Q1 2021 Innodata Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the inter data first quarter 2021 earnings call. Today's conference is being recorded at this time I will turn the conference over to Amy Hey, Chris. Please go ahead.
Thank you good morning, everyone. Thank you for joining us today.
Acres today are Jack Apple Haas CEO of enough data and Mark <unk>, Our CFO, we'll hear from Jack first who will provide perspective about the business and then Mark will follow with a review of our results for the first quarter. We will then take your questions first let me qualify the forward looking statements that are made during the call.
These statements are being made pursuant to the safe Harbor provisions of section 21 E of the Securities Exchange Act 934, as amended and section 27, a of the Securities Act of 1933 as amended forward looking statements include without limitation any statements that may predict.
<unk> forecast indicate or imply future results performance or achievements. These statements are based on management's current expectations assumptions and estimates and are subject to a number of risks and uncertainties, including without limitation, the expected or potential effects of the novel Coronavirus COVID-19.
19, pandemic and the responses of government the general population, our clients and the company there to the outcome of our application for loan forgiveness for proceeds received under the Paycheck protection program established as part of that the Corona virus aid relief and economic Security Act that contracts may be.
Terminated by clients projected or committed volumes of work may not materialize, continuing digital digital data solutions segment reliance on project based work and the primarily at will nature of such contracts and the ability of these clients to reduce delay or cancel projects the likelihood of continued to develop.
<unk> of the markets, particularly new and emerging markets that our services and solutions to support continuing digital data solutions segment revenue concentration in a limited number of clients potential inability to replace projects that are completed canceled or reduced our dependency on content providers in our agility.
Segment of continued downturn in or depressed market conditions, whether as a result of the COVID-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 our services and solutions.
Multi in integrating and deriving synergies from acquisitions joint ventures, and strategic investments potential undiscovered liabilities of companies and businesses that we may acquire potential impairments of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire changes.
In our business our growth strategy, the emergence of new or growth in existing competitors or use up in reliance on information technology systems, including potential security breaches and cyber attacks privacy breaches or data breaches that results in the unauthorized disclosure our consumer clients employee or company Inc.
Formation, where service interruptions and various other competitive and technological factors and other risks and uncertainties indicated from time to 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 thereto.
We undertake no obligation to update forward looking information or to announce revisions to any forward looking statements, except as required by the federal securities laws and actual results could differ materially from our current expectations.
I will now turn the call over to Jack.
Jamie Thank you.
Good morning, and thank you for joining our call.
We're off to a strong start for 2021.
We've delivered 4% sequential and 10% year over year revenue growth in Q1, but.
But much more importantly, only four months into the year. We believe we have already secured enough new business and late stage pipeline to meet or exceed our targeted top line growth this year.
And we expect this growth to accelerate driven by expansions and business from new and recently won customers and pipeline growth as our expanding sales force becomes fully productive.
Operationally, we're executing very well, we have reduced structural cost by $6 million on an annual basis. Since Q4, 2019, allowing us to spend internally generated cash flow on short payback sales and marketing and product enhancement initiatives that we believe will lead to growth in future periods.
<unk>.
And we're exceeding our internal operational kpis and hiring and cost management goals as well.
Within the pipeline. We're also seeing an increase in deal size is generally.
For example, our pipeline includes a large global technology company, that's been tens of millions of dollars on the AI initiatives annually.
We closed a small initial pilot with them about a month ago that went very well.
And we are now in discussions with them around several opportunities a couple of which we hope to close this week.
In the quarter, we signed an SFW amendment with one of the world's leading social media platforms that first became our customer mid last year.
The amendment provides for up to $7 million in AI services in 2021, which if realized would constitute a potential revenue expansion of 35 times last year's revenue with this customer.
We feel great about how we're helping companies embrace the future through AI and we're privileged to be working on an ever expanding set of use cases.
Our new customers. This quarter include a world renowned award winning fashion brand, which chose our agility platform for its industry <unk> AI powered image recognition capability.
This capability enables or a new customer to monitor how it's highly recognizable merchandise is featured in global media.
Another new customer is a 125 year old life insurance company that found our AI enabled <unk> platform to be instrumental in reducing underwriting cost a high priority as it seeks to mitigate COVID-19 exposure and contend with low interest rate environment.
Still another new customer this quarter is an early stage robotics company backed by prominent Vcs, we're helping them build an AI powered solution for automating warehouse smoothed Winston cargo trucking.
