Information Services Group, Inc.

And ladies and gentlemen, please stand by. Good day and welcome to the Information Services Group fourth quarter 2021 results conference call. Today's conference 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 would like to turn the conference over to Mr. Barry Holt. Please go ahead, sir.

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 fourth 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 on our Form 8K that was furnished last night to the SEC and the risk factor section in ISG's Form 10K covering full-year results. You should also read ISG's annual report on Form 10K 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 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 upon today, are 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 and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8 , 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 record fourth quarter and full-year results, our continuing business momentum in 2022, and our outlook for the first quarter. ISG had an outstanding fourth quarter, capping off a historic 2021, our best year ever. We generated record Q4 revenues of $70 million and ended the year with record full-year revenues of $278 million. We continue to expand our recurring revenues in Q4 up 14% from last year to $24 million, bringing our full-year total to $93 million, up more than 11%, and well on our way to our 2022 year-end target of $100 million. We delivered record Q4 adjusted EBITDA of $10 million, up 11% from the prior year, with an EBITDA margin of 15%, up nearly 100 basis points. For the full year, our adjusted EBITDA reached $39 million, up 37%, with an EBITDA margin of 14%, up 250 basis points. We ended the year with a cash balance of $48 million, up 9%, and a net debt to EBITDA ratio under one. From a client perspective, we served a record 853 clients in 2021, up 13%. Of that total, 270 were brand new to ISG, an increase of 20% year over year, a healthy sign for a growing business. Coming off our record year, we have entered 2022 in excellent position to extend our business momentum. Demand for digital continues. More work is moving to the cloud to power applications and optimize customer and employee experience. Cybersecurity is no longer just the concern of the IT department. It is being discussed at the board level amid growing cyber threats. We expect M&A activity to increase in 2022, and that will drive demand for cost optimization and rationalization of technology, both sweet spots for ISG. Companies are in continuous transformation mode and have ongoing and evolving digital needs across the enterprise. But putting it all together is complicated. Clients need a trusted partner like ISG to make sure their technology and people are integrated and working together to achieve business goals. We are focused on all key areas that matter to our clients. Cybersecurity, customer experience, digital workplace, data analytics, app modernization, digital engineering, and enterprise cloud. Our comprehensive portfolio of products and services is unmatched in our industry. And our solution-centric ISG Next operating model is designed to deliver the most value to our clients and to do so with greater agility and efficiency. The result is growing revenues, more clients, and higher profitability, and ultimately more value for our shareholders. Our long-term growth objectives remain. High single-digit revenue growth and EBITDA at one and a half times our top-line growth as we leverage our business model for growing profitability. As always, we strive to exceed these targets, just as we did in 2021. Now, turning to our regions, the Americas delivered $39 million of revenue in the quarter, up 3% versus the prior year. For the full year, revenues were $160 million, up 13%. During the quarter, we saw double-digit growth in our consumer services, banking, and media industry verticals. Among our services, research, automation, and GovernX were also up double digits. Key client engagements during the fourth quarter included Caesars Entertainment, USAA, Exelon, and Humana. Among our notable wins, ISG is supporting a major cruise line with our GovernX vendor management solution. The client is now gaining greater visibility into its spend with nearly 250 vendors and has saved millions of dollars as a result. This is especially important at a time when the cruise industry is looking to recover after a difficult period during the pandemic. ISG also is supporting a major U.S. utility as it separates into two publicly traded companies. We are advising the company on a range of technology and operations decisions as it divides its technology estate and looks to optimize its cost base for both entities going forward. Turning to Europe, our Q4 revenues of $24 million were up 3% versus the prior year and 6% in constant currency. For the full year, revenues were up 4%. For Q4, Europe delivered double-digit revenue growth in our research, network, and automation and in our public sector, insurance, media, and banking industry verticals. Key client engagements in Europe in the fourth quarter included Munich Re, Volkswagen, Deutsche Bank, and Italy's Ministry of the Interior. During the fourth quarter, ISG was awarded a $1.5 million engagement with a major bank in the Nordics region to support one of the industry's largest digital