Innodata Inc.
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good morning, and welcome to the Innodata Second Quarter 2013 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.

[Amy R. Agress:]

Thanks, Tasha. 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. As a departure from our usual practice, today we'll hear from O'Neil first, who will provide a detailed review of our second quarter results, and then Jack will follow with additional perspectives 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 could be terminated by customers; projected or committed volumes of work may not materialize; that our Innodata Advanced Data Solutions segment has not reported any substantial revenues to date and is subject to the risks and uncertainties of early-stage companies; the primarily at-will nature of our contracts with our 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 deriving 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. 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.

[O'Neil Nalavadi:]

Thank you, Amy. Good morning, everyone. Thank you once again for joining us today to review our financial results for the second quarter 2013. As Amy just said, I will begin with a detailed review of our second quarter results, comparing performance to the first quarter of 2013 on a sequential basis, and I will share my insights along the way. After that, Jack will provide additional perspectives about the business in terms of where we are strategically and how we are managing the business. Our total revenues in the second quarter of 2013 were $16.2 million compared to $16.9 million in the first quarter. A decrease of $750,000 was attributable primarily to a $500,000 decrease in revenues from our Advanced Data Solutions segment, which decrease we had anticipated and included in our Q1 guidance. You will recall that we had discussed in our previous earning call, we had $500,000 of revenue in Q1 for special onetime projects in IADS, which are unrelated to Synodex's core service offering for the insurance industry. We expect the revenues from core service offering to be durable and recurring. On a segment basis, total revenues in Content Services were $16 million this quarter compared to $16.2 million in Q1 2013, and total revenues in our Advanced Data Solutions business was $150,000 in this quarter and $650,000 last quarter, reflecting the successful delivery of onetime projects I just discussed. Revenues from our top 3 clients amounted to 43% of total revenues in the second quarter compared to 42% in Q1. Looking ahead, our revenue guidance for Q3 is between $14 million and $16 million. Let me now review the gross margins. On a consolidated basis, gross margins were $2.7 million, or 17% of revenues in Q2, compared to $4.1 million or 24% of revenues in Q1, a decline of $1.4 million. This decline in gross margin was primarily as a result of an increase in gestational losses of $1.2 million in IADS. There are 2 components to this $1.2 million increase in gestational losses. The first is the $500,000 increase -- sorry, decrease in revenues as a result of completing the onetime Q1 special projects. The second is $700,000 increase in expense as a result of commencement of depreciation and maintenance expenses relating to the completion of our workflow to the full [ph] platform, which is now ready to be deployed for production. This increase in expenses of $700,000 is cash flow neutral at the company level on a sequential basis. Gross margin in our Content Services business was essentially flat, $4.2 million or 26% of revenues in the second quarter compared to $4.4 million or 27% of revenues in Q1 2013. Our selling, general and administrative expenses were approximately $4.35 million in Q2 compared to $4.6 million in the previous quarter, a decline of $250,000. Other expenses were lower as a result of cost-reduction initiatives that we have undertaken. On an annualized basis, we have reduced our SG&A in Content Services by $4 million from the second half of FY 2012. Jack will talk more about this in a few minutes. As a result of cost reductions, SG&A expenses as a percentage of revenues was 