Innodata Inc.

Today, ladies and gentlemen, welcome to the InnoData second quarter 2021 earnings call. Today's conference is being recorded. At this time, I turn the conference over to Amy Agreste. Please go ahead.

Thank you, Keith. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abelhoff, CEO of InnoData, and Mark Spelker, our CFO. We'll hear from Jack first, who will provide perspective about the business, and then Mark will follow with a review of our results for the second quarter. We'll 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 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 may be terminated by clients, projected or committed volumes of work may not materialize, continuing digital data solution 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 markets, particularly new and emerging markets that our services and solutions support, continuing digital data solution 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 impairments of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we may acquire, changes in our business or growth strategy, the emergence of new or growth in existing competitors, our use of and reliance on information technology systems, including potential security breaches, cyber attacks, 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.

Thank you, Megan.

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've 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're investing new gross margin dollars that result from incremental growth. As you'll 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, or $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 we're well positioned to serve will be rapidly growing over the next several years. For 30 years, we've 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 five 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 organizations 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, a 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're 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're now working on AI implementations with two of the largest Silicon Valley tech companies, and we have discussions taking place with three others. We're working with about 14 large enterprises and have late stage pipeline discussions in the works with another 12 or so. And we're working with 15 early stage companies, and we've got about 20 others that are proceeding apace. 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'll look to announce over the next few weeks. In addition, we will look to issue press releases as we win pipeline deals that represent important new capabilities we bring to the market. I'll now turn the call over to Mark Spelker, our CFO.

Thank you, Jack, and good morning, everyone. Revenue for the quarter ended June 30th, 21 was 17 million of 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 two cents per basic and diluted share in the year ago period. Revenue for the first six months of 2021 was $33 million, up 16% from the year-ago period. Net income for the first six months of 2021 was $0.3 million, or a penny, 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.

Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause a moment to give everyone an opportunity to signal for questions. We'll take our first question from Tim Clarkson with Van Clemens Capital. Please go ahead.

Hey guys, obviously a really good quarter. I wanted to ask, I know you've talked about how this whole thing works, but why don't you explain again you know, why InnoData is getting these significant contracts from these big companies and, for that matter, the small companies, too.

Sure, Tim. Happy to take that question. So I think the first thing that's important to recognize and, you know, really can't be overstated is that You build AI applications with data, just like you built 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've been working with data for many, many years. We're a leading data engineering company. We're the company that's been chosen by many of the leading brands, the big brands, the Apples, the Bloombergs, the 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 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, 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.

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, public information, that you got a very large contract for another one of the big five It 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?

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 and taking those expanding engagements and summing those all up into the expectations that we're sharing.

Okay, great. Another question, one of my less trusting clients wants to know, when are we going to see the typical 10% to 20% net bottom line numbers you'd see in a high-tech company like this?

So right now when we think about our market opportunity, we feel very strongly that every amount of investment we can be making in ourselves 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. 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 know, you see, however, that it's not at all a meager number. The business is producing, you know, 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 then, you know, concomitant, you know, better expectations relative to growth. So, you know, that's our plan and that's what we're managing to.

Sure. A couple just housekeeping questions. How many salesmen have we hired so far then?

So we've, you know, we measure ourselves against where we were in 2020. And in 2020, we had, you know, 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 at – now our plan is to end the year at about 110 people. Wow. Yeah, and that's across our three segments. And that's, you know, 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, you know, 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.

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

Yeah, we're, we're, we're hiring great people. Um, we're, we're hiring people who, you know, at the leadership level have done this before. Um, I remember when we hired Tom Perchinsky, who's our, our, our chief sales officer, you know, he came in and we said, Tom, this is going to be really hard. You know, here's, here's what we need to pull off. And he said, well, you know, I've done that before. It's not actually that hard. I know how to do this. So you'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.

Right. Well, I'm going to make a comment. I'll give you one last question, and then I'll make a comment. This is an easy question. Where did all the cash come from that showed up in the quarter?