It's difficult to predict with any degree of precision our revenue from new customers of our AI data annotation and apply data solutions drop into the quarters. When you win a new customer there are startup work such as POC as a pilot's tool testing and calibration with our customer systems and additional.
<unk> discovery on the <unk>.
Timing of these things is oftentimes outside our complete control.
And our agility SaaS business. These things are much more predictable revenue starts immediately once the contract is signed.
But what's critical here is that our momentum is building and it shouldnt be sufficient to enable us to meet or beat our growth targets and to accelerate growth over the next few years.
In addition, this year in addition to new customer wins, we anticipate sharing with you a variety of new market facing capabilities together with the customer validation.
Yesterday, we announced that we developed and launched new capabilities in generating synthetic data.
And that we had validated the strength of the solution with a significant new customer win.
Next week, we are planning to release news about an important new capability that will be unveiling and our agility product that will enable our clients to target and monitor quickly growing areas of media that is increasingly getting attention.
Can watch for this release next week.
It is worth mentioning also that in the numbers. We're announcing today. If there was about $1 9 million of costs in the quarter that we are incurring specifically in order to drive accelerated growth.
Stated alternatively user cost that we would not be incurring if our objectives were to run the business flat.
I am sharing with you our level of growth expenditures, because I want you to have visibility on the underlying profit generation capability of our business as well as the operating profit margins generated from incremental business, both of which might otherwise be eclipsed by the investments in growth that we're making.
We anticipate that our growth expenditures will continue to be funded through internally generated cash flow and internal resources.
From Q4, 2019, we reduced our structural costs by approximately $5 $8 million per year.
These aggressive cost reductions have enabled us to fund our growth expenditures.
This year, we'll be increasing our investor awareness efforts, we will be participating in investor conferences, starting with needham's, 16th annual virtual technology and media conference from May 17 to May 20th.
I'll now turn the call over to Mark our CFO.
Thank you Jack and good morning, everybody.
Total revenue was 16.0 million in the first quarter of 2021, which represents a 4% increase from $15 3 million in the fourth quarter of 2020.
Total revenue was $14 5 million in the first quarter of 2020.
Net income was <unk> 4 million in the first quarter of 2021.
Or to <unk>.
<unk> <unk> per basic share and <unk> <unk> per diluted share compared to a net income of $1 2 million or <unk> per basic share and <unk> <unk> per diluted share in the fourth quarter of 2020, and a net loss of $3 million or one per basic and diluted share in the <unk>.
First quarter of 2020.
Cash and cash equivalents were $17 3 million at March 31, 2021.
As compared to $17 6 million at December 31, 2020.
In addition.
Asian with.
With the exception of a $580000 PPP loans, which we expect will be forgiven.
We have no debt.
Operator, we are ready for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please press star one to ask a question, we will pause a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Tim Clarkson with Van Clemens. Please go ahead.
Hey, guys, sorry, I was very pleased with the quarter I thought.
The results are much more exciting here at around $6 than when oil is trading at $9 guys are really doing it so.
Just a couple of background questions. How are we doing in terms of hiring salesmen.
Hi, Tim Good morning, Thank you for joining side, we're doing very very well.
From our last call.
We're on.
We're on track first of all we're and our goal is to exit this year with 98 people.
In our sales area.
And Thats, a pretty substantial increase we have.
<unk> had an average of 15.
Last year.
So we're doing very very well.
I have.
22 people that we've brought on and were working on training and there'll be starting to develop their pipelines.
Within the next month or so so very much on track.
I assume the salesmen are performing.
Well they are doing what they have to do we are putting people through a very rigorous training program that we've taken a lot of time to very thoroughly design.
And what they need to go through in their first couple of months is training. They have assessments that they take they have pitches that they have to make in their graded on those.
And they are expected to perform so as they move through that process and more people come on and then eventually they get to it.
Hitting the phones and working relationships. So we see a tremendous amount of.
Investment going into that we're seeing very good success, we're very happy with the people that we're bringing on.
Yes.
We're getting rave reviews on the training program and.
There is a huge amount of potential for acceleration there as well.
Third new pipelines start to.
It will contribute to our growth.
Great Hey, can you explain a little bit you had an announcement yesterday about RPE and launch explain what it does and how it saves money.
Sure so yes.
Yesterday's announcement from us.
Very important one.
What we were describing there is a new capability that we have designed and validated with the customer to generate synthetic data.
Synthetic data as an alternative to what you might call real real life data.
It has a lot of benefits in terms of overcoming data usage restrictions.
