Q4 2019 Earnings Call
Ladies and gentlemen, thank you for your patience and holding well be beginning today's conference and approximately one to two minutes again. Thank you for holding will be beginning today's conference and approximately one to two minutes.
[music].
Ladies and gentlemen, good day and welcome to the information Services Group fourth quarter Conference call. Today's conference is being recorded and the replay will be available or I guess cheese website within 24 hours at this time for opening remarks, and introductions I would like to turn the conference over to Mr. Barry Holt. Please go ahead Sir.
Thank you operator, Hello, and good morning, My name is Barry Holt I'm, a senior communications executive, but I see I'd like to welcome everyone to Icees fourth 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'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. The management of ice GE 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 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 nights of the FCC and the risk factor section and I asked sees form 10-K, covering full year results.
You should also read iced teas annual report on form 10-K in any other relevant documents, including any amendments or supplements. These documents filed with the FCC, you'll be able to obtain free copies of any advice do says you see filings on either I guess she is website at www Dot is gee, that's one dot com well the fccs website at Www dot.
FCC Dot Gov.
I see 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 I see believes improves the comparability of the Companys financial results between periods and provides for greater transparency of key measures used to evaluate the company's before.
The non-GAAP measures, which 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 gap.
So 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 FCC.
And now I'd like to turn the call there Michael Kors, who will be followed by David Berger Mike.
Thank you Barry and good morning, everyone I.
I asked you had a strong fourth quarter with growing profitability strong cash generation and continued progress in digital.
In the quarter EBITDA margins rose again to nearly 15%.
We delivered $10 million, an EBITDA up 12% year over year.
This campus strong second half, it's almost achieve our most profitable six months ever with record EBITDA of nearly $20 million.
Fourth quarter operating income also rose strongly up 52% to.
The $5 million.
Our more profitable mix of client solutions is driving more margin expansion.
Revenue from higher margin digital services was more than 45% of our total in the fourth quarter.
For the quarter revenues were $66 million a bit lower than projected due to the timing of a few engagement.
Among our regions Asia Pacific returned to double digit growth up 15%.
We also we also we also continued to invest into development of our IC platform for clients.
Our first product off this platform is a compliance and third party risk management product called govern X 2020 that will add to our subscription based recurring revenues.
Govern X 2020 is now operational and producing results for such Blue Chip client says mcdonalds.
Carnival Johnson controls Mariano and a habit.
Globally in the quarter, we saw double digit revenue growth in our insurance and technology industry verticals, and our research organization change management and HR Tech services.
We finished the year in a very strong financial position.
In the fourth quarter, we generated $15 million of cash from operations.
Allowing us to reduce our debt by a further 10% or $10 million in the quarter.
Our strong financial position also allowed us to renegotiate our credit agreement.
We were able to reduce our required principal and interest payments.
By more than $40 million over the next two years.
Freeing up cash for the from while extending our maturity date to 2025 among other favorable terms. This was a great outcome.
We continue to execute on a strategic plan for growing our I asked you automation asset.
This business provides advisory and implementation services to help clients adopt and scale robotic process automation or RPK across the enterprise.
We see an opportunity to be a consolidator advisory businesses in this space and ultimately to unleash the combined value of this business.
Although about 10% of our commercial revenues at present, we believe I asked you automation should command a multiple several times that.
Given the value we see in this business, we've invested significantly and I asked you automation during the last several months, especially in the U.S.
Including doubling our sales team and adding additional resources.
These investments will have a negative impact of about $1 million in Q1 EBITDA.
However, we expect to return to more than doubled this investment in 2021.
Digital is the new normal for our clients as more of them shift workloads to the cloud adopt SAP solutions leverage automation and embrace other digital technologies, such as data analytics and Aiotv.
This demand is reflected in our digital revenues, which were more than 45% of our total in the fourth quarter.
Now turning to our regions the Americas delivered $37 million in revenue in the quarter about $1 million below what we previously expected due to the timing of a few engagements that were pushed into 2020.
During the quarter the region saw good industry growth in our technology and insurance verticals and in our change management digital services and I asked you research service lines.
Key client engagements in the fourth quarter included nutrient.
Humana.
Hi, I'm out.
I'm doing and see you know.
Among our notable wins in the Americas I asked you expanded its relationship with a major east coast utility company.
Adding the million dollar engagement to provide technology advisory services.
For the development of a number of new I T operating models and supplier relationships.
As well as related change management services.
I asked you also it's been awarded the second phase of a technology change management project.
Work nearly $7 million for a major agricultural products company.
The work, which begins this month is focused on an F.C.P. for Hannah implementation impacting over 10000 employees.
