Good morning, and welcome everyone to the Information Services Group First Quarter 2025 Conference Call. This call is being recorded and a replay will be available on ISG's website within 24 hours. Now, I would like to turn the conference over to Barry Holt for his opening remarks and introduction. 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 first quarter conference call. 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's 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'll be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-1.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 provide 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 selective financial data on a constant currency basis. Non-GAAP measures are provided as additional information that should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For a reconciliation of 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 strong Q1 results, including our accelerating margins, our view of the current market, and our outlook for Q2. Our momentum continues. After finishing 2024 with a strong fourth quarter, ISG began this year with an even stronger first quarter. Our execution was superb and our underlying fundamentals are in great shape. We delivered Q1 revenues of $60 million, up 5%, excluding results from our divested automation unit. Growth was led by our largest revenue region, the Americas, up 17%. This is the largest year-over-year growth quarter in the Americas in the last two years. During our fourth quarter call, I indicated that we expected acceleration in 2025, beginning with the Americas during the first half of the year, followed by Europe and the rest of the world later in the second half. Our results reflect that outlook. For Q1, our adjusted EBITDA was up 68% to $7.4 million, with our adjusted EBITDA margin up more than 550 basis points to 12.4%. Our enhanced profitability is the result of our improved business mix and our disciplined operating approach, including Q1 utilization of 745 basis points year-over-year. Recurring revenues continue to be an important pillar of our success. In Q1 they reached $26 million, up slightly from Q4 and represented 44% of our overall revenue. AI continues to be at the heart of everything we do, with AI increasingly embedded in all areas of technology and services. We have served more than 200 clients with AI-focused research and advisory services in the trailing 12 months, up from the 150 we noted last quarter. As AI evolves, so do our offerings. For example, last month, ISG research published a strategic guide to agentic AI for enterprise leaders. With our strong expertise and knowledge of the AI ecosystem, clients continue to look for our advice and support on adopting and scaling AI across their organizations. Our AI-powered platforms also continue to gain traction with clients. For example, more than $9 billion of contract value now flows through ISG Tango, our groundbreaking sourcing platform launched last year. That's up more than 30% from the fourth quarter. Looking at the broader market, we see a growing number of clients accelerating their cloud adoption, modernizing their infrastructure, and leveraging AI operations to improve their IT operating efficiency. This plays right to ISG's strengths in digital transformation and cost optimization, powered by AI and sourcing. Today's market landscape presents both challenges and opportunities for organizations to maintain competitive momentum. We are in a great position to turn market disruption into a long-term advantage for our clients. By optimizing through AI, future-proofing partner ecosystems, and rigorously tracking ROI, we help our clients achieve cost efficiencies, while protecting strategic growth initiatives. With that, let me turn to our regions. As you recall, we divested our automation unit last October. The year-over-year comparisons I cite here exclude automation revenues of about $8 million in last year's first quarter. Our Americas region delivered an excellent quarter with revenues up 17% to $41 million, driven by double digit growth in our technology advisory business and in our banking, energy, utilities, health sciences, and public sector industry verticals. Key client engagements during the first quarter included Lockheed Martin, Kraft Heinz, and ExxonMobil. During the quarter, we won a $1 million plus engagement with a leading CPG company to support a major sourcing initiative covering applications and infrastructure modernization, including leveraging AI operations to enhance security and efficiency. We also won a $1 million engagement with a leading global energy company to support a major infrastructure and applications modernization program, extending our work for this long-term client. In our push into the middle market, which we define as companies under $10 billion in revenues, we also won a $2 million plus engagement with a multinational food processing company that specializes in private label products. We are supporting this first-time outsourcer in developing an operating model and selecting providers for the client's shared services functions, and ensuring a seamless transition with our change management services. Our ISG Tango platform, which allows us to provide a level of service attractive to mid-market clients, was instrumental in this win. We also signed a large research subscription with a leading U.S. provider of streaming services, the biggest win ever for our software research business. Turning to Europe, this market is showing early signs of a rebound with growth in our technology advisory business and double-digit growth in our insurance industry vertical. We expect further improvement later in the year as demand continues to pick up. Key client engagements in Europe in the first quarter included Instar, Air Liquide, Heineken, and Barmer. During the quarter, we won a new $1 million plus engagement with a health care client that we have been working with for the last 10 years. Our latest work involved supporting the client's business transformation to SAP S/4HANA. We also continued our work to support the IT arm of the German Ministry of Defense under a long-term framework contract. With our latest award, we are providing benchmarking services worth more than $1 million annually to lower IT costs, streamline processes, and optimize the organization in support of the German armed forces. Now turning to Asia Pacific, our Q1 revenues of $5 million were down $800,000 from last year primarily due to sluggish Australian government spending ahead of the May elections. With the elections now behind us, we expect government spending to come up again later this year. For Q1, Asia Pacific delivered double-digit revenue growth in our banking, manufacturing, energy, and health sciences industry verticals. Key clients in the quarter included IEMO, Standard Chartered Asia, Bank of Queensland, and AGL Energy. During the quarter, we won a new engagement with a large multinational bank in the region to support a major cost optimization program. Now, a few comments on the overall tech services industry. I think we have seen the first-order effects of US tariffs, lots of uncertainty followed by action planning. We will see the second-order effects, the real economic impacts in the quarters to come. Businesses that experience a direct impact from the administration's current policies are pivoting to new supply chains and cost optimization. For others, volatility is acting as a catalyst for technology transformation. Either way, our clients are not standing still. Last week, I spent time in Europe, and the environment is a bit different there, marked by a realization that Europe needs to be more self-sufficient and less reliant on the US. That means investment in some industries, think defense and aerospace, for example, and cost optimization in other areas to either reduce costs or shift spending. There is a sentiment, maybe it's a hope, that much of the tariff uncertainty for Europe will be resolved by the end of the summer. For ISG, we have seen no material change in buyer behavior to date. Clients are turning to AI and tech modernization to gain strategic advantage. This plays to our transformation work. For clients more directly impacted by the tariffs, our cost optimization is the sweet spot. Of course, we will continue to monitor the tariff uncertainty. But for now, we remain optimistic that we have the right portfolio mix to meet client needs in the months ahead. Now, let me turn to guidance. As I mentioned earlier, we are seeing positive signs of strong demand for technology services in the US. That's reflected in our Q1 results. We expect demand to continue in Q2 driven by cloud, AI, data analytics, and infrastructure modernization. Clients are not standing still. They are looking to get ahead of the curve. We like our position to meet that demand, but given the macro uncertainty, we will remain conservative in our outlook. So with that said, for the second quarter, we are targeting revenues of between $59.5 million and $60.5 million, and adjusted EBITDA between $7 million and $8 million. Now let me turn the call over to Michael Sherrick, who will summarize our financial results.

