Information Services Group, Inc.

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 factors section in ISG's Form 10K 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 ISD 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 and could 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?

Michael Connors Thank you, Barry, and good morning, everyone. Today, we will review our record results for the fourth quarter and full year. our continued recurring revenue growth, our new enhanced amended credit facility, and our outlook for the first quarter. ISG delivered our best quarterly and full-year performance in our 17-year history. For the quarter, ISG delivered record revenues of $74 million, up 11% in constant currency, record net income of $4.3 million, up 20%, Record earnings per share of $0.09. Record adjusted earnings per share of $0.13. And record adjusted EBITDA of $11 million, up 9%. Our key metrics were equally impressive for the full year, with record revenues of $286 million, up 8% in constant currency. Record operating income of $29 million, up 17%. record net income of $20 million, up 27 percent, record adjusted net income of $27 million, up 18 percent, record earnings per share of 39 cents, record adjusted earnings per share of 53 cents, and record adjusted EBITDA of $43 million, up 11 percent. Our record four-quarter and four-year results were accomplished despite an uncertain macro environment and fewer working days in Q4, normally a seasonally lower quarter for ISG. But our diverse and valued suite of products and services, from cost optimization to business transformation, is making a difference in our performance. Looking at the fourth quarter, our top-line growth was driven by double-digit operating growth in both the Americas and Europe. as client demand for efficiency and optimization services escalates. We also saw strong growth for our subscription services in research and governance, and in network and software advisory services during the quarter. Our recurring revenues in Q4 reached $30 million, up 26% over the prior year, and represented 40 percent of our firm-wide revenues. For the year, we achieved $108 million in recurring revenue, surpassing the $100 million goal we set for ourselves back in 2020. Not surprisingly, FX continues to chip away at our reported results. For the quarter, the impact of revenue was 447 basis points, or $3.2 million. and $13 million for the full year. Overall, our more profitable mix of products and services, combined with the operating efficiencies we derived from our ISG Next operating model, resulted in the highest full-year EBITDA margin in our firm's history at 15 percent. From a client perspective, we served 556 clients in Q4, up 6 percent, and surpassed 900 clients for the year, a new high for our firm. Today, nearly every one of our clients is a digital business. Each is using digital technology to redefine how they operate, how they engage with customers, employees, and business partners, and how they create new revenue streams through connected products and services. Even in uncertain times, our clients remain committed to continuous digital transformation. Markets and technology are changing fast. There's really no time to hit pause. Every business needs to keep moving forward or be left behind. With intense market pressure to invest in cloud, analytics, customer experience and AI, Our clients are turning to ISG to help them optimize their costs, not only to get lean, but to free up resources to fund their digital ambitions. To meet this need, ISG introduced a wide-ranging cost transformation service that builds upon our longstanding expertise in this area. very successful today, focuses on the four key levers to optimize cost. The supplier ecosystem, technology investments, software asset management, and business operations. This approach delivers both short and long-term efficiencies and reduces the peaks and valleys of traditional linear spin models. As I mentioned, these continuous savings can be reinvested in our clients' business, particularly for ongoing digital transformation. This is another example of how our 17-year history of being the largest sourcing advisor in the world is paying off. Revenues from our cost optimization services are growing by double digits. Among our major engagements, we are helping a global healthcare solutions company reduce its $40 million of technology costs by 25%, and an automotive supplier reduce its $140 million spend by 20%. There are many more such opportunities in progress and in our pipeline. Turning to our regions, the Americas delivered $44 million of revenue in the quarter, up 12% versus the prior year on the strength of our digital and cost optimization offerings. During the quarter, we saw double-digit growth in our media, health sciences, energy, and utilities industries. And among our services, network and software advisory, research, and GovernX were also up double digits. Key client engagements during the fourth quarter included McKesson, Stryker, Exelon, and Fiserv. As I mentioned, demand for GovernX, our SaaS-based vendor compliance and risk management platform, is soaring as clients seek to get the most value out of their supplier ecosystems. During the quarter, a global hospitality giant renewed its annual million-dollar-plus ISG GovernX subscription at a higher rate for 2023. This client is one of our longest standing GovernX clients, generating more than $25 million in recurring revenue over the last 10 years. We also extended our ISG GovernX contract with one of the top three global tech giants in the world for a further four years with a significant increase in annual contract value. ISG also won a new multi-million dollar ISG GovernX engagement with a major U.S. healthcare company to provide our unique vendor management office as a service capability. Additionally, ISG Research has signed a large deal worth more than $1.5 million with a