Good morning, and welcome, everyone, to the Information Services Group Second Quarter 2024 Conference Call. This call is being recorded. Now, I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.

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. And I'm joined today by Michael Connors, Chairman and Chief Executive Officer; and Michael Sherrick, 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 last night 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 website at www.isg-one.com or the SEC's website at www.sec.gov. ISG undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improve the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance. The non-GAAP measures which we will touch on today include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided as additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night with the SEC. And now, I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Thank you, Barry, and good morning, everyone. Today, we will review our sequentially stronger results for the second quarter, our perspective on the demand environment, and our outlook for Q3. ISG delivered sequentially stronger profits in Q2 with adjusted EBITDA up more than 60% at $7.1 million. Our adjusted EBITDA margin at 11% was up more than 400 basis points versus Q1 on an improved product and service mix. And our utilization improved more than 800 basis points sequentially to reach a record high of 78%, reflecting a pickup in demand we saw in the back half of the quarter. Our revenue base stabilized in Q2 at $64.3 million, even with the first quarter. So good sequential progress in a challenging market where client decision-making and spending continue to be impacted by the macro environment. While reported results were down versus the prior year, we also had record revenues in Q2 last year, making for a difficult comparison. Our recurring revenue streams continue to be a strength for ISG, led in Q2 by our Research and GovernX businesses. We generated $32 million of recurring revenue in the second quarter, representing half of our firm-wide revenue with recurring growing 5% now in the trailing 12 months. One early sign of improving demand can be found in the contract value flowing through ISG Tango, our new digital sourcing platform. Total contract value or TCV, on ISG Tango has reached $4 billion in just the first 100 days or so since we launched the platform. ISG Tango is a growth and margin enhancement opportunity for ISG. This innovative AI-powered solution accelerates speed to value for our enterprise clients and the provider community. It also supports our margin expansion and allows us to extend our addressable market to midsize companies. Indeed, more than 25% of the current TCV on ISG Tango is for midsize companies. We also see the adoption of AI as a catalyst for growth. Our experts leverage ISG's towering strengths in operating model design, sourcing advisory, and governance, and our deep knowledge of the entire provider ecosystem to guide our clients in deploying AI at scale and accelerate business outcomes. Our ISG research team has recently produced a series of detailed surveys on AI that have been a key source of guidance for our clients. This includes a deep dive generative AI software Buyers Guide from our Ventana Research team. As clients progress from proofs of concept to full-scale implementation, ISG will be with them every step of the way, making sure they have the right platforms and operating models in place and are using AI effectively and responsibly. And with the momentum of AI, there will be a knock-on effect in other areas with increased spending on cloud-based infrastructure, software-defined networking, and advanced data and analytics to name a few. In short, AI is a net positive for ISG. With that, let me turn to our regions. As I mentioned at the outset, our revenues were stable quarter-over-quarter, but on a reported basis, we faced a difficult compare with a record Q2 last year. In the Americas, reported revenues at $40 million were down 2% sequentially and down 5% versus the prior year. During Q2, we saw double-digit growth in our manufacturing industry vertical and in automation and GovernX. Key client engagements during the second quarter included Thermo Fisher Scientific, Carnival, GE Aerospace, GE Vernova, and Centene. During the quarter, ISG won a $4 million engagement to renew the intelligent automation ecosystem of a clinical research business. ISG has delivered a range of services and has been a trusted adviser to this client for more than 7 years. We're also realizing new opportunities by way of divestitures. Because of our longstanding relationships with large enterprise clients, ISG is well-positioned to support spin-offs as they separate from their parent companies. For instance, in Q2, we signed a $1 million plus transformational technology sourcing engagement with a global aerospace spin-off with further growth opportunities on the horizon. We won a 3-year, nearly $2 million GovernX engagement with a new global health care company that was spun off from a large Fortune 500 firm. Also of note, we recently announced a new partnership with CoreTrust, one of North America's largest group purchasing organizations. Under the agreement, ISG will initially provide a custom package of intelligent automation services to CoreTrust's 3,200 member companies. Importantly, the partnership represents a bigger opportunity to serve the cost optimization needs of these 3,200 companies with additional ISG services, such as network, software, and sourcing to be offered in the future. Turning to Europe, our Q2 revenues of $19 million were up 6% sequentially, down 23% from last year. During the quarter, Europe delivered double-digit revenue growth in our consumer and insurance industry verticals and in our network, software, and research businesses. Key client engagements in Europe in the second quarter included Volkswagen, Xcite, Allianz, and BASF. During Q2, ISG was awarded a sourcing engagement with a new client in Germany, a leading science and technology company with opportunities for expansion. Significantly, we won this business on a referral from another large client base in Germany, underscoring the strength of our client relationships. That strength is represented in ISG's global client experience scores, which are among the highest in the industry. Currently, 98% of our clients express both broad satisfaction with our services and a willingness to recommend ISG to other companies. Now turning to Asia Pacific, our Q2 revenues of $5.5 million were essentially flat on a sequential basis, down 31% from last year. Key clients in the quarter included the Australian Taxation Office, Department of Home Affairs, Endeavor Group, another spin-off client, and new client Smart Group, a provider of salary packaging and fleet management services. Now let me turn to guidance. As I mentioned at the outset, our higher-margin mix and strong utilization positions us well as the market begins to recover. Our blue-chip clients are telling us that technology modernization remains a top priority, and investments will slowly catch up as macro conditions improve. Efficiency, cost optimization, and transformation remain the key themes. As clients become more cautiously optimistic, we expect demand to inch up in the months ahead. In line with this view and considering the seasonality of summer holidays, especially in Europe, we remain cautious on Q3 guidance. So for the third quarter, we are targeting revenues of between $64 million and $66 million and adjusted EBITDA between $7 million and $8 million. We remain confident in our strategy and stand ready to capitalize on new business opportunities as growth returns. So with that, let me turn the call over to Michael Sherrick, who will summarize our financial results.

