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Edited Transcript of III.OQ earnings conference call or presentation 10-Aug-20 1:00pm GMT

Q2 2020 Information Services Group Inc Earnings Call

STAMFORD Aug 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Information Services Group Inc earnings conference call or presentation Monday, August 10, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry Holt

Information Services Group, Inc. - Senior Advisor

* David E. Berger

Information Services Group, Inc. - Executive VP & CFO

* Michael P. Connors

Information Services Group, Inc. - Chairman & CEO

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Conference Call Participants

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* Joseph Anthony Gomes

NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst

* Marc Frye Riddick

Sidoti & Company, LLC - Business and Consumer Services Analyst

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day and welcome to the Information Services Group's second quarter results conference call. Today's conference is being recorded, and a replay will be available on ISG's website within 24 hours.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Barry Holt. Mr. Holt, please go ahead, sir.

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Barry Holt, Information Services Group, Inc. - Senior Advisor [2]

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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 second quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer; and David Berger, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to read a forward-looking statement. It is important to note that the communication may contain certain 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 this morning 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 will 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 statements to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improves 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 and the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed this morning with the SEC.

And now I'd like to turn the call over to Michael Connors, who will be followed by David Berger. Mike?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [3]

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Thank you, Barry, and good morning, everyone. Let me start by saying ISG delivered a very solid second quarter in spite of the pandemic. Although revenues were down, they exceeded our expectations. And we more than doubled our EBITDA from the first quarter, thanks to our aggressive cost actions and client demand for our higher-margin, pandemic-ready services.

Our balance sheet is very strong, with our debt leverage ratio down to 2.6x EBITDA and with cash sitting at $32 million, boosted by a record operating cash flow of $22 million in Q2. Over the last 12 months, ISG has generated $47 million of cash, a testament to the cash-generating power of our business and our disciplined operating approach.

Let me put these results in perspective. GDP in the U.S. in Q2 was minus 33%. In the Eurozone where ISG also operates, it was worse, minus 40%. Many of our ISG industry segments were significantly affected by the pandemic and economic downturn. Hospitality, banking, consumer and manufacturing were all down double digits. On the flip side, client revenues in our insurance, public sector, retail, media and telecom verticals were all up double digits. And our ISG Research business, which has been a vital source of authoritative insight during the pandemic, was also up double digits.

In a world evolving into all things digital and remote everything, I'm proud to say we marshaled our exceptional talent to help ensure the business continuity of our clients while prioritizing the health and well-being of our people and continuing to deliver on and exceed our financial commitments. Through good times and bad, ISG is there for all our clients, ready to support them with our diversified, recession-resilient portfolio of must-have services. That is why we retain 85% of our client base each year.

Our performance this quarter was helped by sales of our high-value, higher-margin products and services, especially those in high demand during the pandemic. These include: our rapid cost-takeout services; our ISG GovernX vendor compliance and risk management solutions, now with 10,000 users, up more than double since the onset of the pandemic; our network services to enable remote working; our captive asset monetization services; and of course, our digital services, which now represent 50% of our revenues, up from 45% last quarter.

Although some clients are slowing their transformation initiatives, they continue to invest in digital, and with good reason. Our clients and ISG both understand that those who continue to expand their digital capability will recover faster and emerge stronger from this crisis. If there is a bright spot in all of this, we see the pandemic as an accelerator of digital transformation. As clients accelerate their move to the cloud, adopt future workplace technology and upgrade their connectivity, we expect demand for our digital services to be turbocharged in 2021.

With these market and industry insights as a backdrop, let me detail our financial performance. To reiterate, our revenues and EBITDA for the quarter exceeded our expectations. Revenues were down $10 million to $57.4 million due to the overall impact the pandemic had on client spending levels.

A couple of other factors came into play: one, our revenues were reduced $2.4 million from the loss of billable T&E money that was simply not there due to the ban on business travel; and two, we offered reduced rates and extended terms to some of our clients hardest hit by the pandemic, including those in travel and hospitality.

