Good day, and welcome to the Information Services Group's Third Quarter 2019 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 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 statements contained in our Form 8-K that was filed last night with the SEC in the risk factor 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, 2018 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 the 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 statements 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 a greater transparency of key measures we 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 and most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night 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. ISG had a strong third quarter. Revenues of $68 million were driven by the Americas, up 5%, the region's strongest growth since 2017. EBITDA levels were a record $10.3 million, up 17% from a year ago and 28% sequentially. This is the first quarter ever that ISG has exceeded $10 million of EBITDA.

Our EBITDA margin was strong at 15% our best performance this decade.

Our digital business, which tends to have higher margins continues to perform well representing more than 45% of our firm revenues.In our quest for higher margins, we continue to focus on creating more profitable products and services including the development of our ISG platform anchored by GovernX, our Software-as-a-Service offering for managed services.

And we generated strong cash flow in the quarter improving our cash balance by 36% over Q2. Globally, we saw a revenue growth in our energy, manufacturing and insurance verticals and growth in our research, automation, organizational change management and network advisory service lines.

We have now served 614 clients through the first nine months including more than 100 brand-new clients.Now let me update you -- of our growth initiatives. First blockchain.

During Q3, we announced the launch of ISG blockchain exchange, a comprehensive research database and industry collaboration platform for enterprises looking to adopt or expand their use of distributed ledger technology.

Our expertise in blockchain was recognized recently, when the Head of our ISG blockchain business was invited to appear before the U.S.

Food and Drug Administration to advocate the use of blockchain for track and trace solutions to improve food safety.Blockchain is part of our higher-margin Digital Solutions that represent more than 45% of our firm revenues. Second, transformation change management.

During the quarter, we were named the 2019 organizational change management or OCM delivery partner of the year by Infor, a leading multibillion-dollar tech provider of industry-specific cloud applications.

We are proud of the transformational change management work we do with our clients to prepare them for the digital revolution occurring in their business environments today.Our OCM business is projected to grow by more than 30% this year and has doubled in size since our acquisition of OCM from TracePoint in 2016.

We continue to develop and invest in our ISG platform, which will help us drive recurring revenues to $100 million. Our anchor product is GovernX, the SaaS platform we have rolled out as part of our managed services offering. During the quarter, we secured new GovernX clients, including an international cruise line and a large fast-food company.

This quarter alone, we added 6,000 contract documents and $4 billion of total contract value under management bringing our total contracts under management for clients to $55 billion.

Including GovernX, our overall recurring revenue this quarter was $18 million.Turning to our regions, the Americas delivered its largest revenue growth since 2017 with revenues up 5% versus the prior year.

During the quarter, the region saw good industry growth in our insurance and energy and technology verticals and in our HR tech network and OCM service lines. We are beginning to see renewed demand in our U.S. public sector business, which we expect will pick up next year.

Key client engagements in the quarter include United Technologies, Messer Industries, Entergy USAA and Caesars Entertainment.One of our Bitcoin success stories is the work we are doing for a major U.S.-based health insurance company.

During the quarter, we continued to expand our relationship with this client, adding a major new digital transformation engagement worth a $1 million. This follows on from a digital strategy project worth more than $800,000. Over the past two years, this client has generated approximately $5 million in revenue for ISG.

ISG has also been selected to provide multi-tower benchmarking to a Canadian utility company. Our industry expertise and utilities play a big role in this win.Turning to Europe, our revenues declined 2% over the prior year. Despite Brexit noise, our U.K. business performed well with revenues up 6% versus the prior year and up 20% sequentially.

Germany's revenues were up 7% sequentially although down 3% versus the prior year in a tougher macro environment.

Overall, we are seeing growing adoption of digital in Europe which is in trailing other regions due to data security and privacy concerns.In our industry segments, we saw good growth in our energy and manufacturing industry verticals and in our automation and sourcing service lines.

Key client engagements in Europe in the third quarter included VW, Bayer, Allianz, Munich Reinsurance and BMW.

A lot of our client wins this quarter came when we signed a major multinational networking and telecommunication companies to support their large full-scale IT sourcing transaction.Using the ISG FutureSource methodology, ISG will run an Agile competitive process with eight global suppliers covering infrastructure and applications end-user computing and service integration.

The total deal size for the providers is likely to approach $1 billion over five years, one of the largest in Europe in some time.In Asia Pacific, our revenues were up 25% sequentially and 5% versus the prior year. This region has turn the corners as the government sector heats up.

