Q1 2024 Information Services Group Inc Earnings Call
Operator: Ladies and gentlemen, good morning and welcome everyone to the Information Services Group first quarter 2024 conference call. This call is being recorded, and a replay will be available on ISG's website within 24 hours. Now, I would like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.
Ladies and gentlemen, good morning, and welcome everyone to the information services group first quarter 'twenty 'twenty four conference call.
This call is being recorded and a replay will be available on I S cheese website within 24 hours.
Barry Holt: Thank you, operator. Hello, and good morning. My name is Barry Holt.
Now I would like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Hayes. Please go ahead.
Barry Holt: 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 first quarter Conference call I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael <unk> Executive Vice President and Chief Financial Officer, before we begin I'd like to read a forward.
Barry Holt: I'm a senior communications executive at ISG. I'd like to welcome everyone to ISG's first quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer.
Barry Holt: 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 that 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 8K that was furnished last night to the SEC and the Risk Factors section in ISG's Form 10K covering full-year results.
Barry Holt: Looking statements. 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.
Barry Holt: 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-1.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.
Barry Holt: 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.
Barry Holt: 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 last night to the SEC and the risk factors section in Isg's Form 10-K, covering full year results.
Barry Holt: 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.
Barry Holt: You will be able to obtain free copies of any of Isg's SEC filings on either Isg's website at www Dot ISG dash, one dot com or the Sec's website at Www Dot FCC Dot Gov.
Barry Holt: I actually undertakes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances. During this call. We will discuss 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 <unk>.
Barry Holt: During this call, we will discuss non-GAAP financial measures, which ISG believes improve 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.
Barry Holt: 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 that should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP a reconciliation of all non.
Barry Holt: For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on 8K, which was filed last night with the SEC. Now, I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick.
Barry Holt: <unk> measures presented to the most closely closely applicable GAAP measure. Please refer to our current report on 8-K, which was filed last night with the SEC.
Barry Holt: And now I'd like to turn the call over to Michael Connors, who will be followed by Michael sure Mike.
Michael P. Connors: Thank you, Barry. And good morning, everyone. Today we will review our results for the first quarter, including an early progress report on ISG Tango, our view of what we see as an improving demand environment, and our outlook for Q2. As expected, the broader market for technology services remains soft in Q1. Generally, clients are taking longer to commit to new investments as they weigh economic conditions and work through how to deploy AI for their business. As an example, we have two major transactions that were expected to close and begin delivery during the first quarter but have been delayed.
Michael P. Connors: Thank you Barry and good morning, everyone.
Michael P. Connors: We will review our results for the first quarter, including an early progress report on IFC Tango.
Michael P. Connors: Our view of what we see is an improving demand environment.
Michael P. Connors: And our outlook for Q2.
As expected the broader market for technology services remained soft in Q1.
Generally clients are taking longer to commit to new investments as they weigh economic conditions and work through how to deploy AI for their businesses.
Michael P. Connors: As an example, we have two major transactions that were expected to close and begin delivering during the first quarter that were delayed.
Michael P. Connors: Overall, spending continues on larger-scale transformations and cost-optimization programs, and we are involved with many of these, but at a slower pace of implementation with contracts spread out over longer durations. Our pipeline is solid globally, but during this particular quarter, it is much more difficult to convert. Now the good news for the market and ISG. Based on our market analysis, client discussions, and our pipeline development, the market seems to have bottomed out in the first quarter, and the worst appears to be behind us. We are seeing spending coming back slowly and expect further acceleration over the course of the year, if macro conditions permit it.
Michael P. Connors: Overall spending continues on larger scale transformations and cost optimization programs and we were involved with many of these.
Michael P. Connors: But at a slower pace of implementation with contract spread out over longer durations.
Michael P. Connors: Our pipeline is our pipeline is solid globally.
Michael P. Connors: But during this particular quarter much more difficult to convert.
Michael P. Connors: Now the good news for the market and ISG.
Michael P. Connors: Based on our market analysis client discussions and our pipeline development the market seems to have bottomed out in the first quarter and the worst appears to be behind us.
Michael P. Connors: We are seeing spending coming back slowly and expect further acceleration over the course of the year macro conditions permitting.
Michael P. Connors: Market interest in exploring cost efficiencies through managed services remains at a high level. Additionally, we are now seeing a rise in sourcing activity, and this suggests clients are beginning to balance the desire for cost savings with the need to remain competitive and tech-forward. Now, a few comments on AI.
Michael P. Connors: Market interest in exploring cost efficiencies through managed services remains at high levels.
Michael P. Connors: Additionally, we are now seeing a rise in sourcing activity and this suggests clients are beginning to balance the desire for cost savings with the need to remain competitive and tech forward.
Michael P. Connors: Now a few comments on AI.
Michael P. Connors: AI is a net positive for ISG. Clients are looking to ISG as a trusted, independent, third-party advisor to guide them in understanding the impacts of AI, planning their AI strategy, establishing guardrails, identifying use cases, and building their AI ecosystem. Enterprises have ambitious AI plans, but are understandably cautious, given the implications of AI and the lessons learned from cloud migration.
Michael P. Connors: AI is a net positive for ISG.
Michael P. Connors: Clients were looking to ISG as a trusted independent third party adviser.
Michael P. Connors: To guide them and understanding the impacts of AI planning their AI strategy, establishing guardrails identifying use cases and building their AI ecosystem.
Michael P. Connors: Enterprises have ambitious AI plans, but are understandably cautious given the implications of AI and the lessons learned from cloud migration.
Michael P. Connors: Our role is to help them with proof-of-concept deployments and then transition to full-scale implementation, as the market ultimately moves from the planning phase to the execution phase of AI. Significant new investments will be made in infrastructure, sourcing, and implementation, and ISG will be there each step of the way to advise our clients. With regard to our recurring revenue expansion, even in a slower market, we continue to see growth in our recurring revenues, which represented about half of our firm-wide revenues in Q1. Over the trailing 12 months ending March 31, we generated $126 million in recurring revenues, up 10% from the previous 12-month period.
Michael P. Connors: Our role is to help them with proof of concept deployments and then transition to full scale implementation.
Michael P. Connors: As the market ultimately moves from the planning phase to the execution phase of AI.
Michael P. Connors: Significant new investments will be made in infrastructure sourcing and implementation.
ISG: And ISG will be there each step of the way to advise our clients.
With regard to our recurring revenue expansion, even in a slower market. We continue to see growth in our recurring revenues, which represented about half of our firm wide revenues in Q1.
ISG: Over the trailing 12 months ending March 31, we have generated $126 million in recurring revenues up 10% from the previous 12 month period.
Michael P. Connors: Demand continues for our research, governance, and platform offerings. Enterprises are leaning on ISG for market intelligence and in-depth research to plan their AI and digital futures and identify market opportunities that lie ahead. The acquisition of Intano Research late last year has been a positive addition, further elevating our value proposition with enterprise clients, while also opening up new consulting relationships with software vendors and new research opportunities with service providers. Now, a progress report on ISG Tango.
ISG: Demand continues for our research governance and platform offerings.
ISG: Enterprises are leaning on ISG for market intelligence and in depth research to plan their AI and digital futures.
ISG: And identify market opportunities that lie ahead.
ISG: The acquisition of Ventana research late last year has been a positive addition, further elevating our value proposition with enterprise clients. While also opening up new consulting relationships with software vendors and new research opportunities with service providers.
