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Innodata Isogen, Inc. (NASDAQ:INOD)

Q3 2007 Earnings Call

November 14, 2007 11:00 a.m. ET

Executives

Jack Abuhoff - Chairman and CEO

Steve Ford - CFO

Al Girardi - VP of Marketing

Analysts

Bill Sutherland - Boenning & Scattergood

Tim Clarkson - Van Clemente

Tim Reynolds - Goldman Sachs

Sudhir Kona - Kona Finance

Perry Highland - Van Clemens

James McGuire - Global Capital

Jane Levy - Seal Capital

TRANSCRIPT SPONSOR

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Operator

Good morning and welcome to the Innodata Isogen Third Quarter 2007 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President of Marketing and Communication, Al Girardi. Please, go ahead, sir.

TRANSCRIPT SPONSOR

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Al Girardi

Thanks Greg. Good morning and thank you for joining us on our third quarter 2007 Earnings Call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen and Steve Ford, our company's Chief Financial Officer.

Statements made during this call and answers to your questions are intended to provide abbreviated, unofficial background to assist you in your review of the company's press release and SEC filings.

In addition, there may be some forward-looking comments regarding the company's operations, economic performance, and conditions. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. The words "believe," "expect," "anticipate," "indicate," "point to," and other similar expressions generally, identify forward-looking statements, which speak only as of their dates.

These forward-looking statements are based on the company's current expectations, and are subject to a number of risks and uncertainties, including without limitation, continuing revenue concentration in a limited number of clients, continuing reliance on project-based work, worsening of market conditions, changes in external market factors, the ability and willingness of the company's current clients and prospective clients to execute their business plans which give rise to requirements for our services, difficulty in integrating and deriving synergies from acquisitions, potential undiscovered liabilities of companies that Innodata Isogen acquires, changes in the company's business or growth strategy, the emergence of new or growing competitors, and various other competitive and technological factors, and other risks and uncertainties indicated from time-to-time in the company's filings with the Securities and Exchange Commission.

Actual results could differ materially from the results referred to in these forward-looking statements. Along with these risks and uncertainties, there can be no assurance that the results referred to in these forward-looking statements will occur. We encourage you to read the risk factors described in Innodata Isogen's various SEC filings for an understanding of the factors that may affect the company's businesses and results.

And now, I will turn the call over Jack Abuhoff. Jack?

Jack Abuhoff

Thank you, Al. Good morning everyone. Thank you for joining us today. We are three quarters into this year and on plan to deliver record revenue growth in 2007. Today, Steve and Al are in New Jersey and I'm in Manila, the Philippines.

In our call today, I will review with you the highlights of our third quarter performance. Then we'll discuss the business, its direction, its improving dynamics and areas of expanding opportunity. I'll also discuss certain challenges we face and what we're doing about them. Then Steve Ford, will breakout the numbers in more detail. And, when Steve concludes, we'll take your questions and comments in our Q&A period.

Third quarter 2007 revenues were approximately $18.1 million, up nearly 75% from third quarter 2006 revenues of approximately $10.4 million, and up 11% from second quarter revenues of $16.3 million. The third quarter was our fifth straight quarter of sequential quarterly revenue growth. With only three quarters of the year in, we've already exceeded our 2006 revenues by $6.3 million.

On our last earnings call, we said we expected 65% year-over-year increase in revenues in the second half of 2007. We're now revising that guidance upward as a result of strong client demand and strong execution. We now anticipate in excess of 75% year-over-year revenue growth in the second half of 2007, with Q4 revenues exceeding Q3.

Moreover, we have some important new deals in late stages. If we are able to make good progress on these deals, as I think we can, we will be further sowing the seeds for a strong 2008, and depending upon timing, we may even see some additional Q4 contribution from these deals.

Looking after 2008, we anticipate continued strong performance. One of the most attractive elements of our business model is the effect that revenue increases has on earnings. If you look at this quarter year-over-year, you will see that 58% of the additional revenue we added went straight to the bottom-line earrings.

As we continue to drive revenue, we can expect that in excess of 40% can go direct to bottom-line earnings. So, in Q3 we earned $2,115,000, which is $0.08 per diluted share. This is an increase of approximately 145% on Q2's $0.03 per share. At the end of the quarter, our cash and receivables stood at $23.4 million, up nicely from Q2's $21.7 million.