From a profit perspective, our adjusted EBITDA of $7.4 million was more than double the prior quarter, thanks to our early and aggressive cost actions and our higher-margin mix of products and services that are helping our clients weather this downturn. We will likely continue to see revenue pressure in the near term as clients delay spending on major technology initiatives, even as demand remains focused on our higher-margin, pandemic-ready services.

As a result of our actions and our resilient portfolio, our financial position today is significantly stronger. As I mentioned, we generated a record $22 million in cash flow from operations in the quarter. And we used $6 million to further pay down our debt, now with a leverage ratio of about 2.6x, the lowest since 2016.

Additionally, in the quarter, we served 424 clients. That's up 4% from Q1. Our recurring revenues were $19 million for the quarter, representing 34% of our total. And we ended the quarter with $32 million in cash, up from $17 million in Q1.

We recently took another step in our Go Digital journey with the tuck-in acquisition last month of Neuralify, which gave us 40 new clients and a significant new digital platform training capability, especially important in today's remote working environment. As of today, we have now fully integrated this business into ISG Automation.

Our automation business was not immune from the softness in the quarter. However, the size of our automation pipeline is building to its highest level since we launched this business a little over 3 years ago. That is a direct result of the growing demand for the digital transformation services we see accelerating growth in our broader business as we move into 2021.

Looking at the overall automation industry. The leading robotic process automation company, UiPath, in July, announced it's closed on its Series E investment round, raising $225 million at a post-money valuation of $10.2 billion. We estimate this valuation to be about 30x revenue. During the quarter, we also expanded our automation ecosystem by forming a global partnership with NICE, a leading provider of automation solutions.

Now turning to our regions. The Americas delivered $32 million in revenue in the quarter, down 14% sequentially from Q1. A reduction in client billable T&E contributed about 500 basis points of this decline. As mentioned, we accommodated a number of clients in the U.S. on rate reductions, extended terms and other areas in some of the harder-hit segments like automotive, travel and hospitality. We did see good growth in our higher-margin services of cost takeout, network and digital and in industries like consumer and insurance, both up double digits sequentially.

Key clients in the Americas engagements in the second quarter included Walgreens, AIG, CSL Behring, Cushman & Wakefield, Otis Elevator in the state of Louisiana. Among our significant wins, ISG Research has been awarded a wide-ranging contract with more than $2 million with for a long-term ISG client and one of the world's leading professional services companies. In another win, a global leader in retail and wholesale pharmacy awarded ISG a $2 million engagement to support the transformation of the client's global technology operations. A Canadian utility company, a longtime ISG client, also awarded us an engagement totaling $2 million to provide a digital target-operating model and sourcing strategy to enable enterprise agility and a scalable enterprise platform capable of supporting potential acquisitions.

ISG also was awarded a $1 million contract with new network and software advisory engagement with a diversified multinational health care enterprise. The new engagement builds on a well-received benchmark study completed late last year, and all of this done in a remote selling environment.

Turning to Europe. Our Q2 revenues of $21 million were down 5% from Q1. Germany fared extremely well, up 2% sequentially and 8% year-over-year. During the quarter, EMEA saw a doubling of our network services and almost a doubling of our research business. Among our industry segments, consumer and manufacturing were both up, offset by declines in banking, insurance, public sector and technology.

Key client engagements in Europe in the second quarter included Bayer, BNP Paribas, Munich Re, Ericsson and Qatar Airways. Among our wins, ISG has been awarded a $2 million engagement with a German oil and gas company to provide a range of technology advisory services, including security, sourcing and vendor and contract management.

Finally, in Asia Pacific, we reported double-digit growth, with revenues up 19% to $5 million driven by the public sector and our energy and life sciences industry verticals. Key clients in the quarter included Rio Tinto, the Australian Taxation Office, the Australia Department of Defence and the Department of Home Affairs, IAG, AMP Services and ANZ Banking Group. ISG has been awarded a new contract for nearly $2 million with the Australian Department of Defense. ISG will serve as the technology adviser for DoD procurement, the fifth year we have done so.

Now let me turn to guidance. The crisis, as we all know, is far from over. Although there has been some flattening of the curve in some countries, we continue to see surges, and this is impacting our clients' decision-making, especially those in the consumer-facing industries. This crisis likely only begins to subside with the introduction of vaccines.