Thank you, Mike, and good morning, everyone. Revenues for the second quarter were $64.3 million, down 14% compared with the second quarter last year. Currency had a modest $180,000 negative impact on reported revenue. Similar to Q1, our Q2 '24 results faced a difficult compare with a year ago when we generated our highest second quarter revenue ever. I would also note that second quarter revenue was flat sequentially, supporting our view that demand has stabilized. In the Americas, reported revenues were $40 million, down 5% versus the prior year. In Europe, revenues were $18.8 million, down 23%. And in Asia Pacific, revenues were $5.5 million, down 31%. Second quarter adjusted EBITDA was $7.1 million, down from $10.1 million in the year-ago period, resulting in an EBITDA margin of 11.1% as compared with 13.6% in the year-ago quarter. Sequentially, our adjusted EBITDA improved by $2.7 million, while margin rose 420 basis points, fueled in part by our record utilization and corresponding gross margin. For the quarter, gross margin reached 39.5%, up a strong 340 basis points from the March quarter. ISG had a second quarter operating income of $3.7 million compared with operating income of $4.9 million in the prior year. Our reported net income for the quarter was $2 million, or income of $0.04 per fully diluted share, compared with net income of $2.3 million, or $0.05 per fully diluted share in the prior year. Second quarter adjusted net income was $3.8 million, or $0.08 per fully diluted share, compared with adjusted net income of $5.3 million, or $0.11 per fully diluted share in the prior year second quarter. I would note again that sequentially, we saw adjusted net income and earnings per share increase by $3.1 million and $0.07, respectively. Headcount as of June 30, 2024, was 1,497, down 100 professionals compared with the prior year and down 64 from Q1. For the quarter, consulting utilization was a record 78% as compared to 70% in the first quarter and 72% in the prior year. For the quarter, net cash provided by operations was $2.2 million as compared to generating $2.8 million a year ago. We ended the quarter with cash of $11.8 million, down from $14 million at the end of the first quarter. During the second quarter, we repurchased $2 million of shares and made earnout payments of $1.7 million related to prior acquisitions. Our next quarterly dividend will be paid October 4 to shareholders of record as of September 6. We ended Q2 with a debt balance of $74.2 million, down $5 million from Q4 and flat quarter-on-quarter. Our average borrowing rate for the quarter was 7.3%, up from 6.6% last year. We ended the quarter with 49.7 million fully diluted shares outstanding. Overall, our balance sheet continues to provide us with the flexibility to support our business over the long term. Mike will now share concluding remarks before we go back to Q&A.

Thank you, Michael. To summarize, we made good progress in Q2 with strong sequential profit growth on an improved mix and higher utilization. Our revenue base stabilized and our strong pipeline provides clear signs that demand could pick up late this year as macro conditions improve. Our recurring revenue business remains strong, representing about half of our total firm-wide revenues. And we are confident that our operating model and our product and service portfolio, including ISG Tango and AI, positions us for success. 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. And now let me turn the session over to the operator for your questions.

And your first question comes from the line of Joe Gomes of Noble Capital Markets.

Congrats, everyone. Given that utilization rate is up to about the 78% mark, how do you guys expect that to go forward throughout the year? Are you aiming to keep that steady or do you expect the trend to move upward slightly?