The growth we are showing is coming mostly from increasing our knowledge process outsourcing work. Expanding the knowledge process outsourcing work we performed was indeed a key element of our 2007 strategy. Knowledge Process Outsourcing, referred to as KPO for short, is a type of business process outsourcing, but it involves higher-end work.

Business process outsourcing, typically involves repetitive back-office tasks performed by low-skilled workers, but knowledge process outsourcing requires analysis and higher order domain expertise. The people who perform this work often have post graduate degrees and professional certifications such as lawyers, medical doctors and engineers.

Much of the KPO work we perform involves using professionals, JDs, MDs and MBAs, PhDs and others to help edit, organize content and author content. It's specialized information products that are sold by the world's leading publishers.

Here is a clear example of the type of work we do. Just this quarter, for a new client who is a leading business news aggregator, we helped launch a product that delivers customized summaries everyday to corporate executives on topics of interest in industry such as healthcare, retail and media.

We put in place a streamlined process and advanced tools, so each of our people working on this product can monitor incoming news, select relevant stories and write more than 10 summaries each day, which are then posted directly to our client's website. We started out helping the client create content for four industry sectors, but now we are ramping up to cover more than 50 industry sectors.

By using the right processes and tools and performing the work offshore, we're able to save the client almost 50% from what it otherwise would have cost him to get this work done.

From Q2 to Q3, our KPO revenues increased by 22%, a sizable increase. However, looking year-over-year, KPO revenues increased still more dramatically rising a 160% for approximately $2.9 million in Q3 last year to approximately $7.5 million in Q3 this year. We now have more than 1,500 full time personnel providing KPO services.

There are a few reasons why KPO work is so attractive to us, more attractive frankly, than even systems integration or digitization. But one thing, the revenue per head is relatively higher, so we're able to generate comparatively more revenue with our existing investment and production facilities. The second reason is the work tends to be more ongoing, more than 60% of our KPO revenue is recurring revenue.

Now, as if those reasons weren't enough, the predictions industry analysts are making for KPO market growth are simply staggering. Let me give you an example. Frost & Sullivan, a respected business research and consulting firm that tracks the outsourcing marketplace, expects KPO to grow by compounded annual growth rate of 63%, going from $615 million in 2006 to $32.2 billion by 2014.

When it comes to KPO work, we have several significant advantages that our competitors lack. Some of these advantages serve to make us good and others which will make us great. What makes us good is mature processes and project management. We have been performing editorial high-end processes for a long time now and we figured out how to bring together onshore and offshore teams in an integrated delivery model.

What makes us great is that we just don't stop at labor-based savings. We use technology to its fullest to create additional ongoing savings. Our engineering teams know how to automate tasks and create efficiencies to progressively and significantly reduce the human effort required. With their continuous improvement orientation, we are always improving margins on our ongoing work.

To ride the KPO wave that the analysts are predicting, we are going to build on what makes us good and what makes us great. We are going to build on our project management. We are going to build on our onshore, offshore model and also on our differentiating engineering capabilities, as we expand strategically to offer more and more KPO services.

Just this year, we launched two new service areas, technical writing services and research and analysis services. Our research and analysis initiative has already secured four new clients and has more in the pipeline. Our technical writing group is also making great strides.

In our last earnings call, I mentioned that our technical writing group had won a long-term services engagement for a leading global technology manufacturer.

I want to bring you up-to-date on our progress on this because I believe it is indicative of the dynamics of the successful KPO engagement. In the short-term, we have been working for this client. We have expanded for about four or five people to more than 30 people, project managers, writers and editors who perform work from multiple locations across China, the Philippines and the United States.

And now, we are in the process of adding another 10 to 12 technical writers and editors to handle additional assignments that the client is giving us. The client has indicated that they would like to expand our relationship further still, to incorporate additional product lines.

There are many other business and service areas that are right for us to expand into and that also build upon the strong foundation we have in process management, project management and workflow engineering. Some of these are adjacent to or extensions of our current services, like other types of research services and other types of content design services. Others are slightly further refilled, these include opportunities providing specialized legal work, market research, pharmacological research, and engineering and design to name again just a few.

