Good day everyone, welcome to the Information Services Group Third Quarter 2016 Financial Results Conference. 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, I'd like to turn the conference over to Mr. Barry Holt. Please go ahead, sir..

Thank you operator and 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 third 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 yesterday 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?.

Engage, Connect, Deliver was the theme for this year's premier event, which attracted more than 200 software technology cloud and service providers. Traditional providers are facing new competition from cloud and software as a service providers and a host of niche intermediaries.

The industry is growing increasingly fragmented and price-sensitive and only those providers able to rapidly change their business models partner with our customers on technological innovation and offer software and infrastructure on demand will survive over the long-term.

We believe our increasing portfolio of capabilities for providers will open a larger new revenue stream for ISG as we help providers navigate these major shifts.

One new example of how ISG is helping as a new research product, we introduced during the quarter the ISG Automation Index, which quantifies for the first time the cost savings and productivity gains from automating information technology and business services.

Our research found that automation can more than double the level of cost savings that can be expected from sourcing IT services. Now, recently the senior executive team of ISG met for annual weekend offsite strategy meeting.

Coming out of the meeting, we reaffirmed our long-term strategy to invest in digital services, expand our recurring revenue streams, and to drive growth in emerging areas of opportunity such as engineering services, automation, and events.

In addition to such organic growth initiatives, we remain committed to our two-pronged acquisition strategy, our ongoing bolt-on strategy by which we had complimentary products and services to accelerate our growth. An example of this is our recent acquisition of TracePoint, which expanded our organization change management capabilities.

As we have also said in the past, the other part of our two-pronged strategy is seeking an opportunistic transformational acquisition that will accelerate us to our near-term financial goals. So, with that, let me turn the call over to David Berger who will summarize our financial results..

Thanks, Mike and good morning everyone. Third quarter revenues of 51.9 million were up 2% in constant currency and 1% on a reported basis versus 51.4 million in the prior year. Currency negatively impacted reported results by $400,000.

Revenues were 29.2 million in the Americas, up 5% from the same period a year ago, 16.6 million in Europe, down 6%, but up 9% when you exclude the UK, and 6.1 million in Asia Pacific, up 8% with growth rates in constant currency. Third quarter 2016 adjusted EBITDA was 6.6 million, which compared with 6.4 million in last year's third quarter.

We reported operating income of 2.6 million for the third quarter of 2016. This compares with operating income of 3.2 million in the third quarter of 2015. Included in the third quarter 2016 operating income was an additional $500,000 in stock compensation versus the prior year.

Our net income of 0.8 million in the third quarter compares with net income of 1.8 million in the third quarter of 2015. The third quarter net income was impacted by a higher tax rate resulting from a mix of foreign source income. Reported fully diluted earnings per share of $0.02 per share compared with $0.05 per share for the same period of 2015.

Adjusted net income for the third quarter was $3 million or $0.08 per share on a diluted basis compared with adjusted net income of 3.5 million or $0.09 per share on a diluted basis in the prior year’s third quarter. Utilization for the quarter was at 65%. Utilization was affected by softness in the U.K.

Headcount of 1065 was down 23 positions from the second quarter, as ISG had begun automating some areas of our India operations. We continue to maintain a strong liquidity position to support the implementation of our business plan.

As Mike indicated, net cash provided by operations as of September was 9.9 million, which was $8.4 million favorable to the prior year. We invested $1.9 million of capital during the first nine months. During the third quarter, we repaid $600,000 of debt and we repurchased $400,000 of stock. Total outstanding debt at September 30 was at 59.4 million.

Our gross debt to adjusted EBITDA leverage ratio was 2.5 times and our net debt leverage ratio was 1.7 times at September 30, 2016. Our average borrowing rate for the quarter was 3%. Mike will now share concluding remarks before we go to Q&A..

Thank you, David. To summarize, recurring revenue reached nearly $16 million in the third quarter, a record for ISG. Digital services continue to grow representing 20% of ISG revenues in the quarter. We serve 370 clients in the third quarter with 48 brand new to ISG. This will serve as well for our pipeline next year.

