Good morning, and welcome to the Innodata Third Quarter 2012 Earnings 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, Zach. Good morning, everyone. 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 contracts 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 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, 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 filings with the Securities and 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 will review our third quarter 2012 results and update you on our strategic plan progress. Revenue in the third quarter was $19.7 million, an increase of 2% year-over-year but a sequential 13% decline from our second quarter. Revenue ended up at the high end of the range we provided as guidance last quarter and reflects an anticipated second half decline in e-book revenue from a major customer. Revenue from this major customer declined by $3.8 million from Q2 levels, partially offset by a $750,000 increase in general Content Services revenue. The decline in e-book revenue reflects the decline in customer budgets for large-scale conversions in support of domestic digital bookstores. We anticipate that the next waves of customer requirements are in support of new global markets and interactive digital books. I'll take each of these in turn. First, new global markets. As eReaders and tablets, such as the iPad and Kindle, gained traction globally, retail platforms are increasingly launching music and book services that are entirely localized in terms of language and provide large inventories of local content. We've seen the beginning of this in 2012, and we think that this will gain momentum in 2013. We will benefit from e-books becoming more of an international than a strictly-U.S. and U.K. phenomenon as I expect that we will have the opportunity to help platform providers build their inventories of local content. It is for this reason that we are working to expand our e-book production capabilities to include a long list of foreign languages, including complex languages like Japanese, Chinese, Russian and Arabic, that do not use the Roman alphabet. In the third quarter, we began delivering Japanese e-book content, producing several thousand books. And last week, a…

Thank you, Jack. Good morning, everyone. Thank you once again for joining us today to review our financial results for the third quarter ended September 30, 2012. I will follow my past practice. I'll be reviewing our financial performance on a sequential basis, which I will do by comparing our third quarter 2012 performance with our performance in the second quarter. Along with reviewing the financial details, I will also share my perspectives. After completing the financial review, I will briefly go over our capital expenditures, working capital, foreign exchange hedges and investment from the Advanced Data Solutions business. Our total revenues in Q3 was on the high end of our revenue guidance, reaching $19.7 million compared to $22.8 million in Q2. Revenues are lower by $3.1 million, primarily as a result of lower e-book volume from a key client, which impacted revenues by $3.8 million, and this was partially offset by higher revenues of $750,000 from other clients in our Content Services business. Our top 3 clients contributed 43% of revenues in Q3 compared to 54% in Q2. Our e-book services accounted for 34% of our total revenues in the third quarter compared to 44% in the previous quarter. The primary source of revenues in Q3 was our Content Services business, and our Advanced Data Solutions business is working on 2 contracts from which we expect to report revenues in the next quarter. Looking ahead, we remain committed to our 3-year business plan and revenue aspirations that we shared with you earlier. As part of our continuing planning process, we also conducted an internal review of our operations this quarter with the objective of achieving higher efficiencies in production and in selling, general and administrative activities. As a result, we restructured some of our operations, which will produce a…

[Operator Instructions] And we'll go first to the side of Vincent Colicchio with Noble Financial.

Jack or O'Neil, I'm not sure, whoever wants to respond, the IADS business, what was the revenue in the quarter? And you mentioned you're working on 2 new contracts. Can you remind us how many you have in place today?

We have currently 2 contracts, and we expect to report revenues from these contracts in Q4. It's still a moving piece as to what the exact amount of revenues will be because it's based on services delivered and the volumes that we get from those contracts.

Was there any revenue this quarter from the IADS business?

Way marginal. It was not significant. It was less than $50,000.

Okay. And any sense for a range of how large these 2 contracts can be?

It's premature to talk in terms of the total scale. I mean, we expect that they would be meaningful contribution in both Q1 and Q2 -- sorry, Q4 and Q1 of next year.

And Jack, nice job seeing your base business improved. It sounds -- I believe that you had a workshop this quarter with one of your large clients that helped improve momentum there. Will you do more of the same going forward? Any color there will be appreciated.

Sure, Vince. Thanks for the question. We're seeing that the workshops are very effective. The workshop that I think you're referring to and may have heard about was with one of our largest historical clients. And whereas in the past, we would have regular interactions with 2, maybe 3 executives from that company, we had 2 workshops, 1 in Europe, 1 in the States, and we built relationships with over 90 of those executives. A lot of them came back and said, "Wow, we never knew that you did all of those things. Can we have more discussions with you?" So I think we're onto a, if you will, a marketing tactic of customer -- franchise-building opportunity that is very significant and will be important for us going forward.

And on the e-book side, as it relates to your large client, I realize visibility -- you don't really have a sense for things for 2013 as of yet. Any color on -- do you have any expectations in terms of maintaining share with that customer as they ramp? Any color there will be helpful.

