Q3 2025 Information Services Group Inc Earnings Call
Speaker #1: Now, I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.
Speaker #2: 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 Third Quarter Conference Call.
Speaker #2: I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement.
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished this morning to the SEC and the risk factor sections of our most recent Form 10-K and 10-Q filings.
Speaker #2: 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.
Speaker #2: You'll be able to obtain free copies of any of the ISG SEC filings on either ISG's website at www.isg-1.com or the SEC's website at www.sec.gov.
Speaker #2: ISG undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improve the comparability of the company's financial results between periods and provide greater transparency of key measures used to evaluate the company's performance.
Speaker #2: The non-GAAP measures we will touch on today include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant currency basis.
Speaker #2: 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.
Speaker #2: For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed this morning with the SEC.
Speaker #2: And now I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike,
Speaker #3: Thank you, Barry, and good morning, everyone. Today, we will review our outstanding Q3 results driven by strong AI demand, our view of the current market, and our outlook for Q4.
Speaker #3: ISG delivered an excellent third quarter, continuing our AI-powered momentum with clients and underscoring our solid operating fundamentals. Our powerful combination of strategic operational and research capabilities allows ISG not just to comment on AI trends, but to shape them as we work with clients to achieve measurable business value from AI.
Speaker #3: This is the power of having both a technology research and an advisory model. Our Q3 revenues were $62 million, up 8%, excluding results from our previously divested automation unit.
Speaker #3: Growth was broad-based and led by our largest revenue region, the Americas, up 11%. We also saw return-to-growth in Europe with revenues up 7% and continued global growth in our recurring revenues, which were up 9%.
Speaker #3: From a profitability standpoint, our adjusted EBITDA was up 19% to $8.4 million. Additionally, our adjusted EBITDA margin increased by 200 basis points to 13.5%.
Speaker #3: Our profit growth was driven by our improved mix of higher-margin platforms, research, and services revenues, combined with our disciplined operating approach. We also had another strong cash quarter, producing $11 million of cash from operations.
Speaker #3: Over the last two quarters, we delivered $23 million in cash, demonstrating the strong cash-generating power of our business. Recurring revenues continued to be an important component of our success, representing 45% of our overall revenue.
Speaker #3: In Q3, recurring revenues were $28 million, up 9%, led by double-digit growth in our platforms business, including GovernX, ISG Tango, and our research business.
Speaker #3: Our AI-centered approach continues to drive exceptional growth and differentiation for ISG. AI offers so much promise but also brings new complexity and challenges. Our clients are leaning heavily on us for independent AI expertise.
AI is driving the technology research and services market worldwide.
We see growth continuing as clients invest in the infrastructure and data needed to power their AI ambitions.
Our recent state of Enterprise AI adoption report.
Shows the number of AI use cases moving into full-scale deployment has doubled versus a year ago.
The report also shows that use cases have broadened beyond cost efficiency.
To focus even more on competitive advantage and growth.
Now, let me turn to our regions.
The year-over-year comparisons I cite here exclude revenues of about $3.5 million from our divested automation unit in last year's third quarter.
Our Americas region delivered another excellent quarter, with revenues up 11% to $42 million.
Driven by double-digit growth in our research software and GovernX businesses.
And in our consumer health sciences and public sector industry verticals.
Key claim engagements during the third quarter include Lockheed Martin, Carnival Cruise Lines, and Baxter International.
During the quarter, ISG continued to expand its work with a large U.S.-based healthcare company.
Generating revenues of more than $1 million.
We are currently helping the client negotiate new software network and technology services contracts.
We're also working with one of the world's top consumer products companies.
To help them create a next-generation, AI-driven technology operating environment.
This $1 million-plus engagement is expected to help the client realize cost savings of about 40%.
And should lead to future opportunities for ISG.
Turning to Europe.
This market returned to growth for the first time in two years since the start of the tech recession.