We delivered a solid EBITDA performance of $6.6 million. Apart from the UK, we delivered good revenue growth globally and our cash was up 19% to $19 million. We will watch the macro environment such as the UK gridlock and any aftermath of the U.S. elections today.

But overall, our foundation is solid, recurring revenues, digital services are growing list of blue-chip clients and over a 1000 professionals on the ground in the middle of the digital revolution. We are pleased with the momentum we are building in the market.

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

[Operator Instructions] We’ll hear first from Vincent Colicchio with Barrington Research..

Yeah, my question is the business that you lost or that didn’t happen because of delays in the UK, any sense for when that may come back?.

Hey Vince, good morning, look the UK I think at this stage, I would consider volatile. It is difficult to measure from our standpoint, we are inside a number of clients but we are not clear on how the fourth quarter will play out for the UK.

We certainly are planning on growth in the UK next year, we have a lot of things in the early stages but decision making is really, really slow at the moment, so hard to tell their events..

On the digital side of things is that become increasingly important, you are curious, the competitive landscape there differ from your traditional sourcing business?.

Good question Vince, the whole digital environment somewhat is similar to the same kind of competitive growth but let me break it into a couple of pieces. Let me take you for structure for a moment which is where a lot of enterprises are comfortable in moving their infrastructure from proprietary to the cloud.

I think I mentioned that there is going to be about $100 billion of contracts that are going to be coming dew and either will be renewed, renegotiated or changed out in the next two years. That group is going to be typically the similar set of competitors that we run into.

We still keep in mind about 75% plus of our business is full sourced, but when we do a phase competition usually through an RMP then it is using the same kind of cash and characters that either the big four it is couple of smaller independent ones like Halls Bridge or Everest [ph] or from time to time Gartner on those areas as well.

So I would say the landscape around that piece is similar.

The landscape around kind of our broader digital offerings with our clients include all that group but I would say the big four is probably even more engaged a little bit in that area but I don’t think that the overall competitive set is all that different for those pieces of work that we are doing..

And then our recurring revenue had a nice growth quarter there, could you drill down it to what key growth drivers where?.

So our current revenue reached about 60 just a tick under $16 million and we are very pleased with that as you know we are spending a lot of our time energy building that kind of absolute number up the side we can get it.

A lot of the growth in the areas was lot around emerging technologies, you may recall about, it has been about two years ago we acquired a company called Saugatuck Technology, we convert that into what we call ISG Insights which is a subscription based service around emerging technologies around automation, around digital, around cloud, around mobility which is resonating in both the provider side and the enterprise side.

So that all research arena grew very, very nicely. We also launched at the beginning of this year, I think I mentioned in the first quarter that we hired a lady to launch our ISG Advance business. We are holding three ISG what we call Digital Business Summits, one was held in the third quarter, we are holding two in the fourth quarter.

Those also stimulate research and research sales and some custom research out of that as well so that’s kind of where the canvas [indiscernible] was during the quarter..

Okay thank you Mike..

Yeah, thanks Vince..

We'll hear next from Peter Heckmann, Avondale Partners..

Good morning this is Shane Svenpladsen in for Pete..

Thank you, Shane..

Good morning, can you please update on the research offering and kind of what you are seeing in terms of demand environment in each of your main geographies there?.

So the research environment is pretty, is quite strong for us. We have been building this for the last couple of years, research would say anything around technology in disruption around technology is hot I would say both in the U.S. and in parts of Europe the big markets in Europe, Germany in particular and the Europe market but the U.S.

market is the hottest followed by Germany just in terms of market and then I would say a little bit down in Australia certainly in India.

And the focus around the research tends to be around technology what is disruption, what are the choices, who is doing what, what about the automation tools that are out there between people like IPSoft or Blue Prism et cetera, how do they fare, how do they stack up, and how do my cloud mobility, data and big data analytic areas how do they stack up in different markets around the world.

All of that information and as much as they can absorb is hot right now and that’s why we are pushing that whole area primarily around ISG Insights.

