Innodata Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.19.14 | About: Innodata Inc. (INOD)

Innodata (NASDAQ:INOD)

Q4 2013 Earnings Call

February 19, 2014 11:00 am ET

Executives

Amy R. Agress - Vice President, General Counsel and Secretary

O'Neil Nalavadi - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Jack S. Abuhoff - Chairman, Chief Executive Officer and President

Analysts

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Stan Berenshteyn - Sidoti & Company, LLC

Timothy Clarkson

Brad Hathaway

William Sutherland - Emerging Growth Equities, Ltd., Research Division

Joe Furst

George Melas-Kyriazi - MKH Management Company, LLC

Charlie Pine

Operator

Please stand by. Good day, everyone, and welcome to the Innodata Fourth Quarter and Fiscal Year 2013 Conference Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I will turn the call over to Amy Agress. Please go ahead.

Amy R. Agress

Thank you, Debbie. Good morning, everyone. Thank you 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 O'Neil first, who will provide a detailed review of our results for both the fourth quarter and the 12 months ended December 31, 2013, 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, the matters relating to our Innodata Advanced Data Solutions segment that are discussed during the call and the risks and uncertainties of early-stage companies generally; the risks that contracts could be terminated by customers; projected or committed volumes of work may not materialize; the primarily at-will nature of our contracts with our customers and the ability for our 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; 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 investment; 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 over the call 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 fourth quarter and fiscal 2013. Before I get down to reviewing our fourth quarter performance, I'm going to briefly review our full year 2013 performance and share some key financial insights. Our revenue in fiscal 2013 were $64 million compared to $87 million in fiscal 2012. This expected decline was primarily attributable to a decline in eBook revenues from a key customer, and this underscores our big challenge with project-type business and the occasional large black span [ph] engagements. These projects are great when we are scaling up and create value from operating leverage, but we feel the pain when they are ramping down. That's why 2013 was a down part of that cycle.

As most of you know, we are trying to address this challenge by investing in IADS business, with the goal of generating more predictable and recurring revenues. Jack will cover more on IADS in his presentation.

Getting back to our fiscal 2013 performance, Content Services was the main contributor to our top line, with $63 million in revenues.

Gross margins from this segment were 30% and operating margins were 7%, compared to 38% and 13%, respectively, in fiscal 2012. The primary reason gross and operating margins declined as a percentage of revenues was due to lower eBook revenues and the negative impact of operating leverage. That said, we significantly strengthened our CS business in 2013 for its existing scale of approximately $60 million in revenues, which now contributes gross margins in the range of 30% to 32% and operating margins in the range of 7% to 10%. This becomes very clear when we compare the results with FY 2010, when CS business had $61.5 million of revenues with 23% gross margins and an operating loss of 2%.

What has changed to make the difference? There are basically 2 key factors: a combination of our strong focus on more value-added work, prizing discipline, and infusing more technology at the production level helped drive an improvement in gross margin by 8 percentage points over this 3-year period. And the second reason is that we have enjoyed a favorable exchange rate environment as U.S. dollar has gained against the Indian rupee over the past 3 years, while this has been partially offset by losses on our forward covers and salary inflation in Asia.

Taken together, these factors have pulled our gross margins from 23% in FY 2010 to 30% in FY 2013, as this improvement has gone straight to enhancing our operating margins.

Now let me review the IADS business for fiscal 2013. Revenues were $1.1 million, and we incurred gestational losses of $11.8 million. This loss includes taking a 5.5 [indiscernible] charge to write down the value of all Synodex capital assets. The comparable fiscal 2012 numbers were revenues of $1.2 million and $6.3 million in gestational losses, of which, $500,000 was attributable to an impairment charge relating to docGenix assets.

Taking both CapEx and net operating expenses, we invested a total of $8.3 million in IADS during 2013 compared to $11.3 million in FY 2012. Jack will share with you the progress we are making and breaking into the market for private side digital information, and to achieve what aspirations of building the higher margin more predictable business.

Now let me review the consolidated numbers for fiscal 2013. On a consolidated basis, $4.4 million in earnings before taxes in our Content Services business was dragged down by an $11.8 million loss in our IADS business, which included the $5.5 million impairment charge I discussed earlier. The net pretax loss in 2013 was $7.4 million compared to a pretax profit of $6.9 million in fiscal 2012. The pretax earnings in 2012 were driven by $13.2 million of operating profits in our CS business, which was offset by $6.3 million loss in IADS.

Now let me review the fourth quarter financial results, which I will do by comparing them with the third quarter and the sequential basis. Our total revenues in the fourth quarter 2013 were $15.4 million compared to $15.7 million in the third quarter. The decrease of $300,000 was attributable primarily to a $700,000 decrease in revenues from the key eBook client, which was offset by $400,000 increase in revenues from other clients.

