Good day and welcome to the Information Services Group First Quarter 2021 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 first 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..

Thank you Barry and good morning everyone. This morning I will review our record first quarter results, provide guidance for the second quarter, and discuss our initiation of our first ever quarterly dividend. ISG is off to its strong start ever. Last year our clients dealing with the crippling the effects of the global pandemic.

This year while the pandemic in far from over, our clients across many industries are now increasing their digital investments moving beyond their initial COVID cautiousness in anticipation of renewed growth.

This rising demand for all things digital, coupled with the benefits of our new ISG NEXT operating model and our disciplined operating approach is reflected in our record fee revenues and profitability in Q1. Our results across the board exceeded expectations. .

Thanks, Mike. I sincerely appreciate your kind words. I, too, will miss working with you and the entire ISG team. It has been tremendous ride with 9 of our 10 acquisitions completed during my tenure and with more still in the pipeline, as you heard.

Looking at the quarter, we managed through a difficult operating environment to deliver record results in Q1. Revenues for the first quarter were $66.6 million, up 4% on a reported basis and up 1% in constant currency compared with the first quarter of last year. Currency positively impacted reported revenues by $2.4 million versus the prior year.

Including the -- excluding reimbursable client travel costs at $1.5 million, which accounted for approximately a 240 basis point decline versus the prior year, revenues were up 7% versus last year.

Reported revenues excluding T&E, were $38.1 million in the Americas, up 7% versus the prior year, $22.7 million in Europe, up 4% versus the prior year, and $5.7 million in Asia Pacific, up 24% versus the prior year. Record first quarter 2021 adjusted EBITDA was $8.6 million, up 2.4 times from last year's first quarter.

We reported record first quarter operating income up $5 million. There was an operating loss of $700,000 in the first quarter of 2020. Net income for the quarter was $3.4 million and fully diluted income per share was $0.07 per share compared with a net loss of 1.4 million and a fully diluted loss per share of $0.03 respectively in the prior year.

First quarter adjusted net income of $5.5 million or $0.10 per share on a fully diluted basis compared with adjusted net income of $1.1 million or $0.02 per share on a fully loaded basis from the prior year’s first quarter.

Total utilization for the first quarter was 75% versus 68% in the prior year, reflecting the impact of our new ISG NEXT operating model. Our balance sheet continues to have the strength and flexibility to support our business over the long term.

Net cash provided by operations reached a first quarter record of $12.1 million, compared with $4.6 million in the prior year. We ended the quarter with $48.6 million of cash, up 2.8 times from 17.4 million in the prior year.

We repaid $1.1 million of debt in the quarter, lowering our debt balance to 77.7 million and our net debt to EBITDA ratio to 0.9 times. And we repurchased $3 million of ISG shares. Our average borrowing rate for the quarter was 2.5%, almost half of last year's rate and we have 48 million shares outstanding as of April 30th. .

Thank you, David. To summarize, we had a record setting start to the year, revenue up 7% and EBITDA up 2.4 times with revenue, EBITDA, and EPS all meeting expectations. Our balance sheet has never been stronger, $48.6 million of cash and net debt down to 0.9 times EBITDA.

Our new operating model ISG NEXT is driving a more profitable enterprise with our Q1 margins of 13%, up from 6% the prior year. We see digital demand increasing as clients look to accelerate their digital transformations coming out of the pandemic. ISGs momentum is also accelerated.

Our Q2 guidance is up significantly over the prior year, and we announced the initiation of a quarterly dividend to reward our shareholders. As always, we are focused on creating shareholder value for the long-term, and we are steadfast in our mission to deliver operational excellence to our clients. So thank you very much for calling in this morning.

Now let me turn the session over to the operator for your questions..

Thank you. . We'll take our first question from Joe Gomes with Noble Capital..

Good morning and congrats on the quarter, fantastic. .

Good morning Joe, thank you. .

So just wanted to a couple of quick questions, broader for you, Michael.

How is the state business unfolding here, especially as we see the headlines at least that the Federal Government is pumping significant amounts of money into the State -- into the States and do you see any positive impact on the business from your end?.

Good question. First of all, our public sector business in the U.S. continues to be strong and steady and as you know these are longer term contracts that we have with the State and local governments. Yes, we have our eye on all of that money beginning to flow into the different States.

There are some restrictions on how they use it, but no restrictions that we are aware of around the transformation that they could do with a lot of their old antiquated technology. So we are keeping an eye on it. Keep in mind, these things have long runways in terms of buy because they go through a whole process of RFP and so on.

But we think it could be a net positive application for us over the 18 months..

Okay, great.

And then I was wondering if you could give us a little more color on the significant ISG automation win, how that all came about and who you're competing against for this, and do you see more of these significantly larger than normal deal -- potential deals out there?.

