Information Services Group, Inc.

Please stand by. We're about to begin. Good day and welcome to the Information Services Group third quarter 2021 results conference call. Today's call is being recorded and a replay will be available on ISG's website within 24 hours. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Barry Holt. Please go ahead.

Thank you, Operator. Hello and good morning, everyone. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's third quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Bert Alfonso, 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 guarantees 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'll be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-1.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 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 as additional information that 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 8K, 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 Bert Alfonso. Mike?

Thank you, Barry, and good morning, everyone. Today, I will review our strong third quarter results, our continuing business momentum, and our outlook for the fourth quarter. ISG had an outstanding third quarter, positioning the firm for the best year in our history on nearly every financial metric. In the quarter, we generated record global revenues of $71 million, up 15%, including record revenues in the Americas and Asia Pacific. We continue to expand our recurring revenues up 10% from last year to $23 million and $69 million year-to-date. We delivered just an EBITDA of $10 million, up 24%, with an EBITDA margin of 14%, up 100 basis points. And we generated more than $18 million of cash from operations during the quarter, bringing our cash generation to $46 million over the last 12 months. We ended the quarter with a cash balance of nearly $55 million, up 43%, and a net debt to EBITDA ratio under one. Again, a record low. During the third quarter, we also held our first in-person event since the start of the pandemic, our signature ISG Executive Providers Summit in Chicago. We did not include this event in our previous forecast, given the uncertainty over COVID. but it delivered $1 million in revenue upside for the quarter, a nice addition. This is our fifth consecutive quarter of outstanding results coming out of the pandemic. Our portfolio of products and services built around all things digital is in high demand, and our success is being amplified by our ISG Next operating model, which continues to deliver value for our clients and our shareholders. Enterprises are wasting no time modernizing their technology environments for greater efficiency and using technology to reach customers in new and profitable ways. Getting it right is complicated. It's not just about choosing the right technology or the right ecosystem of third-party providers. It's about fundamentally changing the way clients do business, changing cultures and operating models to make everything work. And this is where ISG comes in. Companies continue to turn to ISG to get their digital transformation right, and that is creating great opportunities for our firm. Our market-leading portfolio of digital-ready products and services, coupled with our ISG Next operating model, with its solution-centric approach and IFLEX global delivery network, means our clients have access to ISG talent and solutions anywhere, anytime. It is a winning formula that continues to deliver results. Now, from a client perspective, we served 500 clients in Q3. Of that total, 67 were brand new to ISG, an increase of 16% year over year, a healthy sign for a growing business. Furthermore, we are growing our business with existing clients thanks to our ISG Next solution-centric approach, which allows us to bring together a range of capabilities to solve client needs. Year-to-date, our revenues from existing clients grew by 17%. Turning to our regions, the Americas delivered an outstanding performance. We achieved a record $43 million of revenue in the quarter, up 22% versus the prior year. During the quarter, we saw double-digit growth in our consumer services, banking, and media industry verticals. Among our services, consulting, automation, and research were all up double digits. Key client engagements during the third quarter included Comerica, Merck, Bell Canada, and CIBC. One key client win in Q3 came when we signed a new finance transformation engagement with a major medical technology company worth nearly $1 million. The win came as a referral from two technology providers involved in the RFP who recommended bringing in ISG as an independent third party to advise on the transformation project. Additionally, ISG has been awarded a series of engagements worth $1.4 million with a longtime strategic client of ISG, a leading manufacturer of construction and mining equipment. We will advise our client around technology for their smart manufacturing capabilities and provide them with ongoing technology research. We also want a two-year, nearly $3 million engagement with a top five U.S. bank that leverages our new training as a service capability, an exciting new innovation from our ISG enterprise unit that provides platform-based learning and development to clients. We see great opportunity for this new recurring revenue business in a fast-changing world where employees are asked to adapt to new operating models and technology as part of their company's ongoing digital transformation. Turning to Europe, our Q3 revenues of $20 million were down 4% versus the prior year. The European macro environment remains cautious due to uneven vaccination rates and approaches to the pandemic across the region. Clients have not yet adopted cloud-based technology at the same pace as the