Information Services Group, Inc.

Good morning and welcome everyone to the Information Services Group third quarter 2024 conference call. This call is being recorded and a replay will be available on ISG's website within 24 hours. Now I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.

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 Michael Sherrick, 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 guaranteed a future result 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 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 statements that 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 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 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 gap 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 Michael Sherk. Mike?

Thank you, Barry, and good morning, everyone. Today, we will review our Q3 results, including our strong close to the quarter, the recent sale of our automation unit, and our planned use of proceeds. and our outlook for Q4 and the demand environment heading into 2025. ISG closed Q3 strong, delivering revenues of $61 million and EBITDA of $7 million, both at the top of our expectations. Our profitability improved sequentially over the second quarter, with our adjusted EBITDA margin up 50 basis points and operating income up 18%. Among the drivers of our improved profitability was our higher margin revenue mix, including our recurring revenues, which represent 45% of our firm-wide total, up 175 basis points from the same period last year. Also contributing to our profitability increase was our record productivity as measured by utilization, which reached a third quarter high of 77%, up 400 basis points over the prior year. With our disciplined operating approach, we have delivered record utilization two quarters in a row. Our focus is on operational excellence, also is reflected in our strong cash flow from operations in the quarter, nearly $9 million, compared with $3.2 million last year. In terms of demand, we are seeing both continued improvement in the U.S. market along with momentum in our strategic investment areas, advisory platforms, AI, and research. One aspect of improvement is highlighted by the deal flow in our ISG Tango digital sourcing platform. More than $5 billion of contract value is now flowing through this platform, up 25% from Q2. Innovations like ISG Tango and our recurring revenue streams along with the sale of our lower margin automation unit, will be key to driving our EBITDA margins in 2025. We anticipate further acceleration in our pipeline beginning in early 2025 in the U.S. as the economy continues to improve and as our strategic bets on advisory, AI, and software continue to pay off. Leveraging our strong cash flow generation in the quarter we paid down $8 million or about 10% of our debt. Right after the end of Q3, on October 1, we completed the all-cash sale of our automation unit to UST for $27 million. The sale of this business further strengthened our balance sheet, giving us deeper pockets to continue investing in our core growth initiatives and greater flexibility to enhance shareholder returns over time. Over the next few quarters, we expect to reduce our debt to the lower end of our debt ratio targets, and we expect to accelerate our share repurchases. Meanwhile, we will continue to invest in our business to tap into market growth waves, foremost among them AI. One need look no further than our recent first ever AI summit held in London to see the high level of interest in AI. the event was oversubscribed in our best attended conference of the year. We see AI lifting client demand across multiple fronts, but none more immediately than helping our clients take advantage of modernized AI-driven technology services that have the potential to reduce costs by 30% to 60%. With ISG's leadership in sourcing and contracting, The surge in AI demand is moving the market exactly into our sweet spot. An additional growth lever is our more holistic approach to addressing the large software economy through a combination of research, advisory, and training as a service. This effort opens up a broader lane of revenue as we engage our clients and is a natural path to deepen our market influence. Overall, with a solid pipeline, higher productivity, and seizing new opportunities being driven by AI, along with our expansion into the mid-market made possible by our groundbreaking ISG Tango platform and our growing research capability, we are optimistic about our prospects heading into 2025. With that, let me turn to our regions. Revenues were relatively stable quarter over quarter in the Americas, a good sign. On a reported basis, we did face a difficult compare with a record Q3 last year. Reported revenues in the Americas were $40 million, up slightly sequentially, down 5% versus the prior year. During the quarter, we saw double-digit growth in our consumer services and manufacturing industry verticals and in research. Key client engagements during the third quarter included Carnival, Agco, Lockheed Martin, and McDonald's. During the quarter, ISG expanded its relationship with a large U.S. equipment manufacturer. Our engagement began with cost optimization and moved into a large-scale technology and HR sourcing, driving nearly $2 million in revenue from this client. We are also advising a major U.S. healthcare provider on an engagement to modernize their supplier ecosystem, which drove nearly $1 million of additional revenue in the quarter. ISG also is advising a leading travel and leisure company on a multimillion-dollar long-term infrastructure strategy and sourcing engagement. In the third quarter, we added nearly $1 million in additional revenue here to support an important sustainability initiative. In the area of AI, ISG is engaged with a very large CPG manufacturer to bring to market the largest AI and data sourcing agreement in the Americas this year, one that we believe will set the standard for all future AI sourcing deals. And this is a seven-figure engagement for ISG. Turning to Europe, the European market remains challenging for discretionary tech spending. Q3 revenues of $16 million were led by double-digit growth in our energy and utilities industry verticals. Key client engagements in Europe in the third quarter included BASF, Excite, and KCOM. During the quarter, ISG worked with two European clients on separate engagements worth more than $1.2 million. One was with a leading chemical company to provide sourcing advisory for their network data center, and workplace services, including the implementation of an industrial 5G ecosystem. And the other was a cost optimization initiative with a PE-owned UK telecom company to radically transform its cost base ahead of a potential sale. In AI-specific sourcing, we are working with one of the world's leading energy companies to develop new AI and data governance structures that will be used to train large language models and create the company's long-term data strategies. We expect this early work to grow into a multimillion-dollar engagement over time. Now, turning to Asia Pacific, we had Q3 revenues of $5 million, down $2.3 million from last year, as our Australian government work still has not returned to previous levels. During the quarter, Asia Pacific delivered double-digit revenue growth in our consumer services, energy, utilities, and health sciences industry verticals. Key clients in the quarter included the Australian utilities company, AGL Energy, drinks and hospitality company, Endeavor Group, and life sciences company, Cogstate. Now, let me turn to guidance. As I mentioned earlier, we are seeing positive signs of recovery in demand for technology services in the United States. And at the same time, we're clearly well positioned to leverage the key market growth drivers of AI software and mid-market expansion. For the fourth quarter, we are targeting revenues of between $57 and $58 million, and adjusted EBITDA between $6 and $7 million. Our guidance reflects the expectation that growth will return to the Americas in Q4, with Europe's return to growth following in a few quarters. We remain confident in our long-term strategy, and we're ready to capitalize on new business opportunities as growth returns in 2025. So with that, let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael? Thank you, Mike, and good morning, everyone.