Information Services Group, Inc.

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 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's 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 8K that was furnished last night to the SEC and the risk factors 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 will 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 in addition in additional information and should not be considered an 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 Barry Alfonto. Mike?

Thank you, Barry, and good morning, everyone. Today, we will review our third quarter and year-to-date performance, our outlook for the fourth quarter, our return of cash to shareholders in Q3, and our bolt-on acquisition of Change for Growth, a leading change management company. ISG is a firm with good momentum as we enter Q4 and look ahead to 2023. Demand remains strong for our digital services, our SaaS platforms, including GovernX, and ISG Research. These offerings in particular are driving a strong profitable mix of products and services that resulted in the highest EBITDA margin in our firm's history, 16% in the third quarter. With the pandemic largely behind them, enterprises in every industry remain focused on digital. They are reimagining their businesses to deliver more value to their customers, employees, and shareholders. That requires ongoing investment in cloud, AI, analytics, 5G, and cyber, and a trusted advisor to guide them. The ongoing demand for digital is reflected in the underlying strength of our third quarter results. We delivered $69 million in revenue, $73 million in constant currency, impacted by 540 basis points of FX. We achieved nearly $11 million in EBITDA, adjusted earnings of 14 cents per share, and again, an EBITDA margin of 16%. Recurring revenues reached $26 million, representing 37% of overall firm revenue. With $78 million of recurring revenues year to date, we are on track to achieve the $100 million we committed to in 2020. We also saw a decline of about a million dollars in Asia Pacific due to the timing of certain public sector engagements. Elsewhere, Europe delivered operating growth of 13%, and we expect another quarter of double-digit growth in Q4 despite that macro environment. Our America's business, excluding automation, grew 14% in the third quarter on the strength of our digital services, and this region is also expected to have a robust Q4. As was the case last quarter, our reported growth was impacted by the absence of a large automation deal in the U.S. that was completed last year. The year-over-year impact was $5 million plus in Q3. Our recurring revenues were up 10 percent on strong demand for our research and platform solutions. Our GovernX platform in particular is performing very well, with several major deals in the quarter worth a combined $5 million. As mentioned, in the current environment, our clients are pressing ahead with their digital initiatives. We're also seeing an uptick in demand for our cost takeout services, as some enterprises redouble their efforts to stay lean and reinvest in digital. We recently signed a major client to a million-dollar-plus engagement focused exclusively on optimizing their cost structure, targeting savings of more than $100 million. There are more such deals on the way. Year-to-date, ISG has delivered record revenues and profits, and with the strong fourth quarter we expect, we are on track to deliver record full-year revenue and profitability. During the quarter, we invested in an additional 56 professionals focused on our higher growth digital and recurring revenue streams. Bert will share more details on our financial performance for the third quarter and year to date a bit later. From a client perspective, we served 625 clients in Q3, including 65 new to ISG, up both from the prior year and quarter over quarter. This bodes well for 2023. Continuous digital transformation remains a business imperative, and ISG is ideally positioned to meet that need. We continue to help our clients design their future operating state and leverage the technology and services that will help them realize their objectives. Now moving to shareholder returns. Due to our successful ISG Next operating model, We were able to return nearly $7 million to our shareholders this quarter, comprised of nearly $5 million in share repurchases and $2 million of dividends. We also reduced our debt by another million dollars during the quarter, driving our gross debt ratio to a new low. Now I would like to brief you on our latest acquisition, Change for Growth, an award-winning company specializing in transformational change for enterprises. Founded in 2017, Change for Growth offers market-leading solutions and expertise to ensure the success of large-scale business transformations involving people, process, and technology. This is the right time to invest in expanding our capabilities in organizational change management, or OCM. We estimate demand for such services will grow at a compound annual rate of 15% over the next five years, as companies continuously invest in large-scale digital initiatives that require employee buy-in to be successful. Change for Growth is the perfect complement to our existing ISG enterprise change business. It strengthens our core OCM business and brings additional capabilities to the table. including a change management digital platform that allows clients to track the progress and health of their transformations. In short, we are creating a new global powerhouse in change management. Turning to our regions, the Americas delivered $42 million of revenue in the quarter, down 2% versus the prior year. As mentioned, excluding automation, the Americas delivered 14% growth on the strength of our digital offerings, including cybersecurity, network, and analytics. During Q3, we saw double-digit growth in our media, health sciences, energy, utilities, and insurance industry verticals. And among our services, research, GovernX, network, and software advisory were also all up double digits. Key client engagements during the third quarter included Owens & Miner Medical, the State of