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Edited Transcript of III.OQ earnings conference call or presentation 29-Jan-20 2:00pm GMT

Q4 2019 Information Services Group Inc Earnings Call

STAMFORD Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Information Services Group Inc earnings conference call or presentation Wednesday, January 29, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara Florschuetz;Partner and Managing Director

* Barry Matthews

Information Services Group, Inc. - Partner & Head of Northern Europe

* Owen Wheatley

Information Services Group, Inc. - Partner of Banking & Financial Services - Atlantic

* Steven E. Hall

Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services

* Wayne Butterfield;Director - Cognitive Automation & Innovation

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Conference Call Participants

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* Neil Steer

Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research

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Presentation

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Operator [1]

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Good day, and welcome to the Full Year 2019 EMEA ISG Index Call. This conference is being recorded. At this time, I'd like to turn the presentation over to the index host this quarter, Neil Steer at Redburn Partners. Go ahead.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [2]

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Thank you, operator, and good morning, and good afternoon -- and afternoon to everyone on the call. This is Neil Steer from Redburn. Firstly, I would like to thank the team at ISG for their work on the industry and also for asking Redburn to introduce this call today.

ISG's role as a leading adviser and influencer in the global sourcing markets provide a unique view of the IT services and as-a-service market. ISG has been hosting these calls now for 17 years, over which time the data and discussion has hugely evolved with a very dynamic industry.

For those that have listened to these calls in the past, you will be aware that ISG's position working with both buyers and providers allow them to provide unique insights into the current industry dynamics. I would also note that in the past, these calls offer good early insights into the tone for the forthcoming earnings season. And with that, I would like to hand over the call to Steve Hall from ISG. Steve, over to you.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [3]

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Great. Thanks, Neil, and hello, and welcome, everybody, to the EMEA ISG index conference call, and we're going to cover the full year of 2019 today. And Neil, thanks again to you and your team for sponsoring it. We truly appreciate it.

So my name is Steve Hall, I'm President of ISG's EMEA region and the Global Leader for our ISG Index. And with me today is Barry Matthews, who's the Partner, Managing Director of our Northern European business; Owen Wheatley, who's our Lead Partner in Banking and Financial Services; Wayne Butterfield, who leads our ISG Automation business in Northern Europe; and Barbara Florschuetz, who's a Partner, Managing Director for ISG in our DACH business. And Barbara is going to join us to give us a perspective on DACH for the Q&A session.

So as Neil mentioned, we began the global and EMEA quarterly Index 17 years ago. So this is our 69th quarterly Index. And just recently, we really refreshed the format and the timing of our EMEA call. We previously thought it was just a bit too close to the global call and we wanted to provide some deeper insights on the markets within Europe. And then hopefully, you'll see that come through in the data this quarter.

So in this call, we're going to review the key market trends for U.K., DACH, the Nordics and France and really provide a snapshot of the technology and sourcing trends that are impacting the market. We also have 2 special topics today. Owen is going to dive into details and challenges on banking and the financial services industry. And then Wayne Butterfield is going to share insights on Robotic Process Automation, which we all know is fundamentally changing the value proposition.

So if we go to the headlines, 2019 was really a period of uncertainty from a geopolitical perspective in Europe. But it really seemed to have minimal effect on the broader sourcing markets. We did see challenges with Brexit, slowdown in Germany, public protests and strikes in France, but I think at the enterprise level, we brushed most of those aside as we really expanded our digital journey.

So EMEA's combined market ACV grew 11% year-on-year, which included a 13% rise in managed services and a modest increase in the as-a-service market. The rise in the traditional managed services was fueled by several large contracts awarded in the U.K. market and DACH and clarity of surrounding Brexit and the Tory election victory, comforted markets in the U.K. and Ireland and both accelerated in the second half, with a 22% year-on-year increase in the annual contract value.

Overall, the year saw a 35% growth in managed services, reflecting enterprises continued adoption of sourcing to reduce operational costs. And the U.K. [In-as-a-service] stayed above EUR 1 billion for the third consecutive half period.

DACH also edged up in the second half in 2019, though the managed services ACV dipped 4% due to weakness in energy in the manufacturing sectors. But the as-a-service market registered its fastest growth rate among the major European markets.

France really struggled in the second half of 2019. The combined market ACV dropped 4% from this time last year, and the managed services fell slightly, but was in line with the half year performance throughout the past 5 years.

The as-a-service ACV also lagged though, but stayed above EUR 200 million for the third half in a row. And the Nordics continue to show a strong showing with the combined market ACV up 24% year-on-year, meaning services benefited from a strong infrastructure outsourcing results, and the as-a-service ACV showed consistency with its fourth consecutive half of about EUR 300 million.

The EMEA combined market had a really strong finish to the year, reaching almost EUR 8.5 billion for the second half, consistent with its strong first half performance. Europe enjoyed a period of sustained very high contracting activity over the past 3 years, and enterprise clients have continued to adopt hybrid and multiple cloud and multi-cloud strategies and invest in digital technologies across the region. The managed services ACV rose by double digits in the second half of 2019 and exceeded EUR 5 billion in each half of 2019.

The number of awards remain consistent with 5-year trends and we also saw an increase in large contracts awards this year.

The as-a-service ACV exceeded EUR 3 billion for the second consecutive half with Software-as-a-Service spiked to new highs and Infrastructure-as-a-Service came in just under a record high than the prior half year.