27% in both the sequential quarters, notwithstanding the lower revenue. Moving down to pretax earnings. Our pretax loss in Q2 was $1.5 million compared to $400,000 in Q1. This $1.1 million increase in pretax loss was primarily due to $1.4 million decrease in gross margins, offset by $300,000 of SG&A savings. This pretax result for Q2 is after absorbing costs of $2.1 million net of revenues for building the Advanced Data Solutions business. If we were to exclude these costs, pretax earnings would be $600,000 or 4% of revenues in our Content Services business. In the current quarter, we had a net tax benefit of about $1 million compared to a net tax benefit of $500,000 at Q1 2013. The tax benefit is primarily the result of a tax loss incurred in our U.S. entity, which resulted in a corresponding deferred tax asset, as these losses are available for offset against future taxable profits of the company in the U.S. In addition, there was about $200,000 of tax benefit on account of currency gains with respect to accrued tax liabilities of Asian subsidiaries. On a longer-term basis, we estimate no change in our effective tax rate, which will be in the range of 20% to 25% of pretax earnings on the assumption that our pretax profits are 10% of revenues. Net loss in Q2 2013 after minority interest was $120,000, compared to net earnings of $300,000 or $0.01 per diluted share in the first quarter of 2013. Turning now to our cash flow statement. We consumed $2.1 million in cash this quarter compared to $3.8 million of cash we generated in Q1 2013. The cash utilization is primarily attributable to the gestational losses in IADS business, as well as capital expenses. We incurred capital expenditures of approximately $1.4 million in the second quarter of 2013 compared to $1.6 million in the first quarter. The capital expenditures in Q2 2013 primarily include $500,000 for assets that will be utilized by our IADS business and $900,000 for CapEx in our Content Services business. We expect our CapEx to be in the range of $1 million to $1.5 million in the third quarter, of which approximately $500,000 will be for IADS. Our balance sheet remains healthy, with cash, cash equivalents and investments in term deposits with banks at $27 million at the end of Q2 compared to $31 million at the end of Q1 2013. In addition, our liquidity sources include a $15 million line of credit, which has so far remained unutilized. Looking at working capital, our account receivable increased to approximately $10.9 million at the end of the second quarter from $10.2 million at the end of the first quarter. Our DSO or days sales outstanding was averaging at 60 days during the first half of 2013. Let me now review our inventory of foreign exchange hedging contracts. As of the end of the first quarter, we had outstanding foreign currency forward contracts of $32 million to hedge the foreign currency exposure for our operating expenses in Asia. During the quarter, we saw a sudden spike in the value of the U.S. dollar versus Asian currencies, with the dollar appreciating 10% against the Indian rupee and 5% against the Philippine peso. As a result of the spike, we have notional unrealized losses of $1.8 million on these forward contracts as of June 30, 2013. These forward contracts will be maturing over next 12 months, and we anticipate that any realized losses on hedging contracts will be compensated by higher margins resulting from cash conversion. I will now conclude with a brief summary of the Advanced Data Solutions business. Net investment includes the gestational losses during the second quarter 2013 was $2.5 million, of which $2 million was with the income statement and $500,000 representing capital expenditures. In the second quarter 2013, we earned revenues of $150,000 in our IADS business. Our current rate of investment in IADS is approximately $2 million to $2.3 million per quarter, of which approximately 75% is to our income statement and the balance 25% in CapEx. I will now turn the call over to Jack, who will provide additional insight into the business and our progress on strategic fronts. After that, we will take your questions.