If you haven't yet read Thomas Friedman's best-selling work called The World Is Flat, I sincerely urge you to do so. What Friedman describes in his book, the redistribution of where and how work is done is exactly what we, as Innodata Isogen stakeholders are participating in. Friedman's thesis in a nutshell is that thanks to instantaneous global communication, we are in the midst of a world revolution that is on par with the development of the printing press and the discovery of the new world. In a world made flat by Internet communication, we can create work flows that incorporates skilled professionals in multiple locations across the globe to create specialized products, and that is exactly what we are doing.

Given the size of the KPO market opportunity, our capabilities and our differentiated position within the category, my management team and I are confident that we will achieve annual revenues of $100 million within the next few years.

Clearly, the significant revenue gains we are achieving this year have brought that important milestone substantially within a year.

Another key element of our 2007 strategy has been to make the company better, winning new business both from existing and from new clients. One of the ways that we saw to make that happen this year was by creating self-contained market-facing business practices that has everything it takes, sales, engineering, project management, business management, to work with clients consultatively and creatively. In the first three quarters of the year, this resulted in more than 15 new client wins and more than 100 expanded engagements from existing clients.

Our teams are winning business because they are hungry to succeed and they are delivering unsurpassed value to clients.

Let me share with you a third quarter win which we can credit to this new strategy. Our commercial practice was awarded a contract valued at several hundred thousands dollars by what I believe, is the world's leading software company and a new client for us. The work was heavily contested and we beat out some of the top tier systems integrators. The work will be to engineer and build the web content management system for them that they will use to drive their online health system.

Right now we are under an NDA that prevents me from naming the company, but I can still read to you what they said about us in their email informing us that we had won the business. They wrote, and I'm quoting now.

"This was not an easy decision to make. The competition was experienced and motivated, but you consistently offered the best response to each of our requirements. Your structured and thoughtful approach to the project made a huge difference to our decision. Our team deeply respects and appreciates the professionalism that you displayed throughout this process, your timely response to all of our questions and your flexibility during the negotiation process, as well as your management's commitment and enthusiasm to provide a superior solution."

Now that's good feedback indeed, and it's the type of feedback that is now driving our success.

We recognize that as we grow we are going to need to supplement our team with additional top talent. This quarter, we brought in a gentleman by the name of Tim West, who will support our efforts within the intelligence, defense, and security agencies. Tim has got a tremendous resume and following. He joins us from the Defense Intelligence Agency or DIA, where he led the agency's efforts to establish best practices and standards for data and service oriented architecture.

Prior to that, he led the DIA's Intelligence Community Metadata Working Group, where he was responsible for establishing standards on the use of XML and metadata within the national security community, which includes intelligence agencies, Department of Defense and the Department of Homeland Security.

We also added key senior talent to our KPO execution team, adding professionals to enhance our domain expertise. This included a class mate of mine from the Harvard Law School who was most recently a professor at The University of ToledoCollege of Law. It also included a medical doctor who was most recently an assistant professor at The University of Maryland School of Medicine and holds degrees from the Johns Hopkins Bloomberg School of Public Health, Temple University School of Medicine and Yale University.

In middle of this good news, is the challenge we face from a weakening of the U.S. dollar against Philippine peso and the Indian rupee. The depreciation of the dollar is a headwind to our margins in general and erodes the labor cost arbitrage play that is a component of our value proposition. We have, however, taken active steps both tactically and strategically to deal with this.

For example, on the tactical side, we are able to put in place hedging strategies that help mitigate for a period of time effect of dollar depreciation. In addition, we are focusing our engineering talent and greater automation to achieve productivity offsets. And remember, this is the same engineering team picked this quarter by the world's leading software company to help it create efficiencies in its content management system. We are talking about some top talents here.

Strategically, by focusing on KPO work, we are driving higher margins and greater asset utilization. So, the currency issue, while the drag on margins is offset by these gains, and by the operating leverage we enjoy as we continue to drive revenue on a fixed cost base.

Between these tactical steps and our strategy, we are positioned well to mitigate the negative impact of the peso and rupee appreciation in the near and medium term.

I want to thank you for your time. I will be joining you again during the Q&A portion of our call. But first, Steve Ford will walk you through the numbers in greater detail. Steve?