U.S., but we are seeing signs that demand is accelerating with increasing velocity expected in 2022. For Q3, Europe delivered double-digit revenue growth in our research business and in our public sector, insurance, and media industry verticals. Key client engagements in Europe in the third quarter included Volkswagen, Nestle, Solvay, which is a Belgian chemical company, and the UK Ministry of Defense. During the third quarter, ISG was awarded a $3 million engagement with members of the German Cooperative Finance Group to provide technology strategy around cloud computing and provider ecosystems. ISG was selected based on the client-oriented solution we designed and our industry banking experience. Now to Asia Pacific. This region had a record-setting performance with revenues at $8.1 million, up 42% versus the prior year, driven by growth in our energy, banking, insurance, consumer, and media industry verticals. Key clients in the quarter included the Australian government, where we are doing work across multiple departments, Worley, which is an engineering services company to the energy and chemical sectors, Insurance Australia Group, Suncorp, Rio Tinto, and AGL Energy. We continue to expand our relationship with a leading banking and insurance industry client in Australia, executing a significant extension to support digital operating model design and enterprise change management. We have now undertaken 10 different engagements for this client alone, generating $1.5 million in revenue this year, our fourth straight year in working with them. Now moving to our dividend. Shareholders of record at the close of business on December 3rd will receive a fourth quarter cash dividend of $0.03 per share of common stock, payable on December 17th, part of our ongoing efforts to enhance shareholder value. Now let me turn to guidance. The pandemic continues to have lingering effects on several client industries and in certain markets in Europe where vaccination rates and COVID responses are still a bit uneven. As I mentioned at the outset, the demand environment remains strong, especially in the U.S. and Asia Pacific. Overall, clients are accelerating their digital investments coming out of the pandemic with the pace varying by country and industry. We see a structural shift to more cloud adoption and digital transformation, with demand for ISG services moving in lockstep with these market dynamics. Balancing increasing demand, tempered somewhat by the lingering impact of COVID and the upcoming holiday season, we are targeting revenues of between $67 and $69 million, and adjusted EBITDA between $9 and $10 million. So with that, let me turn the call over to Bert, who will summarize our financial results. Bert? Well, thank you, Mike, and good morning, everyone. Looking at the quarter, our momentum continues following the outstanding first half results. Revenues for the third quarter were a record $71.1 million, up 15% on a reported basis, and up 14% on a constant currency basis compared with the third quarter last year. Currency positively impacted reported revenue of 0.7 million versus the prior year. In the Americas, reported revenues were a record 42.8 million, up 22% versus the prior year, and the second consecutive quarter of plus 20% growth. EMEA revenues were 20.1 million, down 4%, while Asia Pacific reported a record $8.1 million, up an outstanding 42%. Third quarter 2021 adjusted EBITDA was $10.2 million, up 24% from last year's third quarter. Third quarter operating income increased 144% to $7.3 million, compared with $3 million in the prior year. Net income was very strong for the quarter, at $4.4 million, or $0.09 for fully diluted share, compared with net income of $2.1 million or $0.04 per fully diluted share in the prior year. Third quarter adjusted net income was $5.9 million or $0.12 per share on a fully diluted basis compared with adjusted net income of $5.2 million or $0.10 per share in the same prior year's third quarter. Consulting utilization for the third quarter was 74%, up 200 basis points versus the prior year, reflecting the impact of our new ISG Next operating model. Our balance sheet continues to have the strength and flexibility to support our business over the long term. In fact, our balance sheet has never been stronger. Net cash provided from operations for the third quarter was $18.5 million, and we ended the quarter with $54.5 million of cash, up 43% from $38.1 million in the prior year. We repaid $1.1 million of debt in the quarter, lowering our debt balance to $75.6 million and our net debt to EBITDA ratio to a record low of 0.6 times. In addition, we paid $1.5 million in dividends to ISG shareholders and repurchased $2.1 million of ISD shares. Our average borrowing rate for the quarter was 1.9%, down 27% from last year. And we ended the quarter with 49 million shares outstanding as of September 30th. Mike will now share concluding remarks before we go to the Q&A. Back to you, Mike. Thank you, Bert. To summarize, we continued our outstanding performance in the third quarter. Record Q3 revenue up 15%, EBITDA up 24%, with revenue, EBITDA, and EPS all beating expectations. Our balance sheet remains strong, nearly $55 million of cash and a record net debt to EBITDA ratio down below one times EBITDA. Our new operating model, ISG Next, is driving a more profitable enterprise with a 100 basis point improvement and our EBITDA margin in the quarter. We see strong demand for all things digital playing to the ISG sweet spot. We rewarded our shareholders with a third consecutive quarterly dividend, and we have good momentum as we head into 2022. 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, Now let me turn the session over to the operator for your questions.