Thank you, Mike, and good morning, everyone. As Mike stated earlier, our revenue comparison with the first quarter of 2024 excludes our divested automation unit, which contributed about $8 million a year ago. This provides a more accurate view of our go-forward business. Revenue for the first quarter was $59.6 million, up a solid 5% versus the prior year. For the quarter, currency had a $600,000 negative impact on revenue. America's revenue was $41 million, up 17%. Europe revenue was $13.8 million, down 13%. And Asia-Pacific revenue was $4.8 million, down 15%. First quarter adjusted EBITDA was $7.4 million, up sharply from $4.4 million in the year-ago period, resulting in an EBITDA margin of 12.4%, up 554 basis points year-on-year, driving this solid improvement was consulting utilization of 77.7%, up from 70.2% in the year-ago quarter. For the quarter, ISG delivered operating income of $3.4 million compared with an operating loss of $2.4 million in the prior year. Our reported net income for the quarter was $1.5 million or $0.03 cents per fully diluted share compared with a net loss of $3.4 million or $0.07 per fully diluted share in the prior year. First quarter adjusted net income was $3.7 million or $0.07 per share on a fully diluted basis compared with adjusted net income of $0.7 million or $0.01 cent per fully diluted share in the prior year's first quarter. Our headcount as of March 31, 2025, was 1,320, which was basically flat with 4Q 2024. We ended the quarter with cash of $20.1 million, down from $23.1 million at the end of the fourth quarter. For the quarter, net cash provided by operations was $1 million. During the quarter, we paid dividends of $2.2 million and repurchased $3.3 million of stock. Our next quarterly dividend will be paid June 27th to shareholders of record as of June 6th. Fully diluted shares outstanding for the quarter were $50.3 million, down $300,000 from the prior quarter. At the quarter's end, we had approximately $15 million remaining on our share repurchase authorization. Our quarter-end gross debt to EBITDA ratio was 2.1 times, at the bottom of our 2 times to 2.5 times target range, and down from 2.4 times at December 31, 2024. For the quarter, our average borrowing rate was 6.5%, down from 7% last quarter. Overall, our balance sheet remains solid and continues to offer us the flexibility to support our business over the long term. Mike will now share concluding remarks before we go to Q&A.

