Innodata - Earnings Call - Q2 2025

Executive Summary

• Beat-and-raise quarter: Revenue $58.4M (+79% YoY) and diluted EPS $0.20 exceeded Wall Street consensus; management raised FY25 organic revenue growth guidance to 45%+ from 40%+.
• Strength in core DDS segment (Q2 revenue $50.6M) and expanding big tech relationships; largest customer contributed ~$33.9M in Q2, with additional projects in the pipeline.
• Non-GAAP profitability improved: Adjusted EBITDA $13.2M (23% margin), Adjusted Gross Margin 43% (vs 33% LY); balanced by stepped-up growth investments with plans to increase in Q3.
• Regulatory overhang cleared: DOJ and SEC investigations concluded with no enforcement actions, a potential sentiment tailwind.
• Tax rate guide lowered to ~27–28% for coming quarters (from prior ~28–31.5%); cash rose to $59.8M with credit facility undrawn.

What Went Well and What Went Wrong

What Went Well

• Beat on key metrics and raised guidance: “We beat analysts’ expectations across the board… we are increasing our revenue guidance to 45% or more” — CEO Jack Abuhoff.
• Big tech expansion and pipeline: New projects under second SOW with largest customer; another big tech forecasted ~$10M H2 revenue after only ~$0.2M TTM previously.
• Strategic AI positioning: Strong traction in agentic AI, model evaluation, and trust & safety; management views Innodata as “ideally situated” for high-quality training data and evaluation services.

What Went Wrong

• Continued customer concentration and inherent quarterly volatility acknowledged; largest customer dynamics remain “highly dynamic” (Q1 guide had suggested potential -5% sequential change).
• Margin investment cadence: ~$1.4M operating investments in Q2 with expectation to step up by ~$1.5M in Q3, near-term headwind to margins as company leans into growth.
• Competitive environment persists; pricing less critical than data quality, but competition remains robust (Scale AI context discussed).

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Innodata Report Second Quarter 2025 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press restart, followed by the number zero for your operator. This call is being recorded on Thursday, July 31, 2025. I will now like to turn the conference over to Amy Agress. Please go ahead.

Amy Agress (SVP and General Counsel)

Thank you, Sergio. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata, and Marissa Espineli, Interim CFO. Also on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective about the business, and then Marissa will follow with a review of our results for the second quarter. We'll then take questions from analysts. Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements, which are predictions, projections, and other statements about future events. These statements are based on current expectations, assumptions, and estimates, and are subject to risks and uncertainties. Actual results could differ materially from those contemplated by these forward-looking statements.

Factors that could cause these results to differ materially are set forth in today's earnings press release in the risk factor section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information. In addition, during this call, we may discuss certain non-GAAP financial measures. In our earnings release filed with the SEC today, as well as in our other SEC filings, which are posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. Thank you. I'll now turn the call over to Jack.

Jack Abuhoff (Co-founder and CEO)

Thank you, Amy, and good afternoon, everyone. Thank you for joining us. We're very pleased to report that Q2 2025 was another outstanding quarter for Innodata. We beat analysts' expectations across the board on key metrics, revenue, adjusted EBITDA, net income, and fully diluted EPS. Revenue grew 79% year-over-year to $58.4 million, and adjusted EBITDA grew 375% to $13.2 million, reflecting the operating leverage that's inherent in our model. We also continued to strengthen our balance sheet. Cash increased from $56.6 million at the end of Q1 to $59.8 million at the end of Q2. A few days after quarter close, we collected an additional $8 million that typically would have been received by June 30. Our $30 million credit facility remains undrawn, giving us flexibility to support future growth. Our business momentum continues to accelerate.

As a result, we are raising our full-year 2025 revenue growth guidance to 45% or more organic revenue growth, up from the 40% we communicated last quarter. Our forecast reflects significant new deals that have been finalized since our last call, as well as several deals that we believe are highly likely to close in the near term. We have a robust pipeline that includes significant dollar values positioning us for a strong second half of the year. Many of these deals are not incorporated in our forecast, leaving room for possible further increases. Demand for our services is strong and accelerating, and we are seeing success across a diversity of existing and new customers. I'll talk about our largest customer first.

