Business Overview
Innodata (NASDAQ: INOD) is a leading provider of business process, technology and consulting services, as well as products and solutions, that help our valued clients create, manage, use and distribute digital information. Propelled by a culture that emphasizes quality, service and innovation, we have developed a client base that includes many of the world’s preeminent media, publishing and information services companies, as well as leading enterprises in information-intensive industries such as aerospace, defense, financial services, government, healthcare, high technology, insurance, intelligence, manufacturing and law.
We operate in two reporting segments.
Our Content Services (CS) segment provides services that support the creation, enhancement, and re-purposing of digital content. These services include high-accuracy conversion to digital text; data analysis and enhancement of legal, financial, medical and technical information; information technology services related to digital content management and products; and consulting services to help clients with strategic and tactical aspects of digital content operations.
Our clients include legal and business information providers; scientific, technical and medical publishers; providers of mobile computing devices and digital content distribution platforms; enterprises that create and manage large volumes of product support content; and governmental agencies that manage large volumes of content in support of mission.
Most of our business information and publishing clients are in the process of transforming from print publishing to online publishing; from online publishing to multiple-channel distribution that includes web as well as mobile, tablet and eReading devices; or from search-based information products to workflow-based information products. These transformations require the adoption of new strategies, technologies and processes. We help our clients set digital content production and product strategies; integrate new technologies and processes; improve the quality and efficiency of content creation, enrichment and transformation; publish through multiple channels (including portable devices); and build new digital products.
Our clients who market mobile computing devices and digital content distribution platforms are seeking to expand the breadth and depth of their digital inventories. We are one of the largest producers of eBooks, serving the leading manufacturers of eBook reading devices as well as trade, education and professional publishers that sell eBooks. We presently distribute eBooks to more than 20 eBook distributors across North America, the United Kingdom, Australia and 24 countries in the European Union. We manufacture standard eBooks in multiple formats, as well as dual and multi-lingual eBooks and enhanced and interactive eBooks.
Many of our enterprise and government clients are embracing new digital information technologies and workflow processes within their operations in order to improve the efficiency of producing product support content, to broaden channels of distribution for such content to web and tablet platforms, and to make such information more easily searched and discovered. Other enterprise and government clients are embarking on this migration in order to improve internal situational decision-support systems (for example, an insurance company seeking to support its distributed field personnel with searchable procedure manuals on the iPad®). We assist our enterprise clients to accomplish these goals by providing technology, process redesign, and content enrichment services.
In the second quarter of 2011, we launched Innodata Advanced Data Solutions (IADS) as a separate segment to perform advanced data analysis. IADS operates through two divisions. The Synodex division of IADS offers a range of document and data analysis services that are tailored to healthcare, medical and insurance companies. The docGenix division of IADS provides financial services institutions with software products and services that facilitate the analysis and management of legal documentation relating primarily to derivatives. We presently own 77% of the Synodex division and 78% of the docGenix division, both limited liability companies. We purchased certain assets of the docGenix division from a third party for $0.4 million. These divisions are at an early stage of development and reported no revenues in 2011.
Each of our segments is organized and managed around three vectors: a vertical industry focus, a horizontal service/process focus, and a supportive operations focus.
The vertically-aligned groups understand our clients’ businesses and strategic initiatives. The vertical group for each particular industry includes experts hired from that industry.
Our service/process-aligned groups include engineering personnel and delivery personnel. Our engineering teams are responsible for creating secure and efficient custom workflows and integrating proprietary and third-party technologies to automate manual processes and improve the consistency and quality of our work product. These tools include categorization engines that utilize pattern recognition algorithms based on comprehensive rule sets and related heuristics, data extraction tools that automatically retrieve specific types of information from large data sources, and workflow systems that enable various tasks and activities to be performed across our multiple facilities.
Our globally-distributed delivery personnel are responsible for executing our client engagements in accordance with service-level agreements. We deliver services from facilities in the United States, India, the Philippines, Sri Lanka and Israel.
Other support groups are responsible for managing diverse enabling functions including human resources, organizational development, network and communications technology infrastructure support and physical infrastructure and facilities management.
Our sales staff, program managers and consultants operate primarily from our North American offices, European locations, as well as from client sites.
Our Opportunity
Rapid changes in digital content technologies have created the need for all sorts of companies to refashion their product offerings and their operations. Media, publishing and information services companies contend with new monetization models, delivery platforms, and channels. They seek to develop new digital products as print product revenue wanes; to broaden their markets by distributing content over the iPad®, iPhone® and other portable devices; and to monetize existing content in new, highly-targeted custom products through flexible reuse and repurposing.