[Jack S. Abuhoff:]

Thank you, O'Neil. Good morning, everyone. Thank you for joining us. To quickly recap what O'Neil just covered, revenue in our Content Services business remained steady at approximately Q1 revenue levels, but which we know is down considerably from a year ago as a result of lower demand from one of our largest customers. A year ago, the segment produced $4.5 million of EBITDA, but on this lower revenue level only produced $600,000 or so of EBITDA. On the IADS side, O'Neil mentioned that our business gestation costs, and these are costs net of revenues that we're incurring to build our business, increased to $2 million in Q2. As O'Neil pointed out, there were 2 contributors to this increase. The first was that we completed in Q1 $500,000 of special onetime projects, and the second is that we completed development of our Synodex workflow platform, which meant that we now begin depreciating previously capitalized costs and that certain ongoing IT costs have now become current expenses instead of capitalizable expenses. Taking stock of where we are today and what we're doing, there are several important questions that investors are asking us. Related to the core business, where we've seen a decline in revenue from a key customer and otherwise flat revenue, the first key question investors are asking us is, "What are the drivers of revenue from your key customer and can this revenue increase?" The second key question investors are asking us is, "What can you do to grow revenue apart from the key customer?" Related to the IADS investment, there are 4 key questions we hear most often from investors. First, "When do we start to see revenue coming in?" Second, "How large is the addressable market for what you're developing?" Third, "Why do you feel you need to make this kind of investment and is it right for a public company?" And lastly, "What makes you think that you're on the right track?" All of these are the right questions and the important questions, and they go right to the heart of the very issues that my management team and I, as well as our board, are focused on. Therefore, we'd like to take this opportunity to share our thinking as it relates to each of these questions and issues. We'll take them in order. First, on the Content Services side, the question is, "What are the drivers of revenue from our key customer and can this revenue increase?" Here are our thoughts on that. We have been working with this large customer for the past 2 years now. Our revenue derives from e-books that we manufacture on their behalf. Once their U.S. e-book store was launched, and they turned their attention to international e-book stores, their volume requirements reduced. Moreover, in the international context, securing digital publishing rights becomes more complicated, which ends up taking more time and slowing down the process. Here, the best we can do is to execute well, which we have been doing, and do our utmost to ensure that we stay relevant and engaged in their new strategies, which we've also been doing. For example, in order to accommodate their international expansion, we developed the capability to produce e-books in a host of foreign languages. We successfully helped the client launch its Japanese store in the first quarter, and we're actively working with them in other initiatives, including, most recently, content acquisition. We think the trend now of major digital retailers launching localized e-book distribution stores will continue to gain momentum, and we believe that we can benefit by being well positioned to help create local language inventories. We do, however, need to expect that revenue in the sector will likely ebb and flow as new publishers are identified and come into such programs and new online stores are planned. I'll now turn to the second key question relating to the Content Services segment. The second key question is, "What are we going to do to grow the $14 million to $15 million of non-key customer revenue in Content Services?" To answer that question, we first need to level set. The fact that revenues have been flat could leave the impression that nobody is selling anything. This, however, is not at all the case. While $10 million of this $14 million to $15 million of quarterly revenues is recurring business, the remaining $4 million to $5 million is onetime projects. This means that to simply hold the $14 million to $15 million line, we need to be selling $4 million to $5 million of new projects per quarter. If we were to assume an average project value of $100,000 or so, this means 15 new projects per quarter, identified, sold and won. The challenge, of course, is how do we increase the amount of business won each quarter in order to see growth of the type that we aspire to. There are a couple of important things we're doing to accomplish this. First, we're expanding additional capabilities to new markets and new customers. For example, in the first quarter, we launched our e-book service offerings direct to publishers in Japan. Working closely with our key client, we took over from our key client operational and customer support responsibilities for these relationships and began discussions with them about how we could directly support their requirements. To date, this has resulted in 7 new customers deciding to work directly with us, although the contribution to top line so far is at the moment modest. Secondly, we're focused on strongly -- excuse me, we're strongly focused on bringing new innovative capabilities to existing clients. While we've done a good job establishing ourselves over the years as a service provider capable of solid execution at a good price, we have not earned the reputation as a true innovator. Our technology innovation has been more behind the scenes and incremental in nature, figuring out how to do things for less money either in response to a customer need or response to increased market competition. What we've been working on more recently is proactive, customer-facing, blow-your-socks-off strategic innovation that helps our customers meet the challenges and opportunities of digital adoption through technology. Here we've been making some good progress that we think we can build on to drive growth. For example, for one of our large clients, we are using a combination of marketing initiatives focused on technology innovation, including 3 technology symposia for their senior executives, and specific technology development to achieve a reputation as a technology innovator. As a direct result of these efforts, the trust and credibility we have with this client is at a recent high. Client executive managers, product developers, production teams, supplier management and procurement are all seeing us in a new light. Our efforts have helped transform the relationship to a much more open one, with the client sharing information with us about their key initiatives and technology strategy, and engaging us early in projects to help create and influence the vision. In the second quarter, we had our third technology symposium with this client. Like the prior 2 symposia, it was well attended by senior executives. We explored new technologies, new ways of working together and new possible synergies, and we came away with several million dollars of new prospective requirements, as well as additional referrals. I believe that leveraging our relationships to expand markets and accelerating innovation will be the keys to organic growth in our core Content Services business. In addition to organic growth, we are looking at inorganic growth opportunities where we can produce operating synergies based on our capabilities. I'll now turn to the key issues and questions pertaining to the IADS side of the business. The first question investors ask about Synodex is, of course, "When will revenue start coming in?" It's a good question. At a foundational level, based on feedback, it appears that what we have developed is a product that is intriguing an industry which is highly receptive to new products and innovation, focused on electronic-data initiatives and efficiencies. The core selling proposition of Synodex, digital XML data, which enables insurance companies to increase underwriting throughput, shorten response time required to process applications and improve underwriting accuracy, is being met with interest. At the same time, however, the insurance industry makes decisions conservatively and with great deliberation. As a result, forecasting adoption rates and revenue has proven to be exceedingly difficult and, yes, frustrating. The source of our resolve, however, is the reception we're getting and the opportunity we see here, which leads me to the second important question. The second important question is, "How large is the addressable market for what you're developing at Synodex?" We are approximating the market for medical-records processing and data extraction to be over $1 billion. We get there by broadly estimating the potential revenue opportunity in 6 major market segments using a combination of industry data, customer data, competitive data and, frankly, a lot of guesswork. I'll take you through this in broad strokes. There are broadly 6 major segments in this market

