Q2 2022 Information Services Group Inc Earnings Call
Good day and welcome to the information services group second quarter 2022 results Conference call. Today's conference is being recorded and a replay will be available on Isg's 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 at ISG I'd like to welcome everyone to Isg's second quarter Conference call I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Bert Alfonso Executive Vice President and Chief Financial Officer before we begin I would like to read a forward look.
Statements. It's 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 statements contained in our form 8-K that was furnished this morning 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'll be able to obtain free copies of any of Isg's SEC filings on either Isg's website at www Dot I S. G dash, one dot com or the SEC's website at www.
FCC Dot Gov.
I guess, she 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 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 .
<unk> measures, which we will touch on today include adjusted EBITDA adjusted net earnings adjusted net income per diluted share adjusted EBITDA margin and the presentation of selected financial data on a constant currency basis.
non-GAAP measures are provided as additional information that should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. A reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure. Please refer to our carton board on form 8-K, which was filed this morning with the SEC.
And now I'd like to turn the call over to Michael Connors who'll be followed by Bert Alfonso.
Mike.
Thank you Barry and good morning, everyone.
Today, We will review, our second quarter financial results, including our record profitability for the quarter.
Our record revenues and profits for the first half.
Our efficient use of cash and returning value to our shareholders in Q2.
And our outlook for the third quarter.
ISG delivered a solid operating performance in the second quarter, continuing our momentum and excellent start to the year.
We generated revenues of $71 million up 5% in constant currency over the prior year.
And we delivered record adjusted EBITDA of $11 million up 20% in constant currency and an EBITDA margin of 15% up 140 basis points.
Our recurring revenues continued to be robust, reaching a record $26 million in Q2 up 11% drill.
Driven by our Governor next platform and research businesses.
Recurring revenues represented 37% of our firm revenues in the quarter and that's an all time high.
From a geographic perspective, our Europe , and Asia Pacific regions generated double digit operating revenue growth.
And our Americas business, excluding automation remained strong overall with growth in excess of 10%.
Driven by all things digital including cyber security five G and cloud transformation.
With our ISG next operating model continuing to drive a step change in our financials.
Our utilization for the second quarter was 76% up 104 basis points compared with the second quarter last year.
Now looking at our year to date performance, we delivered our best first half ever.
Revenue was a record $143 million up 9% in constant currency.
With record EBITDA of over $21 million up 25% in constant currency over last year.
With more than $50 million of recurring revenues in the first half.
We are well on our way to our year end goal of $100 million.
From a client perspective, we serve nearly 550 clients in Q2, including 69 new to ISG.
Clients continue to turn to ISG for our data insights and advice and solutions to help them on their digital transformation journey.
The efficient use of technology as a competitive advantage for our clients.
That need is even more pronounced in today's environment.
With its high inflation rates and talent shortages.
And with supply chain issues in consumer spending concerns.
Some clients are beginning to focus more on near term cost savings.
For these clients ISG has a suite of services ready to help them with rapid cost takeout.
No matter their needs ISG is focused on helping our clients achieve operational excellence and faster growth over the long term.
Now moving to shareholder return.
Due to our successful operating model, we were able to return nearly $9 million to our shareholders. This quarter.
Comprised of $5 $5 million in share repurchases and $3 $4 million of dividends.
We also reduced our debt by another $1 million during the quarter driving our gross debt ratio to another new low.
All of this due to the strong cash generating power of our business.
Now turning to our regions.
The Americas delivered $39 million of revenue in the quarter down 2% versus the prior year.
As mentioned excluding automation in the Americas delivered double digit growth on the strength of our digital offerings, including cyber security network and analytics.
A word on our automation business.
As you may recall from previous communication, we won a large automation contract with a major entertainment client early last year.
That successful engagement was completed this year.
The conclusion of this engagement had a negative impact on our year over year growth rate in the Americas This quarter.
And it will have a similar negative impact in the $4 million range in Q3.
This impact has been taken into account in our Q3 guidance.
