Q2 2024 Innodata Inc Earnings Call

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Operator: Greetings. Welcome to Innodata's second quarter 2024 results conference. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Amy Agress. You may begin.

Speaker Change: Greetings. Welcome to another data to report 2nd quarter 2024 results conference call.

Speaker Change: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Please note this conference is being recorded. I will now turn the conference over to your host, Amy Agress. You may begin.

Amy Agress: Thank you, Mike. Good afternoon, everyone. Thank you for joining us today.

Amy Agress: Thank you, Mike. Good afternoon, everyone. Thank you for joining us today.

Amy Agress: Our speakers today are Jack Abuhoff, CEO of Innodata, and Marissa Espineli, Interim CFO. Also on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective on the business, and then Marissa will follow with a review of our results for the second quarter. We'll then take your questions.

Speaker Change: Our speakers today are Jack Abuhoff, CEO of Innodata, and Marissa Espineli, Interim CFO . Also on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development.

Speaker Change: We'll hear from Jack first, who will provide perspective about the business.

Speaker Change: and then Marissa will follow with a review of our results for the Japanese water. We'll then take your questions. Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements which are predictions, projections, or other statements about future events. The statements are based on current expectations, assumptions, and estimates, and are subject to risk and uncertainties.

Amy Agress: Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations, assumptions, and estimates, and are subject to risks and uncertainties. Actual results could differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release and in the risk factor section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission.

Speaker Change: Actual results could differ materially from those contemplated by these forward-looking statements.

Speaker Change: factors that can cause these results to differ materially or set forth in today or news today's or news press release in the risk factor section of our form 10K forms 10Q and other reports and filing the Securities and Exchange Commission.

Amy Agress: In addition, during this call, we may discuss certain non-GAAP financial measures. In our SEC filings, which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. Thank you. I'll now turn the call over to Jack.

Speaker Change: We undertake no obligation to update forward-looking information.

Speaker Change: In addition, during this call, we may discuss certain non-GAAP financial measures. In our SEC filings, which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures.

Speaker Change: Thank you. I'll now turn the call over to Jack.

Jack Abuhoff: Thank you, Amy. Good afternoon.

Jack Abuhoff: It's great to be with you here today. We have several exciting updates to share on the financial and operational fronts. Inodated delivered another outstanding quarter, highlighted by record revenue growth of 66% year over year. During the quarter, we significantly expanded our partnership with a big tech customer while also gaining traction with others. We take great pride in the foundation we have built to establish Innodata as a leading partner of choice to deliver reliable, complex, and generative AI training data.

Jack Abuhoff: Thank you, Amy. Good afternoon. It's great to be with you here today. We have several exciting updates to share on the financial and operational fronts.

Jack Abuhoff: Innodata delivered another outstanding quarter, highlighted by the record revenue growth of 66% year-over-year. During the quarter, we significantly expanded our partnership with a big tech customer, while also gaining traction with others.

Jack Abuhoff: We take great pride in the foundation we have built to establish Innodata as a leading partner of choice to deliver reliable complex generative AI training data.

Jack Abuhoff: We believe we are uniquely positioned to capture what we believe to be an enormous market opportunity and to drive value for our shareholders. Given the strong organic growth we are seeing, we are raising our 2024 full-year guidance to 60% or more revenue growth compared to the 40% growth we guided to last quarter. Also, as we indicated in the last quarter, in order to ramp up for our recent wins and anticipate growth, we invested in scaling our organization.

Jack Abuhoff: We believe we are uniquely positioned to capture what we believe to be an enormous market opportunity and to drive value for our shareholders.

Jack Abuhoff: Given the strong organic growth we are seeing, we are raising our 2020-24 full-year guidance to 60% or more revenue growth compared to the 40% growth we've guided to last quarter.

Jack Abuhoff: Also, as we indicated in the last quarter, in order to ramp up for our recent wins and anticipate a growth, we invested in scaling our organization.

Jack Abuhoff: Most significantly, we incurred $3.6 million in recruiting agency fees for a significant ramp-up in our workforce. As recruiting costs come down to a normalized level next quarter, we expect our third quarter marches to reflect strong unit economics and operating leverage from substantial revenue growth. Consequently, we expect Q3 ingested EBITDA to be approximately triple to 2.8 million ingested EBITDA reported this quarter.

Jack Abuhoff: Most significantly, we incurred $3.6 million in recruiting agency fees for a significant ramp in our workforce.

Jack Abuhoff: As recruiting costs come down to a normalized level next quarter, we expect our third quarter margins to reflect strong unit economics and operating leverage from substantial revenue growth.

Jack Abuhoff: Consequently, we expect Q3 adjusted EBITDA to be approximately triple the 2.8 million adjusted EBITDA reported this quarter.

Jack Abuhoff: In a minute, I will describe some of the business we have won and some of the new business opportunities we are pursuing. Suffice it to say, we are seeing an increase in both the number and the magnitude of potential customer requirements, which we reflect in our increased guidance. Therefore, we're taking steps to ensure that we have sufficient liquidity to accommodate working capital as our already substantial growth potentially accelerates. First, we have increased our receivables-based credit facility with Wells Fargo from $10 million to $30 million, subject to a borrowing-based limitation with an accordion feature that enables it to expand up to $50 million, subject to the approval of Wells Fargo.

Jack Abuhoff: In a minute, I will describe some of the business we have won, some of the new business opportunities we are pursuing.

Jack Abuhoff: Suffice it to say, we are seeing an increase in both the number and the magnitude of potential customer requirements, which we reflect in our increased guidance.

Jack Abuhoff: Therefore, we're taking steps to ensure that we have sufficient liquidity to accommodate working capital as our already substantial growth potentially accelerates.

Jack Abuhoff: First, we have increased our receivables-based credit facility with Wells Fargo from $10 million to $30 million.

Jack Abuhoff: subject to a borrowing-based limitation, with an accordion feature that enables it to expend up to $50 million subject to the approval of Wells Fargo.

Jack Abuhoff: The Riz, in her remarks, will give more color on the terms of the facility. I believe the Wells Fargo facility, as now extended, will be sufficient to fund our working capital requirements for our anticipated growth. That said, we want to be prepared to react quickly to customer demand that could result in us significantly exceeding our anticipated rate of growth and, therefore, having additional working capital needs. Toward that end, this afternoon we filed a universal shelf registration statement on Form S-3 with the SEC.

Jack Abuhoff: Mariss, in her remarks, will give more color on the terms of this facility.

Mariss: I believe the world's far-go facility as now extended will be sufficient to fund our working capital requirements for our anticipated growth.

Mariss: That said, we want to be prepared to react quickly to customer demand that could result in us significantly exceeding our anticipated rate of growth and therefore having additional working capital needs.

Mariss: Toward that end, this afternoon we followed a universal shelf registration statement on Form S-3 with the SEC.

Jack Abuhoff: Once the registration statement is declared effective by the SEC, we will have the flexibility to sell up to an aggregate of $50 million worth of our securities in registered offerings pursuant to the effective registration statement. We believe it is prudent and good corporate governance to have an effective shelf registration statement on file with the SEC to preserve the flexibility to raise capital from time to time as needed. As disclosed in the registration statement, we have no specific plans to raise money at this time.

Mariss: Once the registration statement is declared effective by the SEC, we will have the flexibility to sell up to an aggregate of $50 million worth of our securities in registered offerings pursuant to the effective registration statement.

Mariss: We believe it is prudent and good corporate governance to have an effective shelf registration statement on file with the SEC to preserve the flexibility to raise capital from time to time if needed.

Mariss: As disclosed in the registration statement, we have no specific plans to raise money at this time. The intended uses for the net proceeds from any such offering would be set forth in a prospective supplement.

Jack Abuhoff: The intended uses for the net proceeds from any such offering would be set forth in a prospective supplement. Now, I'll give you an overview of the success we're experiencing in the marketplace with both existing and new customers. On June 3rd, 2024, we announced one of our existing Magnificent 7 Big Tech customers had awarded us two significant new LLM development programs. These programs are expected to deliver approximately $44 million of annualized run rate revenue and represent the single largest customer win in a day in history. These awards are in addition to the new programs and program expansion with this customer announced on April 24, 2024, and May 7, 2024.

Speaker Change: Now I'll give you an overview of success we're experiencing in the marketplace with both existing and new customers.