Certainly. Yes, I think that my expectation will be that we maintain share. I think that my impression is we've been gaining share. The issue that we face is not an issue relative to market share but an issue relative to budgeting and forward-visibility. So I think that what we need to do generally in the business is we need to stay relevant with our large customers. Their requirements change. They're not static. And we need to continually build our customer franchise. So what do we need to do to do that? Well in e-book context, we need to do 2 things. We need to go international, and secondly, we need to go enhanced. On the international side, as I've said in my remarks earlier, we've once again proven ourselves able to produce very, very high-quality work, this time in Japanese. If you think about the challenge of producing work in Japanese with a Filipino and an Indian labor force, then you probably can appreciate how -- what a great success that is. Beyond that, we need to go enhanced when you think about what the learning opportunities of the future will be, the kinds of text books that are going to be used, the kinds of devices that are being announced probably in real time. Clearly, the opportunity to build enhanced interactive content at scale is going to be very valuable to our customer base.

And one last question here, and I'll go back in the queue. The low end of your revenue guidance for the 4Q, the $18 million, what is that based on? Is that based on customer commitments?

Yes, what we do is we sum up customer commitments and we look at late-stage customer commitments and we try to handicap the whole thing and do our best crystal-ball work on that. It's an art, not a science, and we're trying to be helpful to you and the investors and everybody.

And we'll go next to the side of Timothy Clarkson.

I wanted to ask a couple of questions, one on this issue of enhanced books. Let's say that the typical e-book would cost $100 to produce on your end, and then it's sold for $10 with, I don't know, a $5 gross margin or better for the customer. What's the economic model for an enhanced book? I know there's different grades, but take an average enhanced book, I mean, what is the cost to produce and how much is it sold for and what kind of gross margins are they trying to create there typically, hypothetically?

Sure. Hypothetically, we're looking to drive gross margins there, at least, as good as our existing business. The price per book will be significantly greater than the existing business, probably to the tune of 10x to 20x that of non-enhanced book. But as you appropriately said, there is enhanced -- and then there is enhanced. There's a wide range of enhancement that's possible. So with 120 books under our belt, it's probably a little premature to declare an average when the range is as great as it is. But the margins are good, and we think we're aligned with where the future is going. The notion of what we think of is a book was shaped long ago by a set of manufacturing limitations: paper, it's how things are bound, it's what a page looks like. Incorporating rich media and creating new types of experiences and new types of learning experiences is going to be where the future is going, and we're on the cusp of that, and we've got the right technology, people, process and customer franchise relationships in order to ride that way.

Okay, good. One other question on your kind of historical legacy business. I know last time, you used the expression pipeline to describe what your business was like. How would you describe the pipeline right now?

Yes, I hesitate to call it legacy business. I know what you're talking about, the existing Content Services business. Jim Lewis, our Sales VP, is proud of the fact that his pipeline has never been stronger. He believes that the marketing techniques that he is now using, most notably the technology seminars and solution workshops for clients, is driving that increase in pipeline, is now more mature. More seasoned team that's experiencing more and more wins is also helping to drive that. And he thinks that we're now starting to see the revenue uptake, and he's hopeful that we'll continue to see that.

Okay. As the stock -- if and when the stock turns much lower, we're going to be back into our old buyback rustle mode. But just trying out, I would argue that at $3.5, let's say, hypothetically, if it gets that low or $3.25, then it's a better value. Now it's $2.5 or $2.75 a year and a half ago before you started some of these new ventures.

We're excited about the new ventures. As I said earlier and I've said for the last couple of calls, we think that our opportunity in IADS is huge. That said, it’s untested. There's a lot that we still need to do there. The sales cycle is more attenuated. We're having to both evangelize and pilot things and then close opportunity, whereas when a company goes out in an RFP and knows exactly what it needs, you're just closing the business. It's a different process, but it's being received very, very well. We've put a lot in place. We've built new facilities. We've gotten our HIPAA, and U.K. data protection act compliance in place. We've got a ISO 27001 Certification enterprise-wide in place. We've built the pipeline. We're doing the things we need to do to create a revenue stream that is providing better revenue visibility with less concentration. Those have been the things that have held us back in the past. So if we can do the things that we do well, building customer franchise, creating high-quality content with now revenue streams that provide more visibility and less concentration, I think we've got an exciting story here.

You said before that you thought that in a reasonable period of time, I don't know, 3 to 7 years, that this new division could be bigger than your legacy businesses. Do you still believe that after spending time with this for the last 6 months?