Revenues were up 7% to $16 million, driven by double-digit growth in our advisory business.
And in our banking, financial services, consumer, and health sciences industry verticals.
Key client engagements in Europe in the third quarter included Process Dajio and Evonik, a German chemicals company.
ISG is currently working on two of the largest technology transformations this year in Europe.
First ISG is partnering with a global leader in business travel services.
To advise them on $1 billion of spend on an enterprise-wide sourcing program.
The program covers AI-driven finance, accounting technology services, and product development.
We expect this engagement will open up even more doors to follow-on opportunities.
Second, we are also working with a global leader in workforce services and solutions.
To support their $1.2 billion AI-powered initiative.
We are helping the client transform their operations through a generative AI.
Leveraging new AI pricing models to drive down costs.
Now, turning to Asia Pacific.
Our Q3 revenues of $4.2 million were down 15% compared with the prior year.
We did see double-digit growth in our banking, energy, and utilities industry verticals.
We will need the public sector to reignite spending for this region.
Key clients from the quarter included iimo, Standard Chartered Asia, and the Reserve Bank of Australia.
Isg is working with a large Australian telecommunications provider.
To get to negotiate more than $1 billion of tech applications and infrastructure spend.
Stops to manage its technology environment.
Now, a few comments about the market.
As I mentioned earlier, AI is the propellant that is driving overall demand for technology services.
In the near term, we are seeing modest improvement in the macro environment, with some lingering caution as companies take time to adapt to the new normal.
We're seeing that play out especially in the managed services sector.
While demand for cloud computing and services needed to support AI continues to soar.
Growth is not the same in all geographies, with the U.S. leading the way and Europe catching up.
Looking ahead, we've seen an improving interest rate environment.
Stimulating further tech spending as we move through 2026.
With AI remaining the dominant long-term growth driver for the industry.
So, with that, let me turn to guidance.
For the fourth quarter, including the slower year-end holiday period, we are targeting revenues between $60.5 million and $61.5 million.
An adjusted EBITDA is expected to increase year-over-year by 15% to 20%.
Or between $7.5 million and $8.5 million, which will continue our year-over-year growth and margin expansion.
Now, let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael.
Thank you, Mike, and good morning, everyone. As Mike stated earlier, our revenue comparison with the third quarter of 2024 excludes our divested automation unit, which contributed about $3.5 million a year ago. This provides a more accurate view of our go-forward business.
Revenue for the third quarter was $62.4 million, up a strong 8% versus the prior year.
For the quarter, currency had a $700,000 positive impact on revenue.
America's revenue was $42.2 million, up 11%. Europe's revenue was $16 million, up 7%. Asia-Pacific revenue was $4.2 million, down 15% from the prior year.
In the third quarter, adjusted EBITDA was $8.4 million, representing a 19% increase from the year-ago period, resulting in an adjusted EBITDA margin of 13.5%, which was up nearly 200 basis points year-on-year.
For the quarter, ISG delivered operating income of $4.6 million, a 7% increase from the prior year’s $4.3 million.
Reported net income for the quarter was $3.1 million, or $0.06 per fully diluted share, as compared with net income of $1.1 million, or $0.02 per fully diluted share, in the prior year.
Third quarter adjusted net income was $4.7 million, or $0.09 per fully diluted share, compared with adjusted net income of $2.5 million, or $0.05 per fully diluted share, in the prior year's third quarter.
Our headcount as of September 30, 2025, was 1,316, essentially flat with Q2.
For the quarter, Consulting utilization was a solid 72%, in line with our average third-quarter utilization year-to-date. Utilization of 75% is in line with our long-term target.
We ended the quarter with cash of $28.7 million, an increase of $3.5 million from $25.2 million at the end of the second quarter. A key driver of the increase was strong operating cash flow for the quarter. Net cash provided by operations was $11.1 million, fueled by our robust operating results.
During the quarter, we paid dividends of $2.4 million and repurchased $2.8 million of stock.