Speaker Change: On June 3, 2024, we announced one of our existing magnificent seven big tech customers had awarded us two significant new LLM development programs.

Speaker Change: These programs are expected to deliver approximately $44 million of annualized run rate revenue and represents the single largest customer win in Innodata's history.

Speaker Change: These rewards are in addition to the new programs and program expansion with this customer, announced on April 24, 2024 and May 7, 2024.

Jack Abuhoff: In the one year that Innodata has been working with this customer, Innodata has landed new programs and program expansions that bring the total value of the account to approximately $110.5 million in expected annual run rate revenue. Innodata aspires to replicate the success across the six other big tech customers already contracted for generative AI development and to land additional big tech accounts. We won several other new assignments in the quarter as well, and we expect to land several others in the near future.

Speaker Change: In the one year that in a day that has been working with this customer, in a day that has landed new programs and program extensions that bring the total value of the account to approximately 110.5 million of expected annual run rate revenue.

Speaker Change: We won several other new assignments in the quarter as well, and we expect to land several others in the near future.

Jack Abuhoff: Some notables include a big tech company that would be a new customer for us. It is one of the most valuable companies in the world and one of the companies most often talked about in connection with generative AI. Another is with an existing big tech customer. In connection with this opportunity, we would aim to become certified to work on their premises.

Speaker Change: Some notables include a big tech company that would be a new customer for us. It is one of the most valuable companies in the world and one of the companies most often talked about in connection with generative AI. Another is an existing big tech customer.

Speaker Change: In connection with this opportunity, we would aim to become certified to work on their premises. We believe being co-located with their engineering and operations teams may potentially enable us to access new attractive opportunities.

Jack Abuhoff: We believe being co-located with our engineering and operations teams may potentially enable us to access new, attractive opportunities. We also expect to certainly sign a prominent social media platform that is building its own gender-specific eye models and would be a new customer for it in a day. And another noteworthy win was with a clinical provider in the health care market.

Speaker Change: We also expect to certainly sign a prominent social media platform that is building its own genre to the AI models and would be a new customer for it in a different way.

Speaker Change: Another noteworthy win was with a clinical provider in the healthcare market. Up until now, we've been focused on the use of the Cynodex platform as a tool for supporting insurance underwriting.

Jack Abuhoff: Up until now, we've been focused on the use of the Cynodex platform as a tool for supporting insurance underwriting. This new engagement is the first time that we will be applying the platform in a clinical use case. We believe that the Synodics Technology roadmap may enable us to expand to support additional clinical use cases in the future.

Speaker Change: This new engagement is the first time that we will be applying the platform in a clinical use case. We believe that the Synedx technology roadmap may enable us to expand to support additional clinical use cases in the future.

Jack Abuhoff: We've also been awarded a deal to provide news briefs and medium monitoring to a federal government agency that will be leveraging the new general AI capabilities built into our recent next platform. We are seeking to expand into the public sector, so we consider this a strategic win. We have started to integrate agility with what we call PR Copilot, our purpose-built generative AI layer that enables PR professionals to get more done in less time and at lower cost. While we're only about 30% into our roadmap for PR Copilot, it is already delivering tremendous business value. This quarter, Agility Revenue crossed the $5 million mark for the first time.

Speaker Change: We have also been awarded a deal to provide news briefs and media monitoring to a federal government agency that will be leveraging the new generative AI capabilities built into our Cinedex platform. We are seeking to expand into the public sector, so we consider this a strategic win.

Speaker Change: We have started to integrate agility with what we call PR Copilot, our purpose-built generative AI layer that enables PR professionals to get more done in less time and at lower costs.

Speaker Change: While we're only about 30% into our roadmap for PR Copilot, it is already delivering tremendous business value.

Speaker Change: This quarter, Agility Revenue crossed $5 million mark for the first time.

Speaker Change: Our agility demo-to-deal win rate in the quarter was 36%, significantly higher than the sub-20% win rates we were achieving prior to starting this integration.

Speaker Change: And we doubled our new business bookings in Q2, compared to the prior year period, even though we're operating with a leaner sales force.

Jack Abuhoff: Our Agility Demo-to-Deal win rate in the quarter was 36%, significantly higher than the sub-20% win rates we were achieving prior to starting this integration. And we doubled our new business bookings in Q2 compared to the prior year period, even though we're operating with a leaner sales force. Now, before I turn the call over to Marissa, I want to share our perspectives on the generative AI market opportunity and how we have shaped our strategy to capitalize on where we see the market going.

Speaker Change: Now before I turn the call over to Marissa, I want to share our perspectives on the generative AI market opportunity and how we have shaped our strategy to capitalize on where we see the market going.

Jack Abuhoff: In our view, the big tech companies are clearly bullish about how generous they are to acknowledge that you will support their core products and services and enable exciting new opportunities. For the mag, seven capital expenditures in the latest quarter were up 63% year over year.

Marissa Espineli: In our view, the big tech companies are clearly bullish about how generative AI technology will support their core products and services and enable exciting new opportunities.

Speaker Change: For the MAG-7, capital expenditures in the latest quarter were up 63% year-over-year, with the bulk of these expenditures tied to generative AI spending.

Marissa Espineli: It is clear that the market sees under-investing as a greater risk than over-investing.

Speaker Change: In the not-discipline future, we believe that technology will enable computers to reason in plan, to solve all hard problems, and to self-organize and complex ways that help people accomplish their goals.

Speaker Change: Our belief is that generative AI technologies will soon sit deeply and ubiquitously in every tech stack.

Speaker Change: That's why none of the big tech companies can sit this one out. The shift in experience is destined to be too significant, making the risk of being left behind untenable.

Jack Abuhoff: Just as the California Gold Rush began on January 24, 1848, the Gen-AI Gold Rush began on November 30, 2022, when open AI demonstrated to the world the power of deep learning, the power of training a deep neural net with enormous quantities of data and utilizing massive compute power for infants. As a result, the world's largest tech companies went on the offense, committing to massive Gen-AI programs, solving for the next big market opportunity while simultaneously defending their hegemony. One analyst forecasts $1 trillion in revenue for Janay Icafix over the next several years. We prescribe wholeheartedly to the notion that in a gold rush, you want to be the person selling the shot.

Speaker Change: just as the California Gold Rush began on January 24, 1848.

Speaker Change: The Gen AI Gold Rush began on November 30, 2022, when open AI demonstrated the world, the power of training and deep neural net.

Speaker Change: on Enormous Quantities of Data and Utilizing Massive Compute for Inferencing.

Speaker Change: As a result, the world's largest tech companies went on the offense, committing to massive genuine eye programs, solving for the next big market opportunity, while simultaneously defending their head Gemini.

Speaker Change: One analyst has forecast 1 trillion dollars of Gen-AI CapEx over the next several years.

Speaker Change: We prescribe wholeheartedly to the notion that in a gold rush, you want to be the person selling the shuffles.

Jack Abuhoff: The shovels required by the big tech companies in the JNI Gold Rush take the form of compute and data. Compute is expensive and hard to come by, which is why we believe NVIDIA's market cap has skyrocketed over 7X to $2.6 trillion since the beginning of 2023. Data is also expensive and hard to come by. Once more, we believe the data that is likely to be required to train tomorrow's Gen-AI is going to become even more expensive and even harder to come by, and we believe that is Innodata's opportunity.

Speaker Change: The shovels required by the big tech companies in the Gen AI gold rush take the form of compute and data.

Speaker Change: Compute is expensive and hard to come by, which is why we believe Nvidia's market cap has skyrocketed over 7x to 2.6 trillion dollars since the beginning of 2023.

Speaker Change: Data is also expensive and hard to come by.

Speaker Change: Once more, we believe the data that is likely to be required to train tomorrow's Gen-AI is going to become even more expensive and even harder to come by.

Speaker Change: And we believe that is in a day-to-day opportunity.

Jack Abuhoff: The next generation of LLMs will be trained to handle more complex tasks and to be more agent-like. The complexity will take the form of models that handle difficult multi-churn tasks. For example, asking you now to find out how much vacation I have left and book me a trip.

Speaker Change: The next generation of LLMs will be trained to handle more complex tasks and to be more agent-like.

Speaker Change: The complexity will take the form of models that handle difficult, multi-turn tasks. For example, asking an LLM to find out how much vacation I have left and book me a trip.