Steve Ford

Thank you very much, Jack. Good morning and thank you all for joining us. Now let's take a closer look at the numbers. I will take you through the changes in revenue, provide insight on the cost structure including discussing the impact on our operations of the fall in U.S. dollar, explain our cash generated from operations and then conclude with some general comments.

Revenues in the third quarter were up 11% from $16.3 million in Q2 to $18.1 million this quarter. On a year-over-year basis, revenues improved 74% from $10.4 million in Q3 2006. We customarily separate our revenue into recurring and non-recurring categories. Recurring revenue, which represents 62% of total revenues, consist of services that we anticipate a client will require for an indefinite period. Non-recurring revenue, which is the remaining 38%, refers to projects that have a more specific timeframe for completion.

Another important measure of revenue is the growth in knowledge process outsourcing or KPO. KPO activities drove approximately 76% of the growth in the third quarter of 2007, as compared to Q2 of this year and 60% of the 2007 third quarter, year-over-year growth of $7.7 million.

Looking at revenue from a segment standpoint, our content services business generated $17.4 million in Q3 2007, up $2 million from $15.4 million in Q2 2007. This increase principally reflects revenue from winnings announced earlier this year.

The Professional Services segment revenue declined 19% from $967,000 in Q2 2007 to $784,000 in Q3 2007. This decrease is the result of projects completed in the third quarter. As the professional services group completed projects, we refocused the teams on supporting new KPO and content services revenue initiatives.

We are continuing to examine ways to use our professional services group in growing new business offerings and in further penetrating our existing client base. Direct operating costs were $12.5 million or 69% of revenue in the third quarter of this year, compared to $8.8 million or 85% of revenue in the third quarter of last year. This improvement in direct operating costs as a percent of revenue to 69% from 85% was achieved in spite of the impact of a weaker U.S. dollar versus the currencies of the Philippines and India.

As you know, we perform most of our production in the Philippines and in India where the majority of our employees and facilities are located. We fund these operations by sending U.S. dollars to these countries. We benefit from labor rate arbitrage, the use of local engineering production improvements and the application of technology to our processes.

In periods of a strengthening U.S. dollar, our requirements to send dollars are lower and our offshore unit costs declined. Of course, the offset occurs when the dollar weakens. During the third quarter of this year, we put a plan in place to mitigate the effects of the weaker U.S. dollar on our operations. We are currently using forward contracts to reduce the impact of the following dollar on our production expenses. Implementing these hedging strategies enables us to mitigate some of the effects of currency fluctuations on our cost structure. We will continue to examine all means available to us to protect our margins.

Even though we have these operating costs challenges, we saw our gross margin grow from 15% in the third quarter of 2006 to 27% in the second quarter of 2007 and now to 31% in the third quarter of 2007. As we have continued to grow our revenue base in the third quarter this year, we have demonstrated the positive effects of the operating leverage inherent in our business model by the achievement of higher gross margin in spite of currency challenges.

Selling and administrative costs up $3.5 million in the third quarter of 2007 for the same total dollar amount as the second quarter of 2007. As a percent of revenue, selling and administrative expenses declined to 20% of Q3 2007 revenue from 22% of Q2 2000 revenue,\ and significantly from the 32% of Q3 2006 revenue.

On a pre-tax basis, we earned $2.3 million in Q3 2007 compared to pre-tax earnings of $953,000 last year than compared to a pre-tax loss of $2.2 million in Q3 2006.

Our third quarter 2007 results included a $167,000 provision for income taxes, primarily representing income taxes attributable to certain foreign operations. In regard to taxes, the company has established a cumulative valuation allowance of approximately $4.3 million, which is roughly equivalent to 34% of our net operating loss carry forward or NOL. Once we achieved several profitable quarters for U.S. tax purposes, and if satisfied other criteria, we may be in a position to begin recognizing the NOL as a tax benefit.

After taxes, we earned $2.1 million or $0.08 per diluted share in Q3 2007 compared to net earnings of $862,000 or $0.03 per diluted share in Q2 2007 and compared to a net loss of $2.2 million or $0.09 per diluted share in Q3 2006.