ISG: Yeah.
Now a progress report on ISG Tango.
Michael P. Connors: As a reminder, just two months ago, we launched ISG Tango, the first fully integrated digital platform to simplify and expedite the sourcing experience. ISG Tango is designed to increase speed to value for clients, improve the speed, efficiency, and margins of our sourcing transaction business, and expand our addressable market. The feedback thus far from enterprises and service and technology providers has been extremely positive.
ISG: As a reminder, just two months ago, we launched IFC tango.
ISG: The first fully integrated digital platform to simplify and expedite the sourcing experience.
ISG: ISG tangos designed to increase speed to value for clients.
ISG: Improve the speed efficiency and margins of our sourcing transaction business and expand our addressable market.
ISG: The feedback thus far from enterprises and service and technology providers.
ISG: Has been extremely positive.
Michael P. Connors: Going forward, virtually all of our new sourcing engagements will be run through ISG Tango. Already, more than $2.6 billion of contract value is running on the platform. So, good early progress.
ISG: Going forward virtually all of our new sourcing engagements will be run through ISG tango.
ISG: Already more than $2 $6 billion of contract value is running on the platform.
ISG: So good early progress.
Michael P. Connors: The macro environment has not been a friend to the industry or ISG this quarter. Yet, we are now seeing signs of clients willing to spend more, primarily in the U.S., and we will capitalize on this in the quarters ahead. ISG is ideally positioned to meet this demand. We have five key differentiators that set us apart. First, we have the industry's deepest technology benchmark and sourcing contract database. It's a data moat that is difficult to replicate.
ISG: The macro environment has not been a friend of the industry or ISG this quarter.
Yes, we are now seeing signs of clients willing to spend more primarily in the U S and we will capitalize on this in the quarters ahead.
ISG: ISG is ideally positioned to meet this demand.
ISG: We have five key differentiators that set us apart.
ISG: First we have the industry's deepest technology benchmark and sourcing contract databases.
ISG: It's a data moat that is difficult to replicate.
Michael P. Connors: Second, as the long-standing global leader in advising large transactions, we have raised the bar with ISG Tango, a disruptive platform that gives us the ability to bring our unmatched data, proprietary tools, and IP to a broader market. Third, we are combining our deep sourcing expertise with our knowledge of AI to help organizations navigate the early challenges of AI and harness its full power at scale. Fourth, our successful research business is now enhanced by the addition of Ventana Research, and combined with our platform businesses, will continue to power growth in our recurring revenue stream.
ISG: Second as the long standing global leader in advising large transactions, we have raised the bar with ISG Tango, a disruptive platform that gives us the ability to bring our unmatched data proprietary tools and IP to a broader market.
ISG: Third we are combining our deep sourcing expertise with our knowledge of AI to help organizations navigate the early challenges of AI and harness its full power at scale.
ISG: Fourth our successful research business is now enhanced by the addition of Ventana research.
ISG: And combined with our platform businesses will continue to power growth in our recurring revenue streams.
Michael P. Connors: And fifth, through our ISG Next operating model and our iFlex delivery platform, we will continue to drive improvements in speed, efficiency, and profitability. With that, let me turn to our regions, all of which experienced declines in consulting revenues in Q1, in line with the rest of the industry. The Americas generated $41 million of revenue in the quarter, down 16% versus the prior year.
ISG: And third through our ISG next operating model NRI flex delivery platform, we will continue to drive improvements in speed efficiency and profitability.
ISG: With that let me turn to our regions all of which experienced declines in consulting revenues in Q1 in line with the rest of the industry.
ISG: The Americas generated $41 million of revenue in the quarter down 16% versus the prior year.
Michael P. Connors: Despite this, during Q1, we saw double-digit growth in our banking industry vertical and in research. Key client engagements during the first quarter included Western Union, U.S. Steel, Stanley Black & Decker, and during the quarter, ISG won a new multi-million dollar engagement with a spin-off of a large industrial conglomerate. ISG will help the client develop a technology-driven product strategy and operating model, select an ecosystem of providers, and ensure long-term value realization.
ISG: During despite this during Q1, we saw double digit growth in our banking industry vertical and in research.
ISG: Key client engagements during the first quarter included Western Union U S steel and Stanley Black <unk> Decker.
ISG: During the quarter ISG, one a new multimillion dollar engagement with the spinoff of a large industrial conglomerate.
ISG: ISG will help the client develop a technology driven product strategy and operating model selected ecosystem of providers and ensure long term value realization.
Michael P. Connors: In another win, we expanded our long-term relationship with a major cruise line, signing a $2.5 million contract to support this client in modernizing its infrastructure services across its North American brand. The initiative will provide increased agility and scalability and enhance the overall customer experience. And we signed a new deal with a multinational banking and financial services firm to help this client build a scalable, long-term approach to manage its AI architecture and services and select its AI partner. Now turning to Europe, our Q1 revenues of $18 million were down 23% from last year.
ISG: In another win we expanded our long term relationship with a major cruise line.
ISG: Running a $2 $5 million contract to support this client and modernizing its infrastructure services across its north American brands the.
ISG: The initiative will provide increased agility and scalability and enhance the overall customer experience.
ISG: And we signed a new deal with a multinational banking and financial services firm.
ISG: To help this client build a scalable long term approach to manage its AI architecture and services.
ISG: And select its AI partners.
ISG: Now turning to Europe, our Q1 revenues of $18 million were down 23% from last year.
ISG: Still during the quarter Europe delivered double digit revenue growth in our consumer and public sector industry verticals.
ISG: And in our network and software businesses.
ISG: Key client engagements in Europe in the first quarter included Allianz.
ISG: F.
ISG: Excite and winter Shaul.
ISG: ISG continued to expand our work with our high Tech facilities company.
Michael P. Connors: Still, during the quarter, Europe delivered double-digit revenue growth in our consumer and public sector industry verdicts, and in our network and software business. Key client engagements in Europe in the first quarter included Allianz, BASF, Excite, and Wintershaw. ISG continued to expand our work with a high-tech facilities company. Under our latest agreement, we're $2.5 million.
ISG: Under our latest agreement were $2 $5 million, we're helping the client with a major transformation program.
Michael P. Connors: We are helping the client with a major IT transformation program, covering infrastructure, cloud, workplace, security, and applications. We are also working with this client to execute an AI and digital first strategy for the firm's engineering function. We also want a $2 million engagement with a public sector client in Switzerland. We're helping this client develop a new operating model aimed at improving cost and efficiency. Now turning to Asia-Pacific, our Q1 revenues of $6 million were down about a million dollars.
ISG: Operating infrastructure cloud workplace security in applications.
ISG: We are also working with this client to execute an AI and digital first strategy for the firm's engineering function.
ISG: We also won a $2 million engaging with the public sector client in Switzerland.
ISG: We are helping this client develop a new operating model aimed at improving cost and efficiency.
Now turning to Asia Pacific, Our Q1 revenues of $6 million were down about $1 million.
Michael P. Connors: Yet we saw double-digit growth in our banking, consumer, and manufacturing industry sectors. Key clients in the quarter included the Australian Taxation Office, the Department of Home Affairs, Endeavor Group, and Insurance Australia Group. During the quarter, we won a significant contract with a major public university in Australia to support their selection of a new ERP platform provider and systems integrator. The engagement will lead to the modernization of the university's human capital management and finance model.