Jack Abuhoff: Complexity will also take the form of deep domain-specific tasks, like helping doctors diagnose diseases or helping banks sort out complex regulations. And it will also take the form of models that enable users to work with audio, video, and text interchangeably. You'll hear this referred to as multi-global capabilities.

Speaker Change: Complexity will also take the form of deep domain specific tasks like helping doctors diagnose disease or helping banks sort out complex regulation.

Speaker Change: And Complexity will also take the form of models that enable users to work with audio, video, and text interchangeably.

Speaker Change: You'll hear this referred to as multi-mobile capabilities.

Jack Abuhoff: Training data will be required to build models that can handle this complexity. Unlike web data that gets users halfway there for today's LLMs, these more complex LLMs are going to require a high quantity of high-quality data to be specifically developed to show the models how they're supposed to function. Right now, this data does not exist anywhere. It isn't on the web.

Speaker Change: [inaudible]

Speaker Change: training data will be required to build models that can handle this complexity.

Speaker Change: Unlike web data that gets users halfway there for today's LLMs, these more complex LLMs are going to require a high quantity of high quality data to be specifically developed to show the models how they're supposed to function.

Speaker Change: Right now, this state does not exist anywhere. It isn't on the web, it isn't on the cloud, it isn't on premises and enterprises.

Jack Abuhoff: It isn't in the cloud. It isn't on-premises; it's enterprise. Because it is neither an input nor an output, it exists only in a transitory, unpreserved state, its impermanence perhaps justified by its nature as a byproduct.

Speaker Change: Because it is neither input nor outputs, and exists only in a transitory, unpreserved state. It's impermanence perhaps justified by its nature as byproduct.

Jack Abuhoff: In other words, when we solve hard problems, we don't save our work. When we began building our own AI models and applying them to our managed services work in legal data and medical data, we had to build new workflow platforms to capture and preserve this interim knowledge in an organized way to be used to train our models. This was our eureka moment when we realized that our breakout opportunity would be in creating this byproduct of human thought in order to train other people's models.

Speaker Change: In other words, when we solve hard problems, we don't save our work.

Speaker Change: When we began building our own AI models and applying them to our managed services work in legal data and medical data, we had to build new workflow platforms to capture and preserve this interim knowledge in an organized way to be used to train our models.

Speaker Change: This was our eureka moment when we realized that our breakout opportunity would be in creating this byproduct of human thought in order to train other people's models.

Jack Abuhoff: Doing this as a science in a way that is repeatable and scalable is a huge opportunity, and we are still in the early days. We intend to be the preferred provider of complex demonstration data at scale, required to train models for complex reasoning, multimodal use cases, agentic retrieval augmented generation, or RAG, and for domain specificity across all languages.

Speaker Change: Doing this as a science in a way that is repeatable and scalable is a huge opportunity, and we are still in the early days.

Speaker Change: We intend to be the preferred provider of complex demonstration data at scale, required to train models for complex reasoning, multi-modal use cases.

Speaker Change: Gentic Retrieval Augmented Generation, or RAG, and for domain specificity across all languages.

Jack Abuhoff: Our competitive advantage is that for decades, we've been providing high-quality data across domains such as medical, law, regulatory, science, and finance. We are encouraged by the feedback from our customers. We already recognize that no single factor has as much influence on LLM performance as the quality of customized data for supervised fine-tuning.

Speaker Change: Our competitive advantage is that for decades we've been providing high-quality data across domains such as medical, law, regulatory, science, and finance.

Speaker Change: We are encouraged by the feedback from our customers, who already recognize that no single factor has as much influence on LLM performance as the quality of customized data for supervised fine-tuning.

Jack Abuhoff: We've always been looking for ways to drive continuous improvement and how we operate, ensuring that our training data is both the best quality and the most economical. Now on the Enterprise.

Speaker Change: We will always be looking for ways to drive continuous improvement in how we operate, ensuring that our training data is both the best quality and the most economical.

Jack Abuhoff: We believe that in 18 to 24 months from now, enterprises will dramatically accelerate their generative AI adoption. We believe the catalyst for this will be generative AI that can tackle multi-phase tasks without losing its way, now often referred to as a gentic rag. In combination with advanced open source models, which significantly lower the bar for experimentation, these smaller but highly trained language models will likely prove ideal for enterprise applications that require high accuracy for specific tasks.

Jack Abuhoff: Now, we'll on the Enterprise side.

Speaker Change: We believe that in 18-24 months from now, Enterprises will dramatically accelerate through enter to the AI adoption.

Jennifer: We believe the catalyst for this will be Jennifer today, I that can tackle multi-phase tasks without losing its way. Now often referred to as a genetic reg, in combination with advanced open source models, which significantly lower the bar for experimentation.

Speaker Change: The smaller but highly trained language models will likely prove ideal for enterprise applications that require high accuracy for specific tasks.

Jack Abuhoff: Like the big techs, we believe enterprises will drive both offensive and defensive strategies to support their investment. The offensive play will be defining new product experiences. While the defensive play will be keeping pace with competitors, who we anticipate will work to enable their current products and re-engineer their operations to be AI-first. Just as with the big techs, we believe enterprises will come to recognize that they've got to be all in, even with uncertain near-term ROI.

Jack Abuhoff: Like the big techs, we believe enterprises will drive both offensive and defensive strategies to support their investments.

Jack Abuhoff: The offensive play will be defining new product experiences, while the defensive play will be keeping pace with competitors, who we anticipate will work to enable their current products and re-engineer their operations to be AI-first.

Jack Abuhoff: Just as with the big techs, we believe enterprises will come to recognize that you've got to be all in, even with uncertain near-term ROI.

Jack Abuhoff: A few years from now, we imagine enterprises will face a shortage of experienced talent and may struggle to manage their internal data. Thus, the shovels for enterprises will be the people with the experience to help them choose the right architectures, the right approaches, and the right models, and to help them manage and deploy their internal data. Innodata's enterprise strategy is focused on this. Specifically, we see the opportunity to respond to these anticipated emerging ways, needs, and three ways.

Jack Abuhoff: A few years from now, we envision enterprises will face a shortage of experienced talent and may struggle to manage their internal data.

Jack Abuhoff: Thus, the shovels for enterprise will be the people living experience to help them choose the right architectures, the right approaches, and the right models, and to help them manage and deploy their internal data.

Speaker Change: In Odea's enterprise strategy is focused on this.

Jack Abuhoff: Specifically, we see the opportunity to respond to these anticipated emerging ways, needs, and three ways.

Jack Abuhoff: First, for enterprises building their own capabilities, we will be ready to assist across the entire continuum of integration types and levels, from fine-tuning custom models to building agentic RAG applications, as enterprises move Gen-AI services from development to production. They will need to know how are the models working? Are they performing as intended? Are they, as they were intended, helpful, harmless, and honest?

Jack Abuhoff: First, for enterprises building their own capabilities, we will be ready to assist across the entire continuum of integration types and levels, from fine-tuning custom models to building agentic RAG applications.

Jack Abuhoff: As enterprises move Gen-AI services from development to production, they will need to know, how are the models working? Are they performing as intended? Are they, as they were intended, helpful, harmless, and honest?

Jack Abuhoff: We see a big opportunity in helping them monitor their LLMs for alignment and safety. We're developing both services and platforms to respond to this need, driven by high-quality custom data. Second, for enterprises that prefer to outsource, we will make available managed services that are engineered to leverage the technology. Third, for enterprises that prefer gender equality to AI encapsulated in the industry platform. We will provide platforms specifically designed for industry-specific, knowledge-intensive workflows. In this way, we intend to serve enterprises at their highest point of value. I'll now turn the call over to Mariss to go over the numbers, and then Mariss, Aneesh, and I will be available to take your questions.

Jack Abuhoff: We see a big opportunity in helping them monitor their LLMs for alignment and safety.

Jack Abuhoff: We're developing both services and platforms to respond to this need, using by high quality custom data.

Jack Abuhoff: Second, for enterprises that prefer to outsource, we will make available managed services that are engineered to leverage the technologies.

Jack Abuhoff: And third, for enterprises that prefer generative AI encapsulated in industry platforms, we will provide platforms specifically designed for industry-specific, knowledge-intensive workflows.

Jack Abuhoff: In this way, we intend to serve enterprises at their highest point of value.