transformation efforts. We also expanded our work with a major German insurance and financial services company to help them navigate a complete revamp of their digital approach, including tech modernization, workplace transformation, cybersecurity, and software cost optimization. And in the transportation sector, we are helping a major international shipping company establish an offshore delivery center in India to support the client's global IT operations. Now turning to Asia Pacific. This region had a record-setting Q4 performance with revenues of $7 million, up 27% versus the prior year, driven by growth in banking, insurance, media, and the public sector industry verticals. For the year, Asia Pacific had record revenues of $27.4 million, up 32%. Key clients in the quarter included the Australian Taxation Office, Australian Ministry of Defense, Bupa Australia, a health insurer, Rio Tinto, and Suncorp. We continue to grow our business in the region with a leading multinational engineering services company focused on the energy industry. ISG is helping the client leverage technology to transform its global business services. across all major functional areas of the company from finance to HR to optimize performance and lower costs. Now moving to our dividend. Shareholders of record at the close of business on March 21st will receive a first quarter cash dividend of three cents per share of common stock, payable on April 6th, 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 restrictions have been uneven. However, with signs of improvement and with more restrictions being lifted, we are hopeful that we are entering the endemic phase of the virus and we'll see these markets rebound during the course of 2022. As for the crisis in Ukraine, we stand united with Ukrainian people in their struggle to remain a free and sovereign state. Ukraine has become a major hub for technology services, particularly software engineering and development. Those activities, as you would imagine, are being moved elsewhere. Although ISG has no operations or people in Ukraine, a number of our enterprise clients rely on providers either located in or obtaining services from Ukraine. As we did with the pandemic, we are committed to helping them adjust their plans and overcome any potential challenges. Overall, we think the situation Ukraine, if contained, will have only a small impact on the global market for technology and business services. And it is possible it could spur companies to invest even more in cybersecurity and other digital initiatives. So balancing digital demand with these macro factors, for the first quarter, we are targeting revenues of between $69 and $71 million, including a negative FX impact of approximately 200 basis points, principally from Europe, and adjusted EBITDA between $9 and $10 million. Looking beyond Q1, we expect growing momentum in our digital revenues as we move through the rest of the year. 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 to everyone. Looking at the fourth quarter, our momentum continued as we closed out a record-breaking year. Revenues for the fourth quarter were a record 69.6 million, up 5% on a reported basis, and up 6% on a constant currency basis, compared with the fourth quarter of last year. Currency negatively impacted the reported revenues by $0.7 million versus the prior year. In the Americas, reported revenues were a record $38.9 million, up 3% versus the prior year. In Europe, revenues were $23.7 million, up 3% and up 6% in constant currency. And in Asia Pacific, the reported revenues reached a record $7 million, up an outstanding 27%. Fourth quarter 2021 adjusted EBITDA was $10.2 million, up 11% from last year's fourth quarter, resulting in an EBITDA margin of 15%. Fourth quarter operating income increased 104% to $7.1 million, compared with $3.5 million in the prior year. Net income was very strong for the quarter, at $3.6 million, or 7 cents per fully diluted share. compared with net income of $1.4 million, or $0.03 per fully diluted share, in the prior year. Fourth quarter adjusted net income was $5.1 million, or $0.10 per share, on a fully diluted basis, compared with adjusted net income of $4.9 million, or $0.10 per share, in the prior year's fourth quarter. Consulting utilization for the fourth quarter was 71% and 74% for the year, up 300 basis points versus the prior year, reflecting the impact of our ISG Next operating model. Our balance sheet continues to have the strength and flexibility to support our business over the long term. For the year, net cash provided by operations was $41.9 million, and we ended the quarter with $47.5 million of cash, up 9% from $43.7 million in the prior year. We repaid $1.1 million of debt in the quarter, lowering our debt balance to $74.5 million and our net debt to EBITDA ratio to 0.7 times. And we returned $4.5 million to our shareholders in the fourth quarter, paying $1.5 million in dividends and repurchasing $3 million of ISG shares. For the full year, we returned $20.7 million to shareholders in the form of $4.4 million in dividends and $16.3 million in share repurchases. Our average borrowing rate for the quarter was 2%, down 20% from last year's 2.5, and we had 48.9 million shares outstanding as of December 31st. Mike will now share some concluding remarks before we go to the Q&A. Over to you, Mike.