Next, I will discuss our operating leverage. As I mentioned in prior conference calls, in planning for 2007 we made the conscious decision to hold on to our production capacity in Asia and to retain our essential management infrastructure. By retaining this capacity and talent, we are able to leverage our established fixed cost base and primarily incur only variable cost as we ramp up the business.

As a result, when we felt the effects on the downside last year, we have now experienced high margins on our incremental revenues in 2007. For example, for the third quarter of this year we generated a $2.3 million pre-tax profit compared to a $2.2 million loss in the third quarter of last year. This $4.5 million improvement, which represented an incremental margin of 58%, was achieved on $7.7 million of additional revenue.

These higher margins in the third quarter of 2007, with a result of favorable product mix and stringent cost control, in spite of significant weakness which I have just mentioned of the U.S. dollar versus the Philippine and Indian currencies.

During the third quarter, we generated $2.6 million in cash from operations. A positive $2.6 million is calculated by adding the $2.1 million in net profit plus $800,000 in depreciation and amortization and subtracting $300,000 of net changes to other assets and liabilities. Our free cash flow during the quarter is $900,000 which is the result of subtracting $1.7 million of capital spending from the $2.6 million in cash from operations.

We ended the third quarter with $12.1 million in cash, which is $900,000 increase from the ending cash balance at June 30, 2007. At September 30, 2007, we still maintained our $5 million line of credit and we have no outstanding obligations under this credit line.

In relation to general corporate matters, I would like to comment on our strategy regarding M&A activity. We have mentioned during prior conference calls that during 2007, we were going to focus on organically growing the topline and driving the business back to profitability. The results for this year are a good indication of our progress. Given the solid traction we have achieved this year, I will be turning my attention more in the direction of M&A opportunities in 2008.

We will be looking at deals that will help us grow the topline, have U.S. based operations that we can take offshore and earn a revenue size range generally from $5 million to $25 million, well priced and are accretive to earnings per share. I will provide you with more color regarding M&A activities in the future as the situation develops.

Okay. That wraps things up for now. Again, thank you everyone and looking forward to your questions. Greg, we are now ready for a Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Bill Sutherland with Boenning & Scattergood.

Bill Sutherland - Boenning & Scattergood

Thanks, good morning. Jack you mentioned in the KPO space, I think you talked about a potential run rate worth over $100 million and first of all, did I hear you correctly? And then, perhaps you can just address a little bit more specifically the timeframe you are thinking of?

Jack Abuhoff

Hi, Bill. Thanks for the question. I did mention that we are targeting to get to $100 million. We think, since the opportunity and the potential is there and we think that we are making some good headway towards that direction what we have said is, in the next few years, we haven't put a timeframe on that at this point, but we are going to run as hard and as fast as we can to get to that goal.

Bill Sutherland - Boenning & Scattergood

But does that - I am sorry, I just want to make sure I am clear. Does that essentially refer to all content management in other words the $17 million in Q3? Is that what you mean by KPO or…?

Jack Abuhoff

In terms of the $100 million, I am talking about the overall business.

Bill Sutherland - Boenning & Scattergood

Okay. Can you all talk about offshore utilization and also turnover?

Jack Abuhoff

We do internally. We have not been sharing metrics regarding utilization or turnover. Metrics in our business are a little bit more complicated than they are in some others because we have the mix of different types of facilities and facilities that use seats in different numbers of shift. And what we find is that depending on the mix of revenue that we are bringing in, we're incrementally adding to our workstation base as we move forward.

Operator

We'll go next to [Tim Clarkson with Van Clemente].

Tim Clarkson - Van Clemente

Yes, great quarter guys, in particular [osculates] to hedging as quite skillful. What I wanted to ask about was could you just discuss this KPO in the context of the historical strengths of the company that you experienced with XML and also your offshore labor facilities that can do things more cheaply.

Jack Abuhoff

Sure, we've got a long history providing high-end domain specific services and what we're finding now is the opportunity has emerged to provide that at a much greater scale. Critically, what we're able to do is leverage on the things that we've put in place. So, as a company we're very strong in terms of process management. We know how to construct processes that are very efficient. We're very strong in terms of project management. We have got great capabilities in terms of global resourcing of people and then, of course, we've got a highly differentiated capability in terms of engineering.