So on utilization, 78% is, I'll call it, lava hot in terms of utilization levels. And again, just to remind everyone, we use 20/80 hours as our denominator, so we don't take out any hours there. So that 78% is probably top decile for utilization. That level is not sustainable, I don't think. I think our target is kind of in the mid-70s on an ongoing basis. So if we can be in that range, especially with the summer holiday season, we would not expect to maintain that level of utilization often and certainly likely not in the summer holiday season. So something in the mid-70s is our ongoing range, and that would produce a very good outcome for us if we can attain that on an ongoing basis.

Okay, great. And then just shifting towards the pipeline, what are you seeing during the quarter? Was there any kind of growth there, any more discussions with other clients? And are those clients still wanting you to spend more time upfront on projects, or have clients started wanting the company to move quicker on those?

So first of all, a couple of things just in terms of kind of the industry segments. The two hottest segments right now are manufacturing and consumer, and they're slightly different. The manufacturing is really pushing on a lot of transformation, while consumer is higher on cost optimization, just to give you a flavor of the two. Both of those are growing at a significant double-digit rate right now for us. Our pipeline is pretty robust. The issue is getting the pipeline out and then once we get it out, the pace of execution. We've not seen that change yet. Our sense is that the macro environment needs to lighten up before we'll see any kind of speed in the pace of burning through that pipeline. But we're very encouraged by the pipeline and we're very encouraged with the discussions. I don't see it moving at a faster clip than what we saw in the second quarter for the third quarter, but we do believe with the pent-up pipeline that we might be able to see that move at a faster pace when we get to quarter four. That's our view at the moment.

Okay. And just on the recurring revenue side, you guys had about half of revenue this quarter and about half of revenue last quarter. Are we still on track for a goal of $150 million in 2024 or how is that looking today?

Right. So our goal of $150 million is to exit 2025 at $150 million, sitting at $126 million today, which we believe positions us pretty well. So yes, we think that level makes sense for us. And then once we attain that level, I’m sure we’ll have a new goal. But it was not that long ago we were sitting at $82 million or $83 million in recurring revenue. So sitting in the $120s looks pretty good for us. So yes, we’re tracking at a good pace. We’re continuing to do all things recurring when we can, and being at half the revenue is a good spot for us right now.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Just curious if you could highlight which geographies have the strongest pipelines and which geographies should perform the best in the second half?

Well, first of all, I think the Americas is definitely ahead of the rest of the world, both in terms of the pipeline and what we would expect as we close out 2024. Part of this is the macro environment in Europe, along with the geopolitical environment there, adding a little more uncertainty in that market. So when you compare kind of the U.S. and Europe, the U.S. is going to move at a faster clip. I see us returning to year-over-year growth in the fourth quarter, definitely in the Americas and Europe will follow that, I think, Vincent.

And then I didn't hear what you said on Tango, the percent that was for midsize companies and the total contract value, what was that?

25% is from our midsize companies right now on Tango of the $4 billion.

And is that a number that you were targeting? Were you pleased with that?

Yes. It's actually at a faster clip, which I don't know if that can be sustainable yet. That's a pretty fast clip to achieve. The 25% from the mid-market for us will generally be all incremental revenue, as that's not a market we had previously tackled because we thought our premium pricing might not be able to accommodate that. The margins look about the same with the mid-market as it does with the large clients, and I don't know if 25% will be the ultimate number in the short term. But certainly, in the long run, that would be a good number for us if we were able to achieve that.

And how are you thinking about product mix in the second half? Will that work to your advantage?

Yes. I think you should see the product mix. Again, the third quarter is going to look like the second quarter. Overall, I think that the margins are going to be healthier as we turn into the fourth quarter and into next year, and we should get back to margins that we are all used to. All we need is just a little cooperation with the macro environment for the top line because we’re going to be able to leverage our fixed costs with the incremental revenue that we think is on the horizon.

Your next question comes from the line of Marc Riddick with Sidoti & Company.

So I was wondering if maybe you could stay on Tango. We're looking at $4 billion, up from about $2.6 billion at the end of the first quarter, which is a pretty good sequential increase. Can you talk a little bit about maybe the industry verticals that are attracted to Tango and the type of mix?

