Good morning, and welcome to the Innodata Second Quarter 2012 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Amy Agress. Please go ahead, ma'am.

Thanks, Jenny. Good morning, everyone. Thanks, thanks for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and O'Neil Nalavadi, our CFO. We’ll 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 based largely on our current expectations and are subject to a number of risks and uncertainties, including without limitation, that our Innodata Advanced Data Solutions segment is subject to the risks and uncertainties of early-stage companies; the primarily at-will nature of the company’s contract with its Content Services segment customers and the ability of the customers to reduce, delay or cancel projects; continuing Content Services segment revenue concentration in a limited number of customers; continuing Content Services segment reliant 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, which give rise to requirements for digital content and professional services and knowledge processing; difficulty in integrating and driving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies that we acquire; changes in our business or growth strategy; the emergence of new or growing competitors; various other competitive and technological factors; and other risks and uncertainties indicated from time to time in our filing with the Securities Exchange Commission. 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. I'm calling in from London today where I'm in client meetings this week and O'Neil is with us from our New Jersey offices. I will review our second quarter 2012 results and update you on our important progress we have made this quarter on our strategic plan. Revenue in the second quarter was $22.8 million, an increase of 40% year-over-year but a sequential 9% decline from our record first quarter, which as we said in our last call, reflected higher-than-expected eBook volumes. Our gross margin remained at 36%, consistent with our 2 prior quarters. Our 3-year strategic plan announced first quarter 2011 targeted making Innodata a globally respected $100 million revenue company in the ensuing 3 years. The plan called for us to create a new segment called IADS and to drive some fundamental changes in our Content Services segment. I'm pleased to report that in the second quarter, we made significant progress in IADS, specifically on Synodex, the medical data analytics part of the IADS business. We completed our substantial workflow and tools build. We successfully established information security practices in compliance with both HIPAA and the Data Protection Act, which are the respective laws in the U.S. and the U.K. that govern handling sensitive personal medical data. We became ISO 27001 certified enterprise-wide, and we passed 2 external audits of our new information security infrastructure, one by Ernst & Young and another by Churchill & Harriman, both leaders in risk assessment. With these now in place, we can begin accepting work from clients. On the client side, which we've been developing in parallel with our systems, we are now in active discussions with more than 50 major firms in life insurance, health care and pharma in both…

Thank you, Jack. Good morning, everyone. Thank you once again for joining us today to review our financial results for the second quarter ended June 30, 2012. As in the past, I will review our sequential financial results by comparing our second quarter 2012 performance with our performance in the first quarter. I will also share my perspective along with the financial details. Towards the end of my review, I will spend a few minutes discussing our capital expenditures, working capital, foreign exchange hedges and investments in IADS. Our total revenues were $22.8 million in the second quarter compared to $25.1 million in Q1, a sequential decrease of 9%. Revenues were lower by $2.4 million, primarily as a result of lower eBook volume from a key client, which reduced revenues by $1.8 million. And the completion of the $600,000 test project within our IADS business in the first quarter. Our top 3 clients contributed 54% of revenues in Q2 2012 compared to 56% in Q1. Our eBook services accounted for 44% of our total revenues in the second quarter compared to 47% in the previous quarter. As Jack mentioned, we expect our eBook revenues to trend lower in the next 2 quarters. Our gross margins changed in line with the revenues. In absolute terms, gross margins were $8.1 million this quarter compared to $9 million in the first quarter. But as a percentage of revenues, our gross margin was consistent at 36% in both quarters. This current quarter's amount includes $800,000 of cost net of revenues for maintaining production capacity in our Advanced Data Solutions business compared to $1 million in the prior quarter. Excluding these costs, the gross margin in our Content Services business was 39% in Q2 compared to 41% in the first quarter, reflecting the impact of…

[Operator Instructions] And we will hear first from Charlie Pine with Van Clemens & Co.

I'd like to direct a couple of questions. To begin with, I want to get a little bit more clarity on some of the dynamics of what you were referring to in the eBook segment. You know, in your remarks and on the call, that there was a decline and you're attributing that primarily to a shift from -- into content in other lang, not English language and into enhanced content and that this one particular large client has shifted their spend into those areas. And my question, I suppose is, at this juncture, is this client -- they must be spending money with somebody on this stuff, and they must be doing non-English-language books with some other service providers and enhanced content with other service providers. Because with the explosion of tablet sales and eBook sales across the world and more and more publishers coming on, it just seems odd that there's been actually a contraction going on here. So are you actually losing business to other eBook service providers? And is this customer going elsewhere in seeking out this business in non-English-language capabilities and in enhanced content capabilities?

