Good morning, and welcome to the Innodata Isogen Fourth Quarter 2011 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Amy Agress. Please, go ahead.

Thanks, Toya. Good morning, everyone. Thanks for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen; and O'Neil Nalavadi, our CFO. We hear from Jack and O'Neil and then take your questions. First, let me qualify the forward-looking statements that are made during the call. These statements are subject to risks that include the primarily at-will nature of the company's contracts with its customers and the ability of the customers to reduce, delay or cancel projects, including projects which the company regards as recurring; continuing revenue concentration in a limited number of clients; continuing reliance on project-based work; inability to replace projects that are completed, canceled or reduced; 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 requirements for digital content and professional services in knowledge processing; difficulty in integrating and deriving synergies from acquisitions; potential undiscovered liabilities of companies that we acquire; changes in our business or growth strategy; and the emergence of new or growing competitors. Our SEC filings also mention other risks. Actual results may differ significantly. Thank you. I will now turn over the call to Jack Abuhoff.

Thank you, Amy. Good morning, everyone. Thank you for joining us this morning. I will begin by reviewing our fourth quarter and fiscal year 2011 results. I will then provide an update on how we performed in 2011 relative to our 7-point strategic plan, and after that, I will share with you my perspective on what lies ahead for us in 2012. It is indeed a great pleasure to present our results today. Revenue in the fourth quarter was a record $23.7 million, which was a sequential increase of 23% or $4.5 million over third quarter. Our gross margins improved sequentially as well from 33% to 36%, and our pre-tax earnings increased from $2 million in the third quarter to $2.3 million in the fourth. Looking at the year as a whole, we increased revenue by 20%, from $61.5 million in 2010 to $74 million in 2011. We expanded our gross margins from 23% to 32%, and we went from a 2010 pre-tax loss of $1.2 million to 2011 pre-tax earnings of $5.3 million. Our gains this year were largely driven by expansion of our eBook services. My management team anticipated the eBooks phenomenon early on, and we invested in building technologies and expertise to meet the demand we foresaw on the horizon. Thanks to this foresight and solid execution along the way, we have become a leading provider of eBook-related services to the world's leading eBook distributors and publishers. This year, we added Apple to our roster of significant clients. As we were reaping the benefits of our early eBook investments this year, we chose to reinvest a significant portion of our related margin contribution back into the business to build new capabilities for the future in areas of healthcare information and complex financial information. Our investment in these…

Thank you, Jack. Good morning, everyone. Thank you once again for joining us today to review our financial results for the fourth quarter and financial year 2011. As Jack just stated, we are very pleased with our performance in the fiscal 2011. First, I'm going to do a brief recap and then review our performance. In our 3-year business plan that we finalized at the beginning of 2011, we had 2 key financial goals. One was to grow our bookings 20% year-over-year, and the second was to improve our project labor margins by 12 to 14 percentage points on these new bookings. As Jack mentioned, bookings is our measure of estimated value of new contracts or work orders, and it is not a formal GAAP accounting measure. Our team executed well on both these key objectives. We exceeded our bookings target by over 50%. This contributed to our revenue growth to $74 million in 2011 compared to $61.5 million in 2010, a growth of 20%. We also achieved our margin targets on these new bookings. These 2 forces, growth in revenues and higher margins and revenues from new bookings, primarily contributed in our gross margins expanding 9 percentage points to 32% of revenues in 2011 compared to 23% in 2010. It also contributed to our financial turnaround from pre-tax losses of $1.2 million in 2010 to pre-tax earnings of $5.3 million in 2011. We earned $0.18 per diluted share in 2011 compared to a loss of $0.03 per diluted share in the prior period. It is equally important to note that we improved performance while simultaneously making strategic investments in developing new software-platform-based service offerings. As many of you are aware, we launched Innodata Advanced Data Solutions business or IADS in Q2 of 2011. In the financial year 2011, we…

[Operator Instructions] And we'll take our first question from the side of Tim Clarkson.

Just a couple of questions. Obviously, some of your large customers are building up, essentially, a digital library. Do you have any sense of do they need 0.5 million books or 1 million books? Or what kind of goal are these guys looking at over the next year or 2 in terms of how many books it takes to be a player with Barnes & Noble and Amazon and Apple, obviously, the 3 biggest at doing this?