Our next quarterly dividends will be paid on December 19th to shareholders of record as of December 5th.
Fully diluted shares outstanding for the quarter were 50.4 million, down 201,000 from year-end 2024.
At quarter's end, we had approximately $8.2 million remaining on our share repurchase authorization.
Our quarter-end growth debt to EBITDA ratio was 1.95 times.
Down from 2.4 times in December 2022, and just below our 2 to 2.5 times range.
Operate and invest in the business.
Michael. Now, share concluding remarks before we go to Q&A, Mike.
Thank you, Michael. To summarize, ISG delivered another excellent quarter, continuing our AI-powered momentum.
Our revenues of $62 million were led by another double-digit growth quarter in the Americas.
A return to growth in Europe and continuing strength in recurring revenues.
We grew our adjusted EBITDA by 19% in our margins by 200 basis points.
And we had another very strong cash quarter, generating $11 million in cash from operations.
Looking to the future, our AI-centered capabilities and relentless drive for operational excellence.
Positions us well for continued year-over-year growth and margin expansion.
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 operators to the operator for your questions.
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Your first question comes from the line of David Storms with Stonegate Capital. Please go ahead.
Good morning, and thank you for taking my questions. Good morning.
Um, just wanted to start maybe with the IBA margin expansion. Uh, I was mentioned that, you know, you had a nice uh, Improvement in mix, which I'm assuming is the best year of the automated automation, uh, portion of the business and then also, you know, some nice efficiency. And Opex, uh, how would you characterize the stickiness or stability of the efficiency improvements? Should we expect this? Uh, margin to kind of continue.
Uh, thanks, Dave, and good morning. Uh, yes. Look, our, um, we've got a number of kind of margin expansion avenues. One is our own efficiencies.
Using AI and one of the best metrics of that is ISG Tango, which we are using for all of our sourcing transactions. It's
Now, we’ve got about $15 billion going through it. But importantly, what it does.
Does it accelerate time to value for the enterprises and, frankly, for the technology providers? Who may be bidding on that business with our enterprise client?
So, it creates efficiency, it creates speed, it creates productivity.
And then when we launched it just a little over a year, maybe almost a year and a half ago, I think we said that it would be one of our.
1 of our drivers to expand margins. And the reason for that is that we can do it faster more efficiently and we can do it with a higher level of margin uh because of it. So that's 1 area. The second area is the mix of what we are actually able to provide with our clients.
and areas around our recurring revenue streams, which continued to expand and, of course,
When you're able to build it once and sell it many times, it helps a lot.
But importantly, all of the AI work that we are doing is premium work; therefore, we have good pricing, if you will, around the work that we're doing in AI.
But it's only going to expand because it's still in the very early innings, so you couple both internal efficiencies.
Along with a mix that is in high demand at the client level.
And you add in the growth that we're getting in recurring. We're pretty confident we're going to be able to continue our expansion and our margins. I hope that helps, Dave.
Potatoes of that client base.
Um, again, good question, Dave. The pipeline is growing.
And it's never really been a big issue as much on the pipeline as it has been on the speed and pace that the European clients are wanting to move.
We saw that accelerate a bit, primarily in the cost optimization areas.
Um, the transformation areas are slower to adapt over in Europe, and frankly, in the U.S., it's a little slower on transformation. That is, on optimization.
But I think what you'll see is our pipeline is strong, and we see continued growth.
level for our European business. We're we're cautious because of the overall macro environment, but right now, there is an a, there is an appetite that has increased in Europe, especially around optimization using AI to assist.
And if you've heard a couple of the points I was making in the remarks, we are operating with two of probably the largest.
Transformations going on in Europe by any enterprises right now.
And both of them will generate very significant cost savings for those two businesses.
Um, and when you can start to see real dollars flow through, we think it'll be around 40% savings.
That's significant and material, but clients have to be ready to move. These two large clients were ready, so that's what we're seeing in your update.
