Information Services Group, Inc. (NASDAQ:III) Q1 2024 Earnings Call Transcript

Information Services Group, Inc. (NASDAQ:III) Q1 2024 Earnings Call Transcript May 10, 2024

Information Services Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning, and welcome everyone to the Information Services Group First Quarter 2024 Conference Call. This call is being recorded and a replay will be available on ISG's website within 24 hours. Now, I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.

Barry Holt: Thank you, operator. Hello and good morning. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's first quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement. It is important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guaranteed of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated.

For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished last night to the SEC and the risk factors section in ISG's Form 10-K covering full year results. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements to these documents filed with the SEC. You will be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-one.com or the SEC's website at www.sec.gov. ISG undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improves the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance.

The non-GAAP measures which we will touch on today include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided in additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night with the SEC. And now, I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Michael Connors: Thank you, Barry, and good morning, everyone. Today, we will review our results for the first quarter, including an early progress report on ISG Tango, our view of what we see as an improving demand environment and our outlook for Q2. As expected, the broader market for technology services remained soft in Q1. Generally, clients are taking longer to commit to new investments as they weigh economic conditions and work through how to deploy AI for their businesses. As an example, we have two major transactions that were expected to close and begin delivering during the first quarter that were delayed. Overall, spending continues on larger scale transformations and cost optimization programs, and we are involved with many of these, but at a slower pace of implementation with contracts spread out over longer durations.

Our pipeline is solid globally, but during this particular quarter, much more difficult to convert. Now the good news for the market and ISG, based on our market analysis, client discussions, and our pipeline development, the market seems to have bottomed out in the first quarter and the worst appears to be behind us. We are seeing spending coming back slowly and expect further acceleration over the course of the year, macro conditions permitting. Market interest in exploring cost efficiencies through managed services remains at high levels. Additionally, we are now seeing a rise in sourcing activity, and this suggests clients are beginning to balance the desire for cost savings with the need to remain competitive and tech forward. Now, a few comments on AI.

AI is a net positive for ISG. Clients are looking to ISG as a trusted independent third-party adviser to guide them in understanding the impacts of AI, planning their AI strategy, establishing guardrails, identifying use cases, and building their AI ecosystem. Enterprises have ambitious AI plans but are understandably cautious given the implications of AI and the lessons learned from cloud migration. Our role is to help them with proof-of-concept deployments and then transition to full-scale implementation. As the market ultimately moves from the planning phase to the execution phase of AI, significant new investments will be made in infrastructure, sourcing and implementation and ISG will be their each step of the way to advise our clients.

With regard to our recurring revenue expansion, even in a slower market, we continue to see growth in our recurring revenues, which represented about half of our firm-wide revenues in Q1. Over the trailing 12 months ending March 31, we have generated $126 million in recurring revenues, up 10% from the previous 12-month period. Demand continues for our research, governance and platform offerings. Enterprises are leaning on ISG for our market intelligence and in-depth research to plan their AI and digital futures and identify market opportunities that lie ahead. The acquisition of Ventana Research late last year has been a positive addition, further elevating our value proposition with enterprise clients, while also opening up new consulting relationships with software vendors and new research opportunities with service providers.

Now, a progress report on ISG Tango. As a reminder, just two months ago, we launched ISG Tango, the first fully-integrated digital platform to simplify and expedite the sourcing experience. ISG Tango is designed to increase speed to value for clients, improve the speed, efficiency and margins of our sourcing transaction business and expand our addressable market. The feedback thus far from enterprises and service and technology providers has been extremely positive. Going forward, virtually all of our new sourcing engagements will be run through ISG Tango. Already, more than $2.6 billion of contract value is running on the platform. So, good early progress. The macro environment has not been a friend to the industry or ISG this quarter. Yet we are now seeing signs of clients willing to spend more, primarily in the U.S., and we will capitalize on this in the quarters ahead.

ISG is ideally positioned to meet this demand. We have five key differentiators that set us apart. First, we have the industry's deepest technology benchmark and sourcing contract databases. It's a data moat that is difficult to replicate. Second, as the long-standing global leader in advising large transactions, we have raised the bar with ISG Tango, a disruptive platform that gives us the ability to bring our unmatched data proprietary tools and IP to a broader market. Third, we are combining our deep sourcing expertise with our knowledge of AI to help organizations navigate the early challenges of AI and harness its full power at scale. Fourth, our successful research business is now enhanced by the addition of Ventana Research and combined with our platform businesses, will continue to power growth in our recurring revenue streams.

And fifth, through our ISG next operating model and our iPlex delivery platform, we will continue to drive improvements in speed, efficiency, and profitability. With that, let me turn to our regions, all of which experienced declines in consulting revenues in Q1, in line with the rest of the industry. The Americas generated $41 million of revenue in the quarter, down 16% versus the prior year. During -- despite this, during Q1, we saw double-digit growth in our banking industry vertical and in research. Key client engagements during the first quarter included Western Union, U.S. Steel, and Stanley Black & Decker. During the quarter, ISG won a new multimillion dollar engagement with a spin-off of a large industrial conglomerate. ISG will help the client develop a technology-driven product strategy and operating model, selected ecosystem of providers, and ensure long-term value realization.