ISG: Yet we saw double digit growth in our banking consumer and manufacturing industry verticals.
Key clients in the quarter included the Australian Taxation office, the Department of home Affairs.
ISG: Endeavour group and insurance Australia group.
ISG: During the quarter, we won a significant contract with a major public University in Australia to support their selection of a new ERP platform provider and systems integrator.
ISG: The engagement will lead to the modernization of the university's human capital management and finance functions.
Michael P. Connors: Now let me turn to guidance. As I mentioned at the outset, we expect the market to accelerate over the course of this year, beginning first in the U.S. As macro conditions improve, the backlog of technology projects builds up, and clients further develop their AI strategy. With this view in mind, we are expecting sequential growth for the second quarter, targeting revenues of between $65 and $67 million and adjusted EBITDA between $7 and $8 million.
Speaker Change: Now, let me turn to guidance.
Speaker Change: As I mentioned in the outset, we expect the market to accelerate over the course of this year beginning first in the U S. As macro conditions improve the backlog of technology projects builds up and clients further develop their AI strategy.
Speaker Change: With this view in mind, we are expecting sequential growth for the second quarter targeting revenues of between 65% and $67 million and adjusted EBITDA between seven and $8 million.
Michael P. Connors: We remain confident in our strategy, and with some market momentum, we should be returning to our growth and margin expectations as we move through the year. So with that, let me turn the call over to Michael Sherrick, who will summarize our financial results. Mike? Thank you.
Speaker Change: We remain confident in our strategy and with some market momentum, we should be returning to our growth and margin expectations as we move through the year.
Speaker Change: So with that let me turn the call over to Michael Sherrick, who will summarize our financial results Michael Thank.
Michael A. Sherrick: Thank you, Mike, and good morning, everyone. Revenues for the first quarter were $64.3 million, down 18% compared with the first quarter last year. Currency had a modest $300,000 positive impact on reported revenue. However, I would note that we faced a particularly difficult comparison with last year when we generated our highest quarterly revenue ever. In the Americas, reported revenues were $40.8 million, down 16% versus the prior year. In Europe, revenues were $17.8 million, down 23%, and in Asia-Pacific, revenues were $5.6 million, down 20%.
Michael A. Sherrick: Thank you, Mike and good morning, everyone revenues for the first quarter were $64 3 million down 18% compared with the first quarter last year currency had a modest $300000 positive impact on reported revenues I would note that we faced a particularly difficult comparison with last year, when we generated our highest quarterly revenue ever.
Michael A. Sherrick: In the Americas reported revenues were $40 8 million down 16% versus the prior year in Europe revenues were $17 8 million down, 23% and Asia Pacific revenues were $5 6 million down 20%.
Michael A. Sherrick: First quarter adjusted EBITDA was $4.4 million, down from $11 million in the year-ago period, resulting in an EBITDA margin of 6.9%, as compared with 14% in the year-ago quarter. ISG had a first quarter operating loss of $2.4 million compared with operating income of $7.1 million in the prior year.
Michael A. Sherrick: First quarter adjusted EBITDA was $4 4 million down from 11 million in the year ago period, resulting in an EBITDA margin of six 9% as compared with 14% in the year ago quarter.
Michael A. Sherrick: BHG had a first quarter operating loss of $2 4 million compared with operating income of $7 1 million in the prior year.
Michael A. Sherrick: Excluding the impact of severance from the workforce actions taken in the first quarter, operating income would have been half a million dollars. Our reported net loss for the quarter was $3.4 million, or a loss of $0.07 per fully diluted share, as compared with net income of $3.5 million, or $0.07 per fully diluted share, in the prior year. First quarter adjusted net income was $0.7 million or $0.01 per share on a fully diluted basis compared with adjusted net income of $6 million or $0.12 per fully diluted share in the prior year's first quarter.
Michael A. Sherrick: Excluding the impact of severance from the workforce actions taken in the first quarter operating income would have been a half a million dollars.
Michael A. Sherrick: Our reported net loss for the quarter was $3 4 million or a loss of <unk> <unk> per fully diluted share as compared with net income of $3 5 million or <unk> <unk> per fully diluted share in the prior year.
Michael A. Sherrick: First quarter adjusted net income was <unk> 7 million or <unk> <unk> per share on a fully diluted basis compared with adjusted net income of $6 million or <unk> 12 per fully diluted share in the prior year's first quarter.
Michael A. Sherrick: Headcount as of March 31, 2024 was 1,561, down 67 positions compared with the prior year, but up 43 professionals from Q4. I would note the sequential change was driven by the addition of Ventana Research employees and resources we assumed from a client to support a new recurring revenue training as a service contract. Normalizing for these two factors, our headcount was down 109 professionals compared with the prior year.
Head count as of March 31, 2024, with 1561 down 67 positions compared with the prior year, but up 43 professionals from Q4 I would note that sequential change was driven by the addition of Ventana research employees and resources.
Michael A. Sherrick: We assume from a client to support a new recurring revenue training as a service contract normalizing.
Michael A. Sherrick: Normalizing for these two factors our head count was down 109 professionals compared with the prior year.
Michael A. Sherrick: For the quarter, consulting utilization was 70%, up 555 basis points sequentially from the fourth quarter, and down 40 basis points compared with the prior year. Based on the workforce actions taken to date and our expectation of improving demand as we move through the year, we expect utilization to improve from current levels, which will contribute to our expected margin expansion. For the quarter, net cash provided by operations was $2.3 million, a strong $5.7 million swing from a $3.4 million usage a year ago.
Michael A. Sherrick: For the quarter consulting utilization was 70% up 555 basis points sequentially from the fourth quarter and down 40 basis points compared with the prior year.
Michael A. Sherrick: Based on the workforce actions taken to date and our expectation of improving demand as we move through the year, we expect utilization to improve from current levels, which will contribute to our expected margin expansion.
Michael A. Sherrick: For the quarter net cash provided by operations was $2 3 million, a strong $5 $7 million swing from a $3 $4 million usage a year ago we.
Michael A. Sherrick: We ended the quarter with cash of $14 million, down from $22.6 million at the end of the fourth quarter. During the first quarter, we paid dividends of $2.4 million, repurchased $2.5 million of shares, and paid down debt of $5 million. Our next quarterly dividend will be paid July 5th to shareholders of record on June 14th. We ended the first quarter with a debt balance of $74.2 million, down $5 million from Q4. And our average borrowing rate for the quarter was 7%, up from 6.3% last year.
Michael A. Sherrick: We ended the quarter with cash of $14 million down from $22 6 million at the end of the fourth quarter.
Michael A. Sherrick: During the first quarter, we paid dividends of $2 4 million repurchased $2 5 million of shares.
Michael A. Sherrick: And paid down debt of $5 million.
Michael A. Sherrick: Our next quarterly dividend will be paid July five to shareholders of record June 2014.
Michael A. Sherrick: We ended the first quarter with a debt balance of $74 2 million down 5 million from Q4.
Michael A. Sherrick: And our average borrowing rate for the quarter was 7% up from six 3% last year.
Michael A. Sherrick: We ended the quarter with 49.7 million fully diluted shares outstanding. Overall, our balance sheet continues to provide us with the flexibility to support our business over the long term, and importantly, we remain comfortable with our debt-to-EBITDA ratio. Mike will now share concluding remarks before we go to Q and A. Thank you, Michael.
