Good day, and welcome to the Information Services Group Second Quarter 2016 Financial Results Conference Call. Today's conference is being recorded and a replay will be available on ISG's website within 24 hours. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Barry Holt. Please go ahead, sir..

Thank you, operator. Hello and good morning everyone. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's 2016 second quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer; and David Berger, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to read a forward-looking statement. It is important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs 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 8-K that was furnished this morning to the SEC and the Risk Factors section in ISG's Form 10-K covering full-year results.

You should also read ISG's Annual Report on Form 10-K for the fiscal year ending December 31, 2015 and any other relevant documents, including any amendments or supplements to these documents filed with the SEC.

You'll be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.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.

During this call, we will discuss certain non-GAAP financial measures which ISG believes improves the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance.

The non-GAAP 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.

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. And now, I'd like to turn the call over to Michael Connors, who will be followed by David Berger.

Mike?.

Thank you Barry and good morning everyone. Today David and I will review our record setting second quarter results. Brief you on our key operating highlights including some significant client wins, discuss our shareholder initiatives and wrap up with our guidance for 2016.

First I'd like to point out that on July 20th ISG officially celebrated its 10th anniversary. It was on that day in 2006 that we filed registration papers in the state of Delaware to establish Information Services Group as a legal corporate entity.

Since then we've evolved from a firm focused predominantly on sourcing into a leading technology insights, market intelligence and advisory services firm serving more than 500 clients around the world to help them achieve operational excellence.

As we mark the official birthday of ISG I imagine an even brighter future, a future marked by greater accomplishment as we work together with our clients to help them go digital and transform their operations for greater efficiency and faster growth. More about that in a moment.

During our first quarter earnings call I indicated to you that our growing portfolio of products and services was driving increased demand, although a break from our normal pattern of not hiring a head of revenues we made the decision to add more than 40 positions during the first quarter based on our increasing global pipeline and emerging new revenue opportunities.

This was the most head count we've added in the first quarter on five years. I'm pleased to say that our investment is beginning to payoff starting with our stellar second quarter results.

We delivered the best revenue quarter in our history with revenues of more than $60 million, up 13% versus the prior year and 21% sequentially with all regions contributing to the growth. Our EBITDA for the quarter of $7 million was up 36% from $5.2 million in the prior year and more than double our first quarter results.

Our adjusted earnings per share for the quarter of $0.09 was up 29%. Our go digital strategy is delivering results as we rapidly expand our digital capabilities to match the growing demand for these services in the marketplace. In the second quarter revenue from our digital services represented more than 20% of firm revenues.

As service provision moves rapidly to the cloud terms such as software as a service, infrastructure as a service, and business process as a service are becoming part of the digital lexicon. Our recently released ISG index in fact was expanded to include coverage of this as a service market.

Our research found the global market for as a service solutions grew 45% in the second quarter and now accounts for 36% of the global sourcing market. That's nearly double its share since the beginning of 2014.

We continue to forecast accelerated growth from the as a service segment in the years ahead, as more and more work is automated and moved to the cloud. Indeed as we look ahead we see companies moving 50 to 70% of their enterprise applications to the public cloud over the next three to five years.

As the agile enterprise becomes the dominant operating model demand will also grow for agile development. Flexible demand in dev ops to accelerate the development of new digital products. Speed to innovation will be crucial.

Automation of IT services is also a game changer, automation has the potential to eliminate 20 to 30% of the human labor now required by service providers in traditional outsourcing arrangements and therefore significantly lower cost. Future deals will demand greater levels of automation and analytics in core IT and application maintenance functions.

And finally connectivity is fast becoming the name of the game. Billions of devices and systems are already connected around the world through internet of things capabilities and platforms. We believe the next generation outsourcing deals will make the value of connectivity real for our clients.

ISG continues to win new digital engagements with major clients across the globe in each of these areas, including a major automotive manufacturer in Germany where we are supporting their IOT and connected card strategy.

