Q2 2021 Innodata Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to the other day to second quarter 2021 earnings call. Today's conference is being recorded at this time I'll turn the conference over to Amy Grant's. Please go ahead.

Thank you Keith good morning, everyone. Thank you for joining us today, our speakers today are Jack Apple Hep C E L F and O data and Marc Spilker, 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 second quarter, well then take your questions.

First let me qualify the forward looking statements made during the call. These statements are being made pursuant to the safe Harbor provisions of section 21 E of the Securities Exchange Act of 1934 as amended and section 27, a of the Securities Act of 1933 as amended forward looking.

This includes without limitation any statement that may predict forecast indicate or imply future results performance or achievements. These statements are made based 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 expense.

After their potential effects of the novel Coronavirus, COVID-19, pandemic and the responses of government. 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 not materialize.

Can you in digital data solutions segment reliance on project based work and the primarily up low nature of such contracts and the ability of these clients to reduce delay or cancel projects. The likelihood of continued development of the markets, particularly new and emerging markets other services and solutions 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, a continued downturn 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 difficulty in integrating and deriving synergies from acquisitions joint ventures and strategic investments.

Potential undiscovered liabilities of companies from 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 or growth strategy, the emergence of new or growth in existing competitors how are you.

Yourself and reliance on information technology systems, including potential security breaches and cyber attacks privacy breaches or data breaches that results in the unauthorized disclosure of consumer clients employee or company information or service interruptions and various other competitive and technological factors.

And other risks and uncertainties indicated from time to time in our filing 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. Thank you I will now turn the call over to Jack.

Hey, Greg.

Good morning, everybody. Thank you for joining our call today.

Last year, we said we were positioning the company for 20% growth in the coming years. This quarter as you see from this morning's announcement from 23 per said year over year growth, we've begun achieving our targets.

Our 23% growth represents an acceleration from Q1's, 10% year on year growth.

Looking forward, we anticipate continuing to achieve 20% or more year on year growth from the remaining quarters of the year.

As a result of strong first half new deal signings and late stage pipeline opportunities, we expect to get over the finish line.

Moreover, we think it is appropriate to target accelerating growth moving into 2022 based on our increased investment in sales and marketing as well as anticipated maturation of our expanded sales force expansion of relationships with new customers and secular industry growth.

Let's talk about our sales and marketing investments.

As we've discussed on these calls before our plan is to invest internally generated cash flow and short payback sales and marketing as well as products enhancement initiatives that we believe will lead to continuing growth.

And while doing so to maintain or bolster our solid balance sheet.

The evidence is mounting that our plan is working.

A significant portion of our investable cash flow comes from the $6 million of costs that we took out of the business since Q4 of 2019.

On top of that we are investing new gross margin dollars that result from incremental growth.

As you'll see in today's numbers are 23% year over year growth represented $3.2 million of incremental revenue and a full 78% of this incremental revenue were $2.5 million.

Slowed down to gross margin, becoming available for investment in sales marketing and new product engineering.

Yeah.

In Q2, we incurred approximately $3 million of investment in sales marketing and product engineering costs as an investment toward accelerating growth.

These are costs, which we would not be incurring if our objective were to run the business flat.

The $3 million of investment is 1 million more than first quarter.

We presently believe the best investment for our internally generated cash is organic growth in our business.

We anticipate that our growth expenditures will continue to be funded through internally generated cash flow and internal resources.

It's worth pointing out that even with our first half $5 million gross expenditures or cash has grown to $22 million at the close of Q2 up from $17.6 million at the end of last year.

We believe our growth expectations, which are driving which are driving our growth expenditure plans are supported by analysts predictions that the markets. We are well positioned to serve will be rapidly growing over the next several years.

For 30 years, we built a brand synonymous with high quality data and we've contributed to many of the world's most important data products. Today by contrast, it's not just information products that benefit from high quality data rather high quality data as the stuff that AI is made from.

AI models are trained with data Theyre not program the way traditional applications are.

About 5 years ago, we saw that AI was destined to be the next new thing and we began making investments in AI technologies. Today. So it was early investments are serving us well.

And a recent Gartner survey Gartner found that data volume and complexity data scope data quality problems and data accessibility. We're among the top barriers organization cited that kept them from getting their AI model prototypes into production.

These are all challenges we are helping organizations solve today.

The survey also cited lack of understanding lack of technology knowledge and complexity of AI solutions integration as additional challenges again challenge, we're successfully helping companies overcome.

We believe we're the perfect partner for data science teams that need quality data to build high performing AI models.

And we're the perfect partner for businesses that may not have full data sciences teams, but need enterprise, great AI solutions to stay competitive.

Okay.

The AI initiatives, we're working on fall basically into 2 categories.

The first category, our AI implementations that help organizations modernize our streamline processes.