So good question, Joe. So first of all on the specifics, this is a very large top five global entertainment company. They went through a significant merger during COVID and as a result of that, they have things like reward cards, etcetera that they are looking to fully integrate and they would like to use automation to help them on their journey.

So yes, we did compete with that. I think our independent third party objective agnostic approach was the winner in addition to the talent and to the large scale deal that we have done in ISG over the years in and around this industry, secured this win. This is a win that's greater than $10 million.

It could get even larger and that will flow through for us during the second half of 2021 and fully in 2022. So you can see this over the next 18 months or so. That's number one. Number two, we are beginning to see that clients are beginning to accelerate, moving from kind of center of excellence, let's try a process or two.

Many industry segments now with the pandemic are looking to accelerate their automation journey and to move to a much more scaling of that. And I think we will see that over the next couple of years. As you may know, UiPath just went public, $600 million in revenue and a 50 times revenue model.

So the industry itself is picking up some steam and our automation business is also contributing to that, and we are also seeing the benefit of clients scaling their automation. So yes sure, we do see that increasing over the next 18 months or so..

Great, thanks for that. One last one for me and I'll jump back in queue. So obviously, last year for most of the year and as you mentioned even here in the first quarter, the live events have taken a hit due to COVID restrictions.

Any kind of time frame is when you see the live event starting to come back and contribute again to the top line?.

Good question. I think at the moment we are planning in our financials for the year to have very little. However, what we are doing internally is we are anticipating potentially in the United States launching our first physical event of any size in September. So right at the end of Q3. So depending on how well the U.S.

here responds over the next couple of quarters, couple of months, the vaccinations penetration that's here, the interest level from clients, so it's possible we will begin to see that at the very tail end of Q3. So that's what we're internally planning on at the moment..

Hey great. Thanks for that, Michael. And David, thank you for all your help in the past and have a great retirement..

Appreciate that Joe..

We will take our next question from Marco Rodriguez with Stonegate. .

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

Good morning Marco..

Hey Michael, I was wondering if you could maybe spend a little bit more time on some of your prepared remarks where you talked about this new wave of digital transformation. Obviously I'm assuming that there aren't people out there that you're still needing to convince as far as all things digital is concerned.

So are your comments more around just people starting to get comfortable or end customers getting comfortable with the economy and they're sort of losing their purse strings if you will?.

Well, so I would put it -- we will talk about cloud for a minute. Clearly people have moved workloads to the cloud for the last several years. However, the level, the speed, the acceleration is all picking up as a result of the pandemic. Why, because of the way work was performed has changed dramatically during 2020.

So when we think about all things digital, when you talk about cloud in particular, we're talking about moving the accelerated piece of the workloads, to the clouds.

Everything from -- our work has everything from kind of cloud implementation strategy to cloud readiness inside of a firm to helping them develop an application portfolio that could migrate a strategy around migrating some of those applications.

It's around kind of sourcing for cloud transformation, it's designing cloud governance, billing, charge back. There's a number of areas now that there appears to be an increased level of investments emerging from the pandemic that's going to accelerate these digital transformations.

Where most companies, most industries were on the use of football analogy were just beginning to march on their own 30-yard line, they are now wanting to move on a faster pace. That is kind of our sweet spot.

So that's what we mean by the acceleration on the digital journeys or investments by clients and acceleration and expansion of what they may have started out in a pre-COVID environment as now pushing the accelerator down much harder. That's what we're seeing..

Understood, very helpful. Then, in terms of your competitive positioning, you sort of addressed this in a prior answer here to the question.

I'm assuming that most people obviously are seeing the digital transformations, the adoption curves are steepening in, and you obviously have a really good position in terms of your independence and your research aspects.

But how are you kind of seeing yourself positioned and if you're seeing any sort of competitive responses, just given your positioning for this digital transformation for your clients?.

So our competitive sets, Marco essentially have not changed. It varies a bit, but we see the big four accounting firms out there around that. We see some of the service providers, especially on the automation side, out in the marketplace and they're doing it for a different reason.

They're doing it because they have a massive number of people that were doing work still on an FTE model. And these contracts are beginning to terminate, these models are all changing to outcomes. So it is in their best interest to automate as fast as they can automate their business.

So they're looking for that from that standpoint, but it's not independent, it's not third-party. So if I'm a Cap Gemini or I'm an Accenture, or I'm one of these others, I'm looking to retain the work that I have with Enterprise X and one way I will do that is I will help automate.

But the reason I'm wanting to automate is because I have all these people that I am not going to need in a more automated environment. So the landscape on competition frankly has not changed much. It's the same set of competitors for us.