On a segment basis, total revenues in Content Services were $15.2 million this quarter compared to $15.6 million in Q3. And total revenues in our Advanced Data Solutions business were $200,000 in this quarter compared to $100,000 in Q3.

Revenues from our top 3 clients was 43% of total revenue this quarter compared to 42% in Q3. Looking ahead, our revenue guidance for Q1 2014 is between $13.5 million and $15.5 million. We anticipate our Q1 revenues to trend lower than our Q4 revenues, as we have been asked to put on hold a couple of projects with a total annual value of $5 million by one of our top 5 clients, due to client's budgetary constraints. This client I'm referring to is not the eBooks client.

Let me now review our gross margins. On a consolidated basis, gross margins in Q4 were $4.5 million, up 29% of revenues compared to $3.8 million or 24% of revenues in Q3, an increase of $750,000. This increase in gross margin was primarily a result of cost efficiencies, including a onetime gain of about $200,000 from a reversal in accruals for retirement benefits for a lower headcount in Asia.

On a segment basis, Q4 gross margins in our Content Services business was $5.6 million or 37% of revenues compared to $5 million or 32% of revenues in the third quarter. And in IADS, the cost of production not covered by revenues amounted to $1.1 million this quarter compared to $1.2 million last quarter.

Our selling, general and administrative expenses were approximately $4.4 million, up 29% of revenues in Q4 compared to $4 million or 24% of revenues in the previous quarter, an increase of approximately $400,000. These expenses were higher primarily due to seasonal factors and year-end adjustments, including a onetime expense of $75,000 that we incurred to assist our employees impacted by typhoon and earthquake in the Philippines.

Moving down to pretax earnings. For an apples-to-apples comparison, I'm going to provide the figures before Synodex impairment expense of $5.5 million. Our pretax profit in Q4 was $170,000 compared to a $160,000 pretax loss in Q3. This improvement in performance was due to an increase in gross margins of $750,000, which was offset by an increase in SG&A expenses of $400,000. This pretax profit for Q4 is after absorbing $1.5 million of IADS gestational losses.

If we were to exclude IADS cost, pretax earnings in our Content Services business would be $1.7 million or 11% of revenues compared to $1.5 million or 9% of revenues in the prior quarter.

In the current quarter, we had a net tax benefit of $360,000 compared to a tax charge of $7.3 million in Q3. The net tax benefit in Q4 is primarily the result of recomputing 2013 tax accruals for our subsidiaries, as a result of year-end adjustments for intercompany transactions based on an independent plans [ph] for pricing study.

In the previous quarter, we had a tax charge of $7.3 million, which included a noncash tax expense for creating a $7.1 million valuation allowance against all our U.S. deferred tax assets.

Net earnings after minority interest was $900,000 this quarter compared to a net loss of $11.7 million in the third quarter.

Turning now to our cash flow statement. Our cash consumption was $1 million this quarter compared to $200,000 in Q3 2013. The cash utilization was primarily attributable to a $1.5 million loss in the IADS business, offset by $500,000 net cash generation in our Content Services business. We incurred capital expenditures of approximately $300,000 in the fourth quarter compared to $500,000 in the third quarter. This entire CapEx was attributable to the Content Services business as all capital expenditures in IADS business are being expensed through the income statement. We expect our Q1 2014 CapEx to be in the range of $400,000 to $600,000.

Our balance sheet remains healthy with cash, cash equivalents and investments in term deposits of banks at $25 million at the end of Q4 compared to $26 million at the end of Q3 2013. Of this, approximately $2.2 million was in the U.S. and the rest was overseas in our international subsidiaries.

In 2013, we had a $15 million uncommitted line of credit from JPMorgan to finance our working capital needs. This uncommitted line of credit is not available for [indiscernible] at present and is subject to review and renegotiations with the bank.

Looking at working capital. Our accounts receivable was approximately $11.8 million at the end of the fourth quarter compared to $10.8 million at the end of the third quarter.

In terms of DSO or day sales outstanding, our AR balance was averaging at 68 days this quarter compared to 63 days in Q3 2013. This slight increase in AR balance was primarily on account of our delayed payment from a key customer, which was subsequently received in January 2014.

Let me now review a couple of key items not reflected in the line items in the financial statements. But first, for the forex forward contracts, which we take as a hedge against foreign currency risk for our Asian operating expenses. We've been gradually reducing our inventory of foreign exchange hedging contracts due to persisting strength of the U.S. dollar against the Asian currencies. At the end of the fourth quarter, the total outstanding contracts amounted to $15 million.

In Q4, U.S. dollar appreciated 3% against the Indian rupee and marginally against the Philippine pesos. And based on mark-to-market, the most of unrealized losses amounted to $600,000 on this forward contracts as of 31st December 2013. These forward contracts will be maturing over the next 12 months, and any losses or gains of these contracts would be recognized upon maturity.