I absolutely do. And I think there are few characteristics of it that will enable it to scale that way: one is extent of our differentiation; the second is the extent to which we built a product. So for our existing business, we're doing a lot of different things for a lot of different people. We're building the equivalent of Bespoke Suits. For our new product, we're creating suits on the rack. We've isolated working in very close coordination with a number of charter customers. We've figured out what they need and how they can do their business better, and now we're taking that on the road, and it's being received well. So I think those characteristics will potentially enable it to be very successful in the future and quite possibly dwarf the Content Services business in terms of its scale.

[Operator Instructions] And we'll go next to the side of Charlie Pine [ph].

Just a few quick questions. Probably more, this one would be toward to O'Neil. Do you sort of expect going forward now that since you've -- looks like the CapEx has been coming down a little bit. Is a $1 million to $1.5 million CapEx that you delineated for Q4, do you expect that going forward with IADS, that that's going to be a more normalized CapEx for the foreseeable future, that range?

Charlie, yes, and I think the background to that is that our routine CapEx is somewhere in the order of approximately $0.5 million to $750,000 per quarter, $750,000 per quarter. And the Advanced Data Solutions business is running at the rate of somewhere between $400,000 to $500,000 per quarter. Until such time, obviously, we experience ramp-up beyond our existing capacity, in which case, with new facilities. But that should be the number for now. And the money that we are spending on Advanced Data Solutions business is just further enhancing the workflows and the platform.

Okay. Moving on to the sort of the pipeline that you discussed in the IADS segment last quarter, how would you characterize the extent of breadth in that pipeline? Have you seen a significant increase in the pipeline since we last spoke in the last call, or has that pipeline been relatively static?

I think since the last call, most of the work that we've been doing has been moving the people in the pipeline through the sales process. So some more piloting activities, moving it along -- the pipeline is pretty large, right? So probably, we have 50 to 60 major firms in life insurance, health care, pharma sitting in the pipeline. We don't need more of it. What we need is to move it through. So that's really where our focus is at this point.

Are you, Jack, willing to give us an idea of how many people are actually -- beyond the contracts that you said that you -- the 2 contracts that you said you will end that you'll start recognizing revenue for, how many of those 50, 60 are you piloting with right now?

I don't have a current count. I think it's somewhere between the area of 8 to 10 at various stages of pilots, meaning that either pilots are current right now or pilots are slated to begin as soon as master services agreements and statements of work are signed.

And what are you finding out from what you did with those last 2 customers? How long are these people generally running pilots for? I mean, do you have any sense of what the duration of these might be?

I don't know that yet. The 2 that are in the bag, I think those ran a course that I wouldn't necessarily extrapolate to the others. When I look at the others, I see some that take a very ponderous, thorough, slow approach. I see others that I believe will move to commitment quicker. But of course, the proof's in the pudding there.

And then finally, just a couple e-book-related questions. How would you characterize the general tone and direction of interest from some of the other -- we've been focused a lot on this one large e-book customer, but how would you say the focus is on with some of the other significant players in the space and where you stand going into Q4 and where you think that they might be the first couple of quarters of next year?

We continue to see build there. There are new prospects coming in all the time. There are a couple that look particularly interesting. But I think we focused on a major customer because its activities tend to eclipse at least right now. A lot of the other progress is being made there.

Okay. And then the last thing on e-book, are you able to give us -- you said you've done 120 enhanced books. Have any of this actually -- are they actually published and available on any particular platforms as we speak?

Yes, I think they are. If you -- and I'd encourage you to look at the books that are on the Inkling website, encourage you to look at books that are available on iTunes and the iBooks store that are enhanced books. And offline, I'd be happy to send you some links to specific works that I think show off very, very -- in a very compelling way what enhancement means and what texts in the future are going to look like.

That'd be great. I'd love to get a couple of examples of some of them, specifically that you'd say will be your -- most proud of your efforts in.

Sure. Happy to send that.

We'll go next to [indiscernible].

Jack, I was wondering with this enhanced books, where did you get involved in the work in terms of -- do you get to start off in the period of process? Where in the cycle do you get in, and what kind of work do you actually enhance the value-add to the process?

Yes, when we first started doing it, we were -- the creative process was being managed by others, and we were coming in more from the technology end and the programming piece, the execution piece. And what we're seeing is that that's -- and this is always the plan. The plan was that would change, and we'd start to get more involved in the implementation of the creative piece. So authors and publishers will still and, I believe, will continue to want to exercise editorial control over what something looks like. But making the animation do what it can do, showing examples, being able to implement different choices within an editorial framework will become more and more our responsibility, and it has, and we're looking up to that challenge.