Thank you, Michael. To summarize, ISG has momentum. After a strong Q4, we delivered an even stronger Q1. Led by double digit growth in the Americas, our revenues of $60 million exceeded our expectations, and our adjusted EBITDA was up a robust 68% as our margin expanded more than 550 basis points. Despite the uncertainty around tariffs, and maybe because of it, we see good market demand with a focus on leveraging technology for cost optimization and competitive advantage, and that plays right into our sweet spot and bodes well for the success of ISG. As always, we are focused on creating shareholder value for the long-term, and we are steadfast in our mission to deliver operational excellence for 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. Our first question will come from Dave Storms at Stonegate.

Good morning.

Good morning, Dave.

I wanted to start by asking about the Americas. How would you describe the growth pacing compared to your expectations? Do you anticipate a similar increase in growth going into Q2, or did you already witness much of your expectations for a strong first half in America during Q1?

So, Dave, thanks for the question. First of all, just a little context for my response to that is, right now in the US, we are seeing some very strong demand. It's both on the transformation side and on the optimization side. It varies depending on which industry and which industry is a little more impacted by the tariff conversations. But we would expect Q2 to be double digits again in the Americas.

Understood. That's very helpful. And then just looking at Europe, I know you've mentioned a couple of times now that you're expecting a rebound in the second half here. Are there any end markets that you're expected to lead the charge? Any end markets that you're starting to see green shoots in already? Anything like that would be helpful.

Okay. So the issue in Europe, and I just came back from there, is still a lot of uncertainty. Their uncertainty is probably captured threefold. One, clearly tariffs and what does it mean. So not unlike the US. But there they also have a lot of geopolitical cloud still, think the Ukraine War, etc. And so that is difficult. And third, they're just getting through a bit of an election cycle. That also has created uncertainty. And even if you think about what's happened in Germany, we have a new leader there, but we also have a difficulty getting a coalition together. So you add all those factors together, I would say there's still a cloud of uncertainty around a lot of the buying behavior. Having said that, what we are seeing in the pipeline is an increase in the pipeline in Europe. We saw it with some of our advisory services, our consulting around cost optimization, around using AI for efficiencies, increasing. I think if the tariff situation begins to clear a bit, that is our expectation that some of this pipeline will be released and that's what gives us our thought process for the back half of the year. Not in Q2, but we would expect to see Q3 and Q4. Q2 will be better, but I don't see growth in Q2, but we do see it beginning to ramp starting in Q3 and Q4 then. That's how we see it at the moment, Dave.

That's very helpful. Thank you. I'll get back in queue.

Thank you.

We'll move to our next question from Marc Riddick at Sidoti.

