Information Services Group, Inc. (III) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the Information Services Group Second Quarter 2026 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. Will Thoretz for opening remarks and introductions. Mr. Thoretz, please go ahead.

Thank you, operator. Hello, and good morning. My name is Will Thoretz. I am Head of Corporate Communications for ISG. I'd like to welcome everyone to ISG's second quarter conference call. I'm joined today by Mike Connors, Chairman and Chief Executive Officer; and Michael Sherrick, 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 this communication may contain forward-looking statements, which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished last night to the SEC and the Risk Factors section of our most recent Form 10-K and 10-Q filings. 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 as additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night with the SEC. And now I would like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Thank you, Will, and good morning, everyone. Today, we will discuss our strong Q2 results, how AI is creating new opportunities across our business, the expansion of our share buyback program and our outlook for Q3. ISG had a strong second quarter and an excellent first half. Our Q2 results, both revenue and EBITDA were above our expectations. The underpinning of our success is how closely aligned our strategy is with the priorities of today's enterprise leaders. Organizations continue to focus on improving performance, reducing costs, modernizing operations and adopting AI responsibly. ISG is uniquely positioned at the intersection of these priorities, and that's demonstrated by our broad-based growth, increasing recurring revenue, expanding margins, larger longer-term engagements and deeper relationships with our clients. Our revenue was $65.5 million, up more than 6%, (sic) [ 6.4% ] led by 10% growth in Europe and 7% growth in the Americas. Equally important this quarter, we reached another record in recurring revenues, $30 million, up 7%, powered by our research and governance businesses. In terms of profits, Q2 marks the seventh quarter in a row, our adjusted EBITDA has grown by double digits. For the latest quarter, it was up 13% to $9.4 million, while our adjusted EBITDA margin rose more than 80 basis points to 14.3%. Both revenue and EBITDA this quarter were our best results since 2023. In addition to disciplined cost management, our expanding margins reflect the continued evolution of our business toward higher-value advisory work, growth in recurring revenues and increasing leverage from AI-enabled delivery. AI is a tailwind for ISG, and we are taking advantage of it, reshaping our business as an AI-centered technology research and advisory firm to drive stronger client demand and improve how we deliver our own services. In the second quarter, our AI-related revenue grew 64% to $26 million, with growth spread across our AI advisory, research and governance. For the first half, AI revenue increased to $47 million and represented 37% of firm-wide revenue. For ISG, AI is not an aspiration. It is delivering results right now. Our AI revenues reflect more than growing interest in AI. They show how enterprises are increasingly turning to ISG to solve their most important business challenges, making better technology decisions, improving performance, reducing costs, modernizing systems and managing increasingly complex environments. AI has become an integral part of each of those conversations. Nearly half of our clients generated AI-related revenue during the quarter. Growth was broad-based across industries, led by consumer, health sciences and manufacturing. What is particularly encouraging is that AI is increasingly embedded across our research, sourcing, governance and advisory engagements, creating larger opportunities and expanded client relationships over time. The reason this momentum is sustainable is that it reflects broader changes in enterprise priorities, not simply growing interest in AI. According to ISG research on companies globally, the top 3 client needs today around technology are: one, cost optimization; two, business transformation; and three, vendor and contract optimization. These priorities align exceptionally well with ISG's capabilities. Our integrated platform combines advisory services, proprietary research and governance expertise to help clients move from strategy to execution and increasingly to AI-enabled business transformation. That combination is difficult to replicate and is one of the reasons we're seeing stronger growth, improving margins and deeper client relationships. It's also the reason why we were able to increase our share buyback program by an additional $30 million, part of a disciplined capital allocation strategy that includes reinvesting in our business, returning capital to shareholders via dividends and share repurchases and supplementing our organic growth with strategic acquisitions to drive long-term shareholder value. Expect an acceleration in buybacks during the second half. Now turning to our regions. The Americas delivered $42 million of revenue in Q2, up 7% from last year and up 6% sequentially from the first quarter. The region saw double-digit growth in research and governance and in our health sciences and insurance industry verticals. Key client engagements during the second quarter included 3M, Centauri and the Commonwealth of Pennsylvania. During the quarter, we continued to expand our relationship with a major global oil and gas company, adding $1 million of revenue to an already multimillion dollar account. Beginning a few years ago with a benchmarking engagement, we have become a strategic partner for this client, supporting their enterprise-wide technology transformation. Our work includes revamping their service agreements and provider ecosystems and realizing greater savings through AI initiatives, including AIOps. Our latest engagement, a major application sourcing program, is expected to save this client more than $100 million. Also in the quarter, we won a major new engagement with a U.S.-based global manufacturer of heating, cooling and refrigeration solutions. This $1 million engagement won through our private equity channel to support portfolio companies will transform this client's technology supplier landscape, modernize their network and strengthen provider governance. This is opening the door to a broader relationship involving the use of AI to optimize customer experience and generate further operating efficiencies. Our Europe region continued its momentum from the second half of 2025 and first quarter of 2026 with an excellent second quarter. Revenues were up 10% to $18 million, driven by double-digit growth in our advisory, software and governance businesses and in our consumer, banking, manufacturing and health sciences industry verticals. Key client engagements in Europe in the second quarter included Roche, Olympus and BNP Paribas. During the quarter, we continued to expand our relationship with a leading health insurer. We began by supporting a $1 billion sourcing program for the client's workplace and core tech services, driving cost savings for them up to 50%. We've since added transition, network, security and now governance, and are in discussions to add change management and software advisory, all leading to a growing multimillion dollar relationship with this client. We also won new business with a leading health and pharmacy chain by leveraging existing relationships with senior management, which asked ISG to advise them on a struggling technology services contract. Based on our strategy recommendations, we were able to reset the agreement and achieve $10 million of savings this year while significantly improving the client's sourcing model. Based on that success, we are jointly exploring other opportunities, including AI-driven process improvements to help them unlock further value. In Asia Pacific, our Q2 revenues of $5.1 million were down $400,000 compared with the prior year. We saw double-digit growth in our health sciences, energy and utility verticals. In addition and importantly, we saw a breakthrough in public sector spending late in the quarter. And based on this trend, we expect this region to return to growth during the back half of this year. Key clients in the quarter included Woolworths, data center company, AirTrunk and the Australian Department of Home Affairs. During the quarter, we won a significant agreement in the public sector to provide sourcing support to a government entity in Australia. Our successful negotiations with the government's telecom providers will provide net savings of more than $12 million, greatly exceeding the clients' expectations. This is leading to additional engagements to design and support AI-led future workplace services and optimize the client's other existing tech services. Now turning to the broader market and our guidance for Q3. Though clients remain measured in their pace of spending, they continue to focus their investments on cost optimization, business transformation and AI adoption. As I mentioned earlier, this plays to ISG's strengths. So keeping in mind the summer months in Europe for the third quarter, we are targeting revenues of between $63.5 million and $64.5 million and adjusted EBITDA between $8.5 million and $9.5 million, which will continue our year-over-year growth and margin expansion. Now let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael?