For the full year, combined market ACV increased 10% due to new highs in both managed services and as-a-service, and the as-a-service sector comprised -- now comprises 37% of the combined market, up from 22% 3 years ago.

So let me just reemphasize that again that the as-a-service market is now 37% of the combined market, so we continue to see this shift from traditional markets to the digital transformation that we're seeing across.

But we did have some interesting observations in the specific services on a full year basis. First of all, the ITO ACV slipped 3% on a full year basis, and the number of awards in the infrastructure space fell 5% from 2018. The ADM deals remained robust though as enterprise clients continue to reengineer applications for the digital age and movement to the cloud.

The BPO market returned to normal ACV averages in 2019 compared to a very weak prior year. Several large renewals helped as did strengthen facilities management and contact centers. And the latter industry is quickly transitioning to a full end-to-end marketing sales and service play as customer engagement has become more complex. Many clients are hiring service providers to optimize their operations with the latest digital technologies and creating a seamless customer experience. The SaaS and IaaS markets both hit new highs in Europe in 2019. The SaaS market grew 13% with broad adoption of SaaS solutions across the region.

The Infrastructure-as-a-Service market grew 12% in 2019. And though growth in EMEA is slower than other regions based on privacy, regulatory, data sovereignty concerns, the stakes have really never been higher in Europe as it becomes a new battleground for privacy rights and the growth of as-a-service and public cloud -- and public and hybrid cloud solutions. We continue to see large investments in Europe despite some of the negative press coming out of Brussels.

Microsoft is making significant investment in Europe and rapidly closing the revenue and functionality gap with AWS. And we think the 2 firms will be fairly evenly matched for market share throughout 2020 and 2021 in Europe.

The overall IT spend increased or was reallocated as cybersecurity solutions became a major focus in 2019. The current EU regulatory environment and broader security threat profile has forced many enterprises to redirect spend to security and third-party risk management projects. And we expect this to be a continued trend that will help reshape many services and as-a-service offerings throughout 2020.

Let's take a look now at how EMEA compares to the other regions and the overall global trends that we saw in 2019.

The ACV for the 3 regions, EMEA, Asia Pac and the Americas increased compared to the prior year. Asia Pac led the growth with 20% growth, fueled by record high in as-a-service and its strongest managed services ACV since 2014. EMEA grew by 10%, also fueled by the as-a-service market and a strong managed services market. The Americas like other markets growing at only 8% with growth dampened by weak managed services market. Globally, the ITO market felt the impact with slight declines in ACV and ADM, though applications remain quite active as clients aggressively use DevOps and Agile to facilitate their business transformation. All regions registered growth in network services with legacy network deals continue to experience volume of pricing pressure, though providers are moving towards SD-WAN, latency and mobile edge computing solutions. BPO, which is the broad domain that encompasses horizontal back-office processes such as HR, finance and accounting and procurement along with functional areas like contact centers, facilities management and supply chain grew 9% over last year.

Flexible office space demand remains high, and more clients are contracting for larger bundle of services. The lion's share of this growth was driven by several large contract awards in EMEA with flat or negative growth in Asia Pac and the Americas, respectively.

The 23% global growth in ACV for Infrastructure-as-a-Service set a new record. Clients are incorporating a hybrid and multi-cloud strategy, while maintaining some private infrastructure, though will have to be integrated seamlessly. This has led to a series of product launches from the largest players such as AWS's Outposts, to manage customers' on-prem data centers, Azure and Google cloud compute have also introduced tools that freely move workloads between private and public cloud computing environments.

From a growth perspective, the Americas grew at 27%, with EMEA growing at 12% ACV for the Infrastructure-as-a-Service space. The SaaS ACV increased 15% last year year-on-year and we continue to see a lot of upside in that market.

So if we take a look at the digital trends, we introduced the digital slide on our global call in response to this observation and the need to understand really what's happening in the world of managed services with a digital component. We understand that everyone defines digital differently and ISG considers it to be those contracts that have some form of cloud computing, either SaaS or IaaS, analytics or AI. We measure the percentage of digital and ACV award in managed services to avoid influence by volatility in the deal flow.

In 2019, over 40% of the ACV coming to market in Europe had a digital component, which was up 37% from the year before. And up from less than 25% over 4 years ago. This is really strong growth, but quite frankly, Europe continues to lag the global markets in the adoption of digital capabilities.

The chart on the right of the slide shows that the average ACV of deals with a digital component was EUR 16 million for the year, which was a 15% increase over the value of 2018. And as the deals get larger, we expect them to be more multi-positive with data analytics and data management included across prem, private and public cloud. Continuing down the column, we see that deals with the digital component are really growing at a much faster rate than those without, both in EMEA and globally. The pace of disruption in global business and the industries as such that companies are compelled to increase their investment in digital services. So before we look at the country performance, let's conclude our analysis of the EMEA-wide market with a look at the leaderboard. Just to remind you, the placement of the leaderboard is based on awards made over the past 12 months, in this case, during all of 2019.