Our global financial services organization moving to an agile enterprise to support development of new payment systems and a global chemical company completely transforming to a cloud first strategy and transitioning to an agile enterprise.

As I mentioned digital is now more than 20% of ISG revenues, with continuing accelerated technological change and growing demand for digital transformation services we expect digital to become a much bigger part of our business over the next few years. Turning to our regions, I am pleased with our strong second quarter results in the Americas.

The region delivered a record revenue quarter led by growth in digital, benchmarking, merger support and SIAM our Service Integration And Management services. Second quarter revenues of $32 million were up 11% versus the prior year and 22% or 6 million versus the first quarter.

We saw especially good growth during the quarter in our energy, life sciences, healthcare and manufacturing verticals. Key client engagements in the quarter included Monsanto, Excel Energy, Bayern Mountain, Southwest Airlines, Marriot and Entergy, I am pleased to say that our business with Entergy for one continues to expand.

Our latest add on service is organizational change management or OCM provided by our trade point consulting acquisition, a great example of how our expanded offerings are leading to expanded relationships and growing revenues with our clients. Q2 was also an excellent sales quarter in the Americas.

We won a three year $30 million renewal contract with a major US auto manufacturer that will keep us engaged well into 2019. The contract includes two extensions that would grow the value of this client account to $50 million over five years. We also signed a four year nearly $12 million contract with the state of West Virginia.

Turning now to EMEA, our revenues in the region grew by 14% versus the prior year and up 11% sequentially. We saw solid growth in Germany and the Nordics, particularly in our energy, life sciences, healthcare, banking and insurance verticals.

Key client engagements in Europe during the quarter included few power companies, RWE Group in Germany and Vattenfall in Sweden, BASF, Commerce Bank, Credit Suisse and ZF Group which merged with TRW.

Among our EMEA engagements ISG was recently awarded a three year IT agreement with a leading international commercial bank in Europe with branches and offices in more than 50 countries. The contract is the largest applications development and cloud sourcing transaction of the market right now.

ISG is supporting a transformation program that covers the design and implementation of target, delivery and sourcing models for applications development, maintenance and operations as well as new cloud infrastructure.

We also recently completed an engineering services engagement in Europe supporting a wind turbine manufacturer and its search for Indian engineering providers to expand development capacity.

Our traction in engineering services also extends to other major clients including a German auto parts manufacturer, a leading US maker of jet aircraft engines, a major pharmaceutical company based in the US, an Australia based mining company.

We are encouraged by our early client successes as we continue to build a market for our engineering services business with both enterprises seeking to increase their return on engineering and providers offering access to lower cost talent pools and proximity to global markets.

On the Brexit front there was a pause in business decision making in the UK late in the second quarter that will have small impact on EMEA growth rates in the back half.

However the promotion of Theresa May the Prime Minister and the rapid formation of a new government should alleviate the slowdown in decision making which we expect to rapidly return to a more normal pace during Q4.

We believe over time that Brexit will be a net positive for ISG as business adapts to the changes such as a possible relocation of certain financial operations out of the UK and the focus on cost intensifies. Finally we were pleased with the continued growth in our Asia Pacific region which also turned in all time record quarter.

Our revenues there were up 22% driven by our telecom and public sector verticals. Key clients in the region included Telstra, Quantas, NBN which is Australia's new broadband network, the Australian taxation office, the Australian department of defense and ores and energy.

We were recently awarded our first managed services contract in the Australian public sector with the department of immigration and border protection. For the quarter our recurring revenues totaled $15 million up 11% sequentially and essentially flat from a year ago.

We expect our growth in this area to accelerate during the second half and into 2017 and to claim a greater share of our total revenues. Investing in growth initiatives including future acquisitions is just one of the ways we use our capital to deliver attractive returns to our shareholders.

During the quarter we completed our Dutch auction tender and used our capital to repay 3.2 million of our convertible loan notes outstanding at par. With these two shareholder actions we reduced our total fully diluted shares outstanding by 3.1 million shares or 8%.