Some businesses will have difficulty recovering, as witnessed by our $600,000 of bad debt write-offs this quarter. Others will emerge with entirely new operating models. We expect our clients will focus on the near term as they cope with the immediate business impacts of the pandemic, and yet others like ISG will use the situation to emerge stronger.

Apart from the pandemic-induced impacts on client demand, in Q3, we expect near 0 of client T&E reimbursable expense, which usually runs about 4% to 5% of our revenues. And though we are planning for our live ISG-produced destination events to eventually return, we are not forecasting any revenue from in-person events for the balance of the year, this in a year when we had expected between $5 million and $10 million of events revenue.

On the upside, as mentioned previously, we are seeing strong client interest in our rapid cost optimization services, supplier and risk management, network capability and resiliency, digital workplace solutions and business recovery planning. Longer term, we think the pandemic will accelerate client demand for and investment in the digital transformation services ISG provides.

Balancing all of this, we will continue to provide guidance on a quarterly basis based on assumptions we are making on a continued volatile environment. For the third quarter, we are forecasting revenues of between $53 million and $55 million and adjusted EBITDA between $6 million and $7 million as a result of the cost actions we have taken in anticipation of higher-margin services being delivered in the quarter.

So with that, let me turn the call over to David Berger, who will summarize our financial results. David?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [4]

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Thanks, Mike, and good morning, everyone. To reiterate what Mike said, we managed through a difficult operating environment and delivered a solid second quarter. Revenues for the second quarter were $57.4 million compared with $67.3 million in the prior year, down 10% sequentially and down 14% in constant currency and a decline of 15% on a reported basis. Currency negatively impacted reported revenues by $700,000 versus the prior year. Reimbursable client travel costs were down $2.4 million, accounting for approximately 400 basis points of the decline.

Reported revenues were $31.6 million in the Americas, down 14% sequentially and down 22% versus the prior year; $21 million in Europe, down 5% sequentially and down 6% in constant currency and 8% on a reported basis versus the prior year; and $4.8 million in Asia Pacific, up 19% in constant currency and 13% on a reported basis versus the prior year.

Second quarter 2020 adjusted EBITDA was $7.4 million, which was up more than 2x sequentially and compared with $8.1 million in the prior year's second quarter. Included in adjusted EBITDA for the second quarter of 2020 was $600,000 in bad debt expense, reflecting a weakening credit position for some of our clients due to the pandemic. This compares to $75,000 of bad debt expense recorded for the full year of 2019.

We reported second quarter operating income of $3.5 million compared with an operating loss of $700,000 in Q1 and up 7% from operating income of $3.3 million last year. Net income for the quarter was $600,000 compared with a net loss of $1.4 million in Q1 and up 48% versus net income of $400,000 in the prior year. Reported fully diluted income per share of $0.01 was flat compared with the same period in 2019.

Adjusted net income for the second quarter was $2.9 million or $0.06 per share on a diluted basis compared with $1.1 million or $0.02 a share in Q1 or 3 -- and $3.2 million or $0.07 per share in the prior year's second quarter. Utilization for the second quarter was 70%. Quarter end head count was 1,279, essentially flat with last year.

Our balance sheet continues to have the strength and flexibility to support our business over the long term. Net cash provided by operations for the second quarter was over $22 million, which was a quarterly record, and $27 million for the first half versus under $1 million in the prior year's first half.

As Mike indicated, we have generated $47 million of cash flow from operating activities over the last 12 months. We repurchased $1.4 million of shares in Q2. And we ended the quarter with $31.6 million of cash, which was up from $17.4 million in Q1 and $10.4 million in 2019 Q2.

We repaid $5.9 million of debt in the quarter, which lowered our debt to $80.9 million, which is down 7% from year-end and down 17% from a year ago. Our average borrowing rate for the quarter was 3%, which is almost half of last year's rate. And we had 48.1 million shares outstanding as of August 5.

Mike will now share concluding remarks before we go to Q&A. Mike?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [5]

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Thank you, David. To summarize, the global pandemic and economic downturn are impacting our clients as never before. Yet in spite of this, ISG delivered a very solid Q2, thanks to our early and decisive cost actions in March and improved mix of higher-margin products and services. Our revenue and EBITDA both beat our expectations, with EBITDA more than doubling from Q1. Our balance sheet is strong, a debt leverage ratio down to 2.6x and $32 million in the bank after generating a record $22 million of cash in the quarter. Our liquidity gives us flexibility for both risk and opportunity.