Key clients in the quarter included the Australian Department of Defence, the Australian Taxation Office, EnergyAustralia and Suncorp.

The Australian Department of Defence awarded ISG a new 12-month contract to provide IT advisory work around sourcing transactions and quality assurance with an option to extend for an additional 12 months beyond September 2020.Our ISG Automation business continues to perform. We expect to exceed $30 million in revenues during 2020.

This is a valuable asset that's not reflected in today's stock price. We continue to believe that ISG shares are undervalued.

In consideration of this our Board recently approved increasing our share repurchase authorization from $9.2 million to $20 million.The timing and amount of any repurchases will be determined based on our valuation of market conditions, capital allocation alternatives and other factors.

The new authorization gives us the ability to increase our share repurchases consistent with the terms of our credit agreement.Turning to fourth quarter guidance, we continue to monitor the overall global macroeconomic environment, especially in Europe for any impact it may have on our performance in the near term.

At present we are projecting Q4 revenues in the range of $67 million to $69 million and adjusted EBITDA of at least $10 million, based on increasing demand for our higher-margin Digital Solutions.

Together with our record EBITDA quarter in Q3, this means we will reach second half EBITDA of more than $20 million a record six months for ISG.So with that let me turn the call over to David Berger who will summarize our financial results..

Thanks, Mike, and good morning, everyone. Revenues for the third quarter were $68.1 million compared with $68 million in the prior year, which is an increase of 2% in constant currency and flat on a reported basis. Revenues were $40.3 million in the Americas, up 5% versus the prior year on a reported basis.

$22.6 million in Europe, down 2% in constant currency and down 6% on a reported basis and $5.3 million in Asia Pacific, up 5% in constant currency and down 2% on a reported basis.Currency negatively impacted reported revenues by $1.3 million or 2% versus the prior year.

Third quarter 2019 adjusted EBITDA reached a quarterly record of $10.3 million, up 17% compared with 8.1 -- $8.8 million in last year's third quarter.We reported third quarter operating income of $5.7 million, which was up $2.3 million or 68% compared with operating income of $3.4 million in the prior year.

Net income was $1.7 million compared with net income of $4 million last year.

Adjusted net income for the third quarter was $4.4 million compared with adjusted net income of $6.6 million in the prior year.Included in net income and adjusted net income for the 2018 third quarter was the reversal of $3.6 million in tax accruals of which $900,000 was offset by a charge to SG&A associated with prior acquisition.ISG delivered a good EPS quarter.

Excluding the previously mentioned tax reversals in 2018, reported fully diluted earnings per share was $0.04 versus $0.02 last year and adjusted fully diluted earnings per share was $0.09 versus $0.08 last year.Including the impact of the tax reversal reported fully diluted earnings per share in 2018 was $0.08 and adjusted fully diluted earnings per share was $0.14.

Consultant utilization for the quarter was 68%, which was up 200 basis points versus the prior year. Quarter end headcount was 1287, essentially flat with last quarter.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 $5.8 million.

On the balance sheet we ended the quarter with $14.2 million of cash, up 36% and our total debt outstanding was $96.4 million. We have repurchased $3 million of stock through September 2019.

Our average borrowing rate for the quarter was 5.6% and we had 47.5 million shares outstanding as of October 31.Mike will now share concluding remarks before we go to Q&A..

Thank you, David. To summarize, we are building profitable growth momentum in our business. We generated our best quarterly EBITDA ever of more than $10 million with margins at 15%.

Our Go Digital strategy is working with digital revenues more than 45% of our total and our Americas business delivered its best quarterly revenue growth since 2017.We generated solid cash flow in the quarter with our cash balance up 36% from Q2 and our Board increased the size of our share repurchase program. And we expect to close the year strong.

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.Thanks very much for calling in this morning. And now let me turn the session over to the operator for questions..

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions. [Operator Instructions] Our first question will come from Marco Rodriguez, Stonegate Capital Markets..

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

Good morning, Marco..

Hey, I was wondering if maybe you could talk a little bit more about the government work that you are seeing some strength in here on the U.S. side. Just kind of give us your thoughts as we kind of head into fiscal 2020, obviously an election year at the federal level.

Just kind of how are you thinking through that? And what is sort of driving the resurgence that you're seeing at least during the last couple of quarters at the U.S.

level?.