Speaker Change: I'll now turn the call over to Marissa to go over the numbers and then Marissa and Nisha and I will be available to take your questions.

Marissa Espineli: Thank you, Jack. And good afternoon, everyone.

Marissa Espineli: Let me briefly share with you our 2024 second quarter financial results. Revenue for Q2 2024 reached $32.6 million, reflecting a year-over-year increase of 66%. On a sequential basis, we observed a 23% increase of $6 million from Q1 of 2024 revenue of $26.5 million. Adjusted growth margin for Q2 2024 was 33%, reflecting a sequential decrease from 41% we achieved in Q1 of 2024. This reduction is attributable to the $3.6 million of recruiting costs we incurred in the second quarter to support a substantial expansion for our organization to prepare for a significantly larger revenue base.

Speaker Change: Thank you, Jack, and good afternoon, everyone. Let me briefly share with you our 2024 second quarter financial results.

Marissa Espineli: Revenue for Q2 2024 reached $32.6 million, reflecting a year-over-year increase of 66%. On a sequential basis, we observed a 23% decrease.

Marissa Espineli: of the increase of $6 million from Q1 of 2024 revenue of $26.5 million.

Marissa Espineli: yeah

Marissa Espineli: The adjusted growth margin for Q2 2024 was 32%, reflecting a sequential decrease from 41% we achieved in Q1 of 2024.

Marissa Espineli: This reduction is attributable to the 3.6 million of recruiting costs we incurred in the second quarter to support a substantial expansion for our organization to prepare for a significantly larger revenue base.

Marissa Espineli: When you separate these unusually high recruiting costs, adjusted gross margin in the quarter would have been approximately 44 percent. Similarly, adjusted EBITDA for the quarter was $2.8 million, a reduction from $3.8 million in Q1 of 2024. But without the $3.6 million of recruiting costs, adjusted EBITDA would have been $6.4 million, or 20 percent of revenue. There are three things worth noting.

Marissa Espineli: When you separate these unusually high recruiting costs, adjusted gross margin in the quarter would have been approximately 44%.

Marissa Espineli: Similarly, adjusted EBITDA for the quarter was $2.8 million, a reduction from $3.8 million in Q1 of 2024.

Marissa Espineli: But without the $3.6 million of recruiting costs, adjusted EBITDA would have been $6.4 million or 20% of revenue.

Marissa Espineli: First, as Jack mentioned, we expect our adjusted EBITDA next quarter to be approximately triple the $2.8 million of adjusted EBITDA reported this quarter. Second, we have since enhanced our captive recruiting engine to enable us to reduce the cost of future larger-scale recruiting. And third, we expect weak payback on recruiting costs, typically within just a few months, and strong ROI. Our cost position at the end of Q2 was approximately $16.5 million, up from $13.8 million at year-end 2023.

Marissa Espineli: There are three things worth noting. First, as Jack mentioned, we expect our adjusted EBITDA next quarter to be approximately triple the $2.8 million of adjusted EBITDA reported this quarter.

Marissa Espineli: Seconds, we had since enhanced our captive recruiting engines to enable us to reduce the cost of future larger scale recruiting.

Marissa Espineli: and third, we expect weak payback on recruiting cause.

Marissa Espineli: Typically within just a few months and strong ROI, our cash position at the end of Q2 was approximately $16.5 million, up from $13.8 million at year-end 2023.

Marissa Espineli: Let me also elaborate a bit on the credit facility extension that Jack mentioned earlier. We are indeed very pleased to announce that Wells Fargo has increased its receivable-backed credit facilities from $10 million to $30 million with an according feature that enables it to scale up to $50 million subject to Wells Fargo's approval. The amount drawable under the facility at any point in time is determined based on the borrowing-based formula.

Marissa Espineli: Let me also elaborate a bit on credit facility extension that Jack mentioned earlier.

Speaker Change: We are in days very pleased to announce that the 12th Fargo has increased on receivable back credit facility from 10 million to 30 million, we've done a cordon feature that enabled it to scale.

Marissa Espineli: up to $50 million subject to Wells Fargo's approval. The amount drawable under the facility at any point in time is determined based on the borrowing-based formulas.

Marissa Espineli: The facility has an attractive cost of capital for amounts drawn under the line set at SOFR plus 2.25%. We greatly appreciate Wells Fargo's confidence in our business and believe the extended facility will be sufficient to fund our working capital requirements for our anticipated growth. That said, we want to be prepared to react quickly to customer demand, which could result in Innodata significantly exceeding the rate of growth we have guided to today.

Speaker Change: The facility has an attractive cost of practical for a mouth zone under the line set as software plus 2.25%.

Marissa Espineli: We greatly appreciate both for this confidence in our business and believe the extended facility will be sufficient to fund our working capital requirements for our anticipated growth.

Marissa Espineli: That said, we want to be prepared to react quickly to customer demand, which could be solved in inner data significantly exceeding the rate of growth we have guided to today.

Marissa Espineli: With this in mind, this afternoon we filed a universal registration statement on Form S3 with the SEC. Once the registration statement is declared effective by the SEC, we will have the flexibility to sell up to aggregates of $50 million worth of our securities in registered offerings pursuant to an effective registration statement. We believe it is prudent and good corporate governance to have an effective shelf registration statement on file with the Securities and Exchange Commission to preserve the flexibility to raise capital from time to time if needed.

Speaker Change: With this in mind, this afternoon we filed a Universal Registration Statement on Form S-3 with the FCC. Once the registration statement is declared effective by the FCC,

Marissa Espineli: We will have the flexibility to sell up to aggregates of 50 million worth of our securities in registered offerings pursuant an effective registration statement.

Marissa Espineli: We believe it is prudent and good corporate governance to have an effective SHELP registration statement on file with the Security and Exchange Commission to preserve the flexibility to raise capital from time to time if needed.

Marissa Espineli: We have no specific plan to raise money at this time. The intended uses for the net proceeds from any such offering would be set forth in a prospective supplement. In terms of preparing for accelerated growth, our expanded Wells Fargo line of credit and the flexibility provided by the shelf registration statement are expected to allow us to finance our short-cycle, growth-driven working capital needs for a revenue base significantly higher than our current projections. Thank you, everyone, for joining us today. Mike, we're open to questions.

Marissa Espineli: We have no specific plan to raise money at this time.

Marissa Espineli: The intended uses for the net proceed from any such offering would be set forth in a prospective supplement.

Marissa Espineli: In terms of preparing for accelerated growth, our expanded Wells Fargo line-up credits and the flexibility provided by the shelf registration statement are expected to allow us to finance our short.

Marissa Espineli: cycle, growth-driven working capital needs for a revenue base significantly higher than our current projection.

Marissa Espineli: Thank you everyone for joining us today. Mike, we're open for questions.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Okay, we do have our first questioner.

Operator: At this time we will be conducting a question and answer session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we pull for questions.

Operator: Okay, we do have our first questioner.

Alan Kee: Alan Kee

Questioner: Yes, hi, great job. This is just a clarification question. In your depressed release, one of the first things you say is that you have one large language model, the Bellman Program, the expansion with a big tech customer, valued at approximately 87.5 million annualized run rate. Is that a new contract, or is that as you talk about below the customer that you expanded with, that you say has a total of 110.5 million. Thank you.

Speaker Change: from Maxim Group.

Questioner: Yes, hi, oh, great job.

Questioner: This is just a clarification question. In depressed release, one of the first things you say is you one large language model development program that's expansion with a big tech customer, valued at approximately 87.5 million annualized run rate.

Questioner: Is that a new contract, or is that, as you talk about below, the customer that you expanded with that you say has a total of $110.5 million? Thank you.

Jack Abuhoff: Kurt, I'm correct Alan, those were the contracts that were announced during Q2. So that was a recap of what was won and announced in Q2.

Kurt: Correct, Alan. Those were the contracts that were announced.

Questioner: Okay, great. And then, um, some of these other new contracts. Could you maybe talk a little bit about the contracts you've announced, which ones are just generally, how many are fully ramped up, or maybe what percent you expect to get a greater contribution in the future?

Questioner: Okay, great. And then...

Speaker Change: Some of the...

Questioner: Some of these other news contracts could maybe you talk a little bit about the contracts that you've announced, which ones are...