We believe these shareholder friendly moves in conjunction with continued appropriate investments in our business create long term value for our shareholders.

Now turning to our guidance for full year 2016, we remain optimistic about 2016 and our ability to continue to advance our long term strategy, we are reaffirming our full year guidance based on a number of factors including the revenue momentum we experienced in the second quarter with revenues up 13% including 11% in the Americas, 14% in Europe and 22% growth in Asia Pacific.

The growing demand for our digital services which helps businesses leverage new technologies and operating models, to lower their operating cost and take advantage of new growth opportunities. Naturally we remain cognizant of broader macro economic conditions as we look ahead to the second half of the year.

Given these factors we reaffirm our revenue growth guidance to be within the range of between 7 and 9% and EBITDA growth in the range between 10 and 15% excluding the impact of currency. We remain confident in our strategy and our relentless drive to execute with excellence.

So with that let me turn the call over to David Berger who will summarize our financial results..

Thanks Mike, and good morning everyone. Second quarter revenues of $60.4 million were up 13% or $7 million versus 53.4 million in the prior year. Revenues were up 21% or 10.4 million sequentially versus Q1. Revenues were 31.7 million in the Americas, up 11% from the same period in 2015.

21.2 million in Europe up 14% and 7.5 million in Asia Pacific up 22%. Second quarter 2016 adjusted EBITDA was $7 million compared with $5.2 million in last year's second quarter more than double the EBITDA of Q1. We reported operating income of 3.2 million for the second quarter of 2016.

This compares with operating income of $2 million in the second quarter of 2015. Our net income of 1.7 million in the second quarter compares with net income of 1 million in the second quarter of 2015. Included in the second quarter 2016 net income was a $244,000 foreign currency transaction gain versus a $26,000 transaction gain in the prior year.

Reported fully diluted earnings per share doubled to $0.04 per share compared with income of $0.02 per share for the same period in 2015.

Adjusted net income for the second quarter was 3.5 million or $0.09 per share on a diluted basis compared with adjusted net income of 2.6 million or $0.07 per share on a diluted basis in the prior year's second quarter. Utilization for the quarter was at 68% versus 72% in the prior year as we ramped up Q1 hiring.

Headcount of 1088 was up 44 positions from the first quarter including 25 positions associated with the Trade Point acquisition in Q2. We continue to maintain a strong liquidity position to support the implementation of our business plan.

Net cash provided by operations for the first half was 5.4 million which was $8.1 million favorable to the prior year. We invested $1.2 million in capital during the first half. During the second quarter we repaid $3.7 million of debt including the retirement of $3.2 million in convertible debt at par.

We repurchased $10.1 million of stock including 9.3 million associated with the Dutch auction tender which concluded in April. Total outstanding debt at June 30th was $60 million. During the quarter we increased our outstanding our debt balance by 9.8 million to fund the tender.

Our gross debt to EBITDA leverage ratio was 2.6 times and our net debt leverage ratio was 1.9 times at June 30th 2016. Included in our outstanding debt of 60 million is $200,000 in convertible notes. Our average borrowing rate for the quarter was only 2.7%. Mike will now share concluding remarks before we go to Q&A..

Thank you David, in conclusion we delivered an all time record revenue quarter with $60 million up 13%, we also delivered record quarterly revenues in the Americas and Asia Pacific.

EBITDA of 7 million was up 36%, we had an excellent sales quarter turning $50 million worth of multiyear client contracts, we continue to expand our growing digital capabilities which now represent more than 20% of our Firm’s revenues.

For the immediate benefit of our shareholders in the last couple of months, we have bought back 8% of our fully diluted shares outstanding and we’ve reaffirmed our full year guidance. We are pleased with our operating trails and the momentum we are building in the market.

They demonstrate the confidence we have in our ability to strategically deliver value to our clients and to our shareholders. Thanks very much for calling in this morning. And now let me turn the session over to the operator for questions..

[Operator Instructions] And we’ll go first to Vincent Colicchio with Barrington Research..

