Innodata Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
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. The results include MediaMiser from July 29, 2014 and Bulldog Reporter from December 24, 2014, so year-over-year segment comparisons are affected by acquisition timing.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $15.1 million | $14.8 million | $43.0 million | $43.2 million |
| Net income (loss) attributable to Innodata | $0.4 million | $(0.2) million | $(2.2) million | $(0.7) million |
| Adjusted EBITDA | $1.7 million | $0.9 million | $1.0 million | $2.0 million |
| Operating cash flow | Not presented separately for the quarter | $2.3 million | $5.8 million |
Q3 direct operating costs were $10.5 million (69% of revenue), down from $10.7 million (72%). Selling and administrative expense was $3.9 million, versus $4.3 million. The resulting improvement in quarterly profitability reflected lower costs despite weaker CS revenue. For the first nine months, direct costs rose to 76% of revenue from 75%, and adjusted EBITDA declined.
Nine-month investing cash outflow was $0.5 million, primarily capital expenditures; financing cash outflow was $0.9 million, mainly debt and obligation payments and share repurchases. Cash increased by $0.7 million to $24.9 million. At September 30, current assets were $37.3 million and current liabilities $12.4 million; working capital was $24.9 million. Accounts receivable was $9.1 million.
Total long-term obligations were $6.1 million, including $1.5 million current and $4.5 million long-term; these include pension, acquisition-related, vendor, and lease obligations. The filing does not report a conventional interest-bearing borrowing balance. Stockholders’ equity was $37.5 million.
Material changes and segment trends
- Q3 revenue increased about 2% year over year. CS revenue fell 4% to $13.5 million, mainly from lower project volumes and completions; IADS revenue rose to $0.5 million and MIS revenue to $1.2 million.
- Nine-month revenue was down about 0.4%. CS fell 10% to $38.0 million, principally reflecting reduced e-book-related services from one client, lower project volumes, and completions. IADS revenue increased to $1.4 million and MIS to $3.6 million.
- For the first nine months, CS segment income before tax was $3.6 million, versus $4.8 million; IADS loss narrowed to $4.6 million from $5.7 million; and MediaMiser/MIS loss increased to $0.9 million from $0.1 million.
- Currency translation reduced accumulated other comprehensive income by $0.8 million during the first nine months. The company reported a $0.3 million unrealized loss on outstanding currency hedges at September 30.
Outlook, risks, and unusual items
- Management said existing cash and internally generated funds should meet financial needs for the next 12 months, but noted that IADS investment could be curtailed if funding is inadequate or outside financing is unattractive. Planned IADS investment is $0.7–$1.0 million per quarter in the immediate future; anticipated capital expenditures over the next 12 months are $2–$3 million.
- In October 2015, the company filed a shelf registration allowing offers of up to $70 million of securities, including equity or debt. This provides financing flexibility but could result in dilution or additional obligations.
- Management highlighted project cancellations or volume reductions, dependence on major clients, difficulty replacing completed work, continued IADS losses, acquisition integration, wage inflation, and foreign-exchange exposure. Three clients generated 44% of Q3 revenue; two generated 34% of nine-month revenue. Four clients accounted for 62% of receivables at quarter-end.
- The company continues to contest tax matters, including Indian and Philippine proceedings. It disclosed a Philippine employment-related judgment involving approximately $8.0 million of back wages and benefits; management believes recovery against Innodata is unlikely. Other legal matters could result in approximately $0.1 million of losses beyond recorded amounts, although outcomes remain uncertain.
- Two Indian tax provisions were reversed after favorable outcomes in the second quarter. The nine-month tax provision remained $0.8 million despite the consolidated pretax loss, reflecting foreign-subsidiary taxes and related tax circumstances.
Most important facts for investors to verify
- Whether CS client losses and project completions can be offset by new work, and whether the new European publisher project’s ramp-up costs lead to profitable volumes.
- Whether IADS can grow revenue enough to justify continued investment and reduce its recurring losses.
- Whether MIS growth can translate into improved profitability, given its higher year-to-date loss.
- The sustainability of cash generation, planned capital expenditures, and the company’s stated 12-month liquidity outlook, including the location and potential tax cost of foreign cash.
- Developments in major-client concentration, foreign-exchange exposures and hedges, tax proceedings, and the Philippine litigation matter.
- The possible effect of the $70 million shelf registration and MediaMiser’s contingent consideration, which could reach $4.6 million if specified revenue and EBITDA targets are met.