The second category are AI implementations that deliver fundamentally new experiences.

We're now working on AI implement implementations with 2 of the largest silicon Valley Tech companies and we have discussions taking place with 3 others.

We're working with about 14 large enterprises and to have late stage pipeline discussions in the works with another 12 or so and we're working with 15 early stage companies and we've got about 20, others that are proceeding at pace.

We believe that over the next several years AI implementations, which up until now have largely been the domain of Big Tech Silicon Valley.

We will increase significantly among early adopter in early majority organizations following the classic technology adoption curve.

In Houston by the dramatic improvements in broadband networks, and mobile device chipsets as well as the maturity of AI ml development tools and the increasing trend for organizations to invest in data science.

As this occurs AI will start to become embedded in everything that we do and everything that we use we believe that the net result of this will be an increasing demand for domain specific high quality training data and models.

Okay.

We had a strong first half of the year in terms of new business bookings and new business pipeline additions, our wins and pipeline expansion are coming from new logos as well as customers that we brought in last year that are now expanding programs with us.

We are also finding an appetite among our legacy customer base for reinventing their operations ran the technologies we have built.

There were a couple of important new wins in the quarter, which for competitive and other reasons, we did not announce in the quarter, but we will look to announce over the next few weeks. In addition, we will look to issue press releases as we win pipeline deals that represent important new capabilities, we bring to the market.

I'll now turn the call over to Marc Spilker, our CFO.

Jack and good morning, everyone.

Revenue for the quarter ended June 30, 'twenty, 1 was $17 million up 23% year over year.

Net loss for the quarter was <unk> $1 million or zero per basic and diluted share versus a net loss of $5 million or <unk> <unk> per basic and diluted share in the year ago period.

Revenue for the first 6 months of 2021 was $33 million.

Up 16% from the year ago period.

Net income for the first 6 months of 2021 was <unk> $3 million or a penny per basic and diluted share versus a net loss of <unk> 8 million or 3 cents per basic and diluted share in the year ago period.

And as Jack mentioned cash and cash equivalents were $22.1 million at June 32021 up.

Up from $17.6 million.

At the end of calendar 2020.

Thank you very much and operator, we are now ready for questions.

Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star 1 on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to let your signal to reach our equipment again. Please press star 1 to ask a question were positive I want to give everyone an opportunity to signal for questions.

We will take our first question from Tim Clarkson with Van Clemens Capital. Please go ahead.

Hey, guys, obviously really good quarter.

Wanted to ask.

I know you've talked about.

How this whole thing works, but why don't you explain again.

Why data is getting these significant contracts from these big companies and for that matter the.

Small companies too.

Sure Tim.

Happy to take that question. So I think the first thing that's important to recognize.

And really can't be overstated.

Is you build AI applications with data.

Just like Q, what you built conventional applications with programmers.

And that being the case virtually any company that is looking to embrace AI and harness AI and its operations or to harness AI to deliver new experiences for our customers has to contend with data.

And Dave is problematic and data is difficult to work with.

We've been working with data for many many years, we're a leading data engineering company.

We're the company that's been chosen by many of the.

Leading brands.

Big brands, the apples the Bloomberg Thomson Reuters of the world to to help them with their data challenges and what we're finding is as it's gone from a small world of.

Professional publishers.

<unk>.

Data product creators to a large world of people looking to transform with the power of AI.

The need for.

Data quality management the need for data analysis model selection model building, it's just.

<unk> grown enormously and thats, creating a wonderful very large opportunity for us. The other thing is that when you are building AI you have to care about most of everything is data quality.

You're building your AI out of poor quality data.

AI will not perform well so companies.

That are building AI care about data quality more than.

More than anything else and every bit as much as our large customers historically have cared about it.

When they are doing business with us they see the results of that say they see the results of what we do.

The.

Performance that they're getting from their technology investments.

Great great.

Just another question in terms of timing I know that you mentioned in.

In the first quarter that we got a large contract from the largest social networking company.

In the world.

I guess, we can guess who that is and you also mentioned on the podcast. It's public information that you got a very large contract for another 1 of the big 5 starts with 100 employees and goes to 500 employees.

When are we going to start seeing some of those revenue show up in the quarters.

So I think youre starting to.

You see that and we're building all of that into our guidance. So when we talk about the growth spurt.

We're expecting to continue through this year and when we talk about accelerated growth moving into next year.

We're doing the work for you of taking those contracts are taking those expanding engagements and summing those all up into.

And to the expectations that were sharing.

Great.

Another question on 1 of my less trusting clients wants to know when are we going to see.

The typical 10% to 20% net bottom line numbers, you would see on a high Tech company like this.

So right now when we think about.

Our market opportunity, we feel very strongly that.

Every amount of investment we can be making in ourselves it's going to return very significant.

