Good day, and welcome to the Information Services Group 2018 Third Quarter Investor Conference Call. Today's conference is being recorded, and a replay will be available on ISG's website within 24 hours. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Barry Holt. Please go ahead sir..

Thank you, operator. Hello and good morning. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's 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 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, 2017, and any other relevant documents, including any amendments or supplements to these documents filed with the SEC.

You will be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-one.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, we will review our record third quarter results, brief you on our key operating and client highlights and update you on our full year forecast. Let me review our progress and some key metrics. Our go digital strategy is working.

Digital solutions continue to be a growth engine for the firm representing more than 40% of total revenues. We're responding to client demand with continued investments in this area including building our ISG automation business and recently launching our ISG Blockchain Now solution.

Moving workloads to the cloud and automating business processes are two of the most important digital transformation areas for our clients. That's reflected in the strong growth of our automation services. ISG automation is on track to produce run rate revenues of $25 million in 2018 up significantly from our startup phase in late 2016.

We recently formed a partnership with UiPath the third largest RPA software provider. This is an addition to the partnerships we already enjoy with the number one and number two providers, Automation Anywhere and Blue Prism.

Strong demand for automation services and software is reflected in the market valuations of these companies, which I will discuss in a moment. Our recurring revenues are on a run rate to reach nearly $80 million this year on the way to our goal of $100 million within three years.

This progress comes despite a significant decline in our US public sector multi-year contracts this year. With a robust European demand environment, our revenues grew by more than 20% with particularly strong growth in Germany, the Nordics and France.

Europe's growth as a services accelerated indicating stronger demand for our digital transformation services. In terms of industries, two of our biggest growth sectors are insurance up 30% and manufacturing up 15%.

We used our cash to reduce our debt by $9 million in the quarter, $16 million in the first nine months and we expect about $18 million for the full year. Our strengthening financial position should put us in line to resume more substantial share repurchases following the announcement of our year-end results in March.

Our GAAP earnings per share of $0.08 was up $0.05 over the prior year and adjusted earnings per share of $0.14 was up 40%. We are pleased with our recent margin acceleration. Out EBITDA margin for the quarter was 13% the fourth time in the last five quarters we have reached this level or higher.

Our third quarter revenues at $68 million were even with the prior year. Revenue growth in the Americas was impacted by a continued softness in our public sector market and a number of timing delays and network engagements being completed. We expect to see much of this network revenue in the fourth quarter.

Our network business generates above average per margins. To remind you this business normally includes a gain sharing component that flows through after carrier contracts are signed. So as we've discussed in the past due to the nature of the work revenues can be at times a bit uneven. The tradeoff however is much stronger margins.

ISG served 430 clients during the quarter, the seventh time in the past eight quarters in which the number of clients has exceeded 400. Through the first nine months we served almost 600 clients. Our business overall continued to have good growth potential near term based both on our building pipeline and industry expansion.

The growth of the sourcing industry overall with an emphasis on digital business and customer experience rather than only cost savings is good news for ISG as we enter 2019.

We expect $80 billion of infrastructure contracts to come due by the end of 2020 and we expect nearly half of that work to move to the cloud and be in the center of digital transformation services. Clearly our decision to move quickly into automation in 2017 is beginning to pay dividends.

Automation is our fastest growing digital business and clients are joining the journey in increasing numbers. Valuations continue to rise in this sector. In September UiPath the partner we just signed with, announced the completion of a Series C funding which raised $225 million at a valuation of $3 billion up from 1.1 billion valuation in March.

Automation Anywhere another RPA software partner firm raised 250 million in July, putting their valued at $1.8 billion and Blue Prism, publicly traded in the UK has a market cap in excess of 1.5 billion on trailing 12 months revenue of around 50 million. We have partnerships with all three of these software providers.

The automation business, the ISG automation business with a combination of services and recurring software subscriptions is becoming increasingly more valuable for our firm and our shareholders. ISG's automation is on pace to deliver run rate revenues of 25 million in 2018 driven in part by software subscriptions.

These recurring software revenues for ISG have now increased to nearly 30% of our automation revenue since our startup phase in late 2016. A recent study from ISG shows that many companies have been able to automate a few processes successfully, but are struggling with enterprise wide adoption, what we call at ISG Bot 3.0.

Many organizations hit the RPA wall after automating 10 to 20 processes. They have trouble scaling automation across the enterprise. Our value lies in supporting clients by creating an automation roadmap and a dedicated RPA Center of Excellence to govern their automation journey.

