Good day, and welcome to the Information Services Group Second Quarter 2022 Results Conference Call. Today's conference is being recorded, and a replay will be available on the ISG's Web site 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 second quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer; and Bert Alfonso, 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 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 Web site at www.isg-one.com or the SEC's Web site 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 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, adjusted net income per diluted share, adjusted EBITDA margin, 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 Bert Alfonso.

Mike?.

Thank you, Barry, and good morning, everyone. Today, we will review our second quarter financial results, including our record profitability for the quarter, our record revenues and profits for the first-half, our efficient use of cash and returning value to our shareholders in Q2, and our outlook for the third quarter.

ISG delivered a solid operating performance in the second quarter continuing our momentum and excellent start to the year. We generated revenues of $71 million, up 5% in constant currency over the prior year. And we delivered record adjusted EBITDA of $11 million, up 20% in constant currency, and an EBITDA margin of 15%, up 140 basis points.

Our recurring revenues continue to be robust, reaching a record $26 million in Q2, up 11%, driven by our GovernX platform and research businesses. Recurring revenues represented 37% of our firm revenues in the quarter, and that's an all-time high.

From a geographic perspective, our Europe and Asia-Pacific regions generated double-digit operating revenue growth. And our Americas business, excluding, Automation, remained strong overall, with growth in excess of 10% driven by all things digital, including Cyber Security, 5G, and cloud transformation.

With our ISG NEXT operating model continuing to drive a step change in our financials, our utilization for the second quarter was 76%, up 104 basis points compared with the second quarter, last year. Now, looking at our year-to-date performance, we delivered our best first-half ever.

Revenue was a record $143 million, up 9% in constant currency, with record EBITDA of over $21 million, up 25% in constant currency over last year. With more than $50 million of recurring revenues in the first-half, we are well on our way to our year-end goal of $100 million.

From a client perspective, we served nearly 550 clients in Q2, including 69 new to ISG. Clients continue to turn to ISG for our data, insights, advice, and solutions to help them on their digital transformation journeys. Efficient use of technology is a competitive advantage for our clients.

That need is even more pronounced in today's environment with its high inflation rates and talent shortages. And with supply chain issues and consumer spending concerns, some clients are beginning to focus more on near-term cost savings. For these clients, ISG has a suite of services ready to help them with rapid cost takeout.

No matter their needs, ISG is focused on helping our clients achieve operational excellence and faster growth over the long-term.

Now moving to shareholder returns, due to our successful operating model, we were able to return nearly $9 million to our shareholders this quarter, comprised of $5.5 million in share repurchases and $3.4 million of dividends.

We also reduced our debt by another $1 million during the quarter, driving our gross debt ratio to another new low, all this due to the strong cash generating power of our business. Now turning to our regions, the Americans delivered $39 million of revenue in the quarter, down 2% versus the prior year.

As mentioned, excluding Automation, the Americas delivered double-digit growth on the strength of our digital offerings, including cyber security network and analytics. A word on our Automation business; as you may recall from previous communication, we won a large automation contract with a major entertainment client early last year.

That successful engagement was completed this year. The conclusion of this engagement had a negative impact on our year-over-year growth rate in the Americas this quarter, and it will have a similar negative impact in the $4 million range in Q3. This impact has been taken into account in our Q3 guidance.

During Q2, we saw double-digit growth in our media, health sciences, and insurance industry verticals. And among our services, research and GovernX were also up double-digits. Key client engagements during the second quarter included McKesson, Tenet Healthcare, PSE&G, and Exelon.

During the quarter, we began work on a nearly $3 million engagement with a leading U.S. based healthcare company. We are helping them digitally transform their entire technology at state, including application, infrastructure, and cyber security.

We are also working with a major industrial company on $1 million human capital management engagement as they prepare for an upcoming spin-off. Turning to Europe, our Q2 revenues of $23 million were up 11% in constant currency over last year.

For the quarter, Europe delivered double-digit revenue growth in our public sector, manufacturing, and media industry vertical, and in our research and GovernX businesses. Key client engagements in Europe in the second quarter included Munich Re, Ericson, TalkTalk, and Volkswagen.

During the quarter, we continued to grow our business with a longstanding insurance client. We are working with them on a multi-million dollar transformation engagement involving cyber security, cloud services, and a digital workplace strategy.

Now turning to Asia-Pacific, this region had a record setting Q2 performance with revenue of $8 million, up 28% in constant currency driven by growth in our insurance, media, public sector, consumer, and health sciences industry verticals.