Among The Big 15 with those with revenues of over EUR 10 billion a year, our mix of the largest multinational corporations along with many of the leading EMEA based providers. Two French firms made the list with Atos winning a major deal of Bayer and Wintershall and Capgemini also signed a large mega deal with Bayer. They are joined by some public cloud infrastructure firms pushing deeper in the corporate enterprise space. Amazon Web Services closed a major deal of BP and SAP, while Microsoft won a large Azure award at Novartis, and Google Cloud Platform is continuing its enterprise push with new clients at Fiat Chrysler and John Lewis.

The Building 15 has several India-based firms, such as Wipro, HCL and Tech Mahindra as well as European-based providers. Orange Business Services secured large awards, chief among them Mars that implement a flexible SD-WAN solution for more than 125,000 employees across 80 countries.

The German IT service providers, Bechtle and French contact center provider, Teleperformance, also made the list, and human capital management software provider Workday had key wins in Anheuser-Busch Inbev and Glencore.

The Breakthrough 15 included -- also included several European headquartered firms such as Tieto, an IT service provider in Finland that recently acquired Evry, and several French R&D providers now appear, such as ALTEN and Altran, along with German IT providers, Axian and Cancom.

In The Blooming 15 (sic) [The Booming 15] [a fleet of high flying] BP -- Indian-based BPO providers such as EXL, HGS and WNS are joined by European firms such as NNIT, a Danish provider of IT services; and Comarch, a Polish IT services provider.

Now let me hand the call over to Barry Matthews to discuss the EMEA subregions. Barry?

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Barry Matthews, Information Services Group, Inc. - Partner & Head of Northern Europe [4]

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Thanks, Steve. We will begin our analysis of the subregions with the U.K. and Ireland. The chart in the lower left quadrant of the slide that lays out the data by year dating back to 2015, as you can see, which shows an annual view to minimize the variability that would appear in a quarterly or half year perspective.

The combined market ACV made a strong showing, up 13% over 2018, its best performance since 2012. Despite the ongoing uncertainty of the Brexit, now in its fourth year, clients are considering larger IT investments and focusing on digital transformation and the use of technology to drive productivity and improved customer experience. Managed services ACV was up 15% compared to 2018. ITO slipped 4%. The strong gain in infrastructure awards was not quite enough to offset the weakness in ADM transactions.

BPO climbed markedly, thanks to strength, particularly in facilities management and industry-specific BPO.

As-a-service ACV exceeded EUR 2 billion for the second year in a row and now accounts for 40% of the combined market.

Both Software-as-a-Service and Infrastructure-as-a-Service reached new highs with SaaS, rising 8% and IaaS 10% over 2018.

Now if we look at DACH, combined market ACV for the full year edged down compared to 2018. Headwinds in manufacturing and the energy sector's skittishness over a possible recession had an impact. But even so, DACH recorded its second best performance. Commercial clients are generally receptive to the strategy of aligning managed services, digital investments and IT-based business solutions.

Managed services ACV fell by double digits since last year. The year ended with a strong second half, led by some large contract awards. The number of awards this year, though, was among the lowest since 2015. This year as-a-service ACV surpassed EUR 1.5 billion for the first time, and it now comprises 38% of the combined market.

In the ITO segment, both applications and infrastructure contributed equally to the decline in managed services, each down by 25%, and BPO's boost came from multifunction transactions and facilities management deals. Both Software-as-a-Service and Infrastructure-as-a-Service increased 22%, which marked the highest growth rate of any of the major markets in Europe. Enterprise momentum continues towards hybrid and multi-cloud environments.

If we have a look at the Nordics, the combined market ACV for the full year beat the prior record, which was set in 2010. Managed services rose 17%, the slowing macroeconomic environment in the Nordics and globally led to more opportunities for cost savings in managed IT services.

As-a-service exceeded EUR 700 million for the first time ever. It now accounts for 35% of ACV in the Nordics combined market, up from 21% just 3 years ago.

ITO climbed with ADM transactions and infrastructure each up over 15%. BPO, though a smaller market, grew 20% due to strength across most functional areas. ACV for Infrastructure and Software-as-a-Service, each increased by more than 10%, second only to the DACH region.

Let's have a look at the French market. So in France, combined market ACV rose 15%, which was its best result in the past 5 years.

Managed services also had its best performance in 5 years with 23% growth. Robust contracting activity, up 38% from last year, reached an all-time high for a number of awards in France.

As-a-service ACV remained above $400 million, as it did last year, and it now accounts for 31% of the combined market ACV.

ITO increased 34% over last year, the 25% growth in applications, which surpassed by infrastructure, which showed a 47% gain. The smaller BPO market dropped 20% on the softness in facilities management and research and development outsourcing. And Software-as-a-Service inched up 6%, while Infrastructure-as-a-Service edged down just 1%.

Let's have a look at what's happening across EMEA industries. The chart that you can see shows different breakdowns for each industry grouping.

The top line under each industry lists the ACV awarded for the full year and directly below that line are the growth rates across a variety of factors. First, for the combined market and managed services and as-a-service, and growth in the geographic regions is broken out at the bottom, as you can see.

So many of the enterprises we work with are in different stages of their digital transformations, of course, and each industry has a different speed of adoption. New economy companies encroaching on turf traditionally held by long time leaders as another layer of complexity. The fintech entrants in financial services, for example, and the new media content players in communications. As providers examine their client portfolios at the start of the new decade, the optimal mix will shift towards a combination of traditional blue chips, and some burgeoning new economy players.

