Business Context and Reporting Period
Company: Innodata Isogen, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company provides knowledge process outsourcing (KPO), publishing, and information technology (IT) services to media, publishing, and information service companies. Operations utilize a distributed global workforce with facilities in the U.S., Europe, India, the Philippines, Sri Lanka, and Israel.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Revenues | $15,763 | $46,623 |
| Net Income (Loss) | $313 | $(1,965) |
| Operating Costs | $15,241 | $47,490 |
| Net Cash from Operating Activities | N/A | $4,164 |
| Cash and Cash Equivalents (Sep 30, 2010) | $16,917 | |
| Working Capital (Sep 30, 2010) | $27,600 | |
| Long-term Obligations | $1,416 |
Note: Direct operating costs as a percentage of revenue increased to 72% for the quarter and 76% for the nine-month period.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 15% year-over-year for the quarter ($15.8M vs. $18.5M) and 23% for the nine-month period ($46.6M vs. $60.5M). This was primarily driven by a significant reduction in revenue from one of the top two clients.
- Profitability Shift: The Company reported a net loss of $2.0 million for the nine months ended September 30, 2010, compared to net income of $8.1 million in the prior year period. The quarterly net income was $0.3 million, down from $1.3 million.
- Expense Increases: Selling and administrative expenses increased 7% for the quarter and 14% for the nine-month period, attributed to new hires in sales/consulting and unfavorable foreign exchange rates.
- Foreign Exchange Impact: Strengthening of the Philippine peso and Indian rupee increased direct operating costs by $0.4 million (quarter) and $1.1 million (nine months), partially offset by gains from foreign currency forward contracts.
Guidance, Outlook, and Risks
- Client Concentration: The top two clients generated 28% of revenue for the quarter and 29% for the nine-month period. Management considers it unlikely that revenue from the declining top client will resume previous levels in the near term.
- Liquidity: The Company holds $16.9 million in cash and $11.7 million in investments. It maintains a $7.0 million line of credit with no outstanding borrowings. Management does not anticipate near-term liquidity issues.
- Legal Contingencies:
- Philippines Litigation: A court decision orders reinstatement of former employees and payment of back wages totaling approximately $7.5 million. Management believes recovery against the Company is unlikely.
- Indian Tax Audits: The Company is subject to ongoing audits by the Indian Bureau of Taxation. While one assessment was resolved favorably in October 2010, others remain under appeal. An additional tax provision of $767,000 was recorded for potential unfavorable assessments.
- Capital Allocation: The Board authorized a $2.1 million stock repurchase program in June 2010. Approximately $0.4 million was spent in September 2010, with $1.7 million remaining available.
Investor Verification Checklist
- Verify the status and potential financial impact of the $7.5 million Philippines litigation judgment.
- Monitor the outcome of ongoing Indian tax audits and the likelihood of further tax provisions.
- Assess the sustainability of revenue from the top two clients, given the significant year-over-year decline.
- Review the effectiveness of foreign currency hedging strategies given the volatility in the Philippine peso and Indian rupee.
- Confirm the timeline for replacing lost project revenue to stabilize gross margins.