Innodata Isogen, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Amounts below are in U.S. dollars. The filing presents unaudited results.
Business context
The company provides digital-content business process, technology and consulting services. Its two reporting segments are Content Services (CS) and Innodata Advanced Data Solutions (IADS), launched in 2011. IADS includes healthcare and insurance data-analysis business Synodex and financial-document software and services business docGenix. Innodata owns 77% of Synodex and 78% of docGenix.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 or comparison |
|---|---|---|
| Revenue | $25.136 million | $14.701 million; up approximately 71% |
| Direct operating costs | $16.105 million | $10.673 million |
| Selling and administrative expenses | $5.400 million | $4.053 million |
| Income before income taxes | $3.722 million | $0.084 million |
| Net income | $2.814 million | $0.015 million |
| Net income attributable to Innodata | $3.432 million | $0.015 million |
| Diluted earnings per share | $0.13 | Reported as zero |
| Operating cash flow | $7.726 million | $1.174 million |
| Cash and cash equivalents | $18.224 million | $11.389 million at December 31, 2011 |
| Short-term investments | $4.805 million | $5.828 million at December 31, 2011 |
| Working capital | $30.875 million | $28.148 million at December 31, 2011 |
| Long-term obligations | $3.076 million | $2.944 million at December 31, 2011 |
Direct operating costs were 64% of revenue, compared with 73% in Q1 2011. CS direct operating costs were 59% of CS revenue versus 73% a year earlier. Selling and administrative expenses were 21% of revenue versus 28%. The filing attributes improved profitability principally to higher revenue, productivity and process and technology improvements. Q1 2012 comprehensive income attributable to Innodata was $4.133 million, including a $0.693 million after-tax gain in derivative fair value.
Operating cash flow benefited from $2.623 million of net accounts-receivable collections and other working-capital movements. Investing cash use was $1.081 million, including $2.104 million of capital expenditures and $1.023 million of proceeds from investments. Financing provided $0.190 million, including $0.260 million from stock-option exercises. The company reported no borrowings on its $7 million receivables-backed credit line, which was due to expire in June 2012. Current and long-term obligations totaled $3.663 million at quarter-end.
Material changes and segment results
- Revenue growth was principally driven by increased eBook-related services for one significant CS client. CS revenue was $24.538 million; IADS revenue was $0.598 million.
- CS reported $6.492 million of pretax segment income before intersegment eliminations. IADS reported a $2.770 million pretax loss before eliminations, or a $1.5 million loss after eliminations.
- The top three clients accounted for 56% of revenue, up from 34% a year earlier. Two clients represented 57% of accounts receivable at March 31, 2012.
- Foreign-customer revenue was 20% of total, compared with 37% in Q1 2011. The United States accounted for $19.961 million of Q1 2012 revenue.
- Days sales outstanding increased to approximately 74 days from 66 days at year-end, which management attributed to higher revenue and receivables from a significant client.
- Capital expenditures rose to $2.104 million from $0.519 million. The 2012 spending included technology, IADS software development and Asian delivery-center expansion.
Outlook, risks and contingencies
Management expected existing cash, investments, operating cash generation and available credit to meet financial needs for the next 12 months and said it did not anticipate near-term liquidity issues. Planned capital expenditures for the next 12 months were approximately $5 million to $6 million; the company said a portion might be financed. No specific revenue or earnings guidance was provided.
Management cited risks including early-stage IADS operations, customer and project concentration, at-will or project-based CS contracts, customers’ ability to delay or cancel work, replacing completed projects, competition, technology changes, acquisitions, and wage inflation in Asian delivery locations. Quarterly results may fluctuate with project starts and replacement timing; fourth-quarter facility holidays can raise overtime costs.
- Taxes: Unrecognized tax benefits were approximately $2.302 million at March 31, 2012, including interest and penalties. Indian assessments and audits remain contested; the company recorded a $0.303 million provision for a 2008 assessment and an additional approximately $0.9 million provision for other potential exposures. The outcome of the 2009 Indian tax audit was undetermined.
- Litigation: A Philippines labor matter involves a judgment ordering reinstatement and back wages and benefits of approximately $7.5 million. Management, based on legal counsel, believed recovery against the parent was unlikely, but warned that an adverse outcome could materially affect the company.
- Foreign exchange: The company had approximately $29 million in foreign-currency forward contracts, with a maximum term of 12 months. It reported a $0.682 million fair-value liability. Management noted that currency movements could affect results, while hedges are intended to offset changes in underlying cash flows.
- Commitments: Contractual cash obligations were $13.316 million, including $12.597 million of non-cancelable operating leases. Expected pension-plan obligations were excluded from that table.
Disclosure controls were concluded to be effective, and the filing reported no material change in internal control over financial reporting during the quarter. Management reported no material changes to previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether the major client driving eBook-related growth continues to generate comparable work, given the rise in top-three customer concentration to 56% of revenue.
- Whether receivables convert to cash and DSO improves, given that two clients accounted for 57% of quarter-end receivables.
- Whether IADS can grow revenue and reduce its operating losses, and how much of planned capital spending supports that segment.
- The status and potential financial impact of Indian tax assessments and the approximately $7.5 million Philippines labor judgment.
- The renewal or replacement of the credit line due to expire in June 2012, and the funding of planned $5 million to $6 million capital expenditures.
- The filing reports both consolidated net income of $2.814 million and net income attributable to Innodata of $3.432 million, reflecting a $0.618 million loss attributable to non-controlling interests; verify the presentation and reconciliation when comparing earnings.