Information Services Group, Inc. (NASDAQ:III) Q4 2023 Earnings Call Transcript
Information Services Group, Inc. (NASDAQ:III) Q4 2023 Earnings Call Transcript March 8, 2024
Information Services Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome everyone to the Information Services Group Fourth Quarter 2023 Conference Call. This call is being recorded and a replay will be available on ISG's website within 24 hours. Now I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.
Barry Holt: Thank you, operator. Hello, good morning. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's fourth quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement. It is important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guaranteed of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated.
For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished last night to the SEC and the risk factors section in ISG's Form 10-K covering full year results. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements to these documents filed with the SEC. You 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 statement to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improves the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance.
The non-GAAP measures which we will touch on today include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided in additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night with the SEC. And now, I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?
Michael Connors: Thank you, Barry, and good morning, everyone. Today we will review our results for the fourth quarter and full year, including our recurring revenue growth and our strong Q4 cash generation, our investments in two growth initiatives, enterprise AI and next-generation sourcing, and the current demand environment and our outlook for the first quarter. Although our fourth quarter was soft, 2023 was largely a successful year for ISG. We grew our top line 2% in an industry that was down 6% last year. We advanced our recurring revenues by 16%, and we invested in two growth areas, enterprise AI and next-gen sourcing. For the full year, ISG delivered record revenues of $291 million. Given the overall IT and business services industry was down 6% last year.
As reported by the ISG Index in January, we consider our top line growth of 2% to be solid. Our strategic investments in recurring revenue streams continue to pay off. For the year, we generated record recurring revenues of $125 million, up 16%, driven by our research and ISG platform businesses. Recurring revenue represents 43% of our total firm-wide revenue, up 500 basis points from the prior year. Our Q4 results, $66 million of revenues and adjusted EBITDA of $6 million, were impacted by slower client decision-making due to the uncertain macro environment, as well as the advent of AI, which is extending sales cycles. More on that latter point in a moment. During Q4, we saw growth in our research, platforms, and software advisory businesses, and in our consumer services and public sector industries.
Recurring revenue represented 45% of our total firm-wide revenue for the quarter. We also generated nearly $10 million of cash in the fourth quarter, the highest amount to end the year since 2019. Now, a further word on the demand environment. It's easy to understand how current macro conditions are impacting client decision making. What's less evident is the impact of AI on the market. And we have seen this before, most recently with the advent of cloud computing. It takes a while for the market to adjust to a major new technology. For many enterprises, knowing how to apply and govern AI is a challenge. They need time to understand the practical applications and see the potential for ROI before they go all in. Much of the hype today is around generative AI.
But other forms of AI are already taking root. Clients are asking us to embed AI in almost all of our sourcing transactions in areas such as AIOps and AI enabled applications. They are also seeking data and AI capabilities to experiment. To take full advantage of AI, however, however our clients need to see the big picture and create a strategic plan for adopting AI at scale. And this is where ISG comes in. ISG launched a new enterprise AI advisory business at the start of this year to guide clients through the intricate maze of AI adoption. We brought together our trusted experience in technology sourcing, our deep expertise in AI, and our broad access to the provider ecosystem to create a new and unique approach to sourcing AI. Clients are relying on our experts to establish their AI strategy, set guardrails, identify use cases, and build their AI ecosystem.
And to ensure we are capturing new opportunities, We have skilled up our workforce, training and certifying more than 1,200 of our employees in enterprise AI during the fourth quarter. Demand for AI and digital transformation is growing. Our pipeline, though slower to close, is 14% larger now than it was last year. Our other key investment is in our new sourcing platform. Yesterday, we announced the launch and availability of ISG Tango, the first fully integrated digital platform designed to simplify and expedite sourcing. ISG Tango is the result of a year-long development effort. It digitizes all elements of ISG FutureSource, the industry's most respected sourcing process and methodology from initial service scope to provider selection to contract creation and signature.
The new platform leverages ISG's market-leading transaction data, provider evaluations, and market insights, and includes a virtual deal room to secure document exchange and user interaction. Powered by AI, ISG Tango also automates contract creation and provides real-time predictive insights to streamline the entire transaction process and accelerate time to value. Because of its ability to scale, ISG Tango will allow us to capture more unadvised transaction activity over the next few years among our current G2000 clients. And for the first time, it will allow us to penetrate the underserved mid-market, which spends about $130 billion on technology and business services annually, most of it through unadvised transactions. This is an exciting new development for ISG.
We expect ISG Tango to help us expand our margins in line with our other elements of our ISG NEXT operating model. Now turning to our regions, the Americas delivered $40 million of revenue in the quarter, down 8% versus the prior year. For the full year, revenues were $173 million, up 4%. During Q4, we saw double-digit growth in our consumer, public sector, energy, and utilities industry verticals. And among our services, research was also up double digits. Key client engagements during the fourth quarter included Centene, US Steel, Carnival, and Safe Life. During the quarter, a global hospitality and entertainment company awarded ISG a strategically important data analytics and AI engagement. Our work will help this client leverage recent advances in AI to support personalized marketing and optimize their operations.