Thank you, Mike, and good morning, everyone. Revenue for the second quarter was $65.5 million, up a solid 6.4% year-over-year, including a $700,000 positive impact from FX. By region, Americas revenue reached $42.1 million, up 6.7%. Europe delivered revenue of $18.3 million, up 9.8% and Asia Pacific was $5.1 million, down 6.7%. Adjusted EBITDA for the quarter climbed to $9.4 million, up 12.9% year-over-year. Adjusted EBITDA margin expanded 80 basis points to 14.3%. Operating income was $5.9 million, up 25.6% year-over-year, resulting in an operating margin of 8.9%. I would note that our operating margin is at a 3-year high, fueled by solid pricing and our continued focus on cost optimization. GAAP net income was $3.3 million or $0.07 per fully diluted share compared with $2.2 million or $0.04 per fully diluted share last year. Adjusted net income was $5 million or $0.10 per fully diluted share, up from $4.1 million or $0.08 per fully diluted share a year ago. Head count at quarter end was 1,281, essentially flat with last quarter, while our consulting utilization remained solid at 74%. We ended the quarter with cash of $23.7 million compared with $22.7 million at the end of the first quarter. For the quarter, net cash generated from operations was $5.2 million as compared to a $700,000 cash usage in the first quarter. We continue to expect strong operating cash flow for the remainder of the year. This week, our Board of Directors approved a new share repurchase authorization of $30 million, the largest such program in our history. The new share repurchase program will take effect upon completion of the firm's current program, which has approximately $2.3 million remaining as of June 30, 2026. During the quarter, we paid dividends of $2.3 million and repurchased $1.5 million of stock. Our next quarterly dividend will be paid September 25 to shareholders of record as of September 4. At quarter end, fully diluted shares outstanding were 49.8 million, and our gross debt-to-EBITDA ratio was 1.7x, down from 1.9x at December 31, 2025. Our average borrowing rate for the quarter was 5.3%, down 81 basis points year-over-year. Overall, our balance sheet remains solid, providing us with a strong foundation to both operate and invest in the business. Mike will now share concluding remarks before we go to Q&A. Mike?

Thank you, Michael. To summarize, we delivered a strong second quarter and first half, both our best since 2023 with a broad-based growth across regions, service lines and industries, and we expect continued strength in the second half. We continue to improve the quality of our business with record recurring revenue, expanding margins and deeper client relationships. Our strong performance and balance sheet allowed us to expand our share repurchase program by an additional $30 million. AI remains an important growth engine, but our overall success is driven by a diversified portfolio that helps clients improve business performance. Our strategy is delivering results today and positions ISG for continued profitable growth as enterprises accelerate their transformation. As always, we are focused on creating shareholder value for the long term, and we are steadfast in our mission to deliver operational excellence and ROI 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.