Key clients in the quarter included the Australia Taxation Office, , Insurance Australia Group, and the Australian Department of Home Affairs. We continue to support the Australian Government serving as primary advisor on the Government's large scale technology infrastructure and telecommunications modernization program.

We are also ramping up a digital transformation engagement with a new client, an international logistics company being spun out and taken private. Now, let me turn to guidance. At this point, we see the demand environment remaining strong and believe ISG is in great shape for a solid Europe performance.

We also remain mindful of the economic factors that could impact our clients including inflation, supply chain disruptions, higher energy cost, geopolitical concerns, and talent shortages.

Taking the current strong demand environment and balancing it with the potential impact of broader macroeconomic factors for the third quarter, we are targeting revenues of between $71 million and $73 million including a negative FX impact of approximately 400 basis points and adjusted EBITDA between $10 million and $11 million.

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

Bret?.

Well, thank you, Mike, and good morning, everyone. As Mike mentioned, ISG continues to have momentum in the marketplace with a solid second quarter adding for a strong start to the year. Revenues for the second quarter were $70.7 million, up slightly on a reported basis and up 5% on a constant currency basis compared with the second quarter last year.

Currency negatively impacted reported revenues by $3.5 million versus the prior year. The Americas reported revenues of $39.4 million, down 2% versus the prior year impacted by the completion of a large automation engagement.

And Europe revenues were $23.3 million down 2% and up 11% in constant currency, and the Asia-Pacific revenues reached a record $8 million of 22% reported and 28% in constant currency.

Second quarter 2022 adjusted EBITDA was a record $10.7 million up 10% from last year resulting in an EBITDA margin of 15% and up 140 basis points as compared with the prior year second quarter. In constant currency, adjusted EBITDA was up 20%. Second quarter operating income increased 22% to $7.1 million compared to $5.8 million in the prior year.

Net income was very strong for the quarter at $5 million or $0.10 per fully diluted share, compared with net income of $4.1 million or $0.08 per fully diluted share in the prior year.

Second quarter adjusted net income was $6.8 million or $0.13 per share on a fully diluted basis, compared with adjusted net income of $6.3 million or $0.12 per share diluted in the prior year's second quarter.

Consulting utilization was a second quarter record of 76% up 104 basis points versus the prior year reflecting the impact of our ISG net operating model. Headcount as of June 30 2022 was 1,482 up 5.6% from Q1 as we invest for future growth. Our balance sheet continues to have the strength and flexibility to support our business over the long-term.

The quarter net cash provided by operations was $0.8 million, and we ended the quarter with $31.5 million of cash down from $47.5 million at December 31, 2021.

During the second quarter, ISG returned approximately $9 million to shareholders, through the repurchase of 5.5 million of shares, and paid first and second quarter dividends totaling $3.4 million. Our next quarterly dividend will be payable September 19 to shareholders of record as of September 6.

In addition, we paid down $1.1 million of debt, lowering our debt balance to $72.3 million and our debt-to-EBITDA ratio to 1.7 times, a record low. Our average borrowing rate for the quarter was 2.43%, up from 2.15% last year and we ended the quarter with 47.8 million shares outstanding down from $48.2 million at the end of Q1.

Mike will now share concluding remarks before we go to the Q&A. Back to you, Mike..

Thank you, Bert. To summarize, ISG delivered another strong quarter, leading to our best first-half ever, with overall revenues up 9% ad EBITDA up 25% in constant currency for the half both record performances. Our recurring revenue set a new quarterly record powered in particular, by growing demand for our research and GovernX platform.

Recurring now represents 37% of our total revenues, the highest share ever. And despite FX headwinds and other macro economic factors, we see our momentum continuing in the second-half as clients continue to invest in digital transformation for cost savings, and future growth.

As always, we're 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. And now let me turn the session over to the Operator for your questions..

Thank you. We will take our first question from Marc Riddick with Sidoti. Please go ahead..

Hi, good morning..

Hey, good morning, Marc.

How are you?.

Great, good.

Yourself?.

Good, thank you..

So, congratulations, the quarter looks really good. I was wondering if you can touch a little bit on a couple of the comments that you made, because we know historically that a lot of clients will engage with you as far as various ways of sort of moving forward. Sometimes it's -- the revenue-growth-driven, sometimes it's cost-savings-driven.

I was wondering if you could talk a little bit about the new customers that you -- it was about 70, I believe, I -- if I remember correctly.

