Noble Consumer Virtual Conference

Slower Decisions Mean Slower Revenue

A Peek into First Quarter Results

Waiting Out the Delays

Joe Gomes

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Information Services Group Inc.

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Fourth Quarter and Fiscal Year 2023 Results
With misses in its guidance for revenue ($68 million â€” $70 million) and adjusted EBITDA ($9 million â€” $10.5 million), ISG continued to experience slower client decision making, resulting in a decrease in revenue overall and in each geography from last year. However, the Company delivered record revenue for the fiscal year with recurring revenues up 500 basis points from the prior year. Recurring revenue now accounts for 43% of total revenue. Enterprise clients continue to look at key ISG capabilities in digital transformation and cost optimization, but spending is still stretched. 
 
Reported revenues for the fourth quarter were $66.2 million, down 11% from $74.2 million in the prior year. We had estimated revenue at $69 million. Currency translation positively impacted reported revenues by $0.7 million from the prior year. For the segments, revenues were $40.1 million in the Americas, down 8%; $20.2 million in Europe, down 15%; and $5.9 million in Asia Pacific, down 12%, all versus the prior year.&nbsp;Consult utilization was 65%, impacted by the slower decision making and retention of advisory talent.
In the fourth quarter, the Company had a $4.8 million reserve for amounts owed by a Dubai based client&nbsp;that were past due and for which ISG was unable to agree upon a revised payment structure. Management noted that the Company is early in the collections process and is pursuing collections of the full amount owed. Operating loss in the quarter was&nbsp;$3.5 million compared with operating income of $7.2 million the prior year.
Net loss was $2.9 million, or $0.06 per share, compared with net income of $4.3 million, or $0.09, per share, in the previous year. Excluding the impact of the reserve, adjusted net income was $3.1 million, or $0.06 per share, compared to $6.5 million, or $0.13 per share, in the prior year. Adjusted EBITDA totaled $5.9 million, a decrease of 47% from last year.&nbsp;Adjusted EBITDA margin was 8.9%, compared with 15.0% in the prior year&#8217;s fourth quarter.
For the year, revenues increased 2%, or $4.8 million, to a record $291.1 million from $286.3 million last year. Within the segments, the Americas were up 4% to $177.1 million due to an increase in&nbsp; Consulting and Automation service lines. Europe slightly decreased 3% to $87.1 million due to ISG&#8217;s&nbsp;Advisory service line, partially offset by an increase in the Automation and Research service lines. Lastly, Asia Pacific decreased 10% to $26.8 million due to a decrease in the&nbsp;Advisory and NaSa service lines, partially offset by an increase in the Research service line. Translation of foreign currency was flat with a negative impact in Asia Pacific being offset by a positive impact in Europe compared to the prior year. Consult utilization was 70% for the fiscal year.
ISG&#8217;s total operating expenses for the year were $276.4 million, an increase of $19.7 million or approximately 8% from last year. The increase was due to higher interest expense of $5.1 million, license fees of $5.0 million, contract labor of $3.0 million,&nbsp;restructuring costs of $1.9 million, travel and entertainment expenses of $1.7 million, non-cash stock based compensation of $1.7 million, computer expenses of $1.0 million, professional fees of $0.7 million and conference expenses of $0.5 million. These costs were partially offset by lower compensation expenses of $2.4 million. Full-year operating income was $14.6 million, down from $29.5 million last year, or a margin of 5.0% compared to 10.3%.
Net income for the year totaled $6.2 million, or $0.12 per share, down from $19.7 million, or $0.39 per share, in the prior year. Excluding the bad debt reserve, net income would be $9.8 million, or $0.20 per share. Adjusted net income totaled $20.1 million, or $0.40 per share, compared to $26.9 million, or $0.53 per share, last year. Adjusted EBITDA for the year was $37.7 million, or a margin of 12.9%, down 13% from $43.3 million, or 15.1% last year.
A Difficult Environment with a Silver Lining
With the 2023 fiscal year officially closed, the environment proved to be challenging as the year progressed, evident by the Company&#8217;s revenue, going from $78.5 million in the first quarter to $66.2 million in the fourth. Client decision making was the biggest macro trend that drove the decrease in revenue; moreover, it impacted all of the Company&#8217;s geographies including the Americas, Europe, and Asia Pacific. However, it was not just the Company experiencing this, as the industry felt the squeeze with the overall IT and business services industry down 6% in revenue for the full year. ISG bucked this through a topline growth of 2% year-over-year, which we believe is a testament to ISG&#8217;s resiliency and focus on growth drivers such as&nbsp;ISG GovernX and ISG ProBenchmark.