The last point I would like to cover as the position of U.S. tax assets. Our U.S. tax NOLs at the end of Q4 amounted to $17 million, and these NOLs are available for set up against future taxable profits in the U.S. At present, we are not recognizing deferred tax assets relating to these losses in our books on account of the uncertainty of future earnings, stemming from our continuing investments to build the IADS business.

I will now turn the call over to Jack, who will provide additional insight into the business and our progress on strategic fronts. And after that, we will take your questions. Jack?

Jack S. Abuhoff

Thank you, O'Neil. Good morning, everyone. Thanks for joining us. I'll begin by talking about progress we've made since our last earnings call in executing our Synodex strategy. After that, I'll provide some of updates on our Content Services business.

On a Synodex side, we're very pleased with yesterday's public announcement by the Reinsurance Group of America. RGA is a Fortune 500 company and one of the largest global reinsurers with $40 billion in assets and approximately $3 trillion of life reinsurance in force. RGA announced a strategic relationship with Synodex, stating its intention to use Synodex data in new, innovative underwriting programs, and to incorporate Synodex into its product offerings. This announcement was the culmination of several years of testing and validation of our products by RG&A -- RGA, excuse me. In its press release, RGA attests to the confidence they have acquired in the quality of Synodex data and the benefits that it believes Synodex brings to the insurance industry as a whole.

The announcement is important strategically for multiple reasons. For starters, it provides a clear and unequivocal endorsement that our client prospects can rely upon. Moreover, reinsurers' willingness to accept risk on the basis of our data means that carriers can save considerable time and money by not having to review the underlying detailed medical records. This puts us in a whole other league from our competitors. And RGA's intention to incorporate our data into their products and assign risk scores based on Synodex data creates additional value propositions for our services. RGA has begun to introduce us to its carrier relationships and to co-market its product enhancements with us. This has already helped us get in front of new carriers and the resulting discussions are moving at a brisk pace. Moreover, we believe that the RGA announcement will help accelerate conversations with carriers currently in the pipeline, especially those who have reinsurance reagents with RGA and spent to benefit from RGA's use of our digital data, and with other reinsurance companies who have expressed interest similar to those of RGA. So for all these reasons, we view the RGA announcement as a key milestone on our commercial strategy, and we're very pleased with this.

Beyond this, we can continue to make steady and measured progress. Since our last call, we have initiated pilots with 7 new prospects, 3 of which, were completed in the fourth quarter, and 4 of which, were completed last month or this month.

In addition, so far in the first quarter, we have initiated and completed another 2 pilots. One of these, was with a large independent brokerage agency, 2 with reinsurers and 6 were with life insurance carriers. This is an addition to the 26 piloted companies we referred to in our last call as being in our list of active prospects. So altogether, that's a total of 35 companies in our active prospect list that we've done pilots for, 1/2 of which, we are prioritizing as having near-term potential.

We have entered 2014 with a single-minded focus and driving high-quality recurring revenue on our Synodex business. To accomplish this, we will continue working closely with our active prospects and early adopter customers, custom configuring the product to work within their workflows and tailoring the product to support their specific underwriting manuals. In addition, we expect to bringing on board as Senior Sales Executive, who brings a significant track record of success in life insurance sector.

On the development side, we will be completing our workflow of 3 product release, which we believe will improve our internal processing speed, integrate new codes and data within our reports and make our reports more configurable.

We believe that our timing is good here. Slow economic growth has meant declining life insurance sales over the past few years, and the protracted low interest rate environment has meant shrinking investment yields for life insurance companies. As a result of these pressures, life insurance companies are needing to be ever more vigilant in risk appraisal and management to improve the time it takes to review informal applications and to increase operational efficiencies, while reducing the tedium of data-gathering for underwriters. We see that our value propositions, the ability to reduce underwriting cost and to create efficiencies without any compromise in quality are resonating well in this environment.

Turning now to costs. In the fourth quarter, Synodex had a gestational loss of $1.1 million, which includes production and engineering expenses and SG&A costs to $450,000. Taken together, this was about $100,000 lower than Q3. The production cost includes a large staff that we can immediately deploy to customer engagements as they come in.

In our board's Q1 review of the Synodex business, we reviewed progress with the short list of late-stage clients, other notable client activity and progress around workflow through development. We also identified specific measures, which we will be reviewing progress at the conclusion of our first quarter in terms of client validation, booking effectiveness and revenue visibility. We stand ready to modulate our spend in ways that we believe will not impact our ability to meet the market's demand, but we see our progress stalling.

In our Content Services segment, we have continued to rationalize our cost structure to support the goal of producing 10% to 15% pretax earnings at a baseline quarterly revenue level of approximately $15 million. At the same time, we continue to respond with agility to exciting new opportunities, especially in regards to technology services and eBook services. I'll walk through some examples of that.

