Q3 2020 Innodata Inc Earnings Call

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Good morning, welcome to the Ido data first quarter 2020 earnings call Todays conference is being recorded.

At this time I would like to turn the conference over to Amy English.

Yes. Please go ahead.

Thank you Sandy good morning, everyone. Thank you for joining us today, our speakers today are Jack gobble half CDR and I'll do that and Mark Celgar, Our CFO, who joined you cannot do the last month.

It's hard for me at least some color LLP.

Well, ladies accounting tax and didn't fit fivethree from where he served as an auditor and technical consulting partner for 20 years, we have some juxtaposed to provide perspective about the business and then Mark will fall out typically view our results for the third quarter well then take your questions first let me qualify the forward bookings.

Got it and stuff are made during the call. These statements are being made pursuant to the safe Harbor provisions of section 21 of this.

Purities and Exchange Act 1934.

The amended and section 27, a securities at 933 as amended forward looking statements include without limitation.

Jim and you stated that may predict forecast indicate or imply future results performance or achievements.

These statements are based on management's current expectations assumptions.

And are subject to a number of risks and uncertainties, including without limitation the expected.

Central affects the novel cleared the virus Oh, this 19 pandemic and the response to the governing the general global population, our clients and the company there too that contracts may be terminated by clients projected or committed.

Volumes of work May now.

Not materialize continuing digital data solutions segment reliance on project based work in the primarily at will nature of such contracts and that the ability of these clients to reduce delay or cancel projects. The likelihood of each can you just help me just the markets, particularly new and emerging.

Markets the other services and solutions to support continuing digital data solutions segment revenue concentration in a limited number of clients potential inability to replace projects are completed canceled or reduced our dependency on content providers in our Joby segment of teaching you.

Downturn and or depressed market condition, whether as a result of a cold at 19 pandemic or otherwise changes in external market factors, the ability and willingness of our clients and prospective clients to execute business plans that give rise to requirements for services and solutions.

Nicole.

Hoping in integrating and deriving synergies from acquisitions joint ventures, and strategic investments potential undiscovered liabilities of companies. Some businesses that we may acquire potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire.

Changes in our business or growth strategy, the emergence of new book growth in existing competitors potential effects on our results of operations from interruptions, Dan or breach yourself, our information technology systems, and various other competitive and technological factors and other risks and uncertainties indicated sometime.

Time in our filings with the Securities and Exchange Commission, including our most recent reports on form 10-K, 10-Q, and 8-K and any amendments there too we undertake no obligation to update forward forward looking information or to announce revisions to any forward looking statements except as required by the.

<unk> Federal Securities laws, and actual results could differ materially from our current expectations. Thank you I will now turn the call over to Josh.

Oh, Thank you very much.

Good morning, and thank you for joining our call.

They were reporting third quarter revenue growth of 5%.

Sequentially as well as 5%.

Year over year.

What's exciting is that based on trends across all lines of our businesses and market opportunities and in order to position us for 20% growth in coming years, a level of growth that we have not seen for almost 10 years are 2021 plan contemplates nearly tripling the size.

Size of our sales team.

And adding resources and budget to our marketing leadership teams.

As a result of operating leverage in the business, we would anticipate cash for growth to outpace revenue growth and cover increased investments.

Our confidence is grounded in the accomplishments this year.

We have successfully expanded our addressable market through new product and service offerings, and we have established product market fit with these new offerings and demonstrated the ability to win against incumbents.

Let me give you some color on what we're seeing and executing on the ground.

In our core digital solutions business we.

We are now primarily focused on the AI data preparation market that was estimated 1.9 billion. This year and is expected to grow to $3.2 billion by 2023.

We believe that this is a made to order market for us in which customers prize data quality above anything.

The kind of which means we're able to bring to the task for 25 years of finely honed skills and technology that we develop to create near perfect data for leading information companies.

As a result, we're winning deals in the eye data preparation market against several incumbent providers.