Simulating conditions that haven't yet been encountered in real life.
It is.
Is better in terms of statistical helps.
Helps overcome some statistical problems that real data can have so it was a very important technology development for us and critically.
We brought this to our first customer who is one of the world's maybe even the world's largest RPI company robotics process automation.
And they viewed it as exactly what they need in order to extend the capabilities of <unk>.
Of their systems, so we closed that partnership.
We did the announcement because it demonstrates both innovation, which is going to be very important part of our story this year and it demonstrates customer validation.
Now, we turn that release over to R. R. A.
Account based marketing team, who goes and finds us other companies, who could benefit from synthetic to generation as well.
Great Great he saw.
I noticed in the announcement you mentioned that you needed to have ability to have some skills from five different foreign languages, maybe you could just talk a little bit about the skill set.
And the data has that goes into creating artificial intelligence to some of the different elements.
Sure happy to.
It's a very good question. So I think as as you know we started building and working with AI about five years ago. We did a lot of work internally with it and we built some high performing systems.
Net debt that are working very very well for us.
Return those systems into external market facing capabilities, and we started to bring those to market.
Last year, and we're continuing that this year.
And we're finding that our combination of very high performing.
Yes.
AI stack that has been trained through lots of content development work that we've done.
In combination with our global reach in terms of subject matter expertise in humans and loops that can work with our technology to create high performing.
Training data for our customers and create.
Very compelling outcomes in terms of applied AI is really the perfect combination to be competing in.
The world.
Our customers care more than anything else that the AI performs well and that requires.
The training data to to be a very high quality. That's the business that we've been bidding for years, creating high quality training data.
In multiple languages.
What we're finding is that there is great receptivity to that.
<unk>.
My lead in the area mentioned to me that he doesn't believe and I hadn't even thought about this until yesterday you said, we've never lost a big RFP yet so.
And we've got a lot, but work that we're doing right now right right right now and we're very excited about it.
One last question here.
Should know this but what were the growth goals that you had at the beginning of the year.
So what we said at the beginning of the year was that looking out we're wanting to.
Get the company to a point, where it's growing at least 20%.
Annually.
And we didn't specifically say that will not happen. This year will that happen next year, but.
That was what we're striving for our internal goals are actually even even a bit more aggressive from that.
So the good thing is when we look at the strength of our pipeline what we see right now is that we've got enough.
Business.
Lined up and ready to be closed in order to.
To get to those growth numbers, we think potentially this year.
That's huge because we're only four months into the year and to have enough pipeline, which we look at deal by deal and forecasts show that kind of growth.
It makes us feel very good it demonstrates that a huge amount of momentum that we've got going right now.
Right right. One last question just on in terms of valuations I know that I always like to use price to sales.
Company Thats growing like in a data because you've got a lot of noise with the earnings.
Would you be comfortable saying that the companies that youre seeing in the industry are trading at least three to five times sales.
Yes, we look we look at people that were competing with who are.
Yes.
Trading at six times sales, frankly, and we're winning deals from them.
So.
We're very focused on frankly.
Is not today's stock price or tomorrow stock price, we think ultimately.
<unk>.
If we keep winning the way we are.
Like <unk> said to me the other day, we haven't lost a major RFP.
And we've got four or five new major Rfps right now in the works that we're expecting answers aren't eminently.
Keep at that pace, then the stock market will take care of itself.
Well that sounds very exciting I'm done thank you.
Thank you.
We will take our next question from Dana Scott with total. Please go ahead.
Hi, Jack.
Hey, Dana.
How are you today.
Doing very well thank you.
Great Congratulations on a nice quarter I just have.
A couple questions around the relationships that you establish with your customers. After you win a deal is this something that we're kind of more one off or are they more something that you see as long term relationships.
So from the most part we see that as potentially a long term relationships and.
Thats, especially true among the large tech companies.
Where they are spending literally tens of millions of dollars, possibly even hundreds of millions of dollars.
On AI preparedness and AI implementations.
So we feel very very good about the expansion that we saw in the social media company that we brought in last year.
We feel very good about the fact that.
We've got another big.
Tech company for whom we've just completed a successful pilot we're in discussions with them that we think will be consummated over the next several days about.
Starting some new and expanded opportunities with them.
And we believe that if we're successful, which we absolutely intend to be those will rapidly scale as well so.
And then in direct answer to your question, we see these as being recurring relationships with a great amount of.
Expansion capabilities among the large customers.
Some of the small startups were working with.