Michael A. Sherrick: We ended the quarter with $49 7 million fully diluted shares outstanding.
Michael A. Sherrick: Overall, our balance sheet continues to provide us with the flexibility to support our business over the long term and importantly, we remain comfortable with our debt to EBITDA ratio.
Michael A. Sherrick: Mike will now share concluding remarks before we go to Q&A Mike.
Mike: Thank you Michael.
Michael P. Connors: To summarize, after a difficult first quarter, the market is showing signs of improving, and we see growth ahead. ISG is ideally positioned to capitalize on this market with the data, products, services, and talent to meet client needs and ensure our long-term success. Our recurring revenue businesses continue to grow both in size and share of overall revenue. Research governance and platforms will remain important drivers of this growth. And we continue to invest for the long term with offerings like our ISG Tango sourcing platform and our enterprise AI advisory services.
Mike: To summarize after a difficult first quarter the market is showing signs of improving and we see growth ahead.
Mike: ISG is ideally positioned to capitalize on this market with the data products services and talent to meet client needs and ensure our long term success.
Mike: Our recurring revenue businesses continue to grow both in size and share of overall revenues.
Mike: Research governance and platforms will remain important drivers of this growth.
Mike: And we continue to invest for the long term with offerings like our ISG tango sourcing platform and our enterprise AI Advisory services.
Michael P. Connors: Overall, we have a strong business plan and operating model in place to enhance our growth and profitability this year and in the years ahead. 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 now, let me turn the session over to the operator for your questions. Thank you.
Mike: Overall, we have a strong business plan and operating model in place to enhance our growth and profitability this year and in the years ahead.
Mike: 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.
Speaker Change: So thank you very much for calling in this morning, and now let me turn the session over to the operator for your questions.
Speaker Change: Thank you.
Operator: Today's question and answer session will be conducted electronically. If you would like to ask a question, you can do so by pressing star 1 on your telephone keypad. If you find that your question has been answered and you would like to remove yourself from the queue, you may do so by pressing star 1 a second time. And again, if you would like to ask a question, please press star 1 on your touch-tone keypad. And we'll pause for just a moment to compile the Q&A roster, and your first question comes from the line of Marc Riddick with Sidoti. Your line is open.
Speaker Change: Today's question and answer session will be conducted electronically. If you would like to ask a question you can do so by pressing star one on your telephone keypad.
Speaker Change: If you find that your question has been answered and you would like to remove yourself from the queue. You may do so by pressing star one a second time.
Speaker Change: And again, if you would like to ask a question.
Speaker Change: Press Star one on your Touchtone keypad.
Speaker Change: And we'll pause for just a moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Marc Riddick with Sidoti Your line is open.
Speaker Change: Okay.
Marc Frye Riddick: Hey, good morning.
Marc Frye Riddick: Hey, good morning, Mara Mara.
Marc Frye Riddick: Hey, good morning, Mark.
Michael P. Connors: So I wanted to follow up on the demand commentary that you had there, Mike. I was wondering if you could sort of give us sort of a general idea. I know you mentioned in the Americas, you called out the banking area as far as some of the areas of strength that you saw in the first quarter. Maybe you could sort of, is that sort of leading the way as far as what you're seeing in the Americas going forward as far as from a client industry vertical perspective? Sure.
Marc Frye Riddick: So I wanted to follow up on that the demand commentary that you had there Mike I was wondering if you could.
Marc Frye Riddick: Give us sort of a general idea I know you mentioned with the Americas.
Marc Frye Riddick: Called out banking area as far as some of the areas of strength that you saw in the first quarter, maybe you can sort of.
Marc Frye Riddick: Is that sort of leading the way as far as what youre seeing in the Americas going forward as far as from a client industry vertical perspective, and then I have a couple of follow ups.
Michael P. Connors: Sure. Well, first of all, I think as we evolve through this year, Marc, what we're seeing are industry verticals that I think are really, I would call them, picking up some steam would be energy, healthcare, manufacturing, and consumer. Those four areas, I think, over the next few quarters, will be hot. And that's what we're seeing in our pipeline area, primarily in the U.S. I think I mentioned during the commentary that we expect the U.S. to move at a faster clip than the rest of the world. And that's kind of how we're planning, if you will, the next few quarters.
Speaker Change: Sure well first of all I think as we evolve through this year Mark what were seeing the industry verticals that I think are really I'll call. It picking up some steam will be energy healthcare manufacturing and consumer.
Speaker Change: Those four areas I think over the next few quarters.
Speaker Change: I think it will be will be hot.
Speaker Change: And Thats what were seeing in our in our pipeline our area primarily in the U S. I think I mentioned during the commentary that we expect the U S to move at a faster clip than the rest of the world.
Speaker Change: And Thats kind of how we're planning if you will the next few quarters.
Speaker Change: Okay.
Michael P. Connors: Great. And then I was wondering if you could talk a little bit about some of the initial early feedback that you're getting from customers regarding Tango. It certainly seems encouraging, sort of how it started. Maybe you could sort of talk a little bit about some of the, you know, the special sauce of Tango, if you will, that's really resonating with the early adopters. Yeah.
Speaker Change: Great and then I was wondering if you could talk a little bit about <unk>.
Speaker Change: Some of the initial.
Speaker Change: Early feedback that you're getting from customers regarding tango. It certainly seems encouraging sort of how it started.
Speaker Change: Started maybe you could sort of talk a little bit about some of the.
Speaker Change: The special sauce of tangle, if you will thats really resonating with the with the early adopters.
Michael P. Connors: Yeah, so first of all, thanks for that. I mean, frankly, we're really pleased with the quick adoption of the Plutengo platform. There are really two factors here.
Yes, so first of all thanks for that.
Speaker Change: Frankly, we're we're really pleased with the quick adoption of the contango platform. There is really two factors here number one is it's a digital platform that connects the enterprise client.
Michael P. Connors: Number one is it's a digital platform that connects the enterprise client with the tech providers and ISG, so all three of us. It allows, it's kind of, it's an AI-supported platform. Microsoft Office Word Document MSWordDoc Word. Document.8, And we might invite three, four, five different providers to such a transaction. This platform allows all of them to work together; we have a virtual secure data room. It allows us to pull up all of the data, and everybody can view, provided permissions are granted, all of this information.
Speaker Change: With the tech providers and.
Speaker Change: <unk>, so all three of us.
Speaker Change: It allows it's kind of it's an AI supported kind.
Speaker Change: Kind of a software platform that.
Speaker Change: <unk> enables all three parties to kind of work together to go from the beginning to the end of the lifecycle of a sourcing transaction so think about.
Speaker Change: Okay.
Speaker Change: Large enterprise company, that's looking to improve their infrastructure or their applications.
Speaker Change: And we might invite 345 different providers to such a transaction. This platform allows all of them to operate work together, we have a virtual secure data room.
Speaker Change: It allows us to pull up all of the data and everybody can view provided permissions granted all of this information.
Michael P. Connors: So the quick adoption here, we have about $2.6, $2.7 billion now of contract value sitting on this platform just in the first six, seven, eight weeks that we have launched the platform. So I think the fully integrated approach brings speed to value for our clients. So something that may have taken longer because of the process part will be faster for the client to get their achieved savings. So their speed to value is important.
Speaker Change: So the quick adoption here, we have about $2 $67 billion now of contract value sitting on this platform just in the first 678 weeks that we have launched the platform. So I think the fully kind of integrated approach it makes the speed.