Meanwhile, for enterprises that rely on content to support other products or operations, this shift to digital technology enables product support information to be produced with greater operational efficiency across a greater variety of channels and languages. This shift also offers opportunities to improve internal decision support and risk mitigation in complex data operations by harnessing the power of machine-readable, digital data to drive improved decision-support.
As a result, media, publishing and information services companies, and content-intensive enterprises, are increasingly relying on service providers such as Innodata to provide digital content-related services.
Our Services
We provide an array of services to help companies both define and implement strategies related to digital data. Both our Content Services segment and our IADS segment provide (i) digitization, enhancement and analysis services; (ii) technology services; and (iii) consulting services.
Digitization, Enhancement and Analysis Services – We provide high-accuracy, large-scale digitization services to transform content from paper and image formats into digital text, and we provide enhancement and analysis services to configure digital text into high-value information products and knowledge repositories that are enriched, structured, normalized, and referenced. We provide these services using a globally distributed workforce utilizing advanced technologies which automate portions of our process and help ensure that our work product is highly accurate and consistent. For our enhancement and analysis services, we maintain a staff in a wide spectrum of disciplines, including medicine, law, engineering, management, finance, science and the humanities.
For example, a publishing company—recently created by a group of publishing industry veterans—emphasizing social media connections between authors and readers engaged Innodata to provide digitization services that support multimedia technologies and multiple platforms. Innodata provided the necessary content production services to publish works to a variety of electronic devices, enabling the company to rapidly develop new digital products without direct investment in staff, facilities or technology.
For a leading electronics manufacturer that merchandises eBooks on its proprietary eReader platform, Innodata transforms digital files used for print productions into eBook files.
A leading provider of networking equipment engages Innodata to provide digital enhancement and related production systems support for its product guides, release notes, configurations guides, installation guides and other documents.
Technology Services – We provide systems integration services in respect of many leading content management systems and enterprise database technologies, as well as custom application development and maintenance for information products, editorial and production systems, data feed integration, portals, websites and mobile applications. We help our customers migrate from print-centric processes to media-neutral content delivery.
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For example, we helped develop a custom mobile application for a $13 billion global publisher, that enabled the publisher to distribute its web-based content to the iPad® as well as Android and Windows-enabled mobile devices, while providing support for links to external sources, subscriber annotations, and a host of other functions not yet available on leading eReader applications.
For a €3 billion global information company, our technology team developed a web and tablet-based digital workflow product based on an existing print product.
We have a special focus on XML and related structured information standards, and a number of our engineering staff have played leadership roles in the development of such standards. We use a hybrid onshore/offshore development approach that provides both the benefits of onsite project management, onshore solutions architecture and offshore globally distributed teams of developers. We embrace agile development methodologies that provide the benefits of early solution visualization and an iterative development process.
Consulting Services – Our consulting practice works with clients at a strategic business and technology level to address challenges and business processes related to digital content supply chain optimization, content technology architecture and strategy, global sourcing, digital product strategy and development, and the deployment of content technologies that relate to areas of strategic focus like mobility, social platform and semantic search.
For example, for a multinational information services company, our consulting practice plays a leading role in a long-term, transformative program of work. Our consultants work in conjunction with the client’s internal teams, engaged in designing new content architectures and implementing new content technologies as it reengineers from product-centric to content-centric business processes.
Integrated Services – Many of our client engagements draw upon a combination of Digitization, Enhancement and Analysis Services, Technology Services and Consulting Services. For example, a large, international publisher is in the process of a print-to-digital migration for many of its key products. Among these is a long-standing loose-leaf product for securities lawyers which the client sought to reinvent as a digital workflow product. Innodata provided a combination of content enrichment, user interaction design, and custom application development required to meet a six month launch plan. We now provide on-going technology and content maintenance services in respect of the product.
Clients
Three clients each generated more than 10% of our revenues in the fiscal year ended 2011. Revenues from Apple Inc. (“Apple”) were approximately $13.3 million, or 18% of total revenues; revenues from Wolters Kluwer affiliated companies (the “WK Clients”) were approximately $10 million or 14% of total revenues; and revenues from Reed Elsevier affiliated companies (the “RE Clients”) were approximately $9.3 million or 13% of total revenues. No other client generated more than 10% of our revenues in 2011. These three clients together generated approximately 44%, 27% and 16% of our total revenues in the fiscal years ended December 31, 2011, 2010 and 2009, respectively. Revenues from clients located in foreign countries (principally in Europe) accounted for 30%, 33% and 21% of our total revenues for each of these respective fiscal years.
