Good day and welcome to the Innodata Second Quarter 2015 Earnings 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, ma'am.

Thank you, Chanelle. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and ONeil Nalavadi, our CFO. We'll hear from O'Neil first, who will provide a detailed review of our results for the second quarter, and then Jack will follow with additional perspective about the business. We'll 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 contracts may be terminated by clients; projective or committed volumes of work may not materialize; our Innodata Advanced Data Solutions segment, IADS, is a venture with minimal revenues that has incurred losses since inception and has recorded impairment charges for all of its fixed assets, we currently intend to continue to invest in IADS; the primarily at-will nature of our contracts with our Content Services clients and the ability of these clients to reduce, delay or cancel projects; continuing Content Services segment revenue concentration in a limited number of clients; inability to replace projects that are completed, canceled or reduced; depressed market conditions; changes in external market factors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for our services; difficulty in integrating and deriving synergies from acquisitions, joint venture and strategic investments; potential undiscovered liabilities of companies that we may 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. We undertake no obligation to update forward-looking information, and actual results could differ materially. Thank you. I will now turn the call over to O'Neil.

Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial results for the second quarter 2015, which I will review on a sequential quarter over quarter basis. Total revenue in the second quarter was $14.1 million compared to $13.8 million in the previous quarter. The $300,000 increase was driven by growth in all three segments, partially offset by $130,000 in lower runoff, deferred and one-time revenues attributable to the Bulldog acquisition. There was no significant change in revenues from the top three clients which was in the 42% to 43% range for both quarters. On a segment basis, Content Services reported $12.4 million revenues this quarter compared to $12.2 million in the previous quarter. This increase was driven by growth in volumes across several engagements, but it still does not include any substantial ramp-up in the large European projects we won last year. IADS revenues increased to $550,000 this quarter compared to $400,000 in Q1 which was primarily driven by a ramp-up in volume under existing Synodex contracts. Our Media Intelligence business reported $1.15 million in revenues this quarter compared to $1.2 million in Q1. Revenue growth from new bookings and new customer additions were primarily offset by $130,000 in lower runoff revenues that I referred to earlier. These runoff revenues will completely wind down in the third quarter after which all Bulldog revenues will be attributable to new bookings under our ownership. Excluding these runoff revenues, the sequential quarter over quarter growth in revenues was 6.5% after absorbing a 3% devaluation of the Canadian dollar. New customers were acquired across all product categories, namely MediaMiser's flagship media monitoring and analysis product as well as Bulldog's Media Pro database and Inside Health Media. MediaMiser added four new customers this quarter. After netting of contract…

Thank you, ONeil. Good morning, everyone. Thank you for joining us today. ONeil has just provided a detailed financial review of the quarter and our revenue outlook for Q3. I will now provide the quarter's highlights for each of our reporting segments and along the way I'll provide some context on where we are now and what we're working on. I'll begin with the Synodex division of IADS. In Synodex, as you may recall, we launched our 3.0 product late in 2014 after lots of iteration and client feedback. Now with a strong product in hand, our focus in 2015 has been on capturing sufficient new bookings to enable us to sustain the investment we are carrying in our processing operation on operationalizing the deals we book and on positioning the business to continue to grow and turn a meaningful profit. So far, we've got about $4.9 million of annual contract value booked to date. By annual contract value, we mean the revenue we anticipate recognizing from an engagement within a 12 month period. The total contract value would be this amount multiplied by the initial term of a contract. Of this $4.9 million booked annual contract value, $1.9 million has been fully operationalized so far. Now when I use the term 'fully operationalized', what I mean is that we have completed all the work that needs to take place before we begin producing work and earning revenue on the deal. This work typically includes finalizing data and reporting specifications, syncing our systems to our clients' systems and resolving any client-side dependencies such as software or hardware configurations. In Q3, another $1.3 million of this $4.9 million annual contract value is scheduled to operationalize and then in Q4 the remaining $1.7 million is expected to operationalize. In terms of this…

[Operator Instructions] We'll take our first question from Tim Clarkson with Van Clemens & Co.

Good to see some improvement here on both the top line and the bottom line. Jack, if you could just explain as simply as you can, again what the value-added on the IADS on the life insurance product and the derivative products, what are the benefits that you're trying to create, make sure clients want to do business with IADS?

