Good day and welcome to the Information Services Group Second Quarter 2017 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 everyone. 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. 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 future results, please refer to the forward-looking statement contained in our Form 8-K which was furnished this morning 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, 2016, and any other relevant documents including any amendments or supplements of 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-1.com or the SEC’s website at www.sec.gov. ISG undertakes no obligation to update or revise any forward-looking statements 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 most closely applicable GAAP measure, please refer to our current report on Form 8-K which was filed this morning with the SEC. And now, I’d like to turn the call over to Michael Connors, who’ll be followed by David Berger. Mike?

Thank you, Barry, and good morning everyone. Today, we will review our second quarter and first half results, brief you on our key operating and client highlights and update you on our full year forecast. We continue to make great progress, establishing ISG as a significant digital technology partner to enterprises globally. We achieved record revenues in the second quarter, a record number of clients served in the quarter, and an increasing demand momentum for our Digital Services, as we enter the second half. Let me review some key metrics that reflect this momentum. Q2 revenues were a record $68 million. We served 448 unique clients in the quarter and that’s a record number for ISG, up 19% from a year ago, including two new big brands, Google and McDonald’s, both of who are working with us on Digital Services. ISG recurring revenues were $18 million during Q2, that’s up 20% from a year ago. To remind you, we are targeting $100 million of recurring revenues within three years and forecasting approximately $70 million in 2017. With $37 million in the first half, we are well on our way to reaching our goals. ISG Digital Services continues to expand and now represents 35% of our overall revenue and climbing. There’s especially strong demand for our Robotic Process Automation or RPA services among banking, insurance and retail clients in the U.S. and the UK in particular. As a result of this increasing market appetite, we increased our spending in Digital Services by approximately $1 million during the quarter, investing in more people, marketing, client development and further product development. ISG Digital Services should have a good run way for growth over the immediate term, based on both our building pipeline but also industry growth projections including the following. Number one, in…

Thanks, Mike, and good morning, everyone. Second quarter revenues were $68 million compared with $60.4 million in the prior year, this was an increase of 15% in constant currency and 13% on a reported basis. Currency negatively impacted reported revenues by almost 3% or $1.2 million. Revenues were $40 million in the Americas, up 26% from the same period in 2016; $21.5 million in Europe, up 6%; and $6.6 million in Asia Pacific, down $600,000 with growth in constant currency. Second quarter 2017 adjusted EBITDA was $8 million, this compared with $7 million in last year’s second quarter. The result was driven by revenue growth, partially offset by increased investment in Digital Services. Adjusted net income for the second quarter was $3.5 million or $0.08 per share on a diluted basis, compared with adjusted net income of $3.5 million or $0.09 per share on a diluted basis in the prior year’s second quarter. We reported operating income of $500,000 for the second quarter of 2017, compared with operating income of $3.2 million in the second quarter of 2016. Included in the second quarter 2017 operating income were $1.9 million in additional depreciation and amortization expense $800,000 in acquisition-related costs, and $1 million in severance and integration expenses. The net loss for the second quarter of 2017 was $300,000 compared with net income of $1.7 million in the second quarter of 2016. Reported fully diluted loss per share of $0.01 compared with fully diluted income per share of $0.04 for the same period in 2016. I want to remind you that the Alsbridge acquisition brought with it two revenue streams, requiring different revenue recognition considerations. In network services, most engagements are contingency-based. Revenues are determined based on a percentage of the ultimate level of savings. Revenues are recorded when the work…

Thank you, David. Let me summarize. We had a very strong first half, putting us solidly on the path to achieving a step change in our financials this year. We had record second quarter revenue, a record number of clients served and continued growth in Digital Services revenues now representing 35% of our total, up from 30%. And recurring revenues reached $37 million in the first half, up 29%. EBITDA margins continue to expand now at 11.8%, up over 100 basis points versus Q1. Our cash balance is strong at $25.5 million and we have had a smooth integration of Alsbridge into ISG. As always, we are focused on creating shareholder value for the long term. I am optimistic about our 2017 prospects and our ability to progress our long-term strategy. Though we have had a nice move in our market cap this year, we believe the equity market will ultimately realize the significant value we are creating and reward us accordingly. Thanks very much for calling in this morning. And now, let me turn the session over to our operator for questions.

Thank you. [Operator instructions] And we’ll take our first question from Sarkis Sherbetchyan with B. Riley & Co.

Thank you. Good morning, guys. So, first question here relates to the incremental spend that you did for the quarter to beef up the digital services advisory business. Was that about $1 million you said?

Yes.

And was that recognized in just the SG&A line or was that in direct cost and expenses?

There is a little in both.

Okay. Do you mind giving us the breakout of that?

You basically split it between the two.

Okay. And do you expect that to recur kind of going forward or was this really just the kind of the one-time spend to beef it up?

It’s to fee it up, Sarkis. We have seen -- this RPA area, in particular robotics is brand new for us and really the market. And I think I gave you some of the key metrics that we have been looking at and then we are anticipating that this will continue to grow. So, we decided to go ahead and add in Q2, but I think it’s a -- at this point for 2017 anyway, I think it’s just a one-time event.