Great question. Thank you. I think the competition that we're seeing among eBook distributors is taking place in terms of a number of different characteristics. Volume of content is certainly one of them. But beyond volume of content, we're also seeing some -- and believe that the competition will primarily be around diversification of types of content, expansion into non-English language and then enhancement, things like reflowable content, dual language, enhanced and interactive media and capabilities, and we think there's tremendous opportunity there for us. And in addition to that, the notion of the eBook I don't think is going to be confined to simply trade publishing as we're thinking about it now. So for example, in Apple's last earnings call, they talked about an unprecedented adoption rate of the iPad in business. They specifically talked about the airlines industry. And we recently signed up a major airline as well as an international airline industry group to begin making airline pilots' data and manuals and information available, portable as eBooks. So tremendous opportunity to increase both the size of libraries, the types of content that we think about as eBooks and the functionality of eBooks.

Okay. Great. I -- just a little bit more color on the new divisions, on the one that involves derivatives. What's the attraction of -- from the client's point of view of using this new technology to keep track of these derivatives?

Sure. The -- there are a number of different benefits that it brings to clients. When we think back on the financial crisis of 2008 and the uncertainty of the market that exists today a lot of what's been at the heart of the 2008 problems were issues that clients had in understanding in the interconnectedness of the counterparty risk in their derivatives portfolios. We enable clients to completely map that out and to be able to fully dimensionalize their data. It means that they can run different scenarios they can work in. What happens if different things happen in the marketplace? How does it affect them? And what we're seeing in the market is having that kind of command and control over this risk exposure is a significant benefit to major financial institutions.

And I guess there's report -- government reporting requirements now that are pretty onerous to these guys if they do it manually.

Well, there is -- there are emerging regulatory requirements as well. And we think there's a -- certainly, a mandate that will exist that they will need to increasingly comply with. But even beyond compliance, there's a significant benefit in simply managing potential risk.

Our next question comes from the side of Joe First [ph].

In this new IADS area, is there potential for business in the insurance industry? I thought you had mentioned it one time, some potential business there. And can you expand on that a little bit?

Sure. Thank you, Joe. Thanks -- and thanks for asking the question. We do see opportunities in the insurance sector. As I've said in my prepared remarks, we're very busy now both building out our service in our solution as well as bringing onboard various perspective new clients, and that includes clients in the insurance sector. When we look at the way various companies handle their work flows, there's still a big chasm between sort of non-digital workflows and then the benefits of digital workflows. So in everything we're doing, whether it's insurance, whether it's in eBooks, whether it's in derivatives contracts, at the heart of it is helping companies with digital transformation, and that very prominently does include insurance companies as well.

A question. In your comments, you mentioned about it was hard to sell an eBook business, where business would stay the same, increase or decrease. It seems to me they were just in the infancy of this area, and I don't see how it would decrease a lot. Do you see any particular reasons why it might decrease?

Yes. We're very excited about the prospects, and we think we're doing the right things in terms of expanding and diversifying the services that we provide within our eBooks group. Now as I said, moving from English to non-English and non-Roman language capabilities, what's called reflowable content, dual, multi-language, enhanced and interactive content, there's a lot of opportunity there that we're building for. So our intent is to see it increase, but at the same time, we recognize it's a very dynamic requirement. It's very new. Our customers are making their plans sort of in real time and bringing us into them in real time. So we want to make sure that's understood by the investor base.

And one other quick question. What's the status of your stock buyback program and acquisition program? I assume you have enough on your plate. You don't need to bother with acquisitions right now. But how about your stock buyback program?

Do you have the numbers on that to share, O'Neil?

Yes. We completed our stock buyback under the first stock buyback program. We kind of shared that with you, Joe, on the last call. We haven't done anything this quarter mainly because of the fact that we have something going on which makes us in a -- puts us in a privileged position. So we have done nothing this quarter.

I'm sorry. Because you said you are in a privileged position as far as managing returns, so you can't buy the stock. Is that what you're saying?

That is -- that's right.

Yes. I think -- let me also, Joe, expand on that a little bit. The development work that we're doing and the investments we're making in IADS are significant. We believe that that's, right now, a better use of cash or the best use of cash that we've got. Now of course, we can do more than one thing at once, and that's true. But at the same time, looking at the possible revenue expansion that could come with IADS, we need to ensure that we'll have 2 things first: adequate working capital in order to support that and beyond that, a very strong balance sheet to help ensure that the prospects that we're talking to feel good about our company. So we're going to be a little conservative on the buyback side presently as we see how things materialize with IADS.

Our next question comes from the side of Bill Sutherland.

