Earnings Call Transcript - III Q1 2026

Operator, Operator

Good morning, and welcome to the Information Services Group First Quarter 2026 Conference Call. This call is being recorded, and a replay will be available on ISG's website within 24 hours. Now I'd like to turn the call over to Mr. Will Thoretz for his opening remarks and introductions. Mr. Thoretz, please go ahead.

Will Thoretz, Head of Corporate Communications

Thank you, operator. Hello, and good morning. My name is Will Thoretz. I am Head of Corporate Communications for 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 would 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 sections of our most recent Form 10-K and 10-Q filings. 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 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 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 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 would like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Michael P. Connors, Chairman and Chief Executive Officer

Thank you, Will, and good morning, everyone. Today, we will review our strong Q1 results, our compelling AI transformation story, our view of the broader demand environment and our outlook for Q2. ISG had a strong first quarter and an excellent start to the year, continuing our momentum. Our Q1 results, both revenue and EBITDA were at the top end of our guidance. Revenue was $61.2 million, up 3%, led by 25% growth in Europe and 9% growth in recurring revenues, powered by our research, public sector and governance businesses. In terms of profitability, Q1 marks the sixth quarter in a row that our adjusted EBITDA has grown by double digits. Versus the prior year, it was up 12% to $8.3 million, and our adjusted EBITDA margin was up more than 100 basis points to 13.5%, fueled by a more profitable business mix and our strong operating discipline. Now a few comments on our AI transformation story. AI demand continues to accelerate for ISG. In Q1, we delivered $21 million of AI-related revenue, about one-third of our firm-wide total. That was up from $12 million a year ago. AI-related revenue includes work where AI is a key part of the client solution, including AI research and insights, AI strategy, sourcing governance, operating model design, business case validation, software, tech provider evaluation and transformation support. AI and the cost optimization initiatives that fund digital transformation remain leading areas of client investment, and that plays to our strengths. Apart from AI-driven solutions, we are leveraging AI in our own client delivery model to improve speed, quality and efficiency, thereby supporting margin expansion over time. Our recently launched ISG AI Index underscores how the AI market continues to develop. Initial spending is concentrated in infrastructure as hyperscalers ramp up capacity to meet demand. Software and platform providers are beginning to monetize their AI capabilities, while managed services is still in the early stages, indicating the larger opportunity remains in front of us. As AI demand rises, so does complexity. It's in these periods of disruption, especially, that clients turn to ISG for our independent trusted advice. Each year, we influence more than $200 billion of tech spend. This activity informs our advisers and researchers, expands our benchmarking data and delivers data-driven insights and recommendations our clients depend on for their AI-powered business transformations. While AI adoption is still in the early stages, pilots are progressing into broader deployments. We expect this to translate into sustained demand and a growing pipeline of opportunities for ISG. One of the highlights of Q1 was the signing of our largest deal ever, a multiyear agreement valued up to $17 million to provide governance services to a top global manufacturer. Under this landmark contract, ISG will manage $300 million in global technology spend with 200 technology vendors to support a large-scale multiyear AI-powered transformation. This work is beginning, and we expect to support this client for up to eight years on this AI-centered client initiative. One comment on our ISG Tango. We continue to deliver great value through our proprietary AI-powered next-generation sourcing platform. More than $27 billion of contract value is flowing through Tango, which is now fully integrated into our workflows and has become integral to our sourcing business. Now turning to our regions. The Americas delivered $40 million of revenue in Q1, down about 3% from last year against a tough compare and up 4% sequentially from the fourth quarter. Our current Americas pipeline is robust, and we expect solid year-over-year growth in Q2. During the first quarter, the region saw double-digit growth in research and governance and in our health sciences, insurance and public sector industry verticals. Key client engagements included Estée Lauder, ExxonMobil and the State of Arizona. During the quarter, we began work on a $5 million engagement with a leading U.S. health care company to deliver technology, cost savings and AI-driven innovation with the goal of improving patient care. We are providing a full range of services, including benchmarking, operating model design, sourcing, transition, change management and governance services. This is one of the largest ever technology transactions in the U.S. health care sector, where there is increasing demand to modernize and digitize care, pointing to a great future opportunity for ISG. Also within this sector, we continue to deliver a multimillion-dollar series of engagements for a global health care and medical products company, involving sourcing, governance, network and software. We are also supporting the client shift to agentic AI, which we expect will lead to follow-on work as the client accelerates its AI adoption. Our Europe region continued its momentum from the second half of last year with an excellent first quarter. Revenues were up 25% to $17 million, driven by double-digit growth in our advisory, software and governance businesses and in our consumer, insurance and health sciences industry verticals. Key client engagements in Europe in the first quarter included Allianz, Diageo and BARMER, a leading health insurer in Germany. During the quarter, we won a large engagement worth about $1 million with a welcome-back client, a leading medical technology company. We are supporting a broad range of infrastructure and software initiatives for the client, aimed at optimizing cost and adopting AI with room for follow-on opportunities. We also won a $3 million engagement with a leading pharmaceutical company, a new client for the firm. We are delivering software advisory support and executing on an enterprise-wide technology sourcing and vendor consolidation strategy, involving AIOps and proprietary AI platforms. The goal is to free up savings for the client to reinvest in its research and development activities. As you can see from these examples, this was a big sales quarter for ISG in the health sciences sector, both in the U.S. and in Europe. In Asia Pacific, our Q1 revenues of $4.1 million were down $700,000 compared with the prior year. Based on our current pipeline, including public sector work, we expect Q2 revenues to be up 20% sequentially. In Q1, we saw double-digit growth in our consumer and enterprise industry verticals. Key clients in the quarter included IMO and Woolworths. During the quarter, we continued our work on a new nearly $1 million engagement with a provider of data center services to power the region's ongoing adoption of AI. ISG is helping the client build out its core AI capabilities to support its rapid growth plans. Now turning to the broader market and our guidance for Q2. Clients continue to focus on cost optimization and AI investments despite uncertain macro conditions, and this plays to our strengths. We see current demand trends continuing into Q2. With this in mind, for the second quarter, we are targeting revenues of between $62.5 million and $63.5 million and adjusted EBITDA between $8 million and $9 million, which will continue our year-over-year growth and margin expansion. Now let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael?