We recently won several new projects with our largest customer, and we have others in the pipeline that are not yet included in our forecast, but which we think are reasonably likely. Several of these new projects are under the second SOW we reported signing with this customer last quarter. We believe that the second SOW potentially gives us access to an even larger generative AI revenue pool with this customer. With another big tech customer, we were recently awarded a number of significant engagements, and we have additional significant engagements in the late-stage pipeline, enabling us to forecast $10 million of revenue from this customer in the second half of this year. It is worth noting that we did just $200,000 of revenue with this customer over the entire trailing 12-month period. This is a very significant upswing that we believe will inure to our benefit significantly next year.

These are just two examples. There are more. The traction we are now seeing is exhilarating. We have built a marquee set of customers whose trust we have worked hard to earn and whose demand for our capabilities is expanding. Our big tech customers are in an all-out race towards superintelligence and autonomy, which we believe will be driven to a large degree by high-quality, complex training data. We believe we are ideally situated to supply them with this high-quality, complex training data. Moreover, we believe we are ideally situated to help them test models, diagnose performance issues, and prescribe data mixes required to improve performance. This is a frontier area. We believe that the future of LLM improvements lies not only in scaled data, but in smart data, knowing exactly what kinds of post-training data are required to achieve specific improvements in factuality, safety, coherence, and reasoning.

At the same time, we are positioning ourselves to help enterprises build and manage AI that can act autonomously, often referred to as agentic AI. This will require simulation training data to capture how humans process multivariant problems. It will also require sophisticated trust and safety monitoring and management. We believe agent-based AI is going to serve as the cornerstone technology that unlocks the full value of large language models and generative AI for enterprises. Moreover, we believe that progress on agentic AI is likely to soon result in a ChatGPT moment for robotics. Within the next several years, we believe agentic AI will be served at the edge in hardware devices with which we will commonly interact in many respects in our lives.

We believe the market for simulation data services and evaluation services to drive agentic AI and robotics is likely to dwarf the market for frontier model post-training data. Our growth opportunities are significant and multidimensional. We intend to invest in ways that we believe will enable us to continue our growth path over the next several years. These include short-cycle, high-return growth initiatives like custom annotation pipelines, verticalized agent development, and expanded global delivery. Strategic platform development, especially for LLM testing, safety, and real-world deployment. Also, advisory and integration services for enterprises building AI-native systems. Expansion into new domains such as multi-agent systems and robotics, and expansion into new markets. We believe now is the time to lean in, investing in capabilities that can compound value over the next decade.

This year, we intend to substantially increase investments, most of which will be expensive, while at the same time beating 2024 adjusted EBITDA. In the second quarter, we incurred approximately $1.4 million of operating expenses that we think of as investments. This largely consisted of new hires in delivery, product innovation, go-to-market expansion, and talent acquisition. At the heart of this performance is a simple truth. We are deeply aligned with the most significant technological invention of our era, generative AI. Across the entire lifecycle of generative AI model training, from pretraining to post-training, to evaluation to safety, we're delivering the services that unlock the performance of GenAI models. I'll now turn the call over to Marissa to go over the financial results, after which Marissa, Aneesh, and I will be available to take questions from analysts.

Marissa Espineli (CFO)

Thank you, Jack, and good afternoon, everyone. Revenue for Q2 2025 reached $58.4 million, representing a year-over-year increase of 79% and demonstrating strong continuing momentum. Adjusted gross margin was 43% for the quarter, up from 33% in Q2 of last year. Our adjusted EBITDA for Q2 2025 was $13.2 million, or 23% of revenue, compared to $2.8 million, or 9% of revenue in the same quarter last year. Net income was $7.2 million in the second quarter, up from a loss of $14,000 in the same period last year. In Q2, we were able to utilize the benefit of accumulated net operating losses, or NOLCO, to partially offset our tax liability. Looking ahead to the coming quarters, barring any changes in the tax environment, we expect our tax rate to be approximately 27%-28%.

