Good day and welcome the Information Services Group Second Quarter 2015 Results conference call. Today’s conference is being recorded and a replay will be available on ISG’s website 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 2015 second quarter results and conference call. I’m joined today by Michael Connors, Chairman and Chief Executive Officer, and David Berger, 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 results, please refer to the forward-looking statement contained in our Form 8-K that was furnished yesterday 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 for the fiscal year ending December 31, 2014 and any other relevant documents, including any amendments or supplements to these documents filed with the SEC when they become available. 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 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 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 submitted this morning. Now I’d like to turn the call over to Michael Connors, who will be followed by David Berger. Mike?

Thank you, Barry, and good morning everyone. Today David and I will review our first half and second quarter results, brief you on some operating highlights, update you on our most acquisition, discuss the demand environment and reaffirm our full-year guidance. Before we review our results, I want to welcome to our call Allen Klee from Sidoti, who recently initiated coverage of ISG. Thank you for joining us today. ISG now has six analysts following our firm, and based on an increasing interest in ISG and our long-term plan, we will be presenting tomorrow at the Avondale conference in Boston and in September we will be at three conferences: at the Barrington conference in Chicago September 1, and in New York City on September 2 for Sidoti and September 9 for Rodman & Renshaw. With continued growth in the second quarter, we had a strong first half with revenues up 9% and adjusted EBITDA up 6% in constant currency, with all of our regions contributing to our growth. Recurring revenue streams were up 8% in the half. We served 351 clients during the first six months, up 9% from the prior year with more than 10% of these clients new to ISG. The growth in our client base was primarily driven by the Americas, and we continued to invest in broadening our product offerings, as I will expand on shortly. Looking at the second quarter, revenues were up 6% with growth in all regions, including double-digit growth in Asia Pacific. Revenues grew by 4% in the Americas and Europe. Recurring revenue streams were up 6% for the quarter and adjusted EBITDA was $5.2 million. About $1 million in European revenues were delayed during the quarter principally due to the Greek debt crisis and its impact on decision-making in the euro…

Thanks Mike, and good morning everyone. Second quarter revenues were $53.4 million, an increase of 6% from the prior year on a constant currency basis. Revenues were $28.6 million in the Americas, up 4% from the same period in 2014, $18.7 million in Europe, up 4%, and $6.1 million in Asia Pacific, up 21% with growth rates in constant currency. Our second quarter adjusted EBITDA of $5.2 million compares with $7 million in the second quarter of 2014. Utilization for the quarter was strong at 72% versus 70% in the prior year. Headcount of 949 was up 16 billable positions from March, with most o the increase to support growth in managed services. Billable headcount was 711. As we discussed last quarter, we report revenues and EBITDA on a constant currency basis to reflect our operating performance. We don’t take on transactional risk, and the matching of revenues and expenses in non-U.S. currencies creates a natural hedge for us. Nonetheless, we are impacted by translation gains and losses for reporting purposes, and like many multinationals we saw significant foreign currency impact on revenues and EBITDA during the quarter. Currency translation negatively impacted reported revenues by $4.7 million or 9% and EBITDA by nearly $1 million. Our operating income for the quarter was $2 million, which compares with operating income of $4.5 million in the second quarter of 2014. Net income for the quarter was $1 million compared with $3.1 million in the prior year. Reported fully diluted earnings per share were $0.02 per share compared with $0.08 per share for the same period in 2014. Adjusted net income for the second quarter was $2.6 million or $0.07 per share on a diluted basis compared with adjusted net income of $4.3 million or $0.11 per share on a diluted basis in…

Thank you, David. We are pleased with our first half results and optimistic about our outlook for the full year. In summary, we delivered a strong first half with revenues up 9%, EBITDA up 6%, first half up revenues up 9% in the Americas, 26% in Asia Pacific, and 6% in Europe, our recurring revenue streams up 8% for the half with especially strong second quarter sales in managed services. We acquired a research and analyst company, part of our continuing investment in supporting our clients’ digital transformation, which also expands our ability to provide valuable market insights and develop new services. Our new credit agreement at favorable terms pushes out the maturity of our debt to May 2020, and we reaffirmed our guidance for revenues and adjusted EBITDA with revenue growth toward the top end of the range. Thanks very much for calling in this morning, and now let me turn the session over to our operator for questions.

[Operator instructions] Our first question, we’ll hear from Brian Kinstlinger from Maxim Group.

Thanks so much. Two questions. The first one, I’m curious - I didn’t hear anything about the engineering advisory services business, so I guess now that you’ve been looking at it for a little bit, I’m curious as to your outlook over the next 18 months, how the pipeline is building, maybe touch on sales cycles, and then maybe when it might become a meaningful contributor to business. Thank you.