We launched our AI data preparation offerings late in Q4 last year and to date, we have closed 18, new customers and we have another 20 or so in our late stage pipeline.

By the time the years done we expect our DBS segment to have signed approximately 40% more new business than it did last year.

As an example of our execution in the segments.

One of the world's largest social media companies became our client in Q2, when we beat out 17 other companies in a highly competitive five month long RFP.

It just five months, we've become one of this company's preferred vendors.

And we're now running multiple projects across seven languages.

Our scope includes AI based search classification to improve the search experience.

Sentiment analysis to automate content filtering.

Product classification engines to improve product placement for advertising.

Trend representation.

Patient to identify trending topics on the platform.

Access to the identification algorithms to identify content that violates terms of surface and misinformation identification to auto and auto identifies sake and misleading information.

We'll now turn to our platform businesses.

Our agility platform for PR and communications professional is now ranked among the best in class platforms in the market today.

To capitalize on this traction we are focusing on two initiatives to significantly accelerate the growth in this business first over the course of next year, we plan to increase our direct.

Sales head count from this year's average of 10 to 43 by the end of 2021.

And to expand marketing and lead Gen to support the scaled up sales effort.

Second we plan to expand and grow our channel partners.

We grew channel revenue, 23% this year.

And we're expecting a higher growth next year.

We are similarly, similarly excited about the prospects of our Synodex platform are.

Our synodex platform is used to extract complex medical data from traditional medical records and electronic health care Records. This.

This year, we were integrating our document intelligent.

Engines, AI engines into the product, allowing us to offer our target markets and much superior solution at a competitive price points.

The 26% growth there.

The revenue growth we achieved in the first nine months of this year is indicative of the traction that we are seeing.

Lastly, our.

For him, but we continue to be on track with the cost savings initiatives that we outlined in our last call.

These cost reductions combined with a considerable operating leverage in our business make us comfortable that our cash flow growth should exceed our revenue growth even with the investments in sales and marketing we are making across the board.

Ill now.

I'll turn the call over to Marc Spilker, our new CFO Mark joined US just last month. So this will be his first earnings call Mark welcome.

Thank you Jack good morning, everyone. Thank you for joining us today to review our financial performance for the third quarter of 2020.

Total revenue was 14 point.

Point $6 million in the third quarter of 2020.

5% increase from $13.9 million in the second quarter of 2020.

Total revenue was $13.9 million in the third quarter of 2019.

Net income was point $2 million in the third.

Order of 2020, or one cents per basic and diluted share compared to a net loss of $5.4 million or two cents per basic and diluted share in the second quarter of 2020 and.

And a net loss of $2.6 million or two cents a share basic and diluted in the third quarter of 2009.

19.

For the first nine months of 2020 total revenue was $42.9 million, an increase of 4% from $41.2 million for the first nine months of 2019 net.

Net loss was point $6 million or two cents per basic and diluted share in the first nine.

Nine months of 2020.

Net loss was $1.7 million or.

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Seven cents per basic and diluted share in the first nine months of 2019.

Our cash and cash equivalents were $15.3 million at September Thirtyth 2020.

Appeared to 10.9 million at December 31, 2019.

Thank you.

She would like to ask a question. Please signal by pressing star one on your telephone keypad you guys using a speaker phone. Please make sure your mute function is 10.

Thats still allow your signal to reach our equipment again press star one to ask a question. So just a moment.

One and opportunity to signal for questions.

The first question comes from Tim Clarkson, John Clemens capital.

Hi, guys hijacked.

Yes.

Just a couple of questions here first of all just dive a bank or client and he he always looks at the bottom line and he noticed that agility still losing money I guess through the six months they lost.

About 600000 or something anyhow USIS wondering when do we expect the you know that division.

Finally start making money.

Tom Hi, Tim Great question. Thank you for that so you have each of the business.

You know weve.

