Innodata Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; amounts below are in U.S. dollars. Innodata provides digital content and data services through Content Services (CS), Innodata Advanced Data Solutions (IADS), and Media Intelligence Solutions (MIS). MIS includes MediaMiser and Bulldog Reporter, acquired in 2014.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $14.1m | $14.3m | $27.9m | $28.4m |
| Net loss attributable to Innodata | $(0.8)m | $(0.7)m | $(2.6)m | $(0.5)m |
| Loss per share, basic and diluted | $(0.03) | $(0.03) | $(0.10) | $(0.02) |
| Adjusted EBITDA | $(0.2)m | $0.2m | $(0.7)m | $1.1m |
| Cash from operating activities | — | $0.5m | $4.4m |
Q2 direct operating costs were $11.0m (78% of revenue) versus $11.3m (79%) a year earlier; selling and administrative expenses rose to $4.3m from $3.9m (30% versus 27% of revenue). For the first half, direct operating costs were $22.1m (about 79% of revenue) versus $21.6m (about 76%); selling and administrative expenses were $8.4m versus $7.7m. The resulting first-half deterioration in profitability was reflected in the net loss and Adjusted EBITDA.
At June 30, cash and cash equivalents were $23.7m, working capital was $24.6m, and current assets were $36.9m against current liabilities of $12.3m. Cash decreased $0.5m from year-end. Total long-term obligations were $6.7m, including $1.4m current and $5.4m long-term; this includes pension and other obligations, not solely borrowings. Capital expenditures were $0.3m in the first half. The filing reports no material interest-rate exposure because lease financing carries fixed rates.
Material changes versus comparable periods
- Revenue declined 2% in both Q2 and the first half. CS revenue fell about 12% in each period, primarily due to reduced e-book work for one client and lower volumes or completed projects. Growth in IADS and the addition of MIS partly offset the decline.
- CS remained profitable in Q2, but its reported segment income declined year over year; for the first half, CS moved from $1.9m income to a $0.1m loss. The filing cites lower revenue and approximately $0.5m of first-half ramp-up costs for a new European publisher project.
- IADS revenue increased to $0.5m in Q2 and $1.0m in the first half, with management citing the Synodex 3.0 launch. IADS continued to post losses, though they narrowed year over year.
- MIS contributed $1.2m of Q2 revenue and $2.3m for the first half, and reported losses of approximately $0.4m and $0.6m, respectively. The 2014 comparison does not include these acquired businesses for equivalent periods.
- First-half operating cash flow fell to $0.5m from $4.4m, largely reflecting lower cash generation and a smaller contribution from working-capital changes, including receivable collections.
Outlook, management commentary, and risks
- Management expects existing cash and internally generated funds to cover financial needs for the next 12 months. It plans to invest $0.8m–$1.2m per quarter in IADS in the immediate future and anticipates $2.5m–$3.5m of capital expenditures over the next 12 months.
- Management identifies project reductions, cancellations or delays; dependence on a limited number of clients; difficulty replacing completed work; wage inflation; and acquisition integration as risks. Two clients accounted for about 36% of Q2 revenue and 35% of first-half revenue. Three clients represented 55% of accounts receivable at June 30.
- Foreign-exchange exposure is managed in part with forward contracts totaling $18.1m notional, with terms of up to 12 months. The filing says currency fluctuations could adversely affect results; $21.3m of cash was held by foreign subsidiaries and management intended to permanently reinvest those funds abroad.
- Two Indian tax disputes had favorable outcomes in Q2, prompting reversal of approximately $0.5m of previously recorded provisions. Other tax matters remain, including Indian assessments and Philippine proceedings; recorded unrecognized tax benefits were approximately $1.2m at June 30.
- A Philippine labor judgment involves an approximately $8.0m claim. Management, citing counsel, believes recovery against Innodata is unlikely, but says a substantial recovery could materially affect the company. For other legal matters, reasonably possible losses beyond recorded amounts were estimated at approximately $0.1m in aggregate.
- MediaMiser acquisition consideration includes up to $4.6m of contingent payments tied to revenue and EBITDA targets. The recorded fair value was approximately $0.5m; actual payment depends on meeting the targets.
Important facts for investors to verify
- Whether CS client losses and project completions are offset by new work, and whether the European project ramps up as expected.
- Whether IADS can grow revenue enough to justify the planned quarterly investment and its cumulative $29.0m net investment through June 30.
- Client and receivables concentration, cash conversion, and the location and potential tax cost of repatriating foreign-held cash.
- Potential outcomes of the outstanding Indian and Philippine tax matters and the Philippine labor litigation.
- MediaMiser’s progress against contingent consideration targets and the integration and performance of the acquired MIS businesses.