Innodata Inc.

Greetings and welcome to InnoData's third quarter 2023 earnings call. 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 Agras, General Counsel. You may begin.

Thank you, Paul. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abelhoff, CEO of InnoData, and Mariz Espinelli, Interim CFO. We'll hear from Jack first, who will provide perspective about the business, and then Mariz 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 21 of the Securities Exchange Act of 1934 as amended, and Section 27 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, impacts resulting from the continuing conflict between Russia and the Ukraine and Hamas's attack against Israel and the ensuing conflict, investments in large language models, that contracts may be terminated by customers, projected or committed volumes of work may not materialize, pipeline opportunities and customer discussions which may not materialize into work or expected volumes of work, acceptance of new capabilities, continuing digital data solution segment reliance on project-based work and the primarily at-will nature of such contracts and the ability of these customers 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, and the limited number of customers 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, changes in external market factors, the ability and willingness of our customers and prospective customers to execute business plans that give rise to our 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 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, customer, employee, or company information, or service interruption. 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 Forms 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.

Good afternoon. We're very excited to be here with you today, and we have lots of good news to share. Today we are pleased to announce third quarter revenue of $22.2 million, representing 20% year-over-year growth. It's worth noting that the year-over-year growth was 27% if we back out revenue from the large social media company, which contributed $1 million in revenue in the year-ago quarter, but dramatically cut spending after a significant and highly publicized management change. We were also very pleased to announce third quarter adjusted EBITDA of $3.2 million, representing 100% sequential quarter-on-quarter growth. The 1.6 million of sequential adjusted EBITDA growth viewed together with the 2.5 million of sequential quarter-on-quarter revenue growth demonstrates strong operating leverage as well as successful cost management. Looked at year-over-year, we see the same thing. We returned 4.4 million of adjusted EBITDA growth on 3.7 million of revenue growth. Third quarter growth was driven by the start of ramp up for generative AI development work with one of the new big tech customers we announced this summer. We expect our work with this customer to continue ramping up in the fourth quarter and into the first quarter, potentially reaching a 23 to 25 million run rate at the end of the year with which to start next year. At the very end of the quarter, we also kicked off our generative AI development program with the other new big tech customer we announced this summer, and we expect it will also contribute to fourth quarter revenue. In fact, we anticipate continuing to expand revenue with both of these new customers through Q4 and in 2024. For the fourth quarter, we are forecasting revenue of $24.5 million or more representing 26 percent or higher year-over-year growth. Again, if we back out revenue from the large social media company, which contributed 0.5 million in revenue in the fourth quarter of 2022, our fourth quarter forecast would represent 30 percent or better year-over-year growth. Since there was no revenue from the social media customer in Q1 2023, beginning in Q1 2024, revenue from the social media customer will no longer provide a drag on year-over-year comparisons. For the fourth quarter, we're forecasting adjusted EBITDA of $3.7 million or more, which would be approximately 15 or more times adjusted EBITDA from the fourth quarter last year. I am also very pleased to announce that in September, we signed a master services agreement for AI development with yet another of the world's largest tech companies, a company whose AI programs we've been trying to break into for a year now. Based on our research, this large tech company is likely to spend several hundred million dollars on generative AI data engineering services in 2024. So this win, like the others we announced this summer, packs a lot of potential. While this relationship is at an early stage, we see huge potential in it. As we look ahead and plan for 2024, we foresee an exciting and transformative year ahead. We believe we have the strategy, business momentum, and customer relationships to deliver significant revenue growth and adjusted EBITDA growth. We currently intend to provide guidance for 2024 revenue and adjusted EBITDA growth on our Q4 call. Our strategy for growth is twofold. First, we will support large technology companies building generative AI foundation models. Second, we will support enterprises across a wide range of verticals that seek to integrate and fine tune generative AI models. Let's first double click on the large tech market opportunity. We now have master service agreements in place with five of the largest technology companies in the world under which we are providing generative AI program support. Landing these agreements was non-trivial. Our success at having done so, I believe, testifies to the strength of our value proposition and our capabilities. With these agreements now in hand, we believe we are poised to deliver significant growth in 2024. Over the next several years, we believe that these technology companies will be building bigger and better generative AI models. Indeed, when you listen to the large tech companies' earnings calls this quarter, what emerges is an overwhelming sense that generative AI is their number one strategic priority, that it's their biggest investment area for 2024, and that they believe generative AI is a foundational platform shift that is just at its very beginning. One of these companies specifically stated that it believes it will drive tens of billions of dollars of revenue over the next several years from generative AI innovation. The product-centered large tech companies are talking about creating