The benefits are significant. First, there is a huge benefit in the time that it takes for an underwriter to underwrite files. The throughput that we're seeing in the programs that we've started is as much as 275% throughput. So it's almost three times more efficient for an underwriter team to use our product than for it not to use our product. The second great benefit is that they can work faster, the cycle time is better, meaning they can turn around a life application for their producers much more quickly, and a lot of times in life insurance business with compared lives, it's the first company to quote that gets business. The most interesting though benefit is in big data. Insurance companies go wild for data and up until now the only piece of digital data that they didn't maintain and didn't have access to for automating and for actuarial purposes was the data about medical conditions coming out of the medical files they were reviewing. So the fact that this is now digital opens up all sorts of opportunities for them to do better actuarial analysis or for them to even create new products, which they are doing. So those are some of the reasons why it's getting the attention that it is in the market right now.

Sure. How about on the derivative side, what are the benefits that that product provides?

It's very similar. It's also a transformation product. It's transforming in a old way of doing things to a new way and the old way there was maintaining legal contracts and things like derivatives contracts as either images in the system or sometimes even as paper. Now what we're doing is we're transforming that to digital data and what that enables companies to do is to track their portfolios much more closely, track their counterparty exposure, or gain proactively their exposure, and perhaps most importantly, it enables them to meet the regulatory requirements that are being imposed upon them and that are due to be imposed upon them in the latter half of this year. So a lot of the interest we're seeing is right there that they can with our product provide regulators the transparency that they are required to very efficiently.

What are the size of some of the contracts you're trying to get?

In which division?

In the derivative side.

You know they differ. We've just started aggressively marketing that and we're talking to several companies. I think that with Analytics and CREO now in hand, it's a very compelling solution, and the size of the contracts is going to either depend upon how much they want to undertake, what the size of their portfolios is. We've talked to some banks that have huge portfolios of agreements and I'm hoping that they see this as a compelling solution to moving, modernizing the way they manage those portfolios.

One last question just on e-books, is there anything new going on there?

There is. We just started producing e-books at scale in Chinese, which is interesting. That's a new capability for us and one that's going well so far. And there is continuing need in that business. I think it's a business that we continue to serve and we'll continue to serve. We're doing some new things within it too in terms of new content types, but it's a project based business and that's why we feel compelled that we can create the kind of shareholder value that we want to create by driving more the recurring revenue opportunities, like we are with Synodex, like we are with MediaMiser and would potentially be doing with things like Xenon that we've talked about.

Okay, great, thanks. I'm done. Thanks.

[Operator Instructions] We'll take our next question from [Chris] [ph] [indiscernible] with [Sambute Technology Group] [ph].

I had a couple of quick ones. One of them is, you talked about operational readiness in terms of some of the large contract revenue ramps. Once those contracts are as you put it operational and ready, does the revenue ramp begin abruptly or is it something that kind of slowly scales up over time?

Great question, Chris. That's absolutely right that after we operationalize, that's the beginning then of the ramp-up. So we're in production, we're starting to produce files and we're ramping up to the full volume requirements. The speed with which we do that will be a function of the staff that we're able to allocate to the project, first, and secondly, the speed that the customer is comfortable going at. So it will differ customer by customer and it will differ based on how much we have going on at the time and available resources coming out of training programs.

Okay. I mean what's your sort of guesstimate as to on average once that they become fully operational to when it hits sort of contracted value on a recurring basis, is it two months, four months, six months, just kind of trying to get a handle on it?

I think that we probably would be aiming for something like four to five months. Larger programs could take more time than that and smaller ones have been less than that.

Okay. I want to ask one more. Out of curiosity, you talked about foreign exchange impact in one contract specifically which will be reduced because of the weakness in the euro. And I guess my – I'm curious as to why it's such a small company. Your clients are forcing you to [indiscernible] or you're ending up with a foreign exchange risk of these rather large contracts given that to my knowledge your clients are fairly big financially sophisticated companies, that is why not the contracts basically rated in your base currency and basically offloading that FX issue to them?

I think maybe I need to put you on the phone with our clients and you can help us negotiate. Seriously though, I think the answer to that is that the customer that we're referring to is looking to and typically does pay its bills in the currency in which it receives its revenues. So it's a European publisher, they bill people in euros, they're paying their current production capabilities internally in euros, and when they externalize that, when they bring that to us, they are not looking to introduce a new foreign currency exchange rate risk to that equation. They're looking for the benefits that outsourcing provides. That said, in our negotiations we don't always take 100% of the currency risk and even when we do we have hedging programs in place. I think the unusual thing about this is that there's been a significant gap in time between the time we entered into the LOIs and the time we started production, in addition to which there was kind of an unprecedented devaluation of the euro. So I hope that answers the question.

Yes, I understand. And because this was a negotiation, it wasn't like you could go up and hedge that because you didn't really have a booking yet.