Okay, thanks Brian. Yes, engineering services, we are targeting--we’ve now been in the market here almost a year, I would say nine months. We have kind of focused now around oil and gas, manufacturing, the telecommunications sectors, independent software vendors, and our medical device and life sciences manufacturers. We are a series of three engineering services conferences starting in late second quarter, will go through until early fourth quarter, with chief engineers of these major industry segments. Our first was held in July for the oil and gas industry in Houston and was very well received. As I’ve stated a couple of times, we are building a market. Too early to call on what size that could be. We’re optimistic. We’re in the market. We have a few clients that we are actually billing, but importantly what we’re doing is educating the market on how a relationship with ISG could enhance the industry, the buy-side clients and the sell-side service providers. So more on that later, Brian, but that’s where we are on all of that.

Great. Do you believe that the sales cycle, if it is in early stages, will be longer than a year? Are they really excited about this and it might be sooner? How should we think about sales cycles, given it’s such a new service?

Yes, it’s early, Brian. I can say that the two or three clients, there are three that we are active on right now. It took about three to four months to develop, so we’ve had the conference in July down in Houston and let’s give it a few months. We’re working those leads as we speak, but I would think that would be the life cycle in terms of from beginning to end on the sales. But again, it’s early because we’re educating, if you will, a new market.

And then I’m curious the percentage of total revenue for the acquisition this quarter that came from recurring revenue, and then should we think about this acquisition--as you mentioned, the gentlemen is a former Gartner analyst, a similar product where I think you were explaining you’ll offer analysts to your customers in return for that subscription. Is that how we think about it?

Yes, so a couple of things, first in terms of the product. They offer a subscription-based approach, just like Gartner and Forrester. That subscription enables the buyer, if you will, for a couple of avenues. One is access to certain research around emerging technologies, and the second, to your point, around analysts and the opportunity to speak with analysts about what’s happening primarily in the emerging technology areas. There is two things this acquisition does. Clearly it brings additional recurring revenues to the firm in and of itself, but secondly it allows us a platform to build out an analyst capability for our clients. So we look at this as just the beginning of that build out using the expertise of Bill and his team as we move forward, so not only do they bring revenue and bring reputation and focus, but we also think it will be the platform in which we can build out a further analyst and further out our subscription-based revenue streams.

Great. Last question I have - when you think about the Gartners and the Forresters of the world, I think the biggest [indiscernible] is the price. I’m curious - will you have to position yourself at a discount? Do you think you’ll have similar pricing? How do you sort of stack up against your competition to be attractively sold? Thanks.

So, good point. We do a value price. We don’t pay much attention, quite frankly, to the price points that the others look at. We look at what we can bring to the table. Our subscriptions range anywhere from $30,000 to $200,000-plus a year per client, and I would expect that number to rise based on including a broader set of value-added capabilities, including what Bill McNee’s team brings to the table. So we’ve got, I think, a good array to be able to target the right client base and its recurring revenue, and our retention rates are well over 90% in terms of clients and well over 100% on WaLa, so we feel pretty good about the price and maybe some future pricing power as well as we enrich, if you will, the offerings that we have available.

Great, thank you.

Thank you, Brian.

Next, we’ll move on to Allen Klee with Sidoti.

Yes, hi. Good morning. Can you talk about utilization and billable rates, and then also how the move to a more flexible workforce is going?

Yes. Allen, first of all, thanks very much. I’m going to ask David if he will address that.

Yes, we commented the utilization for the quarter was 72%. That compares to 70% last year. We continue to hire at the lower end of the pyramid to sort of change the workforce over time to bring in lower-cost resources to help deliver our product. On billable, in terms of realization rate, there was really no major change in that from last year.

Okay, and can you remind us for acquisitions, if you have a certain criteria--maybe first, how you finance the transaction, and then if you have financial criteria that you look for in the future as a result of it.

Yes, this acquisition was financed with cash on hand plus stock. Net of cash received, we paid $700,000 at closing. We have another $1.2 million that will be paid over the next three years based on achieving certain earn-out targets over those years. In terms of criteria, we tend to look at multiples of EBITDA, multiples of revenue. The initial multiple for this one was below 5 times on an EBITDA basis, and as Mike noted, we expect in 2016 for Saugatuck Technologies to contribute $2 million of revenues, bringing in an attractive list of new clients into ISG.

Okay, thank you very much.

Thank you.

Next, we’ll hear from Marco Rodriguez with Stonegate Capital.

Hi, good morning guys. Thanks for taking my questions. Just really quick, kind of following up here on the acquisition. You’ve mentioned the $2 million that you’re expecting as of fiscal ’16. Can you give us a sense of what their historical revenues have been sort of movement, if you could talk maybe a little bit about their mix from a geography perspective or anything of that nature, and what does their margin structure look like?