Turning to Europe, our revenues declined 6% in the quarter as we experienced some softness in Germany.
Our pipeline in Europe, However is robust and we expect the region delivered good growth in 2020.
Including double digit growth in the UK in Q1.
In our industry segments in Europe.
We saw good growth in our banking financial services and energy verticals.
And in our automation in sourcing services.
Key client engagements in Europe in the fourth quarter included Bjs South.
For a serious.
TNT Express.
BNP parable and Ericsson.
I assume it's been awarded a nearly $1 million engagement by a major German auto manufacturer to support their autonomous driving initiatives.
I asked you will leverage innovative technologies, including artificial intelligence machine learning and cloud orchestration for this engagement.
My as she has also been awarded two additional $1 million engagements in Europe.
One to provide technology advisory services for a large supplier of industrial gases in Germany, using our advanced future source process.
And the second to advise a large European bank on network and technology transformation and governance.
To support their paying 3.0 digital initiative.
Finally in Asia Pacific, we returned to double digit growth with revenues up 15% to $5 million.
I just returned from a trip to Australia, where I met with several clients, including government officials say the public sector is turned the corner is spending again.
Key clients in the quarter included Rio Tinto.
The Australian taxation office.
The Australian Department of Defense.
The department of home Affairs.
Energy, Australia, and the insurance company I Agee.
A large mining company has awarded the I.S.G. 2 million dollar technology advisory engagement in the region assisting them with service now sourcing and integration services.
And using our proprietary user ex research to ensure supplier excellence.
Turning to our strengthening financial position.
As I mentioned earlier, we generated $50 million of cash in the fourth quarter, adding to the nearly $40 million of cash we generated over the last two years.
With this cash we paid about $10 million of debt in the fourth quarter and 30 million over the last two years.
Our strong second half coupled with our debt to EBITDA ratio falling below three times.
Allowed us to negotiate a new credit agreement with much more favorable terms.
David will provide detail shortly.
Now just a few comments on the Corona virus.
First of all our employees are safe and continue to serve our clients.
Travel between some of our Asian countries, like Singapore and Malaysia.
And in South Europe, such as Italy have been curtailed.
With a few of our clients asking us to work off site.
I just use prepared for this.
As we are already a mobile virtual company with over 80% of our people working remotely.
Assessing the impact on our business, we are postponing a few of our eyes Gi events over the next 60 days.
And if feasible our plan is to reschedule them for later in the year.
In addition, we could possibly see our clients further limiting the on site work of our advisor teams.
Which could impact our account expansion activities.
And finally client decision, making may slow as they grappled with virus related disruptions to their supply chain and overall business.
On the flip side. However, we also have opportunities to help clients, especially in travel and hospitality with our rapid cost Takeouts services and in fact, we have begun a number of these projects already this month.
Now turning to guidance.
I asked you just position for long term growth with our expanding digital capabilities and portfolio of products and services.
Including new platform solutions software subscriptions and recurring revenues.
And the automation market remains high.
We believe our investment in all things digital including our IC platform will yield strong returns.
We expect good year over year growth for 2020.
As always we'll continue to my or the overall macro environment, including trade economic and political climate and the impact of the crude a virus.
And are ready to adjust our business plans as conditions may warrant.
Well these factors may affect the timing of client decision, making they also present opportunities for our cost optimization surface optimization services.
Under the current macro conditions, we plan to provide guidance on a quarterly basis in the near term.
For the first quarter, we expect strong profitable growth, even with our automation investments and the impact of the Corona virus.
We are forecasting EBITDA increased by approximately 50% year over year in the first quarter, two about $5 million on revenues of $64 million to $65 million.
So with that let me turn the call over to David Berger, who will summarize our financial results.
Thanks, Mike and good morning, everyone.
Revenues for the fourth quarter were 65.5 million compared with 67.9 million in the prior year, a decrease of 2% in constant currency and a decline of 4% on a reported basis.
Currency negatively impacted reported revenues by 1 million versus the prior year.
Reported revenues.
37.3 million in the Americas down, 2% 23.2 million in Europe down, 6% in constant currency and down 8% on a reported basis.
[noise] and 5 million in Asia Pacific.
15% in constant currency and up 11% on a reported basis.
Fourth quarter 2019, adjusted EBITDA was 9.6 million.
12% compared with 8.6 million in the prior years fourth quarter.
We reported fourth quarter operating income of $5.1 million, which was up 52% compared with operating income of 3.3 million in the prior year.
Net income for the fourth quarter was $2.1 million compared with a net loss of $900000 in the fourth quarter of 2018.
Reported fully diluted earnings per share was four cents compared with a for fully diluted loss per share of two cents for the same period in 2018.