Now that digital is becoming a more meaningful portion of revenue, I am just curious about a couple of things. Are you -- do you see sizeable managed services opportunity there as you do in your sourcing business? And is the opportunity as large? But I want you to talk about that first..

Yes, we are still quite bullish on our overall managed services business. All of these cloud and digital capabilities and transactions require contracts.

Though the size of the contracts might not be as large because they’re smaller in terms of length the time so they tend to be more closer to three year lengths instead of four to five year lengths, all of those require management from a managed services standpoint. So, we don’t think it shifts it one way or the other frankly.

We think it continues really proprietary position we have in the market with our managed services offering..

And then is the competitive landscape on the cloud side any different? And then is your differentiation any different?.

So we think we’re differentiated and we have 500 trusted client relationships. They know us. We’ve been involved I transformations for them in many times for years, or now our reputation is certainly out there and we’re beginning to serve a lot more even new clients because of the digital and cloud capabilities.

And so from a competition standpoint, I don’t think the landscape is any different. There is no new entrants, if you will, so it's still the same players that are on the marketplace. But just to give you an example, during the first-half of the year, we served 85 new clients.

Now 42 of those came from our acquisitions, but 43 were brand new logos, many of those around the digital enterprise that is evolving with a lot of our clients. So just give you a little flavor that we believe that is driving increasing demand..

And then last question, I’ll go back in the queue. As far as geographic regions, do you want to talk about -- you talked about APAC should lead a growth for the balance for the year, I think.

How about the other two geographies, which one should be strong as we close out the year?.

So we see Asia-Pacific and the Americas continuing their strong growth. I mentioned in Europe the one area really the only country the UK we saw a bit of a slowdown in decision making towards the tail end of our second quarter. We think that the Brexit hangover was sitting there.

We think it was only a temporary bit but it will have an overall effect on the back half growth rates. We will grow in Europe. But we will have a bit of a lesser growth rate and we think in Europe and the back half as a result.

But other than that, we think that the overall growth rates in the Americas, Asia Pacific and some growth that we’ll have in Europe showing during the back half of the year will continue to bode us quite well for the balance of the year..

Our next question comes from Peter Heckmann with Avondale..

Can you comment on Saugatuck year-over-year and how that acquisition has met your expectations?.

So our research offering, we don’t track Saugatuck independently, but because we folded that all into our research but our research business in totality is growing quite rapidly Saugatuck an expert on which was another research company we folded it in, we launched a new service to ISG insights which incorporates Saugatuck and some other things out into the marketplace.

They are doing terrific. Their focus is around digital and cloud and if you will all things automation and Internet of Things, and all the areas that we are talking about that are moving in a rapid pace, both experts on and researchers capabilities now part of the overall ISG research capabilities are performing overall quite strong.

So our research business is growing quite rapidly..

And then clearly a little bit more currency headwind with the UK pound.

But can you talk about some of the items that could allow you to potentially exceed your annual guidance? Or are there some items that are uncertainties that you’re still tracking that prevented you from raising your guidance at this point in the year?.

Pete, good question. I think I would preface it by saying as you well know we’re a fairly conservative group. We did raise our guidance at the end of Q1. We don’t really have a pattern of raising it more than once during the course of the year. We’re a cautious group. We feel very good about the demand.

We do have the Brexit overhang that we saw late in the second quarter that may have a bit of an impact on the overall growth rate in Europe in the back half, though it will continue to grow. Demand very high in the U.S. also in the Asia Pacific region. So we’re comfortable at the guidance that we given to you..

We’ll go next income Marco Rodriguez with Stonegate Capital Markets..

I was wondering if you might be able to walk through a little more of the Brexit aspect. Just what sort of an impact if you quantify that you saw in terms of the order rates or the discussions you were having with clients in the quarter.

And then if you can maybe talk a little bit about any discussion you have within now and your level of confidence of the order rates are going to pick back up in second half, maybe early next year..