Charlie, thanks for the question. No, I can state emphatically that we're not losing business to competitors in this area. If you look at what's going on in eBooks, even though there's eBook content in other languages certainly, from a perspective of the large platforms, the Amazon, the Apples, the Kobos, the Sonys of the world, eBooks has been an American phenomenon. It has not been a global phenomenon. That said, it's -- and I'm not speaking about any single client when I say this, but looking at the platforms, generally, because I won't speak about any single client, it's not my place to, looking at the platforms generally, you do see that there are significant efforts being made at launching e-content stores globally and those efforts started a little bit late earlier this year and we begin -- they're going to pick up in 2013. We think there's a very rich, very important market for us in international content, and we're very excited about it. As I said in my remarks, we've been building our capabilities in this area. And the fact that we're now in a position to handle an assortment of languages including ideographic languages puts us at a very exciting place and a place that our clients are viewing as big strategic for them.

What about in regards to your reference to this client shift though to enhanced content? I mean, are they spending money on more eBook work and enhanced content? And if so, are they doing that with you? Or who are they doing it with?

Sure. And again, it's our policy not to talk about any client specifically, so what I'm -- in my remarks, I'm looking at the market as a whole and sharing my perspectives on the market. Most of what's being sold on the platforms today is not enhanced content. There's a tremendous interest in enhanced content, but for the most part what's being sold today is English-language, plain vanilla content. The work that we're doing now, I believe, is going to grow. We've clearly established our capabilities in this regard and we think as a strategic matter, producing what are essentially print layouts of print books on a platform that can do a whole lot more from a multimedia and integrated media perspective. It's clearly going to change. So I think we're in a good position in order to accommodate that change and to grow with our clients.

Okay. And on following that, I guess I'm just a little bit -- I guess possibly I'm not quite understanding of the reference that this particular large eBook client shifted their budget priority out of standard English-language content to international and enhanced content, and the inference there is that they're spending money in other areas besides English-language content. I mean, does that mean they're spending it with you or are they spending it with somebody else?

I think I've already answered that to the best of my ability, Charlie. As I said, we have not lost market share in any of our eBook platform clients. And as I've been saying consistently, the spend, I believe, will come in waves. It will not be a consistently rising spend. That's the nature of the spend tracing or tracking somewhat dynamic strategic priorities. So I hope that's helpful.

Somewhat. Let me follow up with a question on the IADS area, in particular, I guess, your docGenix, some of the docGenix comments. What in particular are you grappling with? Last time around on the call, you had more specificity regarding docGenix and almost nothing whatsoever about Synodex and now it sort of -- it's seems to have flipped. You -- sounds like almost all the pilots that you got and all the prospects that you have going right now are firmly in the Synodex area. Can you try to give us a little bit more color and clarity as to where things are playing out with docGenix and what it is specifically that you're trying to do as far as changing your -- the solution and the pricing?

Sure, I'll be happy to. We're further along on the sales side in Synodex because we've had a conservative effort over the last several months in parallel with our systems development in broadening our market. We believe that there's a very significant opportunity there for us, and we believe very much in the platform that we've put in place. On the docGenix side, we've had a couple of pilots. We have a couple of other smaller customers going, but we have not put the push behind it in terms of the sales side yet because we wanted to learn a little bit more about the market. We wanted to have a couple of pilots under our belts. And I talked about there being 2 pilots. One was for -- or one is with a major bank. We're largely completing its first phase. We're getting good reviews there. On the second one where our -- and I was disappointed on this because when our sponsor moved out and some of the more conventional-thinking people came in, I think they may have been scared off by our approach. And what I mean by that is we need to make sure that the product isn't too oriented to what would be called innovators or early adapters -- adopters rather. And we need to check and see whether we need to tweak the offering a bit to ensure that the early majority, the larger part of the customer spectrum would also view the product favorably, that it's not too complicated for them. So on the docGenix side, we're going to do some of that revalidation, make sure that we're targeting the right segment of the market, the early majority, if you will, and go from there.

I've got 2 quick follow-ups in this area. First of all, are you seeing, in the docGenix area right now in the derivatives tagging and legal document sort of metadata work that you want to do, how would you characterize the competition that you're seeing in that area?