We'll highlight a few of the largest industries, beginning with manufacturing, where trade wars and a soft automotive sector of effective supply chains. As-a-service ACV has grown 10% as clients leverage new technology and digitization in smart manufacturing, IoT and mobile and digital platforms. As-a-service now accounts for 37% of combined market ACV, more than double its percentage from 3 years ago.

In contrast to the 10% rise in as-a-service ACV, managed services value slipped by 3%.

Manufacturing growth soared in the U.K. and Ireland, but it fell back in DACH and in France. Telco and media rebounded substantially compared to a notably weak 2018. New media firms, such as over-the-top and digital native entrants have encroached on traditional telco firms. Unlike many industries, telco when faced with new forms of competition, is responding by leveraging digital technologies to take out cost. The telco firms are making CapEx investment in areas like SD-WAN, in network modernization, wireless and pay TV convergence and cloud-based 5G networks.

The vertical is EUR 1.8 billion in ACV is up nearly 60% from last year. And as-a-service accounts for 31% of the combined market. Most of the regions showed double-digit increases with values more than tripling in the DACH region.

Now even with all the travel-related bankruptcy -- bankruptcies in Europe. So we've got Germania, the Berlin-based budget airline, BMI Regional, Thomas Cook U.K. and others. Still the travel and transport sector registered 12% growth despite those difficulties.

Clients are rationalizing capacities and focusing on cost takeout. As-a-service rose 15%, digital technologies make collaboration across multiple industry participants more dynamic, which pushes firms in the sector to do adopt to a customer-focused mindset.

And growth in the Nordics and U.K. soared. However, we saw declines in DACH and in France.

Now I'll turn the call over to Owen Wheatley for a deeper look at the trends in the largest segment, both banking and financial services, which was up 14% this year. So Owen, over to you.

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Owen Wheatley, Information Services Group, Inc. - Partner of Banking & Financial Services - Atlantic [5]

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Thank you, Barry. I frequently talk with clients and stakeholders from the banking and financial services industry across multiple functions from technology and operations, to marketing, finance and the lines of business. Although each institution is on its own journey, they all describe bewildering amount of transformation going on in the sector. Today, I'll talk about this transformation in the context of challenges and trends I see in the industry from retail banks to capital markets firms. The #1 priority for most, if not all banks, is to elevate customer experience to improve loyalty and wallet share. On the next slide, I'll talk in more detail about why that's so important. But in attempting to achieve this goal, established banks are facing strong headwinds from 4 significant macro factors.

One such headwind is flatlining revenues. The post-2008 crash decade has witnessed a relatively stagnant period of revenue growth, particularly in retail banking. Key measures, such as ROI and revenue per customer have struggled to achieve parity with prerecession levels. Nearly every financial institution has conducted multiple cost-cutting cycles, but the low-hanging fruit has been taken.

The focus now turns to attracting new customers and increasing wallet share with existing ones. We see examples such as Mizuho Bank partnering with LINE to leverage their smartphone-based digital bank to appeal to a younger customer, and Goldman Sachs launching a new mid-market personal lending platform called Marcus.

Second, never has there been more competition in the industry. Banks are no longer the only ones offering financial services. For example, in the payment space, 25% of all transactions now go through nonbank institutions. Think of Apple Pay or Amazon Pay. It's ever easier for customers to switch between financial providers and in some geographies, like the U.K., new challenger banks such as Monzo, Starling and Revolut are rapidly taking market share threatening to disintermediate the established banks.

Third, regulatory pressures remain significant. Since the 2008 crash, we've seen unprecedented levels of regulation and an unprecedented degree of global coordination from regulators. The great recession that followed inspired regulators around the world to work together on a coordinated program, recapitalized banks and ensure sufficient liquidity in the global market. That degree of coordination and alignment is now receding, and we're seeing greater regulatory divergence, driven by local market conditions and a pivot to supervision of existing rules as opposed to new ones. Such jurisdictional divergence is a particular challenge for global banks.

Finally, whilst it's true to say that identifying, acquiring and leveraging skilled resources has always been critical to a bank's success. A fierce battle for talent is now raging in areas we wouldn't have seen 5 or 10 years ago, such as data science, innovation and product development. These skills are now viewed as key differentiators, and banks like HSBC and U.S. Bank are weaving talent strategies and robust organizational change management into their transformation programs.

I previously mentioned, customer expectations, which continue to rise sharply, reflecting the new world of personal technology, traditional banks are faced with customers who demand convenience, immediacy and intimacy, for example, by personalized services that show that the bank understands their needs without crossing privacy boundaries. To satisfy these customer centricity demands, increasing operating agility has become pivotal. Most financial institutions, if not all, are, therefore, on a major digital transformation journey. Many established banks have a patchwork of legacy systems, which are impediments to that transformation and provide friction in customer journeys. Devising a strategy that recognizes the need to become more agile, but acknowledges the risks and costs of complete system replacement is imperative. To remove some legacy constraints, banks are leveraging public cloud to provide additional capacity and agility as well as potentially more favorable commercials than on-premise solutions.

I also see banks implementing end-to-end straight-through processing solutions with few manual touch points, such as Bank of America's digital mortgage experience. Banks are also deploying AI to personalize messages and expose customers to new products on the front end as well as to combat fraud in areas such as anti-money laundering and know your customer in the middle and back offices.