That's great. Thank you for the commentary. Good luck to you for.
Your next question comes from the line of Mark Riddick with Sedoti. Please go ahead.
Hey, good morning.
Good morning, Mark.
Maybe we could talk a little bit about. Um, and you're prepared remarks, you you made mention of uh, some of the the potential drivers. You also touched on on the the, the potential for interest rate Cuts being a a, a benefit, maybe, I mean, obviously it's pretty early, but are you beginning to see that already? And as far as loosening a purse strings, are you getting the sense that that's still on a, a large Enterprise driven. Um, uh, issue or are we beginning to see some of the, some of the smaller uh movers uh, tend to act on AI? Thanks.
Yeah, good. Thank you. Look, I think, first of all, to me, the interest rate environment, based on my discussions with a lot of...
Uh, operators in our clients.
It's all about the sentiment, and I think that the interest rate environment is loosening up.
gives some a little more, um, strength to move forward with some of their, um, work efforts that they're feeling a little more competent of. And because of that, then that frees up the opportunity to move a little faster on our part with our clients.
So to me, the interest rates really are at a level of sentiment and confidence.
That things are going to be a bit better. Yes, we hear a little more about higher unemployment and some of these other things, but the reality is that with an interest rate environment, that may change a little bit and may open up things like housing in the United States next year. These things are all positive signs versus negative signs. So, from our perspective, it may free up additional spending. And I would add, Mark.
I think the use cases that are being, uh, marketed or being stated out in the market, that there is really a huge opportunity. If you utilize AI at scale that you can change your business model uh over time, that that's beginning to. Um, I would say um kind of is get is is beginning to get resonated with a number of clients. So you couple the 2 together a little bit more confidence, and a little bit more that you're now seeing that there's real returns that could happen. These are not just in some cases, you know, um, um, just kind of little projects that are becoming be much more scalable projects, like the 2 that I mentioned in Europe.
Great, thanks for the color there. And then you always, um,
Ones that are moving for different reasons, but, uh, is consumer health sciences, um, energy utilities, and the public sector. Um, those kind of four or five areas, uh, are moving—each industry segment for different reasons. Consumer, in some cases, because of the tariffs. Because if you're a consumer and you start off with a 4 or 5% margin business, and you slap tariffs on it, that makes some of your products very unprofitable in a hurry. So, what do I do about that? We're working with a number of consumer, uh, companies because of that. Flip it to the other side, where you have the energy industry, which is uh, literally on fire, if I may say it that way. Um, and because of that, they are looking for money to help grow their businesses. And so, they look at, uh, areas around AI that can help them. So it varies a little bit.
By industry, but those 5 Industries in particular, um, I think are are quite strong as we as we go through the balance of this year and probably the turn of the of of 26.
Great and then uh, just lasts 1 for me, I guess the the balance sheet having improved as much as it has over the last few years, that now just below 2 times. Maybe you can talk a little bit about, um, maybe the potential for acquisition pipeline out there, uh, maybe with the pipeline looks like, valuations are looking like, and maybe, you know, if there there are any areas, or or any, any things that you have your eye out on at the moment. So good question mark. Yes, we are in the market. Uh, we continually uh, have conversations.
Uh, we're focused on everything around, uh, increasing our AI capabilities and our recurring revenue streams. Um, and you know, I would say at the end of the day, the market is, you know, still what we always believed, and that is you have to provide fair value for a great asset.
Um, so we'll continue to have these discussions and we'll see where they, you know, evolve as we go into 2026. Um, but, you know, we certainly have our targets in mind, and we'll see if we can do something in 2026.
Great, thank you very much.
Thank you, Mark.
Your next question comes from the line of Vincent Kikio with Barington Research. Please go ahead.
Good morning, Mike. Uh, nice quarter.
Morning, Vince. I'd like to talk a little bit about the labor market. So, um, your labor was flat; is that by plan, or is it getting increasingly difficult to hire people?
