Innodata Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures are in millions unless noted. The company provides AI data preparation and integration services and operates DDS, Synodex and Agility segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $22.2 | $18.4 | $60.7 | $59.6 |
| GAAP gross profit / margin | $8.2 / 37% | $6.1 / 33% | $21.1 / 35% | $20.8 / 35% |
| Net income (loss) attributable to Innodata | $0.4 | $(3.3) | $(2.6) | $(10.0) |
| Diluted earnings (loss) per share | $0.01 | $(0.12) | $(0.09) | $(0.37) |
| Adjusted EBITDA, non-GAAP | $3.2 | $(1.2) | $5.6 | $(3.5) |
| Operating cash flow | Nine months: $5.8 | Prior-year nine months: $(1.7) |
Q3 revenue rose about 20% year over year, while the company returned to GAAP profitability. For the first nine months, revenue grew about 2%, but the company remained loss-making despite a substantially smaller net loss. Nine-month adjusted gross margin was 41%, versus 40% in 2022; these adjusted measures are non-GAAP.
Segments and material changes
- DDS: Q3 revenue increased 26% to $16.0 million, driven by volume from a new and an existing customer; nine-month revenue declined 2% to $41.9 million. Nine-month gross margin fell to 34% from 39%, and segment net loss was $0.8 million versus $0.2 million.
- Synodex: Q3 revenue decreased 6% to $1.7 million; nine-month revenue rose 6% to $5.7 million. Cost reductions improved nine-month gross margin to 9% from negative 16%; the segment was approximately breakeven for the nine months.
- Agility: Q3 revenue increased 16% to $4.4 million and nine-month revenue increased 15% to $13.0 million, reflecting higher platform and newswire subscription volumes. Nine-month net loss narrowed to $1.8 million from $7.5 million.
Selling and administrative expense declined 19% in Q3 and 23% over nine months, principally due to cost optimization and lower labor, marketing, recruitment and professional costs. Q3 results also benefited from increased revenue and improved segment performance. Nine-month DDS performance was pressured by lower revenue from a large social media customer; management attributed approximately $7.9 million of the year-over-year DDS revenue decline to that customer.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $14.8 million at September 30, 2023, compared with $9.8 million at December 31, 2022. Working capital was $6.4 million, up from $2.9 million.
- Nine-month investing cash outflow was $3.8 million, including $4.3 million of capital expenditures. Financing provided $2.8 million, including $3.2 million from stock-option exercises, partly offset by $0.3 million of obligation payments.
- Total liabilities were $34.3 million. Long-term obligations totaled $7.5 million, primarily accrued pension liabilities of $6.5 million; the balance included $1.0 million for software licenses. Operating lease liabilities totaled $5.6 million.
- A secured revolving credit facility has a maximum commitment of $10.0 million, subject to a borrowing base of approximately $4.7 million at quarter-end. It was undrawn through the filing date, bears interest at daily simple SOFR plus 2.25%, and matures April 4, 2026. A fixed-charge coverage ratio covenant of at least 1.10:1.00 applies by December 31, 2023.
Outlook, risks and contingencies
- Management said cash, cash equivalents and internally generated funds were expected to meet financial needs for at least 12 months from the filing date. It anticipated approximately $6.5 million of capital expenditures over the next 12 months. No specific revenue or earnings guidance was provided.
- Management cited project-based DDS work, customers’ ability to reduce or cancel projects, customer concentration, competition, and investments in large language models as risks. It also noted foreign-exchange and wage-cost exposure, international operating risks, and possible disruption from geopolitical events, including the conflict involving Israel.
- One DDS customer represented approximately 11% of Q3 revenue; two DDS customers represented approximately 10.2% and 10% of nine-month revenue. Two customers accounted for 30% of receivables at quarter-end.
- An Indian service-tax dispute concerns classification of services for 2012–2016; potential tax, interest and penalties could be material if authorities prevail. The company recorded no liability for the matter and reported about $0.8 million of service-tax credits receivable subject to a separate dispute.
- A Philippine former-employee judgment has a stated potential payment of approximately $5.8 million plus interest; enforcement against the parent in the U.S. is subject to a continuing preliminary injunction. The company stated that adverse outcomes estimated beyond recorded amounts for legal proceedings could reach approximately $0.45 million in aggregate and are reasonably possible.
- Management reported no goodwill impairment in its annual Agility test. Disclosure controls and procedures were assessed as effective at September 30, 2023.
Important facts for investors to verify
- Whether DDS growth and customer volumes can offset the prior decline from the large social media customer, and whether customer concentration changes.
- Progress in meeting the December 31, 2023 credit-facility covenant and the availability of borrowing under the borrowing-base formula.
- Whether operating cash generation can support the projected capital expenditures and continued investment in AI capabilities.
- Developments in the Indian tax disputes and Philippine litigation, including any change to recorded accruals or potential exposure.
- How much of reported improvement depends on cost reductions and non-GAAP adjustments, including $0.58 million of nine-month severance added back in adjusted EBITDA.