Michael Sherrick, Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning, everyone. Revenue for the first quarter was $61.2 million, up 3% year-over-year. By region, Americas revenue was $39.8 million, down 2.9%. Europe delivered revenue of $17.3 million, up 25.3% and Asia Pacific was $4.1 million, down 14.7%. Adjusted EBITDA for the quarter was $8.3 million, up 11.8% with margin expanding 111 basis points to 13.5%. Operating income was $5 million, up 47.7% year-over-year, resulting in an operating margin of 8.2%. GAAP net income was $2.7 million or $0.05 per fully diluted share compared with $1.5 million or $0.03 per fully diluted share last year. Adjusted net income was $4.3 million or $0.09 per fully diluted share, up from $3.7 million or $0.07 per fully diluted share a year ago. Headcount at quarter end was 1,276, essentially flat with year-end. Our consulting utilization was 71.5%, in line with our typical first quarter levels. We ended the quarter with cash of $22.7 million compared with $28.7 million at the end of the fourth quarter and up $2.6 million year-over-year. For the quarter, net cash used in operations was $700,000, which was in line with our expectations given normal first quarter seasonality. We continue to expect strong operating cash flow for the remainder of the year. During the quarter, we paid dividends of $2.2 million and repurchased $2.1 million of stock. Our next quarterly dividend will be paid June 26 to shareholders of record as of June 5. At quarter end, fully diluted shares outstanding were 50.2 million, and our gross debt-to-EBITDA ratio was just under 1.8x, down from 1.9x at December 31, 2025. Our average borrowing rate for the quarter was 5.4%, down 115 basis points year-over-year. Overall, our balance sheet remains solid, providing us with a strong foundation to both operate and invest in the business, especially in our AI initiatives. Mike will now share concluding remarks before we go to Q&A. Mike?

Michael P. Connors, Chairman and Chief Executive Officer

Thank you, Michael. To summarize, ISG is off to a strong start in 2026 with AI acting as a tailwind. Our first quarter results were led by 25% growth in Europe and 9% growth in recurring revenues. We delivered our sixth straight quarter of double-digit growth in adjusted EBITDA, up 12% in Q1 with our margins up by more than 100 basis points. We believe ISG is a compelling AI transformation story in the technology research and advisory services market, not because we are talking about AI, but because AI is already having a positive impact on our revenue, our margins, governance wins and client demand. Indeed, ISG is uniquely positioned to help clients realize their AI ambitions. Our unmatched value chain of research, benchmarking, advisory and governance services is a key competitive advantage for ISG, delivering ROI to our clients and long-term value for our shareholders. So thank you very much for calling in this morning. And now let me turn the session over to the operator for your questions.

Operator, Operator

We will now begin the question-and-answer session. First question comes from the line of Joe Gomes from NOBLE Capital.

Joseph Gomes, Analyst (NOBLE Capital)

First of all, I wanted to ask on the new client. I don't know what more color you can provide on that and maybe the pipeline there for a similar size type of deals. I know you mentioned this is the largest one, but is the pipeline growing to those types of deals more than, say, $1 million or $2 million deals?

Michael P. Connors, Chairman and Chief Executive Officer

Yes, thanks, Joe. On the major manufacturing company, a very large deal, it's all around AI governance, which is a hot topic with our client base. They have allowed a diversification of the use of different tools on a global basis in a lot of these major enterprises. The question now is, with all the usage and the cost going up, how are we going to govern this in an enterprise? We have a number of discussions going on and a number of things in our pipeline relative to our governance services with AI governance at the top of the list. So we expect this to be a very hot area for us over the next couple of years, Joe.