Speaker Change: Just generally, how many are fully ramped up or maybe what percent you expect to get a greater contribution in the future?

Speaker Change: in Q2, or generally speaking, going forward in the year? Generally speaking, going forward, you know, of the adjustments you've made, are there certain ones that, could you give us a sense of like, yeah.

Jack Abuhoff: Generally speaking, going forward, you know, of the adjustments you've made, are there certain ones that could you give us a sense of like, yeah. Yes, there are seven big techs

Jack Abuhoff: Yes, so there are seven big tech customers that have been contracted now to perform generative AI work, and that includes the one that scaled very nicely. Of the seven, I don't believe we're fully revved up with any of them. I believe that they all hold tremendous opportunities for us to expand into, and I think we're going to be making a significant progress along that path over the next several

Jack Abuhoff: Yes, there are seven big customers that were contracted now to perform General TVI work and that includes one that's scaled very very nicely.

Jack Abuhoff: Of the seven, I don't believe...

Jack Abuhoff: We're fully revved up with any of them. I believe that they all

Jack Abuhoff: Hold true mend this opportunity for us to...

Jack Abuhoff: to expand into, and I think we're going to be making...

Jack Abuhoff: significant process along that path over the next several quarters.

Jack Abuhoff: The other thing I would add to that is that we also anticipate, as I mentioned in my remarks, landing another couple of big tech customers, which will similarly offer us the opportunity for significant potential expansion.

Jack Abuhoff: Okay, everything I would add to that is we also anticipate as I've mentioned in my remarks, lending another couple of big tech customers, which similarly will have the opportunity offer us the opportunity for a significant potential expansion.

Questioner: So just following up on that, the guidance you gave today, does that include any contracts that haven't been announced yet that you may expect to win?

Speaker Change: So just following up on that, the guidance you give today does that incorporate any contracts that haven't been announced yet that you may expect to win?

Jack Abuhoff: So I think the revenue from contracts that we haven't yet announced but expect to win, can certainly be accrued to Q3 and Q4. When we provision our guidance, we're, you know, we're, there are a lot of puts and takes. We're baking, you know, all sorts of factors into that, including new contracts, but again, if you take that in the aggregate, we're comfortable that our guidance is conservative, and we think there's opportunity to exceed it.

Jack Abuhoff: So I think the revenue from contracts that we haven't yet announced but expect to win can certainly...

Jack Abuhoff: accrued to Q3 and Q4.

Jack Abuhoff: When we provision our guidance, there were a lot of putsyntakes, we're baked in all sorts of factors into that, including new contracts.

Jack Abuhoff: But again, if you take

Jack Abuhoff: That, in the aggregate, we're comfortable that our guidance is conservative, and we think there's opportunity to exceed it.

Questioner: Okay, thank you. You mentioned that you're bringing the recruiting in-house and that's going to save money. So do you feel that, or is it that you still have to recruit a lot more, or that you can just do it more efficiently now that you're saving the money and you feel comfortable about getting enough people to ramp up?

Questioner: Okay, thank you. You mentioned that you're bringing the recruiting in-house and that's going to save money. So do you feel that

Questioner: Or is it that you still have to recruit a lot more or that you can just do it more efficiently now that you're Saving the money and you feel comfortable about getting enough people to ramp up

Jack Abuhoff: Yeah, we're very comfortable in our ability to recruit. It's not that we won't use external agencies anymore. I think we still will, especially for particular kinds of recruiting. But we're very excited to have built an internal recruiting engine. Had we had that in place, we probably could have avoided the several millions of dollars that we had to spend in this quarter. But recruiting costs are an elegant problem to have. We recruit primarily reactively, and pursue it according to demand from our customers.

Jack Abuhoff: Yeah, we're very comfortable in our ability to recruit. It's not that we won't use external agencies anymore. I think we still will, especially for particular kinds of recruiting. But we're very excited to have built an internal recruiting engine. Had we had that in place, we probably could have avoided...

Jack Abuhoff: the several millions of dollars that we had to spend in this quarter.

Jack Abuhoff: But recruiting costs is, you know, it's an elegant problem to have, you know, we recruit primarily reactively, pursue it to demand from our customers, and we get a very fast

Jack Abuhoff: And we get a very fast payback on those investments with a very high ROI. So it's good that we've got a strategy now, and a facility to lower those costs prospectively. But even without lowering them, the ROI and the payback are very fast and very compelling.

Jack Abuhoff: Payback on those investments with a very high ROI.

Jack Abuhoff: So it's good that we're, you know, we've got a strategy now facility to lower those costs prospectively, but even without lowering them the ROI and the payback is very fast and very compelling.

Questioner: That's great. You talk about a bunch of contracts that you've won recently. In terms of what you're doing, is there anything different with them in terms of what part of the annotation and training and monitoring is there? Are they kind of everything, or is there a certain focus that customers are looking for?

Questioner: That's great. You talk about a bunch of

Questioner: contracts that you've won recently is

Questioner: In terms of

Questioner: What you're doing, is there anything different with them of what part of the annotation and training and monitoring, is there, are they kind of everything or is there a certain focus that customers are looking for?

Jack Abuhoff: There is a little bit of everything, but our strategy is very much focused on, you know, what I think of as three tiers, all of which are growth factors. You know, at the foundational layer, you know, kind of the bottom tier, you've got the big techs and the ISVs who are developing generative AI foundation models. In the middle tier, you have enterprises who are helping leverage generative AI, and then at the top tier, you have us building generative AI-enabled platforms for niche industry use cases.

Jack Abuhoff: There are a little bit of everything, but our strategy is very much focused on, you know, what I think of as three tiers.

Jack Abuhoff: All of which are growth factors. At the foundational layer, kind of the bottom tier, you've got the big techs and the ISVs who are developing generative AI foundation models.

Jack Abuhoff: In the middle tier, you have enterprises who were helping leverage generative AI, and then at the top tier, you have

Jack Abuhoff: of us building generative AI enabled platforms for kind of niche industry use cases. So in the things that I mentioned, there's a bit of a sampling of all three tiers.

Jack Abuhoff: So in the things that I mentioned, there's a bit of a sampling of all three tiers. The tremendous growth that we're seizing on today is at that bottom layer; it's the enablement layer, working with the big techs, but we're aggressively planting seeds and earning referenceability in the other tiers as well. And especially long term, we see those as, you know, if we do things right, and we're planting the seeds properly today, we see those as things that enable our growth, you know, three, four, or five years from now.

Jack Abuhoff: The tremendous growth that we're seizing on today is at that bottom layer, it's the enablement layer, working with the big techs.

Jack Abuhoff: but we're aggressively planting seeds and earning referenceability in the other tiers as well.

Jack Abuhoff: And especially long-term, we see those as, you know, if we do things right and we're planting the seeds properly today, we see those as things that enable our growth, you know, three, four, five years out from now.

Questioner: Got it. Thank you. You talked about agility and adding a co-pilot and the benefits from that. Could you, I don't know if I caught everything, could you expand a little on what the value add of the co-pilot is and the opportunity you see from that growing agility? Sure.

Questioner: Got it, thank you. You talked about agility and adding co-pilot and the benefits from that. Could you, I don't know if I caught everything. Could you expand a little about?

Speaker Change: What the value-add of CoPilot is and the opportunity you see of that growing agility?

Jack Abuhoff: Sure, so for agility, just for a little bit of additional context, we have about 1,500 customers, 20 million dollars of ARR, about 17 percent, you know, 18 percent growth, I think, year over year, and 70 percent adjusted gross margin, so you know, lots of operating leverage. We were performing very, very well. I mentioned that we doubled our bookings in the quarter with a sales force that I believe is about 15% smaller than it was last year. So, very high performing, you know, very, operated very efficiently.

Jack Abuhoff: Sure, so for, you know, in agility, just for a little bit of additional context, we have about 1,500 customers.

Jack Abuhoff: $20 million of ARR, about 17%, you know, 18% growth, I think, year over year, 70% adjusted gross margin. So, you know, lots of operating leverage.

Jack Abuhoff: We were performing very, very well. I mentioned that we doubled our bookings in the quarter with a sales force that I believe is about 15%.

Jack Abuhoff: Smaller that it was last year, so very high performing, you know, very operated very efficiently.