leading services tech provider for a range of go-to-market projects and ISG solutions including a multi-year ISG pro benchmark contract. Now, turning to Europe, our Q4 revenues of $24 million were up 12% in constant currency over last year. For the quarter, Europe delivered double-digit revenue growth in our media, public sector, consumer services, and manufacturing industry verticals. and in our GovernX and network and software advisory businesses. Key client engagements in Europe in the fourth quarter included Volkswagen, Deutsche Bahn, Allianz, and Nestle. During the quarter, a leading transportation company in Germany extended the digital labor and automation engagement it awarded ISG in late 2020 for an additional two years. ISG will continue as the client's strategic automation advisor, delivering platform-as-a-service maintenance and licensing services. We also secured a major deal with a global chemicals and industrial solutions manufacturer in Germany to provide network advisory services. Additionally, ISG has been awarded a significant million-dollar-plus engagement with the Swiss Federal Office of Information Technology, Systems, and Telecommunications. We are helping this client optimize their technology portfolio, restructure their underlying cost models, and redefine their organizational structure to ensure lasting improvement. Now, turning to Asia Pacific, our Q4 revenues of $7 million were up 5% in constant currency from last year. with double-digit growth in our network and software advisory business. Asia Pacific has been a strong performer this year, with full-year revenues up 16% in constant currency. In the latest quarter, we saw double-digit growth in our consumer and media industry verticals. Key clients in the quarter included the Australian Taxation Office, High Grieve, and the insurance company Bupa. Turning now to another very positive development for ISG, we recently announced that we were able to successfully amend our $140 million credit agreement at more favorable terms. This was made possible by our strong financial position and operating results. The new agreement converts the previous term and revolving loan into an all-revolving credit facility. It eliminates $4.3 million of mandatory annual principal payments under the former agreement and extends the maturity date by three years to February 2028. This is clearly an excellent outcome, especially during a time of increasing interest rates and a volatile debt market. Now, let me turn to guidance. Continuous digital transformation remains a business imperative, and ISG is ideally positioned to meet that need. In addition, we see continuing strong demand for our services as we help our clients optimize their technology and business environments, design their future operating state, and leverage the technology and services that will help them realize their objectives. Looking ahead to 2023, our demand pipeline remains strong. Indeed, we hired additional employees in Q4 to meet future demand. We are also mindful of the economic factors that could impact the timing of client decision-making, including inflation, the possibility of recession, geopolitical concerns, and talent shortages. In consideration of all of this, for the first quarter, we are targeting revenues of between 73 and $75 million, including a negative FX impact of approximately 200 basis points in this range, 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 market. leading to a record-breaking quarter and year. Revenues for the fourth quarter were $74.2 million, up 7% on a reported basis, and up 11% on a constant currency basis, compared with the fourth quarter last year. Currency negatively impacted reported revenues by $3.2 million versus the prior year. The Americas reported revenues for $43.6 million, up 12% versus the prior year. In Europe, revenues were $23.9 million, up 1% on a reported basis, and up 12% in constant currency. In Asia Pacific, revenues were $6.7 million, down 4% reported, and up 5% in constant currency. Fourth quarter adjusted EBITDA was $11.1 million, up 9% from last year, resulting in an EBITDA margin of 15%, up 33 basis points compared with the prior year's fourth quarter. In constant currency, adjusted EBITDA was up 17% for the full year. Fourth quarter operating income increased slightly to $7.2 million compared with $7.1 million in the prior year. Net income for the quarter was $4.3 million or $0.09 per fully diluted share, up 20% over net income of $3.6 million or $0.07 per fully diluted share in the prior year. Fourth quarter adjusted net income was 6.5 million, or 13 cents, per fully diluted share on a fully diluted basis, up 27% from adjusted net income of 5.1 million, or 10 cents, per fully diluted share in the prior year's fourth quarter. Headcount as of December 31st was 1,599, up 61 professionals, or 4%, from Q3. As Mike mentioned earlier, we added resources to gear up for future growth. Consulting utilization for the fourth quarter was 67%, impacted by our additional hiring. Our full year utilization was 73%. 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 6.6 million and 11.1 million for the full year. We ended the quarter with 30.6 million of cash, up from 19.7 million at the end of the third quarter. During the fourth quarter, ISG paid dividends totaling $2 million. Our next quarterly dividend will be payable on March 31st to shareholders of record on March 20th. In addition, we paid 2.5 million related to the C4G acquisition, borrowing 9 million from our revolver to fund the acquisition and business operations. We also paid down 1.1 million of debt. And with our debt balance of 79.2 million, our debt to EBITDA ratio is 1.8 times a record low for year end. Our average borrowing rate for the quarter was 5.1%, up from 1.9% last year. And we entered the quarter with 48.3 million shares outstanding. Mike will now share some concluding remarks before we go to the Q&A. Back to you, Mike.