 beyond recorded legal reserves are reasonably possible. Indian and Philippine tax matters remain contested; the filing describes an April 2015 favorable Indian tax judgment, subject to possible appeal.
- Management concluded disclosure controls were effective. The assessment excluded MediaMiser during its post-acquisition integration period. The company reported no material changes to risk factors or legal proceedings from its prior annual report.
Important facts for investors to verify
- Whether CS client volumes recover and the company can align delivery costs with revenue, given the rising direct-cost ratio and concentrated customer base.
- Whether IADS can increase commercial revenue enough to justify the stated quarterly investment, and whether investment or planned capital spending changes.
- Cash generation excluding working-capital benefits, including receivable collections, and the availability of the $22.7 million of cash held by foreign subsidiaries; management intends to permanently reinvest those funds abroad.
- Developments in tax and legal proceedings, particularly the Indian assessments and the Philippines employment claim.
- The effect of acquisitions, foreign exchange and the MediaMiser earn-out on future earnings, cash needs and reported comparisons.