Our technology services group continued to expand the scope of work and performs for one of the largest and most highly regarded textbook distribution companies in the U.S. Revenue from this client should exceed $2.7 million in 2014, up from $1.7 million in 2013. While this company built its reputation over the years based on print distribution, we have helped them gain a greater foothold in digital. We migrated all of their digital-content-related IT work to our technology development Center, further developing and maintaining a digital content solution that this company markets to its publisher and institutional client base. This solution enables publishers to sell content directly towards customers through white-branded, e-commerce enabled bookstores and for end-users to consume the content in a custom eReader that works across all major platforms.

Here's another example. For one of the largest digital archives supported by more than 1,000 libraries and publishers and more than 2,000 scholarly societies and associations, our technology services group closed a 3-year managed services contract worth over $700,000. We will be developing and supporting custom applications that drive their content ingestion, transformation, analysis and management.

One last example. Our technology services group was successful in heavily contested RFP to implement a leading XML database for a large U.K.-based organization. We expect the value of the engagement could approach $800,000.

Now turning to the eBooks arena. We successfully won an engagement with a new client, a well-known provider of online higher education and professional training, to transform its textbooks into highly interactive multi-touch eBooks. We began the first phase of the work, which has so far been very well-received by the client. This first phase is a booking value of approximately $400,000 and there's the potential for the total booking value to exceed $1 million, if the pilot phase continues to go well.

Also in our eBooks area, our efforts is focusing on emerging international eBook markets, continues to pay off well for us. In the fourth quarter, we established partnerships with significant clients in Mexico, Brazil and Argentina. This includes exclusive production support for 2 of the top 4 distributors in Brazil. These programs have the potential to produce revenues of up to $1 million per year for the next 3 years.

Looking out on the year ahead, we're excited to see several new opportunities in our Content Services pipeline that have contract values in excess of $1 million. That said, we expect continued ups and downs in the Content Services business, reflecting its inherent project nature for both the unpredictability of client budget cycles.

I will now open the line for questions. After which, I'll wrap up with some final comments. Operator, we are ready for questions now.

Question-and-Answer Session

Operator

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

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Jack, could you -- the large Content Services customer that experienced some delays, could you tell us what's going on there in terms of -- do you think that business will come back? Do you have any visibility to that?

Jack S. Abuhoff

We're continuing to do business with the customer but a good amount of the work that we did last year, which we expected to be continuing, we've been told is on hold pending budget approvals. It's very hard to predict exactly what happens there. We're going to be closely monitoring it obviously, and we're hopeful that favorable decisions will get made.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

On the eBook side, it looks like revenue grew for the first time sequentially in some time. Do you expect that to continue in '14?

Jack S. Abuhoff

Yes, I think there are some great new eBook opportunities. In my prepared remarks, I talked a little bit about some things we're doing in Latin America, which we're having -- seeing some good traction with. On enhanced eBooks, where we're seeing some very interesting new opportunities that are starting to emerge in the enterprise sector and among distant learning companies and things like that. So we're -- we continue to be excited about that business, but we also recognize that it's inherently a project-based businesses that will have ups and downs. So our plan is to continue to focus on it and grow it aggressively, but not to think that it can become a consistent revenue business. And again, of course, that's why we're making investments we are in the IADS businesses, which we think do hold that promise.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Congratulations on the IADS announcement. I'm curious, can we expect other similar announcements maybe in different areas of the insurance market in the coming year?

Jack S. Abuhoff

We're thrilled with the announcement. We really are. In fact, we were remarking just this morning that in our history, this is probably the first time we've had a Fortune 500 company proudly do an announcement about a relationship with us. We have wonderful clients but typically, we're on the execution side, kind of behind the scenes doing some heavy lifting. Curious seeing that our innovation has been recognized by the industry and a key industry leader is proudly proclaiming its excitement about getting on board with what we're doing. So it's a wonderful thing. We've got a lot of things in the pipeline. A lot of exciting things, and we're working very, very hard at getting them closed and absolutely hope to have other pronouncements this year.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

And O'Neil, just what was the eBook revenue in the quarter? And also what was the revenue of your biggest client in the quarter?

O'Neil Nalavadi

Vincent, the e-book revenues for the quarter was 11%. And what's your question on the top 3 clients...

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Draft [indiscernible] revenue.

O'Neil Nalavadi

Yes, top client revenue was 17%.

Operator

We'll go next to Stan Berenshteyn with Sidoti & Company.

Stan Berenshteyn - Sidoti & Company, LLC

I wanted to look at RGA partnership in particular. Do you have any visibility in terms of contribution to revenue for 2014 coming from that partnership?

Jack S. Abuhoff

As we mentioned in our press release, our arrangements with them are not yet finalized. So we're not putting a number on that. We expect that it will be several millions of dollars in contract value. But again, just to align expectations, it's not my belief right now that we're going to see that all in one -- overnight. We think it will come in stages and in a phased approach.

Stan Berenshteyn - Sidoti & Company, LLC

Okay. And in terms of the operating cost, I see the decrease by $1 million from the prior quarter. Now what does that mean in terms of your operating capacity? In other words, how much revenue -- how much can you grow revenue before we'll see an uptick in the operating expenses?