During Q2, we saw double digit growth in our media health Sciences and insurance industry verticals.
And among our services research and Governor <unk> were also up double digits.
Key client engagements during the second quarter included Mckesson.
Tenet healthcare.
P S E N G and Exelon.
During the quarter, we began work on a nearly $3 million engagement with a leading U S based health care company.
We are helping them digitally transform their entire technology of state, including applications infrastructure and cyber security.
We are also working with a major industrial company on $1 million of human capital management engagement.
As they prepare for an upcoming spin off.
Turning to Europe , our Q2 revenues of $23 million were up 11% in constant currency over last year.
For the quarter Europe delivered double digit revenue growth in our public sector manufacturing and media industry verticals.
And in our research and govern X businesses.
Key client engagements in Europe in the second quarter included Munich re.
Ericsson Talktalk and Volkswagen.
During the quarter, we continued to grow our business with a long standing insurance client.
We are working with them on a multimillion dollar transformation engagement.
Evolving cyber security cloud services in a digital workplace strategy.
Now turning to Asia Pacific This region had a record setting Q2 performance with revenues of $8 million up 28% in constant currency.
Driven by growth in our insurance media public sector, consumer and health Sciences industry verticals.
Key clients in the quarter included the Australian taxation office high Grieve.
Insurance, Australia group and the Australian Department of home Affairs.
We continue to support the Australian government's serving <unk> primary adviser on the government's large scale technology infrastructure and.
In telecommunications modernization programs.
We're also ramping up a digital transformation engagement with a new client.
An international logistics company being spun out and taken private.
Now, let me turn to guidance.
At this point, we see the demand environment remaining strong and believe ISG is in great shape for a solid year of performance.
We also remain mindful of the economic factors that could impact our clients.
Including inflation supply chain disruptions higher energy costs.
Political concerns and talent shortages.
Taking the current strong demand environment and balancing it with the potential impact of broader macro economic factors for the third quarter, we are targeting revenues of between 71 and $73 million.
Including a negative FX impact of approximately 400 basis points.
And adjusted EBITDA between 10 and $11 million.
So with that let me turn the call over to Bert who will summarize our financial results.
Well, thank you, Mike and good morning, everyone.
As Mike mentioned ICU continues to have momentum in the marketplace with a solid second quarter, adding to our strong start to the year.
Revenues for the second quarter was $70 7 million up slightly on a reported basis and up 5% on a constant currency basis compared with the second quarter last year.
Currency negatively impacted reported revenues by $3 $5 million versus the prior year.
In the Americas reported revenues were $39 4 million down 2% versus the prior year.
Impacted by the completion of a large automation engagement.
In Europe revenues were $23 3 million down, 2% and up 11% in constant currency and Asia Pacific revenues reached a record $8 million of 22% reported and 28% in constant currency.
Second quarter 2022, adjusted EBITDA was a record $10 7 million up 10% from last year, resulting in an EBITDA margin of 15% and up 140 basis points compared with the prior year second quarter.
Constant currency adjusted EBITDA was up 20%.
Second quarter operating income increased 22% to $7 1 million compared to $5 8 million in the prior year.
Net income was very strong for the quarter at $5 million or <unk> 10 per fully diluted share compared with net income of $4 1 million or <unk> <unk> per fully diluted share in the prior year.
Second quarter adjusted net income was $6 8 million or <unk> 13 per share on a fully diluted basis compared with adjusted net income of $6 3 million or <unk> 12 per share diluted in the prior year's second quarter.
Consulting utilization with a second quarter record of <unk>, 76% up 104 basis points versus the prior year, reflecting the impact of our ISG next operating model head.
Headcount as of June 32022 was <unk> hundred 82 up five 6% from Q1, as we invest for future growth.
Our balance sheet continues to have the strength and flexibility to support our business over the long term.
Quarter net cash provided by operations was <unk> $8 million and we ended the quarter with 31 $5 million of cash down from $47 5 million at December 31, 2021.