I think we are the only company that I am aware of in our competitor set that is selling engineering services directly to customers to help them reengineer their own processes. So when we turn those capabilities inwardly, as we increasingly have, we've got a very compelling offering. It goes beyond labor arbitrage and it goes to the heart of what we are looking to accomplish for customers, which is making them more efficient and more productive and helping them save money.

Tim Clarkson - Van Clemente

Okay. Let me just see if I got this right. So, to put it more simply, I mean, I assume that there is a lot of companies that try to do BPO and they screwed up for various reasons. They underestimate the difficulty of going offshore. So in other words, what you do as you are kind of an experienced guy, you allow them to go offshore and experience the cost savings without screwing up?

Jack Abuhoff

That's right. In other words, the critical threshold requirement is you've got to be able to execute well and executing well requires great processes and matured methodologies. We've got those in place and that's what makes us very good of what we do. What we are able to do is go beyond that and deploy technology and engineering skills to get savings beyond just the savings that labor arbitrage brings.

Tim Clarkson - Van Clemente

Alright.

Jack Abuhoff

And I think I mentioned at the beginning of the call, in Manila, this evening, I am here with some customers who came to understand how we do certain work and they were very impressed by the way we've taken labor out of the work flows by virtue of the technologies we've created.

Tim Clarkson - Van Clemente

Great, thank you

Operator

(Operator Instructions) We will go next to [Tim Reynolds] with Goldman Sachs.

Tim Reynolds - Goldman Sachs

How are you doing, Jack?

Jack Abuhoff

Hi, thank you for joining us.

Tim Reynolds - Goldman Sachs

Congratulations on your quarter.

Jack Abuhoff

Thank you very much.

Tim Reynolds - Goldman Sachs

A couple of things, I'm looking at basically where you guys are at. I know, I think looking at the company itself, you guys are pretty much undervalued here and the number $100 million looking at the way you guys are growing is it possible that you can give a little bit more of a number of next year's bottom line?

Jack Abuhoff

Yeah, I think at this point we are going to. We are comfortable talking about obviously, the rest of this year and we are comfortable saying that performance is going to be very solid next year in terms of revenue growth and in terms of earnings. I think we are getting a little bit more time to be able to quantify that further, because, as I said, we've got a number of very significant deals in somewhat late stages and some more behind that. So, as we see how those shape up, I think we will be in a better position to provide a little bit more color to what the range of possibilities is for 2008.

Tim Reynolds - Goldman Sachs

Okay. I guess, I just want to congratulate you on a good quarter and I do think you guys are pretty much undervalued. I think a lot of more companies will start looking at you guys now, congratulations.

Jack Abuhoff

Well, that's great to hear. Thank you. And I think one of the things that Steve and Al and I have in our calendar working with Stan Berger is to increase the IR efforts fairly substantially starting in the next several weeks. Actually, we started already.

Tim Reynolds - Goldman Sachs

Great.

Operator

(Operator Instructions) And we will go to [Sudhir Kona with Kona Finance].

Sudhir Kona - Kona Finance

Hi, yes, great quarter. I have a question on the percentage of revenues coming from KPO, I mean, is it the $17 million, what percentage growth is that just if you take the KPO part?

Steve Ford

If you look at our revenue and you look at the revenue base, we grew year-over-year $7.7 million, about 60% of that represents KPO.

Sudhir Kona - Kona Finance

Okay. And most of KPO is recurring revenue?

Steve Ford

KPO by its nature tends to be more towards recurring. That is correct.

Sudhir Kona - Kona Finance

Okay, great. Thank you very much.

Steve Ford

You're welcome.

Operator

And we will go next to [Perry Highland with Van Clemens].

Perry Highland - Van Clemens

Hi, Jack and Steve, great quarter, no question about it. Can you just give us any idea if you are making any enrolls with the government contracts or projects or bidding or whatever?

Jack Abuhoff

Sure. There is a lot of good work there for us to do. We mentioned the important hire that we brought on to the team this quarter. He has integrated well into the work that we are doing and sees lots more possibility where that came from. We've expanded the work that we are doing there. I believe there is more late stage pipeline that we are looking at in terms of further expansion. And as you know, what we are doing there is essentially building information management systems that help intelligence analysts relate and find information quickly. It's an important requirement that we have got right now as a country, providing that type of knowledge based decision support.