Can you talk a little bit about maybe what the mix of those new engagements were like, and were they similar to what you've seen in prior quarter or are you beginning to see some of that -- some folks coming in new who are looking to save on expenses?.

Yes, good. Thanks, Marc, a good question. Actually, we are seeing an increase in the number of clients that are looking to get more, what I would call, cost optimization done quicker. And I think it's likely in reaction to, clearly, the noise in the market regarding recession and inflation, and those kind of areas.

Digital transformation still continues to be quite strong. As everybody knows, they continue to move on that journey. But I would say a number of the new clients are looking for more rapid cost takeout than maybe prior to what we've been hearing on inflation, et cetera.

So, I would say just a couple of things, on the existing client base, in areas like insurance, manufacturing, media, technology, health sciences, they are all still very strong on the digital transformation areas, and that's everything from cloud to cyber, to customer experience, to analytics, if you will -- data and analytics.

So, it varies a little bit by industry segment in terms of what is going on. But I would definitely say it's a little bit of a mix in terms of the longer-term digital transformation, with an influx of cost optimization, Marc..

Well, I appreciate your commentary. And within it, you beat me to my next question which was going to around the industry vertical. So, I can move on to something else.

I wanted to touch a little bit on the recurring revenue mix, and maybe how we should think about what the -- I'm not sure if there's optimal level, but maybe -- sort of maybe how you're viewing what that potential could be now versus maybe what you may have thought, in your experience?.

Yes, no, look, first of all, we're very pleased with how the recurring revenue is being generated. That includes everything from our research, to our software, to the multiyear public sector contracts. I mean, we are now at the highest percentage of our revenue. I mean, clearly, we would love to have that number higher.

I think I had set a target, at the same time we set a target for $100 million of recurring revenue, which was two years ago, that we wanted 35% of our revenues in recurring. So, it is tracking that way, slightly ahead, as you know, by both absolute number and the percentage number.

And as we close out this year and we think about the next couple of years, we will have a target on kind of what we're looking for on an absolute recurring number. And I would hope that we would begin to have that number look north.

But right now, we want to achieve what we set out and said we would do, which is roughly 35% and $100 million of recurring revenue, and we're on track for that, Marc..

Okay. And then last one for me, at least for now, and could jump back in queue, possibly. But I wanted to touch a little bit on the -- you have another quarter where utilization is up year-over-year, adding -- the headcount addition was about plus-5%.

I was wondering if you could talk -- when you have both of those sort of moving up at the same time, that that's a positive sign usually. I wanted to talk a little bit about maybe what your thoughts were as far as headcount additions, and then also maybe some technology spend between now, and the end of the year? Thanks..

Yes, okay, well, first of all, on the productivity, clearly our new operating model, ISG NEXT is working exceedingly well. It's allowing us to be more agile in meeting kind of client needs and supplying digital talent wherever it's needed, whether it's across boarders or time zones. So, number one, that model is working, I would say, extremely well.

We're able to deliver our enterprise solutions faster, with more speed and, frankly, more efficient to our client base. Just in terms of the mix of kind of how we're working today, remote, et cetera. You may recall, when COVID hit, we went to nearly 100% remote from a model that was more 90% onsite.

That number has crept up a bit, but not nearly as much as we anticipated during 2022. We anticipated that over the next two years, that that model would look more like 65% remote, 35% onsite as we think about '22 and '23. Right now, that number is more like 85% or slightly higher of remote working.

So, that is beating our model that we anticipated, and that is helping.

On the -- your second part of your question was on -- was it on the gross margins and SG&A, what was it?.

And also any technology spending you might need to do and that you're thinking about between now and the end of the year?.

Yes, on CapEx.

Bert, you want to take that one?.

Yes, our CapEx needs have not changed dramatically, they're just slightly higher. And part of that was the agreement deal that we announced, I believe, at the end of the first quarter. But we continue to be in that sort of $2 million to $3 million range. So, CapEx needs continue to be modest.

Obviously, we do continue to do work on GovernX and some of other platforms. But I wouldn't say there's any outsized growth on the CapEx side. Gross margin was a bright spot for us in the quarter.

Certainly part of it is attributed to the two things that you've just been discussing, continuing to have high utilization rates with our advisors, as well as the increase in recurring, which is -- has slightly better margins than other parts of our business.

And so, we were actually up about 270 basis points year-over-year on the gross margin basis, and slightly below that on the first-half. So, good cost control. While we're adding to our headcount, it's a reflection of how we see the back-half of the year.