During the second quarter, IAC returned approximately $9 million to shareholders through the repurchase of $5 5 million of shares and paid first and second quarter dividends totaling $3 4 million.
Our next quarterly dividend will be payable September 19th to shareholders of record as of September six and.
In addition, we paid down $1 1 million of debt lowering our debt balance to $72 3 million and our debt to EBITDA ratio to one seven times a record low.
Our average borrowing rate for the quarter was 424, 3% up from two 5% last year.
And we ended the quarter with $47 8 million shares outstanding down from $48 2 million at the end of Q1.
Mike will now share concluding remarks before we go to the Q&A back to you Mike.
Thank you Bert to summarize ISG delivered another strong quarter, leading to our best first half ever with overall revenues up 9% and EBITDA up 25% in constant currency for the half both record performances.
Our recurring revenues set a new quarterly record powered in particular by growing demand for our research and govern X platform.
Recurring now represents 37% of our total revenues the highest share ever.
And despite FX headwinds and other macro economic factors, we see our momentum continuing in the second half as clients continue to invest in digital transformation for cost savings and future growth.
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.
And now let me turn the session over to the operator for your questions.
Thank you.
We would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question.
From Marc Riddick with Sidoti. Please go ahead.
Hi, good morning.
Hey, good morning, Mark how are you.
Very good yourself.
Thank you.
So congratulations to the quarter looks really good I was wondering if you could touch a little bit on a couple of them.
Comments that you made because.
We know historically that a lot of clients will engage with you as far as.
Various ways of sort of moving forward sometimes.
Revenue growth driven sometimes just cost savings driven I was wondering can talk a little bit about the new customers.
It was about 70 I believe.
If I remember correctly can you talk a little bit about maybe what.
The mix of those new engagements, where like in where they kind of similar to what you've seen in prior quarters are you beginning to see some of that some some folks coming in new who are looking to save onyx.
On expenses.
Yeah. Good. Thanks, Mark Good question actually we are seeing an increase in the number of clients that are looking to get more what I would call cost optimization done quicker and I think it's likely in reaction to clearly the noise in the market regarding recession and in.
<unk>.
And those kind of areas digital transformation still continues to be quite strong as everybody knows they hate that continue to move on that on that journey, but I would say a number of the new clients are looking for more rapid cost takeout than maybe prior to.
What we've been hearing on inflation etcetera. So I would say just a couple of things on the on the on the existing client base in areas like insurance manufacturing.
Media technology.
Health Sciences. They are all still very strong on the digital transformation areas and Thats everything from cloud cyber the customer experienced analytics, if you will data and analytics. So a.
It varies a little bit by industry segment in terms of what is going on.
But I would definitely say, it's it's a little bit of a mix in terms of the longer term digital transformation with an influx of cost optimization mark.
Well I appreciate your commentary and within it you beat me to my next question, which was going to be around the industry verticals. So I can move on to something else.
I wanted to touch a little bit on the.
The recurring revenue mix and maybe how we should think about what the.
I'm not sure if this optimal level, but maybe sort of maybe how you're viewing what that potential could be now versus maybe what you may have thought in your expense.
Yes, no look first of all we're very pleased with how the recurring revenue.
As being generated that includes everything from our research to our software to the multiyear public sector contracts. I mean, we are now at the highest percentage of our revenue.
Clearly, we would love to have that number higher I think I had set a target at the same time, we set a target for $100 million of recurring revenues, which was two years ago that we won is 35% of our revenues in recurring.
So it is tracking that way slightly ahead as you know by both the absolute number and the percentage number.
And as we close out this year and we think about the next couple of years, we will have a target on kind of what we're looking for on an absolute recurring number and I would hope that we would begin to have that number look north but right now we want to achieve what we set out and said, we would do which is roughly 35% and $100 million of recurring revenue we are on track.
For that market.
Okay, and then last one for me at least at least for now like a jump back in queue, possibly but I wanted to touch a little bit on the <unk>.
Have another quarter, where utilization is up year over year.
