Innodata Inc.

Good day and welcome to the InnoData third quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Amy Agras. Please go ahead.

Thank you, Shelby. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Applehoff, 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 third 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 population, our clients, and the company thereto, that contracts may be terminated by clients, projected or committed volumes of work may not materialize, acceptance of our new capabilities, continuing digital data solution segment reliance on project-based work in 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 solution segment revenue concentration in the 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 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 filings with the Securities and Exchange Commission, including our most recent reports on Form 10-K, 10-Q, and 8-K, and any amendments thereto. We undertake no obligation to update forward-looking information or to announce revisions to any forward-looking statements. Acceptance 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.

Thanks, Amy. Good morning, everyone. We're very happy to be here today with you this morning, and I thank you for joining us. Today, we're pleased to announce that we achieved 20% revenue growth in Q3, and more importantly, we anticipate this growth to accelerate in Q4 as well as next year. Our confidence stems from the new deals we're signing, the traction we're getting in the market with both existing and new capabilities, the productivity ramp up we're anticipating from our expanding sales force, and current expansions and anticipated further expansion of several of our new key customer relationships. Q3 represented our fifth straight quarter of year-over-year growth. Our incremental revenue growth has been highly profitable. Seventy-one percent of our incremental revenue in Q4 flowed through directly to our gross margins thanks to strong operating leverage on fixed costs and effective cost control. We're essentially funneling this incremental gross margin as investment back into the business in some very exciting ways that we believe will accelerate growth while at the same time we're carefully managing free cash flow. I liken our business to a flywheel. A flywheel starts with a bunch of small turns, but as it gains momentum, the flywheel builds on itself and produces more and more positive results. We believe that's the effect we're seeing in our business. We believe one of the best investments for internally generated cash is organic growth in our business. We anticipate that the growth expenditures will continue to be funded through internally generated cash flow and internal resources. It's worth pointing out that even with significant growth expenditures, our cash has increased to almost 21 million at the close of Q3, up from 17.6 million at the end of last year. On our Q2 earnings call, we said that we anticipated announcing important new wins and important new capabilities. Indeed, we announced a five-year data and SaaS software subscription deal that we anticipate will yield 11 million of revenue with one of the world's largest banks. who's our charter customer for a new SAS software product. We also announced a 3.8 million win with a new customer supporting its AI predictive model development around medical information. We're seeing opportunities to expand both of these relationships further over the next several months. These deals represent both important new wins and important new capabilities. On top of these wins, We announced that we are now firmly engaged with the second large Silicon Valley tech company, having quickly won engagements that we anticipate will yield approximately 1.8 million of revenue around content moderation, intelligent document understanding, computer vision, and health records management, again, with opportunities for expansion. We believe these large tech companies often spend tens of millions of dollars, some even over $100 million on AI initiatives, So getting our foot in the door opens up significant opportunities for expansion. Lastly, we announced that Agility, our AI-driven SaaS industry platform for corporate communications professionals, had been named Momentum Leader in the 4.5 billion PR software market, and we launched an exciting new Agility release that features several innovative AI-enabled workflows. I have never seen this kind of momentum in our business. AI is increasingly seen as strategic by companies across verticals, and as a result, our services are increasingly relevant. Here's the key. Every AI initiative begins and ends with data. AI applications are trained with large quantities of data, not programmed in the traditional sense. So when they perform well, it's because they were trained with high quality data. So whether we're creating high-quality AI training data for data sciences teams at large Silicon Valley tech companies or building and managing AI algorithms for financial services companies or offering AI-enabled SaaS platforms to subscribers, the core ingredient, the sine qua non, if you will, is high-quality data, which is what we've built a 30-year reputation on. To capitalize on the significant opportunity, we're focusing our investments on Salesforce expansion and new product development. This year, we've been executing a plan to expand our Salesforce from 19 sales execs at the beginning of the year to 110 at the end of the year. This is close to a 6x expansion. As of October 1, we were at 82 sales execs, so we're well on our way. Even though it's a tight labor market, we're finding some very high-quality people out there. Of the 91 heads we've added or are planning to add to the sales force, 85 are to be assigned to sell our agility platform, the SaaS platform built with AI and data at its core, which, as I mentioned a moment ago, is now ranked as momentum leader in the 4.5 billion PR software market. We have about 12 million of agility annual recurring subscription revenue presently. and a 94% net retention that we believe is likely to improve. We go to market with both direct sales as well as channel sales. Our channel partners consume our data feed within their products, white label our product, or resell our product. We anticipate aggressive growth from our sales force as it ramps up. Additionally, we're focusing growth from our channels, both from existing channel partners and new channel partners we're bringing in. You can expect to hear news from us about new channel partners within the next few months. Our Agility SaaS platform has allowed us to build a core capability in SaaS sales and marketing, as well as the SaaS enterprise software development and product management. To capitalize on this expertise, we plan to launch four additional SaaS platforms in the market, all our own IP, all built on our proprietary GoldenGate AI technology, and all designed to yield high-quality recurring revenue. We announced just this week the general availability of one of these new platforms, our new data annotation SaaS platform, which we believe will serve needs we've identified in today's marketplace. In addition, we're developing a SaaS platform to help companies deploy and productionize AI models. We expect general availability of this platform in the first half of 2022. Taken together, we believe these two new subscription platforms, one for AI data annotation and one for AI model management and deployment, will extend and complement our fast-growing AI managed services. Apart from these two new platforms, we're also building a SaaS industry platform that will initially serve the financial services industry. In September, we announced a large win with a multinational bank that had become a paying customer for this new platform. Tentatively, we're planning general release of this platform late in the second half of 2022. The fourth new SaaS platform currently in development is an industry platform designed around medical data analytics. We're targeting general release of this platform in the second half of next year as well. We believe these four new platforms will significantly expand our core value proposition of accelerating and simplifying the adoption of AI and will help to further diversify and differentiate our products and services that are designed to help companies obtain the benefits of AI. Of this quarter's 17.4 million of quarterly revenue, we regard about 15.8 million or 91% as recurring revenue with significant lifetime customer value. We believe we will be able to grow our recurring revenue as a result of expanding relationships with the large technology companies we're signing, landing new customers for AI services and solutions, growing our agility SaaS platform direct and indirect subscriber bases, and over time, growing subscribers to our new SaaS platforms. Our pipeline is robust, and it's growing. We're working with an expanded assortment of large enterprises as well as early stage companies with many opportunities in late stages. It is also worth mentioning that on top of the two large Silicon Valley tech companies we've announced, we're getting off the ground with a third. Once we build a bit more momentum with this third company, which we are expecting to do, we'll get a formal announcement out. In addition, we have discussions continuing with a couple of other large techs as well. When we reflect upon the AI work that a data is doing with its customers, it becomes clear that AI is destined to be in everything that we do and everything that we use. We're working on AI implementations designed to help organizations modernize or streamline processes, AI implementations that deliver deeper, more insightful analytics, and AI implementations that promise fundamentally new experiences. It is also interesting to observe that many of these initiatives are harnessing the technology to address current macro events, such as labor shortage and supply chain challenges. I'll now turn the call over to Mark, our CFO.