So a few things. We’re not disclosing their historical financials, but I want to say a couple of things about the revenue, and then let’s talk about the other points. First of all, the revenue that we expect from Saugatuck as Saugatuck is what we said, which was $2 million next year. But as I said, we look at this acquisition as a strategic one because it gives us a platform to build out our analyst capabilities beyond even Saugatuck. Secondly, our current research offerings also I think will benefit from Saugatuck in the sense that we can beef up the current offerings from a value standpoint, and we think we’ll have price points greater than what we have today. Margins for that business is well above, as is our own research, is well above the firm average EBITDA margin, and then it is primarily subscriptions and then there’s also an annual event, which is a digital conference, digital summit that’s being held in November at the Yale Club for business enterprises for its fourth year in a row. So it’s primarily subscriptions, events, events primarily around digital, and as I said, one upcoming in November. It’s a great business model, very much subscription-based, as you might imagine a Gartner business model to be.

Got you, and then I guess just trying to understand here this platform that you had discussed in your prepared remarks and the $2 million expectation for ’16. Is that expectation built--you’ve built in that aspect of the platform and that kind of firing on all cylinders, or is that kind of just starting to ramp up? Any kind of color you can provide there?

Well, our expectation is we’ll deliver $2 million-plus at Saugatuck as you think about Saugatuck today; but as I said, we will also use it as a platform to help build out a broader analyst and research capability over the next couple of years so that we can continue to enhance our overall recurring revenue streams. I think I’ve stated that we are currently around 25, a little over 25% of firm revenues is recurring, and at that time we reach toward the end of 2017, I would like to be well over a third on recurring revenue streams. This acquisition helps us strategically position and help us in that regard.

Got you, perfect. That’s helpful. Then if you could talk a little bit about the direct costs for your advisors. Utilization rates seem pretty level sequentially, up year-over-year, revenues on a constant currency are up sequentially and year-over-year, but the costs seem to be a little bit higher. Just any kind of color you can provide there, if there was maybe some one-time items in there or anything else of that nature?

The main impact when you look year-to-year is the impact of foreign currency, so obviously it hits the top line more than the bottom. When you look at the gross margin, most of that impact is being felt on the gross margin line, so that’s really the main driver here.

I would add one other thing, Marco, is in the second quarter we incurred the European cost and believing we would have a little over a million more of revenue, we ate all that cost while things slowed down a bit in Europe. Again, we should see all that flow through on the top line and we should see the benefit on the bottom line during the back half of the year, so that will help as well, so it may be slightly distorted with that.

Got you. Last quick question and I’ll jump back in the queue. In terms of your revenue guidance, when we’re kind of thinking through the impact of FX, what sort of headwind are you guys thinking about for the second half of ’15?

We’re going to continue to have probably 8% to 9% for the full year. The third quarter will be similar to the second quarter and slightly less we’ll experience in the fourth quarter.

Got you. Thanks a lot, guys.

Thanks Marco.

As a reminder, it’s star, one if you would like to ask a question. Next, we’ll move to Sarkis Sherbetchyan with B. Riley & Company.

Yes, good morning, guys.

Good morning.

Just wanted to quickly follow up. Did you disclose what the revenue line was for recurring revs, which includes the managed services, et cetera for the quarter?

It was 29% of our total revenue for the quarter.

Perfect. As far as the acquisition is concerned, would it contribute to revenues in the second half of this year?

Not materially, because it’s really only four months.

Okay, understood. When do you expect it to close?

We closed it on Friday after hours.

Okay, understood, and then as far as EBITDA contribution on the $2 million you stated for fiscal ’16, do you expect it to be accretive to EBITDA?

In ’16?

Yes.

Absolutely.

And then with respect to the guidance, you did reaffirm it and you also hinted toward the revenue growth at the top end of the range. Aside from the million that shifted to that second half, what else gives you incremental confidence that you will be able to deliver on the top end of that range?

Well, a couple of things. I tried to outline them in my remarks. Number one is we see an acceleration in Europe right now, provided nothing else changes, of revenue growth there, number one. Number two, we see a good, steady performance out of the Americas during the back half of the year. We see Asia Pacific third quarter looks very strong. Our recurring revenue streams also look strong. We also are seeing a pick-up in demand around our cloud and the emerging technology work with our clients, which is becoming increasingly important for our clients to work around, what they’re doing around cloud and digital. So as we move through the back half of this year and into 2016, we think that the product and service mix that we now have in the marketplace is serving us extremely well, and therefore giving us the confidence, if you will, on the demand front and why we say revenues we think would be at the top end of that range.

Okay, that’s fair. Just moving on, with respect to the partnerships you had announced intra-quarter, especially as it relates to the cloud services initiatives, can you maybe talk about what you’re seeing as far as demand pick-up, or what’s going on on the client side? If you can just give us a little bit of color [indiscernible] your operations.