So lots of opportunity there, lots of opportunity in terms of the publishing sector. Also, taking some of those semantic technologies that we were applying and bringing those two information media companies that are our bread and butter business. They are helping customers relate and find information just like the analysts have to relate and find information. So it's kind of a double-play. We have got lot of opportunities to drive that growth into the sector and then we have got additional opportunity to take the things we are doing there and bring them to the core customer base in information media.

Perry Highland - Van Clemens

And one last question. Are you still - so you're still biding on like projects then, rather -- I mean, the ongoing the KPO and [stuff]. Is there still project based business you bid on or?

Jack Abuhoff

Yeah, absolutely, I think there is going to always be a project a portion of the business that's project based and in terms of how that effects the revenue base, we are not going to manage, we are not going to overly manage that when we can take large scale projects that are lucrative and enable us to make money we are going to do it. And we will hope to even out the project flow in terms of having a larger number of projects going on and of course, by focusing primarily on the KPOs business.

Operator

Now we will take a follow up from Bill Sutherland with Boenning & Scattergood.

Bill Sutherland - Boenning & Scattergood

Thanks very much. Jack actually, where I was headed with my question on utilization was just, you have been able since you've kept the capacity in place, to manage this really nice uptick in demand and I am just curious if it were to continue at a very rapid pace, to what degree there might be a limitation as far as professional, the availability of the talent offshore? Thanks.

Jack Abuhoff

Bill, thank you for coming back with that because I realize you had a two part question and I didn't get the second part. What we're finding is that there is not a lack of talent that we can tap into. The biggest problems relative to attrition frankly, are among two labor pools IT labor, particularly certain types of IT skills and then separately, the types of people with skill sets that would have them working in call centers. For the most part, we're not actively competing at a large scale for that type of labor.

Bill Sutherland - Boenning & Scattergood

Okay. So, and even though they are higher level degree candidates, they are readily available in Philippines as well as India?

Jack Abuhoff

That's correct.

Bill Sutherland - Boenning & Scattergood

Okay, that's great. And then Jack, I am sorry, Steve. On the hedge, how far out did you go with that and kind of what portion of your cost did you cover with it?

Steve Ford

The way that works is that, we generally try to evaluate this at least initially on a quarter-by-quarter basis with a look out over the six to nine months horizon. So, we're still refining our approach to this area and certainly the whole idea here is to try to lock in a more favorable cost when we feel that it's appropriate to do that type of hedge. So, that's really what we're looking at here and we're going to continue to look into 2008. So, we started at the middle of this year looking through the end of this year. We're now looking at 2008 right now, but we are covered through the end of this year at this point.

Operator

And we'll go next to [James McGuire] with Global Capital.

James McGuire - Global Capital

Hi Jack, great numbers. I know you commented that you couldn't possibly comment on the earnings estimate, but is it possible you can just give us some kind of a guideline from the business that you have now and a possible acquisition going forward to next year?

Jack Abuhoff

Could you just repeat the last part of that sentence, outlook in terms of…

James McGuire - Global Capital

Could you give some kind of a guideline with the current business going forward through first quarter, second quarter, of 2008, well, about any possible acquisition going forward into 2008?

Jack Abuhoff

Some additional color in terms of what we would look for in an acquisition or timing of acquisition?

James McGuire - Global Capital

Right, what you will look for in the acquisition and what kind of numbers on the bottom line would that bring into the bottom line?

Jack Abuhoff

I see, okay. I guess in terms of timing, as Steve mentioned we have increased our focus on acquisitions. We've actively got a list of companies that we're interested in and we're progressively making contact with those companies. We've got our targets set on companies that have certain differentiating KPO capabilities, which we believe could fit well in terms of a portfolio with the KPO capabilities we've got now. I think in terms of timing I wouldn't expect anything in the first quarter certainly. I think it would be later in the year.

Operator

Now we'll take our final question from Jane Levy with Seal Capital

Jane Levy - Seal Capital

Hi there, just a couple of questions. First a housekeeping question, you said content services were $17.5 million in Q3 up from what year-over-year to September '06? Did you say it was up $2 million or up --

Steve Ford

It was up $2 million Jane, from the prior quarter. So the prior quarter, the $2 million number, it was $17.4 million compared to $15.4 million Q3 of this year compared to Q2 of this year, that's the $2 million you are referring to.

