Innodata Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial amounts are in millions of U.S. dollars unless otherwise stated; the filing presents most statements in thousands. Innodata provides digital content services and solutions through Content Services (CS) and early-stage Innodata Advanced Data Solutions (IADS).
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $22.8 | $16.3 | $47.9 | $31.0 |
| Income before taxes | $2.0 | $1.0 | $5.7 | $1.1 |
| Net income | $1.7 | $0.8 | $4.5 | $0.8 |
| Net income attributable to Innodata | $2.1 | $0.8 | $5.5 | $0.8 |
| Basic / diluted EPS attributable to Innodata | $0.08 / $0.08 | $0.03 / $0.03 | $0.22 / $0.21 | $0.03 / $0.03 |
Revenue increased 40% year over year in Q2 and 55% in the first half. Direct operating costs were 64% of revenue in both Q2 and the first half of 2012, versus 70% and 71%, respectively, in 2011. Selling and administrative costs were 27% of Q2 revenue (25% prior year) and 24% of first-half revenue (26% prior year). The filing does not report a conventional operating-income line or an explicit operating-margin measure.
CS generated $22.7 million of Q2 revenue and $47.2 million in the first half. IADS contributed $0.1 million and $0.7 million, respectively, while recording pre-tax losses of $1.4 million for Q2 and $4.2 million for the first half (before intersegment eliminations, per the segment table). Q2 consolidated net income attributable to Innodata exceeds consolidated net income because losses attributable to non-controlling interests are added back.
Cash, liquidity and obligations
- At June 30, 2012, cash and equivalents were $20.7 million, short-term investments $2.6 million, working capital $32.0 million, and total assets $64.4 million. Cash plus short-term investments totaled $23.3 million.
- Six-month operating cash flow was $10.2 million, compared with $1.3 million a year earlier. Investing activities used $1.3 million net, including $4.5 million of capital expenditures and $3.2 million in investment maturities. Financing activities provided $0.4 million.
- Long-term obligations totaled $3.8 million, including $0.6 million current and $3.2 million long-term. The $15 million receivables-based credit line had no borrowings and expires in June 2013.
- Contractual cash obligations were $12.1 million, principally $11.5 million of operating leases. Management said existing liquidity and available credit should meet needs for the next 12 months; the company also filed a shelf registration allowing offerings of up to $70 million in securities.
Changes, outlook and risks
- Growth was principally driven by eBook-related work for a significant CS client. Management reported sequential revenue decline from that client in Q2 and expected its revenue to continue declining in the second half of 2012. Total Q2 revenue was down 9% sequentially from Q1.
- Management attributed improved CS profitability to higher revenue, productivity, process improvements and technology. Increased sales and marketing hiring and IADS start-up costs raised selling and administrative expense. IADS accumulated $6.1 million of operating costs since launch through June 30, 2012, net of intersegment profits.
- Expected capital expenditures for the next 12 months were approximately $5–$6 million, including technology, IADS development and delivery-center investments. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: two clients generated approximately 47% of Q2 revenue and 48% of first-half revenue; two clients represented 58% of receivables at June 30. Days sales outstanding rose to approximately 76 from 66 at year-end.
- Risks include project-based and at-will client arrangements, customer concentration, inability to replace or renew work, wage inflation in Asian operations, foreign-exchange movements, and IADS execution risk. The company had $19 million notional of currency forwards; their fair-value liability was $0.6 million.
- Contingencies include disputed Indian tax assessments, including an approximately $1.1 million assessment for fiscal 2008 (a $0.309 million provision was recorded) and approximately $0.9 million of additional provisions for other potential exposures. A Philippine employment-related judgment involving an inactive subsidiary and purportedly Innodata seeks approximately $7.5 million; management, based on counsel, believed recovery against Innodata unlikely, but noted a substantial recovery could materially affect the company.
- Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether the significant eBook client’s expected second-half revenue decline is offset by replacement or new work.
- Revenue and losses in IADS, and the timing and scale of any path toward profitability.
- Client concentration, receivables collection and the increase in days sales outstanding.
- Progress and outcomes of Indian tax disputes and the Philippine litigation, including adequacy of recorded provisions.
- Execution and funding of planned $5–$6 million capital spending, and renewal or replacement of the credit facility expiring in June 2013.