Jack S. Abuhoff

Yes. On the Synodex side, we have the production capacity to produce approximately $4 million in contract value per year and then we've got the -- and that's on the -- with the labor that's presently in place. The infrastructural capacity, of course, well exceeds that. So after $4 million of contract value, approximately $100 of additional capacity will come at the cost of $35 or so. [indiscernible] pretty well after that, too.

Stan Berenshteyn - Sidoti & Company, LLC

Okay. And lastly, I saw a couple of weeks ago, Apple announced their iTunes new initiative. I was curious if Innodata is going to get a piece of this business. And if so, is this going to increase incremental revenues, or just kind of going to continue the e-book revenue -- the similar stream as 2013?

Jack S. Abuhoff

We really don't comment that specifically on client engagements. I guess it's our strategic imperative to work very closely with Apple, of course. They're our largest client and to stay very close to their strategies.

Operator

[Operator Instructions] And we'll go next to Tim Clarkson with Van Clemens.

Timothy Clarkson

Jack and O'Neil, nice profitability for the quarter. Couple of questions. One, could you just explain of -- on this RGA exactly -- in the simplest terms, what's the value that, that is bringing to this reinsurance company?

Jack S. Abuhoff

Sure. I'm just trying to simplify it in my mind, Tim. I guess I'd look at it this way, what RGA is saying is that they intend to use our data in new, innovative underwriting programs. So I think they're seeing the ability to use our data to help transform their business and beyond whatever...

Timothy Clarkson

Which data, Jack? What kind of data are we talking about?

Jack S. Abuhoff

What we're talking about is our ability to create, essentially, a data feed from unstructured health care records. Insurance companies and reinsurance companies use health care records extensively in their underwriting process. Never before has -- have health care records been available in a structured, consistent, high-quality XML data format. Our innovation is bringing that to these companies, and they're seeing exciting ways that they can use that in their programs.

Timothy Clarkson

So in other words, let's say that there's an underwriter that's looking at giving life insurance to Tim Clarkson and they want to know what my cholesterol level is, my blood pressure is and my family history and so on, you take that data, which is unstructured, and then digitize it, have it in a structured format and that adds validity and ease-of-use to the end-user.

Jack S. Abuhoff

That's exactly right, Tim, in simplified form, of course. And beyond that, because our data is in a structured format, we can use, apply underwriting rules against that data. We can have -- invite other participants to apply rules against that data as RGA is signaling that they intend to do. So they'll be able to assign risks, of course, based on our data and to automatically assign risk scores based on health care histories and things like that. So it's -- it brings a lot of transformational opportunity to the industry.

Timothy Clarkson

Okay. And another item on this JPMorgan line of credit snafu. I assume -- I don't -- does Innodata have a relationship with JPMorgan, or is this something you're looking to potentially get a different banker?

O'Neil Nalavadi

Tim, we have a very good relationship with JPMorgan. I think it should be seen a little bit in the context here. We've traditionally never borrowed from any bank, and the line of credit that we have was -- is an uncommitted line of credit. And it is securitized only by the Innodata's AR balances. In other words, JPMorgan does not have a security interest over our global assets and our global cash balances. So they tend to look at the lending to the U.S. entity in a pretty narrow fraction, as to what the AR balances are and what are the cash flows of the U.S. entity. And what they're saying is we want to understand that in the context of the investments we're making in IADS for 2014 before they take a decision. I mean -- and lastly, just to make a point. It is not that they terminated the relationship with us. They continue to be our bankers. We continue to do forward covers with them. So it is not a question of termination, but it's a question of them trying to understand more precisely as to how our cash flow rotates in the U.S. entity for, that, 2014.

Timothy Clarkson

Okay. Yes, and I'm on the record obviously in terms of wanting to do a stock buyback. I'll talk to you guys privately more about that.

Operator

We'll take our next question from Brad Hathaway with Far View Capital Management.

Brad Hathaway

Congratulations on the RGA announcement. A couple of quick questions in that vein. First off, does the Q1 guidance include any revenue from RGA?

Jack S. Abuhoff

Brad, no, it does not.

Brad Hathaway

Okay. And with -- is that relationship you'd expect to start up relatively soon, or is it going to take a little while to get some kind of announcement to actually generating revenue?

Jack S. Abuhoff

No. We're working pretty fast and furious at getting things going there, which is exciting. But again, my cautionary note is that we think that it will come up in stages and be phased in.

Brad Hathaway

Yes, okay. But I mean, just kind of a timing is -- the first revenue we're thinking possibly in Q1, or is it more kind of second half or...

Jack S. Abuhoff

Possibly in Q1. Well, we're not -- but we're not depending on that. There are several...

