Innodata Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Innodata provides digital content, data and media-intelligence services through Content Services (CS), Innodata Advanced Data Solutions (IADS) and Media Intelligence Solutions (MIS).
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $59.1 million | $64.2 million |
| Operating income (loss) | $(1.6) million | $(7.7) million |
| Net income (loss), consolidated | $(1.9) million | $(12.8) million |
| Net income (loss) attributable to Innodata | $(1.0) million; $(0.04) per share | $(10.6) million; $(0.43) per share |
| Adjusted EBITDA | $3.0 million | $2.4 million |
| Cash from operating activities | $4.6 million | $0.6 million |
| Cash and cash equivalents, year-end | $24.2 million | $24.8 million |
| Working capital, year-end | $25.8 million | $28.8 million |
| Long-term obligations, balance-sheet presentation | $5.5 million | $3.7 million |
Direct operating costs were $43.9 million, or 74.3% of revenue, compared with $49.1 million, or 76.5%, in 2013. The resulting gross margin was approximately 25.7%, versus 23.5%. Selling and administrative expenses were $16.4 million. The company recorded a $0.4 million impairment charge in 2014, compared with $5.5 million in 2013. The 2014 income-tax provision was $0.4 million despite a pretax loss.
At year-end, current liabilities were $12.2 million, including $1.6 million of current long-term obligations. Cash included $22.5 million held by foreign subsidiaries and $1.7 million in the United States. The company said existing cash and internally generated funds should meet its needs for the next 12 months. Operating cash flow improved year over year; investing activities used $5.4 million, including $2.0 million of capital expenditures and $3.4 million for acquisitions. Financing activities provided $0.4 million.
Segments and material changes
- CS: Revenue fell to $56.8 million from $63.1 million. The $6.3 million decline principally reflected lower non-e-book work for a significant client and a smaller decrease in e-book services. Segment pretax income after intersegment eliminations was $4.4 million, compared with $4.4 million in 2013.
- IADS: Revenue was $0.6 million, down from $1.1 million. The segment recorded a $5.6 million net loss after intersegment eliminations. Synodex and docGenix had generated minimal revenue and incurred losses since inception; 2014 investment net of revenues was reported as approximately $5.6 million in one section and $6.2 million in operating expenses in another.
- MIS: Revenue was $1.7 million and the segment recorded a $0.3 million net loss. Results include MediaMiser only from July 29, 2014, and Bulldog Reporter assets only from December 24, 2014.
- Acquisitions: Innodata acquired MediaMiser in July for stated consideration with a fair value of approximately $5.1 million, including contingent consideration, and acquired Bulldog Reporter intellectual property and related assets in December for approximately $0.2 million. MediaMiser’s potential earn-out depends on revenue and EBITDA performance during April 2016–March 2017.
Total revenue declined 8% in 2014, following a 26% decline in 2013. The improved annual loss and operating cash flow versus 2013 reflected lower impairment and tax-valuation-allowance charges, cost restructuring and reduced IADS losses; they did not reflect a return to GAAP profitability. Adjusted EBITDA rose 25% to $3.0 million. Quarterly 2014 revenue increased from $14.1 million in Q1 to $15.9 million in Q4; Q4 attributable net loss was $0.3 million, versus $0.9 million of attributable net income in Q4 2013.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures of approximately $3–$4 million and planned continued IADS investment. The filing gives two different quarterly investment estimates: $1.1–$1.3 million in some sections and $1.1–$1.4 million in the liquidity discussion.
- Management planned a general commercial release of docGenix’s second-generation system in mid-2015. It cautioned that IADS may not achieve commercially meaningful revenue or become viable and that investment could be reduced if funds or acceptable external financing are unavailable.
- Client concentration is material: three clients generated approximately 41% of 2014 revenue; one represented 17%, another 14%, and Apple approximately 10%. Contracts are often project-based or terminable on short notice. Four clients represented 58% of accounts receivable, or $6.0 million.
- Foreign exchange, wage inflation, customer pricing pressure, project delays or cancellations, competition, employee retention, cybersecurity and data privacy, and political or operational disruption in overseas delivery locations are identified risks. Non-U.S. clients generated 47% of 2014 revenue. Cash held overseas may be difficult to access or could incur U.S. tax if repatriated.
- Foreign-currency forward contracts had approximately $19.4 million aggregate notional value and a reported unrealized loss of about $0.3 million at year-end. Management noted that hedge effectiveness is not assured.
- A Philippine labor decision purports to order reinstatement and approximately $8.0 million in back wages and benefits. Management, after consulting counsel, considered recovery against Innodata unlikely, but acknowledged a material adverse outcome was possible. Other legal and tax matters remain; the filing reports $1.8 million of unrecognized tax benefits.
- Innodata reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion. MediaMiser was excluded from the internal-control assessment during the permitted post-acquisition integration period.
Important facts for investors to verify
- Whether CS revenue and margins stabilize after consecutive annual revenue declines, and whether the business replaces completed or reduced client projects.
- Whether IADS generates meaningful revenue and whether ongoing investment remains within management’s stated range; note the filing’s inconsistent quarterly investment estimates.
- Whether MIS acquisitions deliver expected growth and integration benefits, and the eventual cash or share dilution from MediaMiser consideration and any earn-out.
- The accessibility and tax implications of the $22.5 million of overseas cash, alongside the company’s liquidity needs and planned capital expenditures.
- Developments in the Philippine labor case, foreign tax audits and other contingencies, as well as customer concentration and receivables collection.