Yes, thanks. So look I think as we talked about earlier in the year with all of the Governor either changes or reelections that occurred.

That has now began to settle in and especially I would say in the Republican states, there has been a loosening up of activity levels around digitization of a lot of the state and large I'll call it large local government sectors.

So there are more RFPs on the market that allows us to complete more and now that we're beginning to get into certain states, once you're in you're able to be able to look to expand and extend some of that work that goes on there.So we believe as we move into 2020 that our public sector business, I'm speaking of the U.S.

for the moment our public sector business will contribute to grow where it did not contribute during 2019 and in fact during the first part of the year it was down as it was last year.So we see a nice kind of movement going there. I think the federal elections will not have a lot of impact on our public sector U.S.

state business during the course of 2020. We kind of had our pain if you will with all the governor changes. So we feel pretty good about where that looks like, the pipeline looks strong and we look to see that as a contributing member of our growth for 2020 Marco..

Got it. Very helpful. And maybe if you can talk a little bit more on the recurring revenue side of the business here. You called out the GovernX as part of the managed services. If you could just maybe talk a little bit about the marketing push, the sales initiative that may or may not have changed.

Just kind of how you're going to market with those particular services and the feedback you're receiving from potential customers?.

Yes. So we have been investing into what we call the ISG platform which we've discussed here on a few calls. That platform will enable us to build products of it kind of in a much more efficient way. Our first big product in the market is called GovernX.It's a SaaS product.

It helps enterprises from a software standpoint, understand a lot of the processes with large supplier contracts. Our move to -- move from services to leading with a SaaS product like GovernX in the world of automation and digital. We felt this was a good move to make.

So we made that transition during 2019 and we are now beginning to see good traction with that product. We also launched a product called InformX, which is also a SaaS product.

This is a product that clients can put on their systems if you will and load in their cost around technology and then compare it to our database of like companies, industries, peers et cetera all masked.They can do what-if scenarios if I move the $100 million out of applications and moved it into another area how would that stack up relative to my peer group et cetera.

So between GovernX and InformX we have benchmarking as-a-service. We are looking at a potential new product in the whole sourcing area that we'll consider for 2020.

So the platform will help us drive toward the $100 million of recurring revenue.Our overall recurring revenue will hurt a bit this year because our multiyear contracts in the public sector there's just weren't very many of them.

But as we move to 2020 on your question on the government contracts those all tend to be multiyear contracts and those will help our recurring revenue in 2020 as well..

Got it.

And are you seeing customers pick-up like InformX or GovernX these IT platform products as solo purchases? Or they integrate it to a much larger spend with you guys?.

So they normally are a larger spend. So GovernX with always -- almost every instance also has a services dimension to it. So they would have the software on-premise, they would have it -- it's in the cloud of course but they would have it available to them on the premises at clients like Marriott or McDonald's, et cetera.

And then we would have a set of services around that and then those agreements are multiyear agreements with those enterprises.So we have a software stream and we have a services stream.

So we tend to do the software packages with services and then the InformX case it's with our benchmarking and assessment services that tends to lead to downstream, workaround strategy than around execution, et cetera.

So those are the reasons we actually have the products not only for its recurring nature, but also to drive downstream business and in almost all cases it's a combination of software plus services..

Very helpful. And then just in terms of capital allocation priorities. I mean you guys mentioned you're going to be increasing the share buyback. It doesn't look like any shares were purchased this particular quarter. And you also in your prepared remarks talked about limits to your ability to make stock repurchases based on your credit agreements.

If maybe you can kind of walk us through the thought process for capital allocation for say the next couple of 12 -- next 12 months or so in terms of where you're seeing the priorities? And then if you could also possibly address the acquisition landscape?.

Okay, so let me start and then I'll have David talk about the repurchase strategy. We have three areas clearly, we have the debt, we have buyback and we have strategic acquisitions. Let me cover all three.

So on the acquisition front we are continuing to look assets that could help us primarily around our digital business and/or our recurring revenue stream business. So think research, think digital, think automation business.

That's the complete focus we have and we continue to have a number of discussions and dialogues in the marketplace to see if there's something that is out there that make sense both from a value standpoint and that could accelerate growth in certain areas. On the -- so that's the acquisition side of things.

On the debt repayment David do you want to just comment on that?.

Yes. I mean, we obviously continue to focus to pay down debt. We're down from where we were in the prior year. Our debt balance last year September we were $101 million we down to a $96 million and it continues to remain a priority of the business to drive down the overall debt balance.