Our cash position at the end of Q2 2025 was $59.8 million, reflecting a sequential increase of about $3.2 million, shaped by strong profitability and disciplined cash management. As Jack mentioned, we collected an additional $8 million in early July that in ordinary currency would have likely been collected in Q2. We still have not drawn down on our $30 million Wells Fargo credit facility. The amount drawable under this facility at any point in time is determined based on the borrowing-based formula. I'll reiterate what Jack said. The momentum in our business is nothing short of amazing. We believe we got a tiger by the tail and we're investing with a goal of positioning the company to align with what we project the market needs are going to be over the next few years.

In Q2, we incurred approximately $1.4 million of operating costs to build out a variety of technical capabilities to expand our go-to-market as an investment toward a future that we believe is truly exciting. Thank you, everyone. Sergio, we're ready for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any key. One moment, please, for your first question. Your first question comes from George Sutton from Craig-Hallum. Please go ahead.

George Sutton (Partner and Co-Director of Research)

Thank you. Team, nice results. Congratulations. I wondered if we could talk about, during the quarter, your largest competitor, Scale AI, was a large majority purchased by Meta. We've had a few of the large tech companies come out and say they would no longer work with Scale AI. These ostensibly would be tech companies that you have statements of work with. I'm just curious if you can kind of give us the after-effect of that acquisition as you've seen it.

Jack Abuhoff (Co-founder and CEO)

Hi, George. Thank you. Thank you for being on the call. First, we congratulate Scale AI for having delivered a great success for their shareholders. We believe their success and their valuation is a proof point of the key role that data plays in model performance and the path towards superintelligence. We compete with them successfully, and we believe that their shift in focus is likely to accelerate market opportunity for us.

George Sutton (Partner and Co-Director of Research)

Let's think about it a little more holistically. They obviously were working with major tech companies. How quickly should we start to see that business shift? For example, if OpenAI comes out and says, "We are no longer going to be working with them," does that shift very quickly? How do you go to market differently or more aggressively, given the opportunities that will get created?

Jack Abuhoff (Co-founder and CEO)

I think even before this, we were and continue to very aggressively outreach to market participants and to market our capabilities. We have, in light of this, stepped up that effort with certain companies. There are certain conversations that are going on and are now planned to be happening over the next couple of months that I think could be very exciting for us. I don't know that I can get into particulars much beyond that, but I'll reiterate that we do see an opportunity to accelerate our market presence.

George Sutton (Partner and Co-Director of Research)

Okay. Lastly, for me, you throw out an interesting nugget about robotics and the attachment to hardware, creating significant, even more significant opportunities than the large language model training. Can you just walk through how you envision that would work for you and just lay out that opportunity?

Jack Abuhoff (Co-founder and CEO)

I think that we tend to read about these technologies somewhat as if they exist in isolation, but the reality is that as large language models become more and more competent and able to interpret ambiguous language and have capabilities to plan and articulate multi-step responses to problems, there are technologies that will be added to that capability, enabling those models to invoke external APIs or other tools, enabling for multi-step tasks using greater memory and planning capabilities. When you take that and then you think about deploying that at the edge within devices, what you have is a very capable robot.

I think what this means for us is there's a whole new set of activities both to train these devices, to fine-tune models, and to evaluate their performance that together constitutes a market that I believe will exceed that of post-creating post-training data and evaluating models for frontier model builders. It's something we're hugely excited about and intend to be investing very significantly in.

George Sutton (Partner and Co-Director of Research)

Perfect. Thank you.

Jack Abuhoff (Co-founder and CEO)

Thank you, George.

Operator (participant)

Your next question comes from Allen Klee from Maxim Group LLC. Please go ahead.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Yes. Good afternoon. When you reported last quarter, you kind of said that you thought revenue might be down around 5% in the second quarter. Your actual number was flat, sequentially, very slightly sequential. You outperformed. I'm kind of curious, where did the variance come from?

Jack Abuhoff (Co-founder and CEO)

Sure. I'll start, and then, Aneesh, if you want to give any additional color. I think that what we were trying to communicate last quarter is revenue was up. We were up on a run-rate basis from our largest customer, and we were, of course, very happy about that. We wanted to focus our investors on the guidance that we were giving because there are a lot of pluses, puts and takes that get factored into that guidance. Underlying the work that we're doing, there are dependencies on engineering teams that we're working hand in glove with. It's entirely possible that a quarter could be up or down, and that isn't necessarily something that should be extrapolated out and considered locked and loaded permanently. We weren't anticipating that it would necessarily be down, though, and we're very happy to see that it wasn't.

