Innodata Isogen, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 30, 2011; comparative results are for Q3 2010 and the nine months ended September 30, 2011 versus the same period in 2010. Financial amounts are in U.S. dollars; statements are unaudited.
Business context
Innodata provides digital-content services, products, and solutions. Content Services (CS) remains the core business. The company launched Innodata Advanced Data Solutions (IADS) in Q2 2011, comprising Synodex and docGenix, in which it owns 77% and 78%, respectively. IADS generated no revenue in the reported periods and remained in early-stage development.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $19.245m | $15.763m | $50.203m | $46.623m |
| Net income (loss) attributable to Innodata | $1.376m | $0.313m | $2.198m | $(1.965)m |
| Basic and diluted earnings (loss) per share | $0.06 | $0.01 | $0.09 | $(0.08) |
| Cash provided by operating activities | — | $0.883m | $4.164m |
Revenue increased 22% year over year in Q3 and 8% for the nine-month period. Direct operating costs were 67% of revenue in Q3 versus 72% a year earlier, and 69% for nine months versus 76%. Selling and administrative expenses were $4.639m in Q3 and $12.763m for nine months. The statements report consolidated net income of $1.184m in Q3 and $1.957m for nine months; the higher amounts above attributable to Innodata reflect losses attributable to non-controlling interests.
Operating cash flow declined to $0.883m from $4.164m for the nine-month comparison, principally as a $4.232m increase in accounts receivable used cash. Capital expenditures were $2.828m, versus $1.439m. Cash and cash equivalents were $12.757m at September 30, down from $14.120m at year-end; short- and long-term investments totaled $11.460m, down from $13.875m. Working capital was $26.092m, essentially unchanged from year-end. Total long-term obligations, including current portions, were approximately $3.461m; no borrowings were outstanding under the $7m credit line.
Changes, outlook, and risks
- Q3 revenue growth was principally attributable to one of the top three customers: those customers’ combined revenue rose $4.0m, partly offset by declines from other customers. For nine months, top-three-customer revenue rose $7.4m; results also included a one-time $0.6m early-termination fee.
- Management attributed improved profitability to revenue growth, productivity gains, and process and technology improvements. These benefits were partly offset by unfavorable currency movements and IADS start-up costs ($0.3m in Q3; $0.4m for nine months). Nine-month results also benefited from higher interest income.
- Management said it did not anticipate near-term liquidity issues and believed available cash, investments, operating cash flow, and the credit facility would meet needs for the next 12 months. It expects approximately $6m–$7m in capital expenditures over the next 12 months, some of which may be financed. No revenue or earnings guidance was provided.
- Customer concentration increased: the top three customers generated 44% of Q3 revenue and 39% of nine-month revenue, versus 27% and 26%, respectively, in 2010. Two customers represented 33% of receivables at quarter-end. Management also cited project-based and generally at-will customer arrangements, difficulty replacing reduced or completed work, wage inflation, foreign-exchange exposure, and competitive and market risks.
- Foreign-currency forward contracts had approximately $44m notional value. A 10% U.S. dollar appreciation against hedged currencies was estimated to reduce their fair value by $3.6m; a 10% depreciation was estimated to increase it by $4.3m, with corresponding offsets expected in hedged cash flows. Derivative fair-value changes produced a $1.632m nine-month loss in other comprehensive income.
- Contingencies include a Philippines employment judgment involving approximately $7.5m of back wages and benefits; the company said recovery against it was unlikely, but acknowledged a substantial recovery could materially affect it. Indian tax assessments for fiscal years 2003, 2005, and 2006 remained unresolved; the company intends to contest them. It recorded an additional approximately $0.882m tax provision for potential exposure relating to later years, and the outcome of ongoing audits was uncertain.
- The company repurchased 494,000 shares for approximately $1.327m in the first nine months. A new $2m repurchase authorization was approved in September 2011. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether revenue growth from major customers is sustainable and whether customer concentration or receivable collection risk is increasing.
- Whether IADS can generate revenue and manage its early-stage operating losses.
- Cash conversion, receivables growth, and the funding and execution of the planned $6m–$7m capital program.
- Exposure to foreign-currency movements, including hedge valuations and the effect of local wage inflation on margins.
- Developments in the Indian tax audits and the Philippines litigation, including any change in management’s assessment of potential exposure.
- Available liquidity and obligations under leases, vendor agreements, pension arrangements, and the credit facility, which expires in June 2012.