Adding the head Count addition was about cloud plus person I was wondering if you could talk when you have both of those sort of moving up at the same time.
That's a positive sign usually I wanted to talk a little bit about maybe what your thoughts was far as head count additions and then also maybe isn't.
Technology spend between now and the end of the year. Thanks, Yes, Okay, well first of all on the on the productivity clearly our new operating model ISG next.
<unk> is working exceedingly well, it's allowing us to be more agile in meeting client needs and supplying digital talent.
Wherever it needed whether it's cross borders or time zone, So number one that model.
Is working as.
Is working I would say extremely well.
We're able to deliver our enterprise solutions.
Faster with more speed and frankly more efficient.
To our to our client base just in terms of the mix of.
Kind of how we're working today remote et cetera, you may recall when Covid hit we went to nearly 100% remote.
From a model that was more 90% on site that number has crept up a bit but not nearly as much as we anticipated during 2022, we anticipated that over the next two years that that model would look more like 65% remote.
35% on site.
As we think about 'twenty, two and 'twenty three right now that number is more like 85.
Percent or slightly higher of remote working so that is beating our model that we anticipated and that is helping on the your second part of your question was was it on the gross margins and SG&A what was it.
And also any.
Technology spending you might need to do and that you are thinking about between now and the end of the year.
Yes on Capex divert you want to take that one yes, our capex needs have not changed.
<unk> slightly higher.
And part of that was the agreement.
The deal that we announced I believe is at the very end of the first quarter.
But we continue to be in that sort of $2 million to $3 million range. So capex needs continue to be modest.
Obviously, we do continue to do work on cover an exodus in Nevada.
Yes platforms, but I wouldn't say, there's any there's any outsize growth on the capex side.
Gross margin was a bright spot for us in the quarter.
Certainly part of it is attributed to the two bank debt that you've just been discussing.
Continuing to have high utilization rates.
With our advisors as well as the.
The increase in recurring which is which has slightly better margins than other parts of our business and so we were actually up.
About 270 basis points year over year.
On the gross margin basis, and slightly below that on a on the first half so good cost control, while we're adding.
To our to our head count it's a reflection of how we see the back half of the year and SG&A costs were up slightly, but but well below our increases in.
And our gross margins. So we were pleased with that at the end of the quarter.
Great. Thank you very much.
Thanks Mark.
We will take our next question from Vincent Colicchio.
With Barrington Research. Please go ahead.
Yes, good morning, Mike.
And then.
So.
You had mentioned the largest deal in the Americas are having an impact in the quarter I am curious was there any other outsized impact from large deals in the other segments in the quarter and.
Similar question going forward into Q3 will there be any large deals having an outsized impact or is the demand basically broad based.
Yes, no. The answer is no. There is nothing else. It is demand is broad based the automation.
Engagement with that large entertainment client, which we announced.
Announced to all of you early last year.
Is really the only wanted it has about a $4 million impact in Q3.
That will not be repeated but as we said we've factored that into our guidance.
And also we have factored in the FX headwinds, which we've estimated at about 400 basis points.
That's how we've looked at it but the demand overall I call it broad based Vince.
And.
Could you remind us of your acquisition priorities, what the pipeline looks like in.
So is there any changes in.
Valuations in the market given the economic backdrop and also what's your philosophy may maybe if we have a significant economic.
Weakness year, if youll be aggressive in that environment.
So good question Vince our focus on on the acquisition front is really number one around all things.
All things digital that would include cyber customer experience data enterprise change.
Cloud if you will so we're looking at all things digital number one number two then kind of concurrent to that are things that we can add or that we could deploy as recurring revenues or annuity streams into the client channels that we currently have so whether that's into procurement.
And whether that's into the CFO , whether that's into the CIO or CTO.
That's kind of where our focus is on our kind of string of pearls acquisition strategy as it relates to the market.
I would say that.
The market is still a bit frothy in terms of expectations.
But I would also say that if things softened a little bit we might pounce faster just as we did with our.