As I said, looking at the largest customer, as well as quite a number of other customers, we see an incredible pipeline of opportunity right now. We're very excited about that. We're only baking into our guidance and our forecast things that we think are highly likely to close within the next 30-60 days. There's a lot beyond that. I think we're going to be winning as well. I hope that's helpful. Aneesh, anything you want to add to that?

Aneesh Pendharkar (SVP of Finance and Corporate Development)

Yeah. I think you framed that correctly, Jack. Just to kind of reiterate, Alan, we're not seeing any slowdown with our largest customer. In Q2, we generated approximately $33.9 million of revenue from this account. As Jack mentioned, we've secured several new projects and have additional opportunities in the pipeline that, while not yet included in our forecast, a few are reasonably likely. Again, we feel very bullish and optimistic of our prospects in the back half of the year, and we remain very excited.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Thank you. You highlighted one of the things you highlighted was the enterprise and the opportunity there. There's a lot of enterprises out there. I'm just curious how you think about the go-to-market to attack it.

Jack Abuhoff (Co-founder and CEO)

Yeah, it's a great question. We're attacking it already. What we're finding is that the interest in the technology and the opportunities to instantiate it into workflows exist across markets. Naturally, we're looking at the markets where we have the most penetration and the most relationships today, but we're also reaching out to companies in markets where we don't have as much reach. We're finding great receptivity. I think the highlight there is that agentic AI, as it's proven, is going to be the catalyst that unlocks enterprise opportunity. I think that among enterprises that I talk to and, more broadly, they're no longer just looking at this like a frontier technology that's interesting to monitor. They're seeing it as a new economic infrastructure that they're going to need to be embracing, and they're going to need to be adopting.

I think that we can play a very significant role in that. When we have conversations with them about the things that we think they need to do, and our consultants are working with them to figure out what's the right order of operations and how they gain control of their data in order to harvest these opportunities. We've got a lot of experience, both from working with the large big techs on the frontier models such that we know where things are going and how they can best utilize them, and also on all the work we've done historically, taking apart workflows and thinking about how to integrate new technologies into workflows to make them more efficient. Super, super excited about the opportunities there.

Allen Klee (Managing Director and Senior Equity Research Analyst)

That's great. I'll ask one more, and then I'll jump back in the queue. You highlighted a certain amount of money this quarter spent that you viewed as investment in operating expenses. Is there any reason to think that the scale of how much you're going to be investing for growth in the second half is going to change meaningfully from where it's been?

Aneesh Pendharkar (SVP of Finance and Corporate Development)

Yeah, great question, Alan. As you rightly pointed out, we said we invested about $1.3 million in Q2 across several functional areas, including sales, delivery, and product solution capabilities. We anticipate that stepping that up from Q2 to Q3 by approximately another $1.5 million. The reason for doing that is we see tremendous opportunity in the space, and we want to be able to capitalize on that. We will be making some incremental investments in sales, delivery, solutioning, and product to be able to capitalize on what we think is a very significant opportunity right now.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Great. Congrats. Thank you.

Operator (participant)

Thank you. Your next question comes from Hamed Khorsand from BWS Financial Inc. Please go ahead.

Hamed Khorsand (Founder, Principal, and Director)

Hi. My first question was, could you just talk about why you mentioned organic growth and what your intentions are there?

Jack Abuhoff (Co-founder and CEO)

Sure, I mean. I think we mentioned it to draw attention to the fact that this is organic growth. I think if you look across companies who are reporting and reporting growth, a lot of them are growing inorganically, and that can be a great strategy for them, but it's a different strategy. I think our strategy and the kind of growth that we're reporting is testament to the product set and the capabilities that we've developed. From a risk-adjusted basis, I think that's probably a safer bet for investors. We're very proud of it. We're very proud of what we've been able to accomplish. Looking ahead to how well-aligned we are with what we see as today's market opportunities and tomorrow's likely market opportunities, we think that that organic growth can continue.