As 2024 progresses, the Company expects client spending to increase, but not without caution as other macroeconomic factors such as inflation and interest rates can come into play. Another note is the 2024 year being an election year, which brings uncertainty as to what the results are from it. We believe that the Company&#8217;s resiliency can carry it through the expected more difficult first half of 2024 and into the expected better second half and beyond.
Focusing More on AI through ISG Tango
Alongside the results, management announced the launch of a new AI-powered sourcing platform ISG Tango. The platform has been developed over the past year and is now available to enterprise buyers and service providers. It automates&nbsp;contracting and provides real-time insights that streamline the entire transaction process and accelerate time to agreement. The platform coincides with ISG&#8217;s Enterprise AI Advisory business announced two months ago.
The Company launched the new enterprise AI advisory business at the start of 2024 to help clients navigate through and adopt AI. Management expects demand to grow for AI and digital transformation, thus has&nbsp;trained and certified more than 1,200 of its employees in enterprise AI to account for this. ISG has already been awarded an AI engagement from a global hospitality and entertainment company, which showcase ISG&#8217;s capabilities in the space. Potential cross-selling capabilities of enterprise AI and Tango are possible, in our view, as new and old clients get more acquainted with AI.
With Tango, management expects the platform to capture more unadvised transaction activity and penetrate the underserved mid-market, a market that spends around $130 billion on technology and business services annually.&nbsp;We believe the platform to be one that can utilize ISG&#8217;s market-leading resources and become a growth driver for the Company not only in its topline, but in its margins as well.
Capital Allocation for 2024
 The Company generated $9.7 million of cash from operations in the fourth quarter and $12.3 million for the full year. ISG&#8217;s cash balance was $22.6 million as of December 31, 2023, up 21% from $18.7 million as of September 30, 2023. Dividends of $2.2 million were paid during the fourth quarter and ISG had debt outstanding of $79.2 million, unchanged from last year.&nbsp;The Company has been opportunistic with its share repurchases, as during the quarter it repurchased $1.7 million of shares and has $25.9 million in aggregate available under its share repurchase program, or 12.6% of equity market capitalization.
 We believe the Company will continue to be disciplined in its capital deployment in 2024, between dividend payments, debt repayment, and stock repurchases, with capital also available for truck-in acquisitions. However, we believe a debate could be had about whether the small quarterly stock repurchases are actually adding anything in terms of supporting the stock price or signaling management&#8217;s belief in the undervaluation of the shares. Might these funds be better put to use in de-leveraging the Company, especially in light of the higher interest rate environment and the projected challenging operating environment for 2024?
 The dividend yield of 4.28% as of March 8th provides a nice return for investors as well, in our view. ISG paid a dividend for its tenth straight quarter.
Projections
With the continuation of the macroenvironment trends, management provided guidance for the first quarter with revenue being between $65 million &#8211; $67 million and adjusted EBITDA between $6 million &#8211; $7 million. Digital transformation and tech modernization pipelines remain healthy, all while recurring revenue is still a focal point for the business, as we believe the Company is still on track towards its goal of $150 million of recurring revenue by 2025. We anticipate an increase in costs in the first quarter, as the Company is making cost-cutting moves, but we expect improvement as the year progresses.
 For the first quarter of 2024, we project revenue of $66 million, net loss of $650,000 or $0.01 per share, and adjusted EBITDA of $6 million. The first quarter last year had revenue of $78.5 million, net income of $3.5 million or $0.07 per share, and adjusted EBITDA of $11 million. For the year, we estimate revenue of $278 million, net income of $6.1 million or EPS of $0.12, and adjusted EBITDA of $31 million. We believe that our numbers could be conservative if clients decide to agree to contracts more quickly and the overall macro environment is better than expected.

Information Services Group Inc. (III)

Waiting Out the Delays

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Noble Consumer Virtual Conference (III)

Slower Decisions Mean Slower Revenue (III)

A Peek into First Quarter Results (III)

Waiting Out the Delays (III)

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