[Operator:]

[Operator Instructions] We'll take our first question from Vincent Colicchio from Noble Financial.

[Vincent A. Colicchio:]

Jack, on the e-books side, how many platform providers are you working with today? And do you have any sense if you are losing share with your largest client?

[Jack S. Abuhoff:]

We're distributing content to somewhere around 26 different platforms. In terms of doing work directly for platforms, I think we're working with 4 presently. With our largest client, I do not believe we're losing any market share at all.

[Vincent A. Colicchio:]

And then how many Synodex pilots have been completed to date? I think there was 12 as of last call.

[Jack S. Abuhoff:]

I don't have the to-date number. What I can share with you is what we did in the quarter.

[Vincent A. Colicchio:]

Sure.

[Jack S. Abuhoff:]

So -- and we're thinking about it in terms of the direct business and then the Synodex.Connect business. We did 6 pilots in Q2 and another 3 in Q3 to date. It was first several days of July, so that was a little bit of a spillover, so that's, I guess, 9 new ones that were done. And then on the Connect side, a few things, we have a pilot that started up in the end of Q2 and is ongoing. We signed a major BGA agency up for that as a client. And then we signed 13 carriers on as pilot clients and we've gotten another 3 verbals of people who want to join that pilot. So 6 in Q2, 3 spilled over on the Connect side and then 13 plus another 3 verbals plus a major BGA on the Connect side.

[Vincent A. Colicchio:]

And of all the pilots that you've completed so far, have any of these guys, if you will, dropped out or are they still potential clients?

[Jack S. Abuhoff:]

There was one that dropped out. Well, actually, there was one that dropped out recently or they're choosing to wait. There was another that dropped out very, very early on in the process, one of the first that we did last year.

[Vincent A. Colicchio:]

And you just gave an example of a large broker that you're moving forward with and the reinsurance prospect. Any sense for the size potential of one of those -- of any of those 2 deals, if they were to convert?

[Jack S. Abuhoff:]

It's -- we're making guesstimates there, so I'm a little bit reluctant to put a number on it. My guess, my suspicion is that what we're going to see is deals that will start off in a fairly modest stage and then grow with success. So each of the people that we're dealing with, especially the large businesses have a big wallet and larger requirements, but I'm not anticipating that they're going to turn over those full requirements to us, nor would we be able to absorb them in one fell swoop. I think we'll take on a division or we'll take on a product line and then we'll expand from there with success.

[Operator:]

We'll move next to Tim Clarkson with Van Clemens.

[Timothy Clarkson:]

Just on the expense end. What you've said is that you've reduced expenditures by $6 million over the last 12 months, and then you'll reduce more if it seems like you need to do that to keep your cash flows going?

[Jack S. Abuhoff:]

That's right, Tim. And $2 million of that reduction was -- took place in the second quarter.

[Timothy Clarkson:]

Okay. And in terms of potential acquisitions, are you any closer to doing something like that or is that still way down the line?

[Jack S. Abuhoff:]

We're actively looking at several things. We've expressed indications of interest on several things where we've got actively -- management meetings set up and things like that. Very tough to anticipate what comes from those efforts, and we're going to be very deliberate in the process and, of course, look for good value and where we can drive the benefits of synergies and bring them home for our shareholders.