Asset that we purchased during Covid and 2020.
So we are very active in the market, we're very disciplined as you well know in terms of pricing.
But we will take advantage if that market kind of swings a bit to our to our advantage.
Okay. Thanks for answering that.
Great.
Comprehensiveness.
And then on the tax rate was lower than expected I guess this one is for Burton what was the cause of that and should we think about attach rates for Q3 and for the year.
Yes. Thanks for the question we did.
We did have.
The tax rate that was a bit lower than what we anticipated.
In the second quarter was it was more of a Rev. Wright of profit mix, if you will.
Despite the down 2%.
We had higher profits in the Americas than any other regions.
Particularly on a dollar basis as you might imagine and the recurring revenues being as high as they were that also.
Impacted that going.
Going forward, we are bringing down the rate to what we thought it might be earlier in the year. So while we do think it'll it'll be above more or less the 30% rate of the second quarter, we see the rates sort of in the mid to high 30.
But we don't see as higher rate as we thought earlier in the year when we when we thought our mix would actually be going the other way in terms of the geographies.
So I would say those are the primary factors around the quarter and how you should think about modeling the back half of the year.
Thank you.
Nice quarter guys. Thanks.
Thanks, Andrew.
We will take our next question from Joe Gomes with Noble capital. Please go ahead.
Good morning, Thanks for taking my questions.
Doug.
So just on the revenue side.
I wanted to dive a little bit deeper into it.
You had guided.
Last quarter for a little bit.
More than what you ended up generating.
Assuming you you already knew about the automation contract.
Little bit of a shortfall or was that really due to the fact that FX.
Was I think 500 basis points versus your original.
Estimate of $300.
Yes, there was two factors here, Joe one is that.
Yes, clearly the FX was 200 basis points higher than we had forecasted so to your point of view is 500, a bit over 500, and we had factored in 300 <unk>.
Second of all I think the automation pipeline that we have it is quite strong but in terms of having execute anything of significant size against that pipeline did not materialize.
It's just taking a bit longer on the automation front with the software players out there as well. So those are the two factors FX being number one.
In that regard.
And is there.
Anything particular as to why.
Taking a little bit longer for that pipeline to be realized.
I think the Decisioning around software and you can see this with some of the software providers like UI path, which is public blue Prism, which just went from public to private automation anywhere.
This et cetera, the length of time to make a decision that I want to convert on scale now it's different when prior I would say to 2022, when there was still a lot of.
Dabbling around with a lot of the software in certain areas of major enterprises now, they're moving to scale and when you move to scale Youre, making a fairly long term commitment on this automation software and we're seeing that decisioning process take longer which is not.
As in parallel if you will with a lot of the software providers in terms of what they're seeing with their sales of software. So that would be the difference in 'twenty two versus prior years, where everybody is now beginning to look to put scale in and scale means a lot bigger investment.
Okay. Thank you for that clarification.
And on the agreement acquisition just wondering how the integration is going there is are you seeing it open up any new opportunities that you werent getting two previously.
Yes, Youre actually we're very pleased with the integration we've actually.
Now going into another phase of the sort of the first 60 days or so was more about integrating the software and.
It is a component.
Of how we think about covering <unk> and other applications that we have.
We are actually.
And test with two clients at this stage one which.
Was one of the original.
Thoughts that which we had which went into the decision but.
We're quite pleased Peter <unk>, who joined US one of the one.
One of the founders.
Is doing excellent work with us and so we're beyond the first phase of bringing the software in and now we're more in a deploy mode.
And it is incremental.
If I can call it that too.
The governance platform that we put into the marketplace today so.
We're quite pleased with how its starting now.
Okay and then.
The cash levels.
You've been doing a great job, obviously last year generated a lot of cash.
This year Ben.
Turning a bunch of cash to shareholders kind of what level are you comfortable with cash I think hit a high of about $54 million at the end of the third quarter last year. You ended this quarter at 31, and a half youre looking potentially for acquisitions.
Returning cash.
Kind of walk us through how you.