Joseph Gomes, Analyst (NOBLE Capital)

Okay. And then just on the guidance, maybe you could walk me through if I look year-over-year, the second quarter last year was $61.6 million, and you were guiding to $62.5 million to $63.5 million. You already talked about Asia should be up 20%, which is close to $1 million there. I think you said the Americas should also see some growth. So was there something still in the second quarter numbers last year that would kind of — if we remove that, would show a bigger growth rate for this year? Or are you just being conservative because of the environment out there?

Michael Sherrick, Executive Vice President and Chief Financial Officer

Yes, Joe, it's Michael. I don't think there is any single item or individual thing I would point to that drives it. I think like anything, there's an uncertain macro environment. We're still early in May. And so as always, we want to be conservative in how we look at things and make sure that we're not getting ahead of ourselves.

Operator, Operator

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

David Storms, Analyst (Stonegate)

Maybe I wanted to start with Europe. You mentioned you had a welcome-back customer there. Just curious as to when you're looking at your pipeline, are you seeing an increase in welcome-back customers? Is this kind of a one-off? I'm sure you guys are always working on that, but maybe any further color there would be great.

Michael P. Connors, Chairman and Chief Executive Officer

The reference you're referring to: we call a welcome-back client someone who has not done work with us in the last 24 months. We have a lot of continuous clients; about 80% of our clients are continuous year-over-year. What happens in different segments depends on the environment and what clients want to move on and take action on. In this case, the examples I gave were around the health sciences areas. It's really driven by AI and the need to accelerate pace. In Europe, they are a little behind the U.S., primarily because the environment there is a little more constrained because of geopolitical and other factors. They want to make sure the air is clear. But we're seeing they are now moving at a more rapid pace than they had been. They're right behind the U.S., but they are behind overall, and AI is driving the need to move quicker.

David Storms, Analyst (Stonegate)

Understood. I appreciate that. And then I did want to circle back to a large client. It sounds like this contract is predicated on a client that's already been working with AI and now maybe needs a little more guidance. Maybe if you're having this conversation a year ago, the conversations were more about getting clients more comfortable with AI and learning there. Are you seeing more contracts where you're coming into an environment where the customer already has some familiarity and now you're working to professionalize? Or do you still see a large number of clients that you're doing more teaching on, if that question is asked the right way?

Michael P. Connors, Chairman and Chief Executive Officer

It's both. The specific example is a very well-known manufacturing company. They began to put together a strategic AI road map over the next eight years. They were in the early stages of developing the road map and asked us to help complete it. In the process, we ended up with this longer-term contract. Equally, others are just beginning the journey. It's hard to believe, but many clients are in the very beginning—late bloomers, similar to cloud adoption. Some companies have never outsourced even in 2026. The pace varies by industry. The consumer market is red hot due to pressure on pricing and discretionary spend; there's pressure to use AI to optimize cost. Health sciences is also strong. The public sector at the state level in the U.S. is also very hot. So it varies, but we have both sides of that coin depending on where clients are on their journey.

Operator, Operator

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

Vincent Colicchio, Analyst (Barrington Research)

You just mentioned that you're seeing some clients new to outsourcing. My question was going to be, is that happening to a great extent? In other words, is the complexity and shortage of talent in AI expanding the number of companies you could potentially be working with versus other recent years?

Michael P. Connors, Chairman and Chief Executive Officer

Good question, Vince. Let me start with the mid-market, which we define as companies under $10 billion in revenue—think $1 billion to $10 billion. That is a sweet spot. Most have CTOs or CIOs, but the depth of experience is not as strong as in Global 1000 companies. Our ability to go in, especially using Tango as our platform, has been a great door opener, as has the AI maturity index to help them understand their level of AI maturity. It's eye-opening to them. We've been able to penetrate that mid-market where we had difficulty before because of our pricing scheme. Now with AI and the complexity of that, they want to figure out how to use AI at scale to change their business, and they often lack the talent internally. So yes, it's been a nice uplift.

Vincent Colicchio, Analyst (Barrington Research)

And then Michael Sherrick, did the acquisitions meet expectations in the quarter? And what was the contribution?

Michael Sherrick, Executive Vice President and Chief Financial Officer

If you look quarter-over-quarter, what we really had this quarter was AIMI. Nothing really material year-over-year. It did meet our expectations. We continue to be extremely encouraged and optimistic on that transaction. It is a tip-of-the-spear door opener offering for us in the world of AI. We did that knowing it was a technology play and it would be that tip of spear, and we've seen that play out. We continue to be very excited with both the offering and specifically the team that we took on from there.