So yeah, 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 In Europe, you know, we have a lot of European business. We have customers who, you know, have negative interest rates in Europe. So, you know, we go to them and we say, well, how about you prepay us and we'll give you, you know, a small discount and you avoid negative interest rates. And that works. So, you know, some of the money came from that. Some of it came from, you know, being able to, you know, aggressively – seek refunds and tax jurisdictions that owed us refunds. Some of it came from good collections. Some of it came from free cash flow. So, you know, we've, you know, Mark and his team are just doing a really good job at creatively, you know, making sure that, you know, we're executing this plan. And that includes, you know, maintaining a healthy balance sheet.

Well, good. As a large shareholder, I appreciate that. Good job, Mark. One last comment, and then I'll let somebody else get in here. You know, the top guy at Google a couple weeks ago said that he thinks artificial intelligence is going to be bigger than fire, bigger than electricity, and bigger than the Internet. And, you know, 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, you know, 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'll pass, and great quarter.

Tim, thank you. Thank you. Appreciate it. We'll take our next question from Dana Buska with FELTL. Please go ahead.

Hi, guys. Congratulations on a wonderful quarter. Good morning, Dana.

Thank you.

I just have a couple of questions about your recurring revenue versus project revenue. Could you give us a little breakdown on that and how you're seeing your recurring revenue going to be going forward?

Sure.

So when you look at our business, platforms are all, you know, recurring revenue and a lot of the work that we're doing is, you know, within DDS is recurring revenue also. So, you know, in the quarter, you know, we're categorizing 87% of revenue as recurring and 13% of revenue as project-based. Wow, that's pretty good.

It's quite a difference from where you guys were in the past.

Yeah, absolutely. Absolutely. You know, what we're seeing here is so different than anything we've seen in the past. And the big difference is the market opportunity. There's just a very significant market opportunity that we're addressing. We're addressing it creatively from a you know, a product perspective. We're looking at markets. We're looking at where the markets are going to be, you know, a couple years from now even. We're building products and solutions that talk to that. So, you know, we're looking at big deals. We're going to continue to do that, but it won't just be one big deal. It'll be several. And, you know, we think as a result of we'll be able to drive good customer-based diversification as well as strong recurring revenue.

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?

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're 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've 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 you know, model selection training and evaluation deployment for, you know, customers. So that's really good. The other thing that we're doing is we're developing, you know, what we believe will be a best in class data annotation platform for text, you know, which will have embedded in it auto tagging intelligence, you know, both You know, classical and generative AI tasks will be supported by that. We've got a lot of customer interest in that. We've got, you know, customers who have just started using that. And we've got exciting plans for that. Both that and our Golden Gate platform are completely proprietary.

Wonderful. And I'm assuming that that would all be recurring revenue when people use your platform. They put their data on it and it would probably tend to stay there.

Yeah, you know, it depends on how they're using the platforms. That's a complex question, which I'm not going to, you know, I won't try to parse that down to, you know, the very precise answer. But, you know, just to say, you know, relatively high level, yes, in those platforms there are, you know, substantial recurring revenue opportunities. And, you know, looking forward, you know, we think that both the things we're doing today and the things that we're planning on doing in the future will, you know, drive substantial recurring revenue.

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?

Well, yeah.

I mean, what we are seeing, importantly, is that when we start working with a 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, you know, early stage customers where, you know, we're doing everything that they've got now. So there isn't really, you know, we'll grow with them, I think is the way we're viewing that. But with larger enterprises, you know, they don't necessarily know us. We come referred in many cases. Sometimes we, it's an internal referral where like someone from a 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 we do a project, and then we do two. And before you know it, we're off to the races, and we're exploiting a great growth opportunity. So I think that one of the reasons that they come to us is absolutely our technology base is, Another reason they come to us is that we're just really good at what we do. We're a great solutions and services company. It's a small thing, but I think it's worth mentioning in the call. We do customer satisfaction surveys all the time. And in this past quarter, our largest customer gave us a ranking of 4.95 out of 5. And that, to me, just tells it all. And how do you get that? Combination of people and technology. And it's working.

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's just a huge opportunity in front of metadata right now. So thank you.

Thank you. Ladies and gentlemen, as a reminder, star one for questions or comments. Star one, please. We'll pause a moment to assemble the queue.

Star one for questions. And at this time, I turn the conference back to Jack for any additional closing remarks.

Operator, thank you. So, yeah, I guess a couple of key takeaways. You know, 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, you know, 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, you know, 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're very excited about where we're going, and we look forward to continuing to share more with you as we progress through the year.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.