No, that's by plan. We've been using um, you know, we we eat our own dog food. As they say, we've been putting a lot of automation capabilities into our work efforts and that has enabled us to. I would say just have some surgical hires uh, at the moment. So that was a, that's a planned event. And you know, we might have a few extra between now and the end of the year but it should be, you know, in or around that number uh at the end of 26.
Uh, and then I, um, I don't recall your exposure to the federal market. Remind me of that. And are you being meaningfully impacted by the shutdown?
Yeah. Uh, we have zero federal business. Our focus in the U.S. is all on, uh, state, local, and higher education.
So we have no, uh, no exposure at all to, um, to Doge or any other kind of related federal issue.
And then, uh, on the go on the government, uh, on the other side of the world. Uh,
What, uh, what's going on in the public sector in APAC? And, uh, you know, just some color on, uh, when we might see that turn.
Yeah, so the public sector outside the US, we do do work in the federal area. So we do it in the UK. Uh, we do it in Italy, we do it in Germany, we do it in Australia. Um and and so the European public sector business is actually quite good. Australia is still not come back. We anticipate it second quarter next year at the moment based on what we can see in terms of pipeline. Um, but that particular region, I think flips to growth once the public sector which is a large piece of the spending, uh, comes back. And we anticipate that being kind of roughly second quarter next year.
And then last one for me? Are you seeing a meaningful, um, traction with, uh,
Tango in the mid-market.
I was to help create, um, kind of, you know, accelerating time to value for both our clients and for the ecosystem providers.
Which would make it more efficient, more productive, higher margins. So, that's one hand; on the other hand, it gave us an entry into the mid-market. For us, we call the mid-market kind of $1 to $10 billion. So, it's a bit of a spread.
But it it's a market that we never really uh, in the US never really went after now with Tango. It's been a it's been a great success. Um, over 25% of the platform is now mid-market clients running through there.
Um, that could not have been possible without that platform. We don't think we use it as our kind of entry point, and so we expect the mid-market to be a growth driver for us over the next few years. AI is helping that because AI clearly adds complexity and opportunity. But I would say most mid-market companies do not have the level of expertise internally to help execute on their AI initiatives, and that plays right into our strengths.
Thanks Mike. Yep. Thanks man.
Your next question comes from the line of Joe Gomes with Noble Capital Markets. Please go ahead.
Morning, Joe.
So I just wanted to go back to the a pack for a second here. Follow up on Vince's question. Yeah, I think earlier, in the year, you were talking about, you know, you expected to see some improvement there, after some elections had had gone through and just trying to get a, a better handle on, you know, what is kind of pushing out, you know, a, a return to growth in that market, especially on the, on the federal spending
Yeah, look, the elections were over. I think it was May, uh, June. So, end of the second quarter, we expected it may take a little time to ramp up, but it's taking longer. We see the pipeline beginning to build, but the pace at which they are moving in the new regime is not quite at the pace we had expected early on. So, again, I don't want to overplay this one because it's really the difference between having about a million dollars more in revenue in a quarter down there than anything. So, on the scope of things, it's a small piece, but that is what will be necessary to turn that because the commercial side is not big enough to drive the.
The growth without the public.
Okay, thanks for that. Um, in this, and then
Understand. There's there's very limited, I'll call it any, if any, at all exposure to the federal government here, but are you, are you seeing any secondary impacts from like the government shutdown, um, on any of the areas, you know, whether it would be state and local are the education Market?
No zero. In fact, I think our public sector was up in the U.S., almost 30% in the quarter. Just to give you kind of a flavor, um, and primarily because they are moving on; they have a lot of, uh, they have a large older workforce.
The technology is still pretty old.
So using AI to assist them to move at more of an accelerated Pace defined in the public sector. As accelerated, um, has been a good thing, so nothing from the shutdown has impacted. Uh, and it's reflected in our in our growth for the for the quarter of about 30%.