Hey, good morning.

Good morning, Marc.

So I wanted to touch a little bit on the strong start to the year in the dive of Q2 and sort of how that plays into where you finished with utilization. It seems like the utilization was strong not only just numerically, but it seems maybe from a seasonal perspective as well. I mean, a number that high in the first quarter, maybe you could talk a little bit about your comfort levels there and if there's any hiring needs that might come from that, how should we be thinking about that?

Hey Marc, it's Michael. I appreciate the question. I want to emphasize a couple of points. First, a big thanks to our team for their strong contributions; our utilization has been robust, and we're operating at the high end of our target range. We don't anticipate any significant improvements from here. Regarding seasonality, I wouldn't say there was much seasonal impact this time. The seasonal effects are more pronounced in Q3 and Q4, especially with the vacation pressures in Europe during the summer and the traditional holidays in Q4. We're comfortable with our current utilization levels and do not expect an increase. As for hiring, we're being cautious and disciplined in light of uncertainty, aligning our hiring efforts with the demand we see in our pipeline.

Okay, great. And then maybe you could shift over to use of cash with the leverage now coming down to the lower end of your comfort range. It seemed as though there was a pick-up in share repurchase activity in the first quarter, maybe talk a little about that, as well as maybe what you're seeing potentially for acquisition pipeline, availability, and valuations?

Yes. So I'll take the first part, and then I'll pass to Mike on M&A. So you are right, we're at the low end of the range. And so as you think about our cash allocation opportunities, right? In terms of buyback, dividend, M&A, and then investment in the business, we have an active process of looking at all four of those and assessing all four to see where we can create the most value. So we'll continue to look at all four, especially to your point now that we're at the low end of our range, and we expect to continue to see EBITDA improvement. On the M&A pipeline and what we're seeing, I'll turn it over to Mike. Yes. So we continue to be active in the market. We are looking for additional recurring revenue streams that we can put into our distribution channels. We're also continuing to look at everything around digital and AI that might accelerate our growth in those areas. So we will continue to look. There's always a delta between the ask and what we would like to be able to purchase at. So there's always that. That's really no change despite the differences in the markets, but we would expect to utilize some of our cash at the M&A level. But keep in mind, the way we do most of our deals is a little bit of cash, a little bit of stock, and a little bit of earn-out, and that's worked out quite well for us over the years. So that's how we would view it, Marc.

Great. Lastly, I wanted to inquire a bit about your limited exposure to the federal government. Could you share whether you've observed any response from state and local governments? Is it too soon to engage in those discussions? Are you starting to have conversations with state and local government clients and exploring their potential moves? Thank you.

In the U.S. public sector, we experienced double-digit growth in the first quarter, particularly in more receptive areas regarding cost efficiencies. Our pipeline is strong in the public sector, especially at the state and local levels. We do not engage in federal work, so we have no exposure to the federal DOJ activities currently in the market. Overall, we feel optimistic about our performance in the public sector this year.

Excellent. Thank you very much. Thanks, Marc.

We'll move next to Vincent Colicchio at Barrington Research.

Yes. Mike, good morning. Curious how you're addressing the rapid interest in AI and your rapidly growing needs. Are you hiring aggressively there? Are you able to hire aggressively there? Are you facing high turnover with employees that either develop or currently have AI skills?