Finally, we see combinations of banks and tech firms working together to develop blockchain use cases and utility platforms in areas such as reference data and settlements. Crucially, all these technologies, old and new, must be woven together as seamlessly as possible like a digital mesh. The objective is to harness the power of myriad tools and platforms, whilst ensuring the customer experience never feel disjointed. The key wrapper around this digital mesh is data. Few industries can boast as much customer data as banks, yet they remain relatively poor performers in extracting meaningful insight from that data. Chief Data Officer roles are now common with a remit to collect, understand and manage data, the ultimate goal being to monetize it through the mass personalization approach I mentioned earlier. It's no surprise that one of the fastest-growing roles being recruited by banks all around the world is data scientists. JPMorgan alone has a data science team of more than 2,500 to make sense of their 150 petabytes of data.

So how can service providers and technology firms add most value in this environment? But to achieve credibility, it's mandatory to completely understand the industry and its challenges. Bank executives will only trust your solution if you've demonstrated your knowledge of the industry's pressure points and can explain how your solution will help. Accordingly, attention to your proposed solution will rise in priority if it addresses one or more of the bank's pressing business imperatives.

We talked about some of these pressures earlier, but there are many more. Take the time to research your prospect and find ways to link your proposal to one of the main challenges they face. As far as possible, banks want plug-and-play solutions that are simple to integrate with our existing spaghetti of systems and platforms. To develop end-to-end platform solutions and streamline the process to reduce the friction on their customers' journey. Know the limitations of your proposed solution and proactively partner with other providers to fill gaps. Work together to co-design a comprehensive, seamless solution. It's what banks expect you to do. View success from the perspective of the bank by tying your fees to that same success. It doesn't have to be another gain-share model. It could be price per outcome, such as a charge per successful loan application rather than a time and materials or milestone-based payment profile. Once your working relationship is effective, take it to the next level, ensure your client can access and leverage your resource talent and R&D capabilities. This is one of the biggest pain points and relationships between banks and providers. You have the gold dust to find a way to share it with the client. Finally, in response to the great battle for talent I mentioned earlier, a provider offering a build-operate-transfer model can be of immense value in building talent at the bank without compromising short-term services. We're seeing strong interest in this model.

In summary, be creative. Banks want to hear your ideas. They're prepared to put money behind new solutions and even commit to longer-term contractual relationships, if they include deep transformation capabilities and address the bank's most pressing business needs.

Now I'll turn the call over to Wayne Butterfield, who will tell us more about one of the major elements of the digital mesh, I mentioned, and of the RPA market. Wayne, over to you.

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Wayne Butterfield;Director - Cognitive Automation & Innovation, [6]

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Great. Thanks, Owen. Great insights there. RPA comes up a lot in our index calls, and it's a top priority for our client. The automation of knowledge work is going to have a huge impact on our market and the overall economy over the next couple of decades. It's our view that most companies are still at the beginning of their automation journey. We have not yet seen a step-level improvement in automation capability inside the majority of large enterprises so far. Many have ventured into automation, but have yet to immerse themselves at scale. [They are sampling out the] fundamental RPA capability, leaving many additional layers of intelligent automations yet to be explored or exploited. What we have seen, however, is a few million euros added to the valuation of RPA software supplier market.

Now the 3 biggest RPA vendors by revenue are also the ones we work with most often with our clients. UiPath, which has raised $900 million today and has a total valuation of $7.2 billion. Automation Anywhere, which has raised over $750 million, with nearly $6.3 billion valuation. And finally, Blue Prism, which went first public in 2016 and has a market cap of $1 billion, with their share jumping 30% after their latest results.

All 3 are seeing explosive growth with our clients using more normal of the -- some of our recent research shows that most large companies are trending towards multi RPA vendors, and this tends to go up as companies mature their automation capability. So almost 40% of advanced automation companies use 4 or more automation vendors, and this includes things like ICR, OCR and some of the cognitive tools. So it's not just about the Big 3, even though between them, they own nearly half the market. So we're currently tracking over 25 companies with RPA solutions and this number is going to grow. Our most recent market estimate is approximately $1.1 billion this year. And they will grow between 35% and 42% in 2020, much faster than just about any other enterprise software. Now this is spawn in a robust service market. Services revenue are around 3 to 4x the software spend. And today, most of the work is focused on consulting and system integration. But we also think there's going to be a sea change in the next 3 years around services. We're going to see more vertical and horizontal-specific managed automation services, which we think represent a great opportunity for many BPO and ITO providers. Managed services, revolving around the bot, the infrastructure and maintaining them is growing even faster than the implementation and configuration business. We think this will continue as automation implementations become more complex. With ICR, OCR, machine learning and natural language processing element being integrated with core RPA. Clearly, this is a very fast-growing market. But in our view, these massive valuations are bet on what's yet to come. Basically, using RPA as an entry point for more transformative front-office focused automation. However, most companies are still in the early stages of deploying and scaling basic RPA.

Right. Let's take a more detailed look. So in 2018, the RPA market was less than half the size that it is today, a sign of just how fast it's growing. But we focused mostly on where enterprises are in their journey, specifically on what we call the RPA wall. Companies stall in around 20 processes, organizational change management and the lack of mature centers of excellence are huge inhibitors to growth.

