J Capital Research's report on Innodata Inc (NASDAQ:INOD).
More than a promote:
"Mag 7" agreements likely smaller than claimed, revenue and costs both look highly exaggerated
A META "commitment" (claimed by INOD) for > $100 mln may be overstated by 90%
- INOD’s stock is up 179% since April this year, when the company announced and later provided staged updates on its big “Mag 7” contract.
- Our forensic research unveils INOD’s marquee agreement, which formers say is with Meta Platforms, might be 90% overstated.
- We think that INOD has consistently misled investors on over $100 mln in spending “commitments” from META. We spoke to formers who said it was “very unlikely that INOD had this contract,” and a META executive who oversees outsourcing for AI said he hasn’t even heard of Innodata. META publicly has said nothing about INOD.
- The bull case for INOD is that the company can repeat the success it has had with META across other Mag 7 accounts. But how do you replicate business that may not exist?
- Local filings for INOD foreign subsidiaries don’t match SEC disclosures. Revenue may be overstated by around 25%.
- INOD’s finance positions are a revolving door. A former finance executive suggested that the currently acting CFO is in place simply to sign off on the statements. He termed INOD’s closed culture a “hermit kingdom” and said INOD does not respond well to internal scrutiny of financials.
- Based on headcount and average compensation in Asian financials, we estimate a minimum of $16 mln in inflated costs—at least 19%.
- We do not think the reported $50 mln in “unremitted foreign earnings” can be real. Disclosures indicate low to negative profit overseas and near-zero taxes on the profit. We wonder whether INOD is ping-ponging money between inter-company accounts.
- Formers told us it’s unlikely margins will increase, since clients pay on a cost-plus basis and may drop at will.
- With 27% of group revenue from a single customer in Q2 2024, INOD can miss projections with no notice. This happened in Q1 2023, after the Twitter account dropped.
- INOD employs an Indian audit firm even though around 70% of revenue now comes from U.S.-based customers.
- Formers told us this was to save $225,000 a year in fees—despite company reports of $31 mln in annual selling and administration costs. Before BDO India, INOD used a low-tier auditor called CohnReznick.
- The IPO was underwritten-albeit a long time ago-by B. Riley, a troubled firm now under federal investigation for manipulating asset values.
- Top directors have an unbroken record of failure at earlier companies characterized by 90%+ declines in the market value of companies the directors have overseen.
- Interviews indicate that a 2024 boost in revenue could have been engineered to help management exit.
- Investors think INOD is recovering from accusations of “AI washing.” We believe it’s much worse: INOD appears to claim revenue that it does not have. As a former executive said to us, it’s just “people in Asia banging away at keyboards.”
We knew INOD was doing low-value work. Now it appears to be inflating results.
Founded in 1988 by the current CEO, Jack Abuhoff, INOD does business process outsourcing in three segments: (1) Digital Data Solutions (DDS), which collects data to train AI systems; (2) Synodex; a platform designed to extract data from medical records for underwriting/claims processing, and (3) Agility PR Solutions, designed to help PR professionals target and distribute content. DDS generated 71% of revenue in 2023.
On February 15, 2024, Wolfpack Research issued a report on INOD, asserting that INOD is not an AI company as it claims but instead a deteriorating data-entry business staffed by a horde of low-cost workers in Asia. We think the situation is actually much worse.
The extent of this company’s misleading statements is astounding. Through our primary research, we learned that:
- Stated results appear to differ from subsidiary statutory financial statements, by around 25% and possibly more.
- The biggest announced agreement is far smaller than claimed and may not even exist.
- The great majority of customers are worth less than $1,000 per month in revenue. A former executive called INOD’s value proposition “grunt work.”
- Costs look heavily exaggerated to offset questionable revenue.
- Formers say that typical large-ticket contracts are in the $300,000 region, not multiple millions
The $111 mln in “annualized revenue” from META that may not exist
INOD has reported that it has agreements with one customer who has repeatedly stepped up the engagement and will now deliver $110.5 mln in annualized revenue. Yet the footnoted small print in the most recent results presentation calls this only “Anticipated annual revenue run-rate after ramp-up.”
We spoke with a former top executive, who said: “So like when [CEO Jack Abuhoff] says he's got $110 million contract, and I don't know who it is or what it is, that's the first I've heard that number, but . . . my professional skepticism would say, is it really a locked-in, rock-solid $110 million? Or is that the potential that could happen, but the contract could be canceled next week and you're only a million dollars into it?”
The executive said: “You gotta understand, the CEO is a Harvard-trained lawyer, so he knows how to keep himself legally out of trouble.”
INOD announced the “program expansion” on August 8, 2024, suggesting, without saying directly, that the revenue would start in August or September of the same year and bring $9.2 mln per month into the company.
See the full report here by J Capital Research.