I -- just trying to get a feel for kind of the business shift as you go into this year. And I think I understand from your comments, Jack, that the downshift in revenue from Q4 to Q1 is in the eBook area.

We're not anticipating a particular downshift in revenue. I think we're trying to give guidance that best reflects a perspective with the intention of not disappointing. And there's some amount of fluctuation that occurs just based on volumes, client requirements and the timing of requirements last quarter. I guess this time, we talked about anticipating a $20 million or more quarter in the fourth. We were fortunate, in terms of requirements in volume and timing and all those things, to do better than that. Looking out to the first quarter, we're talking about approximately $21 million, and our perspective will be the same.

And so you're -- so you're on track as far as your goal in terms of bookings growth. Is that accurate?

Very much so. We set ourselves up with the goal of 20% increase over 2010, and we did actually increase. It's 55%, so absolutely feeling good about that.

Great. O'Neil, is the AR cycle, it's not any different for eBooks than for the other Content Services, is it?

No, it's not. In terms of the terms of trade, it is kind of similar. It is just that we experienced process delay with one major client, and again, this client is a real major player in the eBook space. And it's just sometimes, the way the process works on the other side. But we are working through with them and hope to expedite the process.

Okay. So for now, the guidance for '12 is limited to the first quarter revenue and the full-year CapEx. Is that what you guys are going to be able to get into at this point?

I think what we've also said is that we're targeting for 2012 to be a year of growth both in revenues and profits. It's not our desire at present to put a number on that. There are some moving parts. And we don't want to jinx ourselves, but we're very excited about our prospects, very optimistic. The IADS investment is a very good one and very much looking forward to the year.

No, I understand. It's -- that's actually where I want to end up, was if there's any -- if you can put any dimension on how IADS may develop in the 2012 year at this point or maybe it's too early.

Our next question comes from the side of Jay Harris.

Jack, I also had a question on the way you're using guidance at this point, just to sort of go over something that you just try to cover. When you did your third quarter, and you'd been running quarter-over-quarter revenue increases, you indicated, as you just said -- you just characterized it as a minimum of $1 million more. I guess I heard it a little differently. But in that context, what should we think the $21 million represents as your guidance for the March quarter? Is that the minimum expectation? Are there things that you're working on that could result in revenues in the March quarter which are not in that $21 million? Can you give us a little more texture?

Sure, Jay. I think our aspiration is not to disappoint. We would -- obviously, if you look at the track record we've had recently of kind of giving you quarter guidance in what we're delivering. We're trying to surprise on the positive side, if anything. Yes, there are things that we're working on that could improve that. Moreover, there's volume fluctuation, all the moving parts of the business. So I think that we should feel positive about the first quarter. More importantly, if we look a little bit more down the road, which is where I would encourage everybody to focus, we should feel very positive about our prospects right now.

Are there any issues in the way business is being developed which would lead to a -- something other than a consecutive quarterly increase in revenues as the year unfolds?

I think that timing is important. At this point, I think it's prudent to suggest that we should not yet look at this business as a business that grows sequentially quarter-over-quarter. We've got client concentration that we've talked about. We undertake large requirements. Sometimes there's startup involved in those requirements. There's a lot of things. I think that the IADS strategy will, over the medium and long term, be what helps us reduce some of that variation quarter-to-quarter, but I don't think we're there yet.

[Operator Instructions] We'll take our next question from the side of Edwin Fowler [ph].

I think it's the first time I've been on one of your calls, so I'm not as familiar with your company as I'd like. Could you break down your revenues by region?

Sure. O'Neil, maybe you've got that number. I think the breakdown that we'll be able to help you there with is North America versus Europe.

And Asia?

And Asia. O'Neil?

Yes. We don't -- there's very little from Asia, but it's mainly U.S. and Europe. Approximately 70% is U.S., and 30% is Europe. But having said that, even within Europe, when we bill the clients, a significant portion of is actually billed in U.S. dollar currency.

Okay. I just had 2 other quick questions for you, if you could. You mentioned third-party consultants. Could you give a little color on how many you're using and what exactly you're looking for in that? And also, could you talk a little bit about your goals relative to India or Asia relative to the IADS the business? How big are you going to make this? How much money are you going to put into it in the future and that kind of thing? Just a little color on it.

