Information Services Group, Inc.

Good day and welcome to the Information Services Group second quarter 2022 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 second 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 would 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 that 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 this morning 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 certain non-GAAP financial measures, which IHG 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, adjusted net income per diluted share, adjusted EBITDA margin, 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 this morning 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 we will review our second quarter financial results, including our record profitability for the quarter, our record revenues and profits for the first half, our efficient use of cash in returning value to our shareholders in Q2, and our outlook for the third quarter. ISG delivered a solid operating performance in the second quarter, continuing our momentum and excellent start to the year. We generated revenues of $71 million, up 5% in constant currency over the prior year. And we delivered record adjusted EBITDA of $11 million, up 20% in constant currency, and an EBITDA margin of 15%, up 140 basis points. Our recurring revenues continue to be robust, reaching a record $26 million in Q2, up 11% driven by our GovernX platform and research businesses. Recurring revenues represented 37% of our firm revenues in the quarter, and that's an all-time high. From a geographic perspective, our Europe and Asia-Pacific regions generated double-digit operating revenue growth. And our Americas business, excluding automation, remained strong overall with growth in excess of 10% driven by all things digital, including cybersecurity, 5G, and cloud transformation. With our ISG Next operating model continuing to drive a step change in our financials, our utilization for the second quarter was 76 percent, up 104 basis points compared with the second quarter last year. Now, looking at our year-to-date performance, we delivered our best first half ever. Revenue was a record $143 million, up 9% in constant currency, with record EBITDA of over $21 million, up 25% in constant currency over last year. With more than $50 million of recurring revenues in the first half, we are well on our way to our year end goal of $100 million. From a client perspective, We serve nearly 550 clients in Q2, including 69 new to ISG. Clients continue to turn to ISG for our data, insights, advice, and solutions to help them on their digital transformation journeys. Efficient use of technology is a competitive advantage for our clients. That need is even more pronounced in today's environment with its high inflation rates and talent shortages. And with supply chain issues and consumer spending concerns, some clients are beginning to focus more on near-term cost savings. For these clients, ISG has a suite of services ready to help them with rapid cost takeout. No matter their needs, ISG is focused on helping our clients achieve operational excellence, and faster growth over the long term. Now moving to shareholder returns. Due to our successful operating model, we were able to return nearly $9 million to our shareholders this quarter, comprised of $5.5 million in share repurchases and $3.4 million of dividends. We also reduced our debt by another million dollars during the quarter, driving our growth debt ratio to another new low. All this due to the strong cash generating power of our business. Now turning to our regions. The Americas delivered $39 million of revenue in the quarter, down 2% versus the prior year. As mentioned, excluding automation, the Americas delivered double digit growth on the strength of our digital offerings, including cybersecurity network and analytics. A word on our automation business. As you may recall from previous communication, we won a large automation contract with a major entertainment client early last year. That successful engagement was completed this year. The conclusion of this engagement had a negative impact on our year-over-year growth rate in the Americas this quarter, and it will have a similar negative impact in the $4 million range in Q3. This impact has been taken into account in our Q3 guidance. During Q2, we saw double-digit growth in our media, health sciences, and insurance industry verticals. And among our services, research and GovernX were also up double digits. Key client engagements during the second quarter included McKesson, Tennant Healthcare, PSE&G, and Exelon. During the quarter, we began work on a nearly $3 million engagement with a leading U.S.