And SG&A costs rose slightly but well below our increases in our gross margins, so were pleased with that at the end of the quarter..

Great, thank you very much..

Thanks, Marc..

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

Yes, good morning, Mike..

Good morning, Vince..

So, you'd mentioned the large deal in the Americas having an impact in the quarter.

I'm curious; were there any other outsized impact from large deals in the other segments in the quarter? And similar question, going forward into Q3, will there be any large deals having an outsized impact or is the demand basically broad-based?.

Yes, no, I would -- the answer is no, there is nothing else. It is -- demand is broad-based. The automation engagement with that large entertainment client which we announced to all of you early last year is really the only one. It has about a $4 million impact in Q3 that will not be repeated. But as we said, we've factored that in to our guidance.

And also, we have factored in the FX headwinds which we've estimated at about 400 basis points. So, that's how we've looked at it. But the demand, overall, I'd call broad-based, Vince..

And could you remind us of your acquisition priorities, what the pipeline looks like, and if there's any changes in valuations in the market, given the economic backdrop? And also, what your philosophy may be if we have a significant economic weakness here, if you'll be aggressive in that environment?.

So, good question, Vince. Our focus on the acquisition front is really number one around all things digital. That would include cyber, customer experience, data, enterprise change, cloud, if you will. So, we're looking at all things digital, number one.

Number two then, and kind of concurrent to that, are things that we can add or that we could deploy as recurring revenues or annuity streams into the client channels that we currently have, so whether that's sent to procurement or whether that's sent to the CFO, whether that's sent to the CIO or CTO, that's kind of where our focus is on our kind of string of pearls acquisition strategy.

As it relates to the market, I would say that the market is still a bit frothy in terms of expectations. But I would also say that if things softened a little bit we might pounce faster just as we did with our asset that we purchased during COVID, in 2020. So, we are very active in the market. We're disciplined, as you well know, in terms of pricing.

But we will take advantage if that market kind of swings a bit to our advantage..

Okay, thanks for answering that with great comprehensiveness.

And then on the -- tax rate was lower than expected, I guess this one's for Burt, and what was the cause of that, and what should we think about tax rates for Q3, and for the year?.

Yes, Vince, thanks for the question. We did have a tax rate that was a bit lower than what we anticipated in the second quarter. It was more of a profit mix, if you will, despite the down 2%, we had higher profits in the Americas than in the other regions, particularly on the dollar basis, as you might imagine.

And the recurring revenues, being as high they were, that also impacted that. Going forward, we are bringing down the rates where we thought it might be earlier in the year.

So, while we do think it'll be above more or less the 30% rate of the second quarter, we see the rates sort of in the mid to sort of high-30s, but we don't see as high a rate as we thought earlier in the year, when we thought our mix would actually be going the other way in terms of the geographies.

So, I would say those would be the primary factors around the quarter, and how you should think about modeling the back-half of the year..

Thank you. And nice quarter, guys. Thanks..

Thanks to have you, Vince..

We'll take our next question from Joe Gomes with Noble Capital. Please go ahead..

Good morning, and thanks for taking the questions..

Hi, Joe..

So, just on the revenue side, just want to dive a little bit deeper into it. So, you had guided, last quarter, for a little bit more than what you ended up generating. I'm assuming you already knew about the automation contract.

So, a little bit of a shortfall, was that really due to the fact that FX was, I think, 500 basis points versus your original estimate of 300?.

Yes, there two factors here, Joe. One is that it -- clearly, the FX was 200 basis points higher than we had forecast. And so, to your point, it was 500 -- a bit over 500, and we had factored in 300. Second of all, I think the automation pipeline that we have, it is quite strong.

But in terms of having execute anything of significant size against that pipeline did not materialize, it's just taking a bit longer on the automation front with the software players out there as well. So, those are the two factors, FX being number one in that regard..

And is there anything particular as to why it's taking a little bit longer for that pipeline to be realized?.

I think the decisioning around software, and you can see this with some of the software, and you can see this with some of the software providers, like , which is public, Blue Prism, which just went from public to private automation anywhere, , et cetera.

The length of time to make a decision that I want to convert on scale, you know, it's different when prior, I would say, to 2022, when there was still a lot of dabbling around with a lot of the software in certain areas of major enterprises. Now, they're moving to scale.

And when you move to scale, you're making a fairly long-term commitment on this automation software. And we're seeing that decisioning process take longer, which is not -- which isn't parallel, if you will, with a lot of the software providers in terms of what they're seeing with their sales of software.

