Innodata Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Innodata provides data and digital operations services and technology through Digital Data Solutions (DDS), Synodex, and Agility.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $13.85 | $14.05 | $41.18 | $42.44 |
| Direct operating costs | $9.02 | $9.24 | $28.15 | $29.06 |
| Selling and administrative expenses | $4.95 | $3.64 | $14.17 | $11.22 |
| Net income (loss) attributable to Innodata | $(0.56) | $0.69 | $(1.66) | $(0.05) |
| Basic and diluted earnings (loss) per share | $(0.02) | $0.03 | $(0.06) | $(0.00) |
| Adjusted EBITDA | $0.91 | $2.27 | $1.73 | $5.25 |
| Cash provided by operating activities | — | $4.93 | $4.01 |
Direct operating costs were 65% of revenue in Q3 and 68% for the nine-month period, compared with 66% and 69%, respectively, in 2018. The resulting revenue less direct operating costs margin was approximately 35% in Q3 and 32% year to date. These figures exclude selling and administrative expenses.
Business trends and changes
- Q3 revenue fell 1% year over year; nine-month revenue fell 3%. DDS revenue declined 6% in Q3 and 5% year to date, mainly from lower client volumes. Synodex revenue was roughly flat in Q3 and down 3% year to date. Agility revenue grew 17% in Q3 and 7% year to date, driven by media-database subscriptions.
- Selling and administrative expense rose 35% in Q3 and 27% year to date. Management attributed the increase to strategic investments intended to expand the addressable market, including compensation, recruitment, professional fees, and marketing.
- Net results weakened despite lower direct costs: Innodata reported a Q3 loss versus prior-year income and a nine-month loss of $1.66 million versus a $46,000 loss. Adjusted EBITDA also declined materially.
- Agility remained loss-making year to date; management reported a $0.42 million adjusted EBITDA loss. DDS adjusted EBITDA was $2.09 million year to date versus $5.29 million; Synodex adjusted EBITDA was $0.06 million versus $0.27 million.
Balance sheet, liquidity, and cash flow
- Cash and cash equivalents were $13.19 million at September 30, 2019, up from $10.87 million at December 31, 2018. Working capital was $10.68 million, down from $12.98 million.
- Current assets were $26.31 million and current liabilities $15.64 million. Accounts receivable was $8.30 million, down from $10.63 million at year-end; reported DSO improved to 62 days from 66 days at December 31, 2018.
- Nine-month operating cash flow of $4.93 million reflected, in part, lower receivables and prepaid assets; investing cash use was $1.39 million, principally technology equipment. Financing cash use was $0.93 million, including $0.88 million of obligation payments and $0.04 million of share repurchases.
- Long-term obligations totaled $3.79 million, including accrued pension liabilities, settlement payments, and capital leases. The company reported no debt facilities or lines of credit. Operating lease liabilities of $8.10 million were recognized following adoption of the new lease standard; the balance sheet also included a $7.27 million right-of-use asset.
- Management said existing cash and internally generated funds were expected to meet financial needs for the next 12 months. It anticipated $2.0–$2.3 million of capital expenditures over the next 12 months, funded from operating cash flow.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management described ongoing investment in technology, products, strategic marketing, Agility, and operating expansion, while continuing cost-rationalization efforts.
- Management cited project-based and at-will DDS contracts, customer and project concentration, the risk of reduced or canceled work, competition, wage inflation, foreign-exchange exposure, technology and cybersecurity risks, and acquisition execution as uncertainties. Quarterly results may fluctuate with project transitions and seasonality; Synodex typically has lower revenue in Q3 and higher revenue in Q4.
- Two DDS clients generated 25% of Q3 revenue and 26% of nine-month revenue. Three clients accounted for 43% of accounts receivable at September 30. Foreign customers generated 54% of nine-month revenue.
- A 2019 one-time $0.4 million charge related to retroactive foreign social-security contributions following an Indian Supreme Court decision. No 2019 goodwill impairment was recorded; the company had recorded a $0.675 million DDS goodwill impairment in 2018.
- A Philippine judgment involving former employees is approximately $6.2 million plus accrued interest. A U.S. preliminary injunction remained in effect, and the related action was administratively closed subject to reopening. Management said substantial recovery could materially affect the company. Other legal matters had approximately $0.275 million of reasonably possible exposure beyond recorded amounts.
- An Indian tax authority dispute concerns the classification of services for July 2012–November 2016; if the authority prevails, the cited tax rate is 12.36%–15% on approximately $66 million of subsidiary revenue. The company has recorded no liability based on counsel’s assessment. Separately, approximately $1.0 million of Indian service-tax credits remained recorded as a receivable amid a contested refund appeal.
- Unrecognized tax benefits were approximately $2.75 million at September 30, 2019. Cash held by foreign subsidiaries was $5.9 million; management said it intended to indefinitely reinvest foreign earnings.
- After quarter-end, the company repurchased 390,625 shares in a privately negotiated transaction for $0.5 million, in addition to Q3 repurchases of 34,150 shares for approximately $44,000.
Key facts for investors to verify
- Whether DDS client volumes stabilize and whether Agility subscription growth continues to offset declines in core revenue.
- Whether strategic spending produces revenue and operating improvements, given higher selling and administrative costs and lower adjusted EBITDA.
- Cash generation, working-capital trends, planned capital spending, and liquidity without credit facilities.
- Developments in the Philippine judgment and Indian tax matters, including any change to recorded reserves or receivables.
- The effects of customer concentration, foreign-exchange and wage-cost exposure, and the newly recognized lease obligations.