Adjusted net income for the for the 2019 fourth quarter was 4.8 million or 10 cents per share on a fully diluted basis compared with adjusted net income of 2.3 million or five cents per share on a fully diluted basis in the prior years fourth quarter.
Order.
Consulting utilization for the fourth quarter was 63% quarter ahead cat was 1287, essentially flat with last quarter as we continue our own automation and productivity initiatives.
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 fourth quarter was $14.6 million or 20.4 million for the full year.
We paid down $9.6 million of debt in the fourth quarter and $12.3 million for the full year.
Lowering our debt balance to $87 million.
On the balance sheet, we ended the quarter with $18.2 million of cash.
We repurchased $500000 of stock in the fourth quarter and a total of $3.4 million for the full year.
In the limit of our credit agreement in place at that time.
Our average borrowing rate for the quarter was 5.3% and we had 47 million shares outstanding as of March 4th.
We were pleased to announce yesterday, our amended credit agreement with significantly improved terms.
Based on the strength of our last six months performance, which included a gross debt to adjusted EBITDA leverage ratio of 2.8 times.
The main provisions included.
Extending the maturity out five years to March 2025.
Increasing the commitment to $140 million.
Of which $86 million its term loan and $54 million is revolver with the ladder up $24 million, giving us added flexibility.
Eliminating restrictions on share buybacks as long as our ratio stays below three times debt to EBITDA.
Reducing amortization to $4.3 million a year freeing up significant additional cash.
This compares with our previously scheduled amortization of $11 million in 2020, and the $8.3 million. The principle, we paid in 2019.
Increasing the required leverage ratio for the term of the loan to 3.25 times.
And lowering our interest rate by 50 basis points to below 4%.
In terms of modeling for 2020, we're looking at interest expense between four and four and a half million for the year lessen approximately $300000 non cash write off acquire bank fees in Q1.
A 2 million dollar year to year reduction.
Depreciation expense of between three and three and a half million intangible amortization of around 3.5 million.
Stock compensation expense of about 10 million the same as the last two years.
Cash taxes of between five and 6 million.
Capital expenditures of approximately 3 million at an effective tax rate of 60%.
Mike will now share concluding remarks before we go to QNX.
Thank you David.
To summarize building on our second half momentum, we enter 2020, a stronger from in terms of cash financials and flexibility.
We had one of our most profitable quarters ever in Q4, capping a second half that saw us deliver the best adjusted EBITDA on our history.
Of nearly $20 million.
Our go digital strategy continues to work.
With our more profitable digital services, representing more than 45% of our from revenue.
We generated $15 million of cash in the quarter lowered our debt balance by 10% or nearly $10 million.
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.
Well, thanks very much for calling in this morning, and now let me turn the session over the operator for questions.
Yes, Sir ladies and gentlemen, if he would like to ask a question. Please signal by pressing star one on your telephone keypad now if you are using a speakerphone. Please make sure your mute function as turned off to allow your signal to reach our equipment again press star one to ask a question now our first question comes from Mr., Joe Gomes with noble capital.
Good morning, and thanks for taking the questions good morning, Joe.
This is what have you might get will touch on the I asked you automation I know you're set a goal this year to be.
Well north of 30 million revenue range is that is that still what you guys are expecting or are given some of the headwinds are you think that's going to be a little bit later this year.
Well for 2020, we definitely think we will have significant double digit growth.
We are targeting internally to be in and around the $30 million level, and we'll see how the market conditions warrant, but it will certainly be a significant growth.
But that is our target.
Okay, great and.
Nice work there on the on the new credit agreement on and I know you've talked in the past about especially here get on the.
Yeah, I guess, you automation and some on the call today about possibly into consolidator and do you guys have a pipeline of acquisitions that you're looking at me now how should we think about that in terms of timing.
Yes so.
We do have a pipeline of possible acquisitions, both an automation.
And in some of the other growth areas that we are working on that drive recurring revenue software digital areas.
So we are looking at those as always we're very disciplined in our approach, but you know more news later on those but we do have we do have a good solid pipeline.
Okay, great and it just.
Well more and I get back into queue. So your your guidance for Q1 is suggesting basically flat year over year revenues.
Is that kind of all the virus related.
This year or is there some other parts of the business that you know are little bit softer than you guys had had expected.
No, that's where we're being conservative with the virus frankly so.
We have a plan we know that several events were canceling during the first quarter in March.
We are anticipating a little bit of slower decision, making so we're doing that is our best.
Kind of knowledge for today and trying to be as conservative is we can based on what we now so that's why we're coming in there, but you'll note that the mix will be better and thus the profitability despite that will be higher much higher than a year ago at least that's what we think our plan is.