In terms of the repurchase with the increase in the repurchase authorization we plan to prepare -- to utilize some of our cash that we generate particularly you notice we had good cash generation in the third quarter. We expect to have a good cash generation in the fourth quarter.

So we plan to increase our buybacks once we have clearance from our banks to be able to do that..

Got it. Thanks a lot guys. Appreciate your time..

Thanks, Marco..

Thank you very much. Our next question will come from Vincent Colicchio, Barrington Research..

Yes. Mike last quarter you had a project delay with a large-order client and some other delays.

Did they start to come back what are the outlook --0 what's the outlook there?.

Yes. Good morning, Vince, yes, you recall that we had our largest -- one of our largest clients -- automotive clients we had to bite a bullet here and it does effect about $1 million-plus each quarter and that will continue through the fourth quarter.

As we move to 2020 that particular client we believe will have stabilized and the run rate that we have for 2020 will be -- have then reset with the reduction of roughly $4 million or so during 2020. And we expect them to be if not our largest one of our top few if you will top of the house large client.

So as we move to 2020 from a growth standpoint that will not be a drag if you will on growth as it was in 2019..

And the U.K was the growth broad-based? Or was it one or two large deals in -- is the growth there sustainable?.

Yes. So the growth in the U.K. is around digital and automation at the moment with all the noise around Brexit. The tendency is to do a bit of shorter-term work with a lot of the enterprises not the longer-term work. But that also happens to be a little higher-margin business for us. So it helps us. So you saw the growth both sequentially and overall.

We do expect the UK to grow again in the fourth quarter and our expectation is once they can work their way through the Brexit thing that opens up the opportunity for even larger transformational work again.

So we're cautious with the UK, but the UK looks like it's performed pretty good for us certainly in Q3 and Q4 looks just as optimistic as Q3 did..

Okay. Nice quarter. Thank you..

Thanks very much, Vince..

Thank you very much. [Operator Instructions] Our next question will come from Marc Riddick, Sidoti..

Hi. Good morning..

Hey, good morning, Marc..

I wanted to, sort of, follow-up that thread -- moving over to Asia-Pac and I wanted to touch on one of things you mentioned this far as a pick-up of government activity and I wanted to get a sense of if you could give a sense of whether or not that was something that was stimulated by maybe somewhat using potential tensions? Or was there any particular specific driver that was behind that and if you think that might have legs going forward?.

Yes. So I think Marc our view in the Asia Pacific region is that the government work is there we have opportunities to really grow that business over there because it represents a nice chunk of the overall size of the market.

I think it's opened up because there's been such instability regarding the government leadership in Australia literally over the last few years they've been through a few as you well know a few Prime Ministers.

That seems to have now settled down and once that has settled down, we now see an opening up of workloads that were not there before with all of the uncertainty and the changes that kept occurring at the federal level in AustraliaSo we saw some opening up, we saw the Department of Taxation -- Australian Department of taxation.

We saw a few other departments and some contracts that were issued for us. And we actually are optimistic about the government sector as we move into 2020.

So unless there is other -- some type of other change relative to the government which there has been a lot of over the last few years, we think a bit of stability helps take out uncertainty and that opens up opportunities for ISG.

So we're cautious, but we believe as we move to 2020 that should be a good opportunity for us and our Asia Pacific region then will return back to what I would call a more normalized growth..

Okay. Great. Thank you for the color there.

And I wanted to then switch gears and sort of follow-up and maybe get an update on your views on recurring revenue as far as the business mix, and what we might see there whether or not may be the near term might be a little bit more project specific with some recurring revenue growth to come in 2020 and beyond? Thanks..

Yeah. Thanks very much Marc. So on the recurring revenue, yeah, I mean, we were held back a little bit on our growth rate on recurring revenue this year primarily because we didn't have the government sector contracts that are the multi-year contracts that help our recurring revenue.

But we had good strong software licensing sales that included things like our own GovernX, our InformX, and recur also in terms of license sales around automation with Blue Prism and Automation Anywhere in particular UiPath as well.Our benchmarking as-a-service business, we have a pricing software product out of the market now called ProBenchmark, which is also a subscription-based product.

And our research business is also from a subscription standpoint also we should see a nice lift in 2020.So when you combine all those factors, you also get the government contracts not holding you down in terms of being a reduction, which they were in 2019. We see that helping not put a drag on the growth rate on recurring revenues.