Okay. And then on the recurring revenues, and I was just looking, you know, it looks like they were basically flat with what occurred in the, the second quarter, the same 28 million, the revenue and about 45% of the overall. Um, I was just wondering, you know, what do, what do you think needs to happen to start to to start seeing some of the faster growth on the recurring Revenue side of the business?
Properly, when the year's out, that's just a quick estimate, and we expect that to, you know, see 120 plus next year, to give you an indicator on where we're going.
Okay, great, thanks. And just real quick, can you give us a little update on the Martino acquisition and how that is progressing?
Uh, it's now almost fully integrated. It will be by the end of the year. Uh, we had a kickoff meeting the first week of September.
Uh, taking our Italian business and theirs together and we're very, very pleased. Um, with the leadership Andreas Martino who was the CEO now of our, all overall, Italian business coming out of Martino, um, so that's pacing nicely, um, and and they we have some, you know, good. Nice little recurring Revenue stream there and it's, uh, it's a nice little strategic add-on for us, so it's it's moving. Well,
Great. Thanks for that, and congrats on the quarter. Thank you. Jim.
Your next question comes from the line of Gallzy, Shree, with Singular Research. Please go ahead.
Yes, sir. Good morning.
Morning, Mike. Uh, finally, with, um, with so much boardroom focus on AI, I sense any increased effort from the traditional IT consultants or the hyperscalers to encroach on your adversary relationships.
I'm sorry. I didn't I didn't catch the last part G. Are you are you are you sensing? Are you sensing any increased? Uh, competition from the traditional, it Consultants, or the hyperscalers on your, on your advisory relationships? Uh, no. No, from our standpoint. No. Um, they are, uh, excellent. Um, relationship partners with us. I mean, most all of them, AWS and others are clients of ours. Uh, but we do not, uh, run into them in a competitive standpoint for the work that we do.
And, in terms of, um, AI business,
How are the clients quantifying the ROI, and how much of that savings are you able to directly link back to a follow-on project?
Okay, good. Good question. Um, I think a couple of things. I think most...
Most of the larger enterprises are prioritizing.
If I can say it this way, they're prioritizing profits a little bit over more aggressive growth.
And because of that, um, they are looking at how they can utilize AI and their delivery models to help with costs and risk.
And in some cases, they're focusing on data acquisition, engineering, and governance.
Um, of kind of the, underlying systems that drive some of their, some of their business. So from from our standpoint, I think we're seeing them wanting to try to scale and do it in a cost-effective way, utilizing a road map to start with an AI roadmap, which we help them with and develop, and then begin to execute it at the pace that they're comfortable in doing. So, so, you know, I think overall optimization and using AI inside the large Enterprises is still Paramount.
Of course they want to use it to drive growth, but if they can get the cost from the from the, if they can get the dollars from the optimization side, they either will take that to earnings per share or they move it over to their growth initiatives. And at some combination of both depending on the industry typically on which they're operating in at the moment.
Gotcha. Thanks for that. And on the, um, with the uncertainty around H-1B visa policies and under the current administration, any impact, positive or negative, uh, on your competitive space or delays either from your side or on the client side?
Basically, this is going to impact the incoming class, if you will, that applied for this year, which wouldn't be until October, that any of them would have landed in the U.S. But I think it can create opportunity for us as people have to rethink their models, and we'll be a part of that process.
Awesome. That's all I had. Thanks, guys.
Thank you.
As I'm showing no further questions, I'll turn the call back to Mike Connors for his closing remarks.
Well, let me close by saying thank you to all our professionals worldwide for our continuing progress and for their collaboration and unwavering dedication to our clients and driving our long-term success.
Our people have a passion for delivering the best advice, support, and research to our clients as they continue their AI-powered transformations, and I could not be prouder of them.
And thanks to all of you on the call for your continued support and confidence in our firm.
Have a great rest of the day.
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