Idaho, and Capri Holdings. During the quarter, we want a $3 million engagement to assess, standardize, and optimize the training programs of a major financial services technology provider. This represents another major client for our emerging training as a service offering. We also want a $2.3 million engagement to provide Govern-X vendor management services to a major distributor of pharmaceuticals and medical supplies. Turning to Europe, our Q3 revenues of $19 million were up 13 percent in constant currency over last year. For the quarter, Europe delivered double-digit revenue growth in our public sector, consumer services, and manufacturing industry verticals, and in our GovernX network and software businesses. Key client engagements in Europe in the third quarter included Volkswagen, Munich Re, Dansk Bank, and Diageo. During the quarter, we expanded our business by $2 million with a major networking and telecom company. ISG is helping this client define and optimize their IoT offerings. and is providing strategic planning for their future business state. We also secured major wins with two public sector clients in our DOC region, BWI, which is the IT arm of Germany's Federal Ministry of Defense, and with BIT, the Swiss Federal Office of Information Technology Systems and Telecommunications. These multi-year engagements combined are worth over $5 million. Now, turning to Asia Pacific, our Q3 revenues of $7 million were down 3% in constant currency from last year due to some timing issues on government contracts. Asia Pacific has been a strong performer this year with year-to-date revenues up 20% in constant currency, and we expect growth to continue. In the last quarter, we saw double-digit growth in our insurance and media verticals. Key clients in the quarter included the insurance company Bupa, shipping company Global Express, and Insurance Australia Group. We continue to expand our relationship with the Australian arm of a leading global insurance company, growing our business with this client by $1 million in the third quarter alone. We are supporting this client with our GovernX and Executive Insights platform solutions, ESG strategy and implementation, organizational change management, and cost optimization services. Now let me turn to guidance. We see continued strong demand for our services as enterprises remain in a state of continuous digital transformation to defend and grow their market position. We are also mindful of the economic factors that could impact our clients, including inflation, supply chain disruptions, higher energy costs, geopolitical concerns, and talent shortages. Taking both demand and the macro factors into account, we continue to target record revenue and profits for the full year. For the fourth quarter, we are targeting revenues of between $70 and $72 million, and this includes a negative FX impact built in of approximately 500 basis points. and adjusted EBITDA between $10 and $11 million. You will note that our fourth quarter revenues are expected to be higher than our third quarter revenues, despite the FX impact reflecting a stronger demand environment. 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 market. with a solid third quarter, adding to our strong year-to-date financial results. Revenues for the third quarter were 68.8 million, down 3% on a reported basis, and up 2% on a constant currency basis, compared with the third quarter last year. The currency negatively impacted reported revenues by $4 million versus the prior year. In the Americas, reported revenues were 42.2 million, down 2% versus the prior year, impacted by the completion of a large automation engagement. In Europe, revenues were 19.3 million, down 4% on a reported basis, and up 13% in constant currency. And in Asia Pacific, revenues were 7.3 million, down 10% reported, and 3% in constant currency. Third quarter adjusted EBITDA was 10.7 million, up 5% from last year, resulting in an EBITDA margin of 15.6%, up 120 basis points compared with the prior year's third quarter. In constant currency, adjusted EBITDA was up 12% in Q3 and up 20% year-to-date. Our ISG Next operating model, which lowers our delivery costs, contributed to a 300 basis point improvement in our gross margin in the quarter and a 220 basis point improvement year-to-date. Third quarter operating income increased 2% to $7.4 million, compared with $7.3 million in the prior year. Net income for the quarter was $5.6 million, or 11 cents per fully diluted share, up 26% versus net income of $4.4 million, or 9 cents per fully diluted share in the prior year. Third quarter adjusted net income was $7.2 million, or 14 cents per share on a fully diluted basis, up nearly 21% from adjusted net income of $5.9 million, or 12 cents per share diluted in the prior year's third quarter. Headcount as of September 30th, 2022, was 1,538, up 56 professionals, or 3.8%, versus the second quarter. And as Mike mentioned earlier, we added resources in anticipation of future growth. Consulting utilization for the third quarter was 72%, down 310 basis points versus the prior year, impacted by our additional hiring. Our balance sheet continues to have the strength and flexibility to support our business over the long term. For the quarter, net cash provided by operations was neutral, impacted by higher accounts receivable, higher prepaid expenses, and lower taxes payable. And we ended the quarter with $19.7 million of cash. During the third quarter, ISG returned approximately $6.8 million to shareholders including share buybacks of $4.8 million and dividends of $2 million. Our next quarterly dividend will be payable on December 19th to shareholders of record as of December 5th. In addition, we paid $1 million in a final payout related to our 2020 acquisition of Neurolify, and we also paid down $1.1 million of debt, lowering our debt balance to $73.1 million and our debt to EBITDA ratio to 1.7 times a record low. Our average borrowing rate for the quarter was 3.6%, up from 1.9% last year, and we ended the quarter with 47.9 million shares outstanding. Mike will now share some concluding remarks before we go to the Q&A. Back to you, Mike.