And we can then continue our journey toward a $100 million in recurring revenue, which we would like to achieve by the end of 2021.So we are -- we feel very good about that. That's all on the organic standpoint. We continue to look at some inorganic capability around recurring revenue as well. But I'm just talking right now about organic.

So we think the recurring revenue streams should pickup growth rate back to double-digits in 2020..

Okay. Great. And then last one for me. I just wanted if you could give a quick update on the -- what you're seeing on automation? And where we are runway -- I think we were like about close to $30 million, if I -- last quarter.

So maybe if we can get sort of a quick update on what you're seeing from a customer adoption automation, because it seems still there's a long way to go there as far as opportunity? Thanks..

Yeah. Okay, good. So the automation business continues to be red hot out in the marketplace. This is our, you recall our robotic process automation. Now we're doing some cognitive work as well. The market continues to have high demand again. It is still early innings. There's a lot of adoption going on by enterprises. Not many have gone to quote scale yet.

So we see that as real opportunities for ISG and the automation market overall.You've seen some of the big valuations with UiPath and Automation Anywhere and Blue Prism's public over in the U.K.

So there's the -- they've got some very strong, if you will, valuations for the software companies.We also see on the advisory side, such as ourselves, we also see that that marketplace is still tends to be quite robust out in the market.

This is why we have a little bit of a frustration around not recognizing the value of this asset inside our stock. So we'll continue to look at ways to unleash that.So we're very confident in our automation business.

We will not be at $30 million this year, but we should become, as I mentioned earlier, we should see that $30 million number plus during 2020 as that is a business as you know we started essentially from kind of an emerging startup in January of 2017.

And we've got ourselves in a nice position there.So we expect that business to continue to deliver double-digit type growth for us, but we'll also be continuing to look at how we can unleash the value of this asset that we think is undervalued in the market today..

Okay. Certainly, encouraging. Thank you very much for the color..

Thanks Marc..

Thank you very much. [Operator Instructions] Our next question will come from Joe Gomes, NOBLE Capital..

Good morning. Thanks for taking my questions..

Good morning, Joe..

Yeah. Just a point of clarification here.

When you talk about the potential for doing some repurchases on the stock you said, once you have clearance from the banks, if can you just give us a little more color as to what the banks have to sign off on in order for you guys to get more aggressive on the repurchase program?.

Yeah. So if you'll recall, right now the agreements we have our banks is we can buy back $3 million a year which we have done. Once we achieve EBITDA ratio to debt of 3x -- under 3x then we have the flexibility to do what we like with our cash..

Okay. Thanks for that. And then may be you can clarify something for me here.

On the public sector, last quarter, we -- you talked about I think it was 13 contracts that you have been signed on the public sector and then you expected to see them contributing to revenue here in the second half of 2019, but now it seems like you're being a little more modest on their contributions and what is happening here in 2019, and I was wondering if again can you just provide some more color or detail of what's going on the public sector side?.

Yeah. No, no, no, I didn't mean to be modest. We do have those contracts. They began during the third quarter they will then go into the fourth quarter.

But what I was saying on the full year 2019, because the first half was down, we will not see growth overall in the public sector so it held us back on overall growth.So no we see that market picking up, as I stated, and we have those contracts signed. There are few others that are out in the market today that we are pursuing.

So as I said, I think we will be able to see the public sector give us a full year basis in 2020 will contribute to growth, whereas this year it did not contribute to our growth it held us back. That's what I meant..

Okay. Great. Thanks. I appreciate it. Thanks for the time..

Yeah. Thanks very much, Joe..

Thank you. [Operator Instructions] Well, speakers at this time, we have no further questions in the queue. So I'd like to turn this conference back to Mr. Connors for any closing remarks..

Thank you very much. Let me close by saying, I am energized by the great enthusiasm our employees are showing for our future.

As I travel around meeting with our employees and clients, I get a real sense of the forward momentum that we are building as a firm and the excitement our people have for being part of the digital revolution that's transforming the world's top enterprises for operational excellence and faster growth.I want to thank all of our professionals around the world for their contributions to our success.

And I want to thank all of you on the call for your continued support and confidence in ISG. Enjoy the upcoming holiday season and have a great rest of the day..

Thank you very much. Ladies and gentlemen that does now conclude today's conference. You may disconnect your phone lines and have a great rest of the week. Thank you..