Look, I don’t want to overstate this. But we wanted to communicate and continue to be transparent with everybody. We did see that some of our client base that with all the noise level around Brexit that before they wanted to trigger the large scale transformation that they would pause that.

So that means that some of the projects that we were going to gear up at a much heavier level would be slow down in terms of its pace. We do not believe that those will not come about. In fact we believe they will all, or nearly all, come about. The pace will be slightly differently we think during the second half.

We always have a third quarter softness a little bit in Europe anyway because of all the vacations. So, yes that component in when you have about half the Europe off about half the time during the quarter. We just added those two together and said, well, look could we expect similar growth rates in the back half and we think no.

When we think it will grow, yes. Do we think that some of this Brexit thing cloud will be lifted, of course. So we’re anticipating it coming, lifting sometime during the Q4 period. And that’s why we just pointed out that we expect Europe to be slightly slower in its growth rate. But we think it's only a pause..

And then walking through our guidance a little bit, I know it's a difficult question but the currency aspect obviously you’ve lifted out what the impact has been year-to-date. Not asking any guidance necessarily forecast FX or what that might look like.

But just if rates stay where they are, just can you help us think through the impact on those constant currency growth rates?.

Yes, I think it's probably a little over 1% impact on the growth in the second half on the current level..

And last quick question, just in terms of your capital structure, you bought some shares back, you add a little more debt here, paid off some convertible loans.

Just give us your thoughts here in terms of where you’re sitting on your capital structure and your comfort levels with your debt and your comfort level to maybe take on more? And little bit in terms of how you view that capital structure and your ability to do acquisitions?.

Honestly, what we indicated we bought back 8% of the fully diluted shares outstanding. We believe that sent a good message to the market that we believe in the Company, particularly for where they -- we though the shares were undervalued at the point we made that decision. We believe we have about 2.6 debt-to-EBITDA ratio.

We feel very comfortable in that range. We’ll continue to drive down that leverage ratio for the right deal. We believe we could take on additional leverage as long as we would be able to quickly leverage it out.

So we’re going to continue to focus on buying back shares, paying down debt and also continue pursuing acquisitions which add to the portfolio overall capabilities..

We’ll go next to Ben Klieve with Noble Financial..

Most of the financial questions I had answered here, but the one question operationally I am still wondering about is your personal expectations for headcount going forward here.

Is that -- the hiring process ramped up to where you feel it needs to be, or do you think that’s going to continue? And then second of all you said that your utilization rate was 68% was down year-over-year.

And just wondering what your targeted and really when you expect to hit that target?.

First of headcount, you should not expect unless we receive something significant that the headcount would move much more, I mean there is always a bit because we’re always adding certain skill sets in the quarter. So I would not expect it to have any significant movement during the back half of the year.

On the utilization rate, that’s simply a factor of all the people we brought in Q1 to get them ramped up. Our target is 70% plus I think we were at 68% for the quarter. But that’s simply a factor of a lot of our new team members, if you will, getting in and getting up to speed, nothing more than that.

So, we’re comfortable how that’s evolved and emerged in our existing utilization of our team members is greater than 70%. But we would expect that to inch its way up as we proceed..

Our next question comes from Sarkis Sherbetchyan with B. Riley & Company..

So you did mentioned that you signed three more tier agreements that sold about $50 million.

Can you share some more details on when you’d expect the revenues and associated profits to ramp here?.

So I believe we said that roughly 20% of that is brand new revenue, others are extending and we were able to sign those, two of those three to longer or multiple year contracts as we stated. All of those should begin in the third quarter, if I am not mistaken. But we’ll be moving and ramping those up in Q3..

And then your SG&A levels increased here year-over-year.

May be if you can help us understand if they’re any one time costs or that should be the run rate that we need to start building and thinking about in our models?.

During the quarter obviously the year-to-year stock compensation is up, that would continue. We did have in the quarter we did quarter-to-quarter versus the first quarter, we did have an increase in the bad debt reserves, it was small but we had a reversal in the first quarter. So the movement quarter-to-quarter was around 400. That won’t continue.