We continue to serve our clients without interruption and deliver the higher-margin services they need to contend with the downturn. And we continue to operate our business with impeccable execution reflected in both our Q2 results and Q3 forecast.

Longer term, we see the pandemic being an accelerator for our clients' digital transformations and demand increasing for our digital services in 2021. As always, we are focused on creating shareholder value for the long term, and we are steadfast in our mission to deliver operational excellence to our clients.

So thank you very much for calling in this morning. And now let me turn the session over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Vince Colicchio with Barrington Research.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [2]

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So curious, the government sector seems like it had a pretty good quarter. Are you anticipating in the U.S. some pressures in the second half given the financial situation?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [3]

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So good question. Public sector has done well here and also down in Australia, by the way. Right now, we do not because some of the new work that we have signed is multiyear. That will carry us through the back half of the year. So we know that the states will be under pressure because of -- clearly because of the whole kind of pandemic situation. However, it does put pressure on to potentially reduce cost at a more rapid pace. And of course, that's what we help our clients do in terms of their transformation.

So we've won in the state of Louisiana. We've won in the state of Florida. And I've said this before, we tend to be able to manage in Republican-kind-of-run states who are more receptive to the cost takeout at a more rapid pace. And so that will play well, I think, for us in the back half of the year. We will watch it. But right now, we do not anticipate a softening there.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [4]

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And the strength in Germany, does that have legs into the second half?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [5]

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I think -- first of all, during the second quarter, one of the advantages we had there is we have a number of very large anchored clients, including a lot of the manufacturing clients in Germany. So look, I think third quarter is always a little more challenging in Europe because despite COVID, they're all planning to take their vacations, if you will.

But our pipeline is strong, and I would expect on the back half of the year -- I'm not so sure -- Q3 probably will look closer to Q2 just because of vacations. But we see Germany holding up pretty well over there.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [6]

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And where are we in the dealing with -- helping customers financially? Are we past that type of relief? Or are you still working on some of that?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [7]

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So it's a combination. So we did about 120 days of relief for several clients. And relief for us was significant, somewhere between 25% and 50% reduction. And we kept the entire team operating during that time. We do expect for the back half of the year to have a number of clients in similar fashion. Think about hotels, think about the cruise lines, which we have -- all have clients of the major companies there. And we plan to stick with them, just as we did back in the recession with General Motors before they -- just as they would file for bankruptcy. And clearly, we know they've been a client for us for over a decade.

So yes, there is some relief coming out of the auto side but not out of the hospitality, travel side. We expect to have that suppressed for the balance of the year as we work with our clients to help them through this.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [8]

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Okay. Nice job in the quarter.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [9]

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Yes. Thanks, Vince.

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Operator [10]

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Our next question will come from Marco Rodriguez with Stonegate Capital.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [11]

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I was wondering if maybe you could spend a little bit more time on the digital applications. Just kind of talk a little bit more in detail, if you can, on the areas or pockets of demand that you're seeing perhaps accelerate right now because of the pandemic and then kind of what sort of applications you see really, using the word that you -- I think that you had in the prepared remarks, kind of turbocharge your digital services in '21.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [12]

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Okay. Great. Look, I think if I was characterizing, I'd probably do it in 4 or 5 areas: one, workplace of the future, contact centers of the future, cloud, cloud and networks. I double up on cloud because I think what's happened here is those that were -- those enterprises that were on a decent digital journey are simply accelerating that. Those that were behind have been exposed.

But I think many companies are looking at remote working for a number of quarters going forward. So when we think about where are the areas, it's around technology modernization. It's around enterprise agility. It's around all these contact centers of the future where you can't necessarily be all in one room and how do you manage that. How does the workplace of the future going to work? You need more bandwidth. You need more network capability. You need more tools. All of those areas are what we call in the ISG digital areas. Those areas will be hot, we think, for the next couple of years.