Vincent Colicchio, Analyst (Barrington Research)

And Mike, in APAC, are you seeing government come around there in Australia?

Michael P. Connors, Chairman and Chief Executive Officer

Our pipeline in APAC is very strong, including public sector opportunities. That's why we're bullish and expect the region to be up about 20% sequentially in Q2, which would make it roughly flat year-over-year. That turning point is being driven by an increase in federal spending based on our pipeline, and we expect to see that in Q2.

Operator, Operator

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

Marc Riddick, Analyst (Sidoti & Company)

I was wondering if you could talk a little bit about what you're seeing as far as demand catalysts—maybe from a regulatory standpoint or other external catalysts—related to the AI activity that you're seeing more recently?

Michael P. Connors, Chairman and Chief Executive Officer

The biggest catalyst we're seeing is in risk mitigation, compliance and governance. This was reflected in the very large client contract we just won. Overall, there is strong sentiment to find the best way to govern AI spend and the use of AI tools in large enterprises. When we run our AI maturity index, an individual takes about 15 minutes and it's all digital. They outline their level of maturity and the tools they're using, which we can roll up across the organization. The eye-opener is that organizations often find 10, 15, or 25 different tools being used globally, which raises the need to govern and manage the exploding use of AI tools and models. That's benefiting our governance services thrust that we started several years ago.

Marc Riddick, Analyst (Sidoti & Company)

Right. Excellent. And I was wondering—I'm not sure if you mentioned in your prepared remarks—but where are we now as far as recurring revenue as a percentage of revenue?

Michael P. Connors, Chairman and Chief Executive Officer

Let us get you that number. I think it's around 47%—approaching that 50% mark which we had laid out. We'll get you the exact precise number.

Michael Sherrick, Executive Vice President and Chief Financial Officer

To be exact, recurring revenue is about 47% of total revenue, and it was up 9% versus the prior year.

Marc Riddick, Analyst (Sidoti & Company)

That makes sense. That was sort of where I was getting to. And then lastly for me, it was nice to see the introduction of the AI Index last month. Could you talk a little about the feedback you've received and your expectations for moving that message forward?

Michael P. Connors, Chairman and Chief Executive Officer

We launched the ISG AI Index to cover three areas: Infrastructure as a Service, Software as a Service and Managed Services. Infrastructure uses December 2022 as the start point. From then through the first quarter of this year, Infrastructure as a Service is up 160%, revenue has doubled, profitability in the companies is up 60%, their stock price is up 113% and CapEx is up 265%. That's a clear sign of growth driven by hyperscalers. For Software as a Service, despite some noise in the market, it's up 53% since that date. Revenue is up 61%, profitability up 18%, stock up 39%, and CRPO—current remaining performance obligations or backlog—is up 71%. Managed Services is up slightly less than 1% since inception; revenue is up 8%, profitability up 4%, revenue per employee up 8%, while stock is down about one-third. What we see is revenue per employee increasing despite pressure on growth and margin; we expect that segment to turn over the next 12 months. The feedback on the index has been great. We've been doing indexes for over 90 consecutive quarters, and people appreciate the structure around the noise in the marketplace.

Operator, Operator

Your next question comes from the line of Gowshihan Sriharan with Singular Research.

Gowshihan Sriharan, Analyst (Singular Research)

Can you hear me?

Michael P. Connors, Chairman and Chief Executive Officer

Yes.

Gowshihan Sriharan, Analyst (Singular Research)

I wasn't sure the $17 million governance contract—can you give us a sense of the economics? Is that a fixed annual fee over that eight-year contract? What does the margin profile look like?

Michael Sherrick, Executive Vice President and Chief Financial Officer

Gowshi, in contracts like that there are really two components. The first is an implementation phase as you get everything put in place and ready for the ongoing contract. Then there's a fixed-fee contract thereafter. That's typically how those are structured for us.

Gowshihan Sriharan, Analyst (Singular Research)

Okay. At what point in the year does it start contributing meaningfully to the revenue line?

Michael P. Connors, Chairman and Chief Executive Officer

Think about it as roughly $2 million a year, and it should start toward the tail end of Q2. We should begin to see that annualized contribution starting in Q3.

Operator, Operator

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

Michael P. Connors, Chairman and Chief Executive Officer

Great. Thank you. In closing, let me thank all of our professionals worldwide for their continuing progress and for their collaboration and unwavering dedication to our clients in driving our long-term success. We had the honor of celebrating this week by ringing the closing bell at NASDAQ to represent our 20th anniversary. It's our people who have a passion for delivering the best advice and support to our clients as they continue on their AI-powered transformations, and I could not be prouder of them. So thanks to all of you on the call for your continued support and confidence in our firm, and have a great day.

Operator, Operator

This concludes today's conference call. You may disconnect at any time. Thank you again for joining us.