Basic RPA can only take them so far. And it will need to be coupled with cognitive tools to open their floodgates into tackling judgment-oriented processes. Based on some research we just published, we don't think these things have significantly changed. We're still seeing companies using and continuing to hit the RPA wall. Automation capability has improved, and we saw a significant percentage of companies move up from lower capability levels, but the highest level, Bot 3.0, stayed flat year-over-year. This is a threshold at which companies pass through the wall. While almost 70% have implemented RPA, 59% of those have automated fewer than 20 processes, and only 12% have automated 50 or more, another indicator that progress might be stalling. As bot utilization, our study found that the average utilization of bots was just 44% for companies at a lower capability level versus nearly 60% for the small number of companies at the Bot 3.0 level. This is because it's hard to get past the 1 bot, 1 automation mindset with our strategic plan and governance about how to scale automation across the entire company.

In our view, it's clear why companies are hitting the wall. They have not established an effective automation CoE. The CoE defines the strategy and the operating model. It lays the foundations for building and supporting bots and establishes metrics and reporting standards, which in turn drive reinvestment in automation as companies start to see results. We see this solution anecdotally with our clients and in our data. Bot 3.0 companies that have mature CoEs are consistently meeting or exceeding their business goals around cost savings, reducing cycle times and improving data accuracy.

We believe that the need for an automation CoE is going to become even more important as companies start to look beyond back-office swivel chair processes to more front-office processes where judgment is required. This will be the holy grail for the software suppliers, because the number of processes in this area dwarfs those in the back office, where the focus is on executing the same process faster, but in the middle and front office, they're different. With processes like know your customer and trade-based money laundering inside banks is a complex, time-consuming processes that also require human judgment.

So RPA suppliers are seeking to add judgment capability to their products through development, partnering or acquiring. What does this mean for RPA software suppliers and managed service providers? We can easily imagine that UiPath or Automation Anywhere are likely to explore a public offering in 2020 or 2021. There's a good chance that 1 or both could be absorbed in a blockbuster straight-up acquisition by an Oracle, Salesforce, SAP or Microsoft. We also believe there will be new entrants, perhaps one of them whether they're really big ISPs deciding they want in on the RPA market. This is already underway, though not highly publicized. Just last month, Microsoft rebranded its workflow automation solution, Flow, as Microsoft Power Automation, which adds RPA capabilities.

If Microsoft can add RPA capabilities into its deeply integrated office productivity suite where a lot of RPA activity happens today, it could create challenges for the Big 3.

Similarly, that announced recently an RPA capability called Intelligent Robotic Process Automation by introducing automation, pre packets inside nearly 25% market share of the ERP market. It represents yet another competitor in an already highly competitive independent software vendor market. RPA is also having a big impact on ITO and more so BPO, managed service providers. As we've talked about before, BPO providers are feeling the impact from automation more than ITO because traditional BPO services tended to be highly manual and task-focused and tasks are what RPA is great to automating.

But this is also why we're seeing so much platform-based automation from the leading BPO providers. They know this is the case and are working to transition to nonlinear revenue models. They are doing the disruption to themselves rather than waiting for someone to do it for them.

So what will 2020 hold for RPA? We think it will focus on proving out the multibillion euro evaluation of the top players in the market that is getting more retention and more entrants every day.

Steve, at this point, I believe you'll take us over the finish line.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [7]

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Great. Thanks a lot, Wayne. And Barry, Wayne and Owen, great job on the market insights. Clearly, what's happening in banking and financial sector. And Wayne, great overview of the RPA market, which is quite interesting. So to summarize, the EMEA combined market grew 8% in managed services ACV and 13% in the as-a-service. Most of the European markets, with the exception of DACH, were up substantially in the managed services ACV and 40% of the managed services award had a digital component and the number of managed services award that have a digital component grew much faster than those that didn't.

The as-a-service market continue to reach new heights and now comprises 37% of the combined market ACV. So if we turn to our forecast, the as-a-service market will continue to expand across EMEA, and we're projecting revenue growth of 23% year-on-year for 2020 in the as-a-service market, which is slightly lower than our global forecast of 23.5%. And that just goes to sort of the slower adoption of as-a-service within the EMEA markets. We're also forecasting growth in the managed services market and we expect that managed services market to grow 2.8%, again, slightly below our global forecast of 3.2%.

The rates to as-a-service, combined with a potentially sluggish manufacturing sector in Germany, and certainly, the Brexit trade discussions, we think, will continue to dampen some of the market.

If you'd like to learn more, please go to www.isg-one.com. And at this point, I'd like to hand the call back over to the operator and start the Q&A section.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And Neil Steer. We will start with your questions for ISG.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [2]

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And thanks, guys, for a very good and comprehensive run through the industry dynamics. Just one quick question, first of all. Clearly, the overall market has done remarkably well and been more robust than people may have anticipated over the duration of last year. Is it possible to sort of quantify what you think the impact of Brexit, trade war tariffs and so forth have actually been on the market? And where, otherwise, the growth may have been, absent those headwinds?

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [3]

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Yes, Neil. This is Steve. Great question. If I look at it, I think the market probably would have been 300 to 500 basis points higher had it not been for the combination of the trade wars, the slowness in manufacturing across Germany. And certainly, the Brexit.