I think there are a couple of types of competition. The one competition is internal, law -- legal departments of large financial services institutions, to decide to do it themselves or to do -- or not to do what we do themselves but to do something themselves that they believe is adequate to address the legal risk in these instruments. The other thing that we see is them taking a traditional approach of pulling out select data points, either themselves or using an LPO provider, and putting those points in basically a spreadsheet or a simple database. Our product is a lot more than that. It's much richer. It enables a level of downstream reporting to collateral systems in an automated way that those other solutions do not. It enables very detailed, very complex querying to be done so a bank can understand the risk that it takes in any number of different disruption scenarios or market scenarios, that enables people to understand their counterparty exposures very, very well. And again, we think the product is very interesting, but we have to be very careful that we're targeting a sufficiently broad aspect of the market that we can get the traction that we need to meet our objectives. We're looking through Synodex and docGenix, that these things should themselves be $100 million companies. If it can't -- if we think that it can't get there, we're going to lose interest, we're going to shift investment.

Okay. Follow-up, last question. You put -- you spent a lot on CapEx in bulking up a couple of your offshore centers over the last several quarters and you apparently have hired a lot of people and reinforced the capabilities for a lot of these new business. In light that some of this isn't coming on stream, what are all these people doing right now?

Well, everybody is -- a lot of the CapEx work that we do is not the hiring of people. When we hire people, that's operating expense. The people that we've hired into these efforts are very, very busy. Developing the capabilities that we're putting in place don't happen by themselves. We're taking some risk there, but we think the reward is very substantial.

And we will hear next from Tim Clarkson with Van Clemens.

Just a couple of questions. What kind of volume would you have to do in the IADS to break even?

Dollar volume of the business?

Yes.

O'Neil, do you want to pick that up?

Yes, in terms of -- the current operating expense is running at about approximately $1.7 million per quarter. And to break even, we currently need approximately about $500 million of revenues. Keep in mind the way the business will look as we -- and to continue to build this business out is, obviously, we will look at the prospects in the pipeline. We will make judicious decision. If some of them are coming at us faster, then we will have to build up production capacity. So what you will see in terms of the P&L going forward will be a combination of other factors that could impact the P&L as it lays out.

Okay. Just on a -- to understand, there's obviously been a little bit of a shift towards -- excitement towards Synodex. What's the value added on the services that you got a contract? What's the value added for doing that service? Why are people excited about your product?

I think what they're seeing, and these are firms, as I said, life insurance, health care, pharma, they're seeing that the ways that they need to -- or that the process with which they are currently interacting with health records are less than effective or efficient. And what we're able to do is give them a vision of how they could operate in a much more effective and efficient process using our product set. I'm not going to go into a lot more detail right now for competitive reasons. All of the firms that we're in discussions with, we've got MDAs with in order to preserve that competitive advantage at this point.

What was the potential size of the markets?

I think it's very huge. I think, for us, it could be very, very significant. And again, like I said, for -- in response to Charlie's question a few minutes ago, we're really not interested in investing in anything that is product-oriented that couldn't be a $100 million business soon. On the Synodex side, I think that we believe that we easily achieved that threshold.

And what kind of margins would you have in that kind of a business?

I think from a margin perspective, we should be thinking that it meets our margin thresholds very clearly. And what we're targeting is, of course, an approximate 40% gross margin on an ongoing basis.

And this business, obviously, will be more repeatable?

Well, yes, I think that one of the most important aspect of it is exactly that. It's the repeatability. The works that we bring in through the Synodex portfolio, we believe, would be largely, if not exclusively, recurring.

[Operator Instructions] We will go next to Vincent Colicchio with Noble Financial.

Jack, a couple of questions. Would you say your sales pipeline, a potential business, increased sequentially versus where you were last quarter?

Yes, it did. And I have to qualify what I'm about to say with the obvious. The pipeline is only a pipeline, right? But if I look at the pipeline from an opportunity, aggregate opportunity, aggregate value perspective, it actually increased by 50% beginning of the quarter to the end of the quarter. That's a pretty big number for us and that's giving us confidence that this glass ceiling that I talked about in general Content Services can and will be busted through.

And last year, when you set strategic goals, 2 of the goals were bookings growth of 20% per year and also to hit $100 million of revenue by 2013. Are those goals still current to your thinking?