Yes. Tango is going to be beneficial across all industry segments that we serve. It's really industry-agnostic. Early days, but it looks like Tango as a digital platform will achieve two critical objectives. One is to accelerate time to value for the enterprise. Think about a sourcing transaction for a client that takes a certain number of weeks to complete: under this scenario, it will take less time, leading to quicker value and savings for the clients. For tech providers like Accenture, IBM, and others on the platform, it will also accelerate outcomes for them, reducing the time to get to a solution and enhancing their revenue access. So both the enterprise and the provider see Tango as a win-win. For us, as ISG, we view it as an opportunity for efficiency, speed, and productivity, which supports our margin expansion plans over the next few years as we can celebrate in a more efficient, productive manner, leading to higher margins and supporting overall firm expansion. So early signs indicate that we're aligning with our objectives, and we expect this to progress over the next 12 to 18 months.

And then you touched on the AI playbook. Can you provide an update on Ventana and the benefits observed so far?

Yes. Ventana Research is fully integrated now into ISG, and we will be referring to it more as our ISG software arm than Ventana Research in the future. The team is completely intact and has been a great help in broadening our business, especially on the software side. This year, we've doubled the number of software Buyers Guides sent into the market to assist clients with topics like AI. I mentioned the AI buyer guide earlier, which provides objective, independent assessments of AI software providers. It has proven very helpful; we utilize it with our clients and within ISG Tango, along with our Candidate Provider Qualification. It's been an outsized advantage, especially considering that the software industry is projected to move from $800 billion to $1 trillion. Our focus areas include AI platforms, generative AI platforms, and machine learning operations. Ventana Research has been instrumental in helping evaluate providers in the market and provide independent assessments. We're very pleased with Ventana Research, and their integration has enhanced our capabilities significantly.

Great. Lastly, could you provide an update on your acquisition pipeline and thoughts on valuations?

We remain very active in the market. There is a slight reluctance on the buy-sell side as the market has softened over the last year. The expectations on both sides have not aligned yet, which adds some complexity. However, we are optimistic and continue looking for areas related to digital and recurring revenue streams. If we find something that accelerates growth or enhances capability, we're ready to act. Overall, we continue to balance value, but it has not quite reached previous levels, and a bit of time should help ease that imbalance.

Your next question comes from the line of Dave Storms from Stonegate.

Barry, Mike, this is Rob filling in for Dave. I have a few questions for you here. First, on guidance, could you clarify the key factors influencing your Q3 guidance? I understand your Q3 guidance is consistent with Q2. Does this imply that we might face late client decision-making and not experience the same growth in the latter half of the year?

This is Michael. I'll take the question. As noted, Q2 saw stable revenue quarter-on-quarter and significantly improved profitability. We expect those trends to continue in Q3 but also recognize a seasonality pattern in Q3, particularly due to summer vacations, especially in Europe, but also in the U.S. Therefore, we wouldn't expect the business to run as hot due to this seasonality, which is the rationale behind the guidance we provided earlier on the call.

Regarding ISG Tango, are there specific sectors or client types that you expect to have the most impact moving forward?

Tango is effectively industry-agnostic. By this time next year, we expect nearly all of our sourcing transactions to flow through ISG Tango, given its applicability across all industries and service infrastructures. This offers an opportunity to enhance efficiency, which will improve productivity and ultimately impact our firm margins positively. Therefore, as we target margin expansion, Tango is one of several elements contributing to this objective.

Your next question comes from Singular Research.

Given the competitive market for AI talent, what strategies are you employing to attract and retain top AI professionals? Also, is the current proof of concept phase for AI a temporary headwind for margins?

We are building our internal team and training them in AI. We have launched a full AI training university for many of our consultants. Our first source of talent is our global workforce, and we feel confident in investing in them to get skilled in AI. Our turnover is quite low, which has always been the case for us; therefore, we are confident in our approach. I wouldn’t characterize AI as a headwind; rather, we see it as a potential tailwind for our business. Helping clients with AI-related challenges is an opportunity for us to drive value.

Could you explain the revenue model for ISG Tango?

The revenue model works by charging a fee to the enterprise client based on their sourcing transaction. The $4 billion is the value the tech provider would receive if a transaction is awarded. For instance, if we work with a hypothetical hotel and Accenture or IBM bids for that business, the hotel is on the platform along with the providers and ISG advising the enterprise on selection. If the contract is worth $250 million, that reflects the transaction value on the platform. Our fee might range from $500,000 to $1 million, and our arrangements are direct with the enterprise.

And I'm showing no further questions. I'll turn the call back to Mike Connors for his closing remarks.

Let me close by saying thank you to all our professionals worldwide for the progress we made in Q2 and for your continuing collaboration and dedication to clients and driving our long-term success. Our people have a passion for delivering the best advice and support as clients continue their transformations in both uncertain times and in better times ahead. I could not be more proud of them. Thank you all for your ongoing support and confidence in our firm. Have a great rest of the day.

This does conclude today's teleconference. You may disconnect at any time.