As our clients adopt a range of digital technologies, they must also consider upgrading their networks to support the increasing digitization of their organizations. In September we held our first ever ISG Future Networks Summit in Chicago.

Our experts addressed the key issues for moving to the network of the future including using software defined networks to bring the network into the cloud. One of the most talked about and perhaps least understood digital technologies is Blockchain. Last month we announced the launch of ISG Blockchain Now.

This new advisory and sourcing solution enables enter prize clients to improve the efficiency, the accuracy and security of their business processes through distributed ledger technology. Beyond cryptocurrency, Blockchain is being used in such areas as supply chain management, logistics, smart contracts and more.

We are currently working with the global building systems manufacture on a proof of concept for using Blockchain to streamline and coordinate the supply chain interactions between the company, service technicians and building owners to keep the installed base of equipment running smoothly.

We expect our block chain business to evolve over time, but as with automation ISG is entering the arena now to create use cases with clients in preparation for when this technology becomes even more main stream over the next few years.

Now turning to our regions, in Europe we reported revenues of $24 million up 22% versus the prior year and in line with our record quarterly revenues in Q2. Our performance this quarter also is a reversal of historical trends. As you may recall Europe's third quarter is typically slower in Q2 due to client vacations during the summer months.

However, especially strong demand for services reversed this trend with over 20% growth in Germany, France and the Nordics. Overall we saw good growth during the third quarter in our technology, manufacturing, energy and life sciences verticals.

Key client engagements in Europe in the third quarter included Volkswagen, BASF, Bayer, Fresenius, Ikano Bank and BMW.

Among our significant wins in Europe during the quarter, ISG won a $1 million plus piece of business with the UK based aircraft engine and power systems manufacture for a major developed transformation program aimed at creating a complete end-to-end product oriented operating model.

In the Nordics we won another $1 million digital transformation engagement with the [indiscernible] manufacturer supporting our clients to strategize design and manage the building of a digital landing platform for all future software products under their digital product family.

ISG has also been selected to support the development of a central IT shared services unit for a very large European insurance company. ISG will program manage the data center transition and transformation, finalize the IT information library and project and project manage the IT cost saving initiative.

In the Americas revenues were $39 million down 7% principally due to the continued softness in the US public sector and the timing of revenues in our network service business I mentioned earlier. Key client engagements in the quarter included Exelon, Caterpillar, Humana, Entergy, Bell Canada and AIG.

Turning to a few of our notable client wins in the Americas. We recently signed a $1 million managed services agreement with a major entertainment company, extending a successful relationship that began with an organizational change management or OCM engagement more than a year ago.

ISG also has been selected for a $1million strategic sourcing engagement by a major multi-state US utility. Our engagement covering applications, workplace services and infrastructure supports a new demand management program created as part of a regenerating of the client's technology ecosystem.

ISG also won a $1 million engagement with a large global insurance company based in the United States. This engagement includes workplace services transformation including our ISG future source transaction services, transition and organizational change management.

Shifting to Asia Pacific, our third quarter revenues of 5.4 million were down 1.7 due to slowness in the Australian public sector vertical which accounted for a majority of the shortfall.

Treasurer Scott Morrison has become Australia's sixth prime minister in 11 years after Malcolm Turnbull lost control of the ruling Liberal Party, such political turmoil impacts pending in the federal sector with ISG. Key clients in the region included Qantas, The Department of Home Affairs, Toll Holdings, Insurance Australia Group and Westpac.

During the quarter ISG was selected by one of the world's largest metals and mining corporations in the region to develop a combined global human resources and payroll strategy for that company.

Now, turning to our guidance, we expect the best quarter in our history in Q4 both in terms of revenue and adjusted EBITDA, based on continuing demand for our digital services and the addition of revenues from our delayed networking engagements all of which are creating a more profitable revenue mix for ISG.

As a result we remain confident we will achieve our full year adjusted EBITDA guidance and we are updating our full year revenue guidance to 280 million to 285 million to reflect the softness we are experiencing in the public sector markets.

Finally, your ISG management team recently returned from its annual strategy offsite meeting held over a weekend in late October. We reaffirmed our strategy direction around all things digital, including the continued expansion of our automation business as well as our continued focus on recurring revenue growth.