I think just looking at it from a U.K. standpoint, Brexit really delayed a lot of decision making. I mean, we saw it over and over with clients that there was just too much uncertainty to make big decisions on either traditional outsourcing or as-a-service. And discretionary spend that they did have tended to be on Brexit planning and the regulatory issues associated with that, which just took dollars out of the system to be able to do it. I think you combine those things, again, I think it's easily sort of 300 to 500 basis point difference. Barry or Barbara, any insights from you guys?

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Barry Matthews, Information Services Group, Inc. - Partner & Head of Northern Europe [4]

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Yes. It's a difficult one to quantify, obviously. But I mean, it was -- we're still seeing significant growth in the U.K., particularly seeing manufacturing was up 72%. So organization is obviously investing heavily in digital despite that. And it's maybe they've been putting off some of the bigger programs that we might see this year or next, but they've still been investing in cloud, in multi-cloud and in hybrid cloud models in some of the networking space, particularly in software-defined networks. And also, particularly in cybersecurity, where we've seen big growth. So maybe they've been putting off the big programs, but they've still been investing in the areas of technology, which are absolutely necessary as they move to digital.

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Barbara Florschuetz;Partner and Managing Director, [5]

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Just want to add my best perspective. I also believe that the trade war has delayed some biggest decisions. But in general, in regards to digital investments, they have definitely all been made.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [6]

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Okay. Can we -- is it possible just to drill down a little bit into the seasonality of what we saw in DACH and in France. It looks as though France has had clearly a much tougher second half. If you could add a little bit of color as to what drove that slightly softer performance there? And conversely, it appears that the DACH region probably had a slow start to the year, but things must have come back towards the end of the year. So if you could just add a little bit of color as to the dynamics there, that would be much appreciated.

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Barbara Florschuetz;Partner and Managing Director, [7]

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Yes, if I can start with DACH. I would say in the first half of the year, we have seen some volatility. In the second half, a lot of enterprises were facing a significant decline in their profits. And as a result, they are pushing cost takeout initiatives, and 1 of them is obviously sourcing. So in DACH, there is quite a dramatic change, which I see in 2020 in regards to large-scale sourcing contracts. Those sourcing contracts include a significant part related to digital, which is finally reengineering applications to prepare them for public cloud, and as a consequence, also to use the hyperscaler for the operation. But more interestingly, we again see projects with people and asset transfer. And as a consequence, we will see against these risks, contract terms will be 5 years or even longer because of the takeover of the assets and the people. So this is a dramatic change to what we have seen so far, when we have seen only contracts, which were rather small or only for circa a 3 years period, without any people and asset transfer, to be honest, I believe, in the last 3 to 5 years, there were never people at transfers anymore. So this is changing quite dramatically. We just have finished a large-scale transaction, the value of more than $2 billion in December, and I'm aware of 2 other firms who are targeting to source on a large scale, again, with asset and employees involved. So it seems the megadeals, they are coming back, and as such, they will pump up the sourcing market for 2020.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [8]

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Yes. And then Neil, from a -- from a CEMEA's perspective or a France perspective, I think what you saw the decline is we had an exceptionally strong first half of the year in 2019. So the as-a-service business in France has sort of been, sort of EUR 200 million over -- per half year. What we saw in the first half of 2019 on the managed services side was almost EUR 600 million deals out there. But the overall market has really been between [34 to 36], which is right where it came in on a -- on 2019. So I wouldn't read too much into sort of the seasonality on France as much as a really, really strong compare over the first half of 2019.

Again, from our business, we still see a lot of great activity with most of the big name clients in the French market and across CEMEA. And clearly, with some of the acquisitions and mergers and partnerships that are taking place, both in banking and on the manufacturing space, I think you're going to see even more of a multinational approach in that market, which will drive further behavior.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [9]

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And just one more question. Thanks for the color on the banking industry dynamics. The phrase or the word spaghetti is quite often used, describing the IT infrastructures that banks have. And obviously, there's been a lot of debate as to whether large refresh programs of core banking systems are going to solve that conundrum. Could you just -- it wasn't very clear. Are you suggesting that the work's going -- the work that is being undertaken by the banks at the moment is really going to be putting more spaghetti on the spaghetti? Or is it going to some way drive and promote that renewal of the core banking platforms that the banks have?

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [10]

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Owen, you want to take that?

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Owen Wheatley, Information Services Group, Inc. - Partner of Banking & Financial Services - Atlantic [11]

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Yes, sure. Thanks, Steve. It's a great question, Neil. I think the answer is that what we're tending to see is when banks are looking at how they transform, they have various options. They can go for the kind of heart and lung transplant of core banking transformation and replacement, and they might look to somebody like Temenos, partnering with all the public cloud providers. With their T24 package, for example, or other bank-in-a-box models and start again with a new kind of core banking model. The trouble with that is, it's very risky, it's very costly, it's very time-consuming, all forms of client data all over the bank if it's a large established bank it's grown usually through acquisition.

And so what they're tending to do, we're seeing, is they are setting up parallel banking platforms, new digital banking platforms alongside what they currently have, and they're looking at a structured and slow migration. So it may be that they set up a new digital bank like Mettle at NatWest, for example, we talked about Marcus as a new platform of Goldman Sachs. So for new customers or for new products, we see new platforms and then a gentle migration over time that's much more orderly and structured moving away from some of that spaghetti. So that's kind of what we're seeing in the industry. There are examples in the last few years, probably the last large one that I can think of in the U.K. was probably Nationwide who did a complete core banking transformation back in '13, '14. But since then, it tends to be more about parallel running and the gradual migration.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [12]

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That's great. With that, operator, would you like to go ahead and open up the lines for questions from the audience?