Speaker Change: The value for our clients so something that may have taken a longer because of the process part will be faster for the client to get their achieved savings. So their speed to value is important the enterprises, who are pursuing these things that can cost them, a $1 million or more.
Michael P. Connors: The enterprises who are pursuing these things that can cost them a million dollars or more for a pursuit see it as an efficient and effective way to operate. And then we, as ISG, it is a margin enhancer for us because it does not take as much labor for us to accomplish all the tasks to get to the end zone. We believe that we'll have a margin expansion as a result of that.
Speaker Change: More for our pursuit see it as an efficient and effective way to operate and then we as ISG is a margin enhancer for us because it does not take as much labor for us to accomplish all of the tasks to get to the end zone. We believe that will be have a margin expansion.
Michael P. Connors: So it's a win-win-win, if you will, for all parties. And that's why we think the early adoption here is going well. So we'll, of course, monitor this. We expect it, of course, over the first 18 months or so, but we expect by that time, we'll have nearly or virtually all of our transactions going through this platform.
Speaker Change: And as a result of that so it's a win win win if you will for all parties and that's why we think the early adoption here is going well. So we'll of course monitor this we expected the course over the first 18 months or so, but we expect by that time, we will have nearly or virtually all of our transactions going through this platform.
Marc Frye Riddick: Great. And then one last one for me, at least for now.
Speaker Change: Great and then one last one for me at least for now.
Speaker Change: So what I'm wondering is.
Speaker Change: Like how you are feeling about the potential for acquisitions are there any.
Speaker Change: Kind of thoughts as to sort of are there things that you'd like to add at this point and.
Speaker Change: It certainly got year on new service offerings.
Speaker Change: And within the pipeline, but wondering if you could talk a little bit about maybe sort of what that was.
Michael P. Connors: I'm sort of wondering, Mike, how you feel about the potential for acquisitions? Are there any kind of thoughts as to sort of are there things that you'd like to add at this point? And certainly, you've got your own new service offerings in the pipeline. But I wonder if you could talk a little bit about maybe sort of what the acquisition pipeline looks like for you right now, valuations, availability of attractive targets, and the like. Thanks. Yeah, you bet. So again, I kind of borrow.
Speaker Change: The acquisition pipeline looks to you right now valuations availability of attract.
Speaker Change: Attractive targets and the like thanks, Yeah, you bet. So again kind of our approach is up as a string of pearls approach that we've been using for a number of years. We are always in active discussions and we are as well.
unknown: www.humbertoalfonso.com Unknown Executive, Barry Holt, Joshua Zoepfel, Rishi Jhunjhunwala, David Menninger, Michael Mathison, Unknown Executive, Barry Holt, Joshua Zoepfel, Rishi Jhunjhunwala, David Menninger, Unknown Executive, Barry Holt, Joshua Zoepfel, Rishi Jhunjhunwala, David
Speaker Change: On areas that we can improve our kind of digital assets and or recurring revenue streams and use our chat.
Speaker Change: Channels into the C suite to drive more value, whether thats, ventana research or whether Thats an enterprise change.
Speaker Change: To put a wrapper around all the technology changes that are occurring in enterprises.
Speaker Change: And I would say on a valuation front I do think the valuation expectations are a little softer today, that's an advantage at the end of the day most everything we work on our owner operated so it's it's a dance and it's it's.
Speaker Change: It's both a financial as well as a relationship type of acquisition and so they do take time, but that's how I would describe the environment right now mark.
Speaker Change: Thank you very much.
Speaker Change: Yes. Thank you.
Operator: And your next question comes from the line of Dave Storms with Stonegate. Your line is open.
Speaker Change: And your next question comes from the line of Dave storms with Stonegate. Your line is open.
David Storms: Good morning.
David Storms: Good morning, David. I was hoping I could ask about the demand in the pipeline and kind of how you're thinking about how pent up it is. You know, when that demand starts coming back, do you anticipate that it's going to come back in a wave or more on a steady flow, maybe with clients remaining a little hesitant as things get onboarded? Yeah.
David Storms: Good morning, David.
David Storms: Hoping I could ask about <unk>.
David Storms: Demand in the pipeline and kind of how youre thinking about that.
David Storms: How pent up it is and that demand starts coming back do you anticipate that it's going to come back.
David Storms: And a wave or more on a steady flow.
David Storms: With clients remaining a little hesitant as things get on boarded.
David Storms: Yes, so Dave the pipeline is really pretty strong I think I don't expect it to have a dam burst I do think it'll be a measured timing. What we are seeing is a the pipeline is strong and all things still around transformation and.
Michael P. Connors: Yeah. So, Dave, the pipeline is really pretty strong. I don't think I'll expect it to have a damned big burst. I do think it'll be a measured time. What we are seeing is, A, the pipeline is strong, and all things are still around transformation and optimization with the emphasis on optimization, and we see that being informed by the numbers. What I think will happen is it will be a measured approach. They're asking us to spend more time up front.
David Storms: <unk> with the emphasis on optimization and we see that being informed by the number of sourcing transactions that are now coming through our pipe.
David Storms: What I think will happen is it will be a measured approach. They are asking us to spend more time upfront. They are asking us to take more time for the execution.
Michael P. Connors: They're asking us to take more time for the execution. And it's kind of a little counterintuitive, because you would think that if I can save money, you want it as fast as you can. On the other hand, it also costs money to save money.
David Storms: And it's kind of a little counterintuitive because you would think that if I can save money you want it as fast as you can on the other hand, it also cost money to save money and so they are using a more paced a more measured approach and so things are taking a little longer the good news is with our platform.
Michael P. Connors: And so they are using a more measured approach, and so things are taking a little longer. The good news is that with our platform, if it's a sourcing transaction, Tango, it can move as fast as the client wants it to. But again, we will just have to follow the lead of the client. So we like our pipeline. We would love to have it burst out at a faster speed, but I think it will be measured. I do think the US is going to see it at a faster clip than the rest of the world.
David Storms: understood. Very helpful.
David Storms: <unk>, if it's a sourcing transaction with tango as it can move as fast as the client wants it too.
David Storms: But again, we will just have to follow the lead of the client. So we like our pipeline, we would love to have it burst out at a faster speed, but I think it will be measured I do think the U S is going to see it at a faster clip than the rest of the world.
David Storms: And then just one more for me. You were able to bring in operating expenses, both sequentially and year over year. How much more room is there to bring those in? And what if that is reliable going forward?
Understood very helpful. And then just one more for me.
Speaker Change: You were able to bring in operating expenses.
Speaker Change: Sequentially and year over year, how much more room is there to bring those in and.
Speaker Change: What of that is.
Speaker Change: Yes.
Speaker Change: Reliable going forward.
Michael A. Sherrick: Yeah, Dave, so it's Michael. So obviously, the big lever that remains is utilization. And as our utilization improves, as I noted, throughout the rest of this year, we'd expect to continue to see benefits to the gross margin, right? We should be able to drive revenue without a material change in the direct cost.
Speaker Change: Yes, Dave So it's Michael So obviously, the big lever that remains is utilization and as our utilization improves as I noted throughout the rest of this year, we would expect to continue to see benefit to the gross margin rate, we should be able to drive revenue without material.
Speaker Change: Change in the direct cost.
David Storms: That's perfect; thank you for taking my calls. Thanks, Ted.
Speaker Change: That's perfect. Thank you for taking my questions.
