Innodata Inc. (INOD) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen. Welcome to the Innodata Second Quarter 2021 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Amy Agress. Please go ahead.
Amy Agress: Thank you, Keith. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata and Mark Spelker, our CFO. We will 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. We will then take your questions. First, let me qualify the forward-looking statements that are made during the call. These statements are being made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 as amended and Section 27A of the Securities Act of 1933 as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. These statements are made – these statements are based on management’s current expectations, assumptions and estimates and are subject to a number of risks and uncertainties, including without limitation the expected or potential effects of the novel coronavirus COVID-19 pandemic and the responses of governments, the general global population, our clients and the company thereto; that contracts maybe terminated by clients, projected or committed volumes of work may not materialize, continuing Digital Data Solutions segment reliance on project-based work and the primarily at-will nature of such contracts and the ability of these clients to reduce, delay or cancel projects; the likelihood of continued development of the market, particularly new and emerging markets that our 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 in or depressed market conditions, whether as a result of the COVID-19 pandemic or otherwise; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans that give rise to requirements for our services and solutions; difficulty in integrating and deriving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire; changes in our business or growth strategy; the emergence of new or growth in existing competitors; our use of and reliance on information technology systems, including potential security breaches, cyberattacks, privacy breaches or data breaches that result in the unauthorized disclosure of consumer, client, 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.
Jack Abuhoff: Thank you, Amy. 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 of 23% year-over-year growth, we have begun achieving our target. 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 in 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 investment. As we have discussed in these calls before, our plan is to invest internally generated cash flow on short payback sales and marketing as well as product 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 will see in today’s numbers, our 23% year-over-year growth represented $3.2 million of incremental revenue and a full 78% of this incremental revenue were $2.5 million flowed down to gross margin, becoming available for investment in sales, marketing and new product engineering. 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 growth expenditures. Our 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 our growth expenditure plans are supported by analysts’ predictions that the markets, who 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 is the stuff that AI is made from. AI models are trained with data. They’re not programmed 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, those early investments are serving us well. In a recent Gartner survey, Gartner found that data volume and complexity, data scope, data quality problems and data accessibility were 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-grade AI solutions to stay competitive. The AI initiatives we are working on fall basically into two categories. First category are AI implementations that help organizations modernize or streamline processes. The second category are AI implementations that deliver fundamentally new experiences. We are now working on AI implementations with two of the largest Silicon Valley tech companies and we have discussions taking place with three others. We are working with about 14 large enterprises and have late-stage pipeline discussions in the works with another 12 or so. And we are working with 15 early stage companies, and we have 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 will increase significantly among early adopter and early majority organizations following the classic technology adoption curve and hastened 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. We had a strong first half of the year in terms of new business bookings and new business pipeline additions. Our wins in 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 around 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 will now turn the call over to Mark Spelker, our CFO.
Mark Spelker: Thank you, Jack and good morning everyone. Revenue for the quarter ended June 30, ‘21 was $17 million, up 23% year-over-year. Net loss for the quarter was $0.1 million or zero per basic and diluted share versus a net loss of $0.5 million or $0.02 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 $0.3 million or $0.01 per basic and diluted share versus a net loss of $0.8 million or $0.03 per basic and diluted share in the year ago period. And as Jack mentioned, cash and cash equivalents were $22.1 million at June 30, 2021, up from $17.6 million at the end of calendar 2020. Thank you very much. And operator, we are now ready for questions.
Operator: Thank you. We will take our first question from Tim Clarkson with Van Clemens Capital. Please go ahead.
Tim Clarkson: Hey, guy. Obviously, really good quarter. Wanted to ask you know what, I know you have talked about how this whole thing works, but why don’t you explain again why Innodata is getting these significant contracts from these big companies and for that matter, the small companies too?
Jack Abuhoff: 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 you build conventional applications with programmers. And that being the case, virtually any company that is looking to embrace AI and harness AI in its operations or to harness AI to deliver new experiences for its customers, has to contend with data. And data is problematic and data is difficult to work with. We have been working with data for many, many years. We are a leading data engineering company. We are the company that’s been chosen by many of the leading brands, the big brands, the Apples, the Bloombergs, Thomson Reuters of the world to help them with their data challenges. And what we’re finding is, as it’s gone from a small world of professional publishers and 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 and model selection and model building has just grown enormously, and that’s creating a wonderful, very large opportunity for us. The other thing is that when you’re building AI, what you have to care about most of everything is data quality. If you’re building your AI out of poor quality data, the AI will not perform well. So companies that are building AI care about data quality more than anything else and every bit as much as our large customers historically have cared about it. When they’re doing business with us, they see the results of that. They see the results of what we do in the performance that they’re getting from their technology investments.