Thank you, Bert. To summarize, we camped our best year ever with record revenues and profitability in Q4. Revenue for the year was a record $278 million. EBITDA was a record $39 million with an overall EBITDA margin of 14%. Our ISG Next operating model is driving a more profitable enterprise with a nearly 100 basis point improvement in our EBITDA margin in the quarter and a 250 basis point increase for the year. Our balance sheet remains strong, $48 million of cash and a net debt to EBITDA ratio down below one times EBITDA. We rewarded our shareholders with a fourth consecutive quarterly dividend, and we have good momentum with growing client demand for cost optimization and ongoing digital transformation playing to the ISG sweet spots. 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.

Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Do keep in mind, if you are using your speakerphone, make sure your mute function is released so your signal can reach our equipment. Once again, for questions today, star 1.

We will pause for just a moment to allow everyone an opportunity to signal. And we'll begin with Mark Riddick with Sidoti. Hey, good morning.

Good morning.

Morning, Mark. So very encouraging trends and a great way to finish the year. I was wondering if you could talk a little bit. I wanted to go back to some of your prepared remarks, Mike, around the support that you guys provided to your clients during the pandemic and kind of you know, sort of help shepherd them through some of those challenges because, you know, given the, you know, what we're seeing with global events right now, I was wondering if you could sort of touch a little bit on those experiences that you had with those clients before, which can sort of help, you know, give folks an idea of being sort of in a similar situation with what's going on with global events and the way that that played out.

Yeah, great, great question, Mark. Look, during the pandemic, clearly there were kind of, I'll call it two extremes of of clients in different industry segments. On the one, those who took advantage because of the kind of way they operated, think about the retailers and others that really took off during the pandemic. And you had others that were hit harder like hospitality, cruise lines, et cetera. And the services that we had to offer were kind of in two different of those buckets. On the ones that were a little bit more distressed, We had our rapid cost takeout. We had our network management. We had our digital workplace services, all helping them better understand that they were having to operate in a more distressed type of environment. So we allowed them and helped them, if you will, around cost optimization, using technology, using automation. On the sides that were really trying to accelerate growth and take advantage of their market position and the ability to do what they could, with the change with the pandemic, we focused a lot with them on cloud, with the client customer experience, the employee experience, and they used the time to kind of accelerate their digital transformation, moving much faster to the cloud, looking at their cyber services, their data analytics, et cetera. As we apply this, if you will, a little bit to the Ukraine situation, we're seeing kind of two things initially emerge. you have a number of enterprise clients who rely on providers who have operations in Russia or in Ukraine. Clearly, both of those are a bit at risk at the moment. And so their immediate asks of us is, how can we move work from those areas to other areas in a very rapid way, number one? And number two, if their businesses should slow down as a result of this, Can you help us rapidly move cost out, at least on a temporary basis? And that's what we're doing. On the other side, the providers who have operations in Ukraine and Russia are also asking us for help with the enterprises. And so we've got an opportunity on both the provider side and the enterprise side during this kind of terrible disruption that's occurring in Ukraine. So hopefully, Mark, that helps inform you a little bit.

It does. Thank you. And I was wondering, are you seeing, it's an odd way of asking this, I guess, but are you seeing new relationships that are sort of coming to you that, you know, in unfortunately a challenging situation, or is it primarily your existing clients that you're working with there?

No, that's another good question. We are We are seeing a number of new clients who have come to us and said, look, we currently have been relying on X to provide services in areas like software and management, et cetera. Are there things that you can do for us quickly? Because we do not believe we're going to get the level of service or the quantity that we need with our current providers. So we are seeing some of that inbound as well, Mark.

Okay, great. And then shifting gears to a little more pleasant topic, I guess. The strong balance sheet improvement over the years certainly is very visible, and I was wondering if you could sort of give a bit of an update. Certainly, we're training capital shareholders in multiple ways. I wanted to touch a little bit on maybe what you're seeing in the acquisition pipeline. It's been, I guess, since Nuralify, I guess. So I'm wondering if you sort of give some thoughts as to maybe what you're seeing there.