Hamed Khorsand (Founder, Principal, and Director)

Is the organic growth that you're seeing in your business, is that coming with any kind of competitive pressures on pricing, or are you able to maintain pricing and capture new customers?

Jack Abuhoff (Co-founder and CEO)

It is a robust market. I think that we expect, we do experience, of course, a competitive environment. What we're seeing is that the most important thing to our customers isn't our price. It's the quality of our data and the extent now to which we can work hand in glove with them in order to help understand model performance, understand model deficiencies, understand use cases, and make recommendations about the data sets that are required to remediate or to extend those capabilities. It's a holistic service, and the investments that they're making are so extraordinary. There's such a deep desire to win in this race that when we're contributing as well as we are in so many accounts, they become much less price-sensitive. That having been said, I don't believe that we're the most expensive among our competitive set, but I do think we're among the best.

That's a position that I think if we can sustain, that will significantly in order to our benefits from a competitive perspective and a growth perspective.

Hamed Khorsand (Founder, Principal, and Director)

Lastly, last quarter, you had a series of different customers you were describing and talking about. This quarter, I think, sounds a little less. I'm just trying to understand where are you in terms of those relationships. Have they started up what you were talking about last quarter? Where do you sit as far as revenue opportunity goes when you look out into year-end 2026?

Jack Abuhoff (Co-founder and CEO)

Yeah, no, there's actually more opportunity, and there's a bigger pipeline today than there was a quarter ago. I just looked at that earnings call and thought that maybe that was a little long and decided stylistically to try to condense it a bit. There's more opportunity. There are things that we talked about last time that have closed and that are now in our forecast. There are things that we're continuing to progress that are real interesting. By memory, I'm thinking about the things we talked about. I think there's only one thing that kind of went dormant a little bit, but everything else is either closed, moving forward well, advancing significantly in discussions, and that we feel very bullish about.

Hamed Khorsand (Founder, Principal, and Director)

Very good. Thank you.

Jack Abuhoff (Co-founder and CEO)

Thank you.

Operator (participant)

Thank you. Your next question comes from Mr. Allen Robert Klee from Maxim Group LLC. Please go ahead.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Oh, hi. I just had a follow-up. I thought it was really interesting how you said that you can make the data smarter for the customers to get better results. Could you go into that a little bit? Thank you.

Jack Abuhoff (Co-founder and CEO)

Sure. There are a lot of different dimensions that we use to look at data and analyze data. Our data science team is rapidly expanding. We end up, for engineering teams, producing what are the equivalent of, in many cases, the equivalent of white papers with all sorts of mathematical formula and statistical analysis that correlate what we benchmark as a model's performance or identify as a model's deficiency with what data sets are required in order to remediate that. What that capability has resulted in is that we're no longer just providing data, but our status, our role has been elevated to sitting at the table with the data scientists who are building these models and figuring it out with them. The journey is about data. It's about, as I said in the prepared remarks, not just scale data, but smart data.

Being able to do all that deep technical scientific analysis of data, of model performance, of correlating the data that's required in order to achieve the level of performance that's required. In just the last several months, that's become a problem space that we're getting to occupy. That's tremendously exciting for us.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay, great. Thank you so much.

Operator (participant)

Thank you. There are no further questions at this time. I will now turn the call over to Jack Abuhoff for closing remarks. Please go ahead.

Jack Abuhoff (Co-founder and CEO)

Thank you, operator. Q2 was a high-performing quarter with 79% year-over-year growth, and we're anticipating a strong second half to the year. In the second half, we anticipate potentially winning major new customers, significantly deepening relationships, and further broadening our base. We'll also be continuing to make investments in infrastructure, talent, and platforms that we believe are key to continuing our growth trajectory over the years to come. As a result of our successful execution, we're raising our guidance today from 40%-45% or more organic revenue growth for the year. We're humbled by our good fortunes that scale data, our specialty, is, we believe, the sine qua non of the greatest technological innovation of our lifetimes. With the runway we see ahead, our goal remains to build Innodata into one of the leading AI services companies for this era. Thank you all for your continued support.

We'll look forward to being with you a quarter from now.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.