Brad Hathaway

Great. And you touched on this a little bit in your prepared remarks, but you've always said historically that the insurance industry is kind of slow to lead but fast to follow. So now you have a leader who's adopted Synodex. Does that mean that you believe that you really kind of turned the corner here and this is really the kind of the key sign [ph] for us for adoption going forward?

Jack S. Abuhoff

I guess that remains to be seen. We're very hopeful about that. And what we're excited about is that the reinsurance companies are critical in this ecosystem. They really do set the standards. They're very influential, and RGA is among the most influential of the reinsurers. What we're seeing is that the ability of carriers and reinsurers to use our data creates value for both the carrier and for the reinsurers. So it's a real win-win. And when they start incorporating it into their products, as they're suggesting that they will be doing, we do believe that will help create velocity around adoption. So we're very excited by it.

Operator

We'll take our next question from Bill Sutherland with Emerging Growth Equities.

William Sutherland - Emerging Growth Equities, Ltd., Research Division

I was just wondering if you could give us a little more color on the implications for you guys for a contract with someone like RGA. You've talked -- and maybe you just want to kind of talk hypothetically about the -- what's involved with the size reinsurer.

Jack S. Abuhoff

Sure. Well, I think the value of the RGA contract for us -- or it's not yet a contract, for the announcement and the contracts that we expect to follow will be several fold. First, and most notably, it will be a revenue opportunity for us, which as I said, we expect to phase in slowly over the course of the year, hopefully beginning in first quarter, but that's aspirational. Beyond that, we see that it's very strategic what they're looking to do with our data, which is incorporating it not just into their operations, which they'll be doing, but also into their products. And to be co-marketing with us to their carrier relationships the opportunity to integrate our data. So that right there creates tremendous value and we think will help accelerate and provide momentum to our marketing efforts.

William Sutherland - Emerging Growth Equities, Ltd., Research Division

Jack, if I could interrupt, just to get a little more understanding of what that co-marketing -- I mean, one example of it that comes to mind.

Jack S. Abuhoff

Sure. So an example of that is going with RGA to an RGA customer and showing them how the assignment of risk scores based on the pharma feed will -- once it includes Synodex data, will offer more protective value for the client. And then beyond that, showing the value to the client in terms of efficiencies and productivities. So RGA has an interest in seeing that their products are improved and adopted. We have an interest in bringing more carriers onto our platform, and those interests align very, very well. We've made some of those -- a couple of those calls. We intend to do a lot more with RGA. And we're seeing that the carriers that we're talking to with RGA seem to move very quickly in their interest level in terms of moving forward with the service.

William Sutherland - Emerging Growth Equities, Ltd., Research Division

And then I think, to date, Synodex has had 1 or 2 customers. Is that correct?

Jack S. Abuhoff

That's right.

William Sutherland - Emerging Growth Equities, Ltd., Research Division

And they're significantly smaller than RGA, just in terms of their needs and size?

Jack S. Abuhoff

That's also correct. RGA is likely -- I think RGA will be our first large customer. And they're more important as a first large customer than perhaps even other large customers would be, again, because the reinsurers are so very influential in the space and the opportunity to partner with them in the industry should provide a very compelling distribution opportunity for us.

William Sutherland - Emerging Growth Equities, Ltd., Research Division

And not to take you guys into a corner at all, but just trying to get a sense of just how big the breadbox is, if -- or if it's bigger than one. Is this sort of -- is the RGA revenue opportunity a multiple of the existing customers?

Jack S. Abuhoff

Yes. The RGA revenue opportunity is significantly larger than things that we've been working on. But again, I guess I just want to repeat it for a third time. I do want to caution people not to expect that it comes on fast and furious...

William Sutherland - Emerging Growth Equities, Ltd., Research Division

Of course. Of course, not.

Jack S. Abuhoff

phased way and that the strategic value to us even exceeds the booking value of -- or the likely anticipated booking value of the RGA opportunity.

Operator

We'll take our next question from Joe Furst with Furst Associates.

Joe Furst

Congratulations on the new customer. The other 25 people that you said you've done pilots for and so on, I would assume since that you said nothing, all 25 of them are still somewhere on the process, some further along than others. Is that correct?

Jack S. Abuhoff

Yes, that's correct. And we did, as I mentioned, I think, 7 new pilots in Q4 and 2 more in Q1. And as you would expect, they're moving at different rates and different pace. And all of that, we're staying very close to them and hopeful that will be having some more customers coming onboard in the very near future.

Joe Furst

What's the biggest entitlement to getting this thing done? What's the biggest obstacle you've run into with people? Not that they're not saying no. It's just to get it through their systems.

Jack S. Abuhoff

I think that there's no single common obstacle. Incorporating our service is a major commitment to them. They're very careful, their insurance companies. They're very careful that they fully understand what our product can do within their environments, that they put together a careful business case, that they have a high confidence in the quality of our data. Again, the RGA announcement is very helpful in that regard because we got a major player in the industry saying that they've taken a careful look over multiple years now of a study of our service and they've got full confidence in our ability to handle the most difficult cases. So we expect that, that will also help accelerate things.