[Timothy Clarkson:]

Okay. And in terms of the digital book area, are you more excited about the interactive features that are coming or more excited about doing more foreign books? Which do you think will be a more meaningful contributor?

[Jack S. Abuhoff:]

I think in the near term, the more meaningful contributor is going to be foreign books. There are a lot of places where, especially Asian countries, if you think about Japan and you think about China and India and other places, where tablets are becoming much more ubiquitous, where access to libraries has not been the same as what we enjoy here or even bookstores. So there's a real interest and a real opportunity, I think, in foreign. Digital interactive is fascinating. Clearly, I think anybody would agree that 10, 15 years from now, the reading experience of a book will be fundamentally different and that we'll see blogs and apps and books and different things converge into a new experience. And that is exciting, but I think we need to temper our excitement with the realization that adoption will take time. What I'm happy with is that we're on the forefront of that. We're doing those kinds of books and we're working with the largest, most important people who are going to drive that adoption. That, of course, includes Apple, but it also includes Inkling. It also includes work that we're doing in HTML5. So I'm excited about both. I think the near-term opportunity is foreign language.

[Operator:]

We'll take our next question from Brad -- we'll actually go to Jay Harris with Goldsmith & Harris.

[Jay Richard Harris:]

Jack, this is a very good dissertation from you. It causes me to be interested in the second derivative of your revenue curve, and that is the change in the rate of expectations. If you divide the business into e-books and other traditional services and Synodex, are you in a position to create for investors, at any point in time, a profile of your revenue expectations going out -- I don't know, 24 months, and then updating that on a quarterly basis?

[Jack S. Abuhoff:]

It's interesting, Jay. We, of course, create forecasts and pro formas and business plans that we use internally that we do not share externally. We're, for the purposes of external communication, we try to be a lot more guarded and a lot more careful, and meet expectations and manage expectations. And I'm glad we did that because, frankly, we have had some internal forecasts where we thought we would be way out ahead of where we are right now on Synodex based upon the interest we see and the demand that we see and the innovation that I think we've managed to accomplish. So we've got very big notions of where that is. We don't think we're losing market interest; on the contrary, we think we're gaining it. But we know that we're not good at forecasting adoption right now. We're not good at [indiscernible].

[Jay Richard Harris:]

That's why I'm interested in the rate of change.

[Jack S. Abuhoff:]

Yes, I know you are, and I am, too. So I think what we're going to do is we're going to go out there and we're going to look to close as much business as we can. We're going to look for ways that we can accelerate it, and I think there may be some ways. And we're going to keep reporting to you like we are today, trying to be real transparent and tell you why we're doing what we're doing, and bring you some good results. As -- when we start closing business and we start to become better at predictably managing the sales process, then we will share with you those kinds of predictions knowing that we'll be able to manage to the expectations we're creating.

[Jay Richard Harris:]

Well, it seems to me that if we were going to go out 24 months, you'd have a high degree of confidence in a record -- generating record revenues and record profits. And what I'm trying to focus on or get you to share with us, let me put it that way, is how far before the 24-month period do you expect things to turn up? And where are the -- and over a period of time, if you were to do that, do we see acceleration or do we see deceleration? I mean, you and I have had conversations about the opportunities, which are very large, and how investors should position themselves with respect to other opportunities and other companies. And there's a, I guess, there's a limit to patience. And you've taken a great step forward in addressing that issue on this call, but I wondered if you couldn't even go further.