The acquisition we did with the company called Experton which is based in Germany have these vendor what they call vendor benchmarks which are really country specific around the hot topics of social mobility, big data and so on. So all of those areas are quite in demand at the moment and that’s where the focus is Shane..

I appreciate it and then within your geography you mentioned some industry verticals that were particularly strong are there any of it where surprisingly week in the quarter and are those temporary or there verticals that you see headwinds going forward in the near term?.

So I would just say the soft is probably the financial services excluding insurance and insurances demand is quite good but I would call the kind of banking side of things are little bit soft.

There is a lot going on and as you all know in the banking environment but I would think of all the verticals we have that is one is probably the softest on the banking side, the insurance side the flip of that is true, it is very much in high demand and lot of it is around digital, it is around mobility moving stuff to mobile apps, automation of certain of their tasks that are pin to be routine processes that they can automate, reduce headcount, take the cost and move it into other areas but that’s where I would say it is the softest area..

Appreciate it; I will get back in the queue..

Yup, thanks Shane..

We'll hear next from Marco Rodriguez with Stonegate Capital Markets..

Good morning guys, thank you for taking my questions..

Good morning Marco..

I had to jump on the call little bit late, so if you have already my questions please let me know and I will fall back, I am flying but just wondering Mike can you kind provide a little bit of an update on the three last acquisitions you have made just kind of where they are in terms of performance expectations, integrations and things of that nature?.

Let me start with trace point, you will recall, we acquired close to the middle of this year, which is an organization change management OCM they call it in the markets business, that business in our view in 17 and 18 will sky rocket for us and the reason for it is with all of the technology change, the digital revolution, the automation that’s occurring there is a large element of change associated with those pretty dramatic changes and operating models of companies and one of the areas that we didn’t have enough strength then there are clients we are asking because of us, we would like first is kind of wrap around our services and that is how do you help us manage this change process because it can take 6,12,18,24 months to work their self through it.

So what we are seeing and we are introducing our colleagues out of the OCM, that what we call now the ISG OCM proactive around to our various client base and I think we are going to see some terrific things resonate out of the OCM business in 17 and 18.

So we are very, very pleased with Randy Geoghagan and his entire team from trace point, that unit will continue to grow in both headcount but also we expect to see several big deals come out of that in 17.

On the other acquisitions they are around research which was expert in Germany which I mentioned earlier we are planning in 2017 to take one of their products which they call vendor benchmark.

which are country-specific, who are the best SaaS providers that can provide X, Y, or Z in Germany or in Switzerland or in Austria and they do that work around there and think about it as a quadrant and then providers of all - supply lots of data and information about how well they're doing. We accessed the client base.

So, it gets us in front of a lot of different clients to assess how well these providers in these different areas are doing. So, that, also, we think, is going to be a big opportunity for us as we take that export, if you will, their product set starting first in the United States next year with the exports in product. So, we're very pleased.

It is early days. But we think both of them are adding to our capabilities.

We wanted to pace them a bit, so they were all stabilized if you will during the course of the year, integrate them in, which has been our pattern and then basically the first full year or year two is beginning to take their product set and export them into our global distribution channels..

Got it. So, that's helpful. Then I'm kind of shifting over here to the UK softness obviously with the Brexit has caused quite a bit of volatility over there.

Just wanted to - maybe you can provide a little bit more color on the overvalue themes, if you will based on the kind of the conversations you've had with clients over there? Is it just we have to stop spending? Is that they’re deferring spending? Just can you give us a sense as far as what they're - what they're kind of nervous about?.

Yeah, I would say the nervousness is the uncertainty about the impact on their businesses and I'll start with the BFSI sector over there, the Banking financial services sector is very sluggish. I think there's a lot of discussions going on about the implications of that for a number of the financial services institutions there.

So, they have us inside their institutions, but the pace, the number of people, the progress is very slow. It doesn't mean it can't turn on overnight, because we have people on the ground.

But right now the financial services sector, the retail segment, also a bit nervous about the implications of the macro kind of economy in Europe, but particularly in the UK, and the implications for them. The government side, I would call it steady. We actually expect the government side to expand as a result of Brexit.