I'll touch on the M&A and then ask Bert just to touch on the balance sheet itself. On the M&A, we still remain active. As you know, we've done 10 acquisitions over our lifetime here at ISG, and we are continuing to look for areas that can provide an acceleration in the digital space or in the recurring revenue space. So all things kind of technology, recurring digital, that's the area that we're looking at. And we continue to look at it. And like we have in the past, we are very disciplined on pricing. But at the end of the day, you know, as long as we have fairness on both sides of the deal equation, then we will be able to get deals done. So we see the market good. We also see the opportunity coming out of the pandemic. There are individuals in different situations. and that may provide more opportunity for ISG on the M&A side. On the balance sheet, Bert, yeah, good morning, Mark.

You know, with respect to the balance sheet, we're very fortunate to have a business that's a strong cash generator, and our cash flow from operations continues to be quite strong. You know, I comment on some of the things that we're already doing, which we will continue to do, and so we're committed to the dividend and the board's concurrence growing that dividend over time. We've been active in the marketplace, as you saw, in the fourth quarter, and we believe that that makes sense going forward in terms of share buybacks. And, you know, we'll diligently continue to pay down our debt, although, you know, as I mentioned, with a 2% rate, we're certainly not going to accelerate those payments, but we continue to get, you know, a lower leverage ratio, which, you know, which can help us, you know, with the comment you made earlier around M&A, should that materialize. So we see that as a continuing trend for the firm, and those are our key priorities.

Oh, and Bert, just one extra one, I guess, for you. Could you share with us CapEx, where we finished out, and what we may be looking at for next year?

Yeah, one of the areas that our investors are pretty familiar with is this is a very low capital-intensive business, and so We'll range in sort of that two, sometimes up to three million in terms of capex. Primarily, most often, it tends to be our laptop replacement, which we do over a period of time. But from a real estate perspective, we really have very low requirements. We do invest in our SaaS platforms as well. which are the ones that you're familiar with, GovernX in our research area. But on the GovernX side, that platform, we continue to upgrade it as we see clients desiring more capabilities.

Great. Thank you very much. Okay. Thank you. I'm out here from Joe from Noble Capital.

Good morning, Mike and Bert. Congratulations on the quarter and a tremendous year.

Good morning, Joe.

Thanks, Jeff. So quick question on gross margins here. I was just looking at our model. It looks like gross profit margin was up about 200 basis points in the fourth quarter from what we saw earlier in the year. I was just wondering what was behind that and where do you think that could be that level in 2022, or do you think it retreats back more to the high 39% level?

Yeah, you know, our gross margin has been reasonably stable at around 40. It has been ticking up slightly. The predominant factor there is the mix of our revenues. And so, as Mike mentioned, our recurring revenues, in large part, tend to be on a slightly higher gross margin, as well as our digital services, which are over 50% of our revenues now, do give us a benefit in that regard. So we see continued positive growth in that space, and from an S&A perspective, continue to focus on cost control as well. But yeah, product mix is a benefit, as well as as I mentioned, the, you know, the digital component of the services.

Okay. Thanks for that. And, you know, one of the, some of the big issues here, you know, I'm not saying anything everybody doesn't know here is on supply chain, inflation, hiring, just wondering, you know, how you guys are dealing with those types of issues and on pricing, are you looking to raise prices here? You know, how's that competitive environment around the whole looking at raising of pricing?