Based on what we know today Jim.
Okay, great. Thanks, guys appreciate it.
Yes. Thank you.
Thank you. Our next question comes from Mr., Vincent Colicchio Barrington Research.
Yeah.
Good morning, Mike [laughter] current event, you had mentioned that this shouldn't gauges of pushed out the Americas could you give us more color on that and.
If you expect that to come back.
Yeah, So primarily around network, yeah, and a few automation.
Engagements were pushed out into what we think will be the first quarter I will say that they are slow to get closed on the network. In particular, we cannot recognize the revenue until we have sign off with the virus I would say theres a little bit of a distraction factor, but it was small I would say it was in the million you know million.
All are kind of arrangements, but we do expect to do expect to have all of that revenue.
But right now I don't know for they'll end up being closed in Q1 or not.
And David You had mentioned you know you stick flat headcount.
In Q1 Q1, as you continue automation initiatives.
You know maybe Mike let's start with this to you ramping that up and then should we see no better productivity going forward or am I, just looking to four answer though.
Well I think first of all I think the productivity is higher if you look at the profitability over the last six months, we're continuing to utilize our India Center of excellence.
And moving work to India.
Can't work to India, which is enabling us.
To improve if you will our productivity.
And the second aspect of this Joe is that the mix that we have with some of our recurring revenue streams and our digital services, which are in higher demand. Therefore, we can have a bit more of a premium pricing. If you will in those areas. Those factors are all included into why the price.
For the ability is higher and why we can see more profitability per dollar of revenue.
And my Kid mentioned, Oh, we've got some cost takeout project opportunities around the virus I substantial opportunities that could that be meaningful.
Yes, I think.
The three areas that we see that are that are on the demand high demand that we're being called and right now as travel hospitality and oil and gas all three yet as you well know quite quite harshly.
So they're looking at our rapid cost Takeouts services that we can help them web.
And as I said, we are now deployed in several plants at the moment executing as quickly as we can with the clients in cost takeout. So we think that will help us as weve, especially move into Q2 as enterprise clients are now reacting here in March to what is happening.
And we're getting kind of a mobilized with the client. So we believe it could help us nicely in Q2.
So I'll go back in the queue. Thank you.
Okay. Thank you Vince.
Thank you. Our next question comes from Mr., Marc Riddick with study.
Hi, good morning, gentlemen.
Good morning, Mark.
So I really appreciate the color around the opportunities that you're seeing and especially the commentary around what you're seeing the enterprise clients. I was wondering if you spend a little bit of time a lot of the the comments of course that we've heard from companies are around the avoidance of co location in order to upper provide an opportunity to avoid the.
Disease spread I wanted to see if there was any sort of historical examples or or some commentary that you might be provide as far as the opportunity to for future revenue growth generation opportunities from from those efforts. If there's something that you could sort of talk about a little bit there.
Well first of all from a enterprise client standpoint, some of the work that we've been asked to come in and how busy if you think about a lot of a large.
Service and technology providers that have very large employee counts under roof or under a campus setting like you see in Bangalore, and Mumbai et cetera.
And when there is disruption or shut down what does that mean for the enterprise client how will they continue to be able to mobilize executed against their initiatives et cetera.
And we are working in concert with all the service providers and enterprise clients to minimize business continuity issues now in terms of what it might bring down the road from future I don't have a good answer for you today on that.
But I would say to you that I think many are looking at this as more of a temporary or near term issue versus some type of a sustainable change in their business structure.
Going forward at this point in time, although it's early so I don't know I don't know that we see that yet if I can respond that way I would say on the flip Brian's G. We are we are you know in some ways in a good position because we are on mobile virtual company anyway. That's.
How we were we were born that way here. So we have about 80% of our teams that work in a virtual environment or a client environment every day. So having our work moved from for example at a enterprise clients site to off site or to remote is very natural for all.
All of our team members so at least from that standpoint from an eye as chief standpoint, it's quite natural if you will for us to operate our business that way, but on the enterprise side, that's what we're saying at the moment.
Okay, great. Thank you for the color there and I was wondering then switching to.
Wanted to see if they get a little bit of an update around the use of cash priorities and and certainly you know it's been a.
Significant progress that you guys are made as far as debt reduction sort of getting to where you are now and now that you've kind of and then now that you've gotten there with the work that's been done over those over the last several quarters wondering if you could certainly give a bit of any update there is too.
A little bit well meaningfully more flexibility than where you where it's a yard.
