Information Services Group Inc. Q3 FY2024 earnings call

• ISG closed the third quarter strongly with revenues of $61 million and EBITDA of $7 million, both at the upper end of expectations. - Profitability improved sequentially, with the adjusted EBITDA margin up 50 basis points and operating income up 18%. - Recurring revenues, representing 45% of total firm-wide revenue, increased by 175 basis points year-over-year. - Consulting utilization hit a record 77% in the third quarter, a 400 basis point increase from the prior year. - The company had strong operating cash flow of nearly $9 million in the third quarter, compared to $3.2 million the previous year. - Completed the all-cash sale of the automation unit to UST for $27 million, strengthening the balance sheet. - Anticipate further acceleration in the pipeline starting early in 2025 in the U.S. as the economy improves. - Hosted the first ever AI summit in London, which was oversubscribed and the best-attended conference of the year. - AI is expected to boost client demand across multiple fronts, potentially reducing costs for clients by 30%-60%. - A holistic approach to the software economy through research, advisory, and training as a service opens up broader revenue lanes.

In the third quarter of 2024, ISG reported total revenues of $61.3 million, a 15% decrease compared to the prior year period. Currency had a modest $300,000 positive impact on recorded revenues. In the Americas, recorded revenues were $40.1 million, down 5% year-over-year. Europe generated $16.2 million in revenues, a 27% year-over-year decline. Asia Pacific had revenues of $4.9 million, a 32% year-over-year decrease. The third quarter adjusted EBITDA was $7.1 million, down from $10.6 million in the same period last year, resulting in an EBITDA margin of 11.6% compared to 14.8% in the prior year quarter. Recurring revenues make up 45% of the firm-wide total, an increase of 175 basis points from the same period last year. Consulting utilization reached a record high of 77% in the third quarter, up 400 basis points from the prior year.

• For the fourth quarter, ISG targets revenues between $57 million and $58 million and adjusted EBITDA between $6 million and $7 million. - Expects growth to return to the Americas in the fourth quarter, with Europe's return to growth following in a few quarters. - Aims to reduce debt to the lower end of debt ratio targets over the next few quarters and accelerate share repurchases.

• Market uncertainties that could cause actual results to differ materially from expectations. - Geopolitical events impacting the European and Asia Pacific markets. - Fluctuations in interest rates affecting debt and borrowing costs. - Uncertainty in the pace of AI adoption by clients, which may impact revenue growth.

Q: Joe Gomes inquired about revenue decreasing sequentially from Q3 to Q4.

A: Michael Connors responded that the Q4 number excludes the automation unit which was around $7-8 million, so they are not actually decreasing.

Q: Joe Gomes asked about the growth of the mid-market percentage.

A: Michael Connors stated that the mid-market is continuing to grow, with around 25% of the $5 billion now from mid-market and expects a significant push in 2025.

Q: Vincent Colicchio asked about signs of sales cycles improving in the Americas.

A: Michael Connors said they see improvement starting in the fourth quarter with election uncertainty lifting driving business confidence.

Q: Vincent Colicchio asked about the nature of demand return as a wave or steady flow.

A: Michael Connors said the U.S. will see a substantial uptick in 2025 and Europe will follow a few quarters later.

Q: Vincent Colicchio asked about AI revenue in 2024.

A: Michael Sherrick said AI revenue will accelerate in 2025 but likely 2026 will be bigger due to enterprise momentum.

Q: Marc Riddick asked about headcount after the automation sale.

A: Michael Sherrick said Q4 will see about 115 automation-related employees leave, and headcount will be opportunistic with a focus on AI skills.

Q: Marc Riddick asked about debt target leverage.

A: Michael Sherrick said the debt to EBITDA ratio will be between 2x and 2.5x, aiming for the lower end by early 2025.

Q: Marc Riddick asked about the acquisition pipeline.

A: Michael Connors said they are actively seeking assets to accelerate growth in recurring revenues and AI capabilities.

Q: Dave Storms asked about pipeline segments and headcount.

A: Michael Connors said consumer and manufacturing segments are progressing rapidly, and headcount will be opportunistic.

Q: Unidentified Analyst asked about challenges in Europe and Asia Pacific.

A: Michael Connors said Asia Pacific is affected by a slowdown in Australian government spending due to an upcoming election, and Europe has a challenging discretionary spending environment.

Q: Unidentified Analyst asked about ISG Tango adoption.

A: Michael Connors said Tango is growing rapidly with over $5 billion in value and will aid in margin expansion.

Q: Unidentified Analyst asked about maintaining/growing the sourcing advisory segment.

A: Michael Connors said they grow the segment annually, are a leader in the market, and will continue to grow through innovations like Tango.