So, Joe, first on the pricing side of things, and then we'll talk about the staffing side. You know, we continue to be able to have what we like to refer to as firm pricing. Our strategy over the years is is to be fair because we want a ROI on our clients and we want our clients to stay with us for the long run. So we feel that our pricing and our rate card, if you will, certainly we are beginning to move it up a bit, primarily in the higher demand areas. So think about it as almost surge pricing, if you will. And so we can be quite firm in a lot of those areas. Thus, to Bert's point, the margins around the digital and the recurring are higher for us, and you're seeing that being reflected in our overall results. On the staffing front, you know, we continue to have a terrific model. We have for years. We were born virtual as a firm. We didn't want real estate. We had people working from home from day one in 2006. That model has played out well. We couple that with some ownership with our stock and we end up with owner operators roaming around our business and serving our clients and therefore our shareholders well over time. So that still seems to be quite steady. Our turnover rates have not really moved much from 22 to 21, from 21 to 19 if you go back pre-COVID. So we've been very, you know, I'll call it very lucky and very strong in that regard. The only area that we're seeing the uptick in is really in India, and that's primarily because our India turnover had dropped significantly over the last couple of years. We used to run kind of around the low 20s. The industry out there is in the mid-20s. We dropped all the way down to kind of call it the 13th. 14% range in India. We are seeing that uptick by about 400 basis points just with the India demand of workers in that environment. So we are seeing a bit of uptick in India, but still below our historic levels in India. That's what we are seeing for us.

Okay, great. Thanks, Dan. One more, if I may. I mean, you touched on briefly, you know, the new clients, you know, I think you mentioned 270 brand new through the year. It was up 20% year over year. What is driving the new clients to come to you? You know, what in particular, you know, is made ISG so attractive to potential clients that they're coming to you? You know, is it kind of the word of mouth, so to speak, that's bringing them in? Is it a better, more focused marketing campaign on your end? Just trying to get a little better idea because it's awesome that we're seeing the new client numbers continue to increase. Thank you.

Yeah, no, good question, Joe. I think the way I would answer that is I think the market moved right to ISG. We have a long-term strategy that we put in place around Go Digital a few years ago. Those investments are paying off, and I think the intensity of the global 2,000 organizations to stay competitive has kind of unleashed a huge wave of digital transformation. And because we've had great success around, I'll call it all things digital. And for us, that includes cloud, it includes the customer experience, it includes the digital workplace, modernizing applications and kind of data and analytics. Clients know they need an independent and skilled partner on their side of the table. And we have an embedded client base that when they go from one company to the next and with the great ROI that we have produced for them, they bring us over. So if they're going to split a company or if they move from company A to company B, we can help them navigate and kind of power through and help them with their technology. And we have reputation through this pandemic. We started it pre-pandemic, if you will, with Go Digital. And so our success has resonated in the market. And we are getting great kind of word of mouth and client referrals from current clients who go from place to place. So we've skated to where the puck is, if I can use that analogy. And I think that really is what has underpinned our strong performance last year, and we see that momentum moving on.

Great. Thanks for that, Mike. And, again, congratulations on the quarter and the year. I'll get back in queue.

Thanks, Joe. We'll now hear from Vincent Colicchio with Barrington.

Yeah, good morning, Mike. Nice quarter.

Morning, Vince. Morning.

I'm just curious, maybe you're early, but you talked about how you may benefit from the Ukraine situation. Are you seeing any signs yet of delays or changes in sales cycles in any areas of Europe related to the war?

We have not. What we are seeing clearly is a close watch, especially in Europe. Think about Germany, France in particular. But what we think it has done, and I think you saw a little uptick in the fourth quarter. You'll see it, I think, as we move through 2022. I think clients are now focusing in region there. with making sure that they are armed and ready and prepared if other things escalate. And by that I mean they're getting their cost house in order. They want plans. They want to make sure how they can use technology and automation to assist them. So in the area that I would call kind of leading rapid change areas, those are beginning to pick up steam. as companies begin to kind of put preparations, I'll call it plan B, into place. And that plays again to the ISG strengths. So that's what we're seeing in the early stages. So we don't like to refer to it as taking advantage of the Ukraine situation. It's just the Ukraine situation has created some anxiety around certain clients in that region. and that anxiety is just being transferred into wanting them, they want to prepare themselves, and in so doing, then they want plans on how they could move fast if they need to.

And thanks for that. What caused the upside in the quarter versus your expectations?