Speaker Change: Thanks, Dave.
Operator: And your next question comes from the line of Joe Gomes with Noble Capital Markets. Your line is open.
Speaker Change: And your next question comes from the line of Joe Gomes with Noble capital markets. Your line is open.
Joe Gomes: Good morning.
Hey, Joe.
Joe Gomes: So just wanted to.
Joe Gomes: I just wanted to take a step back here for a second and... kind of see if maybe you can give us a little bit of color here. You know, you released your fourth quarter results the first week of March. And at that point, the guide was for 65 to 67 and revenue and adjusted EBITDA of six to seven. And I was just trying to figure out what happened in the last three weeks of the quarter when adjusted EBITDA came in at 4.4. So I'm just looking for a little more information there.
Speaker Change: Taking a step back here for a second.
Joe Gomes: So maybe you can give us a little bit of color here.
Joe Gomes: You released fourth quarter and the <unk>.
Joe Gomes: First week of March.
Joe Gomes: At that point the guide was for $65 to 67 in revenue and adjusted EBITDA of six to seven.
Joe Gomes: And just trying to figure out what happened in the last three weeks of the quarter.
Joe Gomes: That adjusted EBITDA came in at four four.
Speaker Change: So I was just looking for a little more information there.
Michael P. Connors: Yeah, look, primarily it was around a couple of projects that we expected to start, complete, and recognize during the first quarter. And two of those projects did not only not get started, completed, and recognized, but one of them actually got pushed out until the month of June. One of those is a gain-share that we don't recognize until everything is done and signed, and so that did not make it into Q1, and so that was also a factor.
Yeah look primarily it was around a couple of projects that we expected to start complete and recognized during the first quarter.
Speaker Change: Two of those projects did not only not get started completed and recognized one of them actually got pushed out until the month of June.
Speaker Change: One of those is a gain share that we don't recognize until everything is done and signed and.
Speaker Change: And so that did not make it into Q1 and so that was also a factor so.
Michael P. Connors: So we always do the best we can with the information that we have at the moment. We expected something to close and deliver and recognize that did not happen in Q1. That's the primary reason, Joe.
Speaker Change: We always do the best we can with the most information that we have at the moment, we expected something to close and deliver and recognize that did not happen in Q1.
Speaker Change: It's the reason primarily Joe.
Joe Gomes: Fair enough. And then last quarter you talked about how you're bullish on the public sector. Just trying to get your feelings for today.
Speaker Change: Fair enough.
Speaker Change: And then last quarter you talked about you are bullish on the public sector, just trying to get your feeling for today.
Michael P. Connors: Yeah, so the public sector, let me start with the U.S., the public sector is growing. So the public sector grew, not by a large amount, but it did grow in the first quarter.
Joe Gomes: Yes, so the public sector, let me start with the U S.
Joe Gomes: Is the public sector is growing so the public sector grow.
Joe Gomes: Not a large amount, but did grow in the in the first quarter. What we're seeing there is there is a lot of interest in exploration around AI and the public sector and they are not the first to adopt most anything but.
Michael P. Connors: What we are seeing there is a lot of interest and exploration around AI in the public sector, and they're not the first to adopt most anything. But they are very interested in exploring and creating some proof-of-concept areas. So we are helping a few states in that regard. There's also some work going on in some of the Northeast states that we're operating in. They want us to help them understand the guidelines, the guardrails around the use of AI, and who would be liable, and what would happen if they introduced it into their motor vehicle system or if they introduced it into their toll system.
Joe Gomes: But they are very interested in exploring creating some pos.
Joe Gomes: Proof of concept type areas. So we are helping a few states in that regard. There's also some work going on up in some of the northeast States that we're operating in.
I want us to help them understand the guidelines the guard rails around the use of AI and who would be liable and how would it happen if they introduce it into their motor vehicle system or if they introduce it into their toll system.
Michael P. Connors: So it's created a new demand area for us, which fits in perfectly with our AI advisory business. And we're seeing a pickup in that area here in the U.S. I expect the Australian government, just kind of going around the globe, to be a little sluggish for a few quarters because they kind of go in cycles, and when they go in cycles, they go in big chunks. There's not any larger RFPs in the system at the moment.
Joe Gomes: It has created a new demand area for us.
Joe Gomes: Which fits in perfectly with our AI advisory business. So we're seeing a pickup in that area here in the U S. I expect the Australian government, just kind of going around the globe to be a little sluggish for a few quarters.
Joe Gomes: Because they kind of go in cycles and when they go in cycles. They go in big chunks. There is not any larger kind of rfps in the system at the moment, they easily sometimes we'll skip a quarter or so.
Michael P. Connors: They usually sometimes will skip a quarter or so, but that's how I would see the Australian government. So that government work there, I think, could be a little sluggish for a quarter or two in that part of the world. And then in Europe, we're seeing some good strength in Italy, a little less strength in Europe, and we're seeing some strength now in the German market. So that's how I would describe the overall market.
Joe Gomes: But that's how I would see the Australian government so that.
Joe Gomes: Our government work there I think could be a little sluggish for a quarter or two out that part of the world and then in Europe, we're seeing some good strength in Italy.
Joe Gomes: A little less strength in Europe, and we're seeing some strength now in the German market. So that's how I would describe.
Joe Gomes: The overall market the only exception in Australia was the we got a large deal with a large university in Australia as they want to kind of retool their whole human capital and financial system. So that is a project that will begin late this quarter. So that's kind of.
Michael P. Connors: The only exception in Australia was we got a large deal with a large university in Australia as they want to kind of retool their whole human capital and financial system, so that is a project that will begin late this quarter. So that's kind of how it's going around the globe on the government side.
Joe Gomes: Going around the globe on the on the government side.
Joe Gomes: Thanks for that. And just one more on Tango, since it is so so exciting here. Can you kind of size the number of clients that are using the platform today and, you know, maybe, the kind of revenue generation you see coming from Tango? Yeah, look, a couple of things.
Speaker Change: Thanks for that and just one more on tango since it is so exciting here can.
Speaker Change: Can you kind of size the number of clients that are using the.
Speaker Change: <unk> platform today.
Speaker Change: Maybe.
Speaker Change: Kind of revenue generation, you see coming from Tango.
Michael P. Connors: Yeah, look, a couple of things. We're not going to talk about the exact number of clients on Tango. We'll talk about it in terms of contract value, but I will put it in this context. The sourcing component of our business, which is really the foundation of how ISG was built. Think about it from a revenue standpoint; it's kind of in the one third of our business type. So if you think about it that way, and you have 900 clients, that's one way to look at it, Joe.
Speaker Change: Yeah look a couple of things, we're not going to talk about the exact number of clients on tango will talk about in terms of contract value, but I will put it in this context, the sourcing component of our business, which is really the foundation of how ISG was built.
Speaker Change: Think about it on a revenue standpoint has kind of been one third of our business pipe tight area.
Speaker Change: If you think about it that way and you have 900 clients. That's one way to look at it Joe.
Speaker Change: Okay.
Joe Gomes: Thanks for that, Mike. I'll get back in queue. Yep, you bet.
Thanks, and ill get back in queue.
Speaker Change: Yes, you bet.
Operator: And your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.
Speaker Change: And your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.