Exactly, that's right.

Okay. And I mean when you do have bookings, I mean you apply whatever efforts you can to try to hedge those things based on your anticipated revenue stream?

We do, and when you're talking about a five-year contract, you're not buying five-year hedges.

Right, I understand.

So it does continue to be exposure there. Sometimes what you do is you put a collar in place which says, if the currency moves outside a certain range then you can come back to the table and have discussions about it, but a lot of what we do is we're moving work from one part of the globe to another and we're paying our costs in one currency and we're earning revenue in another, and that's just something we need to be comfortable managing.

Okay. Very good. Thanks for taking my questions.

We'll take our next question from Ed Fowler with JHS Capital Advisors.

ONeil, could you explain why the current, I think it's $1.5 million in long-term debt, where did that come from and when is the payment due?

$1.6 million is the deferred payment obligations for MediaMiser acquisition. So that's what it relates to.

When do you have to make that payment?

There was a payment due in July which was completed and then is in 2017.

Okay. So your cash level is not as high as it was stated on June 30?

We have a choice to pay the deferred consideration either using our cash or using our shares.

And have you done that?

I guess we have done that. For the July payment, the consideration was done through issuance of shares.

So your shares outstanding are greater now?

The shares outstanding would be greater by approximately 170,000 shares, yes, that's right.

Okay. And, Jack, why is the deal with the German publisher taking so long? I think it was mentioned that they didn't download the information to you quickly or not for whatever. When do you start seeing that to really work for you and why is it taking so long?

There were two divisions there that we've talked about. The first division has ramped up faster than the other one. The other one is taking a little bit more time, but as I said, we're seeing that coming up and will continue to come up. It's still late for – it's probably about three months or so behind the schedule that we had hoped it would be on, but we always said, and so has been in our working assumptions, that it would be a slow ramp-up into 2017. That said, we will be running the operation once that's completed and that's exactly the kind of recurring revenue base that we're looking to build out in the Company.

Okay, thank you. Jack, regarding the IADS, is there any of the payments you received, I think you said it was $550,000 so far, is that for work completed or is that upfront payments from these insurance companies?

The revenue is for work that is completed.

Okay, good. Thank you, Jack.

[Operator Instructions] We'll take our next question from Madhu Kodali with Yaksha Capital.

I have a few questions. The first question is related to the breakeven. I believe I heard it is $16 million per quarter. Is that cash breakeven to suppose right?

No, that is breakeven at the pre-tax level, though before amortization expenses of the goodwill and the intangibles. So we have approximately about $600,000 of amortization relating to the acquisition of MediaMiser and Bulldog.

So that naturally would be non-cash expenses?

No. In addition to that, we have approximately about $4 million of normal depreciation to other amortization expenses like options and other things. So the only differentiation is, it will cover the $4 million of depreciation and option amortization but not the expense pertaining to the acquisitions.

Okay. So given the current contracts you have in pipeline, when do you see you reaching cash flow breakeven, assuming I mean no new contracts are going to kick-start anytime in the next quarter or two?

Madhu, there's two ways to look at cash breakeven. Our current adjusted EBITDA loss for the current quarter was approximately $200,000. So another $1 million of revenue would comfortably get us above the adjusted EBITDA. The second criteria that we look at is the free cash flows, and our normalized CapEx is somewhere in the region of about $2 million to $2.5 million per year. So that's the next important criteria for us. So right now, the adjusted EBITDA breakeven point is another annual revenues of about $1 million.

All right. So coming to the CapEx, is there any additional large CapEx requirement that you have to incur for those two large contracts, one, the German publisher, and the other $4.8 million, $4.9 million contract at this time or have you already invested into those requirements?

The normal Content projects, the normal CapEx that we have would take care of those contracts. There's nothing significant other than replacement CapEx that comes in the normal course for desktop and software applications. That said, we may have some CapEx associated with Synodex over the next six months depending on how the ramp-up takes place.

That would require you to add more people for the ramp-up?

When we talk about CapEx, it is not the [indiscernible] the people. That will go to the operating expense.

I understand, right. But would you have to hire new people to support these contracts or you have enough capacity at this point?

We have some spare capacity of people who are – and that's the reason why we have the loss at the gross margin level because we're maintaining capacity in anticipation of the future work, and it will not take care of all the prospects that we have in the pipeline. The plan is to bring people onboard as we get closer to execution of contracts and operationalizing and getting contracts into live production.

Okay, thank you. One last question on that $4.8 million, $4.9 million contract that Jack talked about, he mentioned 'operationalized' as a keyword for three different stages of execution. For example, $1.9 million operationalized, totally operationalized for the last quarter. Is that already booked as revenue and what about the cash payment from the customer on those, how does that work?