So, that would be difference in '22 versus prior years, where everyone is now beginning to look to put scale in. And scale means a lot bigger investment..

Okay, thank you for that clarification.

And on the agreement acquisition, just wondering how the integration is going there as you're seeing it open up any new opportunities that you weren't getting to previously?.

Yes, actually, we're very pleased with the integration. We've actually now going into another phase, the sort of the first 60 days or so it was more about integrating the software. And it is a component of how we think about GovernX and other applications that we have.

We are actually in test with two clients at this stage one, which was one of the original thoughts that which we had, which went into the decision. But we're quite pleased, Peter Graham, who joined us one of the Founders is doing excellent work with us.

And so, we're beyond the first phase of bringing the software in, and now we're more in a deploy mode. And it is incremental, if I could call it that to the GovernX platform that we put into the marketplace today. So, we're quite pleased with how it's turning out..

Okay. And then, on the cash levels, you've been doing a great job, obviously, last year generated a lot of cash, this year been returning a bunch of cash to shareholders, kind of, what level are you comfortable with? Cash, I think hit a high of about $54 million at the end of the third quarter.

Last year, you ended this quarter at $31.5 million; you're looking potentially for acquisitions, still returning cash, just kind of walk us through how you see where, what kind of cash levels you really be comfortable with?.

Yes, that's actually a very good question. And we've been having a lot of discussions about that internally, as you know, if there is a more significant downturn, we certainly would want to have a better cash cushion, if you will, which would make a lot of sense for us.

If you look at where we were about a year-ago, at $47 million, I know we did hit a peak in the 50s. There are a couple of one-timers in there, particularly on the tax side. And so we already talked about the return to shareholders at about $9 million, we pay down some debt, about a million dollars there.

But we've talked in the past about the deferral of taxes in the EMEA region. Germany in particular with the 2020 taxes were deferred, they allowed firms to defer those taxes and not pay them. So, we recently in the second quarter paid about $7 million of cash taxes. That was 2020 and 2021.

We don't expect that obviously, we would not expect that to repeat because it was two years in one, which is an unusual thing around COVID, but what I would say, we were a little bit ahead, probably with respect to just offsetting dilution, you saw where our shares are down about 400,000.

We're a little more aggressive in the quarter when we saw the shares that we thought was a lower intrinsic value. During the quarter, we've since had, obviously some recovery.

So, we're very conscious of the cash needs we have going forward, we think all the components continue to stay in place, whether it's the dividend or the buyback, or obviously the debt paid down, which is not a big number.

And anything we might do on the M&A side, we have a revolver obviously, which is 50 million plus that we could still draw upon but we're conscious of this market turns down that we probably would hold a little bit more cash, but right now, we're pretty comfortable with the levels that we have..

Okay.

And just one follow-up from me, I heard that the 69 new clients, I missed how many clients do you serve that they're in the quarter?.

Yes, let me get that. Let me get that number for you, 550, we got the number, 550 is the number, Joe..

Okay, that's my follow-up but I wasn't positive. Thanks again, really nice quarter. And I'll get back in queue..

Okay, Joe. Thank you..

And we will take our next question from Marco Rodriguez with Stonegate Capital. Please go ahead..

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

Very good morning, Marco..

Hey, I was wondering, maybe you could spend a little bit on Europe.

Just kind of curious, I know you've had some comments in terms of where you're seeing some strengths and what you're trying to balance in terms of your guidance, but maybe if you can provide a little color on the conversations you're having with the end customers in Europe, I mean, how are they feeling as far as their confidence levels in the second-half of the year just kind of given the weakening economic picture that Europe is somewhat moving towards and the potential for and energy crisis that may come this winter..

Good question, Marco. Here's what we're seeing in Europe, first of all, in terms of kind of vertical manufacturing is up. You may recall last year, manufacturing was quite soft.

In Europe, we've seen a uptick in manufacturing in Europe, we've seen an uptick in the digital transformation among the large insurance players in Europe, and as you know there's a number of them based in Europe.

So, that is also pretty robust in terms of what they are doing around cloud, around cyber, around customer experience, around digitizing their user experience with clients.

So, all of that I think is positive in Europe, I would say if we think about Europe, the one area we keeping a very close eye on, of course, is Germany, in terms of how they are responding with the whole Ukraine situation, I think I'd mentioned in the past that in some ways, with the Ukraine situation, with talent shortages among clients, hard to get and recruit people, that plays a little bit to our advantage.