We were also selected by a US state government to support an upcoming implementation of a new statewide ERP system for finance and procurement. Turning to Europe, our Q4 revenues of $20 million were down 15% from last year. For the full year, revenues were flat at $90 million. During the quarter, Europe delivered double-digit revenue growth in our banking industry vertical and in our network and software advisory business. Key client engagements in Europe in the fourth quarter included the financial services firm IQ-EQ, Nestle, Volkswagen, and Deutsche Bahn. In the fourth quarter, we expanded our already robust relationship with a European CPG company by delivering a nearly $2 million software advisory engagement. We helped this client renegotiate its worldwide contracts with SAP, Microsoft, DocuSign, and Adobe at a savings of more than $10 million, and we began an assessment of the company's procurement and vendor management organization to generate ongoing sustainable savings.
Now turning to Asia Pacific, our Q4 revenues of $6 million were down 12%. For the full year, they were down 5% to $28 million. In the fourth quarter, we saw double-digit growth in our banking and manufacturing industry verticals. Key clients in the quarter included the Australian Taxation Office, the Department of Home Affairs, CBH Group, and Insurance Australia Group. In Q4, ISG delivered a sourcing advisory and software negotiation support to a leader in the Australian grain industry for its transformation journey from legacy SAP to S/4HANA. Now let me turn to guidance. We expect the market to accelerate over the course of this year as inflation continues to cool, central banks respond, and clients become more comfortable with AI decision making.
With this in mind, for the first quarter, we are targeting revenues between $65 million and $67 million and adjusted EBITDA between $6 million and $7 million. I would point out that we will face a difficult comp with our record first quarter last year. Based on our next two-year business plan and in anticipation of accelerating demand and the margin impact we expect from ISG Tango, We remain committed to driving toward our target of a 17% adjusted EBITDA margin for the firm by the end of 2025. So with that, Let me turn the call over to Michael, who will summarize our financial results. Michael?
Michael Sherrick: Thank you, Mike, and good morning everyone Before I begin I want to provide some context on a bad debt reserve we took in the quarter. During the fourth quarter, we recorded a reserve for bad debt of $4.8 million related to collections from a Dubai-based client that were past due and for which we were unable to agree upon a revised payment structure. I want to stress that this is a reserve. We are early in the collections process and that we are pursuing collections of the full amount owed. We will use all channels, legal and other, available to us towards such collections. Now onto the details of the quarter. Revenues for the fourth quarter were $66.2 million, down 11% compared with the fourth quarter last year.
Currency positively impacted reported revenues by $0.7 million versus the prior year. In the Americas, reported revenues were $40.1 million, down 8% versus the prior year. In Europe, revenues were $20.2 million, down 15%. And in Asia Pacific, revenues were $5.9 million, down 12%. Fourth quarter adjusted EBITDA was $5.9 million, down from $11.1 million last year, resulting in EBITDA margin of 8.9% compared with 15% in the prior year's fourth quarter. ISG had a fourth quarter operating loss of $3.5 million compared with operating income of $7.2 million in the prior year. Our reported net loss for the quarter was $2.9 million, or a loss of $0.06 per fully diluted share, compared with net income of $4.3 million, or $0.09 per fully diluted share in the prior year.
Excluding the previously mentioned reserve, net income and GAAP EPS would have been $0.8 million and $0.02 per fully diluted share respectively. Fourth quarter adjusted net income was $3.1 million or $0.06 per fully diluted share compared with adjusted net income of $6.5 million or $0.13 per fully diluted share in the prior year's fourth quarter. Headcount as of December 31, 2023 was 1,518, down 32 professionals or 2.1% from the third quarter. Consulting utilization for the fourth quarter was 65%, impacted by slower client decision making in the quarter, and our retention of advisory talent. Our full year utilization was 70%. Even with some cost cutting moves in Q4 and Q1, we are maintaining our core strength in advisory services, retaining the key talent we need when demand begins to accelerate this year.
Our balance sheet continues to be solid and provides us with the flexibility to support our business over the long term. For the quarter, net cash provided by operations was a solid $9.7 million and $12.3 million for the year. We ended the quarter and the year with $22.6 million of cash, up strong from $18.7 million at the end of the third quarter. During the fourth quarter, ISG paid dividends totaling $2.2 million and repurchased 1.7 million of ISG shares. Our next quarterly dividend will be payable March 29th to shareholders of record as of March 19th. We ended the fourth quarter with a debt balance of $79.2 million, unchanged from Q3. Importantly, we remain comfortable with our debt to EBITDA ratio. Our average borrowing rate for the quarter was 7%, up from 5.2% last year, and we ended the quarter with 49.7 million fully diluted shares outstanding.
Mike will now share concluding remarks before we take Q&A. Mike?
Michael Connors: Thank you, Michael. To summarize, ISG achieved record revenues and grew our recurring revenues by 16% in 2023, despite Q4 results that were impacted by slower client decision making. We had an outstanding cash quarter in Q4, generating almost $10 million of cash. We made investments in both enterprise AI and next-gen sourcing to accelerate our growth. We are excited and optimistic about the future. We expect client demand to accelerate over the course of 2024 as macro additions improve and clients become more comfortable investing in AI. Overall, we have a solid business plan in place to enhance our growth and profitability, and we remain confident in reaching our stated objectives. 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 our operator for your questions.
See also 10 Best Steel Stocks to Buy According to Analysts and 11 Countries with the Highest Number of Military Special Forces in the World.
To continue reading the Q&A session, please click here.
