Innodata Inc. (NASDAQ:INOD) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
Amy Agress – SVP, General Counsel & Corporate Secretary
Jack Abuhoff – President, CEO
Marissa Espineli – Interim-CFO
Conference Call Participants
PJ Solit – Potomac Capital Management
Dana Buska – Feltl Advisors
Operator
Good day everyone. And welcome to today’s Innodata’s Third Quarter 2022 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the conference over to Amy Agress. Please go ahead.
Amy Agress
Thank you, [Elisa]. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata; and Marissa Espineli, Interim CFO. We’ll hear from Jack first, who will provide perspective about the business, and then Marissa 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 pandemic and the responses of governments.
The general global population, our customers and the company thereto; impacts resulting from the rapidly evolving conflict between Russia and Ukraine; that contracts may be terminated by customers; projected or committed volumes of work may not materialize; acceptance of our new capabilities; continuing Digital Data Solutions 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 market, particularly new and emerging markets that our services and solutions support; continuing Digital Data Solutions segment revenue concentration in a 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, whether as a result of the COVID-‘19 pandemic or otherwise; changes in external market factors.
The ability and willingness of our customers and prospective customers 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 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 results in the unauthorized disclosure of consumer, customer, 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, 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
Good afternoon, and thank you for joining our call. Our Q3 revenue was $18.4 million exceeding the guidance we provided in our last call. We expect that Q4 revenue will show sequential improvement from Q3. Due to our rigorous focus on costs we expect to be adjusted EBITDA positive in Q4 and our business plan calls for us to achieve greater than 10 million in adjusted EBITDA next year.
As you have probably heard, many of the large tech companies have launched major layoffs and cost cutting measures. Our large social media customer recently significantly reduced its workforce and as a consequence, we are seeing interruptions in the work we do for them. We believe our work is critical to their ongoing operational goals and anticipate that our work will likely pick up again, as responsibilities of the laid off workers are assigned to other employees.
That said, our business plan conservatively is not dependent upon this occur. Despite these relatively significant disruptions we managed to show 6% year-over-year growth, which will not reflective of our ambitions, supports our belief that our business growth engines remain intact. Although the general economic outlook has resulted in longer sales cycles and more levels of customer sign off, we believe that our products and services are critical to helping our customers stay competitive and achieve their cost and efficiency goals and that increased spending on such initiatives is a secular trend.
For us to recently recommended companies maintain spending on AI initiatives, despite a potentially deep recession looming in order to increased efficiency and stay competitive. And in a recent survey, where the 75% of technology leaders said that they expect their firms to be spending more on technology this year, not withstanding economic uncertainty, with investments focused on cloud computing, machine learning, artificial intelligence and automation.
Outside these transitory issues, we believe our business continues to build momentum. We now have 10 large customers for our AI/ML lifecycle Services, which we believe will increase their spend with us in 2023 some significantly based on our current line of sight. Many of these companies have revenues in multiple billions of dollars.
In the third quarter, we brought on four of these customers. The used cases were landing include facial recognition, retail anomaly detection, automation, chatbots, security monitoring, and voice to text. Indeed, we’re hoping to be in a position to announce several additional important wins and expansions with these and other customers by year end.
Our Synodex business which enjoys a net retention of over 150% is also rapidly onboarding new customers. Just yesterday, we announced two new customer wins for our Synodex platform that we believe will together yield approximately $1.1 million of annualized recurring revenue.
We also expanded the value of Synodex engagement from an estimated $1.8 million to $2.3 million of anticipated annual recurring revenue as we began ramping up disengagement this month. On the agility front, we’ve seen 107% year-over-year increase in our year-to-date bookings and we expect this trend to continue through the remainder of the year as a result of a strong pipeline. We’ve also increased our mid market ASP from a year ago by 49%, with large increases in the number of deals significantly exceeding the average. And now that we’ve launched our new social media listening product, which we announced in September, we’re seeing that mid market deals incorporating this new product are increasing ASP by 200%.
To-date, we have 20 customers using our new social listening product and we have 65 prospective customers in our pipeline. Another significant accomplishment is that this year, we’ve continued to expand new agility customer that is an our largest ever agility customer. We now valued them at $628,000 of annual recurring subscription revenue.
Moreover, we’re expecting this ARR to increase further based on additional expansions. For this customer, we’ve developed a new critical awareness capability that we believe could have broader application in the market.
Consequently, we believe that the secular growth trends underlying our business remain robust. Over the past year, we believe that we have proven that we are well-positioned to serve the growing AI market, helping companies that are already deep into AI with large scale data collection and annotation, helping companies that are now getting into AI with model development and deployment and building AI-enabled applications and platforms that are blueprints for how to strike the right balance between humans and machines.