So as we think about that, we think about it in those ways. But one other area, Marco, that we are seeing in terms of kind of fast relief, by fast relief, I would say, 6 months, is that some clients are now wanting to monetize their data centers. So we have this area of expertise we call asset monetization. And what we do is we help, for example, 1 very large top 5 insurance company who wants to get out of the physical data center area as a result of all of this, they will monetize it, sell it to one of the very large providers. We are helping through that whole process. They will walk away with billions, if you will, of potential dollars with a long-term, multiyear kind of payback-type agreement with one of these providers.

So this is big. These are very large, and that is a quick way for some of these companies to pick up $100 million, $200 million, $300 million is on the data center asset monetization. So those would be the areas, Marco.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [13]

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Very, very helpful. And then how should we kind of think about the digital demand and how that kind of dovetails into your goal of reaching $100 million in recurring revenue by the end of fiscal '21?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [14]

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Yes. So the -- there's 2 ways here. We've got recurring revenues, and we also have digital revenues. Our digital revenues, as you know, now this quarter, 50%. Our objective by the end of '22 is to have 2/3 of our firm on digital revenue. That's around cloud, that's around workplace, that's around network, everything as it relates to digitizing and enterprise.

So we are tracking there. We were, was it 3 years ago, we were at around 20%. We were 45% at the end of last year. We're now at 50% of firm revenues and on our way, I think, to the 65% level.

The $100 million of recurring revenue over the next 12, 24 months, we are trying to drive everything we can to annuity-based streams. One of the things around the Neuralify acquisition is they have a subscription-based approach to learning. It's a digital enablement platform. So it fit in perfectly with the world of remote working. And that's a subscription-based.

So our research business has exploded during this pandemic. A lot of that is, again, subscription-based. So we are working on new products as well as expanding what we currently have as we are trying to get to $100 million of our revenues being recurring over time, Marco.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [15]

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Got it. And then in terms of the quarter on the expense side, can you maybe quantify what were sort of the temporary cost takeouts? And then maybe how should we think about those costs as we progress through the rest of this fiscal year?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [16]

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So what we've done is we took out a lot, as you know, of the discretionary spending. We took out a lot of marketing, of course, all the travel costs, all of those things during the course. What we have done is we have -- as we move forward, I would say most of those costs are permanent. We are changing our business model as a result of the pandemic. We are creating -- and this will be for future calls, but we are creating what we're calling an integrated delivery platform inside of ISG. This will enable us because we will not need to be on client premises like we've been in the past. It will enable us to leverage our talent around the globe. So think about someone in Germany supporting a P&C insurance company in the United States or a cybersecurity expert in the U.S., supporting a German manufacturing company, which was not possible in the past, where clients insisted on our folks being on site. Well, the world is changing. And we have an opportunity, which we are going to seize on, and this will change our cost model as we evolve into 2021.

So most of our actions will be permanent in nature, substituted in some ways. Some costs coming back in, but other costs coming back out. So we expect most all these costs to be on a takeout basis to be close to permanent.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [17]

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Understood. And last quick question, if I might. On the cash flows, very well done for the year-to-date here period from generating cash flows from operation. Just kind of wondering if maybe you can talk a little bit more about the drivers there. How much of the working capital liquidation kind of helped would drive that? And then how should we think about cash flow from operations in the second half of the year?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [18]

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Well, again, to reiterate, we did $22 million of cash in the quarter, $27 million for the first half, $47 million for the last 12 months. Big driver of the cash, when you see the cash flow, will be accrued expenses, generated $8 million of favorability in the cash flow statement.

The big driver were the government stimulus programs that we were able to tap into that we talked about last quarter. So as you know, in the U.S., payroll taxes have been pushed into -- later into the year and also into the next 2 years. We had similar stimulus programs across the globe in payroll programs and that.

And in addition, we drove -- we've delivered more than double EBITDA on lower revenue. As you do that, you're generating your profit with a lower expense base. So basically, the other half of the big driver of close to $19 million in working capital gain was in the receivable area as we drove down receivables. Obviously, we're not going to be able to repeat that level of cash flow in the second half, but we expect to have a positive cash flow in the second half of the year.