We've not seen it yet, but we expect to have a few new departments created in the UK government, which certainly creates new opportunities.

So, I would say the commercial side from our perspective is what is the most dramatically impacted, the government side has been, I would call it, steady state, but we would expect the government over time to actually expand there in the commercial.

It will depend on the environment and how fast they will allow us to kind of turn back on those tickets..

Got you and can you talk a little bit about what you might be doing in the UK in that business, I mean, to kind of ride through the storm if you will? And I think it was asked a little bit earlier.

I mean, is there any sort of timing aspect that you guys are planning for that this might take a few quarters, a year, just any kind of sense there would be helpful?.

Yeah. I think this is short-term, Marco. I mean it's hard to tell. The reason I think is short-term is that it’s not that we are not inside the client. So, when I would say longer term is when the client doesn't want us there. It's a matter I think of how much and at what pace.

So, it could - we think it could happen through fourth quarter and the first quarter, but we're not clear whether that would even take that long.

We don't think it's a full-year issue, but I think a combination of the kind of the market uncertainty around banking, retail, maybe even some pharma, but I think the whole cost intensity should help us, because that's where we focus. There's also a number of kind of M&A trends going on in that market there.

We noticed that even WPP and Martin Sorrell is doing the whole Brexit transit [ph] if you will in that particular media segment as well. So, I don't think it’s long-term, hard to tell. A stick that can be turned on, which is why we're a little hesitant about what will the fourth quarter be with the U.K. So, we're all on the ground.

We're working it and we're going for the fences, but we need the clients to kind of cooperate with this. So we think it’s a very short-term issue there..

Got you and last quick question and I'll jump back in queue.

Can you provide, maybe of the European revenues, I mean, approximately how much is UK based?.

It’s under 8% of our total revenue..

Got you. Okay, guys. Thanks. I appreciate your time..

Thanks, Marco..

We’ll hear next from Sarkis Sherbetchyan with B.Riley and Company..

Yeah. Good morning and thanks for taking my question..

Yeah, good morning..

So, first I think on last quarter's earnings call commentary, you had anticipated the revenues from the recurring streams to accelerate here in the second half and into 2017.

Can you maybe provide us some color or flavor as to your expectations on that bucket?.

Yeah, good question. We continue to push our multi-year contracts, our subscription revenue, whenever we can. We were able to achieve about $16 million of those recurring revenues during the quarter, which is a high watermark for ISG. So, we're going to continue to look for avenues there.

We secured a long-term contract with the State of Louisiana, one of their major departments during the quarter as well, in addition to the research. And certainly our managed services contracts are continuing to unfold on some of the sales that we had earlier in the year. So, we will continue to strive.

Our objective has been to try to reach 35% of our overall revenue base within a three-year period. As you know, our initial goal was 25. We passed that a year early last year and now our next target is to get to a bit over a third of our revenues. So, we're marching in that direction.

If you think about our revenues for the quarter, it was roughly a little over 30% with recurring revenues. So, I think we're making good strides. We’ll take it as we can get it, but that's our objective. So, by the end of ‘18, we'd like to be at 35%. That's our target..

That's fair.

And also with respect to the digital business, is there a difference in the margin that you're able to earn on digital versus, say, some of the more traditional business that you’ve had?.

It depends on which pieces of the digital, but I would say it’s in line, maybe slightly better, which is - the mix this quarter was a little better. Our margins were better. When you think about the revenue that we had a combination of the recurring revenues, maybe a little tick up on - on digital revenues, but it's not that much different..

Understood and then finally from me. With respect to the guidance you provided at least on last quarter's call, you sounded pretty optimistic for 60 minutes. It sounds like at least the impact from Brexit has tempered things here.

Would you say that your guidance kind of heading or exiting the year is altered because of that and then also for fiscal ‘17 if you can just kind of give us a flavor for, if you still think you can grow 7% to 9% constant currency on the top line and then EBITDA to 15%? Thank you..