We are targeting digital revenues for our firm to exceed 50% within 18 months and recurring revenues to reach $100 million by the end of 2020. 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 were $68 million compared with $68.3 in the prior year, flat in constant currency and a decrease of 1% on a reported basis. Currency negatively impacted reported revenues by 1% or $800,000.

Revenues were $24 million in Europe up 22% from the same period in 2017, 38.5 million in the Americas, which was down 7% and 5.4 million in Asia Pacific, down 1.7 million from the prior year. Third quarter 2018 adjusted EBITDA was 8.8 million versus 9.6 million in the prior year.

Our net income for the quarter of $4 million was up 180% over the 1.4 million of net income reported in the prior year. Our reported fully diluted earnings per share were $0.08 compared with a fully diluted income per share of $0.03 for the same period in 2015.

Included in the net income for the third quarter of 2018 was the reversal of $3.6 million in tax accruals of which $900,000 was offset by a charge to SG&A for prior acquisitions.

Adjusted net income for the third quarter was $6.6 million or $0.14 per share on a diluted basis up more than 40% compared with the adjusted net income of 4.7 million or $0.10 per share on a diluted basis in the prior year's third quarter. Utilization for the quarter was 66%. Quarter end headcount was 1,344 versus 1,371 in June.

Our balance sheet continues to have the strength and flexibility to support our business over the long- term. Net cash provided by operations for the first nine months was 11.2 million versus 3.3 million last year. Through the first nine months we invested $3.6 million in capital expenditures. We paid $15.6 million in debt.

We purchased 2.9 million in shares and paid $1.2 million in contingent consideration associated with prior acquisitions. On the balance sheet, we ended the quarter with $13.5 million in cash and $101.2 million of debt.

As Mike indicated earlier, our improved financial position puts us in line to resume more substantial share repurchases following the announcement of our year-end results in March. Our average borrowing rate for the quarter was 5.3% and we had 45.2 million shares outstanding as of October 26.

Mike will now share concluding remarks before we go to Q&A..

Thank you, David. Overall we are pleased with our operating momentum through the first nine months and remain optimistic about the full year and our longer term future. To summarize, in Q3 we delivered 68 million in revenues and EBITDA of almost $9 million.

That translated into an EBITDA margin of 13% continuing our acceleration of EBITDA margins over the past two years. Digital services continues to be a strong growth engine representing over 40% of our revenues for the quarter.

And our ISG automation business revenues are expanding with recurring software revenues and a full year run rate of $25 million. Our year-to-date recurring revenues reached nearly $60 million on the way to our three year target of$100 million. Our GAAP earnings per share was up $0.05 versus the prior year and our adjusted EPS up 40%.

We generated $11 million in cash versus 3 million at this time last year. We repaid 16 million of debt during the first nine months and anticipate $18 million for the full year.

And with the shifted network revenues into the fourth quarter and the continued growth of our digital services, we expect Q4 to be the best quarter in our history both in terms of revenue and adjusted EBITDA.

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. Overall, our foundation remains solid.

Recurring revenues, digital including automation services, adhesive [ph] lift of blue chip clients and a talented global team of 1,300 professionals on the ground in the middle of the digital revolution. Thanks very much for calling in this morning and let me turn the session over to the operator for any questions..

[Operator Instructions] We'll take our first question from Sarkis Sherbetchyan with B. Riley FBR..

Good morning and thanks for taking my question here..

Good morning, Sarkis..

So just to ask a quick one on the top line guidance, if I take the midpoint of the top line range just communicated. It represents about call it 5% annual growth and then I suppose if you kind of think about the growth algorithm of the business clearly many different layers here.

Can just remind us what you expect the consolidated growth plan to be for the business? Is it still in the mid single digit range, do you expect some acceleration perhaps with the growing recurring revenues bucket, just some color there please?.

Yes, we are targeting a high single digit growth on organic basis and we would be there this year but not for the public sector so our commercial business is quite strong, so yes we would expect to see that in 2019..

Understood and as you ramped the recurring revenue component of the business, it seems like automation run rates growing nicely, would you expect the margin profile to accelerate kind of as we look at 2019 and beyond, just kind of any thoughts around the margin profile from where we are today to where it could go?.

Yes, we would like to see within three years through our planning process. We think we can get to 15% EBITDA margins. We've got good trajectory.

A couple of years ago we were at 9 to 10, now we're kind of 12 going to 13 and I would hope that that trajectory continues, but we think we have at least 200 basis points of improvement over the three year period that's including our investments that we make along the way..