Okay. And on the IADS, I speak on the Synodex side, I probably asked you before, but could you help me understand the services you provide maybe by running through a typical example of what you do for this client?

Yes, we're still flying a little bit under the radar there just in terms of being specific, and we're doing that for competitive reasons, no excuse in that. But at a high level, what we're looking to do is to apply technology and workflow processes to solve or to address problems related to a chasm between non-digital, unstructured information and various uses of well-defined, well-structured digital records. When you look at the -- going to a doctor's office, right, and look at the way medical records look like for now and think about what uses a well-structured, normalized, well-defined medical record could be put to. That's really where we're flying.

Okay. And the target client base, is that the health insurance payers, providers?

We're looking across a spectrum of different people. We're looking at health insurance. We're looking at the health care companies. We're looking at pharma companies.

All right. One other question on the pipeline, and you talked about the pipeline being stronger, more mature and so on and winning more deals. Is that -- are you referring more into the content and e-book business, or did you also include the health care and the Synodex business in that?

Sure. I think the question was directed specifically at the Content Services segment, and my response was that the -- that Jim Lewis, who head Sales and Marketing for the Content Services segment, feels very strongly that the improvements that we're seeing in the pipeline are real, they're tangible and that they will be helping to propel revenue in that segment going forward. Separately, I talked about the IADS pipeline, and we can't compare the IADS pipeline to any prior periods because it's new. It's a new business for us. But again, there, we feel very strongly that the pipeline is compelling.

Right. And within the content, you said just legacy content business or e-book business?

E-book business and non-e-book business on the Content Services side, both.

[Operator Instructions] We'll go next to Edwin [indiscernible].

I think you got my name wrong, but that's okay. Just a couple easy quick questions. One relates to the enhanced services. How do you see the trend moving here? And can you keep up with the trend, or is it just going to move slowly?

Sure. The operator got your name wrong. I'd like to get it right. Can you repeat that, please?

Ed Fowler. F-O-W-L-E-R.

Okay, thank you. Can we keep up with the trend? I think that we can. I'm very pleased with the progress that we've made in terms of -- from a technical implementation perspective, being able to work with the iBooks author package, the Inkling package, to work with EPUB 3 enhancements. I'm pleased that we've gone from kind of strict implementation to the creative side of implementation. Progressively, I see that strengthening. And I think we will be in a position to maintain that edge. We've managed to please various customer constituencies in terms of our progress there. The risk to that business is it's kind of cutting edge, right? There's a lot of publisher adoption that needs to take place in order for that to scale. Our job is to make sure that we're ready for that and recapture our market share, that opportunity. At the same time, we want to become a company that has good quarter-to-quarter sequential characteristics, and that's where the IADS strategy comes in and why it's so important.

And just one other easy question. With regard to your accounts receivable, it was $19 million last quarter, at $17.499 million as of the end of the quarter. Why doesn't this come down quicker?

O'neil, do you want to take that or...

The typical cycle time between the services we provide and collection is somewhere in the order of 60, 65 days. So depending on how the revenues were in the quarter, if it were -- towards the end of the quarter, you will see we are fluctuating. Having said that, this particular quarter, we had a procedural delay from one of our key clients, and I think that will be sorted out next quarter. And you can -- these things are normal when our business is organized around several large customers.

Does that kind of answer or..

No, not really. They're holding back on payments to you?

It is just a procedural issue. You got to understand the cycle time that these companies take after the invoices get approved and they go to the accounts payable and they get paid out. There's absolutely no risk of credit risk here. It's just a procedural issue in getting the disbursements.

Just to add to that, would you expect that, closer to the end of the year, that you'd receive bigger payments on this?

Yes, we should expect whatever delay that we experienced this quarter to get regularized in Q4.

And we have no further questions in queue at this time. I would like to turn the call back over to Mr. Jack Abuhoff. Please go ahead.

Thank you, operator. To, I guess, recap a bit, quarterly revenue was up slightly year-over-year but down from last quarter. The sequential decline is coming about primarily as we did predict from a major e-book platform customer dialing down its budget for books destined for the domestic market. We made some significant progress in foreign-language e-books and enhanced interactive e-books. We're coordinating these efforts very closely with our major customers. Our general Content Services segment, net of its largest client, showed some modest growth in the quarter. I think it was 5%, to be exact. There's strong, there's growing enthusiasm among customer prospects for our Synodex, health care and insurance services business. We're working to make Synodex an important and sustainable growth driver going forward. And I appreciate the time you've all spent with us today and look forward to your continuing interest and support. Thank you.

And this does conclude today's teleconference. You may now disconnect, and have a wonderful day.