Jane Levy - Seal Capital

Yeah, got it. And then just wanted to check, 31% gross margin is really excellent seeing that you have this pressure from currency. Just wanted to get a sense, I am trying to define in my own mind how much of that improvement came from the increasing proportion of KPO revenue? Is there any frame that you can give us perhaps for the margin profile of KPO relative to the rest of business?

Steve Ford

The KPO business, Jane, carries a very high margin with it and it's a very lucrative business for us to be in. And so, we haven't really come out and differentiated the margin. The best way for you to try to get a better sense of that is to take a look at the growth and the percentage that we've indicated represents KPO. The reason I say that is because we have a variety of KPO services. We have KPO services that involved various professions, both in the medical field, in the legal field and in others. They carry a variety of margins, but the blended margin, the overall margin is significantly more favorable. So as we have indicated, our growth is primarily KPO and obviously, the move up in margins as you can see is primarily associated with that.

Jane Levy - Seal Capital

Okay, great. And are we still in line for $2 million to $3 million in CapEx in the second half, I guess, you did about $1.7 million in Q3?

Steve Ford

Yeah, I think the $2 million to $3 million for the second half is not a bad number to use as an estimate. Our number in Q3 was $1.7 million and I would expect we would do a number, maybe in the $1 million to $2 million range in Q4.

Jane Levy - Seal Capital

Okay.

Steve Ford

And we're generally looking at over a 12 months horizon of a $3 million to $4 million range in total. It varies, some quarters it will be higher or lower than others. It's tied into our need to provide more technology for our production. And our productions and technology needs to be put in place obviously immediately in advance of us generating revenue. So there is a sort of a natural ebb and flow to that investment in CapEx. But, generally speaking, over 12 months horizon, right now we're looking at $3 million to $4 million as a reasonable range.

Jane Levy - Seal Capital

Okay. And then, my final question. Last quarter, you did talk about revenue concentration from your biggest clients. Is there a number that you care to share with us this quarter?

Steve Ford

Our revenue concentration has increased. I don't have the percentages here right now, but it has increased slightly since the last quarter numbers that we put out. And we'll actually be putting that information in our 10-Q, which we will be filing shortly.

Jane Levy - Seal Capital

Okay. And it's the same clients as last quarter?

Steve Ford

Yes.

Jane Levy - Seal Capital

Okay, great. Thanks.

Steve Ford

You're welcome.

Operator

That concludes the question-and-answer session today. At this time, I would like to turn the conference back over to Mr. Abuhoff for any additional or closing remarks.

Jack Abuhoff

Well, thank you, everybody. Thanks for your questions and thanks for joining us today. I guess I will just summarize our discussion today. We are growing our business. We are delivering strong financial performance. In Q3, we increased revenue year-over-year by nearly 75%, boosted recurring revenue by more than 60% and more than doubled profitability from Q2 to Q3. We anticipate that we will see strong revenue performance and sustained profitability in the fourth quarter.

Further, we are anticipating that revenues in Q4 will rise more than 75% from Q4 2006 and will be up strongly from Q3 2007, so that is up strongly from the quarter that we are reporting on now, as well. And again, we are confident that we will sustain strong financial performance and profitability in 2008.

Our balance sheet shows cash increased by about a $1 million in Q3 to more than $12.1 million, at the same time receivables rose from $10.5 million to $11.3 million. We are engaged in an acquisition strategy. We are looking for select deals, good deals that are accretive to earnings.

I am working with Steve and Al and Stan Berger to intensify our investor relations efforts and get out and tell our increasingly compelling story to a broader pool of interested investors. We are also working on several significant opportunities, which we believe could help fuel further our rapid growth.

So, I guess today, as always, I want to thank you for your confidence and for your continued support. I very much appreciate it and very much appreciate the large number of new callers on with us today. And perhaps, if anybody is interested in getting together after the call for a more in-depth meeting, we would love to do that. So thank you, and look forward to being with you next time.

Operator

Once again, that does conclude today's conference call. We thank you for your participation. You may now disconnect.

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