Well, look, I think, you know, I think that the whole problem The whole move around the customer experience is accelerating maybe at a faster clip because now everybody needs a competitive advantage. So we're seeing that whole area, that all has a technology thread to it. And as long as there's technology involved, that's our sweet spot. And I would also say that the kind of the workplace of the future or the digital workplace, Very hot. We're very good at this. We're actually having a live event in New York City for the first time on this topic since the pandemic. And the array of clients wanting to kind of showcase what they can do is very hot. So I would say those areas in particular have picked up some good steam, Vince.

And somewhat related, if you look at your sales pipeline, I'm curious what service and solution areas, what three or four service and solution areas should be strongest in 22? I suppose those two you mentioned are two of them.

Yes, and certainly, you know, cloud migration, we all can say, hey, people have been moving to cloud for a while. You're right. But what is happening is the acceleration, the percentage of workloads that are in the cloud, they're still enormous numbers. amount of cloud implementation strategy, the economics around that, developing kind of an application portfolio that you can migrate, designing kind of a cloud operational model for clients, and then really scaling the enterprise cloud is kind of the next step. And when you do that, you have to build out, scale out kind of a strategy to scale. You need to kind of design a continuous level of compliance as it relates to risk management for these enterprises. So those areas are, you know, in addition, because I'll call it kind of creating the roadmap and executing kind of the cloud migration application rationalization areas in addition to kind of I see the rapid cost takeout being there. And then, of course, helping clients with cloud security, the whole cyber area is even more pronounced with what is going on right now in Eastern Europe.

And I assume it's fair to say you'd expect, you know, if there's no setback to demand higher adjusted EBITDA margins for the year. Is that fair to say?

Yeah, I mean, you'll recall that back in 2020 when we were around 11%, we said we wanted to gain 400 basis points of EBITDA margin over a two-year period. And, you know, we're 250 basis points or so into that journey. So we are definitely looking to expand that in 2022, Vince.

And explain to us the levers that you have to offset the wage inflation. I assume, you know, scaling your revenue is one of them, but I'm particularly curious about utilization rates. Do they have room to move up?

Look, we had – you want to touch that one on, Bert, on the utilization?

Yeah, sure. In terms of our utilization, you know, we ended the – you know, for the year we were at 74%. And – And we think that's a sustainable level. It could take up from there. We don't expect it to go to 80, to be perfectly honest, but the scale at the top line with a continuous sort of mid-70s utilization will give us higher leverage. And so we expect to be able to maintain that. We're not seeing a lot of demand for back-to-client, although We are planning for some of that, certainly on the back half of the year, and that's the way we think about it right now.

Thanks, guys, and again, nice quarter.

Now we'll hear from Marco Rodriguez, Stonegate Capital Markets.

Good morning, everybody. Thank you for taking my questions.

Hey, good morning, Marco.

Good morning, Mike. Morning, guys. Mike, I was wondering if maybe you could come back to one of your prepared remarks, comments on the overall long-term model, upper single-digit growth rates and a one-and-a-half incremental flow through the EBITDA. Obviously, fiscal 21, the last couple of years were kind of unprecedented. In fiscal 21, you had some really nice flow through on the EBITDA line. And with the ISG Next model, you're kind of lapping it a year now. That's a slightly lower operating expense model, I would think. Just kind of help us think through why maybe that one and a half times flow rate might not be just a bit higher.

Well, first of all, Marco, we always strive to be higher. You know, both of those are our We call it our three-year guidance, if you will, and our objective internally is to strive to exceed that. And you saw during 2021, we, in fact, exceeded on both of those, both with a double-digit growth on the top line and, you know, almost three times on the bottom line versus one and a half. So we're not going to get out over our skis. That's our guidance. And of course, we as a team will always strive to exceed that. And I think we have good proof that we are able to execute. And provided there are no macro environments that change things, we will continue to pursue that. You'll note that we said in the first quarter, you know, we see that there is going to be an FX headwind in the first quarter. We estimated kind of, you know, approximately 200 basis points. So that has an impact on our reported results on the top line and a bit on the bottom line. So, you know, but all of those things are manageable. All those things are factored into kind of our overall thought process there, Marco.