Jack Abuhoff: The idea behind... PR co-pilot was that you could disassemble the workflow of PR professionals and enable them to use generative AI at multiple points in that workflow to enable them to do more with less resources for their customers, to be able to do more for less money. And as I mentioned, we're only 30% into the integration, meaning there are, you know, we'll call it, eight different, Thank you very much.

Jack Abuhoff: The idea behind...

Jack Abuhoff: and the PR co-pilot was that you could disassemble the workflow of PR professionals and enable them to use generative AI at multiple points in that workflow to

Jack Abuhoff: enabled them to do more with less resources for their customers.

Jack Abuhoff: to be able to do more for less money. And as I mentioned, we're only 30% into the integration, meaning there are, you know.

Jack Abuhoff: We'll call it, you know, eight different.

Jack Abuhoff: Points within the PR workflow that we feel we can creatively leverage these technologies and we've only gotten through a couple of them.

Jack Abuhoff: We're planning on making an important announcement probably within the next few weeks about another element of that PR co-pilot integration. We're excited about that, and we've got every reason to believe that the improvement in the results that we're now seeing will be further accelerated as we further integrate that roadmap.

Jack Abuhoff: We're planning on making an important announcement probably within the next few weeks about another, you know, element of that PR copilot integration. We're excited about that.

Jack Abuhoff: and we've got every reason to believe that the improvement in the results that we're now seeing will be further accelerated as we further integrate that roadmap.

Questioner: Thank you. With Sinodex, you mentioned that this is the first time you have a clinical application. Could you go into a little bit of what that means?

Speaker Change: Look down!

Speaker Change: Thank you. For Sinodex, you mentioned that this is the first time you have a clinical

Speaker Change: application. Could you go into a little bit of what that means?

Jack Abuhoff: Sure, so what we're doing in Cinedex is extracting, at a very granular, very detailed level, medical information from patient health care records. And the use case that we've been working with up until now has been primarily life insurance underwriting and related insurance underwriting to property and casualty and things like this. What we haven't done is had the technology layer that's sufficient to support clinical use cases. So, for example, analyzing patient medical records in order to make determinations about treatments or make determinations about things that would occur and decisions that would need to be taken in a clinical use case, meaning hospitals and doctors and live patients.

Jack Abuhoff: Sure, so what we're doing in Cinedex is where we're extracting at a very granular, very detailed level

Jack Abuhoff: Medical information from patient health care records.

Jack Abuhoff: And the use case that we've been working with up until now has been primarily life insurance underwriting and related insurance underwriting to property and casualty and things like this.

Jack Abuhoff: What we haven't done is had the technology layer that's sufficient to support clinical use cases. So for example,

Jack Abuhoff: Okay.

Jack Abuhoff: you know, patient medical records in order to make determinations about treatments or make determinations about

Jack Abuhoff: Things that would occur in decisions that would need, would be needing to be taken in the clinical use case, meaning hospitals and doctors and live patients.

Jack Abuhoff: With this new win, and in conjunction with the development we've been doing in our technology, we now see opportunities now and down the road to increasingly target clinical use cases. And, you know, we're very excited about that, obviously, because that would represent an extended market.

Jack Abuhoff: With this new win and in conjunction with the development we've been doing in our technology, we now see the opportunities now and down the road to increasingly target clinical use cases.

Jack Abuhoff: And, you know, we're very excited about that, obviously, because that would represent an extended market.

Questioner: Got it. Last question. So you mentioned that there are around $300,000 of recruiting costs that will be less in the second quarter. Sorry, the third quarter. If I was just thinking about... expenses overall, is there any way to think about, like, what do you do you try to think about like the operating leverage and to what degree, maybe operating expenses will grow at a lower rate than the top line?

Questioner: Got it. Last question. So you've mentioned that

Questioner: So there's around 300,000 of recruiting costs that will be less in the second quarter, I'm sorry, the third quarter, if I was just thinking about it.

Speaker Change: Expenses overall.

Speaker Change: Is there?

Questioner: Any way to think about, like, what, do you try to, like, think about, like, the operating leverage and to what degree?

Speaker Change: Maybe operating expenses will grow at a lower rate than the top line.

Marissa Espineli: Yeah, so...

Marissa Espineli: Yeah, so I think the way to think about it is, you know, even if you just look at this quarter. You know, our sequential revenue is up about six million dollars. And our adjusted EBITDA net of that $3.6 million of recruiting costs was up about $2.6 million. So that would be, you know, 2.6 over 6 is about 43% flow through to contribution. Now, you know, obviously that won't hold up or, you know, every quarter they're putting in takes in any quarter, but I think it's indicative.

Marissa Espineli: Yeah, so I think we...

Marissa Espineli: The way to think about it is, you know, even if you just look at this quarter.

Marissa Espineli: You know our sequential revenue is up about six million dollars.

Marissa Espineli: and are adjusted to Abuhoff net of that 3.6 million of recruiting calls was up about 2.6 million.

Marissa Espineli: So that would be, you know, 2.6 over 6 is about a 43% flow through to contribution. Now, you know, obviously that won't hold up or, you know, every quarter there are puts and takes in any quarter, but I think it's indicative.

Marissa Espineli: Now, if you look at operating costs, one of the benefits of executing as aggressively as we are in the big tech market is that it's very concentrated. You don't need a lot of sales and marketing in order to work these accounts. What you need primarily is great execution, and that's what we've been bringing to the table. So as you think about that contribution margin, which in this quarter would have been 43% or so absent the recruiting costs, you're not going to consume a lot of that in SG&A. Now, you're not going to, it's not all going to show up as operating profit, but

Marissa Espineli: Now if you look at operating costs, one of the benefits to executing as aggressively as we are in the big tech market.

Marissa Espineli: is that it's very concentrated. You don't need a lot of sales and marketing in order to work these accounts. You know what you need primarily is great execution and that's what we've been bringing to the table.

Marissa Espineli: So, you know, as you think about that contribution margin, which in this quarter would have been, you know, 43% or so, absent the recruiting costs, you're not going to consume a lot of that.

Marissa Espineli: in this GNA. Now, you're not going to, it's not all going to show up is, you know, operating profit, but a lot of it will.

Questioner: That's great. Thank you, and a really fantastic quarter. Thank you very much.

Speaker Change: That's great. Thank you and really fantastic quarter. Thank you very much.

Jack Abuhoff: Thank you, Alan. I appreciate it.

Operator: We now hear from Hamid Khorsan with EWX.

Hamid Khorsan: Thank you. I'll appreciate it.

Operator: hel

Speaker Change: We now hear from Amy's course on with the WS.

Questioner: Hello everyone, thank you so much for taking my questions. This is Sarah calling in for Hamid at BWS. My first question is regarding the addition of the large tech company, Wynn, that you announced today. Does this indicate that you're at all seven, magnificent seven companies?

Questioner: Hello everyone, thank you so much for taking my questions. This is Sarah, calling in for Harmon at BWS.

Speaker Change: My first question is regarding the addition of the large tech company win that you announced today. Does this indicate that you're at all seven magnificent seven companies?

Jack Abuhoff: So Sarah, first, thank you for taking the call. Welcome. Say hello to Hamid for me. So what we've talked about is that we're in seven big tech companies. And of those seven, five of them are MAG 7.

Jack Abuhoff: So, Sarah, first, thank you for being on the call. Welcome. Say hello to Hamid for me. So, what we've talked about is that we're in seven big tech companies.

Jack Abuhoff: And of those seven, five of them are MAG-7 companies.

Jack Abuhoff: Okay. Thank you. And then my Yes, yes, it's very clear. Thank you. Under NDAs, we can't use customer names, but it's, you know, five of the seven MAG-7 customers plus two others who are, you know, very important to notable customers in the Gen AI market, but they're not, they're not MAG-7 customers. Right, got it. Thank you so much. My next question is, other than the one large tech company that has given you $110 million worth of work, where are you in the revenue recognition process with the other six large companies?

Speaker Change: Okay, thank you, and then my name is...

Jack Abuhoff: Yes, and there are a lot of very clear things in it. Under NDAs we can't use customer names, but it's, you know, five of the seven mag seven.

Speaker Change: plus two others who are, you know, very important and notable customers in the Gen-AI market, but they're not They're not MagSafe and customers

Jack Abuhoff: Right, got it. Thank you so much. My next question is, other than the one large tech company that has given you the $110 million worth of work, where are you in the revenue recognition process with the other six large tech companies?

