Innodata Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The filing is unaudited.
Business context
Innodata provides digital content and data services through Content Services (CS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). In July 2014, it acquired MediaMiser, a media-monitoring and analytics business, which contributed $0.7 million of revenue from July 29 through September 30. Innodata owned 90% of Synodex and 94% of docGenix, its IADS subsidiaries.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $14.8m | $15.7m | $43.2m | $48.8m |
| Direct operating costs | $10.7m | $12.0m | $32.3m | $38.2m |
| Net loss attributable to Innodata | $(0.2)m | $(11.7)m | $(0.7)m | $(11.5)m |
| Loss per share, basic and diluted | $(0.01) | $(0.47) | $(0.03) | $(0.46) |
| Adjusted EBITDA | $0.9m | $1.0m | $2.0m | $1.3m |
| Cash from operating activities | — | — | $5.8m | $1.5m |
Direct operating costs were 72% of revenue in Q3 (76% in Q3 2013) and 75% for the first nine months (78% in 2013). Selling and administrative expense was $4.3 million in Q3, up from $4.0 million, and $11.9 million for nine months, down from $13.0 million. The company reported consolidated net losses of $0.4 million in Q3 and $1.5 million for nine months; the smaller losses attributable to Innodata reflect losses allocated to non-controlling interests.
At September 30, cash and cash equivalents were $26.0 million, current assets $37.6 million, current liabilities $12.0 million, and working capital $25.6 million (versus $28.8 million at year-end 2013). Total assets were $55.5 million and stockholders’ equity $39.0 million. Long-term obligations were $6.3 million, with a further $1.6 million current portion; these balances include pension and other obligations, not solely borrowings. Nine-month investing cash outflow was $5.0 million, including $3.2 million for the acquisition and $1.8 million of capital expenditures. Cash increased $1.3 million during the period.
Changes versus comparable periods
- Revenue declined 6% in Q3 and 12% for the first nine months. CS revenue fell about 10% in Q3 and 12% year to date; management cited reduced non-e-book services from one client in Q3, and lower e-book-related and other services from two clients for the year-to-date decline.
- CS cost reductions, restructuring, lower production headcount and productivity improvements helped reduce direct costs. CS generated positive segment results; IADS continued to incur substantial losses. MIS contributed revenue only after its July acquisition.
- Reported losses were substantially smaller than in 2013, when Innodata recorded a $5.5 million IADS fixed-asset impairment and a $7.1 million valuation allowance on U.S. deferred tax assets. Neither the impairment nor that valuation allowance recurred in 2014. Adjusted EBITDA improved year to date to $2.0 million from $1.3 million, despite lower revenue.
- Operating cash flow improved to $5.8 million, supported in part by $3.7 million of net accounts-receivable collections. DSO was approximately 65 days, compared with 74 days at December 31, 2013.
Outlook, risks and unusual items
- Management expected IADS investment to continue at approximately $1.1–$1.3 million per quarter in the immediate future. It cited cumulative net investment of about $26 million since 2011, minimal IADS revenue, and the write-off of all IADS fixed assets. Management said it had curtailed some investment and could curtail more if internally generated funds were insufficient and attractive financing unavailable.
- Management believed existing cash and internally generated funds would meet financial needs for the next 12 months. Expected capital expenditures over the next 12 months were approximately $3–$4 million. The filing provides no specific revenue or earnings guidance.
- Cash included $21.7 million held by foreign subsidiaries, which Innodata intended to permanently reinvest outside the U.S.; repatriation could trigger U.S. federal income taxes. Foreign-exchange exposure is partly hedged with forward contracts of $15.4 million notional value. Management noted that a 10% U.S. dollar movement against hedged currencies could change the contracts’ fair value by approximately $1.4–$1.7 million, with corresponding changes in hedged cash flows expected to substantially offset the effect.
- Revenue and receivables remain concentrated: three clients represented 41% of Q3 revenue; two represented 32% of nine-month revenue. Three clients accounted for 44% of receivables at September 30. The business also faces project cancellation or volume reductions, wage inflation, start-up delays and seasonal fourth-quarter overtime costs.
- MediaMiser acquisition consideration was $5.4 million non-contingent plus up to $4.6 million contingent on future revenue and EBITDA. The recorded fair value of contingent consideration was approximately $0.6 million. Acquisition-related intangibles totaled $5.3 million net, and purchase accounting estimates and integration remain relevant.
- Contingencies include Indian and Philippine tax matters and legal claims. A Philippines employment matter seeks approximately $8.0 million; management, relying on counsel, said recovery against Innodata was unlikely. The company said reasonably possible adverse legal outcomes beyond recorded amounts could total approximately $0.25 million.
- Management reported effective disclosure controls. Its assessment excluded MediaMiser, which had $7.4 million in assets at quarter-end, under the permitted first-year acquisition exclusion.
Important facts for investors to verify
- Whether CS client demand stabilizes and revenue concentration or project reductions worsen.
- Whether IADS can produce commercial revenue and whether planned quarterly investment remains sustainable.
- MediaMiser’s revenue growth, integration progress, purchase-accounting estimates, and potential earn-out exposure.
- Cash availability given the substantial foreign-held balance, repatriation tax considerations, and contractual and pension obligations.
- Developments in tax assessments, legal proceedings, foreign-exchange exposures, and the company’s ability to maintain operating cash generation.