Jack, do you want to take that?

Sure. No, it's not paid upfront. We are paid on deliveries. So we build the files that we deliver and as we invoice those we recognize revenue.

So the question then is, have the $1.9 million operationalized revenue build already or is it yet to be build into Q3?

It's yet to be built. But the way to think about the $1.9 million is, that's a portion of the $4.9 million that we've booked. So what I want to do is give you a sense of where are we with those bookings, how are they going to turn into revenue. So the first step to turning them into revenue is operationalizing them. So you start your ramp-up, you start providing the service to your client, the client starts paying you that portion. So that's what a little bit less than half. In the quarter, we've started our ramp-up of it. The $1.9 million is a booking number, it's not revenue and it's not an invoice number.

But, Jack, you have already incurred the cost related to that $1.9 million, correct?

No. I think the way to think about it, again the $4.9 million and – the $1.9 million is a portion of the $4.9 million, so the way to think about that is backlog. It's the value of contracts that you've won up until now. So the contracts are in the bank but you haven't started producing the work, you haven't started invoicing them yet. When they are operational, then you begin sending invoices out and you begin recognizing revenue under that backlog.

Okay. So the breakdown you gave, the $1.9 million, $1.3 million and $1.7 million over the period of last quarter and the next two quarters, can we think that they are lagged by a quarter in terms of booking and collection?

So again those are annualized numbers. So that's the question of an annual contract value, those are annualized numbers, and the way to think about that is, roughly a four to five month ramp-up.

Wonderful. Thanks Jack.

We'll take a follow-up question from Ed Fowler with JHS Capital Advisors.

At the Annual Meeting, you mentioned you were going to meet with the CEO of John Hancock. That would be some Annual Meeting was on June 6 I think and you said a couple of weeks. Has that happened and any color to add on that meeting?

Yes, we had the meeting with the John Hancock people. I think it actually turned out to be a Senior Vice President, not the CEO, but the meeting went very well. Hancock partnership is something we're very excited about. As I said, there is a lot of industry buzz that's helped create and we see opportunities to continue to grow that relationship. So it's all good.

And you have a contract with them now?

We do. In fact it's a contract under which they are going to be utilizing our technology. And I mentioned in our last call, we build our technology primarily with a view that we would be using it to provide a service. Hancock came, they spent a lot of time in the lab environment at our New Jersey office test-driving the system and they decided they want to license it to use internally. So we're building a customized version for them that should go live in the next couple of months and it's a great relationship for us. They actually announced – they did a press release about their relationship with Synodex just last April. If you look at their Web-site, you can come up with that press release.

Synodex appears to be very positive as you move forward, so that's good. One other thing, you mentioned a new Content client and I think you said it was a venture capital firm?

No, it's a venture-funded firm, so it's an early stage firm but it's an information provider. They are building new kind of cutting-edge next-generation products in professional information.

So it has nothing to do with e-books?

Has nothing to do with e-books, no.

Okay. So that should move fairly quickly, should it?

We know exactly how it should roll out. It has a delivery schedule associated with it and a performance period that should be 18 months. So we're saying 18 to 24 months should be the period of time over which we recognize the $4.8 million of revenue.

Okay. Thanks Jack.

[Operator Instructions] It appears there are no further questions. At this time, I would like to turn the conference over to Mr. Abuhoff for any additional or closing remarks.

Thank you, operator. I guess I'll just do a real quick recap. In Synodex, as I said, we've got about $4.9 million of annual contract value booked to date. By the end of the year we should have that all operationalized, meaning ramping up. We're working to achieve our near term bookings goals which focus very much in getting the business to run rate breakeven, and from there positioning the business for growth and earnings. Toward that end, we're laser focused on our priority pipeline that has a value of $21 million or so of potentially addressable annual contract value and include some of the largest players in life market. And then on the Content side, as we said, just yesterday we closed a $4.8 million contract with a new client. It's a great win for us, a real exciting new company and we're thrilled to be working with them. In our Media Intelligence group, the team is abuzz with how well the new content marketing and lead gen programs are working. So you put that together with the scale that we've now achieved by building new offshore teams to work together with the Ottawa teams, and then put that together with the 60% contribution margin on incremental growth, and it could make for quite a ride, quite a ride up. So we're ending at 50% growth this year and we've got the ambition to ramp that growth rate even higher going forward. So I guess that's my quick recap. Thank you everyone for joining us on today's call and for your continued support and interest, and look forward to talking to you next time.