We believe that the circumstances around our social media customer are unique, neither born out of general market conditions nor out of general economic uncertainty. We remain enthusiastic about our market opportunity and the intrinsic value of our business.
I will now turn the call over Marissa of the numbers and then we’ll open one for some questions.
Marissa Espineli
Thank you, Jack. Good afternoon everyone. Let me recap the third quarter 2022 financial results. revenue for the quarter ended September 30, 2022 was $18.4 million, up 6% year-over-year. Net loss for the quarter ended September 3020 22 was $2.2 million or $0.12 for basic and diluted share, compared to a net loss of $0.8 million or $0.03 for basic and diluted share in the same period last year. Revenue for the nine months ended September 30, 2022 was $59.6 million, up 18% year-over-year. Net loss for the nine months ended September 30, 2022 was $10 million or $0.37 for basic and diluted share compared to a net loss of $0.5 million or $0.02 for basic and diluted share in the same period last year.
Adjusted EBITDA loss was $1.2 million in the third quarter of 2022 compared to adjusted EBITDA of $0.7 million in the same period last year. Adjusted EBITDA loss was $3.5 million for the nine months ended September 30, 2022 compared to adjusted EBITDA of $2.7 million in the same period last year. Our cash and cash equivalents were $10.7 million at September 30, 2022 and $18.9 million at December 31, 2021.
Again, thanks everyone. [Elisa] we are now ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll take our first question from PJ Solit with Potomac Capital Management. Your line is open.
PJ Solit
Hi there. Hi, Jack.
Jack Abuhoff
Hi, good morning Solit. Sorry we are doing the call in the afternoon. Good afternoon.
PJ Solit
Good morning somewhere. So congrats on putting up some respectable growth in a tough environment. I guess I just wanted to clarify your comment about the plan for 10 million EBITDA next year does not count on seeing the interruptions come back at the at the large customer. I guess, just to clarify, does that assume the current run rate that we’ve already seen in this third quarter or does it assume some percentage coming back or just nothing?
Jack Abuhoff
So it assumes nothing. So we’re being very conservative about that. That said, we don’t believe that it’s likely that nothing comes back.
PJ Solit
Right. Got it. Okay. That’s good, that is nice conservative then. Okay, and then maybe could you just give us a little color on the listening product that sounds pretty exciting with the ASP increased? Maybe a little bit of background on that, and then what you’re seeing there?
Jack Abuhoff
Sure. So we’re seeing very, very favorable reception. And one of the things is interesting in our competitive set, is there are other people that have a product that’s similar to the one that we have, but they’re all companies that have grown by acquisition and they’ve acquired it, and then integrate it in ways that is not particularly user friendly or helpful.
And we believe that we’re the first company to build this and natively integrated into our platform, which enables a tremendous amount of functionality that one wouldn’t otherwise have.
Increasingly, we’ve got customers who are very much focused on being able to go back and forth between traditional media, social media to combine analytically data that’s derived from all of these channels and to be able to, work with that. And we think we’re uniquely be able to now provide that seamlessness in terms of the analytics. It’s being received well.
We launched it and just September. We’ve got 20 people that are working on it. We’ve got 65 people in the pipeline, and from a business perspective really goes to the heart of what we can do to make our business perform better, which is increasing our ASP. We are closing deals now at 200% of our ASP a year ago when we’re selling with the social media platform.
So we’re very focused on extending that to many of our existing customers, making sure that we’re selling it effectively to all of the new logos that we’re talking to. And we’re also looking at extending it further. We’ve got ideas for how we can add additional functionality, which again, I think will be functionality that has never been natively integrated into a PR suite. So we think we’re on the right track there.
Operator
[Operator Instructions] We’ll take our next question from Dana Buska with Feltl. Your line is open.’
Dana Buska
Hi, Jack.
Jack Abuhoff
Hi, good. I’ll get it right this time, good afternoon, Dana.
Dana Buska
One of my first questions I have for you is foreign currency with the strong dollar. And with all your operations you have around the world. Is that something that’s impacting your earnings at all right now?
Jack Abuhoff
Yes. So it has two chief impacts for us. We’ve got contracts most of our contracts are U.S. dollar denominated, but we do have contracts that are Canadian dollar denominated, Euro denominated, Sterling denominated, and the strong dollar has a negative effect on revenues from those contracts. On the cost side where we have offshore costs then we’re offset we’re benefited by the strong dollar, although some of that is we have to kind of give back in the form of salary adjustments and keeping our employees somewhat protected against runaway inflation that they’re seeing. When you net it all against each other, we’re benefited by strong dollar.
