Innodata’s AI segment slowed from 99% YoY growth last quarter to 22.6% YoY growth this quarter, although on a QoQ basis there was some improvement with 8.3% growth compared to essentially flat last quarter.
However, the company is twiddling its thumbs (so to speak) until the next deal is announced. With nothing concrete to add this quarter, there was instead vague talk around their biggest customer expanding “based on verbal confirmation.” Management does believe 2026 will be stronger with $26 million in pre-training data wins expected to be signed “very soon” and “new partnerships emerging with key AI and sovereign AI players, which we expect to be announcing in 2026.”
According to management, there are eight potential customers with five expected to contribute meaningfully in 2026. In terms of how much revenue they can contribute, the following was shared: “Three of these new five, we believe, are positioned to allocate up to hundreds of millions of dollars annually to generative AI data and evaluation, and we believe we’re well-positioned to capture a share of that spend. It is worth noting that two of these are global leaders in commerce, cloud, and AI.”
Overall, it’s difficult to sit in the waiting room on any AI stock right now. With a name like Innodata, we prefer to remain balanced and to wait for more tangible evidence that new deals are materializing. Opportunity cost comes to mind when there are other AI names already showing clear acceleration in deal flow and revenue contribution today.
Q3 Revenue Beat by 4.6%
Revenue grew by 19.8% YoY to a record $62.6 million, beating estimates by 4.6%. Revenue growth decelerated from 79.4% in Q2, which was expected. It grew by 7.1% sequentially and was better than flat in the previous quarter.
Management reiterated the annual guidance of 45% or more growth for the full year. They stated: “We reiterate guidance we provided last quarter of 45% or more year-over-year organic revenue growth in 2025, and we anticipate continued transformative growth in 2026 based on new wins and strong momentum.”
Looking ahead, analysts expect revenue to grow 22.8% YoY to $303.8 million in 2026 and 3% growth to $313 million in 2027. These estimates could be revised higher based on the new deals in the pipeline.
Innodata Federal Business Unit Launched
The company also announced the launch of Innodata Federal, a dedicated government-focused business unit designed to deliver mission-critical AI solutions to U.S. defense, intelligence, and civilian agencies. Management expects this business unit to be a material revenue generator for the company in 2026 and beyond. The business unit has won an initial project with a new high-profile customer. They anticipate that the initial project will generate approximately $25 million in revenue, primarily in 2026.
The company has additional projects under discussion with the customer, and they anticipate that these projects will be substantial. Management expects to issue a press release regarding the relationship prior to the end of the year. These projects are expected to be a potential game-changer for the next phase of growth. The new partnership is strategically significant, representing a material top-line opportunity.
AI Segment grew by 23%
Innodata’s Digital Data Solutions (DDS) segment grew by 22.6% YoY to $54.8 million. This AI segment slowed from 99% YoY growth last quarter, although on a QoQ basis, there was some improvement with 8.3% growth compared to essentially flat last quarter. Also, it had tough comps as the company reported a strong YoY growth of 179% in the same period last year.
Management was also optimistic about the enterprise AI opportunity and mentioned that it was also gaining traction and holds promise for 2026. Innodata provides full-stack support to help enterprises integrate generative AI into products and operations.
- Synodex segment revenue was down (14.6%) YoY to $1.65 million compared to a 4% growth in the previous quarter.
- Agility segment revenue grew by 9.3% YoY to $6.1 million compared to an 11.5% growth in the previous quarter but was up 6.4% sequentially.
Margins
The company’s gross profits grew by 19.6% YoY to $25.5 million with a margin of 40.8%, which was flat YoY and up 80 basis points sequentially. The adjusted gross margin improved by 40 basis points YoY and 130 basis points sequentially to 44.2%.
Operating income was up 3% YoY to $11.8 million. Operating margin was 18.8%, down 310 basis points YoY, but was up 350 basis points sequentially. The operating expenses increased by 38.7% YoY to $13.7 million, primarily due to new hires. Management expects operating expenses to increase to support strong expected growth.
Net income was $8.3 million compared to $17.4 million a year ago. The decrease was primarily due to the tax benefit arising from the utilization of net operating loss carry forward in the same period last year.
Adjusted EBITDA grew by 16.9% YoY to $16.2 million with an adjusted EBITDA margin of 25.9%, down 60 basis points YoY and up 320 basis points sequentially.
- The DDS segment adjusted EBITDA margin was 27.8%, up 70 basis points YoY.
- Synodex segment adjusted EBITDA margin was 8.2%, down 19.2 percentage points YoY.
- Agility segment adjusted EBITDA margin was 14%, down 8.1 percentage points YoY.
EPS beat by 75%
The company’s GAAP EPS came at $0.24, beating the analyst’s estimates by 75.2%. Analysts expect GAAP EPS of $0.21 and $0.24 in the next two quarters.
Looking forward, analysts expect GAAP EPS to grow 40.8% YoY to $1.07 in 2026 and 21.5% YoY to $1.30 in 2027.
Cash Flow and Balance Sheet
The company has a healthy balance sheet.
- Q3 operating cash flow was $18.77 million or 30% of revenue compared to $11.37 million or 21.8% of revenue in the same period last year. The company also benefited from an $8.0 million cash payment received in the recent quarter, which would have otherwise been received by the end of Q2.
- Q3 free cash flow was $14.5 million or 23.2% of revenue compared to $9.92 million or 19% of revenue in the same period last year.
- The company’s cash was $73.86 million at the end of the quarter, up from $59.8 million at the end of the previous quarter. The company has no debt.
Conclusion:
As stated above, it’s difficult to sit in the waiting room on any AI stock right now. With a name like Innodata, we prefer to remain balanced and to wait for more tangible evidence that new deals are materializing. Opportunity cost comes to mind when there are other AI names already showing clear acceleration in deal flow and revenue contribution today.
I/O Fund Equity Analyst Royston Roche contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in INOD at the time of writing.
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