Innodata Inc.

Good day everyone and welcome to the InnoData third quarter 2024 earnings conference call. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question and answer session. You may register to ask questions at any time by pressing the star and 1 on your telephone keypad. You may withdraw your question by pressing star 2. Please note this call may be recorded and I will be sending by should you need any assistance. It is now my pleasure to turn the conference over to Amy Agris. Please go ahead.

Thank you, Miki. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abelhoff, CEO of InnoData, and Maryse Spinelli, Interim CFO. Also on the call today is Anish Pindarkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective about the business and then Maryse will follow the review of our results for the third quarter. We'll then take questions from analysts. Before we get started, I'd like to remind everyone that during this fall, 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 in the risk factor section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information. 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 non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. Thank you. I will now turn the call over to Jeff.

Thank you, Amy. And hello, everyone. Third quarter marked another leap forward for InnoData. We delivered record revenue of $52 million, representing 136 year-over-year increase in organic growth. Adjusted EBITDA was $13.9 million, or 27% of revenue, which was five times our adjusted EBITDA in Q2. And our cash reserves increased to $26.4 million, up by $10 million from last quarter. we're very pleased with our results this quarter. And as a result of strong business momentum, we are raising our 2024 full year revenue guidance. We now anticipate revenues between 52 and $55 million in Q4, which if achieved, would translate to between 88% and 92% year over year growth for full year 2024. Our strong business momentum is reflected in revenue growth, margin expansion, broadening customer relationships, and continuing progress on our strategic roadmap. We are a laser focus on providing big tech companies with the data engineering they require to develop generative AI frontier models. We believe our efforts are paying off. In the third quarter, we generated 30.6 million of revenue from just one of our big tech customers. Previously, we estimated that the programs and expansions we had won with this customer would result in approximately 110.5 million of annualized run rate revenue once fully ramped, which implies attaining $27.6 million in quarterly revenue once fully ramped. We are pleased to find that revenue received in Q3 from this big tech customer exceeded this estimate. We have seven other big tech customers as well, and we believe they will collectively become a significant part of our revenue makeup next year. They are all investing aggressively in generative AI. These seven other big techs include a prominent social media platform that we won in Q3. Like the other big techs, they are building their own traditional and generative AI models and leveraging inner data for data engineering. We had mentioned last quarter that we expected this company would sign with us and we're excited to report that they indeed have. We believe the initial value of the one engagements to be approximately $3 million in annualized run rate revenue at full ramp. Our confidence that these seven other big tech customers will collectively become a significant part of our revenue makeup next year is bolstered by the progress we made this quarter in building relationships, expanding work, securing new wins, gaining traction, and earning trust. The number of projects and pilots we have underway with these customers significantly increased in Q3 and are expected to increase in Q4. This includes several pilots running now which hold the promise, potentially, of seven or even eight-figure wins. Last quarter, we also spoke about our pursuit of an agreement with an existing customer to collate our staff at their sites. I'm pleased to report that we've signed this agreement and that we expect our resources to transition to working at one of their sites as early as next week. We believe collocating on customer sites positions us to further build trust and expand our collaborative relationship with customers as we look to capitalize on opportunities together. Additionally, last quarter, with another one of our big tech customers, we won new engagements projected to result in approximately $3 million in revenue based on our customers' projections. This followed the successful execution of two smaller projects. We are pleased to see the relationship growing, and we're in discussions with them on potentially other significant opportunities. In our last call, we also mentioned the possibility of engaging with another big tech customer or big tech company, rather, which is one of the most valuable companies in the world and one of the companies most often talked about in connection with generative AI. Based on discussions, we now anticipate getting a pilot off the ground with this company in the next several months. We're also pleased to announce that in the third quarter, we had our second win with the federal government. a deal to provide news briefs and media monitoring to a second federal government agency. Similar to our agreement with the first government agency that we signed last quarter, this new agreement will leverage the new generative AI capabilities we have built into our agility platform. We are seeking to expand further into the public sector, and these federal sector wins are validating the success of that strategy. Now let me talk a bit more about our go-forward strategy and opportunities for growth. Our strategy encompasses both services and platforms. On the services side, we intend to be a go-to partner for big techs that are building generative AI frontier models and enterprises that seek to transform their products and operations with generative AI technologies. We believe these are lucrative markets which we are well positioned to serve. On the platform side, we are utilizing our B2B industry