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Operator [19]

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Our next question will come from Joe Gomes with NOBLE Capital.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [20]

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Let's just keep on the cash flow line. So you built up a nice little pile of cash there. Any particular immediate uses for that? Or is this something that we can now have it in reserve and would be able to capitalize on opportunities once we see that -- hopefully, the economy rebounding here in the near term?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [21]

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No. It's more the latter of your answer. We -- again, we have almost $32 million of cash in the bank. Given the uncertain times, we think it's prudent to have the cash in the bank. It gives us the opportunity for risk -- or additional opportunities as we go forward. So we're comfortable with our position, and we'll continue to evaluate cash usage as the economic conditions become clearer.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [22]

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If you, you said there, David, expect to have some positive cash flow in the second half, would you expect that to continue to build on the cash or to be used to further reduce debt?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [23]

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Again, we'll evaluate -- we'll definitely pay down the $2.5 million of debt that will -- that is required. And we'll continue to evaluate how to use our cash in the second half of the year based on economic events.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [24]

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Okay. And then last quarter, you had talked about -- you guys had been making some investments into the ISG Automation business sales team. And just trying to get an idea -- I understand the environment that we're in, but have you seen any progress from there, maybe pipeline building or more contacts with the fact that you doubled that sales team?

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [25]

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Yes. So good question. So they were not immune. They were also soft in Q2. However, as I think I indicated in the overall remarks, the pipeline, as a result of us building that sales team, is now at the largest level that we've ever had in the 3 years since we launched this business from scratch.

So the question really will become is the timing for us to close what is a fairly large pipeline. And I don't have a good answer for you yet because decision-making is still somewhat slow. But we have some very large deals in the pipeline. So whether they materialize in Qs 3 or 4 is to be determined. But we're very pleased with the sales team, with the investments that we have there and now with a very large pipeline that, depending on how fast clients will move, will benefit us either during the back half of this year or into the early part of 2021.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [26]

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Okay. And then if you could provide a little bit more detail on the Neuralify acquisition. I mean is it going to have any impact at all on second half results? Maybe a little more color on how that really helps expand or drive some of the automation business for you guys.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [27]

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So it will be a small impact, so not material in the back half of the year. However, what it has done is it's brought a series of clients, 40, that we did not have in ISG Automation. And so what we are -- the plan is, is because we have a relationship there, we plan to expand the services among those 40 clients as we go forward. And that is helping contribute to our larger pipeline. We've already had very good success with Neuralify during the month of July on deals that would not have happened had it not been for the combination.

So in a world where you're home working, trying to find brand-new clients from scratch is difficult for business development. But if there is an existing client relationship, then we can push much, much harder, and that's where the sales efforts are being focused on. And that is where Neuralify will assist us and, we think, will help with the ISG Automation business during the back half and as we move into 2021. That's helping build this large pipeline that we are now building in ISG Automation.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [28]

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Okay. That's it for me. Nice quarter, guys, in challenging times.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [29]

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Yes. Thanks, Joe.

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Operator [30]

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Our next question will come from Marc Riddick with Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [31]

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Actually, I wanted to touch on -- follow up on what you just said there and maybe shift that over to some of the new business wins that were -- that you mentioned in your prepared remarks, which were certainly very encouraging. I was wondering if you could touch a little bit on some of those new business wins that were announced, what that mix might have looked like as far as is that extension or expansion of existing relationships and versus any new relationships that were part of those announced new business wins? And then I have a couple of follow-ups on top of that.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [32]

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Yes. So it was a combination, Marc, on the new business and existing, expanding businesses. So as I said before, the new business development is a little more challenging, but we've had some great success with a large retailer around our -- around the network business: a big manufacturer around GovernX, which is managing the supply chain; a large retailer in Germany around their transformation; 1 of the top 2 telecom companies in the world around their life cycle contract management and GovernX there; we had, with a professional services firm, a multimillion-dollar deal with one of the largest professional services firms in the world. Now think about that. They're coming to ISG; large insurance companies as they are transforming and trying to digitize their claims processing around automation and around operations; and then a number of public sector wins, both in Australia and the U.S., around technology enablement in order to take out costs, whether that's with the tax office in Australia or the state of Louisiana's Department of Health.