Got it. And so that’s really what reflects the modification to the adjusted EBITDA guidance, is that correct?

Yes, that’s the only thing.

Got it. Just moving on to the recurring revenue number, I think you mentioned $18 million for the quarter and that’s what, about $37 million for the first half? And in your comments, did you say you expect $70 million for the year?

Yes. That’s our -- I think we gave that earlier in the year that we estimated that recurring would be approximately $70 million for the year, up from I think it was around 60 last year.

Is there anything going on in the back half of the year that we should be aware of, either from recurring revenues in aggregate that it’s kind of tempering off or is that just kind of positioning it conservatively?

I think it’s the latter, but we also have one public sector contract in West Virginia that ended in the second quarter. So, I would say that we took that into consideration.

We will take our next question from Vincent Colicchio with Barrington Research.

Good morning, guys. Couple of questions. So, UK, you said stabilized, flat year-over-year in a nice win with the Defense Department. And I am just curious, couple of quarters ago, you said, there was bunch of projects that were delayed and you still have guys on sites; you expected them to eventually come back. What are your thoughts on those projects? Have some of them gone way or were they still -- or do you still expect them to come back?

So, I think I mentioned that last year we made the decision to leave most, not all, but most of the people in place despite the fall off with Brexit. I think that’s helped us stabilize during the first half. And knock on wood, even though the full year, we have assumed roughly a flat UK kind of environment or a stable UK environment, the pipeline especially with digital in the UK looks promising, so we think that some of those projects will show fruit in revenue growth during the back half. But, we are very cautious there.

Okay. And you mentioned -- I think you said 35% digital contribution to quarter. I am curious -- you’d cited some important data points in terms of growth prospects of robotics and IA. I am curious order of magnitude perhaps, what portion of your digital is robotics and IA today, and how do you expect it to change over time?

Yes. We don’t break that out, although I will say we communicated earlier in the year that we expected robotics to be $10 million plus of our revenue, and it is tracking at a higher rate than that at the moment.

Okay. And then the network carrier sourcing business you acquired; is that business growing organically and do you -- and how large is that as a percentage of revenue?

So, the two, what I would call, revenue recognition items that are different this year, which is network and RPA, as David outlined, together represent approximately 15% of our revenue. So, that helps. But, we don’t break out robotics that much because of competitors that are out in the market, but that will give you some guidance to just give you a feel between the two, it’s roughly 15%.

And then, after you did the acquisition of all Alsbridge, you’d said that there is opportunities to expand you research business. I am curious if the growth in recurring revenues, if research was an important contributor to that.

Yes, research is a significant contributor and we think it will be for the full year. It’s around -- we try to focus it around emerging technologies around, cloud, digital, security, big data, AI, robotics, and those are all hot topics. We try to kind of create a niche for ourselves. We don’t compete with the research of a Gartner or Forrester, we try to put it into the areas that we have experience and expertise, and most part it is real live engagement data that others cannot have. And so that’s what we have been focusing and it has served us quite well.

We will take our next question from Allen Klee with Sidoti.

For the revenue that you’ve highlighted as a timing issue, how long does it take until it balances out?

Well, we think if you will notice, we have reaffirmed the full year revenues. So, we expect it to be completed this year. One thing to note Allen, and not necessarily for this call, but come January 1, the accounting for such items changes again under the new accounting rules. So that will be a different story next year. But our view for 2017 is it simply a matter of we have got to get certain outcomes to occur before you can actually recognize the revenue, but we are recognizing the expense. But we hope that that flows through for the full year and thus our full year guidance and revenue remains the same.

Okay, great. And then for other segments of former Alsbridge, besides like network carrier, the non-robotic type segments, could you give a comment on how they performed?

Well, we’ve fully integrated the business, so the outsourcing, our network, our software platform businesses, we’re now all and going to market as one. We have integrated the leadership, the teams. We are very pleased with the entire integration with Alsbridge, both on a people and on a business. We are cross-selling now into client base. You saw the client numbers for the quarter; they are off the charts for us. So, we feel very good about all aspects of it. Including by the way, I’ll add, including the cost takeout that we’ve also been in the process of accomplishing as well.

Okay. So, to follow up on that, I think when you announced the deal, there was projected to be around $7 million of synergies. Where do we stand on that?

Well, we said $7 million over 18 months’ period and we’re well on our way to achieving that number at this point.

Okay. And then, can you just remind us of how we should think about any seasonality in third quarter and fourth quarter?

Well, I mean historically second quarter has been our high. This year, we don’t think there’ll be a major drop off in the third quarter of this year. There are vacations in Europe during the third quarter, particularly in France that do impact the third quarter revenue.

We’ll take our next question from Ben Klieve with Noble Capital Markets.

Couple of questions for you guys regarding Europe. In the past, you’ve talked about the traction RPA was making in Europe, your customers kind of willingness to make investments in the higher return, faster payback period investments in the technology, but kind of the bigger investments of longer payback periods were kind of delayed in the post Brexit climate. I guess, I’m wondering, if you could just kind of update us on your take on that. Is that still the case? Did you notice that your clients are beginning to increase their willingness to make those larger investments? Have do you see that playing out in the first half?