Yes. So good question. So from an AI standpoint, we are almost in every instance now have an AI component in almost all of our work. So the first thing we did is we trained 90% of our client-facing staff around AI, and we have an ongoing skill-up program related to that because there's constant change, of course, in AI. So that's one. Two is the surgical hiring that we are doing is around transformation is around AI, and that is what we bring in. We are also trimming, if you will, skill sets that maybe we don't need as much. When we think about AI, if I think about it from the client standpoint and then kind of reflect it back to us. One is most clients are looking to secure funding for AI, and they do that by looking at what else they have and what they're spending and how can they shift it. So one is securing the funding. Two is how can I use AI to increase productivity. Third is how can I then get some scalable, cost-effective use of AI in my particular business. And then really, they're looking at, I would call it a Wave 2 scenario, which is how do I accelerate it, whether you're using Agentic AI or other areas in addition to kind of Gen AI use cases that are sitting out there. So as we think about how clients are kind of one step at a time looking at it, we are right there with them. We've had 200 clients in the last 12 months, and 50 unique new clients in the first quarter. We went from 150 to 200, as we mentioned. So this is a very hot area and why we kind of pivoted our firm to look at ourselves as more of an AI-centered technology research and advisory firm. So that's how we think about it, Vince.

And next question, Americas strength, you appear to be on quite solid footing right now with what you're delivering in the Americas. So I'm curious, your commentary on second half being strong for Europe and APAC, does that assume a slowing in Americas or based on your pipeline or will that continue to be strong throughout the year?

No. I believe the U.S. market remains robust. We expect stronger percentage growth in the first half than in the second, as achieving 15% to 17% growth each quarter isn't feasible. However, we are anticipating solid double-digit growth. We categorize disruption into three tiers: low-impact verticals that are less affected, such as public sector, defense, and healthcare, which are performing very well in the U.S.; moderate-impact sectors, including BFSI, energy, utilities, media, and technology; and high-impact sectors like manufacturing, automotive, CPG, and retail, which are facing significant challenges and are eager to optimize costs. Our focus is on addressing these categories. The U.S. has a good mix of all three, contributing to its overall strong performance. In Europe, the situation is different; there are fewer low-impact industries due to geopolitical issues and macroeconomic challenges, along with tariffs. As the tariff situation improves—some believe it could clear by the end of summer—we expect that Europe will become more receptive to our offerings and spending in the latter half of this year.

Thanks for all the color. Appreciate it.

We'll move next to Joe Gomes at NOBLE Capital.

Good morning.

Good morning, Joe.

I wanted to continue on the AI discussion. You mentioned you gained 50 new clients this quarter, and I think the goal you mentioned on the fourth quarter call was to double that business from 150 to 300 this year. I was wondering if the goal might be a little more ambitious than that now. And the second part of the question on AI, given the high demand for all things AI, are you finding any challenges in adding AI-based consultants and/or if there's any type of wage pressure for consultants focused on AI?

Good question, Joe. First of all, we do not see wage pressure. I think we have a good model of a combination of wage plus stock that helps us both on the traction as well as importantly, on retention. If you think about AI, we said, hey, look, let's double our client base here from 150 to 300. Certainly, we're sitting at 200 now at the end of Q1. We're not going to do another number. But I would say that as we turn into 2026, I would expect a large majority of our clients all to have an AI component. Now some will start slower because just like cloud, shockingly, and just like outsourcing, shockingly, there are companies that have not done either even at this date in 2025. So there's always the slower starters, if you will. I can't say at what point all of them would be, but we certainly would envision that by the time we get into the middle of 2026, most all of our clients will have an AI component with it, but it does gain steam as you go through. In Europe, we need Europe to kind of come around and begin spending and utilizing it in a way other than a proof-of-concept type way and to do it in a real, let's begin to scale this way, and that will really generate the kind of client increase on AI. We do have good, I'll call it, firm pricing on all of our AI work. So that helps. And as we think about our margin acceleration from, call it, 8.5% closing out last year, you're seeing the mix when we talk about our mix. AI is clearly one of them. Recurring revenues are clearly a second one. You're seeing our margins gradually move up. We're looking again to be a teenager in our margins soon. So all of these factors help with that, including things like the platform with Tango. So that's how we would think about it, Joe.

Okay. On Tango, you've done an excellent job increasing the value of contracts. I believe you mentioned it's now at $7 billion. How should we view the revenue contribution from this business? It has grown significantly from a standing start to $7 billion. How does this impact the company's revenue?