Joe Furst

I think one of the most important things, as I think you mentioned previously, is that the insurance companies are very slow to innovate and very quick to follow. So now that you got someone of great reputation and great size who thinks your product is very good, it certainly should make it easier for others. Keep up the good work.

Jack S. Abuhoff

We think that's right. Thank you, Joe.

Operator

We'll go next to George Melas with MKH Management.

George Melas-Kyriazi - MKH Management Company, LLC

A quick question on the reinsurance -- life insurance, reinsurance industry. Can you give us a quick landscape? How many players they are? How big is RGA in that space? What market share do they have? Sort of rough brushstrokes on that.

Jack S. Abuhoff

Yes, they're -- RGA is one of the leading reinsurers. We're also working closely with a number of other leading reinsurers. Not all reinsurers specialize in the kind of underwriting that RGA does, which implicates our service or just looking at their sizes could be -- you have to look a little bit deeper. But suffice it to say, that there are a number of other reinsurers who also do facultative underwriting, which is what RGA is well known for. And we're trying to do a good job covering those as well.

George Melas-Kyriazi - MKH Management Company, LLC

Okay. How many -- are there similar reinsurers are you guys working with or have you done pilots with? [indiscernible]

Jack S. Abuhoff

I don't have that precise number in front of me. But we are -- we're deep into working with a number of others, and we see that they're following similar paths.

George Melas-Kyriazi - MKH Management Company, LLC

Okay, great. And then 2 other quick questions. Do these insurers typically have products that then their carriers adopt and that's how they sort of collaborate or...

Jack S. Abuhoff

They do. Many of them have very specific products that help carriers assess risk, and many of them have automated solutions that help carriers automate portions of risk assessment. And our product can enhance those automated solutions quite likely.

George Melas-Kyriazi - MKH Management Company, LLC

Okay, great. And then a final question on Content Services. Did you reduce the capacity that you have in Content Services, and especially in the e-books area, and that enabled you then to lower your -- lower the cost of service? Or would you still have capacity to get well beyond that $15 million in Content Services?

Jack S. Abuhoff

Yes. We have not taken down our capacity to respond to e-book opportunities or other Content Services opportunities. And as I said in my remarks, we're seeing some large, new opportunities emerging in the pipeline, which is very good to see. And it's our intention to go after them very aggressively and to bring them in. So...

George Melas-Kyriazi - MKH Management Company, LLC

And so if you bring additional revenue there, you would be able to maintain your current margins -- your current growth margins? If you decided to grow them.

Jack S. Abuhoff

We bring an additional revenue which see the gross margins improve.

Operator

[Operator Instructions] We'll go next to Charlie Pine with Van Clemens.

Charlie Pine

A few brief questions. Returning to the topic of the Synodex pipeline, you've stated that approximately 50% of the 35-odd trials that you completed, you defined as having, I believe you said, near-term potential. I guess I'd like to know what you are defining as, number one, near-term potential. And number 2, how would you characterize where things stand with the other 50% that don't have near-term potential? What's going on with those?

Jack S. Abuhoff

Sire. There -- Charlie, there isn't a bright line definition there. And when we go client by client, we're making guesses. We're making approximations. What we're trying to do is to take the level of interest we're receiving, which is high, and qualify that for nearest-term potential. We're very driven to bring in business and prioritize correctly around business that can be brought in most quickly. We're working on things that we think could be -- if we're correct, that could be brought in within the next couple of months. So when we talk about near-term potential, we're talking about weeks and months. And things that go outside of that, we think about as having a longer-term potential. Sometimes we're -- we can easily be surprised. Something that we think is -- will take longer ends up taking less time. And something we think takes could go faster takes more time. But -- so there's a certain dynamic quality to that. And we're always assessing it and always thinking about where's the lowest-hanging fruit, where can we move most quickly.

Charlie Pine

The ones that -- we roughly half that, you wouldn't say have near-term potential, are some of those still, would you consider, open doors at some point? Or have a number of these that have actually run pilots, just decided that the service really just is not of interest to them at this point?

Jack S. Abuhoff

Yes. The ones that that we're saying don't have near-term potential, we still think have potential within a 12-month period of time, let's just say. There are some that we think are outside of that, and we're not including those in that list of the 26 -- or that -- now to 35. There are a few that we think, for various reasons, don't have potential and those are off our map.

Charlie Pine

Well, it sounds like you're developing a good batting average then. What's the status of -- right now, as far as the -- your so-called what you -- I guess you kind of define it as a restart last quarter with docGenix. What's going on there?