Yes, so look - our partnerships are actually serving us extremely well. Let me give you a few examples, Sarkis, just how that works for us. Clients, for example, want to know what their IT cost of their current environment is, both on an applications and a workload basis, and our partnership with Apptio which helps us with the cost side of things has been quite helpful to try to answer that kind of question. Then, you have the question from clients who say, well, what would it cost to support that workload if I moved some of my applications to the cloud? And that’s where the partnership with Gravitant, which is a cloud broker, comes into play, and you saw in the quarter, late in the quarter we launched our ISG Cloud Comparison Index using the combination of our data as well as data from Gravitant, and that has been very well received by the enterprise clients. Then if you think about licensing agreements that clients have, again the enterprise-type clients, they ask the question, if I start moving applications to the cloud, what happens to all my software licenses? That’s where our partnership with NPI comes into play. So that’s maybe just a few examples of how our partnerships help address questions that our clients are getting, and we try to access not only our, I think, significant proprietary database but also our partners at Apptio, at Gravitant, at NPI and so on.

Okay, thank you. That’s all for me.

Okay, thank you.

We’ll move on to Peter Heckmann with Avondale.

Good morning, gentlemen. Nice results.

Thanks Pete.

I wanted to ask a question on the U.K. [indiscernible]. Was that an expansion of the contract or a renewal of that deal with the consortium?

Yes, good question. So what we’ve done with the U.K. Ministry of Defence - they call it MOD, so the Ministry of Defence. We did get a significant extension/expansion of that contract as part of our three-company consortium. Just as a reminder, we originally received about 20--what was it, David, £25 million contract a little over two years ago. We’ve gotten a sizeable and, let’s call it, equal to or greater than that number expansion and extension over the course of the next few years, so that was the significant movement in the quarter.

Very nice. Then some of the additional traction you’re getting in Australia with the public sector, can you remind us some of the larger projects you’re working on there? Was it the toll road and information?

Yes, for the quarter, this particular quarter, it was Department of Defence, it was Department of Immigration and Border Control - that’s one department, and also the Australian Taxation Office. That business has picked up. I think I’ve spoken in the past that the government there, because of the changeover on the federal side and then they had elections on the local side late last year, that there was some pause in some of that government spending. We have seen that pick up now that all the elections seem to be over and stabilized, so that is playing well to our position because we’re very well positioned on the government side in Australia. We’ve also had good movement, though, on the commercial side there led by Peter Swensen, who leads that effort for us down there, but Qantas, AIA, McDonald’s, Westpac Bank and others have also picked up, so I think our broader set of product and service offerings around service integration and management - we call it SIAM, also around our cloud areas, and also the acquisition that we did last year in the second quarter with CCI, which was a research capability that we had not had, has also picked up both in that region and we have taken that product, which is around what is the user experience inside a client, how well do they view a service provider’s services from, say, an HP, an IBM, an HCL, that also has picked up because we’ve now launched that into the U.S. and soft launched that into Europe, and all of those are as a result of the acquisition of CCI a year ago. So that total combination, I think is helping us drive our Asia Pacific success.

Okay, that’s helpful. Then on the managed services side, do you have some anecdotal commentary on renewals of some of those managed services deals? Are you seeing typically those renew as is; are you seeing any expansion of those deals, or have you seen any non-renewals?

So we have seen a good expansion. Most of the time when we do renew, we see expansion of our scope. I think I also mentioned in the quarter, we had our second largest sales quarter ever since we launched managed services, adding six new clients that will come onstream toward the end of the year, so we’ll begin to spend a little money on Q3 and a little bit into Q4 before those contracts kick off by hiring--I think I’ve said before, we hire them up ahead, we train them up mostly in India, so you’ll see a headcount increase in the back half of the year that will be driven by that. So all of that, I think is good. We did lose one client, but it was based on a merger between a company in the U.S. a very large retail client, between the U.S. and in Europe, and they’ve taken it all in-house as a result of that. Although we’re still billing now, that client will go away toward the end of the year. But other than that, and I think Blockbuster was the one we lost a couple of years ago when they went bankrupt, this is a business that’s very, very sticky and certainly has EBITDA margins well above the firm overall margins after Year One, after the start-up costs.

Got it. All right, thank you. Very helpful.

Okay, thank you, Pete.

There are no further questions. I would like to turn the call back to the speakers for any additional or closing remarks.

Okay, well thank you very much, and let me just close by saying thank you first to our over 900 professionals globally as they continue to drive great value and dedication to our clients. Their ability to help our clients I think achieve operational excellence is the reason for our strong performance in the first half. Let me thank all of you also on the call for your continued support and confidence in our firm. It’s an exciting time at ISG and we’re very excited about the future. Everyone have a great day. Thanks again for joining.

That will conclude today’s call. We thank you for your participation.