Those are all kind of combinations. So 50%, 75% are existing clients in that grouping that we talked about; 25%, new. As I said, our number of clients this quarter from Q1, somewhat surprisingly, is higher in Q2 than Q1. That's good news for us because you start, you get a toehold in, and then you build that business as you proceed. So we were up, I think, around 5% or 6% -- 4%, 4% on clients in the quarter.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [33]

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It's certainly encouraging in a challenging environment to get new clients. In this environment, it's pretty good. And so congratulations on that.

I did want to touch a little bit on the utilization level that you mentioned. I think you said it was around 70%. Is that sort of ballpark what you were looking for? Is that close to what you were expecting? And how should we maybe think about that going forward as far as the -- as you continue to get more experience, I suppose, working from home and get a little closer to some more implementation of projects?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [34]

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Well, it's 70 -- we expect that to continue to go up. Working at home has not significantly impacted it. Our advisers are fully engaged and learned how to deliver the product remotely. So again, we'll continue to see improvement in the utilization, as Mike talked about, with the new model coming out.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [35]

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Okay. Great. And then I just want to make sure I got this -- the right numbers. So basically, between the travel and the currency impact, they sort of combine to over $3 million of impacted revenue. Even though you guys had a really good revenue quarter, it could have been even better, if not for those. Is that a right way of looking at it?

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David E. Berger, Information Services Group, Inc. - Executive VP & CFO [36]

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Correct.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [37]

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Okay. Great. And then the last thing for me. I just wanted to talk a little bit about the...

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [38]

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Yes. I was going to say, one other thing to keep in mind in the quarter that was different for us historically is bad debt. So a number of -- we'll call them in the hospitality, travel areas, I think we had $600,000 of bad debt. I don't know that we've had $600,000 of bad debt cumulative over the last several years. Certainly, last year was under $100,000. So there is -- there are clients that have been dramatically impacted. And so you add that into the quarter as well. So between the travel, the T&E top line, to your point, the currency, so there are some unique factors, if you will, that are going on.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [39]

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And I did want to touch just one last thing. Mike, you may have mentioned -- as far as the decision-making process kind of moving along maybe a little bit slowly, but it's sort of moving along, I was wondering if you could just sort of touch a little bit about maybe what you're seeing there with some of the enterprises that you're dealing with who are -- I mean, we're kind of looking at, I guess, maybe the process of moving toward implementation, but you kind of have to come up with what you're going to do first. And I was wondering if you could touch a little bit about that decision-making process and kind of where you're seeing that play out and where your involvement may be on that as a whole.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [40]

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Yes. So it varies, Joe, by -- it varies, Marc, by industry. So we saw some very significant growth in areas like retail, insurance. We saw the flip of that in places like our travel or hospitality areas, some automotive during the quarter, if you will.

The pace then kind of varies. You have -- we kind of have this quadrant box where we have groupings down the bottom left that talk about they need cost out. They're not going to look at longer term. Longer term is 12 months at the moment for some of the harder-hit industries. They want cost takeout. They want network capability. They want workplace of the future now. So those are some of the areas that we look at from those industry standpoint.

Then you have -- so then you have other areas like health care, like pharma, like utilities that we are seeing some strength in. And again, in cohorts, we'll see the reductions probably in retail, travel -- not retail, but travel and hospitality in particular. So it kind of varies by the industry and how deeply they've been impacted with either their supply chain, consumer spending, consumer behavior, business behavior, if you will. So that -- it's kind of industry-specific as to the speed and pace of decision-making and then the types of services they're needing right now, if you will.

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Operator [41]

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And at this time, I am not showing any further questions in the queue. I would like to hand the call back over to our speakers for any closing remarks.

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Michael P. Connors, Information Services Group, Inc. - Chairman & CEO [42]

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Thank you very much. And let me close by saying thank you to all of our professionals worldwide for stepping up to the challenges presented by this coronavirus. Even working remotely, there has been no letup in the intensity of our collaboration and client engagement nor the passion for delivering the best advice and support to our clients. And for that, I thank you.

And thanks to all of you on the call for your continued support and confidence in ISG. Stay well, everyone. Thanks very much.