Innodata Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the provided text does not give a clear set of fourth-quarter 2018 results.
Business context
Innodata provides digital data services and technology, combining human expertise with machine learning and AI. Its three reporting segments are Digital Data Solutions (DDS), medical-data services business Synodex, and PR/media intelligence SaaS business Agility. The company reported a global workforce of approximately 3,500.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $57.4 million | $60.9 million |
| Direct operating costs | $39.0 million | $45.8 million |
| Operating income (loss) | $1.9 million | $(5.1) million |
| Net income (loss) attributable to Innodata | $4,000 | $(5.1) million |
| Adjusted EBITDA | $6.7 million | $(0.7) million |
| Cash from operating activities | $3.6 million | $0.6 million |
| Capital expenditures | $2.0 million | $3.4 million |
Revenue declined approximately 6%. Direct costs fell faster than revenue, and the derived gross margin (revenue less direct operating costs) improved to approximately 32%, from 25%. Operating margin was approximately 3.2%, versus negative 8.4%. The income statement reports net income of $11,000 before non-controlling interests and $4,000 attributable to Innodata; the filing’s MD&A also describes net income as $4,000.
Operating cash flow less capital expenditures was approximately $1.6 million in 2018, calculated from the reported figures. Cash and cash equivalents were $10.9 million at year-end, down from $11.4 million; working capital was $13.0 million, up from $9.7 million. Total reported long-term obligations were $5.6 million, including pension, lease, and other obligations; the filing reports no bank facilities or line of credit. Days sales outstanding rose to 66 days from 61.
Changes versus 2017
- DDS revenue fell 9% to $43.5 million, principally reflecting a large project that ended in 2017 and lower volumes from other clients. DDS direct costs and selling and administrative expenses declined following cost reductions.
- Synodex revenue increased 11% to $4.1 million; Agility revenue increased 4% to $9.8 million. Both segments improved their reported earnings, but Agility remained loss-making.
- Selling and administrative expenses declined 22% to $15.8 million. The company attributed the reduction largely to cost rationalization begun in 2017.
- In 2018, Innodata recorded a $675,000 full impairment of DDS goodwill. It also recorded a $269,000 out-of-period pension expense correction relating to 2008–2013; management concluded the error was immaterial to prior periods.
Outlook, risks and unusual matters
- Management said cash and internally generated funds were expected to meet financial needs for the next 12 months. It anticipated 2019 capital expenditures of approximately $1–$2 million.
- Revenue is exposed to client and project concentration: two DDS clients generated approximately 30% of total revenue in both 2018 and 2017. Client work is often requirements-based or terminable on relatively short notice.
- Three clients represented 48% of year-end receivables, or approximately $5.1 million. The company also cited pricing pressure, wage inflation, foreign-exchange exposure, competition, and reliance on third-party content and technology.
- A Philippine former-employee judgment is approximately $6.2 million plus accrued interest. A U.S. court injunction remained in force while the matter was administratively closed; the company warned that a substantial recovery could materially affect it. Management also disclosed other proceedings and approximately $275,000 of reasonably possible losses beyond recorded amounts.
- An Indian service-tax dispute concerns historical subsidiary revenue of approximately $67 million and could entail tax at 12.36%–15% if the tax authority prevails. No liability was recorded for that case based on counsel’s assessment. Approximately $1.0 million of service-tax credits remained recorded as a receivable.
- The 2018 income-tax provision was $1.8 million despite $1.8 million of pretax income, largely reflecting foreign taxes and valuation-allowance effects. The company intended to keep approximately $21 million of unremitted foreign earnings invested abroad.
- Effective January 1, 2019, lease accounting was expected to add approximately $8 million of right-of-use assets and $9 million of lease liabilities. Management did not expect a material effect on annual earnings or cash flows.
Important facts for investors to verify
- Whether DDS client volumes and projects can be replaced, and how the two largest clients’ work and contract terms are changing.
- Collection of concentrated receivables, including the three clients representing 48% of year-end accounts receivable.
- Cash generation after capital spending, obligations, and the absence of a credit facility.
- Potential outcomes and financial exposure from the Philippine judgment and Indian tax disputes.
- Progress toward sustainable profitability, particularly whether Agility can reduce its continuing operating losses.
- The effect of the pension correction and goodwill impairment, and the basis for management’s adjusted EBITDA measure.