Innodata Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Innodata provides data transformation and management services and technology through Digital Data Solutions (DDS), Agility PR Solutions, and Synodex.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $14.05 | $15.02 | $42.44 | $45.27 |
| Direct operating costs | $9.24 | $11.46 | $29.06 | $34.59 |
| Operating income before interest and taxes | $1.17 | -$0.88 | $1.48 | -$2.40 |
| Net income (loss) attributable to Innodata | $0.69 | -$1.07 | -$0.05 | -$2.96 |
| Diluted earnings (loss) per share | $0.03 | -$0.04 | -$0.00 | -$0.11 |
| Adjusted EBITDA (non-GAAP) | $2.27 | $0.22 | $5.25 | $1.01 |
- Revenue declined 6% year over year in the first nine months; Q3 revenue declined 7%. Direct operating costs and selling and administrative expenses fell 16% and 15%, respectively, year to date. Direct costs were 69% of revenue for the nine months, versus 76% a year earlier.
- Q3 revenue by segment: DDS $10.76 million (down 8%); Synodex $1.01 million (up 5%); Agility $2.28 million (up 3%). For the first nine months, DDS revenue fell 10% to $32.06 million, while Synodex rose 17% to $3.01 million and Agility rose 4% to $7.37 million.
- Nine-month consolidated net loss included a $675,000 DDS goodwill impairment recorded in Q2. DDS and Synodex were profitable for the nine months; Agility reported a $1.4 million loss.
- Cash from operations was $4.01 million for the first nine months, versus $1.16 million in 2017. Investing activities used $1.70 million, mainly for technology and equipment; financing activities used $1.79 million, primarily to repay obligations. Cash increased $0.48 million to $11.89 million.
Financial position and liquidity
- At September 30, cash was $11.89 million, current assets $26.16 million, current liabilities $15.19 million, and working capital $10.97 million. Total assets were $46.11 million.
- Long-term obligations totaled $4.89 million, including $1.28 million current and $3.61 million noncurrent. The balance includes pension and lease-related obligations, as well as other items; the filing does not present this total as solely interest-bearing debt. The company reported no bank facilities or lines of credit.
- Management said existing cash and internally generated funds were expected to cover financial needs at least through November 9, 2019. It anticipated $1–$2 million of capital expenditures over the next 12 months, potentially financing part of the amount.
Changes, outlook, and risks
- Management attributed lower DDS revenue to a large project that ended in 2017, reduced volume from one client, and fluctuations among other clients. Cost reductions, including savings from headcount reductions begun in the second half of 2017, supported improved profitability. Synodex benefited from increased client volume and production efficiencies.
- No specific revenue or earnings guidance was provided. Management noted that quarterly results can fluctuate as projects begin, end, or are replaced; Synodex revenue is typically lowest in Q3 and highest in Q4. Wage inflation, especially in Asia, may pressure margins.
- Customer concentration remains material: two DDS clients represented approximately 30% of nine-month revenue. The company also cited project-based work and clients’ ability to reduce or cancel work as risks.
- The company recorded a full $675,000 impairment of DDS goodwill following a decline in its stock price and other impairment indicators. Agility goodwill was not impaired.
- Tax and legal exposures warrant attention. An Indian service-tax dispute concerns classification of services for July 2012–November 2016; if the tax authority prevails, the filing says the relevant $65 million of revenue could be subject to tax at 12.36%–15%. The company contests the matter. A separate Philippine employee judgment was recalculated at approximately $6.2 million plus interest; a U.S. preliminary injunction remained in force. Management said additional reasonably possible losses across legal proceedings could reach approximately $350,000 beyond recorded amounts, while noting that a substantial recovery in the Philippine matter could materially affect the company.
- Foreign-exchange exposure is managed in part with forward contracts; outstanding contract notional value was $2.6 million, down from $15.9 million at year-end 2017. The company expects adoption of the new lease standard to increase reported assets and liabilities, potentially significantly.
- Management reported effective disclosure controls at quarter-end and no material changes in internal control over financial reporting. It reported no material changes to the risk factors disclosed previously.
Important facts for investors to verify
- Whether DDS can replace completed or reduced projects and diversify its concentrated customer revenue base.
- Whether recent cost savings and higher adjusted EBITDA are sustainable despite declining revenue; adjusted EBITDA is a non-GAAP measure.
- The outcome and potential financial impact of the Indian service-tax dispute and Philippine employee judgment, including related interest and recorded reserves.
- The company’s ability to maintain liquidity without credit facilities, particularly if operating losses, legal payments, or investment needs increase.
- The filing gives two different thresholds for potential tax exposure on repatriated foreign earnings: $25.8 million in the notes and $24.8 million in MD&A; investors may wish to clarify the discrepancy.