Dana Buska
Okay, excellent. That’s sounds good. I have a question about one of your announcements that you made. You made an announcement about migrating a language, a company with their language model over to your model. Could you talk a little bit about that, and what it takes to develop a high performing language model?
Jack Abuhoff
Sure. There’s a few things there. First of all we developed a high performing language model for this customer to enable them to integrate it into their operations, and to begin to automate certain tasks that are important to them. We think the work we’re doing there as very representative of what businesses are all going to have to face, which is a world where UI is folded into their operations. And every professional starts to look at regardless of domain look at AI as something that’s constantly running in the background acting as a co-pilot helping them along and whatever it is that they do.
So the work that we’ve done, there is very much oriented to figuring out well, how do we integrate the technology into their environment and then once we do that how do we present that capability to humans? How do we augment the work that humans do when appropriate way?
And I think we’re as we do work like this, we’re figuring out a lot of things have kind of first impression. We’re creating blueprints that are replicable across businesses that we work with, which is super exciting. Inevitably, what we have to do when we demonstrate that we can build a model that works for someone as well then the next thing is, we’ve got legacy client server applications and legacy databases, which are not cloud enabled that needs to be migrated to benefit from the AI/ML. So that becomes additional scope that we’re able to do.
For this particular customer we see that work ahead of us long with additional migration work as well as additional models because they’re getting very good results with what we’ve built so far.
Dana Buska
Okay, excellent. I would assume that would be recurring revenue then. Is that how you looked at that?
Jack Abuhoff
It’ll be a combination. So there will be recurring revenue in terms of the ongoing management and optimization of the ML. There will be one time revenue into terms of cloud migration. But we think that there will be recurring customer revenue in terms of migrations, because we do believe that will continue for a while. And then pure recurring revenue from ML models, because there’s always the need to be retraining and re-optimizing the models to comport with heterogeneous data that’s coming into the company.
Dana Buska
Okay. Great. And you talked, in your last press release, you talked a little bit about your banking platform that you’re developing. Could you talk a little bit about how that’s going along?
Jack Abuhoff
Yes. So again the banking platform is another example of exactly what I was just referring to. It’s looking at how do you integrate domain specific tasks with AI. How do you build the copilots that people are going to increasingly be needing to use in their jobs? In that application, what we’re doing is we’re looking at a large several 100 people in one of the world’s leading banks. We’re understanding the work that they do, how they’ve done it in the past. And we’re helping them reimagine how that work can be done in a different way that benefits from our technology.
So we’re able to think about eliminating all of the rote time consuming aspects of their jobs. We are able to really rethink how the job gets done assigning the appropriate tasks to the AI and the appropriate parts of those tasks to humans. It’s coming along very, very well. We’ve got a large number of users there that are working with a product and liking it very much. And they didn’t ask us to, but we just completely, we had like an epiphany. Well here’s even a better UI that you can use. And we showed them that last week, and they just loved it. So very excited about that work.
Dana Buska
Okay, wonderful. is that product then that you are thinking about taking out to other banks? Is that the correct assumption and selling it to them?
Jack Abuhoff
We’d love to and we are in discussions with other banks. Right now, we’re very focused on getting it right here. We think that the fundamental architecture and the way to think about human and machine will be reproducible and transportable to other environments, banking and non banking and the needs that they’re applying it are needs that many financial institutions and non financial institutions have. So there’s definitely applicability to other places both direct and indirect.
Dana Buska
Okay, excellent. That does it for me right now. So thank you.
Jack Abuhoff
Thanks, Dana.
Operator
It appears there are no further questions in the queue. I’ll turn the program back to Jack Abuhoff for any additional or closing remarks.
Jack Abuhoff
Thank you, operator. So the momentum in our business is evident. We have 10 large customers for AI/ML solutions. Four of that we’re just one recently that we anticipate will grow in 2023 some significantly, despite the economic downturn. We have three recently announced wins in the Synodex business, two of which are ramping up now and one likely to ramp up in the first quarter.
In agility we’re seeing 107% year-to-date increases in bookings, 49% increases in mid market ASP with 200% increase in mid market ASP when combined with our new social media platform. So really across businesses, we’re succeeding at land and expand as well as reaching new logos. And we believe that we’re actually well-positioned to navigate a challenging economy.
Now, on the other side of the ledger uniquely standing alone is the unforeseeable circumstances that have affected our large social media customer. Importantly, our business plan which includes growth as well as a near term return to positive adjusted EBITDA is not dependent on business with this customer picking up even though we anticipate that it likely will.
So our enthusiasm about our market opportunity and our conviction in the intrinsic value of our business truly remain the strongest effort. Thank you all for joining and I’ll look forward to our next call.
Operator
This concludes today’s program. Thank you for your participation and you may disconnect at any time.
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