Jack S. Abuhoff

Sure. We're working on there is trying to make some changes to the product to make it appeal to a larger market as opposed to early adopters who are very interested in digital technologies. So we're widening the numbers of contract types that we can address through the product. We're putting in new user interface on it. And we're going to leverage some of the production technology that has been brought in for Synodex, which is very highly rated for information security, something that the financial services companies care a lot about. And we're going to start borrowing from that in the financial services area as well. Beyond that, we're creating some new functionality to enable banks to author some of the documents in using our services well. We've got one customer who, I've said before, proudly proclaimed that it has the best risk -- contract risk management system on Wall Street, thanks to our product, and wants to make introductions to us. We're holding them back, saying let us get our -- make these revisions to the product and then we'll take you up on that invitation for referrals. And my hope is around in the springtime, probably late springtime, we're in the position to start selling that new product release.

Charlie Pine

Okay. So you're looking at general availability sometime early -- late spring, early summer, then?

Jack S. Abuhoff

Correct.

Charlie Pine

And lastly, I was kind of notice that after all this time, you actually now have a name for the Synodex product. It's called APS.Extract. Can you -- what's the derivation of that? What does it mean?

Jack S. Abuhoff

Sure. APS [indiscernible] I'm sorry...

Charlie Pine

Name -- after a couple of years, we never even knew this kind of a name.

Jack S. Abuhoff

Okay. Well, APS stands for applied physician statement. It's the -- what the insurance companies refer to as the health care record that they obtain in order to perform a underwriting. Our Extract is just that. It's a digital XML extract of critical impairments and critical terms from the APS. So that's the derivation of the name.

Operator

We'll go next to Perry Highland [ph] with Rubicon Wealth Advisors.

Unknown Analyst

Congratulations on the RGA. But only one question, are you still looking at acquisitions or anything?

Jack S. Abuhoff

Perry, thanks for the question. The answer is unequivocally yes. In fact, O'Neil and I were out just, I guess, last week visiting with a company. O'Neil is not allowed to say that, but I don't know why. I'm going to say where it was or who it is. Yes, we're continuing to look and we intend to maintain that search.

O'Neil Nalavadi

Perry, just to add a little bit more to the IADS. So we have a pipeline that is in early stage. We've got 3, 4 deals that have emerged that seem to look into interesting and Jack and I, we visited particular prospects just last week. So we are doing our best to look at good assets where we can leverage our skill and competencies and look for those opportunities that enjoy a secular growth trend in the marketplace.

Operator

We'll now take a follow-up from Brad Hathaway with Far View Capital Management.

Brad Hathaway

Just a quick question on the cash. So I know that you've previously talked about kind of option you would have for bringing it back onshore without incurring that full tax penalty. Can you maybe elaborate on kind of what you think you could do to bring some of that $22 million I believe, back to the U.S.?

O'Neil Nalavadi

Right. Brad, let me give you a perspective on the flow of money within the Innodata group so that you can understand how it moves and how we finance our business. As you know, most of -- all our invoicing and billing takes place through the U.S. entity. And our clients are either U.S.-based or they're based in Europe. So the money all essentially flows comes into the U.S. entity and then we fund and finance the subsidiaries for the services they provide. So we have control over a significant amount of cash flow. Now where does the constraint come in? The constraint comes in essentially at the end of each quarter. We just want to make sure that the amounts we owed to our subsidiaries are settled within a reasonable timeframe. Because if we don't do that, we trip over IRS regulation that says that the money we don't pay them in a normal course of business will be considered as being dividends. So what's the strategy in the context of this? Our strategy is that we're going to be using our existing U.S. cash balances and focus on AR and expedite AR collections to meet our U.S. cash requirements. And the last and final recourse would be to rely on the international cash balances that we have. That's the last recourse for the simple reason that bringing money to the U.S. has a tax implication.

Brad Hathaway

Understood. But I guess through prior conversations, there were suggestions that through uses of your tax assets, you might be able to actually mitigate a portion of those tax implications.

O'Neil Nalavadi

Right. That is -- technically, assuming right, we can. There will be a minimum A&P, which we estimate will be between 4% to 5%. But we also look at -- in the context that in U.S., it is an asset, the NOLs. And we just won't want to take it very lightly. We want to, ideally, apply to our operating profits and leverage that for the benefit of shareholders.

Brad Hathaway

I completely understood that it's a last recourse. I was just trying to think about how to appropriately haircut your overseas cash. So -- but it -- that's all I need to know.

Operator

[Operator Instructions] And there are no other questions at this time. I'll turn it back to management for closing remarks.

Jack S. Abuhoff

Thank you, operator. So to recap a bit, we're very pleased with our RGA's press release yesterday and the marketplace validation that comes with that. We continue to make steady progress on our Synodex strategy. We hope to have more good news soon. On the Content Services side, there are some exciting new opportunities, several of which exceed $1 million in potential contract value, but we expect continued ups and downs in the segment given the combination of its inherent project nature and difficult-to-predict client budget cycles.

So thanks, everybody, for joining us today for your continued support. Look forward to talking next time.

Operator

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