Sure. I guess the -- taking the first question, the monies that we spent on consultants recently were to help us build out in infrastructure that will compare favorably with the most highly secured from an information security perspective of our -- not just on our competitive set but of companies that are providing the kinds of businesses that we aim to provide. So information security, data protection, things like that is mostly where those funds went to. In terms of your second question, kind of where is it going, right now, we're a little bit ahead of where we thought we would be in terms of client uptake and kind of our timing being good and building out pipeline in these business, and we're excited about that. As we proceed, we'll dial up or dial down our investment and our spend to sync up with the progress we make on pipeline. And as client requirements emerge, we'll be prudent and conservative, but right now, we're very excited about the investment that's been made.

With regard to your accounts receivable, it looks rather large, and you say you did take a payment in January, about $3 million. Do you have any discussions with 1 or 2 of your clients as to what it takes to resolve this or why they're holding back?

Yes. As O'Neil said, more of a process issue that needed to be worked out. We've had discussions. We think we've largely refined the process and made some changes in order to resolve that issue. There's probably a little more work to be done there, but the client's very receptive to making it workable and very helpful in terms of resolving issues.

So you've actually got the problem resolved. So you just -- you have to prove to the client that the problem's resolved.

No, I don't think it's a matter of proving to the client. I think it's just working through some details and some process in order to improve things. There are probably 3 or 4 different things that we're going to be doing to do that. One of them is increasing the frequency of invoices. The second one has to do with the detail that we provide under invoices and how machine readable that is and how that best works with some of their internal systems. So it's that level of detail, and we think we're -- we've done the right things, and the client's been very cooperative in helping to really bring our companies closer together and make doing business more seamless and faster.

Our next question comes from the side of Perry Highland.

The only question I have, with the IADS market, can you give us an idea on what the overall size of that market is? And also, is this the area that they refer to where you're dealing petabytes and big data of information?

Yes, very much so. When people talk about big data, the business that we're doing is directly in the sweet spot of big data and the issues that are implicated by big data. In terms of size of market, we don't have any numbers prepared for you right now there, but we are talking about large market requirements and as I said earlier, some broad generic needs that we are addressing with proprietary tools and solving some -- attacking some pretty big issues for big companies, so feeling good about that.

And then just one follow-up. What kind of customer needs tetrabytes [ph] of data, massaged or whatever?

They vary. And we're going to be a little bit constrained in what we put out there right now, because we're still in the developmental phase there. In essence, what we're seeing is that there are a lot of very big companies who have lots of what we call unstructured information versus text-based information that really hasn't -- they haven't made the transformation to true digital-enabled information yet. And as a result of that, they either spend more money or sustain more significant risks or are otherwise unable to perform certain critical business processes in the way that they could in a truly digital environment. So we're looking at where that's the case and figuring out how we can help them with increasingly proprietary specialized tools and solutions.

Okay. And then how much do you guys know as recurring these days? Or is that number going up, down? Or eBook's more of a onetime deal that would skew the number?

Yes. We're not tracking that in the same way that we had been because of -- there are too many things that we're kind of neither fish nor fowl. It was hard to categorize as recurring or not recurring. We're -- a lot of our business increasingly is with recurring clients. On the clients that we brought on, we plan to cultivate and develop and have for a very long time. eBook business is transactional by its very nature, but we believe the clients that we're working with will be clients that we'll have relationships with for many years.

[Operator Instructions] We'll go to the side of Ron Legro [ph].

Now I apologize. I missed part of the Q&A session, so I don't know if it's already been answered. But who do you consider to be your peers or your competitors in the eBook business?

Yes. I think there are a number of companies that provide services that are similar to us in eBooks. I don't know whether they have the breadth of relationships, both on the publisher side and the distributor side, that we do. I know from talking to the clients that we've brought on over the last year that they've had experiences with a number of companies. They find that from a technology perspective, in a "doing what we promised to do" perspective, they consider us a leader.

Our next question comes from the side of Craig Bach [ph].

I just had a question about some of your commentary. And maybe I caught this wrong, and maybe I didn't catch it. One of the things I thought I heard you state, that there were some onetime costs or some startup costs in the quarter. Is that correct?

Yes, that's absolutely the case. O'Neil, do you want -- and there a few things there. And I'll just kind of queue this up for O'Neil, and he can give the numbers. What we've broken out are onetime SG&A expenses, so that's part of it. The other thing are -- is the IADS investment, which is significant. So O'Neil, maybe you want to reiterate those 2 pieces?