It'll depend on their success rates, obviously, but with large customers.
Among tech companies and the companies, we're working with in financial services and insurance and applied.
Allied health and things like this.
We see lots of Greenfield opportunity.
Okay great.
One question around with your annotation business one of the things I've been reading about is refreshing data and is that something that you.
Are anticipating will be like a recurring revenue stream part are you in that in that area.
Yes, thats exactly right.
So.
When you build an AI algorithm.
The build is not something that is completed one of the things.
Like to talk about is AI.
<unk> are built with data theyre not built through coding and programming the way that conventional applications are and what are the things about data is what's called data drift. The data is always changing there or new instances there are new new variables.
And the AI needs to be consistently trained round.
We're around that in order to accommodate that drifts and.
Continually to perform at expectations.
And just like you said, that's exactly what gives rise to recurring revenue.
Okay, great and from a capacity wise.
How do you look at your capacity that you have to be able to handle the.
These contracts do you have line.
Like unlimited capacity right now or is that something that you have to scale as you get more contracts.
Well I think one of the things that.
Happened as a result of COVID-19 frankly, when we had to shift from our model of working with.
People in large scale facilities and establish a more variable is more remote way of working is we booked a lot of technologies and tools to enable that and the side benefit of that is it dramatically increases our ability to scale. So as we look across the opportunities that we see.
And we don't worry about the ability to scale up to support those.
Okay great.
Then with your.
Gross margins could you talk a little bit about gross margin and how you see them.
Progressing as you as your sales increase.
Yes, sure. So when we think about the business first of all.
As you're aware there are three large contributors.
To the business. There is there is the business that we're doing and growing.
AI data preparation and applied AI solutions and then there are platform businesses. So if we start with our platform businesses Thats, where we see.
The greatest gross margin expansion capability.
By virtue of the operating leverage you have there our agility business.
A true platform business, it's a rule of 40 business. We when we look at our projections, we see getting to rule of 40 sometime mid next year, which is pretty huge for that.
Gross margins from that business will continue to track very well.
Believe looking out mid sixties into the seventies and perhaps higher.
When you look at the San Index platform business.
There again, we see capabilities to move gross margins into the high <unk> high fifties sixties as we look out over our plan.
And in the DDS segment first.
First probably upper thirties forties on a consistent basis.
So depending upon how the revenue comes together.
And in what proportion.
Youll see gross margins that will be.
A confluence of that.
And we will trend up I believe into the 40% <unk>.
Great.
Excellent. Thank you.
That does it for me.
Thanks very much.
We will take our next question from Joe Furst with Furst Associates. Please go ahead.
Good morning, Jack.
Great to see your revenue increases.
And gross margin increases, but what are you doing to get more to the bottom line with so far hasn't been too much.
One of the things that we're we're going to be doing Joe because we see so much opportunity that we are so well aligned for us where we're investing very very heavily back into the company. So in this quarter $1 $9 million could have gone to the bottom line, but instead of.
Sending it to the bottom line, we're we're recycling it right back into new sales hires.
As I mentioned earlier in the call we're going from 15 to close to a 100 salespeople this year.
Recycling it back into new product that enables us to win new deals.
We are measuring ourselves very much this year on what new business, we can book.
Net new bookings turns into growth.
What new technologies, we can come out with.
What new technologies and capabilities, we can validate in the marketplace.
Yes.
Those are the things, we're obsessing over and I think the investments that we're making in the company are going to provide a short term return that will be very very compelling.
So I will continue as we move through the year to share the.
Mount of spend of new spend in the quarter that is dedicated to those growth initiatives and we will be very happy to talk about the return we're getting on that.
Very happy to talk about how that money is getting spent in where we see that going but we see that return is being <unk>.
Very compelling right now potentially because we just have such a great market opportunity in front of us.
Great. Good luck. Thank you.
Ladies and gentlemen, if you would like to ask a question you may do so by pressing star one on your telephone keypad star one for questions, we'll pause a moment to assemble or Q.
We will take our follow up from Tim Clarkson with Van Clemens. Please.
Go ahead.
Yes, Jack just on Joe's question, there I assume that.
Volume of revenue.
20% to $25 million level, you'll you'll start making.
And you easily anywhere from 10% to 20% net right.
So I think what we're going to do there is we're going to be.
Mindful of the return that we're getting on the investments that we're making.
I'd like to see Us frankly, Tim I'd like to see us.
Thinking about the company in terms of like an underlying EBITDA concept here's here's the.