We have long-standing relationships with many of our clients, and have provided services to two of the three clients mentioned in the preceding paragraph for over ten years. Many of our clients are recurring clients, meaning that they have continued to provide additional projects to us after their initial engagement. Our track record of delivering high-quality services helps us to solidify client relationships and gain increased business from our existing clients. As a result, our history of client retention enables us to derive a significant proportion of revenue from repeat clients.
Our contractual arrangements with Apple during calendar year 2011 consisted of a master services agreement (“MSA”) and a statement of work (“SOW”). The MSA and SOW automatically renew on a monthly basis unless terminated by either party for convenience on 60 days’ prior notice. The MSA may be terminated by either Apple or the Company for material breach, failure to meet service levels, or insolvency related events that that are not cured during a 30-day notice period, or if the material breach is incapable of cure, immediately on written notice. Apple may also terminate the MSA in the event of a force majeure that materially affects performance and lasts for more than 30 days. The SOW may be terminated by either party for “cause” on 30 days’ notice (0 days’ notice if the “cause” is incurable), and without “cause” on 60 days’ notice. The MSA also contains confidentiality, indemnification and other standard provisions.
Our contractual arrangements with the WK Clients during calendar year 2011 consisted of multiple MSAs and separately agreed to SOWs for specific services. Three MSAs have indefinite terms, two MSAs continue in effect until the later of their expiration date and the completion of all services performed pursuant to such MSA, and three MSAs have terms that expire, respectively, in December 2012, July 2013 and March 2017. WK Clients may terminate certain MSAs on notice periods ranging from three months to 30 days, and they may terminate certain individual SOWs on notice periods ranging from 10 days to three months. WK Clients may also terminate certain of the MSAs and SOWs on notice periods of 60 days or less for “cause” and for insolvency related events, and on changes of control, force majeure and the imposition of certain price increases by the Company that are not acceptable to them. The Company may terminate certain of the MSAs on notice periods of three months, and it may also terminate certain MSAs and SOWs for “cause”, insolvency related events affecting the WK Clients, and other defined events. The MSAs contain confidentiality, limitation of liability, indemnification and other standard provisions.
Our contractual arrangements with the RE Clients during 2011 consisted of multiple MSAs and separately agreed to SOWs for specific services. Two of the MSAs have indefinite terms, a third has a term that ends in February 2014, and the fourth has a term that ends on the later of September 2015 or the expiration date of all SOWs issued under that MSA. RE Clients may terminate the MSAs on notice periods ranging from zero to six months, and they may terminate their SOWs on notice periods of up to 180 days. They may also terminate certain of the MSAs and SOWs on notice periods of three months or less for “cause” and for insolvency related events, and on changes of control, force majeure and the imposition of certain price increases by the Company that are not acceptable to them. The Company may terminate two of the MSAs on notice periods of 180 days, and a third on a notice period of three months, and it may also terminate certain MSAs and SOWs for “cause”, insolvency related events affecting the RE Clients, and other defined events. The MSAs contain confidentiality, limitation of liability, indemnification and other standard provisions.
Our agreements with our other clients are in many cases terminable on 30 to 90 days' notice. A substantial portion of the services we provide to our clients is subject solely to their requirements.
Competitive Strengths
Our expertise in digital data. We are primarily focused on helping clients across multiple vertical industries use digital data to build new kinds of products, to reduce publishing cost and to improve decision support.
Our focus on quality. We have achieved a reputation within our clients for consistently delivering high-quality content. We maintain independent quality assurance capabilities in all geographies where we operate. Our quality teams are compliant and certified to the ISO 9000:2000 quality management system standards.
Our global delivery model. We have operations in seven countries in North America, Europe and Asia. We provide services to our clients through a comprehensive global delivery model that integrates both local and global resources to obtain the best economic results. Our offshore outsourcing centers are ISO 9001:2000 certified and our engineering and IT facility meets ISO/IEC 27001:2005 specifications.
Our proven track record and reputation. By consistently providing high-quality services, we have achieved a track record of project successes. This track record is embodied by our reputation as a leader in the business process services, especially within the media, publishing and information services sector. This reputation or brand provides an assurance of expertise, quality execution and risk mitigation.
Our focus on technology and engineering. Rather than simply relying on labor cost arbitrage to create value for clients, our engineering and IT team optimizes efficiency by integrating proprietary and best-in-class third party tools into our workflows. In addition, our engineering and IT team provides work directly to our clients, helping them achieve improved efficiencies within their own operations.
Our long-term relationships with clients. We have long-term relationships with many of our clients, who frequently retain us for additional projects after a successful initial engagement. We believe there are significant opportunities for additional growth with our existing clients, and we seek to expand these relationships by increasing the depth and breadth of the services we provide. This strategy allows us to use our in-depth client-specific knowledge to provide more fully integrated services and develop closer relationships with those clients.