Got it and would there be anything that kind of comes about where you'd either accelerate the investments or kind of stay on the current trajectory that you're on, just kind of help us understand the opportunities you see to accelerate some and/or kind of pull back?.

So I think we are in a pretty good steady state here with our recurring revenue investments with our digital investments, our automation. Clearly if artificial intelligence moves at a faster pace than we might expect them we would probably accelerate in that area.

We like the Blockchain investments that we're making now kind of like what we did in 2016 and - on digital where we've got now 40% going to 50% of our revenue. Blockchain can help drive that maybe a little bit quicker if it takes hold faster.

So there are some accelerators around I would say digital transformation and technologies that are disrupting many industry segments, which when there is disruption whether in technology or in business models those are all good news for ISG..

That's all for me. I'll hop back and thank you..

Okay, Sarkis, thank you..

We'll take our next question from Vincent Colicchio with Barrington Research..

Yeah, Mike, I'd like to ask you about the network measured business you had several delays here. Do you see that as a growth business going forward? And what's causing this last round of delays..

Yeah. So - good morning, Vince. Our network business is growing, I think when we acquired Aldridge two years ago, I mentioned at the time that we have this new jewel called network and from an ISG standpoint it was a white space and it's normally about the third largest spend inside large corporations.

We now have we believe the world's largest database as it relates to network. The business is good, it's strong but it's uneven and by that I mean that we have a component of that because that's what the market dictates is not only our fee base, but we also put fees at risk on a success basis or a gain share basis.

Those gain shares do not get recorded until the carrier physically signed the contract for us, so when those get signed do not fit necessarily into a nice quarterly package, but overall the network business is a growth engine for us and it is above average firm margins.

So it's a very good business and we are looking to accelerate that business frankly in 2019 because of the success that we've had, but it does bring a little unevenness in quarters.

You may recall, we had stuff in Q1 that moved to Q2 and these things just happen with this business, but overall on a full year basis it's a great little growth business with higher than average firm margins..

I could see that the European business was - had a healthy quarter.

I'm curious is there any indication - signs whatever from your clients in the UK that Brexit may have an impact on their decision making?.

So good question, so overall Europe very strong for the quarter really year-to-date, very strong double digit growing there, what we are seeing in the UK is that our digital - our automation business in particular is being consumed by the retail, by the financial institutions and their perspective is look because of some Brexit disruption that may occur, automation is going to go with them no matter what happens from that standpoint.

So I think I think we believe that it's going to continue disrupt I think both the UK and Europe what we call the applications and services market, but I think it will be mostly felt of course in the financial institutions and probably in healthcare and life sciences.

But for us - we think it may be helping us because they're looking for shorter term solutions while this disruption occurs. So yes, there is going to be some disruption, but unlike 2016 when the shock of Brexit first hit and they stopped spending altogether.

You may recall, we made the decision to keep all of our people and resource and expense there in anticipation that it would benefit us as the Brexit thing unfolded and we are seeing that with the results that we have through Europe and in the UK.

So yes, there is going to be some disruption on ADM services with clients, but to our view that could serve us to our advantage and it has this year and we expect it to again next year..

And then my last question, any thoughts on where we may see an improvement in the US public sector?.

So I think the issue with the public sector is we've been seeing the uncertainty and slowness in decisions across the market for this year and including the quarter especially during the election cycle where there was over, I think there was over 20 states electing governors.

So our portfolio include Michigan and Illinois and Arizona and Texas and Florida, Kansas, all of which had governors coming up for election.

So our hope is that 2019 we will see a rebound in the public sector, we haven't done our complete planning for next year, but now that the midterm cycle is behind us, our hope is that eliminates a lot of uncertainty. The governors whoever they may be will be in and decisioning will go back to more normal state '19 maybe the year..

Okay, that's it for me. Thank you..

Okay. Thanks, Vince..

We'll take our next question from Marco Rodriguez with Stonegate Capital Markets..

Good morning guys. Thank you for taking my questions..

Good morning..

Good morning.

I was wondering if - can you quantify the revenues that were delayed in the networks for network services?.

Yeah, it's around $2 million that got - that will shift from the third quarter into the fourth quarter..

Got it and then kind of following up on the prior question here on the US public sector, I just kind of want to better understand in fiscal '19, so is that business for you more aligned with the states rather than federal government type spending?.

