December 05, 2013 - 9:35am EST by
2013 2014
Price: 2.50 EPS $0.00 $0.00
Shares Out. (in M): 25 P/E 0.0x 0.0x
Market Cap (in $M): 63 P/FCF 0.0x 0.0x
Net Debt (in $M): -17 EBIT 0 0
TEV ($): 45 TEV/EBIT 0.0x 0.0x

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Innodata is a provider of outsourced services to the publishing and information services industry through its content services division as well as a provider of solutions to the insurance industry through its Synodex division (82.5% owned).  The stock has declined due to recent unprofitability caused by INOD's significant investment in internal start-up Synodex and exacerbated by  a drop in project-based e-book revenues in the core content services division.  However, even at current depressed levels, content services generates solid EBIT and should provide downside protection near $2 while success with Synodex has the potential to create upside to $6.50+.  Thus, at $2.50, it represents an interesting risk/reward (+150%/-20%) as the value of its existing business provides a cheap option on the massive potential of Synodex.

Capitalization and Valuation

INOD has 25.0mln diluted shares for a  63mln market cap at $2.50. The company has 26.2mln of cash and investments however, 89% of that cash is overseas so I use 18mln of cash net of a 20% repatriation tax as INOD has NOLs that it believes will allow it to repatriate some money at lower levels.  The company also has 4.1mln of obligations which mainly consist of an unfunded Asian pension (payments very low, actual liability probably much lower), capital leases and a software purchase agreement.  Including all of these liabilities, INOD has net cash of 13.9mln ($0.56per share) and a total EV of 45mln.  TTM sales are 68mln (0.7x), TTM consolidated ongoing EBIT of -2mln (167x) and TTM Content EBIT of 5.6mln (8x). 


The biggest potential source of upside for INOD is Synodex.   Synodex extracts and classifies data from unstructured medical records for insurance underwriting and provides a connection platform between life insurance brokers and agents to place applications.  Over the past 2 years, INOD has invested 20mln in Innodata Advanced Data Solutions which includes Synodex and DocGenix.  This investment was undertaken because the company believes that Synodex has the potential to conquer a massive market.

According to the company, Synodex has a TAM of 1bln in the US and UK by providing data solutions to life insurance companies to help them process applications.  The product is currently in pilot stage with 26 life insurers each of which could provide large amounts of business (10mln+ per large client).  Instead of reproducing it hear, I would highly recommend reading/listening the most recent 2 quarterly conference calls (Q2-3 13) as the CEO spends a great deal of time detailing the Synodex opportunity.  Due diligence has provided confidence that Synodex is a strong product with a large potential market opportunity and also supported the company's claim that the lack of current revenue generation is due to the very long sales cycle for a key product in the insurance industry.  On the slower than expected sales cycle, the CEO noted on the Q3 13 CC "We are bolstered by the advice of the Vice Chairman at one of our client prospects, a company with $40 billion in assets, who told us "the (insurance) industry is slow to lead, but fast to follow."

If successful, Synodex could generate over 100mln of revenue and 20mln of EBIT in the medium term (CEO believes it could be larger than the original business in 3-7yrs).  In an upside scenario, I will value that option at $100mln (1x upside revenue, 5x upside EBIT) or $3 per INOD share. In reality, it is tough to put a precise value on Synodex but I am confident that the upside is large if it becomes successful.

Another source of upside could come from the core content services business which is currently cyclically depressed.  With a recovery in areas such as e-book publishing for overseas markets, enhanced content e-books, and other outsourcing projects content services could return to 10mln+ of EBIT (peak 15mln in 2012) which would be worth $3 per INOD share at 8x.  Very close peer Aptara was acquired by UK based competitor iEnergizer for 12x EBIT. 


 SOTP- Upside   % Owned  EBIT Multiple Value Per Share
Content Services 100.0%          10.0 8.0x          80.0  $      2.85
Synodex 82.5%          10.0 10.0x          82.5  $      2.94
     ----     ----   ---- 
Total            20.0          162.5  $      5.79
Cash net of   Obligations and Tax              17.4  $      0.62
     ----     ----   ---- 
Total Value              179.9  $      6.41
Upside         156.6%



Current content services EBIT of 5.6mln is cyclically depressed due to significantly lower e-book volumes as most of its English e-books have been completed and foreign and next-gen e-books have yet to generate significant revenue.  If we assume these results stay depressed, content services would be worth 39mln at 7x TTM EBIT or $1.50 per INOD share.  Another source of downside protection is that content services has a sticky stream of recurring revenue of ~40mln from content services providers' (Bloomberg, Reed Elsevier etc) constant need for data processing.  39mln is ~1x this high value recurring revenue and 0.6x TTM total revenue significantly below the 1.8x total revenue in the Aptara acquisition.  INOD also has strong relationships with blue chip clients (the two mentioned above, Apple, Amazon, Sony, Thomson Reuters, Wolters Kluwer, Simon & Schuster, Random House etc) which speak to the quality of its content services solution.  These ongoing relationships should have significant value to a strategic acquirer.

On the Q3 13 call, INOD's CEO noted that the company would be willing to lower the cash burn from Synodex in 2014 if they did not believe it would have a significant near-term improvement in revenue outlook.  Thus, I believe that Synodex cash burn will not continue for more than another 12 months. 

If we add cash less liabilities and 1 year of Synodex cash burn, then INOD should be worth $1.90 per share. 


 SOTP- Downside   % Owned  TTM EBIT Multiple   Value Per Share x TTM Revenue x Recurring Revenue
Content Services 100%            5.6 7.0x            39.2  $         1.56 0.6x 1.0x
Synodex 83%           (8.0) 1.0x             (8.0)  $        (0.32)    
     ----       ----   ----     
                   31.2  $         1.25    
Cash net of   Obligations and Tax                17.4  $         0.70    
     ----       ----   ----     
 Total Value                  48.6  $         1.94    
 Downside           -22.4%    


Risks- Synodex unsuccessful and burn continues. 

Content services fails to recover

Management wastes the cash

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Synodex Success
Cyclical upturn in Content Services
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