And there were some conferences that occurred in the second quarter that we didn’t have in the first. So, the third quarter will not be at the same level as we want within the second quarter..

And finally from me, looking at the nice ramp in revenues here and obviously sounds like the SG&A is not going to be at the level in Q1.

Are you still on target to expand EBITDA margin by about 100 basis points annually?.

We target ahead up to 100 bps but have to 4% a year over the next few years..

Our next question comes from Allen Klee with Sidoti..

Can you comment on recurring revenue, what percent that is at total? And then also any update on your plans and for events? Thank you..

Let me start with events and then David will get you the recurring revenue numbers. Yes, so as we mentioned during the first quarter, we launched ISG events. We are evolving that business that’s just kind of its first year.

We’re not going to relay revenue numbers off of that at this stage but we have very good momentum for the back half of the year as we move into 2017, which is our plan. We brought in a leader from the outside. She’s doing a fantastic job.

And we expect our ISG events business to grow rapidly over the next two to three years as we mentioned in the first quarter. So, we believe it's on track if not slightly ahead and more news on that as we evolve into 2017..

And recurring is up -- the recurring revenues as we indicated it was around $15 million or 25% of revenues in the second quarter. We expect it to be higher percentage of the revenues in the second half..

We’ll go next to Brian Kinstlinger with Maxim Group..

You mentioned recurring revenue was flat year-over-year I think but it also benefited from acquisitions.

So what do you think the Company needs to do, or has already done drive the acceleration in the growth rate for the recurrings?.

Well, first, the recurring was de minimis on any acquisitions. But it depends on how our overall business goes. The absolute dollar number on recurring revenues will grow double-digits. So when we closed out the end of the year, you should see double-digit growth in recurring revenue.

The percentage of the overall total of course has to deal with how the rest of the business is going as well. We are putting an over emphasis on recurring revenues. And I’ve indicated that we want to hit the 35% recurring revenues for the full firm over a three year period of time up from 25% or 26%.

So, A, we think the recurring revenue streams are fine, we saw you saw some multi-year contract signed in the first quarter -- in the second quarter. I think you saw $15 million worth. That will also add over time to the recurring revenue bit.

So, I think our overall recurring revenues as our public sector business continues to win work as those things have long sales cycle but they’re all multi-year. We’re very confident that recurring revenues will be a double-digit grower for us and higher percentage of overall revenues over time, Brian..

And then advisory has been a big driver to growth obviously.

Can you just finally talk about the average duration of new advisory program?.

There is so much by the assignment, we don’t really average them. But let me see if I can give you what I saw would be as typical. The typical if you think about some of the digital examples that I gave you, the one with the automotive manufacture in Germany, we got the financial services company and the chemical company.

All of those will be multi-year engagement with these clients because it is literally a major digital transformation for the enterprise. It will be a series of different engagements. The pace in which all of those will occur clearly will be up to the clients’ ability to absorb those transformation changes.

But all of our engagements tend to be six months or longer. I mean certainly we start off with some benchmarking. We use our proprietary data base to create their business case for them in almost all instances to explain about how that cloud and digital enterprise can change for them, their cost structure.

So they can take money and either move it into growth initiatives, which many of them are doing or take it for increased earnings per share. So, the length of these all vary, so it's hard to really put a summary number on them.

But I would say the answer to it is that 80% of our clients every year are the same clients as the previous year is probably a good way to look at the continuation of work that we have with these guys..

And with no further questions in queue, I’d like to turn the call back to Mr. Mike Connors for any additional or closing remarks..

Well, look, let me close by saying thank you to your more than 1,000 professionals around the world for their continued passion and dedication to our clients. It’s their ability to help our clients achieve operational excellence and navigate through this digital transformation as the reason for our strong performance.

And also thank you to all of you on the call today for your continued support and confidence in ISG. Everyone have a great day..

This does conclude today’s conference. We thank you for your participation. You may now disconnect..