They are. I think they are the right goals for us to have. And again, we've got a number of different irons in the fire that are contributing to us achieving those goals. We've got the development efforts in Synodex and docGenix, the ideas efforts. We've got a general core Content Services business that we're working on in terms of our offering and our sales and marketing go-to-market approach. And then we've got the eBook business. So there are a bunch of irons in the fire. We're carefully managing each of them in order to achieve those goals.

So 20% bookings goals still seem reasonable for the year. Was that -- would you agree with that?

Yes.

Okay. And the DOJ case, do you think it had a slowing impact on the eBooks market at all in the U.S.?

Yes, not at all. Not at all. The people that I talked to, as you might expect, largely believe the decision was wrong. And we aren't seeing that -- any -- with the platforms or the publishers, we're not seeing anybody slow down in terms of enthusiasm for where eBooks are going.

And what will it take to occur in your business to hit the high end of your guidance for the upcoming quarter versus the low end?

So much is about timing and it's very difficult for us to accurately predict on what we do as we look at what's booked and we revenue project off what's booked. We look at what's late stage and we project off there. And then things at an earlier stage, we don't even project them. So as I've said in the call, there are several moving parts and -- to the business generally. When we look very, very narrowly near term, it's a line by line projection. And that's where we try to do our best at projecting them.

Okay. And just 2 more questions related to docGenix. I think, here, you were saying in your prepared remarks about bank number one on the docGenix side, the one that you're sharing revenue last quarter. Where does that relationship stand now?

Relationship is good. We're doing some very good work there. The proponent of our service there is, I believe, an early adopter. He is very enthusiastic about what he's receiving. Our product is turned on and he's using it. We've expanded engagement where we're doing some more documents there as well. He's referring us to other places within the bank where he feels the need may be even more significant. And we've done some downstream integration. We've built some systems in order to tie into their collateral management system. So they're really using the product for what it's -- what it was envisioned to be.

Jack, I think Vince is asking about big clients we earned revenues from in the previous quarter which is at this project, I think, which are referred to in your script as well so you may like to go over that.

I'm sorry, if I can clarify that. So there are 2 clients. I'm referring to the first in our -- as I said just earlier, the pilot from whom we are in substantial revenues in the last quarter, the pilot was viewed as being successful by the sponsors of that pilot where we became unlucky, was that sponsor got a new job basically, moved on to another bank. The successors of that person came in and said, "This is a little too fancy for us. We're comfortable doing things the old-fashioned way." And again, it was that experience that gave us pause and made us think, well, gee, maybe this is a little too oriented to the early adopters, maybe we need to think about how we'll broaden this so that it has some more general appeal.

Okay. And then IDS revenue, was there any revenue in the quarter, O'Neil?

It's been very marginal, about $100,000 approximately.

[Operator Instructions] We will go next to Joe Furst with Furst Associates.

I just have one question. I wanted to clarify something. These 50 potential clients you're talking about in the Synodex area, are you basically saying that all 50 of these clients seem to be pleased with the offering you have for them at all or at some stage considering doing some business? Is that a reasonable statement?

Yes. The 50 are, and as I said, we -- I'm trying to think now, the 50 are -- we've had discussions with more than 50. Of the discussions we've had, I think there was only one client, who's a very small client, who said, "No, this doesn't really make sense for my business." So the enthusiasm has been very substantial. And again, to reiterate, yes, all 50 are in the pipeline.

This is good. And you were saying the potential business in this area, that you think it could be as much as $100 million annually?

I think that it could exceed that.

And with no further questions in the queue, I would now like to turn the conference back over to Jack Abuhoff for any additional or closing remarks.

Operator, thank you. To recap a bit, I guess, quarterly revenue was up 40% year-over-year but was down 9% sequentially, albeit from an unexpected Q1 high. We're feeling good about being able to deliver growth this year, although we're anticipating a likely revenue dip in the second half as we turn the corner from plain vanilla English-language eBook conversion for the platforms to foreign-language eBooks and to enhanced eBooks. Customer interest in our IADS segment, specifically Synodex, is very strong. We believe this will be an important and a sustainable growth driver going forward. Timing is, of course, something yet to be determined. I thank everybody for joining today, and I will, of course, look forward to sharing with you more as our progress continues on all these fronts. Thank you.

And ladies and gentlemen, that does conclude the call for today. We thank -- today's conference is available for replay by dialing (888) 203-1112 or (719) 457-0820 and entering passcode 4736219. That concludes today’s conference, you may now disconnect.