We used to think we have a nice edge by being independent, by being third party, by having these relationships with 700 blue chip clients, where we can go in and say, hey look, we can be your independent objective third party, a trusted advisor on all things digital, that's our market positioning..

Understood. And last question from me, just kind of around capital allocation with the new dividend being implemented.

Maybe if you can kind of update us on your thoughts on any sort of pre-payment of debt, obviously I know that the interest rate is pretty cheap and kind of stacked up where M&A kind of fits into everything as well?.

Yeah, thank you. So, the dividend doesn't preclude us from continuing us to pay down debt when you have a requirement of $4 million given the current interest rate environment. We don't really see accelerating that at this point.

But, with the spot cash generation that we have incurred last year in the first quarter anticipated for this year, we see still being able to in addition to the dividend allow them to repurchase their shares, and in pursuit of acquisitions on an opportunistic basis..

And I'm sorry if I can just have one more quick follow-up on the M&A environment, what sort of opportunities are you guys kind of looking at if you can kind of from a high level just discuss that and then what does the valuations sort of look like?.

So, Marcos it is Mike. I would say in acquisitions we continue to focus primarily in two areas.

Anything that is digital related that we think can accelerate or add a channel into kind of our distribution network that we have now, which is at the C-suite level, we continue to look at if there's something there that we could do to either add capability or accelerate some visual channel that's one.

And then second, all things recurring revenues that we could use again, to sell into our distribution channels that we added to C-suite, there are a few other things that may come up opportunistically, but in terms of strategically going after those are the two areas.

Relative to valuations, there's always from a buyer or seller it has always been a bit of an inflated view from our perspective as the buyer, that the seller's viewpoint on value is higher than what we believe it ought to pay. So we'll continue to stay disciplined in that.

We have walked away from a few things because we have not gotten the level of valuation that we had preferred, but we will be disciplined and we will do the right things to add value to the overall firm..

Got it, understood. Congratulations David on your retirement, I hope you have a great time. Thank you guys for taking my questions. Appreciate the time. .

Thanks Marco..

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

Hello, Mike. Nice quarter. Very nice quarter.

So, what did -- how did the sales pipeline change at the end of the last quarter to the end of this quarter, just the point of the question is to get a sense of what the revenue trajectory may look like in the second half?.

So the sales pipeline is building very nicely for 2021, 2022. Some of these have a little bit of a longer close cycle on them. But as I mentioned earlier, anything related digitally, the pipeline has picked up a lot since towards the tail end of last year.

The sales cycle is a little bit longer especially in Europe because there is still some uncertainty about the pandemic and when it ends, the U.S. is a little bit of ahead of Europe. Australia is a little bit of ahead of Europe. But that's how we seen unfolding within the regions and the pipeline is looking good as we evolve through the year..

And, the automation, the large automation deal that you won, what timeframe will that be delivered?.

That will be delivered over 2021 and into 2022. .

Okay, clearly the digital environment is a sort of a tailwind for you, for your business.

And if we look back at 2019 to now, I assume you think the organic growth potential of the company is higher now than it was then, would you like to take a shot at sort of what kind of organic growth do you think you can do over say a three to five-year timeframe?.

So our target I think remains kind of high single digits on the revenue line with EBITDA at call it one and half times revenue growth. Overall over a long period of time those are the right markers for us. That doesn't mean we won't have years when we can hit the double-digit top line growth. But that's our overall markers that we have given.

And we remain kind of steadfast in those markers. .

Okay.

And, any thoughts on government activity in APAC, I didn't hear you talk about that this quarter, should that come back later in the year?.

Yeah, so the government business is nice and steady now in Australia. We talked before that the Australia business, the government side is spending and it serves us well for the whole region. And it continues to be steady for us and it is growing.

But in addition to that, the commercial enterprises in Australia have also picked up steam relative to digital and that’s why you saw a pretty good growth in the quarter here in Asia Pacific. So I think the government business looks strong for this year in Australia and should serve us well for the region for the year..

And, congrats to David. We'll miss you buddy..

Thank you Vince. .

You're welcome, appreciate it..

. We will take our next question from Marc Riddick with Sidoti. .

Hi, good morning gentlemen. .

Good morning Marc. .

So first of all, David, I wanted to congratulate you and thank you for everything along the way. And hopefully I'll look forward to once you're done, cause you're not completely done yet, but look forward to a very happy retirement there. So thank you for all of your efforts..

I appreciate that Marc..

I wanted to touch a little bit on comments around the utilization and I think, so you're looking now at mid-70s.

I was wondering if you could touch a little bit on maybe what you've seen there in the past as far as what the maximum level that you've seen in the past, and then what you think might be attainable now given the new business structure and kind of what you're seeing out there now?.