[Operator Instructions] Our first question comes from Joe Gomes from NOBLE Capital Markets.

It's Jacob Mutchler on for Joe Gomes this morning. First question, could you just provide any color on what you're seeing in terms of just total enterprise technology spend with your clients and just across the industry in general? And if you could just compare today with 3 to 6 months ago?

Yes. Thank you for the questions. Well, look, what we are seeing is, first of all, there is a shift in the spending of the total budgets around technology. And the shift, of course, is trying to move things from the -- I'll call it, the normal day-to-day or run operations into growth initiatives and especially AI to help them run their business more effectively. AI is clearly a structural growth theme for sure. The economics around it, I think, are pretty uneven depending on which business, which industry that you're talking about. But certainly, infrastructure and software are compounding and labor-based work in these enterprises are facing a lot of pressure, if you will, around improving productivity around them. So we see spending accelerating certainly in AI to be able to get AI beginning to begin to scale their AI in these enterprises. It is still very early innings, but the spending is there, but it is shifting. And the pace in which they're making their decisions, if I think about it to your question of 3 to 6 months ago, is not much different than it was 3 to 6 months ago. It is still a measured response. But the important factor here is they are making decisions unlike what I would characterize back in '24 or early 2025. So the money is there. The spending is there. The pace is measured, but decisioning is happening now much more so than a year ago. I hope that answers that question, Jacob.

Yes, absolutely. And that addressed one of my other questions about the decision-making process, if that has sped up. So thank you for addressing that. My next question is just in regards to the AI pipeline. Could you talk about what region you're seeing the bulk of that AI business come from? Is it across the board? I know you've mentioned in the past that Europe was behind the U.S. in AI spend. So just curious if we're seeing a little bit of a catch-up here in Europe.

Yes. Good question. So definitely, the U.S. leads. Europe still trails. And I would say the Asia Pacific region certainly trails that. But I would say that in Europe, we have seen a pickup because AI clearly is a competitive weapon as it relates to speed, as it relates to quality, as it relates to productivity. So the clientele in Europe sees it. They know it. But there's a lot of geopolitical issues in different parts of the main, I would call it, main countries in Europe, call it, U.K., France, Germany, in particular. So it is still behind the U.S., but I think the spending around AI has picked up, but not at the pace of the U.S. yet.

Congrats on a solid quarter.

Our next question comes from Vincent Colicchio from Barrington Research.

So I'm curious, how is your visibility compared today to, say, 6 to 12 months ago?

Yes. I mean, look, I think the visibility is, I would call it, roughly the same, Vince. I wouldn't call it greatly improved. There's no deterioration in it. And it's primarily, again, around the pacing of decisions. The good news is that our pipeline is strong. We know those decisions are going to be made, the pace in which is a little unknown. But it looks pretty good. And we have some very good momentum. We have some very large engagements. Our research and our governance, especially around AI governance is really resonating with clients. So it looks good, but we're cautious with all of the geopolitical and other things that are going on in terms of their pace of decisioning. But we're confident that decisions are being made and will be made. It just may be at a pace that we prefer a little faster. But it is there, and we like that. So I would say we're optimistic about it.

And are there any large deals in your pipeline that could significantly benefit your trajectory of growth?

Well, we do have a number of large ones. I can't tell you whether they come to fruition or not. But if the pace happens and it happens sooner, then we'll have a little bit of a nice jolt. But I can't really project it per se, Vince, but we do have a number of large engagements that we are pursuing.

So how should we think about the economics of your consulting business? So clients know that AI is reducing consulting costs. Is there any pressure or talk on billing rate relief? I know that sounds contrary to what you're likely seeing right now.

Vince, it's Michael. I think it's a good question. I think that for us, it's about the value provided, right? And so, we're not seeing that pressure in terms of billing rates. And I think that, again, for us, it's about number of transactions, right, and processing transactions. And the expectation as you look forward from our perspective is that AI is driving a more rapid acceleration in people's review of their existing programs, contracts, et cetera, and that will drive transactions, and that's good for us. So we continue to see this, as Mike had said, as a tailwind and a benefit from where we sit.

And our next question comes from Dave Storms from Stonegate Capital Partners.

This is Maximus. I'll be asking questions for Dave this morning. To start off, recurring revenues definitely seem to stabilize this quarter. And curious to hear, would you like assume this is a pretty fair run rate moving forward? Or if there are any goals on growing this?

Yes. So on the recurring revenue, the recurring revenues were strong. We had our largest absolute number in any quarter at $30 million in the quarter. It clearly is a priority for us. It is expanding. It is driven by both our research, which is focused around clearly technology, the trends, AI, as you might imagine, and our governance services businesses, which includes AI governance. That grew at a faster rate than the overall firm, and we would expect recurring revenues to continue to grow. Our objective is to get to over 50% of our revenue to be recurring. And just to remind you, 5 years ago, it was half of that, and we're approaching that now at around 45%, 47%. So that is a continued focus, and we expect that to continue to grow over the next couple of years.