Information Services Group, Inc. (NASDAQ:III) Q3 2023 Earnings Call Transcript

Information Services Group, Inc. (NASDAQ:III) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, and welcome everyone to the Information Services Group Third Quarter 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.

Barry Holt: Thank you, operator. Hello, and good morning. My name is Barry Holt. I’m the Senior Communications Executive. I’d like to welcome everyone to ISG third quarter conference call. I’m joined today by Michael Connors, Chairman and Chief Executive; 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 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 in our Form 8-K that was furnished last night 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-one.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 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 GAAP measure, please refer to our current report on Form 8-K, 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 Sherrick. Mike?

Michael Connors: Well, thank you Barry, and good morning, everyone. Today, we will focus on four areas. First, our record third quarter revenues, including our fast-growing recurring revenue streams. Second, our acquisition of Ventana Research. Third, our Gen AI engagements and a view of this emerging market. And fourth an update on the demand environment. ISG delivered its best top line performance ever in the third quarter with revenues of $72 million. Through the first nine months of the year we generated a record $225 million in revenue up nearly 7% on an operating basis. Performance in the third quarter was driven by strong double-digit growth in Europe and in our recurring revenue streams. Clients are increasingly focused on leveraging technology to improve customer experience and reduce operating costs, a traditional sweet spot for ISG and this is reflected in our strong pipeline.

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Q&A Session

With that said, client decision-making right now is slower than usual and spending is being stretched over longer periods of time as clients weigh the impacts of the macro environment and rising geopolitical concerns. We expect the pace of spending on large-scale transformations to pick up again in the New Year when demand is likely to increase. In the meantime, clients are focused on cost optimization and making targeted digital investments that will help them prepare for the next wave of growth. During the third quarter, our ISG net operating model and disciplined approach to operating efficiency allowed us to improve our firm-wide EBITDA margins by 120 basis points quarter-over-quarter. Our team execution remains stellar. We also achieved 19% growth in our recurring revenue streams in the third quarter, driven by an increase in our multiyear contracts and our investments in proprietary platforms and research.

For the first nine months recurring revenues were up 22% to $95 million and accounted for 42% of our firm-wide total. Our focus in this area continues to pay off and will help drive our margin expansion plans over the next two years. ISG is already well-known and highly valued for our industry-leading data on sourcing transactions our comprehensive market research on the managed services sector and our market-making influence with buyers of technology and business services. Now we are expanding the reach of our research business with our acquisition of Ventana Research announced yesterday. Ventana is a well-respected technology research firm, specializing in coverage of the $800 billion software industry. The firm tracks more than 2000 software vendors and provides detailed coverage on more than 250 of them.

In addition to expanding our ISG research coverage, this move gives us the unique ability to guide our clients’ decision-making with proprietary research that now spans the entire software and services ecosystem. Software is an important sector for ISG and our clients. It now represents more than half of global technology spend and growing. Ventana gives us unparalleled coverage of this market adding to our market-leading coverage of the technology and business services industry. The client list of Ventana Research reads like a who’s who of the software industry, ADP, ServiceNow, Salesforce, SAP and Workday to name a few. Ventana brings more than 40 unique new clients to ISG and the opportunity to cross-sell our broad array of ISG products and services to them.

Beyond adding to our recurring revenue streams, Ventana Research is a valuable complement to our existing software advisory business. On the buy side, we have a long history of advising our enterprise clients on software selection and implementation price and feature optimization. Indeed, more than 80% of our advisors are involved in sourcing transactions where software plays a big role. That’s particularly noteworthy considering we are the market leader in sourcing advisory. On the sell side, Ventana Research gives us a new growth platform for advising software vendors. We can help them identify client needs in areas such as cost optimization, governance and tech modernization and help them hone their go-to-market approaches. We are excited to add Ventana Research’s capabilities to our portfolio and welcome Ventana Founder and CEO, Mark Smith and his nearly two dozen experienced industry analysts to our firm.

Now, a brief look at the active role ISG is playing in the hot new area of generative AI. Our clients are increasingly exploring and testing concepts to utilize generative AI in their businesses. ISG is involved in a number of these initiatives including, we are advising a large US metal resources firm on using Gen AI to forecast the demand and price of minerals on a monthly basis. We are advising a state auditor on creating Gen AI foundational models to identify fraud and advising another client on creating guidelines and frameworks to control Gen AI for ethics, bias and data poisoning. And we are formulating an ethics and compliance management system for two large US-based insurance firms that will provide guardrails for their Gen AI experiments and proofs of concept.

In September, ISG released our global research study on the state of applied generative AI from an enterprise perspective. Among many insights, our research shows the first adopters of Gen AI on the commercial side are banking, financial services, insurance, healthcare, travel and hospitality. It’s still early days but Gen AI is starting to gain some traction with a promise of much more ahead as we support our clients in this emerging area over the next few years. Now moving to shareholder returns. Our commitment to shareholders is demonstrated by our disciplined management approach that allows us to continue returning cash to our investors. During the quarter, we paid a quarterly dividend for the ninth quarter in a row since we instituted the cash dividend in 2021 and raised it last year by 12.5%.

In fact, we have returned $62 million to our shareholders, since the start of 2021. As we move through the next few quarters, we will continue to deploy capital in a disciplined way for our shareholders including accelerating our share buybacks. Our goals remain. By 2025, as part of Phase 2 of ISG Next, we are aiming to expand our adjusted EBITDA margin a further 200 basis points from the end of 2022 to approximately 17%. We feel we are tracking to achieve this goal as our product and service mix continues to change. And we will accelerate the growth of our recurring revenues to $150 million after surpassing our previous target of $100 million last year Now turning to our regions. The Americas delivered $42 million of revenue, up 1% versus the prior year.

Year-to-date revenues in the Americas are up more than 8% on the strength of our digital solutions and cost optimization services. During the quarter, we saw double-digit growth in our consumer, banking, manufacturing and public sector industry verticals. Key client engagements included Corning, Centene Carnival and McDonald’s. During the quarter, ISG continued to expand its relationship with a major US utility. This is a multimillion dollar engagement to support a divestiture and right-size the provider ecosystem for this reorganized company. We also had several significant million-dollar wins in the banking and financial services sector. We won an infrastructure strategy and sourcing engagement with a leading fintech company and we won new business with a leading pension fund to support the client’s selection of technology, operations and client service providers.