Yeah, thanks for that. We were able to leverage our experts globally and now with the travel near zero that has also had the impact of increasing our productivity. So, 75% I mean, that's a good level, and we're striving to continue to maintain that. And you see how that’s improved our results with our margins and whatever at 13% versus 6% last year..

Great.

And then I was wondering if you could talk a little bit about your initial, I know it's relatively early but I was wondering if you could talk about some of the initial findings that you're seeing so far with NEXT and talk maybe a little bit about it, are there any surprises so far, is it along the way of what you thought it would be, like you to talk a little bit about that and the evolution there that you see going forward?.

Marc, it is Mike. Yeah, the ISG NEXT I think has performed exceedingly well, and I would say a bit better than even our expectations early on here. And the model was basically based on a couple of principles. Principle one is, is that we can take our experts that we have around the world and we can leverage them with any client, anywhere, any time.

And we should be able to generate more revenue because we have stronger experts in front of a client, in front of it in this case in a remote way.

And then second of all, the iFlex delivery network that we've created, which enables us to kind of flex the resources because they're not jumping on an airplane on Monday morning, coming home on Thursday night, clearly makes them more profitable and it makes them available for multiple clients during the dead time.

So this is what's also helping to get to the 75% utilization.

You know, to the point that David mentioned that is a pretty significant utilization level when you factor in holidays and time off that you add in as training time, all around the world, whether we can stay at that level every quarter, I mean, that is going to be somewhat dependent on how clients engage us and we come off of deals and so on.

So there's a little bit of factor client influence on that standpoint. But in terms of NEXT overall, we are very pleased because we can take things like cyber security where we provide services around risk assessments and security enablement and security strategy.

And we can take our cyber experts in Europe and our cyber experts in the United States and we can leverage that all together in our new model that we were not able to do, we were always to be onsite with our clients. Now this isn't going to be forever.

Our sense is, is that we have a nice runway this year and into next year, and then we'll have to see how clients behave. We expect some of our clients to want our people or at least some of our people back on premises in 2022. But we will not be going back to the way it was pre-COVID for some period of time however.

So those were some of the areas that we're seeing ISG NEXT and our iFlex delivery network operate and it's resonating very well with our clients, as you can see with the increased number of clients, 11% in the quarter, and some new clients that we also had.

It's still very much working in a remote environment and that's helping our productivity more..

Okay, great. And then if I could add just another, I wanted to touch a little bit on maybe how you've seen the business return with the activity and the acceleration, really appreciate the commentary that you've given us.

I was wondering if you could talk a little bit about maybe the way it has come back, is there -- does that give you any more or less visibility than you've historically had with potential upcoming engagements or maybe what that -- or is it similar to what you've seen in the past, I was wondering if you can touch a little bit on that even if it is sort of in an anecdotal fashion?.

What we're seeing I think on the visibility point, I don't think it's achieved that much, just because of the nature of what we do. Marc, I would say visibility is somewhat similar as we've always had it. Clearly as recurring revenues increase now being a third of the business that helps.

But in terms of our more project based business, I would say the visibility is somewhat similar from that standpoint. What we are seeing though is an acceleration and therefore our pipeline is increasing. We talked about a bit earlier that we are seeing some increase in investments in digital transformation across the board in multiple industries.

Even some of the industries who've been hit the hardest like hotels, cruise lines are beginning to engage us for the second half of the year, coming up on work that they want to do, that they know they have to do, and as their revenue begins to come back, they're in a stronger position then to put some money into these digital transformations that they know they need to do as well.

The automation deal that we talked about, that's a major entertainment company that was hit very hard by COVID, but they see this as an acquisition and a merger that they've completed. They got to get it together, they want to take out a lot of costs.

They believe automation can help them, and they can have a better customer experience with an integrated reward program, reward card program, etcetera. So that's how I would probably say we view it. .

Yes, it's very encouraging to hear that level of engagement in those types of customers. So, thank you very much. .

Okay, Marc. Thank you..

That concludes today's question-and-answer session. At this time, I will turn the conference back to today's speakers for any additional or closing remarks..

Well, thank you. And let me close by saying thank you to all of our professionals worldwide for stepping up in the challenges presented by the coronavirus and delivering these terrific first quarter results. Even working remotely, there's been no let-up in our passion for delivering the best advice and support to our clients.

And allow me again, to extend my sincerest best wishes to David on his retirement and to Bert on assuming his new role at ISG. We're going to miss David's contributions and I'm going to miss his friendship, but we also look forward to Bert taking over without missing a beat.

And finally, thanks to all of you on the call for your continued support and confidence in our firm. Stay well everybody, have a great day..

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