Yeah, and thanks for that as we indicated we did generate a $15 million during the quarter, we pay down $10 million of dead in terms of 2020, we would be looking at increasing the amount of share buybacks. As you know we were limited last year.
We did.
3.4 million, we would see increasing that.
And we would see you know continuing to drive our leverage ratio down to around two and a half times.
And then as Mike indicated evaluate some of these opportunities acquisition opportunities in the pipeline.
Okay, great. Thank you very much and then one last thing for me. So Youve made mention as far as you know what you're looking at with events, which is certainly understandable I was wondering if you could just so you could just a quick reminder is to maybe the timing of events. During the course of the year and sort of how that flows because I think you.
You have more a few more scheduled this year than last year. So I just wonder if it gets it just touch on what we should look for there.
Yeah. So we had approximately I think it was 19 or 20 events and night in 2019, we had planned on that being in the 25 range. This year and they are scattered relatively evenly relatively evenly across the quarters.
Through the course of the through the course of the year. So what we're looking at the moment is the balance of March and April.
We're we're going to postpone what we had on the schedule.
And our plan at the moment is we're going to retain what we have made going forward pending how this involves an unfolds over the next month, if if it stays in this kind of.
Environment than we would likely move or may events, as well, but we don't need to make that call at the moment, but that's kind of how our events roll out.
Okay, great that makes sense. Thank you very much yeah. Thank you.
Thank you. Our next question comes from Mr., Marco Rodriguez with Stonegate capital markets.
Good morning, guys. Thank you for taking my questions. Good morning Marco.
Hey.
A quick follow ups first off on the I asked you automation business what was the revenue run rate you guys exiting Q4 at.
We we are not communicating the exact number but the overall revenue is in or around 10% of our revenue.
Gotcha and the time I was wondering if maybe you can help frame a little bit more the timing of hitting that 30 million kind of revenue run rate coal or is just more kind of a second half or do you think it's a Q4 fiscal 2000 type event.
We currently have our plan would be to exit 2020 with a three.
That's the current plan, we'll see how the market conditions warrant in speed, but it will be a significant growth this year.
Got it then in terms of your guys guidance I just wanted to clarify something here for Q1 adjusted EBITDA at about 5 million, a if I'm remembering correctly, but I I do recall hearing some investments that you'll be making in Q1 is well that will.
I guess kind of act as as a 1 million dollar headwind. So is that inclusive of your 5 million dollar guidances inclusive of that additional investment or is that.
Something that would bring it down.
No more called that that is inclusive and without the investment of course that number we would have had a higher but we we didnt. We did spend some money and we think it'll be prudent but that is inclusive.
Gotcha, Okay, and then lastly, I'm just kind of wondering if you could help frame a little bit better and I know this is difficult gesture. Your overall general sense of fiscal 20 growth. You guys are obviously, you said that you're looking for some growth in fiscal plenty on the revenue side, obviously a lot of.
Unknown is right now with the krona viruses impact here.
Are you kind of thinking a the growth might be a little bit more muted first half just in terms of the impact of the current a virus or there's some other thoughts you have around how that growth kind of plays out your fiscal 2000.
Well of course, we're moving this and now real time, Marco but the answer is of course, the early half is going to be a little slower than the back half with though with the virus.
So I think the answer is we would see acceleration as we go through the year Q2, you know we have good plans good growth plans in Q2, we have to see how the environment and we will adjust accordingly, so we're not giving the full year guidance only because I think there's a little bit too much on knowns, but we do have growth plans in place.
But I would expect the acceleration certainly to be greater in the second half than the first half because of the virus.
Got it and last question if I might just in terms of the acquisition landscape for you guys.
Is your anticipation or or you leaning more towards the smaller kind of bolt on acquisitions that you can maybe deployed just cash or are you thinking of more type of transformational All's bridge type acquisitions there.
Well, we have we always have two streams going Marco one is what we call our string of pearls approach, which are the bolt on you know using cash in an earn out concept that we've been six very successful in in the past and then the second stream of course is we're always in the market. If there is.
As a transformational deal that makes sense.
And so both of those were always always on the table for us.
Got it thanks, guys appreciate your time.
Thanks Marco.
Thank you speakers at this time, we have no other questioners in the Q.
[noise], yes, sorry, well, let me let me just close by saying Thank you to all of our professionals worldwide for their are both individual and collective contributions.
In writing the chapters in our growth story and for the strides that they are making on behalf of the road ahead and and working through this corona virus with our enterprise clients.
In the weeks ahead, and thanks to all of you on the call for your continued support and confidence in our firm so have a great day.
Thank you, ladies and gentlemen that concludes the information services group fourth quarter Conference call. You may disconnect your phone lines and thank you for joining us this morning.
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