I think we have over $9 billion now. We moved from $7 billion in the fourth quarter to over $9 billion in the first quarter. The main benefit is that it helps us accelerate margins. This happens because we can complete work more efficiently, allowing our clients to achieve value for money more quickly. If we accomplish tasks in less time for the same cost, our margin clearly improves. We're witnessing this every day. Additionally, Tango has allowed us to enter the mid-market successfully. Previously, our pricing was more challenging in that segment due to clients' budget constraints with outside advisers. Now, Tango enables them to realize value for money faster and see returns more quickly. I provided a few examples, including a large food distributor we're working with. Without Tango, we wouldn't have secured that multimillion-dollar client. It's this combination of margin improvement and the opening of a new market segment that defines Tango's impact. We foresee a time when we won't even need to track the value flowing through Tango because, by 2026, it will encompass almost all our transactions and value. This shift will assist us, and you can already see the acceleration in margins within our sourcing business. That's the advantage Tango brings us.

Thanks for that. I’ll get back in queue.

And next, we'll go to Gowshi Sri with Singular Research.

Good morning. Can you hear me?

Yes. Good morning.

Good morning. Congratulations on your progress. My first question is, given the rapid productivity gains in AI and IT services, how are you thinking about calibrating your delivery model and pricing strategy to capture both more value and defend your margins since you were saying that the margins have improved.

Thank you for the question. We have several initiatives related to AI. First, our AI advisory business is thriving, especially in the United States. We are integrating AI into our platforms like Tango and GovernX for intelligent contracting. Secondly, we are leveraging our top-tier research and software capabilities to inform clients, which helps us grow our recurring revenues in software and research. Lastly, we are using AI to enhance our operational productivity. Together, these efforts will improve margins and boost productivity, as reflected in our workforce. This comprehensive approach will drive an acceleration in our overall margins.

Got you. And in terms of the shift to increased tariffs, what kind of increased activity are you seeing in work with global capability centers? Is that at its early stages from call centers to innovation? What is the real opportunity here? Is that really at the early stages or are multinationals really putting some thought into it?

Yes, I'll start and then Michael will jump in here. GCCs are hot, okay? These are global capability centers that are hot in the sense that what our work is, is around advising clients around GCCs, whether formula whether to shrink them or whether to sell them and do something else differently. In fact, in July, I'm holding a CEO conference for half a day with some of the major GCCs globally in Bangalore because of how hot this whole area is. We've had quite a demand for this. We've kind of created an invitation-only event for a few hours in Bangalore to cover this particular topic. Let me ask Michael Sherrick, who's really right on point for us on GCCs here to comment further.

Yes, got you. I think it's a really good question and a really good point on the evolution of the industry. This piece of AI is driving because it's moving so much beyond the technology component to business function and activities. That's really what's driving this move to GCCs and the desire for the enterprise to control it differently than they would have done with labor arbitrage. I think there's a lot more to come on this. We're very active in this space from an advisory standpoint and helping our customers, our enterprises. As Mike said, we've got a whole bunch of things coming up on the calendar directly aligned to this as we continue to be out in the marketplace.

Okay. And just my last question. Regarding your balance sheet in order to take advantage of all the new developing areas, what kind of investments do you still need to capture the value proposition?

I wouldn’t describe it as a need. It’s more about staying current and maintaining relevance. When considering the tools and platforms we have, it’s important to make the right investments to integrate AI technology effectively across all areas, whether it’s Tango or how our enterprises and providers utilize our research. We are focused on keeping the existing solutions relevant rather than developing entirely new ones, emphasizing enhancement and upgrading.

Thank you, guys.

Let me close by saying thank you to all our professionals worldwide for our continuing progress and for their collaboration and unwavering dedication to our clients in driving our long-term success. Our people have a passion for delivering the best advice and support to our clients as they continue their AI-powered transformations, and I could not be prouder of them. And I want to thank all of you on the call for your continued 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.