Jack Abuhoff: I don't have a number for you handy right now, but what I would say is we're at. In the early stage, you know, we're seeing that accelerate, especially with a few of them pretty rapidly now, and you know I think we're going to see that acceleration through the end of the year on several. We believe, frankly, that all of the seven are going to grow with us this year. So, very early days, but very exciting.

Jack Abuhoff: yes

Jack Abuhoff: I don't have a number for you handy right now, but what I would say is we're at an early stage, you know, we're

Jack Abuhoff: We're seeing that accelerate, especially with a few of them pretty rapidly now.

Jack Abuhoff: And, you know, I think we're going to see that acceleration through the end of the year on several. We believe, frankly, that, you know, all of the seven are going to grow with us this year. So...

Jack Abuhoff: Our goal, of course, is to replicate the success that we've had with this big one, which was the earliest out of the gate, with as many of the others as we possibly can. No guarantees, obviously. But, you know, we're competing against the same people, and we're bringing the same execution that has so differentiated us on this large account.

Jack Abuhoff: You know, very early days, but very exciting.

Questioner: In Q2, or, generally speaking, going forward in the year.

Questioner: Our goal, of course, is to replicate the success that we've had with this big one, which was earliest out of the gate, with as many of the others as we possibly can. No guarantees, obviously, but we're competing against the same people and we're bringing the same...

Questioner: execution that is so differentiated us in this large account.

Questioner: Great. Thank you for that.

Speaker Change: Thank you for that. My next question is regarding the previously mentioned I guess increase in recruiting costs. Do you find that you're still needing to hire people or

Questioner: My next question is regarding the previously mentioned, I guess, increase in recruiting costs. Do you find that you're still needing to hire people, or are you at a good headcount figure? And, I guess, what is the timing of revenue to help offset the hiring and recruiting op-ex?

Questioner: Are you at a good headcount figure? And I guess what is the timing of revenue to help offset the hiring and recruiting op-ecs?

Jack Abuhoff: Sure, a great question, so the timing is pretty fast; it's really just a matter of a couple of months, and there's training that needs to go on, there's a..., you know, other things that need to take place. But generally speaking, you know, it comes on very quickly.

Jack Abuhoff: Sure, a great question. So the timing is pretty fast. It's really with it a matter of a couple of months. And there's training that needs to go on. There's...

Jack Abuhoff: You know, other things that need to take place, but generally speaking, you know, it comes on very quickly, and that's why, you know, as an investment, it's as compelling as it is.

Jack Abuhoff: And that's why, you know, as an investment, it's as compelling as it is. I think you should think about the recruiting spend over time as one that will be reactive, so there'll be a baseline spend that's kind of always going on and in a normalized growth mode. And then when we get big wins like we did, in the quarter, you know, $44 million win, our largest ever, you know, single win, then there's going to be concentrated spend.

Jack Abuhoff: I think you should think about the recruiting spend, you know, over time as

Jack Abuhoff: you know, one that will be reactive. So there'll be a baseline spend that's, you know, kind of always going on and in a normalized growth mode. And then when we get big lands like we did

Jack Abuhoff: In the quarter, you know, $44 million win, our largest ever, you know, single win.

Jack Abuhoff: Now, I'm hopeful that that concentrated spend will be lower than it was this quarter by virtue of our captive recruiting capability that we've now put in place. But frankly, even if it weren't, you're not gonna ever find a better investment opportunity than that.

Jack Abuhoff: then there's going to be concentrated spend. Now, I'm hopeful that that concentrated spend will be lower than it was this quarter by virtue of our captive recruiting capability that we've now put in place. But frankly, even if it weren't, you're not gonna ever find a better investment opportunity than that.

Questioner: Right, thank you so much. And this will be my last question. So you are raising liquidity needs. Are you seeing extended net terms from customers? No, we're not.

Speaker Change: Thank you so much and this will be my last question. So you are raising liquidity needs. Are you seeing extended met terms from customers?

Jack Abuhoff: No, we're not. We get paid very quickly. So, you know, nothing, nobody's stretching us out. You know, all is good there. Now, when we do our modeling to determine our needs, we take a very conservative approach. If someone's paying us in 30 days, we'll model it at 60 days. If someone's paying us in 60 days, we'll model it at, you know, 120 days just to provide that conservatism in our forecasts. But no, we're paid well, and Marissa makes sure of that.

Jack Abuhoff: So, you know, nothing, nobody's stretching us out, you know, all is good there. Now, when we do our modeling to determine our needs, we take a very conservative approach. If someone's paying us in 30 days, we'll model it at 60 days. If someone's paying us in 60 days, we'll model it at, you know, 120 days, just to provide that conservatism in our forecasts.

Jack Abuhoff: But no, we're paid well and Marissa makes sure of that.

Jack Abuhoff: Thank you, Sarah. Thank you so much.

Operator: Our next questioner is Tim Clarkson with Van Clements.

Questioner: Hey Jack, obviously, I'm thrilled with the results. Great work. I'm sure you and Mrs. Abuhoff are very happy with all the hard work over the many years, and maybe I'm the third happiest person in the world about Innodata.

Speaker Change: Our next questioner is Tim Clarkson with Van Clements.

Tim Clarkson: Hey Jack, obviously I'm thrilled that the results are great work. I'm sure you and Mrs. Abuhoff are very happy with all the hard work over the many years and maybe I'm the third happiest person in the world about in a data, but anyhow getting into the business side.

Jack Abuhoff: But anyway, getting into the business side... In terms of the, you know, these big contracts. You know, what's the magic elixir that's allowing you to get a contract of that magnitude versus the competition?

Jack Abuhoff: In terms of the you know these big contracts

Speaker Change: You know, what's the magic elixir that's allowing you to get a contract of that magnitude versus the competition?

Jack Abuhoff: So I think, uh... There are several things.

Jack Abuhoff: You know, I think the, you know, if there's one thought that I'd ask you to, you know, kind of hold on to, it's that Data and AI are inextricably linked. And that's true with the big techs when you're training the, fine-tuning or customizing or implementing, you know, rag-based solutions. Now, you know, as you know, we've been in the data business for a long time. We worked with the most demanding customers who were the most error-intolerant in the world for years, and we learned how to keep them happy. And we worked across domains, tax, regulatory, legal, medical, healthcare, technical, financial, all of that is repurposable into this opportunity.

Jack Abuhoff: So I think I'll...

Jack Abuhoff: There are several things, you know, I think the, you know, if there's one thought that I'd ask you to, you know, kind of hold on to, it's that

Jack Abuhoff: Data and AI are inextricably linked.

Jack Abuhoff: and that's true with the big techs when you're training the models. It's true in the enterprises when you're, you know, fine-tuning or customizing or implementing, you know, rag-based solutions.

Jack Abuhoff: Now, you know, as you know, we've been in the data business for a long time. We've worked with the most demanding...

Jack Abuhoff: customers who were the most error intolerant in the world for years and we learned how to keep them happy and we were working across domains.

Jack Abuhoff: tax, regulatory, legal, medical, health care, technical, financial.

Jack Abuhoff: All of that is what makes us Yeah, we've been told the number one provider for this largest cat that we now have. Now the good thing is that, you know, what we've learned and what we've developed as a platform is transferable. We're now engaged by these other accounts. We're bringing those same capabilities to the field and these other, these other competitions, and we have every reason to believe we'll be successful.

Jack Abuhoff: All of that is repurposable into this opportunity. All of that is what makes us, and we've been told, the number one provider for this largest account that we now have.

Jack Abuhoff: Now the good thing is that, you know, what we've learned and what we've developed as a platform is transferable.

Jack Abuhoff: We're now engaged by these other accounts. We're bringing those same capabilities to the field in these other...

Jack Abuhoff: These are their competitions and we have every reason to believe we'll be successful.

Questioner: Right. Now, I suppose a corollary of this is that, you know, when your large customers work with companies that don't have as accurate an annotation, they don't get successful results. So from their point of view, it's very risky to do business with someone where the data isn't as good as it should be.

Questioner: Right, now I suppose the corollary of this is that

Questioner: You know, when your large customers work with companies that don't have as accurate of annotation, they don't get successful results. So from their point of view, it's very risky to do business with someone where the data isn't as good as it should be.

