Innodata Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports quarterly results, including Q4. Amounts are in U.S. dollars unless stated otherwise.
Business context
Innodata provides digital content, data processing and media intelligence services through Content Services (CS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). CS remains the largest business; MIS includes MediaMiser and Bulldog Reporter, acquired in 2014. IADS focuses on data extraction and analytics for insurance, healthcare and financial-services clients.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $58.5 million | $59.1 million | Down 1% |
| Direct operating costs | $43.9 million | $43.9 million | Flat; 75.1% of revenue versus 74.3% |
| Selling and administrative expenses | $16.8 million | $16.4 million | Up 2% |
| Operating loss | $2.2 million | $1.6 million | Loss widened |
| Net loss attributable to Innodata | $2.8 million | $1.0 million | Loss widened; diluted loss per share was $0.11 versus $0.04 |
| Adjusted EBITDA | $1.9 million | $3.0 million | Down 36%; non-GAAP measure |
| Cash from operating activities | $2.7 million | $4.6 million | Lower year over year |
| Cash and cash equivalents | $24.9 million | $24.2 million | $20.8 million held by foreign subsidiaries |
| Working capital | $25.0 million | $25.8 million | Down modestly |
At year-end, total assets were $51.2 million and stockholders’ equity was $38.2 million. Balance-sheet long-term obligations were $3.4 million, with $1.6 million classified as current; these obligations include pension, lease, vendor and acquisition-related amounts. Capital lease obligations were $0.4 million. The filing reports no material exposure to interest-rate changes on its fixed-rate financing.
Capital expenditures were $0.7 million in 2015, with an additional $0.3 million of IADS expenditures expensed. Management anticipated 2016 capital expenditures of $2.5–$3.5 million. DSO improved to 61 days from 69 days in 2014.
Segments and comparable-period developments
- CS: Revenue fell 9% to $51.7 million, mainly because of lower e-book services for one client, reduced project volumes and completed projects. Segment income after intersegment eliminations was $2.7 million versus $4.4 million. Cost efficiencies and lower labor expense partly offset lower sales, but ramp-up expenses and a $0.4 million retroactive India bonus accrual weighed on margins.
- IADS: Revenue rose to $2.1 million from $0.6 million, but the segment still recorded a $3.7 million net loss after intersegment eliminations. Management reported cumulative investment net of revenue of $30.7 million since inception and intends to continue investing approximately $0.8–$1.0 million per quarter in the near term.
- MIS: Revenue increased to $4.7 million from $1.7 million, principally reflecting a full year of acquired operations, 21 net new MediaMiser Enterprise subscribers, and Bulldog Reporter sales. MIS recorded a $1.2 million net loss, partly reflecting increased sales and marketing spending.
- Q4 comparison: 2015 revenue was $15.5 million versus $15.9 million in Q4 2014. Net loss attributable to Innodata was $0.6 million versus $0.3 million; quarterly gross profit was $4.2 million versus $4.3 million. Results fluctuated during 2015, including a $1.8 million first-quarter loss and $0.4 million third-quarter profit.
Outlook, risks and unusual items
- Management stated existing cash and internally generated funds were expected to meet financial needs for the next 12 months, while noting it could curtail investments or reduce expenses if funding proved insufficient and outside financing was unattractive. A shelf registration permits offers of up to $70 million of securities.
- Revenue concentration remains significant: two CS clients contributed approximately 33% of 2015 revenue. Many contracts and projects are terminable on short notice, and replacement work may be delayed or less profitable. Foreign clients represented 51% of revenue.
- IADS remains loss-making; management plans continued investment despite limited revenue and prior impairment of its fixed assets. MIS subscription renewals, customer acquisition and integration of acquisitions are additional execution risks.
- Indian authorities disputed the classification of services provided by the Indian subsidiary, which generated $16.5 million in 2015 revenue. If treated as taxable online information/database services rather than exempt business-support services, a service tax of approximately 14.5% of affected revenue could apply. The company contests the position; separate 2016 appeals may delay certain refunds.
- The company reported $24.9 million of cash, including $20.8 million overseas, and intends to keep foreign earnings permanently reinvested, subject to projected deemed dividends. It deferred $4.0 million of payments to Asian subsidiaries in Q4, creating approximately $1.0 million of deemed dividend income for U.S. tax purposes; management projected a further $3.0 million cash deficit in such intercompany payments over 2016–2018.
- Currency exposure is material. Outstanding forward contracts had a $15.8 million notional amount and a reported unrealized loss of approximately $0.2 million at year-end. Foreign-held cash is not hedged.
- A Philippine labor decision seeks reinstatement and approximately $8.0 million in back wages and benefits; management believes recovery against Innodata is unlikely, but acknowledges a substantial recovery could materially affect the company. Other legal claims are also possible.
- Other pressures include wage inflation, pricing competition, customer credit concentration (68% of receivables was due from four clients), cybersecurity and data-privacy risks, and political or operational disruption in delivery locations. The company reported an unqualified audit opinion and effective internal controls over financial reporting.
Investor verification priorities
- Track CS client retention, project replacement, revenue concentration and segment margins.
- Assess whether IADS can grow revenue and reduce losses relative to the planned quarterly investment.
- Monitor MIS subscriber growth, renewals, acquisition-related costs and the contingent MediaMiser earn-out.
- Follow the Indian service-tax inquiry and refund appeals, including potential cost exposure and refund timing.
- Review cash availability by jurisdiction, foreign-cash access, intercompany payment deferrals, and any use of the $70 million shelf.
- Reconcile operating cash generation and obligations, and monitor the Philippine labor litigation and other contingencies.