Tim Clarkson: Great. Great. Just another question in terms of timing, I know that you mentioned 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 one of the Big 5 starts with 100 employees and goes to 500 employees. When are we going to start seeing some of those revenues show up in the quarters?
Jack Abuhoff: So, I think you’re starting to see that. And we’re building all of that into our guidance. So when we talk about the growth that 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 to taking those expanding engagements and summing those all up into the expectations that we are sharing.
Tim Clarkson: Okay, great. Another question, one of my less trusting clients wants to know when are we going to see big – the typical 10% to 20% net bottom line numbers you would see on a high-tech company like this?
Jack Abuhoff: 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 is going to return a very significant return on that 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 three things: sales, sales expansion, marketing expansion and product engineering. We’re building new things, we’re seeing the opportunities in front of us, and we’re 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 that’s the most important opportunity for us now. Now at the same time, what we’re doing on these calls, I just want to add one thing, is we’re sharing with you what that investment looks like. So when we look at this quarter, we said we made $3 million of investments into our business. Now when you add that to our meager free cash flow number this year, you see, however, that it’s not at all a meager number, it’s a – the business is producing wonderful cash flow. The operating margins – operating leverage is very, very significant, 78%. And that’s enabling us to invest harder and faster and to have been concomitant better expectations relative to growth. So that’s our plan, and that’s what we’re managing, Tim.
Tim Clarkson: Sure. A couple just housekeeping questions, how many salesmen have we hired so far then?
Jack Abuhoff: So we’ve – we measure ourselves against where we were in 2020. In 2020, we had organizationally about 19 people doing sales. Right now, where we are is we’re about at 67, and we’re planning on ending the year – now our plan is to end the year at about 110 people. And that – yes, and that’s across our three segments, and that’s really doing a build out that can continue to scale in that way, meaning, we’re not just adding sales executives, we’re adding business development representatives, BDR teams, we’re adding line sales managers, sales directors, we’re adding enablement people, we’re adding channel managers. It’s a pretty big build. And we’re very happy with the progress on that so far.
Tim Clarkson: I assume you are pretty fussy about who you’re hiring. You are hiring good people?
Jack Abuhoff: Yes. We are hiring great people. We’re hiring people who at the leadership level have done this before. I remember when we hired Tom Perchinsky, who is our Chief Sales Officer, he came in and we said, Tom, this is going to be really hard. Here is what we need to pull off. And he said, well, I’ve done that before. It’s not actually that hard. I know how to do this. So we’re hiring great people at a 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 it 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 exploiting that market opportunity.
Tim Clarkson: Right. Well, I’m going to make a comment. And then – well, let me make – I’ll give you one last question, and then I’ll make a comment. The – easy question, where did all the cash come from that we – that showed up in the quarter?
Jack Abuhoff: So yes, it came from really good creative cash management. We’re looking at all sorts of opportunities 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 Europe, we have a lot of European business. We have customers who have negative interest rates in Europe. So we go to them and we say, well, how about you pre-pay us, and we will give you a small discount and you avoid negative interest rates? And that works. So, some of the money came from that, some of it came from being able to aggressively seek refunds in tax jurisdictions that are just refunds. Some of it came from good collection, some of it came from free cash flow. So we’ve – 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.
Tim Clarkson: Well, good. It’s a large shareholder. I appreciate that. Good job, Mark. One last comment, and then 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 than fire, bigger than electricity and bigger than the Internet. And the one thing I think that’s kind of cool about Innodata is Innodata in a way is – you guys are – it’s a gold rush, but you’re not doing the risky part of mining for the gold, you’re providing the supplies, the shovels and the various supplies the gold miners need. So I think it’s a great business model, and I think it’s great that you’re investing in it. So with that, I will pass and great quarter.
Jack Abuhoff: Tim, thank you.
Mark Spelker: Thank you. Appreciate it.
Operator: We will take our next question from Dana Buska with Feltl. Please go ahead.