Jack Abuhoff: Yes, I have it, absolutely right: garbage in, garbage out, bad data. He trains poor-performing models, of course.

Jack Abuhoff: But yes, absolutely right, garbage in garbage out, bad data.

Speaker Change: who trains poor-performing models, of course. I think there are two aspects to it. One is the data quality. And as I mentioned, the challenge of creating high-quality data is only going to get more significant.

Jack Abuhoff: I think there are two aspects to it. One is data quality, and as I mentioned, the challenge of creating high-quality data is only going to get more significant. As we move into agentic RAG and these other applications and think about domain-specific models and more complex models, the challenge of finding training data is going to be more significant, and then the challenge of getting it right is going to be harder still.

Jack Abuhoff: As we move into agentic RAG and these other applications and think about domain-specific models and more complex models, the challenge of finding training data is going to be

Jack Abuhoff: more significant and then the challenge of getting it right is going to be harder still.

Jack Abuhoff: So that's one of the differentiators that we bring. The other thing that we bring is just very reliable, very tuned execution. So when someone's training a model, they're depending on getting that data payload on time when expected because they've reserved the data center. They've reserved the GPUs for those training cycles. If the data is late, if the data needs to be reworked, those GPUs are sitting idle, costing a ton of money.

Jack Abuhoff: So that's one of the differentiators that we bring. The other thing that we bring is just very reliable, very tuned execution.

Jack Abuhoff: So when someone's training a model they're depending on getting that data payload on time when expected because they've reserved data center, they've reserved the GPUs.

Jack Abuhoff: for those training cycles. If the data's late, if the data needs to be reworked, those GPUs are sitting not being used, costing a ton of money.

Jack Abuhoff: So, you know, we think of that performance on it. Essentially, those two vectors, data quality and data timeliness, and if we can execute well on both of those, we, as we have now, have become a very important partner to very important customers.

Jack Abuhoff: So, you know, we think of that performance on it.

Jack Abuhoff: essentially those two vectors data quality and data timeliness and if we can execute well in both of those we as we have now we've become a very important partner to very important customers

Questioner: Sure. Hey, to kind of give a profile, what would be the typical background of an employee in the Philippines or India that's doing this kind of work for you in terms of, you know, college degree, speaking English, how many years of experience, what would that look like?

Speaker Change: Sure. Hey, just kind of give a profile. What would be the typical background of an employee in the Philippines or India that's doing this kind of work for you in terms of, you know, college degree, speaking English, how many years of experience, what would that look like?

Jack Abuhoff: Yeah, so a couple of things there, Tim. Firstly, as you well know, our legacy has been in hiring people offshore. The Philippines, Sri Lanka, India have been locations of choice historically for us. Now, for this set of opportunities, we are hiring people in those locations, but we're also hiring a ton of people in other locations. We're hiring a lot of people here in the U.S., many hundreds of people here in the U.S. You know, our footprint and our profile relative to, you know, who we're hiring is changing dramatically from what you recall.

Jack Abuhoff: Yes, a couple things there, Tim. Firstly, you know, as you well know, our legacy has been in hiring people offshore, you know, Philippines, Sri Lanka, India have been locations of choice historically for us.

Jack Abuhoff: Now, for this set of opportunities, we are hiring people in those locations, but we're also hiring a ton of people in other locations. We're hiring a lot of people here in the U.S., many hundreds of people here in the U.S.

Jack Abuhoff: You know, our footprint and our profile relative to, you know, who we're hiring is changing dramatically from what you recall.

Jack Abuhoff: The other thing I'd say is that when we're building these teams, we're hiring kind of a pyramid of different skills and capabilities. At the base of the pyramid are people with very fine-tuned language capabilities, people who are linguists. We have PhDs, and we have masters and bachelors in linguistics, computational linguistics, journalism, and English. The language that we're working with is English. People need to pass significant batteries of tests in order to be qualified.

Jack Abuhoff: The other thing I'd say is when we're building these teams, we're hiring kind of a pyramid of different skills and capabilities.

Jack Abuhoff: At the base of the pyramid are people with very fine-tuned language capabilities, people who...

Jack Abuhoff: are a linguist, so, you know, we have PhDs, and we have master's and bachelor's in linguistics, computational linguistics, journalism, English, if language that we're working with is English.

Jack Abuhoff: People need to pass.

Jack Abuhoff: significant batteries of tests in order to be qualified. We then measure their aptitude for this kind of work and then of course we put them through a pretty extensive training and design.

Jack Abuhoff: We then measure their aptitude for this kind of work, and then, of course, we put them through pretty extensive training and design, in partnership with our customers, the kinds of workflows that we can parse out to people and have them be effective very quickly after being trained. So the good thing about that is we believe we can keep on scaling and not face an impediment in terms of being able to recruit and staff. We believe the platform is extensible and can keep growing to support the growing customer base and the expansions that we're anticipating. Great, great. Well, look, I

Jack Abuhoff: In partnership with our customers, the kinds of workflows that we can parse out to people and have them be effective very quickly after being trained.

Jack Abuhoff: So, the good thing about that is we believe we can keep on scaling and not face an impediment in terms of being able to recruit new staff.

Jack Abuhoff: We believe the platform is extensible and can keep growing to support the growing customer base and the expansions that we're anticipating.

Jack Abuhoff: Great, great. Well, look, I'm speechless at how well things are going. I appreciate it. Let someone else have some questions. Thank you.

Jack Abuhoff: Great, great. Well look, I'm speechless with how well things are going. I appreciate it. Let someone else ask some questions. Thank you.

Tim: Thank you, Tim.

Operator: We have reached the end of our question and answer session. We now turn the call back to Jack for any closing remarks.

Operator: We have reached the end of our question and answer session. We now turn the call back to Jack for any closing remarks.

Jack Abuhoff: Thank you, Operator, and thank you, everybody who joined the call.

Jack Abuhoff: Thank you, Operator, and thank you, everybody, who joined the call.

Jack Abuhoff: You know, we have really never felt more bullish about our business and more enthusiastic about a market opportunity. Creating large-scale, near-perfect data is a hard, technical problem. It took us years of development and a ton of trial and error, but that's why we've emerged as the preferred data engineering partner at our biggest, big tech customer and why we're getting solid traction with other big tech customers. We believe large language models will not be built without training data. It's a critical must-have.

Jack Abuhoff: You know, we really no

Jack Abuhoff: You know, we've really never felt more bullish about our business and more enthusiastic about a market opportunity.

Jack Abuhoff: Creating large-scale near-perfect data is a hard technical problem. It took us years of development and a ton of trial and error.

Jack Abuhoff: But that's why we've emerged as the preferred data engineering partner at our biggest.

Jack Abuhoff: Big Tech customer and why we're getting solid traction with other big Tech customers.

Jack Abuhoff: We believe large-language models will not be built without training data, it's a critical must-have. We also believe that our differentiating capabilities will be even more highly valued as models become more complex and require more complex training data.

Jack Abuhoff: We also believe that our differentiating capabilities will be even more highly valued as models become more complex and require more complex training data. If you remember back in the middle of 2023, we said we were executing on a transformational strategy. We also said that our training data would be the foundation of making LLMs valuable, and you're now seeing that with your own eyes in our results. Today, we are focused on growing Innodata to be a larger and more valuable company. We believe there are exciting days ahead, and we're really thrilled that you've chosen to be part of our journey. Thank you.

Jack Abuhoff: i

Jack Abuhoff: If you remember back in the middle of 2023, we said we were executing on a transformational strategy.

Jack Abuhoff: We also said that our training data would be the foundation of making LLMs valuable.

Jack Abuhoff: You're now seeing that with your own eyes in our results.

Jack Abuhoff: Today we are focused on growing Innodata to be a larger and more valuable company. We believe there are exciting days ahead and we're really thrilled that you've chosen to be part of our journey. Thank you.

Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Operator: [inaudible]

Jack Abuhoff: With the bulk of these expenditures tied to generative AI spending, it is clear that the market sees under-investing as a greater risk than over-investing. In the not-distant future, we believe the technology will enable computers to reason and plan, to solve hard problems, and to self-organize in complex ways that help people accomplish their goals. Our belief is that generative AI technologies will soon sit deeply and ubiquitously in every text stack. That's why none of the big tech companies can sit this one out. The shift in experience is destined to be too significant, making the risk of being left behind untenable.