That is very helpful, Michael. Then in terms of remarks you made at the beginning, one of the things you talked about is there's still some areas that are being negatively impacted by COVID, whether that's just kind of shutdown rates or what have you. I was wondering if maybe you can expand on that a little bit, just kind of describe the regions where you're seeing that. And I know this is a difficult question, but if you can kind of help us understand If those impacts weren't there, what that might mean to your revenues or meant to your revenues in fiscal 21? Yeah.

So let me, one example I would use, Marco, is manufacturing. Manufacturing was fairly weak in 2021. So think about the growth that we had. Manufacturing did not contribute much to that. And why? Why is enormous supply chain issues in in really many, many aspects of different manufacturing, whether that's for the chips, for the autos, et cetera. And when the number of units aren't able to be sold at the pace that they want, not that they don't have sales, but they're not able to achieve and close because they can't deliver a vehicle or what have you, then from the manufacturing side, we think that the manufacturing side will pick up likely the second half of the year, not the first half, as the supply chain begins to get more improved. We'll see what the current crisis over in Eastern Europe means, but our certain forecast at the moment is that that starts to improve during the back half of the year, and that will help on manufacturing. So if it helps on manufacturing, that will free up spending, and that is an industry category that normally spends on digital transformation and technology and has slowed because of the supply chain. So that's one example. The second example, if you want to flip it on the other side, if you look to the U.S. with the latest infrastructure bills that were passed and spending that's to occur and some of the spending categories, we are hearing now from the energy and utility clients on they are getting an influx of dollars. And of course, they want to understand how they could best utilize that money, some of which has to be spent on a certain 12-month period of time or they lose it. And so we are helping them think about projects that can enhance their business And so on that side of the equation, we might see the energy and utility categories increase as a result of that. And, of course, we have the whole oil situation on top of that. So those are a couple of examples, Marco, on how we see that things could accelerate in a couple of few industry segments that, let's say, were not as robust last year as others.

Got it. Excellent color. And then I don't know if I missed this, but what was the headcount at the end of the year? And wage inflation, I know it was kind of asked by the last caller, but I'm not sure I heard a specific answer. But how are you sort of thinking about, you know, how to model that through fiscal 22? And are you seeing that that wage inflation impact that most people are seeing?

Well, let me just touch on wage, and then Bert will get you the headcount number here. You know, look, clearly there's a bit of wage inflation. We look at it as a combination, though, of not only kind of, quote, cash compensation, but we have utilized stock as a way for retention, recruiting, and having an ownership mindset in our firm. And it has worked out extremely well. to ensure that our attrition rates are substantially lower than the industry average, and we think those areas plus the kind of work that we do are all the most important from that standpoint. We are seeing more wage increase in India than we have elsewhere. Our India wage increase will probably be around 8 percent for the year. But I would remind you that that is off of a fairly low base salary, if you will. So, you know, 8% of that is certainly different than an 8% in Europe or the U.S. So that's how we look at it. We're managing it well with all of our teams. And it's some combination of all of that. So I don't know if you found the number yet.

Yes, we ended the year with about 1,350 colleagues And that was up about 80 colleagues for the year.

Very helpful. Thank you guys for your time. I really appreciate it. Thanks, Marco.

And ladies and gentlemen, this does conclude your question and answer session today. I'll turn the call back over to Mike Connors for closing remarks.

Well, let me just close by saying thank you to all of our professionals worldwide for your dedication to our clients and for delivering our record fourth quarter and full year results. There has been no let up in our passion for delivering the best advice and support to our clients as they continue on their digital journeys, and I couldn't be prouder of our team. And thanks to all of you on the call today for your continued support and confidence in ISG. So stay safe, everyone, and have a great rest of the day.

Ladies and gentlemen, I'm sorry, please go ahead.

Yeah, just one parting comment for those of you that are working on your models, because we really didn't touch on the subject. But we do expect our tax rate, effective tax rate, to be somewhat higher in 22, call it near 50. I mean, you've seen the rate, which is somewhere in the mid-30s, and that's a consequence of some deferred taxes from 21 to 22. And so just as you prepare your models, just think about that as well as the comment that Mike made around Q1 headwinds in terms of currency.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.