Yes. Craig, there's about $700,000 of expense, which is mainly because -- be exceeding our internal targets of our employee incentives in place. So that's kind of in a spike to cost this quarter. In addition to that, we traditionally have some year-end or quarter-end expenses to do with participating in trade fairs and exhibitions and professional fees that go with the year-end audits. And the last piece of -- there was a nonrecurring expense in the IADS business that we incurred for third-party professional fees, essentially to clear the best-in-class information and data security environment. So there are different pieces there that increased the expense this quarter, which a large component of that is kind of nonrecurring in nature. Having said that, for just the benefit of investors, you saw the SG&A expenses going up from $4.6 million to $6.3 million. In terms of -- the way to calibrate that going forward, at least for the current scale of operations, you should look at that in terms of $5 million to $5.2 million per quarter.

Okay. So let me see if I understand you correctly. So the cost for additional expenses in this particular quarter were about $700,000, and that was for SG&A. Did that also include the IADS investment? Or would that be additional to the $700,000?

The IADS expense in total for the quarter was $1 million.

If within the SG&A, the IADS in the quarter in total was $1.7 million, because there's $700,000 of cost in COGS that is in the nature of IADS investment.

But in SG&A, it was $1 million.

That's right.

Okay. So the total figure would be what? We have $1 million for IADS and then you have the $700,000 in the SG&A?

Craig, no. The -- there are 2 segments, right? We have -- one is the Content Services business and then the IADS business. The expense on the IADS segment in the SG&A component was $1 million, so that makes the Content Services at $5.3 million. Makes sense?

Okay. Okay.

Our next question comes from the side of Marsu Kadali [ph].

I was wondering about your non-eBook business. You have about $50 million -- $52 million, I believe you said, and that is flat. Could you tell us what's going on with that business? Do you see some growth this year? And -- or is the focus more on the eBooks going forward?

Thanks for the question. No, we're absolutely going to be focused on growing that business as well. We see a lot of opportunity there, and we'll have various initiatives in place to make some changes to our services provision, our marketing and messaging around our services as well, to more closely align the way we message our -- those services to some of the very significant issues that are being faced by publishers today, who are looking to increasingly go the direction of mobile content and eBooks and things like that.

And on the CapEx, you have given guidance for the Q1, $3 million to $3.5 million. I was wondering what -- if you have any visibility in terms of what you would spend in CapEx for the year.

Yes, we -- it depends. Like Jack explained I think earlier in the call, it depends on how fast the IADS business ramps up. There are different situations. So clearly, if we see the customer needs are coming to us faster than what we are looking at, then we have to be prepared to obviously spend the CapEx. So it depends on how fast the business ramps up.

Okay. So as far as the content business is concerned, you have enough infrastructure now, and you don't expect any more investments into that for the year?

We have typical routine CapEx that we have, on an average, running at about $2 million per year. So it is something that we believe we'll continue this year for routine replacement of software and hardware.

Okay. One last question on the IADS. I believe you already have some pilot customers starting from middle of last year, I believe. Do you have any projects already signed up for IADS in terms of revenue-generating opportunities for this first half?

Yes, we do.

And we have a follow-up question from the side of Edwin Flower -- I'm sorry, Fowler.

Sorry to trouble you here. But having married a girl from Hackensack, have you set a date for your annual meeting?

Have her give us a call, and we'll work around your schedule.

And also, what is your company's policy relative to -- I mean, your company's relatively unknown to institutional investors. How do you get out -- do you have any plans to get out and go to conferences and meet with institutional investors? Or is it kind of like we keep everything a big secret?

Well, we're going to keep certain things a secret, but we have been getting out. In fact, O'Neil presented at the Noble Conference several weeks ago, and I think he was received well there. Prior to that, we had recently gotten out in New York and Chicago and Boston and met with a number of institutional investors in those cities, and we intend to be dialing that activity up over the next several months.

I would now like to turn the conference back over to our presenters for any closing remarks.

Thank you. I guess just to recap a bit, quarterly revenue, gross margin, net margin, all up sequentially and up year-over-year. As a point of information, our quarterly revenue this quarter was an historical high. Looking back over 2011, I'm proud of how we managed to attract key new clients; how we managed to grow the top line while simultaneously increasing margin on new bookings; how we turned a 2010 loss to a profitable 2011 while at the same time investing more than $4 million in new businesses, which we believe hold significant promise for our future. As we said, first quarter of 2012, guidance approximately $21 million. We really appreciate everyone's time today and interest in the company. We look forward to sharing with you our continued progress as we move into 2012, and thanks again.

Today's conference is available for replay by dialing (888) 203-1112 or (719) 457-0820 and entering passcode 7914822. That concludes today's conference. You may now disconnect.