Especially if you look late this year and you'll see it we believe next quarter also.

You know we've got it in a position where we.

We're being in mean relative to operating costs were.

Free cash flow generation, I think weve seen that come up and we're going to see that next quarter as well.

The important thing and the agility business is of course that the operating leverage is here.

Just a SAS business here, you see 90% or so revenue.

The bottom line.

So the real key there is growth we've achieved a tremendous amount with the product the product is.

Ranked as a leader in its addressable market.

And it's our intention.

I'm going to start to significantly expand the sales force and expand lead generation.

Next year.

Where even in this environment, we're seeing that the return that we're getting on sales.

Makes economic sense.

And we think it's time to.

To to dial up revenue growth.

Sure can you can you can't comment on the potential valley value of a agility. If it was sold based on Comparables.

Sure so.

There have been a few deals that we've seen in the market over the last you know 12.

For.

You know 18 months I think the one of the high use high comps that we saw was fivex revenue.

And the media CCOP is about three X revenue.

Do you think.

Realistically that.

You can you can put a three X value on on.

On agility, I mean, theoretically or is that a is that unrealistic.

So I think when we when we look at our plans we're looking at you know.

Forward looking.

30% or more forward looking compounded annual growth rate.

We think that with revenue growth, we're going to be hitting our target margin. So we're going to be moving into a rule 40 territory very very quickly.

I think that the kinds of.

Durations, we're seeing in the market for this kind of business are or what we're seeing and Theres no reason that those shouldn't apply to us as well.

Yes.

Okay I know on the bigger picture here I guess, it's all about accurate data or can you just give some color on the logic between.

Radically expanding your sales force was it from 15 to 58 I guess it was he said in a in a press release.

Correct. So.

He did a deep dive so just this summer into strategy in each of our businesses and the numbers look really good and they justify extending.

Sales force in all of our businesses.

In the core of the business.

The key for for our strategy is that we are taking exactly what we know how to do the creation of high quality new.

Your perfect data it used to be a requirement only have a couple of handfuls of information companies.

And now with the requirement to almost any company that is embracing AI.

So it's a huge opportunity for us we're winning customers from people, who haven't been focused on that market exclusively for for some time now.

We just entered that market in Q4, and we are winning so.

You know, it's clearly time too.

You know to to dial that up and.

You know our confidence that the market. There is expanding is confirmed by analysts you were saying you know it's that market's going to be going from 1.5 billion.

Now do you know 3.5.

Just a couple of years and it's also you were talking about recent market comps. It's also confirm by market comps that we're we're seeing right now in.

In that market.

One of our competitors Lionbridge.

Sold its 200 million dollar AI data.

Prep business I believe it was just last week for Fivex revenue.

So clearly there are a lot of sophisticated people.

You know looking at this market opportunity and you know understanding it for for what it is.

Sure.

Yeah.

I know.

You've mentioned to me you know offline that that you hit you got us a 70% close ratio.

When you're.

Able to demonstrate.

Demonstrate the accuracy of your data.

Is that is that still happening.

Yeah, that's still holding up and.

You know not only are you know is that holding up right. I think we may even see some expansion in that you know the only thing is that we seem to not close are things that just aren't moving forward for one reason or another.

But when you when you look at just how.

So critical high accuracy data is to succeed.

Successfully operation and Operationalizing, AI, and creating give a sound analytical models.

People want that high quality data it means everything it it's the difference between success and failure or success.

Jordan or a success. So we're that's what we've been doing for the last you know two decades is figuring out.

How do you create near perfect data and.

Oh, Hi, this is a broad now requirement, it's moving past experimentation stage many many businesses.

It's moving beyond you know voice or excuse me moving images to voice and text and Oh you know, we're we're just really excited to be to be part of that right now.

But how about on the on the Synodex Division can you give us some additional color on on.

All your relationships with these life insurance companies are going.

[noise] I'm relations relationships are going very very well we.