Here's the return here's the EPS that we're getting is we're not investing sure.
And our growth to where we are and here's the return that we're getting for investing in our growth.
We're looking at other things that we can be doing to deploy cash we are looking at acquisitions. We're looking at all sorts of things right. Now there is no opportunity IC that is more compelling and creating new opportunities in this space.
New technologies in this space new capabilities that we can quickly go out validate and.
Business with <unk>.
Huge.
New customers, that's the best way that we're going to create value.
One of the things that we worked on this year.
Nick and I worked very closely together on this we worked up.
Three and a five year plan.
And we said to ourselves what do we need to do from a.
Resource allocation perspective.
And an execution perspective to take this stock to $30. How do we work backwards from there what does this look like and do we have the market opportunities to do that.
Right now when I look at the company I see that we do have those market opportunities I'm very very excited about those.
We're four months into the year and we.
We have enough pipeline, if we can close it two to hit our numbers and as we do that there'll be further expansion in those companies that were bringing on.
We're bringing on new salespeople know create new pipeline those.
Create acceleration.
Weighted entered the year with are our 2021 plan.
With four deals for big deals that we wanted to win with one one we have a verbal on another.
Another still we're going to hear we hope this week in the fourth is looking good.
<unk> reminded you haven't lost a single RFP there.
Right, which is which.
Which is great. We've got a new Tech company that we did a successful pilot for we think this week, we're getting new opportunities with that that has the same potential as the.
The social media company that we have.
We've spoken about so there is true.
Greenfield of opportunities that we're going to be.
Going after and investing.
Sure one comment one last question on my clients quite naturally complain about how long it's taken for all this to develop for any data, but I guess the other part of it is that it's going to take the competition I'm guessing a number of years to duplicate that kind of skill sets that ended at is develop digitizing books and doing the kinds of work for <unk>.
Severe and Thompson and so on.
Is that right.
Well it is there.
There used to be for companies that cared about high quality data and they were our customers, but there wasn't a lot of growth you could have within them that we didn't already accomplished and there wasn't anywhere else to go.
If you compare events and now now everybody that's embracing AI has to care about high quality data and.
And all of the systems and all of the capabilities. We've developed over the years to create high quality data are applicable applicable excuse me to this opportunity.
So we think we're in a very privileged position.
That privileged position is being validated by the business that we're winning.
The old days when there were four companies to talk to pets, that's in the rearview mirror.
Now, it's a very impressive list of companies that we're engaged with and.
We're just having a lot of fun and we're very excited about it and we see the momentum being created all the time I wish there were a financial statements like a balance sheet or cash flow that could track momentum that could demonstrate what's going on right now there isn't one to my knowledge.
This is why I have to qualitatively.
Explain that we've been in this business for very long time, and we've seen a lot we know services businesses and technology businesses very very well.
This is very exciting momentum and it bodes very well for our future.
Alright, great. Thanks, I'm done thank you.
Okay.
Ladies and gentlemen, this will conclude today's question and answer session I would like to turn the conference back to Jack <unk> for any additional or closing remarks.
Thank you so yes.
I'll recap just a few thoughts we're four months into the year, we already have enough new business secured.
And visible in our late stage pipeline to meet or exceed our growth targets.
<unk>.
As you might imagine our focus now is getting these deals over the finish line.
Our plan to accelerate growth is very much a function of ramp up in this newly secured business. It's late stage pipeline conversions.
It's expansions and business from new customers recently won customers.
It's about pipeline growth as this very rapidly expanding sales force starts to become fully productive.
In this quarter there is about $1 9 million of costs that we're incurring specifically in order to drive accelerated growth and we view this as an investment we are making.
From a capital allocation perspective, we expect that it will have a short payback given how well positioned we are in the market right now and how we're winning.
And we think we're going to be ultimately ideally taking advantage of strong tailwind in each segment of the business that we seem to now be enjoying.
We're able to fund this in large part because we aggressively reduced structural cost by $6 million annualized since Q4 2019. So.
That's a quick recap.
Thanks, everybody for joining us today and look forward to continuing our conversations through the year.
Okay.
Ladies and gentlemen, todays conference is available for replay from two P. M. Eastern time today to June five 2021 at two P. M. Eastern you may access the recording by dialing 701 nine.
Or 570820 or 188820.
Zero three.
One one.
<unk> using pass code 390 25006.
Again, the numbers are 71945700 or 18882031112 passcode 390 25006. This concludes today's conference you may now disconnect.
Yeah.
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