And by that, I mean that we are a steady force for our enterprise clients. We're a trusted advisor. We have talent in all of those digital transformation areas.

So, maybe in instances where they might have tried to bring people in and do it internally, without a third-party like ISG, this market is enabling us to take a little bit of advantage of that situation. And especially in Europe, because there's such a long period of time between people leaving one job and moving to the next.

So, that's how we would look at the European theater right now, of course, we're cautious. We know about the FX. But from an operating standpoint, we feel pretty good about the whole European theater. And clearly they're having a very, very good year so far..

Got it, very helpful.

And then thinking about North America, Mike, if you can talk a little bit about what sort of surprises whether positive or negative, you're seeing from the demand side?.

Well, on the Americas on the U.S., footprint just put automation to one side, it is very good, the demand is good, cloud, network, analytics, 5G, software, if you will, all of those areas are still quite robust in the U.S., there is still quite a large demand for this digital transformation work different industry segments, are at different points along the continuum there.

And so, we feel very good about how the U.S. is operated. And we expect that to continue.

The automation is the only area that really has just a tough compare with that large entertainment client, putting that aside, cloud migration, cyber, Next Gen, if you will applications, as clients begin to try to simplify the number of applications they have that plays right into our application, modernization of applications, if you will.

So, all of those things, plus our kind of workplace collaboration, workplace of the future type of work, all has played very well into our solution set..

Got it.

And then, just in terms of the operating structure, the expense side obviously, you heard some improvements in efficiency the new ISG next model was definitely helping in terms of improving profitability, improving your margin, but just kind of looking at some of the absolute costs year-over-year on your SG&A and your direct costs for your advisors.

It seems lower year-over-year, and that's a little bit different than maybe perhaps what might be expected just kind of given the inflationary environment.

Can you maybe talk a little bit about those expense structures? And what are some of the major drivers behind the outlook?.

Yes, look I've mentioned earlier, the gross margin, which I thought we were really stand out in the second quarter. And the components are the ones that we talked about that, our utilization rates continue to be in the mid-70s.

We're actually at 79 in the first quarter, which we've said was likely not a number that we would stay at, on a constant basis, but to the extent that our model remains in place, and we have that flexibility to move talent around the globe, sure as we bring in new talent, we're paying the market prices.

So, it's a little bit higher, but we continue to generate efficiencies on the SG&A side. We have good cost control. Our finance and HR costs are quite steady. It's not an area where we need to add talent frankly. We are very pleased where we are. So, we think that with our of 15% which are nearing where we said we want to be at the end of the year.

Before we reassess, it's an area of the business that continues to operate quite efficiently both at the advisory side as well as for the back office side. Not to mention that we all know that we have a large contingent of our workforce which is Bangalore based in India. When we talk about the increases to 1,482, about half of those would be in India.

So, we continue to have good labor arbitrage. It's something that we focus on a daily basis. So, we don't take that for granted because there is a lot of inflation in the marketplace. But for the moment, we feel that that's manageable within the profitability projections that we have in place..

Great, thanks a lot, guys. I really appreciate your time..

Thanks..

Thanks, Marco..

Thank you..

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

Yes.

What was the contribution of agreement in the quarter?.

But we don't breakout that revenue. But think about it as part of GovernX, and GovernX was up double-digits in the quarter..

Okay.

And how should we think about geos in Q3? Which should grow most rapidly year-over-year?.

I think you are going to see Europe looking strong in third quarter. When you talk about it -- I'd call it, headline growth it's probably Europe, Asia-Pacific, Americas; in that order only because of the automation bit, if you take the automation out, then the U.S. and Europe are both going to grow nicely..

And I think we'll see normalization in Q4, right? We're not -- the automation thing is very much a Q2 - Q3 issue for us..

So, should Americas lead in Q4 year-over-year?.

I am not going to -- I don't want to predict that because then we'll have competing forces between our regions. But they both should perform quite well, Vince..

Okay. Thanks for answering my questions..

Yes, thanks, Vince..

Thanks, Vince..

And it appears there are no additional questions at this time..

Okay. Well, let me thank you all, but let me close by thanking all of our professionals worldwide for their dedication to our clients, for working together as a global team to achieve what was clearly a record first-half performance for ISG.

I know our people have a passion for delivering the best advice and support to our client as they continue their digital journeys. And I could not be prouder of them. And thanks for all of you on the call today for your continued support and confidence in our firm. Have a great rest of the day..

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