The work what kind of cash level would you really be comfortable with.
Yes, that's actually a very good question and we've been having a lot of discussions about that internally as you know.
If there is a more significant downturn, we certainly would want to have a better cash cushion. If you will which would make a lot of sense for us. If you look at where we were about a year ago at $47 million I know, we did hit a peak in the <unk>.
There are there is there are a couple of one timers in there, particularly on the tax side.
And so we already talked about the the return to shareholders at about $9 million, we pay down some debt by $1 billion there.
But we've talked in the past about the deferral of taxes in the EMEA region in Germany in particular, where.
Where the 2020 taxes were deferred they allowed firms to defer those taxes and not pay them. So we recently in the second quarter paid about $7 million of cash taxes.
That.
But that was 2020 and 2021, we don't expect that obviously would not expect that too.
To repeat because it was two years and one which is an unusual thing around COVID-19.
But what I would say is we were a little bit ahead, probably with respect to.
Just offsetting dilution you saw where our shares are down about 400000, we were a little more aggressive in the quarter. When we saw the shares at what we thought were was a.
A lower than intrinsic value.
During the quarter as we have since had obviously recovery.
So we're very conscious of the cash needs. We have going forward. We think all of the components continue to stay in place.
Whether it's the dividend or the buyback.
<unk>.
Obviously, the debt Paydown, which is which is not a big number.
And any anything we might do on the M&A side.
We have we have a revolver, obviously, which is $50 million plus that we can still draw upon but.
We're conscious of this market turns down that we probably would hold a little bit more cash, but right now we're pretty comfortable with the levels that we have.
Okay, and just one follow up for me.
Yes.
I heard the 69, new clients I missed how many clients do you serve that during the quarter.
Yes, let me get let me get that let me get that number for you.
550 was that the number of 550 is the number Joe.
Okay, that's what I thought, but I wasn't positive thanks.
Thanks, again really nice quarter.
I'll get back in queue.
Okay, Joe Thank you Jeff.
And we'll take our next question from Marco Rodriguez with Stonegate capital. Please go ahead.
Hey, good morning, guys. Thank you for taking my questions.
Hey, good morning Margaret.
Hey, I was wondering if maybe you could spend a little bit of time on Europe , just kind of curious I know you had some comments in terms of where youre seeing some strengths.
What we're trying to balance in terms of your guidance, but maybe if you can provide a little color on the conversations you're having with the end customers in Europe I mean, how are they feeling as far as their confidence levels in the second half of the year just kind of given.
The weakening economic picture that Europe is in somewhat moving towards and the potential for an energy crisis that may come this winter.
Good good question Marco.
Here's what we're seeing in Europe first of all in terms of kind of vertical manufacturing as is up you may recall last year manufacturing was quite soft in Europe , we've seen a uptick in manufacturing in Europe , we've seen an uptick in the digital transformation among the large insurance.
Players.
In Europe , and as you know Theres a number of them based in Europe . So that is also pretty robust in terms of what they are doing around cloud around cyber around customer experience around digitizing their user experience with clients.
So all of that I think is positive in Europe , I would say the we think about Europe . The one area, we keep keeping a very close eye on of course is Germany.
In terms of how they are responding with the whole Ukraine situation I think I've mentioned in the past that in some ways with the Ukraine situation with talent shortages among clients hard to get and recruit people.
That plays a little bit to our advantage and by that I mean that we are a steady force for our enterprise clients. We are a trusted advisor we have talent in all of those digital transformation areas.
So maybe in instances, where they might have tried to bring people in and do it internally without a third party like ISG.
This market is enabling us to take a little bit of advantage of that situation.
And especially in Europe , because there is such a long period of time between people, leaving one job in moving to the next.
So that's how we would look at the European Theater right now of course, we're cautious we know about the opex, but from an operating standpoint, we feel pretty good about the whole European theater in and clearly they are having a very very good year so far.
Got it very helpful.
And then thinking about North America.
Maybe Mike you can talk a little bit about.