generative AI-powered experiences across their product lines transforming the way people use their products. The infrastructure-centric large tech companies are talking about deploying new and differentiated generative AI services and bolstering their AI infrastructure to serve their customers' AI training and inferencing needs. And both product-centric and infrastructure-centric large tech companies are talking about increasing capital investment into generative AI as a result of the strong demand that they see. This, we believe, bodes very well for us. During the summer, we announced winning two new Big Five tech customers, and both a program expansion and a new program with an existing Big Five tech customer, all to help develop and train large language models. We announced the first new Big Five customer win on July 18, and on August 29, we announced the program had been expanded. Our program began ramping up in early August. We anticipate that we will continue to ramp the program through Q4 and into Q1, reaching a revenue run rate on just this one customer of potentially 23 to 25 million by the end of the year, with which to start next year. We are now in discussions with this customer about potential further program expansions and potential additional programs. We announced our second new Big Five customer win on August 10, and on August 22, we announced that our agreement got signed. While in our announcements, we stated that ramp-up could begin early in the fourth quarter, I'm pleased to report that we were able to kick things off at the tail end of the third quarter. While we had a little bit of revenue from this customer in the third quarter, we anticipate that revenue from this customer will impact our fourth quarter results more significantly. We are now in discussions with this customer about scope of the initial program, which has the potential to be quite large, as well as other programs. The customer has authorized $2.5 million in spend to get us started, has promised that an additional $1.5 million authorization will arrive soon, and has stated that it intends to supplement these authorizations as we move forward with program expansion. On June 27, we announced that an existing Big Five customer had selected us to perform AI data annotation and LLM fine-tuning as a white-labeled service for its cloud and platform customers. And on June 14, we announced that the same customer had engaged us for its LLM build program. In the latter announcement, we stated that we anticipated potentially exceeding 8 million in revenue from this customer in 2023, up from approximately 3 million last year. We believe that we are on track to meet or exceed this target. Included in this year's forecast is approximately $330,000 of revenue from the White Label Program, consisting of six one or late stage opportunities. We believe this White Label Program will contribute more significantly to 2024. For 2024, we already have several million in pipeline opportunities, including two opportunities that we value at $2 million and $1 million, respectively. It is worth noting that we believe the $2 million opportunity could potentially open an exciting new market for us. We are hoping to close both of these opportunities in Q1. Under the White Label Program, we are seeing a mix of requirements from our customers' enterprise customers. Requirements range from generative AI data pipelines to two- and three-dimensional data annotation, chatbot fine tuning, LLM-based search and retrieval, and training LLMs for multilingual domain-specific summarization and conversation. Importantly, the program is enabling us to potentially scale an enterprise offering independent of our own sales and marketing. to leverage both our customer's brand and its significant customer reach, and to gain exposure to a wide variety of early adopter generative AI use cases. We believe this exposure will set us up well for what we believe will potentially be our largest and most significant opportunity, LLMs for the enterprise. I'll now talk a little bit about our enterprise opportunity and the progress we made on it in Q3. These are still early days in terms of enterprise adoption of generative AI, but we believe that a decade from now, virtually all successful businesses will have adopted generative AI technologies into their products and operations. To do so, they will require one or more of the capabilities that we offer. Enterprise data sciences teams will require support to train and fine tune open source and proprietary LLMs to conduct specialized testing and evaluations to ensure that the LLMs are helpful, honest, and harmless. They will also require support to implement retrieval augmented generation, or RAG for short, a technique for harnessing enterprise data assets within LLM prompts. Meanwhile, enterprise line of business managers will require support to build customized generative AI models and applications. Additionally, these line of business managers will require support to deliver the kind of business process and workflow transformation that will be possible with generative AI. And when we identify opportunities to deliver AI-enabled transformation via a subscription-based platform, as we now have with PR workflows, underwriting workflows, and compliance workflows, we will enable them to subscribe to our platforms rather than having to undertake complex and expensive builds themselves. In the third quarter, we close three important enterprise generative AI opportunities with large companies. Their scope ranges from strategy to implementation. In one of the engagements, we will be helping a leading information company create a strategic roadmap for AI LLM integration for its products and internal operations, and we will be building LLM proofs of concept. In another, we will be helping fine-tune LLMs for three customer use cases pertaining to legal services. In the third, we will be creating datasets to train an LLM to support doctor-patient interactions. We ended Q3 with $14.8 million in cash and short-term investments, up from $13.7 million last quarter. We continue to have no appreciable debt. To support our growth and future working capital requirements, We have a revolving line of credit with Wells Fargo that provides for up to $10 million of financing subject to borrowing-based limitation. I'll now turn the call over to Maryse to go over the numbers, and then we'll open the line for questions.