platforms and enterprise platforms that leverage generative AI and traditional AI for particular niche use cases. McKinsey recently released research showing six distinct opportunities in the generative AI value chain, and it ranked services and applications as two of the three most attractive of these opportunities. Now I'll give you some color on each of these three areas of focus for us. The first focus area is big tech. We believe we are still in the early days for big techs in terms of their generative AI investments. From recent disclosures, it's evident that these companies are seeing their generative AI investments yielding business benefits by enhancing current products and providing optionality for future growth and new products. Several of the big techs also signaled increased generative AI investment in 2025. The report issued this past Monday, Morgan Stanley said they now see Amazon, Google, Meta, and Microsoft's combined CapEx reaching approximately $300 billion in 2025 and $337 billion in 2026 as they continue to invest in multi-year gen AI and LLM-enabled opportunities. A large component of this investment is training data. Big techs require two types of data for training large language models. The first is pre-training data, which is data that has historically been scraped from the web. And the second is supervised fine-tuning data, which is the data that is purpose-built by humans. Currently, most of the work we do for the big techs involves creating supervised fine-tuning data, which consists of instruction tuning data, sometimes called demonstration data, and RLHF, or reinforcement learning from human feedback. You can think of instruction tuning data as the data that teaches models to think, to respond to user prompts, to follow user direction, and to perform complex reasoning. This is data we create specifically for them. It is not web data or third-party data. We anticipate over the next several years the big techs requiring progressively more complex demonstration data to support foreign languages, long context understanding, multimodality, industry-specific models, and agentic capabilities. Models perform better when supervised fine-tuning data is high quality, large scale, highly consistent, and diverse. We believe InnoData will be at the forefront of supplying this data. In addition to supplying supervised fine-tuning data, we are increasingly identifying opportunities to source and transform pre-training data. While today's models are mostly pre-trained on data scraped from the internet, This approach is likely to become increasingly problematic for two reasons. First, there are IP-related issues around the use of unlicensed third-party data with little legal precedent. Second, web-scraped data is increasingly likely to contain the output of generative AI models, and training new AI models with data produced by AI models deteriorates performance of the new models, a phenomenon known as model collapse. We're also finding expanded opportunities in the LLM safety and evaluation. We presently have six engagements in this area, and we're leveraging a lot of what we're learning from these engagements into a new platform that we're currently developing. In the past couple of months, we have demonstrated a prototype of our new platform to three of our big tech customers and several enterprises, and it has been well received. Our next focus area is enterprise services. On the enterprise side, our strategy is to provide a range of services to help businesses adopt enterprise gen AI. Our focus will be on integration and customization, providing strategic consulting services, AI services, digital services, and managed services. Everything necessary to enable enterprise IT teams and businesses teams to drive the shift from legacy systems to AI-first solutions. We believe we are in the early days of enterprise generative AI investment and that enterprises are on the cusp of significantly increasing investment. And finally, our third focus area is enterprise platforms. On the platform side, we are working on B2B industry applications and enterprise applications for a niche specialized workflows in which humans apply knowledge and judgment in their interactions with unstructured data. One such application is agility. We were particularly pleased with agility's 26% year-over-year growth in the quarter and acceleration in new bookings. Before I pass the call to Maryse, I'd also like to say a word about the significant progress we have made this year in building a strong company with talent across key areas of the organization, and a great workplace for our employees. We believe the work we have done in these fronts has been instrumental in enabling us to scale and meet or exceed the expectations of some of the most demanding, fast-moving companies in the world. This year, we have made several senior-level hires across delivery, technology, solutioning, pre-sales, recruiting, and sales and marketing. We have plans in place for additional strategic hires in Q4 and early 2025. In terms of brand building at a facility level, we have, for the second year in a row, been certified by Great Place to Work, and we are also certified as Most Preferred Workplace and Most Preferred Workplace for Women by Team Marksman. We also won an award for Asia Best Employer Brand 2024 by the World HRD Congress and Employer Branding Institute. and we were one of 10 companies to receive the 2024 Asian Leaders Award. We also won the 2024 Trailblazer Excellence Award for pioneering leadership and innovative contribution to the IT business process management industry in terms of employee engagement, job satisfaction, culture and work environment, growth, development, and recognition. Two of our country managers received awards for their exemplary leadership, The National Awards for Excellence named us a best organization to work for, and also awarded us for our environmental responsibility initiatives, women's empowerment initiatives, and corporate social responsibility initiatives. I'll now turn the call over to Maryse to go over the financial results, after which Maryse, Anish, and I will be available to take questions from analysts.