We're renewing clients as they come up for renewal.

As I mentioned in the call we've seen.

Looking at the past nine months 26.

Percent year over year growth.

Looking out to next year, we see that growth accelerating.

A couple of drivers there were finding some new markets for.

For what we do.

Number one number two we are successfully integrating our document intelligence AI into.

At platform, which makes it even more powerful.

So lot of excitement there as well and like the other markets. We're also expanding our sales force for Synodex as well.

Sure sure well I'll I'll do one last analogy and get off the call I mean my.

No the way I look at in a data it's almost like you guys have the.

Only gasoline and Tom that does clean and makes the engines per and the other customer. The other the competition has Ah Ah you know gasoline with sugar in it and when they put it in the cars that spotters. So you know who who wants to do business with people.

I like that.

[laughter] well. Thank you Tim I know I'll be sure to quote you in some of our new proposals I like the inherent break.

Great. Thanks, Okay I'm done thanks.

Okay.

Did you find that your question has been answered could you maybe just give some to Q.

Other places document.

The next question comes from Dan Dan Who's got LTL.

Hi, Jack.

Hi, Dan good morning.

Hi, congratulations on a nice quarter.

Thank you so much.

Thank you very much.

Welcome.

My question is around recurring revenue and your average annual contract value on your new AI contract.

Can you talk a little bit Oh, it's how you see that developing in terms of recurring revenue and what you're targeting annual.

Direct values to be in the business are getting.

Sure so.

It's still early days for US you know.

We are seeing that there is a pretty big spread in terms of you know the HCV value of work or the TCV value of engage.

It means that we're signing.

You know and you know, they're ranging from you know several million dollars to $50000 one of the.

One of the things that we are seeing is that by virtue of the way.

Hi, guys operationalize it always requires continuous feed a refined and improved data.

So we believe that these projects will have a recurring revenue component to them that seems to be playing out well.

Most likely there will be a.

From you know kind of heavy lift and then ongoing maintenance component to that.

Okay, Great and then one question around agility, what do you estimate the total addressable market is for agility.

So if you take the total addressable market for PR Communications and communications intelligence, it's about $3.5 billion back out of that.

Newswire that it comes down to about two 2.5.

Billion dollars. So that's.

That's what I would consider our addressable market. We are we selling other other news wires, you know better integrated into our platform now, but you know I think the core market is the targeting and the monitoring piece I mean, that's about two 2.5 billion.

Okay and.

And with the.

You are an annual contract value on that.

Do you have like an average or something that you target for those.

Subscriptions that you are selling them.

Yes, so it's probably about five to $7000.

You know for the south.

And that's a platform.

Platform.

The you know the retention rate there is about 80% on and on a gross basis, but we get about a 10% uplift on a you know.

In terms of increasing seemed to increase your content and things like that.

You know on renewals.

Lastly on the managed services side.

Average revenue per customer is probably closer to about 35000.

Okay, Alright, great well that answers my question. Thank you and congratulations on your progress.

Thank you so much.

But again, if you would like to ask a question. Please press deadline.

It appears there are no further questions at this time.

Hi, Mr. Idaho, I'd like to turn the call back to you find it interesting no closing remarks.

Thank you operator.

So could you provide some closing thoughts first we're very pleased to be able to share with you this level of confidence in our business, especially in such trying times.

Yes.

We're expecting to deliver growth and 2020, both on a consolidated basis and across our business segments.

Looking out to next year, well, there's clearly macroeconomic risk and it's a tough environment in which to predict how companies will budget, we're making investments to position our organization.

For 20% growth in coming years on a consolidated basis, and we believe that growth will be supported by growth in each of the underlying businesses, which were confident across the board.

We continue to have a strong balance sheet grew 15.3 million in cash at the end of Q3, which was an ink.

Pre tax of 1.8 million over Q2.

And I'll just close by thanking everybody for having joined US today I will look forward to reporting our continuing progress.

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