Return on net investment.

So our strategy is and is going to for the near term certainly continue to be.

To invest free cash flow back into our business in terms of chiefly 3 things sales sales expansion.

Marketing expansion.

And product engineering, we're building new things, we're seeing the opportunities in front of us.

Building, new things and some of those things will be solutions capabilities, others are going to be new systems that will drive SaaS like revenue for our company.

So we believe that thats the most important.

Opportunity for US net now with the same day on what we're doing on cost I just want to add 1 thing.

As we're sharing with you what that investment looks like so when we look at this quarter. We said, we made $3 million of it.

Investments into our business that when you add that to our our meager free cash flow number.

This year you see however that it's not at all and make our numbers the business producing.

Wonderful cash flow the operating margins.

Operating leverage is very very significant 78%.

And that's enabling us to.

To invest harder and faster and to have then concomitant.

Better expectations relative to growth.

That's our plan and that's what we're managing to.

Sure.

A couple just a housekeeping question, how many salesmen have we hired so far then.

So we've.

We measure ourselves against where we were in 2020 and in 2020, we had.

Organizationally about 19 people doing sales.

Right now where we are is we're about at 67 and.

Planning on ending the year at.

Now our plan is to end the year at about 110 people.

And that yes.

That's across our 3 segments.

And Thats really doing a build out that can continue to scale in that way, meaning we're not just adding sales executives were adding business development Representatives BTR teams we are heading.

Line.

Sales managers sales directors were adding enablement people, we're adding channel managers, it's a pretty big built in.

We are very happy with the progress on that so far.

I assume you're pretty fussy about who you are hiring and hiring good people.

Yes, we're hiring great people.

<unk>.

We are hiring people, who at the leadership level have done this before.

I remember when we hired Tom <unk> Who's our Chief sales Officer, who came in and we said Tom is going to be really hard.

So what we need to to pull off and you said volume.

I've done that before it's not actually that heart I know how to do this so they're we're hiring great people.

The management level, who know how to execute this.

We're collecting tons of metrics to track our performance and make mid course corrections as we need to.

So we've got a great dashboard lined up we're looking at our results. We have people looking at a daily I tend to look at it weekly.

And.

We feel very good about the market opportunity, we feel very good about our execution relative to.

To exploit that market opportunity.

Alright.

While they make a comment and then let me Michael I'll give you 1 last question and then I'll make a comment.

<unk> question, where did all the cash come from that that showed up in the quarter.

So yes. It came from really good creative cash management, we're looking at all sorts of opportunities too.

To bolster our balance sheet and to execute the plan that I spoke of dramatically investing in the company while at the same time.

Maintaining a very strong balance sheet. So just for example.

We saw an opportunity in.

In Europe, we have we have a lot of European business, we have customers, who have negative interest rates in Europe. So we go to them when we say well how about.

How about you prepay us and we will give you a small.

Discount and you avoid negative interest rates in.

That work so some of the money came from that some of it came from.

Being able to.

Aggressively.

Seek refunds and tax jurisdictions that Otis refund some of it came from good collections of it came from free cash flow. So mark and his team are just doing a really good job at creatively.

Making sure that.

We're executing this plan and that includes maintaining a healthy balance sheet.

We will go up as a large shareholder I appreciate that good job Mark.

1 last comment and I'll, let somebody else get in here.

The top guy at Google a couple of weeks ago said that he thinks artificial intelligence is going to be bigger.

And then fire bigger than electricity and bigger than the Internet and the 1 thing I think that's kind of cool about Ana data Athena data in a way is <unk>.

You guys are.

It's a gold rush.

We're not doing the risky part of mining for the gold you are providing the supplies.

The shovels and the various supply as the gold miners needs. So I think it's a great business model and I think it's great that you are investing in it so with that I'll pass on great great quarter.

Tim. Thank you. Thank you I appreciate it.

We'll take our next question from Dana Bhaskar.

Ethanol <unk>.

<unk>. Please go ahead.

Hi, guys congratulations on a wonderful quarter.

Good morning, Dana Thank you.

I just have a couple of questions about.

Your recurring revenue versus project revenue.

Could you give us a little breakdown on that Ed.

But how you're seeing your recurring revenue going to be going forward.

Sure.

We are.

When you look at our business.

Our platforms are all recurring revenue and a lot of the work that we're doing is.

Within DDS are is recurring revenue also so in the quarter.

We're categorizing 87% of revenue as recurring.

And 13% of revenue as project based.

Oh, that's pretty good that's quite a difference from where you guys were in the past.

Yes, absolutely absolutely what were seeing here is so different than anything we've seen in the past.

The big difference is the market opportunity there.

A very significant market opportunity that we're addressing we are addressing creatively from ey.

A product perspective.

We're looking at markets, we're looking at where the markets are going to be.