So, yeah, look, here is how we look at Q4. We're targeting approximately double-digit revenue growth in the Americas. We also are targeting near double-digit growth in Europe outside of the U.K. in the fourth quarter. I think for ISG overall based on how demand actually unfolds in the U.K.

in the next couple of months, we will either meet kind of the lower end of that range or possibly fall uptick below it, but it really is going to be somewhat dependent on how the U.K. evolves here over the next 60 days.

But overall aside from that, you'll see that we are quite optimistic double digits in the Americas, in or around that number for the rest of Europe.

And as we enter 2017, we think the goals that we had in ‘16, although we haven't provided guidance yet for ‘17 certainly we would expect that kind of range as we move into ‘17 when we give our guidance for there..

Thanks. That’s it from me..

Thank you..

We’ll hear now from Allen Klee of Sidoti..

Yes. Hi..

Good morning..

Should we be thinking - good morning - the tax rate should be kind of at a higher run rate going forward?.

Well, going forward, I mean, I would say for this year we were impacted by the mix of foreign sourced income as you realize the tax rate gets booked as a full-year forecast. So, when you adjust them into the full-year forecast, it falls within a quarter.

So, if you look at this year, probably the rate is probably around 47%, which is about the same as last year. If you adjust it for one of the - we had an acquisition related adjustment last year, which favorably impacted the tax rate if you pull that out, about 47, but we think overtime if we are going down slightly next couple of years..

Okay and then I don’t this is the right time of the year to ask this but in general for your research projects that are multi-year you try to renew them can you give us any sense of kind of the percent of renewal, I think that’s are up for renewal and if they do like in general the percent that they take versus they took the year before?.

So we don’t release all of our research metrics but let me leave the answer this way on, our research is expected to be double digit growth for the next few years, certainly will be this year, we certainly expect it to be 17 and 18 but that is a combination of wallet retention as well as client retention we continue to look to expand each client in terms of spend they have and we are able to do that primarily because portfolio of research products and services that we have for continuing to expand and we expect that to continue in the next year, I mentioned our plans to take one of the products from Experton, they call it a vendor benchmark, we may refer to it something else in the stage but we plan to export that over in the US, that provides yet another product for a lot of our research clients to do, we launched out what we call ISG Insights during the last part of Q2 and Q3 into the market place again around emerging technologies changes informing our client based what is happening in those areas.

So all in all I would say research we expect to be one of our top growers over the next couple of years and certainly double digit growth as we go into 17 as well as this year..

Thank you..

Thank you Allen..

And from Maxim Group we will hear form Brian Kinstlinger..

Hi, this is actually Josh Seide in for Brian, thanks for taking the questions..

Good morning Josh..

Good morning, can you give us a sense of what you expect will be the primary drivers of the rebound in demand in Q4 and maybe also give us sense of how much of that implied Q4 revenues now in backlog versus the amount the company will need to go in. Thank you..

First on the demand in Q3 frankly if you put the UK aside was quite good, I mean we had almost 9%. I think we had about 9% growth in Europe; we had 5% - 6% growth in the US.

I think I mentioned that based on the demand environment for Q4, we expect the Americas to deliver around double digit range, we expect Europe aside from the UK to be up and near the double digit range so I think the demand environment in Q3 continues, in Q4 maybe even intensify in Q4, the wild card for us is the UK, it is a bit unpredictable from our standpoint and I think we commented on the UK bit..

Understood, okay and then and also if currency rates stay where they are today, could you give us a sense of maybe what the headwind from currency would be to the top line for next year?.

For next year, I mean we expect only a small impact year-to-year obviously it is going to depend on as the currency movement even the last part of the year at this point there won't be a major year-to-year impact on currency..

Well said, that’s helpful, thank you..

And Gentleman at this time I’d like to turn the conference back to you all for any additional or closing remarks..

Thank you very much, let me just close by saying thank you to our more than 1,000 professionals around the world. It is really their passion and dedication that our clients allow our success.

Their ability to help our clients achieve operational excellence and navigate through this digital transformation is the reason we are able to deliver for our owners. And I also want thank all of you on the call for your continued support and confidence in our firm. Have a great day and don’t forget to vote..

And that will conclude today’s conference. Again thank you all for joining us..