Yes, in fact all of our - Marco all of our business is either state or local no federal. So our business is aligned directly with the states or large local municipalities like Jacksonville or Fort Worth, Texas, but we do not operate in the federal sector so it is all state driven..

Got you, understood, then shifting here in terms of the growth profile that you had answered to a prior question, one of the first questions asked on a upper single digit kind of growth rate. When looking into fiscal '19 it kind of sounds like you're expecting maybe a more normalized Americas growth rate.

I was wondering maybe you could talk a little bit about your expectations for Europe and then also Asia Pac..

So I'll blow around the horn then, so yes, I think the US growth rate will have somewhat dependency on it. The public service sector can rebound a bit; if that does that will keep us up in that high single digit in the US business.

Europe, it's a little early to call, but we would expect Europe to probably continue on to a double digit level next year based on the digital work that's going on over there despite the Brexit noise. And then on Asia Pacific, it's going to depend on the federal spending in Canberra in Australia.

It is a is a - is a chunk of our business it's been quite disruptive with all the changes with governments down there and the growth rate there I'd be hard pressed to give you one at the moment until we understand how that's going to play out for next year, Marco..

Understood..

The only other thing I would add maybe is on automation, which is also helping us in Europe. We did launch into Germany with our ISG automation business earlier this year and we should begin to see that as part of our growth in 2019 as well that helps our European business..

Got you and I'm not sure if I caught all of this I apologize. You had mentioned something about clients with the automation moving to Bot 3.0 and some of them having I guess troubles with scaling that business.

Can you maybe provide a little more color there and is this an issue of the technologies not available for them to scale past certain points or are kind of what's going around that sort of a statement if you will..

Yeah, so the way we view the automation business is we think approximately our research which show that approximately 40% of clients in our kind of portfolio have begun the process of robotics and the begun might be a proof of concept, it might be a few processes that have been automated, might be five, might be 10 for the most part and there are few exceptions.

For the most part and most - all of those organizations have not scaled to any degree. Scaling meaning, taking what may be a handful or a dozen processes and making them into a 50 or 100, 200, 300 process changes. And the rationale for that is just it's still early stage it's still on a first inning, second inning for most clients.

Financial services just like outsourcing years ago, they are faster to adopt and adapt here, so we are seeing some of our major bank clients beginning to scale part of the robotics. But if you chase down almost every other industry vertical is still very early stages, so the - it's more about the pace, the pace of change.

You're talking about saying, hey look, I'm going to take my claims processing or my credit card processing that I've always done X way and I'm now going to automate it and have a digital labor handle that. That's a major transformation for a company, so they tend to start small and then they will scale and we have not seen the scaling happen.

But when we do then this automation business will continue we think to accelerate. So it's a very good business for us as you will know we started it and we're now up to kind of the 25, going to be in the $25 million range.

So that's what we see going and that's why we think that the whole RPA future is so bright that we're still in such early stages that scaling has not occurred yet..

Thanks a lot guys. I appreciate your time..

Okay, Marco. Thank you..

We'll take our next question from Joe Gomez with Noble Capital..

Good morning..

Hey, good morning..

Just on the debt level you guys have done a great job of paying down debt this year.

If you could just remind us what debt level are you guys trying to get down to be comfortable with?.

Well, we're comfortable at the current level. We leveraged up slightly to do the Altridge deal. As you commented we've been successful as we noted paying $16 million of debt down through three quarters that included a $7 million payment of the Altridge seller down [ph]. We would be targeting around 2.5 times gross debt to EBITDA level.

Again we're comfortable at the current level, but we would see driving down to that level..

Okay and then on - just on the on the buyback, if you could just remind us what amounts you have left on that maybe if you were to start and what are kind of the metrics you're looking at to decide whether you should be by buying back more..

Yeah. We have authorization of $12 billion outstanding at the current time. We evaluate our uses of cash. Our main uses of cash are to pay down debt.

We continue to look for acquisitions that - bolt on acquisitions that would enhance our service offering and then share buybacks is the third component of our use of cash, so we evaluate within those three items..

Okay, great. Thank you very much..

Thanks, Marco..

It appears there are no further questions at this time..

Okay, let me close by saying thank you to our 1,300 professionals around the world. It is their ability to help our clients achieve operational excellence and faster growth especially through digital transformation and that continues to be the reason for our strong performance.

Thanks to all of you on the call for your continued support and confidence in our firm and have a great day..

This concludes today's call. Thank you for your participation. You may now disconnect..