Innodata Isogen, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. The company provides digital content services and launched Innodata Advanced Data Solutions (IADS) in Q2, focused on data analysis and related software.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $16.3m | $15.4m | $31.0m | $30.9m |
| Net income (loss) attributable to company | $0.8m | ($0.9m) | $0.8m | ($2.3m) |
| EPS, basic and diluted | $0.03 | ($0.03) | $0.03 | ($0.09) |
| Operating cash flow | Not separately presented | Not separately presented | $1.3m | $2.0m |
Direct operating costs were $11.4m in Q2 and $22.0m for the half, down 6% and 10%, respectively. They fell to 70% of revenue in Q2 (79% prior year) and 71% for the half (79% prior year), reflecting productivity gains. Selling and administrative expense was $4.1m in Q2 and $8.1m for the half. Pre-tax income was $1.0m in Q2 and $1.1m for the half. Interest income, net, was $170,000 in Q2 and $279,000 for the half.
At June 30, cash and equivalents were $11.7m; short- and long-term investments totaled $15.2m; working capital was $24.6m. Total assets were $53.1m. Long-term obligations, including current portion, were $3.3m; the $7.0m receivables-backed credit line had no borrowings. Six-month investing cash use was $2.5m, including $1.2m of capital expenditures; financing cash use was $1.2m, including $0.9m of share repurchases. Cash declined $2.4m to $11.7m.
Changes and business developments
- Q2 revenue increased about 6% year over year, while first-half revenue was nearly flat. Management attributed the improvement chiefly to increased revenue from the two largest customers and a $0.6m one-time early-termination fee, partly offset by declines from other customers.
- First-half net income improved from a loss to profit, driven by lower direct costs and improved margins, along with higher interest income and a lower tax provision. Unfavorable foreign-exchange movements partly offset the cost improvements.
- IADS reported no revenue in Q2 or the first half and incurred $0.26m of pre-tax loss for the half. The segment includes Synodex and docGenix; the company acquired certain docGenix assets for $0.4m.
- Foreign exchange increased direct costs by approximately $0.4m in Q2 and $0.8m in the first half. The company had $32m notional of foreign-currency forward contracts outstanding.
Outlook, risks and contingencies
- Management said available cash, investments, operating cash generation and credit availability should cover financial needs for the next 12 months; it anticipates $4.5m–$5.0m of capital expenditures over the next 12 months.
- Key risks include reliance on a few customers and project-based work, customers’ ability to reduce or cancel projects, replacing completed work, early-stage IADS execution, wage inflation in Asian delivery locations, and currency movements. The top two customers represented 31% of Q2 revenue and 32% of first-half revenue; three customers accounted for 47% of receivables at quarter-end.
- A Philippines employment case seeks approximately $7.5m in back wages and benefits. Management, citing counsel, believes recovery against the company is unlikely, but warns that a substantial recovery could materially affect it.
- Indian tax matters remain unresolved: disputed assessments for fiscal 2003, 2005 and 2006 totaled approximately $1.0m including interest through June 30, 2011; the company said it would contest them. It also recorded an approximately $0.9m provision, including interest, for potential exposure in 2007 and later years.
- Other commitments include $6.9m of non-cancelable operating leases and $1.0m of vendor obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Assess whether underlying customer demand and revenue growth can persist without the $0.6m termination fee, and whether customer concentration is changing.
- Track IADS launch costs, commercial traction and ownership/non-controlling interest arrangements.
- Review cash conversion, receivables concentration and planned capital spending alongside the decline in cash and working capital.
- Monitor Indian tax proceedings and the Philippines litigation exposure, including any change in management’s estimates.
- Evaluate the impact of Asian wage inflation and currency movements, and the effectiveness and accounting effects of the foreign-exchange hedges.