[Jack S. Abuhoff:]

Yes, I probably could or try to, Jay. And let me try to a little bit here. First of all, let me be my own worst critic, okay. I thought several quarters ago that by this time, we would be driving revenue. I said as much. Now I turned out not to be right. So I want to be cognizant of that. I want to appreciate that and I want to understand -- are we getting better at predicting that. Well, we've closed our first contract, and that's a great thing. And we're in active, active, flurry of activity with clients where we see them making investments in working with us, figuring out how to adopt our product into their workflows, and that's all good stuff. But I want to be very careful in terms of managing expectations for exactly what does that mean, and when will it come, and all of that because I want to create some believability, and I want to bring people along in terms of the journey that we're on. I don't want to get out ahead of ourselves. That said, I think we're working on something big, and I think we're working on something transformative, otherwise, we wouldn't have been carrying the level of investment in it that we've been carrying. I also think to your point that we will see acceleration. I don't think this is something that we should linearly extrapolate. I think, to say, well, we'll close 1 deal every 2 quarters because that's what we have unless [ph] -- that would be absolutely the wrong way of looking at it. I think this is an industry that -- where people talk to each other. I think we're already getting recognition in the industry, and we're kind of not even out of the gate. And I think that adoption can come quickly. What we need, of course, is to get some clients working. We need to start to have them share the benefits that they're actually accruing based upon our capabilities. I think that will come. And again, I think just the extrapolating the level of activity that we've got today suggests that there's a bright future ahead. We see the light at the end of the tunnel; we don't know how far we are from that light. We have not developed a good way of predicting that yet or a good track record. But again, I think we're getting better, and I think it looks very promising.

[Jay Richard Harris:]

Well, I don't envy your position in managing an enterprise at this stage, let me put it that way. Let's turn to e-books for a moment. Has the stretch out in internationalizing the opportunities brought us to a point where e-book revenues might stabilize and be constant for a much longer period of time than what we were seeing a year ago, a rapid runoff and then a decay?

[Jack S. Abuhoff:]

Yes, I think there will be arguably less at these levels. There's not the decay period that we would have experienced when we were coming off the high of the activity. At the same time, there are new markets, there are new publishers, there's a lot of activity that's taking place, there are even conversations with other platform providers that have taken place. So it's a little bit still the Wild West. It's a technology phenomena that is being heavily invested in, being heavily pushed into new territories, we're part of that. And our job is to stay part of that and to stay relevant.

[Jay Richard Harris:]

What percentage of your revenue base in the June quarter was e-book-related?

[Jack S. Abuhoff:]

O'Neil, do you have that number?

[O'Neil Nalavadi:]

This was -- it was about 19%.

[Jay Richard Harris:]

All right. And what has happened to the other part of that base of business?

[Jack S. Abuhoff:]

In terms of what, Jay?

[Jay Richard Harris:]

In other words, your non-e-book traditional business, what's going on there?

[Jack S. Abuhoff:]

Well, I think what's going on there is, again, there's about a $10 million stable recurring piece to that. Then there's the e-book piece, which is project-based and there's other projects that are taking place. And the other project side, we're seeing things become -- customers are clearly interested in technology innovation. We're seeing opportunities to get more involved in that, more involved in product creation. The challenges, as I said, though, are there is less spent on new product initiatives, which creates revenue opportunity for us. But I think we're doing things that should enable us to see some growth in there as well.

[Jay Richard Harris:]

Do you see any change in the tone of that business in the last half of this year or the first half of 2014?

[Jack S. Abuhoff:]

I think there's a change in the tone of certain of our customers. I think we're doing a good job at changing their impression of us. So we've earned a good reputation among our key customers for execution, for dependability, for quality. I think what we've been working on now and where we're seeing some results is developing a similar reputation for quantum innovation in processes and tools. We're -- it's not just about tools that we use internally, but they become tools that can be used by our customers as well and that the customers can directly benefit from. We're doing a lot more sharing of those things and I'm seeing that it's being received very, very well, so...

[Jay Richard Harris:]

But do you see a change in the aggregate revenues of that business in the third or fourth quarter, or do you think it stays where it has been?

[Jack S. Abuhoff:]

Well, I think it has stayed where it's been, and our ambition is to get it to grow.

[Jay Richard Harris:]

I understand that. That's part of my ambition, too.

[Jack S. Abuhoff:]

I know it is.

[Operator:]

We'll take our last question from Brad Hathaway from Far View Capital.

[Brad Hathaway:]

So just one quick follow-up question. Did I hear right that e-book was 19% of revenue in the quarter?

[O'Neil Nalavadi:]

That's right, Brad, it's 19%.