A couple of years from now even.

We are building products and solutions that.

Talk to that.

So we're looking at big deals, we're going to continue to do that but it won't just be 1 big deal. It will be several and we think as a result, we'll be able to drive good customer base diversification as well as strong recurring revenue.

Okay.

Wonderful I have a question about your platform.

I had read that Tesla is building a.

Supercomputer to do data annotation.

And I was wondering.

With your data application platform does that have a proprietary nature to it.

Yes.

Absolutely does so we've.

We're building several platforms right now the platform that we've.

<unk> been investing in most substantially is what we refer to internally as our Golden Gate platform.

It's a very high performing AI full stack platform that can be used to address real world problems and when we kind of bring that capability to customers what they're seeing is that they can get higher quality.

Faster dips.

Deployment with less risk from using our platform then they can from.

The competitive platforms that they've looked at.

So that's really strong and that platform is powering.

Most of what were doing its growth.

It's powering everything from our Sydney index delivery capabilities to our solutions for data annotation data management to projects that we take over too.

Model selection training and evaluation deployment for customers. So that's really good the other thing that we're doing is we're developing.

What we believe will be a best in class data annotation platform for tax.

Which will have embedded in it auto tagging intelligence both.

Classical and generative AI tasks tasks will be supported by that we've got a lot of customer interest in that we've got customers, who just started using that and we've got exciting plans for that both that and our Golden gate platform are completely proprietary.

Okay wonderful and I'm, assuming that that would all be recurring revenue when people use your platform.

They put their data on it and maybe it would probably tend to stay there.

Yes, it depends on how they are using the platform. That's a complex question, which I'm not going to I won't try to parse it down too.

Very precise answer but just to.

Day relatively high level, yes in those platforms there are substantial recurring revenue opportunities.

Looking forward, we think that.

The things, we're doing today and the things that we're planning on doing in the future we will.

Drive substantial recurring revenue.

So you can kind of say there'd be a flywheel effect of that once you get a customer you create their data and then that kind of multiply that what you are kind of thing.

Yeah.

I mean, what we are seeing.

<unk> is that.

When we start working with the customer and they start experiencing our technology and start experiencing our services.

They tend to grow now not all of the customers do because as I mentioned in the call. We're working with some early stage customers, where we're doing everything that they've got now so there isn't really will grow with them I think is the way, we're viewing that but with larger enterprises.

They don't necessarily know us we come referred in many cases.

Sometimes we.

It's an internal referral aware like someone from a.

A company that has used us in the past.

They start working day. So you have to use these guys and we come in.

And we do a project and we do too and before.

Sure.

We're off to the races.

Were exploiting a great growth opportunity.

So.

I think that.

<unk>.

1 of the reasons that they come to us is absolutely our technology base.

Another reason they come to US is that we're just really good at what we do are great solutions and services company.

It's a small thing, but I think it's worth mentioning in the call.

We do customer satisfaction surveys all the time in this past quarter, our largest customer.

<unk> gave us a ranking of 495 out of 5.

And that to me just sales at all and how do you get that combination of people and technology.

And it's working.

That's tremendous I just have.

1 comment.

I think the investments that youre, making.

And the business a very small right now.

Seems like artificial intelligence.

Just getting going and there is just that.

Huge opportunity in front of any data right now.

Thank you.

Ladies and gentlemen, ladies and gentlemen, as a reminder, star 1 for questions or comments Star..1. Please we'll pause a moment to assemble the queue.

Oh.

Darwin for questions.

And at this time I'll turn the conference back to Jack for any additional or closing remarks.

Operator, thank you.

So, yes, I guess a couple of key takeaways.

Last November we said we were positioning the company for 20% growth from the coming years Bruce This quarter. We made good on that promise, we got there sooner than we were anticipating.

And that's thanks to very strong first half new business signings.

Our maturing and expanding sales force.

Customer engagement expansions.

And based on all of that we're looking to achieve 20% or more year over year growth from the remaining quarters of the year and we're looking to target accelerating growth moving into 2022 as these investments continue to bear fruit.

Sure.

In this quarter there were about $3 million of costs, we chose to incur specifically in order to position us for accelerated growth.

We use the word investment we think of this as an investment.

We expect it to have a short payback given how well positioned we believe we are to take advantage of strong tail winds in our segments.

And then lastly.

I want to emphasize in the quarter, we saw a 78% of growth dollars flow to gross margins proving out the strong operating leverage that results from our business model combined SaaS and solutions business model. So thank you all very much for joining our call today appreciate the time and the inter.

Chris We're very excited about where we're going and we look forward to continuing to share more with you as we progress through the year.

Ladies and gentlemen. This does concludes today's conference. We appreciate your participation you may now disconnect.

Okay.

Yes.

Yeah.

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