In another win, we expanded our long-term relationship with a major cruise line, signing a $2.5 million contract to support this client in modernizing its infrastructure services across its North American brands. The initiative will provide increased agility and scalability and enhance the overall customer experience. And we signed a new deal with a multinational banking and financial services firm to help this client build a scalable, long-term approach to manage its AI architecture and services and select its AI partners. Now turning to Europe. Our Q1 revenues of $18 million were down 23% from last year. Still, during the quarter, Europe delivered double-digit revenue growth in our consumer and public sector industry verticals and in our network and software businesses.

Key client engagements in Europe in the first quarter included Allianz, BASF, [Indiscernible] and Winter Shaw. ISG continued to expand our work with a high-tech facilities company. Under our latest agreement were $2.5 million, we are helping the client with a major IT transformation program, covering infrastructure, cloud, workplace, security and applications. We are also working with this client to execute an AI and digital-first strategy for the firm's engineering function. We also won a $2 million engagement with a public sector client in Switzerland. We are helping this client develop a new operating model aimed at improving cost and efficiency. Now, turning to Asia-Pacific, our Q1 revenues of $6 million were down about $1 million. Yet we saw double-digit growth in our banking, consumer and manufacturing industry verticals.

Key clients in the quarter included the Australian Taxation Office, The Department of Home Affairs, Endeavor Group, and Insurance Australia Group. During the quarter, we won a significant contract with a major public university in Australia to support their selection of a new ERP platform provider and systems integrator. The engagement will lead to the modernization of the university's human capital management and finance mentions. Now, let me turn to guidance. As I mentioned at the outset, we expect the market to accelerate over the course of this year, beginning first in the U.S. as macro conditions improve, the backlog of technology projects builds up and clients further develop their AI strategy. With this view in mind, we are expecting sequential growth for the second quarter, targeting revenues of between $65 million and $67 million and adjusted EBITDA between $7 million and $8 million.

We remain confident in our strategy and with some market momentum, we should be returning to our growth and margin expectations as we move through the year. So, with that, let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael?

Michael Sherrick: Thank you, Mike, and good morning, everyone. Revenues for the first quarter were $64.3 million, down 18% compared with the first quarter last year. Currency had a modest $300,000 positive impact on reported revenues. I would note that we faced a particularly difficult comparison with last year when we generated our highest quarterly revenue ever. In the Americas, reported revenues were $40.8 million, down 16% versus the prior year. In Europe, revenues were $17.8 million, down 23%. And in Asia-Pacific, revenues were $5.6 million, down 20%. First quarter adjusted EBITDA was $4.4 million, down from $11 million in the year ago period, resulting in an EBITDA margin of 6.9% as compared with 14% in the year ago quarter.

ISG had a first quarter operating loss of $2.4 million compared with operating income of $7.1 million in the prior year. Excluding the impact of severance from the workforce actions taken in the first quarter, operating income would have been $0.5 million. Our reported net loss for the quarter was $3.4 million or a loss of $0.07 per fully diluted share as compared with net income of $3.5 million or $0.07 per fully diluted share in the prior year. First quarter adjusted net income was $0.7 million or $0.01 per share on a fully diluted basis compared with adjusted net income of $6 million or $0.12 per fully diluted share in the prior year's first quarter. Headcount as of March 31, 2024, was 1,561, down 67 positions compared with the prior year, but up 43 professionals from Q4.

And I would note the sequential change was driven by the addition of Ventana Research employees and resources we assume from a client to support a new recurring revenue training as a service contract. Normalizing for these two factors, our head count was down 109 professionals compared with the prior year. For the quarter, consulting utilization was 70%, up 555 basis points sequentially from the fourth quarter and down 40 basis points compared with the prior year. Based on the workforce actions taken to-date and our expectation of improving demand as we move through the year, we expect utilization to improve from current levels, which will contribute to our expected margin expansion. For the quarter, net cash provided by operations was $2.3 million, a strong $5.7 million swing from a $3.4 million usage a year ago.

We ended the quarter with cash of $14 million, down from $22.6 million at the end of the fourth quarter. During the first quarter, we paid dividends of $2.4 million, repurchased $2.5 million of shares and paid down debt of $5 million. Our next quarterly dividend will be paid July 5th to shareholders of record June 14th. We ended the first quarter with a debt balance of $74.2 million, down $5 million from Q4, and our average borrowing rate for the quarter was 7%, up from 6.3% last year. We ended the quarter with 49.7 million fully diluted shares outstanding. Overall, our balance sheet continues to provide us with the flexibility to support our business over the long-term. And importantly, we remain comfortable with our debt-to-EBITDA ratio. Mike will now share concluding remarks before we go to Q&A.

Mike?

Michael Connors: Thank you, Michael. To summarize, after a difficult first quarter, the market is showing signs of improving, and we see growth ahead. ISG is ideally positioned to capitalize on this market with the data product, services and talent to meet client needs and ensure our long-term success. Our recurring revenue businesses continue to grow both in size and share of overall revenues. Research, governance and platforms will remain important drivers of this growth. And we continue to invest for the long-term with offerings like our ISG Tango sourcing platform and our enterprise AI advisory services. Overall, we have a strong business plan and operating model in place to enhance our growth and profitability this year and in the years ahead.

As always, we are focused on creating shareholder value for the long-term, and we are steadfast in our mission to deliver operational excellence to our clients. So, thank you very much for calling in this morning. And now let me turn the session over to the operator for your questions.

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