Vincent Alexander Colicchio: Yeah, thanks. Good morning, Mike. Morning, Ben. So, uh, you know, most service providers seem to say, uh, you know, generative AI, given complexity, um.., uh... risk, and other related issues. You know, it's taken some time to get started here. There are a handful here and there that are saying they're off to the races, but that seems like a little bit of an exaggeration to me.
Vincent Alexander Colicchio: Yes, Thanks, good morning, Mike.
Vincent Alexander Colicchio: I think you're a good measure of where things are. So I don't know, this may not even be a useful question, but it may be useful. In a meaningful way, what did you read on when it becomes a meaningful contributor? Is it a 25 issue?
Vincent Alexander Colicchio: When events like that.
Vincent Alexander Colicchio: So.
Vincent Alexander Colicchio: <unk>.
Vincent Alexander Colicchio: Most service providers seem to say.
Vincent Alexander Colicchio: The generative AI given complexity.
Vincent Alexander Colicchio: Risk.
Vincent Alexander Colicchio: Other related issues.
Vincent Alexander Colicchio: <unk> taken some time to get started here.
Vincent Alexander Colicchio: There's a handful here and theyre, saying theyre off to the races, but that seems like a little bit of an exaggeration to me.
Vincent Alexander Colicchio: And I think you're through a good measure of where things are.
Vincent Alexander Colicchio: So I don't know this may not even be a useful question, but it.
Speaker Change: It may be useful.
Speaker Change: In a meaningful way.
Speaker Change: As you read on when it becomes a meaningful contributor at 2025 issue.
Michael P. Connors: Yeah, so look, it's a good, it's a very good question, and let me tell you how we think about it and the context that we think about it in. If you go back to kind of cloud adoption 10 years ago, and think about how that has matured over the last 10 years. Today, you might see 50-55% of the workloads that could go to the cloud are in the cloud today. That's number one to think about 10 years from now.
Speaker Change: Yes, so look it's a good it's a very good question and let me tell you how we think about it in the context that we think about it in <unk>.
Speaker Change: If you go back to kind of the cloud adoption call. It 10 years ago and think about how that has matured over the last 10 years today you might see.
Speaker Change: 50, 55% of the workloads that could go to the cloud or in the cloud today. So that's number one to think about 10 years later the.
Michael P. Connors: The second way to look at AI is that it's new, it's definitely going to be revolutionary, but it still requires lots of education and proof of concepts. It requires a kind of understanding what it is and what it can do, so there's a large education component. They need to understand how the information and the data architects would feed into AI models. And one of the other elements that all of the tech providers, which I'm sure you follow, Vince, as well, is that there is also a liability question.
Speaker Change: The second way to look at AI is it's new.
Speaker Change: <unk> definitely going to be revolutionary it still requires lots of education and proof of concepts. It requires kind of understanding what it is and what it can do so theres a large education component.
Speaker Change: Need to understand how the information and the data architects would feed into AI models.
Speaker Change: And one of the other elements that all of the tech providers that I'm sure you follow Vince as well.
Speaker Change: Is there is also a liability question. So if a technology provider develops a model for client a.
Michael P. Connors: So if a technology provider develops a model for Client A, Client A uses that model. And all of a sudden, if it's an insurance company, as an example, something goes awry in their claims using this AI model, who's the liable and responsible party?
Client a uses that model.
And all of a sudden if its an insurance company as an example, something goes awry in their claims using this AI model who's.
<unk> the liable and responsible party. So there are a lot of guardrails.
Michael P. Connors: So there are a lot of guardrails and legalities around the use of AI models that will take a while to kind of sort out. So I think we're in the stage of pilots and proof of concepts. I think the hype is much bigger than the reality, and I think it will be that way for 12 or 18 months.
Speaker Change: And legalities around the use of AI models that will take a while to kind of absorb sort out. So I think we are in the stage of pilots proof of concepts I think the hype is much bigger than the reality and I think it will be that way for 12 or 18 months.
Speaker Change: Don't expect to see large amounts of real.
Michael P. Connors: I don't expect to see large amounts of real AI, if you will, differentiaters, before that time frame. The other aspect of it is that all the enterprises that we are now dealing with are asking us to consider AI as part of the sourcing transaction that they are doing. And they want to understand from the Accenture's and the Capgemini's and all these other providers, what they are thinking about the use of AI. And from the enterprise standpoint, one of the things they want is, well, how can I benefit from it from a cost standpoint?
Speaker Change: AI, if you will differentiators before.
Before that timeframe. The other aspect of it is that all the enterprises that we are now dealing with.
Speaker Change: We are asking us to consider AI as part of the sourcing transaction that they are doing and they want to understand from the Accenture and the cap Gemini is in all of these other providers.
Speaker Change: How are they thinking about the use of AI and from the enterprise standpoint, one of the things they want as well how can I benefit from it from a cost standpoint.
Michael P. Connors: I don't really want my tech providers to benefit from the entirety of that. How do I, as an enterprise, get value from the use of AI? And that will be ongoing over the course of the next, you know, call it 12 or 18 months. But there's definitely the hype is bigger than the reality at the moment, but not unexpectedly so, I think, Vincent.
Speaker Change: I don't really want my tech providers to benefit the entirety of that how do I as an enterprise get value from the use of AI and that will be ongoing over the course of the next call. It 12 or 18 months, but there is definitely the hype is bigger than the actual at the moment, but not unexpectedly saw I think Vince.
Speaker Change: Yes.
Speaker Change: That was very helpful color. Thank you for that.
Vincent Alexander Colicchio: That was very helpful, Culler. I thank you for that. And then. Could you highlight the top three practices that should lead growth going forward?
Speaker Change: And then.
Speaker Change: Could you highlight the top three practices that should lead.
Vince: Growth going forward.
Michael P. Connors: Well, number one for us is recurring revenue streams, and in that recurring revenue stream, you know, we have our research, we have our governance, we have our platforms. We have things like our ProBenchmark software platform.
Vince: Well number one for US is the recurring revenue streams and in that recurring revenue stream. We have our research we have our governance, we have our platforms we.
Vince: We have things like our pro benchmark software platform, we have things like our government acts.
Michael P. Connors: We have things like our GovernX platform. So number one is around our recurring revenue streams. Number two is, I believe that the sourcing component, where clients are looking at the sourcing element to help them optimize costs and possibly use some of those savings for growth initiatives, will accelerate. We're seeing it in our pipeline right now.
Vince: Platform. So number one is around our recurring revenue streams number two is I believe that the sourcing component.
Vince: Where clients are looking at the sourcing element to help them optimize cost and possibly use some of those savings for growth initiatives will accelerate we're seeing it in our pipeline right now so that'll be a <unk>.
Michael P. Connors: So that'll be a second area. And thirdly, the transformation journey is still a long way to go. So transformation is still gonna be ongoing. But the pace of those transformations has been slowed because of the macro cloud. And frankly, I think if we start to see a cut or two in the US from a Fed rate or from the European scene over the course of this year, that might also change the sentiment among some of the client buyers that, okay, maybe the worst is behind us because one day there will be no cuts.
Vince: Second area and thirdly, the transformation journey is still in a long way to go so transformation is still going to be ongoing the pace of those transformations has been slowed because of the macro cloud and frankly I think if we start to see a cut or two in the U S from a.
Vince: Fed rate or from the.
Vince: From the from the European Theater over the course of this year that might also change the sentiment amongst some of the client buyers that okay. Maybe the worst is behind us because one day. There is no cuts. The other day there are cuts one day as we wait a minute are we moving towards a recession.
