Innodata office Philippines. HVG IT Park, Mandaue City, Cebu, 2023 Photo by Alfred Robles.

INOD

"Mag 7" agreements look far smaller than claimed, revenue

​and expenses exaggerated

A supposed META commitment for >$100 million could be overstated by 90%
​

September 20, 2024

J Capital Research ("J Cap")  is a stock-research company. ​J Cap  has analyzed the U.S.-listed company Innodata Inc. (“INOD”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We may benefit from a decline in the price of INOD shares, and, for this reason, there might be a conflict of interest.

• 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. 
  o 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. 
  o 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.”

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