Information Services Group Inc. Q3 FY2025 earnings call

• ISG delivered excellent Q3 results driven by strong AI demand. Q3 revenues were $62 million, up 8% excluding divested automation unit. • Americas region had 11% revenue growth, Europe returned to growth with 7% revenue increase, and recurring revenues were up 9%. • Adjusted EBITDA was $8.4 million, up 19%, with a margin increase of 200 basis points to 13.5%. • AI-related revenue was $20 million, 4 times that of a year ago. ISG Tango platform had over $15 billion in contract value. • AI is driving the technology research and services market, with growth continuing as clients invest in AI infrastructure and data. • Key client engagements in Americas included Lockheed Martin, Carnival Cruise Lines; in Europe, Fresenius, Diageo; in Asia Pacific, IEMO, Standard Chartered Asia.

ISG's Q3 revenues were $62 million, up 8% excluding results from the divested automation unit. The Americas region led with revenues up 11% to $42 million. Europe saw revenues up 7% to $16 million, and Asia Pacific had revenues of $4.2 million, down 15%. Recurring revenues were $28 million, 45% of total revenue, up 9%. Adjusted EBITDA was $8.4 million, up 19%, with an adjusted EBITDA margin of 13.5%.

• For Q4, targeting revenues between $60.5 million and $61.5 million. • Adjusted EBITDA is expected to increase year-over-year by 15% to 20%, or between $7.5 million and $8.5 million.

• Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. • Factors affecting future results include those in Form 8-K, 10-K, and 10-Q filings. • Uncertainty around H-1B visa policies and their impact on staffing models and client operations.

Q: I just want to go back to the APAC for a second here, a follow-up on Vince's question. I think earlier in the year you were talking about, you expected to see some improvement there after some elections had gone through. And just trying to get a better handle on what is kind of pushing out a return to growth in that market, especially on the federal spending?

A: Yes. The elections were over, but the pipeline is building slower than expected. The commercial side isn't big enough to drive growth without public sector spending, which is expected to return in the second quarter next year.

Q: I understand there's very limited, I'll call it, if any at all, exposure to the federal government here. But are you seeing any secondary impacts from like the government shutdown on any of the areas, whether it would be state and local or the education market?

A: No, 0. Our public sector in the U.S. was up almost 30% in the quarter, driven by their need to use AI to accelerate technology adoption.

Q: On the recurring revenues, I was just looking -- it looks like they were basically flat with what occurred in the second quarter, the same $28 million of revenue and about 45% of the overall. And just wondering, what do you think needs to happen to start seeing some of the faster growth on the recurring revenue side of the business?

A: Well, first, we think 9% is pretty good. Year-over-year, recurring revenues were up 9%. We feel very good about the recurring revenue stream, which is expected to grow to over $120 million next year as we continue to expand our offerings.

Q: Can you hear me? Finally, with so much boardroom focus on AI, are you sensing any increased effort from the traditional IT consultants or the hyperscalers to encroach on your advisory relationships?

A: No. From our standpoint, no. They are excellent relationship partners with us, and we don't run into them in a competitive standpoint for the work we do.

Q: In terms of AI business, how are the clients quantifying the ROI? And how much of that savings are you able to directly link back to a follow-on project?

A: Most larger enterprises are prioritizing profits over aggressive growth, looking to utilize AI for cost and risk management. They use AI road maps developed with us and execute at a comfortable pace. Savings from optimization are either taken to earnings per share or used for growth initiatives depending on the industry.

Q: On the uncertainty around H-1B visa policies under the current administration, any impact of positive or negative on your competitive space or delays either from your side or on the client side?

A: Gowshi, it's Michael, and good question. Change and uncertainty create opportunity for us. Enterprises will rethink staffing models, and we're well-positioned to advise on on-site vs. offshore staffing, creating opportunity for our advisory services.