[Brad Hathaway:]

Okay, great. So then this kind of follows up a little bit. So when we think about the non-e-book business, historically, you say it's kind of around $14 million to $15 million, but if I look at the last 2 quarters of this -- the 2 quarters of this year and some kind of guess based on what you've guided for Q3, it's probably where it will be in Q3, it looks like the non-e-book business is kind of somewhere between 12 to 13. So, I guess, can you -- and I think you kind of hinted at it a couple of times, maybe talk a little more concretely about some of the areas that are showing kind of weakness in this kind of project side on the non-e-book?

[Jack S. Abuhoff:]

I think the area, the primary area of weakness is -- relates to the types of large new product development initiatives, which, over the past several years, have been our revenue drivers. So when we've got one of our large information company clients who's creating an ambitious, large new product, it's an opportunity for us to get involved. We're seeing less spend in terms of that. So -- and we have for a couple of years now. So that's requiring that we pivot a bit, as we have. We pivoted into the e-book business. That enabled us to drive some good revenue there. From that, we pivoted into the IADS investment. We took a bunch of that revenue and we put it on something else that we believe has the ability to be more durable. Now when we look back to the core business, what we do see is other kinds of opportunities. We see opportunities to help our clients use technology more efficiently, to undertake new product development at a much lower price point, leveraging technology in ways they haven't leveraged it before. Things like that. We see opportunities to take over operations or aspects of operations for them that further enable them to lower their operating costs. We're pursuing several of those. So there are opportunities there. That said, I'm mindful of the fact that it's a -- it's an industry controlled by a handful of very large dominant players. What we need to do, therefore, is be very vigilant and very top of our game in terms of the cap management, we need to be adding value all the time and we need to measure our impactfulness all the time. But if we're going to really grow this company, we're going to make this company what I think it can be, we're going to have to spread our wings, we're going to have to develop new products, we're going to have to go into other sectors like we now are.

[Brad Hathaway:]

So you're still comfortable, though, with the idea of kind of that $10 million of recurring revenue per quarter that's pretty solid with -- and then this kind of project-based stuff on top of it that you can then tack on? I mean, there hasn't been any weakening in that kind of core recurring revenue?

[Jack S. Abuhoff:]

That is correct.

[O'Neil Nalavadi:]

Brad, the -- keep in mind when we give a range of $14 million to $16 million, part of that range includes how the e-book revenues will also work out. There's a range for e-books as well within that. Like Jack covered in his -- when he gave his perspective on the business, with regard to this foreign books, sometimes there is a significant inventory of books to be produced, but we don't get all the digital rights that are required to complete the production and recognize the revenue because then accounting takes away some of the fun unless you have it complete in all respects and deliver it to the client, we cannot recognize the revenue. So often the book is produced to 99% and 1% is still pending and we still have to remain patient until we get that last piece before we complete it and recognize the revenues.

[Brad Hathaway:]

Understood. I mean, I guess, unless -- I understand the e-book dynamics. My question was I guess more -- unless e-books falls off a cliff in the third quarter, it would suggest also that the non-e-book is still kind of below what would be considered a kind of more normal basis? And is that a fair assertion on my part?

[O'Neil Nalavadi:]

There is a range there. I mean there is a range because there are projects, and there's a solid recurring piece there, which is a little over $10 million.

[Operator:]

[Operator Instructions] It appears we have no further questions at this time.

[Jack S. Abuhoff:]

Thank you, operator. So I'll just conclude with a couple of remarks, I guess. To recap, quarterly revenue was sequentially down, as we anticipated, due to some Q1 project completions. We are working hard to make Synodex an important and sustainable growth driver going forward. We believe that we're tracking well on that ambition and that our collective patience and perseverance will pay off in the end. We're managing costs carefully and we'll continue to do so. And we see opportunities to continue to grow our franchise in Content Services. Thank you, everybody, for joining us today. Thank you for your continued support, for your perseverance and for your patience, and we look forward to continuing the dialogue with you. Operator, I believe you can conclude the call.

[Operator:]

Yes. Today's conference is available for replay by dialing [phone] or [phone] and entering passcode 6507252. That concludes today's conference. You may now disconnect.