What sort of surprises whether positive or negative you are seeing from the demand the demand side.
While on the Americas on the U S footprint, just put automation to one side. It is very good the demand is good cloud network analytics five G.
Software, if you will all of those areas.
Are still quite robust in the U S does there still quite a large demand for this digital transformation work.
Industry segments are at different points, along the continuum there.
And so we feel very good about about how the U S is operated and we expect that to continue.
The automation is the only area that really has just a tough compare with that large entertainment client putting that aside.
Cloud migration cyber.
Next Gen. If you will applications as clients begin to try to simplify the number of applications. They have that plays right into our.
Application modernization of applications. If you will so all of those things plus our kind of workplace collaboration and workplace of the future type of work.
All has played played very well into our solution set.
Got it.
And then just in terms of the operating structure of the expense side.
Obviously, you heard some improvements in efficiency.
The new ISG next model is definitely helping in terms of improving profitability improvement improving your margins.
But just kind of looking at some of the absolute costs year over year on your SG&A and your direct costs.
Your advisors.
It seems lower year over year, and a little bit differently, maybe perhaps what might be expected just kind of given the inflationary environment can you maybe talk a little bit about those expense structure than some of the major drivers behind.
That look.
Yes look I.
I've mentioned earlier, the gross margin, which I.
I thought we were real standout in the second quarter.
And.
And the components are the ones that we talked about our utilization rates continue to be in the mid seventies.
We're actually at 79 in the first quarter, which we said was likely not a number that we would stay at a constant basis, but to the extent that our model remains in place.
And we have that flexibility to move talent around the globe remote.
Sure.
As we bring in new.
New talent, we're paying the market prices, so it's a little bit higher but we continue to generate efficiencies on the on the SG&A side, we had good cost control.
Our finance and HR costs are quite steady.
It's not an area, where we need to add talent frankly, we're very pleased where we are so so we think that.
With our EBIT margin of 15%, which are nearing where we said we might be at the end of the year before we reassess.
It's an area of the business that continues to operate quite efficiently.
Both at the advisory side as well as as well as sort of the back office side.
Not to mention that we all know that we have a large contingent of our workforce, which is Bangalore based in India.
When we talk about the increases to 2882 about half of those would be.
In India. So we continue to have good labor arbitrage.
It's something that we focus on on a daily basis. So we don't take that for granted because of there is a lot of inflation in the marketplace.
But for the moment.
We feel that that's manageable within the profitability projections that we have in place.
Great. Thanks, a lot guys I really appreciate your time.
Thanks, Thanks Mark.
Thank you.
We'll take our next question from Vincent Colicchio with Barrington Research. Please go ahead.
Yes.
What was the contribution of agreement in the quarter.
But we don't break out that revenue, but think about it as part of Governor <unk> and govern X was up double digits in the quarter.
Okay.
And.
How should we think about <unk> in Q3, which.
Should grow most rapidly year over year.
I think youre going to see Europe , looking looking strong in third quarter.
When you talk about how call a headline.
Growth, it's probably Europe Asia Pacific Americas in that order only because of the automation a bit if you take the automation out then the U S and Europe are both going to grow grow nicely.
We will see normalization in Q4, right, we're not we're not.
Automation thing is very much a Q2 Q3.
The issue for us.
So should Americas lead in Q4 year over year.
I'm not going to I don't want to predict that because then we will have competing forces between our regions, but theyre, both bill boltz should perform quite well.
Okay.
Thanks for answering my questions.
Alright.
Yeah.
And it appears there are no additional questions at this time.
Well, let me. Thank you Albert let me close by thanking all of our professionals worldwide for their dedication to our clients.
For working together as a global team to achieve what was clearly a record first half performance for ISG.
I know our people have a passion for delivering the best advice and support to our clients.
As they continue their digital journeys and I could not be prouder of them and thanks to all of you on the call today for your continued support and confidence in our firm have a great rest of the day.
This concludes today's call. Thank you for your participation you may now disconnect.
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