-based healthcare company. We are helping them digitally transform their entire technology estate, including applications, infrastructure, and cybersecurity. We are also working with a major industrial company on a million-dollar human capital management engagement as they prepare for an upcoming spinoff. Turning to Europe, our Q2 revenues of $23 million were up 11 percent in constant currency over last year. For the quarter, Europe delivered double-digit revenue growth in our public sector, manufacturing, and media industry verticals. and in our research and governance businesses. Key client engagements in Europe in the second quarter included Munich Re, Ericsson, TalkTalk, and Volkswagen. During the quarter, we continued to grow our business with a long-standing insurance client. We are working with them on a multimillion-dollar transformation engagement involving cybersecurity, cloud services, and a digital workplace strategy. Now turning to Asia Pacific, this region had a record-setting Q2 performance with revenues of $8 million up 28% in constant currency, driven by growth in our insurance, media, public sector, consumer, and health sciences industry verticals. Key clients in the quarter included the Australian Taxation Office, High Grieve, Insurance Australia Group, and the Australian Department of Home Affairs. We continue to support the Australian government, serving as primary advisor on the government's large-scale technology infrastructure and telecommunications modernization programs. We're also ramping up a digital transformation engagement with a new client, an international logistics company being spun out and taken private. Now, let me turn to guidance. At this point, we see the demand environment remaining strong and believe ISG is in great shape for a solid year of performance. We also remain mindful of the economic factors that could impact our clients, including inflation, supply chain disruptions, higher energy costs, geopolitical concerns, and talent shortages. Taking the current strong demand environment and balancing it with the potential impact of broader macroeconomic factors, for the third quarter, we are targeting revenues of between $71 and $73 million, including a negative FX impact of approximately 400 basis points and adjusted EBITDA between $10 and $11 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. As Mike mentioned, ISG continues to have momentum in the marketplace, with a solid second quarter adding to our strong start to the year. Revenues for the second quarter were $70.7 million, up slightly on a reported basis and up 5% on a constant currency basis compared with the second quarter last year. Currency negatively impacted reported revenues by $3.5 million versus the prior year. In the Americas, reported revenues were $39.4 million, down 2% versus the prior year, impacted by the completion of a large automation engagement. In Europe, revenues were $23.3 million, down 2% and up 11% in constant currency. And in Asia Pacific, revenues reached a record $8 million, up 22% reported and 28% in constant currency. Second quarter 2022 adjusted EBITDA was a record 10.7 million, up 10% from last year's, resulting in an EBITDA margin of 15% and up 140 basis points as compared with the prior year's second quarter. In constant currency, adjusted EBITDA was up 20%. Second quarter operating income increased 22% to 7.1 million compared to 5.8 million in the prior year. Net income was very strong for the quarter at $5 million or 10 cents per fully diluted share compared with net income of 4.1 million or 8 cents per fully diluted share in the prior year. Second quarter adjusted net income was 6.8 million or 13 cents per share on a fully diluted basis compared with adjusted net income of 6.3 million or 12 cents per share diluted in the prior years of second quarter. Consulting utilization was a second quarter record of 76% of 104 basis points versus the prior year, reflecting the impact of our ISG Next operating model. Headcount as of June 30th, 2022 was 1,482, up 5.6% from Q1 as we invest for future growth. Our balance sheet continues to have the strength and flexibility to support our business over the long term. The quarter net cash provided by operations was $0.8 million, and we ended the quarter with $31.5 million of cash, down from $47.5 million at December 31, 2021. During the second quarter, ISG returned approximately $9 million to shareholders through the repurchase of $5.5 million of shares and paid first and second quarter dividends, totaling $3.4 million. Our next quarterly dividend will be payable September 19th to shareholders of record, as of September 6th. In addition, we paid down $1.1 million of debt, lowering our debt balance to $72.3 million, and our debt-to-EBITDA ratio to 1.7 times a record low. Our average borrowing rate for the quarter was 2.43%, up from 2.15% last year. And we ended the quarter with 47.8 million shares outstanding, down from 48.2 million at the end of Q1. Mike will now share concluding remarks before we go to the Q&A. Back to you, Mike. Thank you, Bert. To summarize, ISG delivered another strong quarter, leading to our best first half ever, with overall revenues up 9% and EBITDA up 25% in constant currency for the half, both record performances. Our recurring revenues set a new quarterly record, powered in particular by growing demand for our research and GovernX platform. Recurring now represents 37% of our total revenues, the highest share ever. And despite FX headwinds and other macroeconomic factors, we see our momentum continuing in the second half as clients continue to invest in digital transformation for cost savings and future growth. 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.