Michael P. Connors: The other day, there are cuts. One day is, well, wait a minute, are we moving toward a recession? The other day is, "No recession." So there's a lot of noise out there. And I think until we see an affirmative kind of movement that will help indicate that, that may help free things up late this year or as we turn into 2025 events, at least that would be our hope.
Vince: The other day is no recession, so theres a lot of noise out there and I think until we see.
Vince: And affirmative kind of movement that will help indicate that that may help free things up late this year or as we turn into 2025, Vince lease that would be our take.
Vincent Alexander Colicchio: And then one more related to the sourcing platform. So, uh, is there a way for you to parse out, you know, business you happen to win on the platform versus, You know, I don't know if it's too early to tell. So to what extent do you think the platform was the cause for the win?
Speaker Change: And then one more.
Speaker Change: Related to the sourcing platform so.
Speaker Change: Is there a way for you to parse out.
Speaker Change: Business you happen to win on the platform versus.
Speaker Change: I don't know if its too early to tell.
Speaker Change: So what extent do you think the platform is the cause for the win.
Michael P. Connors: So, I think first, I think because we are the global leader in sourcing transactions, and we've said this before, we have a greater, we believe we have a greater than 50% share of that marketplace. Number one, they're going to go to ISG no matter what. That's step one.
Speaker Change: So I think the I think first I think this because we are the global leader in sourcing transactions and we've said this before we have a greater we believe we have a greater than 50% share of that marketplace number one theyre going to go to ISG no matter, what that's step one.
Michael P. Connors: What the platform enables is that it enables a client then to also understand that I may be able to get time to value much faster or speed to value much faster using the ISG platform, which then enables me to get to my savings at a faster pace if I so choose. It also enables the technology providers that we deal with every day to understand that there will be a likely outcome. And that outcome might come a little sooner.
Speaker Change: The platform enables.
Speaker Change: Is that it enables a client then to also understand that I may be able to get time to value much our speed to value much faster using the ISG platform, which then enables me to get to my savings at a faster pace if I so chose.
Speaker Change: It also enables the technology provider that we deal with every day to understand that there will be a likely outcome and that outcome might come a little sooner and therefore, they might be a little more aggressive in their pricing and therefore, it will benefit the enterprise. So I think it's the combination that.
Michael P. Connors: And therefore, they might be a little more aggressive in their pricing, and therefore, it will benefit the enterprise. So I think it's the combination that we have the leadership position. We're now adding a nice, strong, efficient, and effective platform. Together, I think that is why we will continue to lead in this space.
Speaker Change: We have the leadership position, we're now adding a nice strong efficient and effective platform together I think that is why we will continue to lead in this space.
Vincent Alexander Colicchio: Thanks for answering my questions.
Speaker Change: Thanks for answering my questions.
Speaker Change: Thanks Bill.
Operator: And your next question comes from the line of Michael Mathison with Singular Research. Your line is open.
Speaker Change: And your next question comes from the line of Michael Matheson with singular research. Your line is open.
Michael Mathison: Good morning, and thanks for taking my question. Good morning, Michael.
Michael Matheson: Good morning, and thanks for taking my questions.
Michael Matheson: Good morning, Michael.
Michael Mathison: So obviously, a challenging environment. Just a couple questions about your income statement in the quarter. SG&A was $24 million. I know that included some severance costs. Can you quantify how much of that was severance and what a good working figure would be for modeling going forward?
Michael Matheson: So obviously a challenging environment.
Michael Matheson: Just a couple of questions about <unk>.
Michael Matheson: Your income statement in the quarter.
SG&A was $24 million.
Michael Matheson: I know that included some severance costs can you quantify how much of that was severance and what a good working figure would be for modeling going forward.
Michael A. Sherrick: Yeah, so Michael, it's Michael. So the severance in the quarter was $2.1 million, excuse me, $2.9 million, thank you. So you remove that, you're down around that 21 and a half level, and we would expect to remain pretty consistent with that as we look at our outlook for Q2.
Michael Matheson: Yeah, So Michael it's it's Michael so the severance in the quarter was $2 1 million.
As can be $2 9 million was $2 9 million. So you remove that youre down around that 21, five level and we would expect to remain pretty consistent with that as we look at our outlook for Q2.
Michael Mathison: Okay, great. Thank you for that.
Speaker Change: Okay, great. Thank you for that.
Michael Mathison: Now, secondly, coming back to Tango, like everybody else, I'm pretty excited by the possibilities there. Particularly since you're now having your own analysts do their work on Tango. You mentioned you're getting some efficiencies out of that. Your current gross margin is kind of high 30s, 38, 39, 40 sometimes. Do you have any sort of target of what kind of a lift you would get from increased efficiency? Nothing to pin you on, but are we talking 2 to 1 or 10 percent, something like that?
Speaker Change: Now secondly, coming back to tango like everybody else I'm pretty excited by the possibilities there.
Speaker Change: Particularly since Youre now having your own analysts do their work on Tango, you mentioned youre getting some efficiencies out of there.
Speaker Change: Your current gross margin is kind of high <unk> 38, 39 40, sometimes.
Speaker Change: Do you have any sort of target of what kind of a lift you would get from the increased efficiency nothing to pin you on but are we talking 2% to 110% something like that.
Michael Mathison: Yeah, I think it's early in the process, Michael. I mean, we clearly expect to see better efficiency and, therefore, better profitability. But, as Mike said, we're still in the early stages. You know, a little over $2.5 billion of volume that's on it. So we want to really see how it matures and what goes into it before we really put a number against that. Okay.
Speaker Change: Yes, I think it's I think it's early in the process Michael I mean, we clearly expect to see better efficiency, and therefore better profitability, but as Mike said, we're still in the early stages, a little over $2 5 billion of volume Thats on it. So we want to really see how it matures and what goes in it before we really put a number against that.
Michael Mathison: You understand. Well, good luck with it, though. It's a very exciting idea. That runs me out of questions. Thanks again.
Speaker Change: Understood.
Speaker Change: Good luck with it though it's a very exciting idea.
Speaker Change: You may ask questions. Thanks again.
Speaker Change: Thank you Michael.
Operator: And I have no further questions, so I will turn the call back to Mr. Mike Connors for his closing remarks.
Speaker Change: And I am showing no further questions. So I will turn the call back to Mr. Mike Connors for his closing remarks.
Michael P. Connors: Well, let me just close by saying thank you to all of our professionals worldwide for your dedication to our clients and for working together as a global team to drive our long-term success. Our people have a passion for delivering the best advice and support to our clients as they continue their digital journeys in both good times and uncertain times, and I could not be more proud of them. And I want to thank all of you on the call for your continued support and confidence in our firm. Have a great rest of the day.
Michael P. Connors: Thank you well, let me just close by saying Thank you to all of our professionals worldwide for your dedication to our clients and for working together as a global team to drive our long term success.
Michael P. Connors: Our people have a passion for delivering the best advice and support.
Michael P. Connors: To our clients as they continue their digital journeys in both good times and uncertain times and I could not be more prouder of them and I want to thank thanks to all of you on the call for your continued support and confidence in our firm have a great rest of the day.
Operator: And ladies and gentlemen, this concludes today's teleconference. We thank you for your participation, and you may disconnect at any time.
Speaker Change: Ladies and gentlemen. This concludes today's teleconference. We thank you for your participation and you may disconnect at any time.
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