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Operator [13]

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We currently have no participants in the queue. (Operator Instructions)

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [14]

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And Neil, did you have any follow-up, while we're waiting for somebody to join?

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [15]

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Yes. Just -- I was just interested on the comments on the RPA markets. For those that have followed the industry for a while, a few years ago, many of the larger IT services and consulting firms would have given the impression that RPA was something that they were doing themselves organically. That market seems to have clearly moving on over the last couple of years. So how is the relationship between some of those platform providers and the independent service providers changing? If you could add some light on that, that would be much appreciated.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [16]

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Wayne?

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Wayne Butterfield;Director - Cognitive Automation & Innovation, [17]

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Yes. No, I think that's probably one for me. So I think there's a realization in the market overall that potentially RPA isn't as simple as what it was originally made out to be. And I think our research backs that up that less than 1 in 10 adopters of the technology have really done anything meaningful with it. So I think it was a realization across the market that the right partnerships with the right experience is really the only way to truly transform as a result of this and many of the other intelligent automation technologies. So I think it's just a sign of the market maturing that -- and understanding and probably realizing that RPA is more than just a technology. It's actually a different way of working. So it's as much about successful change management as it is about automating a process using the technology. So I think it's just a sign of the maturing times. And I think now as we start to see intelligent automation versus RPA. I think we're going to see a lot more of this as well. But it's through partnerships and successful partnerships between vendors, service providers, service integrators, consultants and it's -- the best partnerships, they're going to lead to the best results moving forward.

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Owen Wheatley, Information Services Group, Inc. - Partner of Banking & Financial Services - Atlantic [18]

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And just to add to that from the banking perspective, certainly, that is exactly what we're seeing, this whole rise of the ecosystem. I mentioned it a little bit in what I said earlier about creating proactive partnerships with other providers of all sorts of technologies as part of this digital mesh. Certainly, automation is a huge part of that. A lot of the banks that we work with have 3, 4, even 5 different types of automation technology that they either have deployed or will be deploying, and the emphasis is shifting on simply implementing a single technology to combining those multiple technologies, often in the same product area, maybe it's payments, maybe it's mortgages, maybe it's credit cards or somewhere else in the bank. But trying to drive more insight using structured and unstructured data, combining RPA with more intelligent automation. So it's actually happening on the ground in a lot of our clients.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [19]

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Okay. This next question is slightly unfair. But if you look at the focus on digital. In the slides, you referenced the fact that the average ACV in the EMEA market is now around about EUR 16 million. How high do you think that will be in 3 to 4 years from now? Is that sort of an average ACV that is likely to double? Or has that kind of reached overall site that's broadly mature at the moment? Where are we in terms of the commitments, if you like? The customers doing these really quite significant digital transformation programs.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [20]

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So I would use the sort of the Americas and Asia Pac as sort of the trendsetter right now, Neil. When -- I think Europe is actually lagging a bit in the adoption. So when I see the percentage that's digital and sort of the growth on the ACV, I think we have some really strong tailwinds that we're only going to see that number go up significantly. And I wouldn't be surprised to see that number increase 30%, 40%, 50%, quite frankly, over the coming years. Again, one of the indicators that I look at is, when I look at the Asia Pac market now, it's now 75% to 80% on the as-a-service space and the ACVs are holding. I think the U.S., with their cloud adoption has been exceptionally high, and the ACVs are holding. So I think you'll continue to see sort of that level of growth as soon as really the true digital transformation takes off across the European market.

Barry, anything you want to add to that? I know you look at that as well.

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Barry Matthews, Information Services Group, Inc. - Partner & Head of Northern Europe [21]

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Yes. I mean, we certainly are seeing, obviously, a big increase in deals with digital scope. About 44% of the deals, which we see globally, have digital scope, and the deals which have digital scope are typically 17% bigger than deals that don't have digital scope. And that's a trend which is only increasing. So we're going to see more and more digital deals, and they are going to be larger. The contracts may be more flexible, meaning clients are now wanting more flexible contracts. So it's difficult to say what the duration of those contracts are likely to be, the sort of 3- to 4-year mark. Clients certainly want as much flexibility as possible. I think we will see average contract values as we go more into the digital and less into managed services increase over time. So I totally concur with what you said, Steve.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [22]

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Great. That's pretty much all I had...

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [23]

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And operator do we have any calls? Go ahead Neil.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [24]

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No. Just to say that was my final question. So over to you.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [25]

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Okay, very good. And operator, if we don't have any other calls queued?

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Operator [26]

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We have no participants in the queue at this time.

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Steven E. Hall, Information Services Group, Inc. - President of ISG EMEA & Partner of Digital Advisory Services [27]

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Okay. Excellent. Well, thank you, everybody, for joining the EMEA call. We will do this again probably at the end of Q2. For Q3, we will have another EMEA focus as well, and we certainly appreciate the feedback on what you think about the EMEA-only call and the views that we give on each of the countries. So thank you. And again, if you want the slides you can go to www.isg.com (sic) [www.isg-one.com] and everything is there. Thank you very much. Have a great day.

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Operator [28]

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Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.