Dana Buska: Hi, guys. Congratulations on a wonderful quarter.
Jack Abuhoff: Good morning, Dana. Thank you.
Dana Buska: I just have a couple of questions about your recurring revenue versus project revenue. Could you give us a little breakdown on that and what – how you are seeing your recurring revenue going to be going forward?
Jack Abuhoff: Sure. So we’re – 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 is recurring revenue also. So in the quarter, we’re categorizing 87% of revenue as recurring and 13% of revenue as project-based.
Dana Buska: That’s pretty good. It’s quite a difference from where you guys were in the past.
Jack Abuhoff: Yes. No, absolutely. Absolutely. What we are seeing here is so different than anything we’ve seen in the past. There is – and the big difference is the market opportunity. There is just a very significant market opportunity that we are addressing. We are addressing it creatively from a product perspective. We’re looking at markets. We are looking at where the markets are going to be a couple of years from now even. We’re 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 one big deal, it will be several. And we think as a result, we will be able to drive good customer-based diversification as well as strong recurring revenue.
Dana Buska: 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 annotation platform, does that have a proprietary nature to it?
Jack Abuhoff: Yes. It absolutely does. We’re building several platforms right now. The platform that we’ve been investing in most substantially is what we refer to internally as our Goldengate 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 are seeing is that they can get higher quality, faster deployment with less risk from using our platform than they can from the competitive platforms that they have looked at. So that’s really strong. And that platform is powering most of what we’re doing. It’s powering everything from our Synodex delivery capabilities to our solutions for data annotation and data management to projects that we take over to 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 text, which will have embedded in it auto-tagging intelligence, both classical and generative AI tests will be supported by that. We’ve got a lot of customer interest in that. We’ve got customers who have just started using that. And we’ve got exciting plans for that. Both that and our Goldengate platform are completely proprietary.
Dana Buska: Wonderful. And I’m assuming that that would all be recurring revenue when people use your platform? They put their data on it, and they would – it would probably tend to stay there?
Jack Abuhoff: Yes. It depends on how they are using the platform. So that’s a complex question, which I’m not going to – I won’t try to parse that down to the very precise answer. But just to stay relatively high level, yes, in those platforms, there are substantial recurring revenue opportunities. And looking forward, we think that both things we’re doing today and the things that we’re planning on doing in the future will drive substantial recurring revenue.
Dana Buska: So you could kind of say there would be a flywheel effect of that, once you get a customer, you create their data and then that kind of multiplies? Is that what you’re kind of seeing?
Jack Abuhoff: Well, yes, I mean, what we are seeing, importantly, 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 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 have got now. So there isn’t really – we 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 where like someone from a company that has used us in the past, they get a job, they start working, they say, you have to use these guys, and we come in, and then, we do a project and we do two. And before you know it, we’re off to the races, and we’re exploiting great growth opportunity. So I think that one 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, a great solutions and services company. It’s a small thing, but I think it’s worth mentioning in the call. Our – we do customer satisfaction surveys all the time. And in this past quarter, our largest customer gave us a ranking of 4.95 out of 5. And that to me just says it all. And how do you get that? Combination of people and technology, and it’s working.
Dana Buska: That’s tremendous. I just have one comment. I think the investments that you’re making in the business are very smart right now. It just seems like artificial intelligence is just getting going, and there is just a huge opportunity in front of Innodata right now. So thank you.
Jack Abuhoff: Thank you.
Operator: And at this time, I’ll turn the conference back to Jack for any additional or closing remarks.
Jack Abuhoff: Operator, thank you. So yes, I guess, a couple of key takeaways. Last November, we said, we were positioning the company for a 20% growth in the coming years. 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, a 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 in the remaining quarters of the year. And we’re looking to target accelerating growth moving into 2022 as these investments continue to bear fruit. In this quarter, there were about $3 million of costs we chose to incur specifically in order to position us for accelerated growth. And 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 tailwinds in our segments. And then lastly, I want to emphasize in the quarter, we saw 78% of growth dollars flow to gross margins, proving out the strong operating leverage that results from our business model, a combined SaaS and solutions business model. So thank you all very much for joining our call today. Appreciate the time and the interest. We are very excited about where we are going and we look forward to continuing to share more with you as we progress through the year.
Operator: Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation. You may now disconnect.