Good questions, certainly on the digital front including RPA, because RPA is a bit quicker, meaning it’s months, not necessary years on ROI for clients that has taken hold in the UK in particular. Because as you know, I’m sure you’ve been reading all the Brexit decisioning is beginning to begin to unfold here, I think in the next 12 months or so, as clients are beginning to decide what operations they want to keep in the UK, what operations need to go elsewhere. So, I think you’ll see -- we think, we will see toward the second half of the year and into 2018 that some of the larger projects will take hold and then that should bode well for revenue growth for that part of the world. So, we’re cautious about this, but we’re optimistic that we will see this sooner rather than later based on some of the client behavior that we see going on right now.

And along that the same line, I guess, I noticed especially in kind of the May, June timeframe, a lot of banks really started to make their plans, I don’t want to say official, but made their plans more public about shifting away from London towards Frankfurt and Dublin. And I guess I’m wondering have you noticed any notable business improvement in the financial vertical in Europe?

Yes, we have. Actually, it’s a very good observation. The financial services sector, banking in particular, but I would put insurance in there as well, in the UK is quite active at the moment. We are in a number of the top banks, beginning initial work with them in the UK. So, yes, we do see increased activity in the financial services, banking and insurance in particular.

Okay. If I remember correctly, that was one of the verticals that you highlighted in your prepared remarks, but you’re saying that maybe wasn’t a revenue driver in the second quarter, but you are seeing business pick up in that base, correct?

Yes. I would see that picking up in the second half based on the current activity level. But it did not have any material impact for us in Q2. But with the activity level we are involved in now, I could see that happening in the back half.

And then turning discussion to Digital Services, I’m trying to gauge the organic versus inorganic improvement. And I know, you won’t break that down, but I am wondering on a pro forma basis, when you acquired Alsbridge, can you remind us of what percentage of the revenues fell into what you would consider your digital service offerings?

Very little, I would call it quite immaterial.

Okay. Sorry go ahead.

I was just going to say, Ben, the advantage we have though is by integrating Alsbridge into the ISG totality, we are able now to access a broader client base to sell the broader portfolio. So, from that perspective, it’s been a nice leverage point, but in terms of revenues, it was really immaterial.

Got it, okay. And then, final question is regarding the disconnect between revenue and cost recognition from Alsbridge. I am wondering if that’s the same on both the cash and GAAP basis, sort of cash collection bit more favorable?

It’s got to have an impact on cash. I mean, we continue to build the client as the work is incurred. So, it’s just an accounting impact from the revenue recognition.

And we will take our next question from Marco Rodriguez with Stonegate Capital.

Good morning, guys. Thanks for taking my questions. A few housekeeping items here. What was cash flow from operations for the year-to-date period?

Cash flow from operations for the year-to-date period is $1.7 million.

And what is the deferred revenue balance on the balance sheet right now?

It’s $9.2 million [ph].

9.2, got it. Okay. And then, I was wondering if maybe you can talk a little bit more -- a little bit more color here on the Americas. Revenues sequentially declined, where I think that normally they are up a bit here sequentially. Can you just provide a little color there?

Yes. The Americas continues to lead our growth. As we indicated, the revenue growth was driven by continued growth in RPA and digital services. Network services continued growth as well, managed services and research also obviously components of the growth in the Americas. So, the Americas had a strong quarter, year-to-year growth versus the prior year.

So, I guess I was asking more sequentially, it was down versus Q1. Was that just a factor of maybe Q1 was a little bit heavier than you thought it was going to -- stronger than you thought it was going to be, or were there some issues with this revenue recognition that really kind of impacted Q2 versus Q1 revenue?

There are impacts, yes, definitely in Q2 from the revenue recognitions. And again, we have to basically -- in the RPA area, we have to complete implementation before we get start the revenue recognition; in network you have to -- we have to have an agreed upon contract with our clients and the telecom providers before we could actually record all the revenue from that engagement. So, there is some up and down in the recording of revenue in that sector.

So, how should we think about the seasonality then I guess going forward with these revenue recognition practices, which are obviously not impacting your cash flows, but just from kind of the seasonality aspect you’ve had historically, how should we think about that going forward with these new impacts?

We are projecting -- we did a $135 million for the first half; we have said we were going to record -- were going to project full year revenues over between 270 plus. So, obviously, the second half would be at least equal to the first half and we expect even stronger second half than we have first half.

Marco, let me just add one thing here, maybe to add a little additional color here. What we’ve never had before is this network and RPA and how we recognize revenue, both are growing businesses for us. So, as you build up the business, clearly it adds to the recognition, pushes things out as you’re in a growth business there. So, this is our first year ever with both of those. So, even though in prior years our first half has always been I think about slightly higher than the second half. not so sure that that would be the case this year because of network and RPA, and that’s why we’re so confident on our revenue bands, if you will, for the full year. But, this is kind of a one year anomaly because next year the recognition rule will change again.

Got you. And do you have any color on the change in revenue recognition for fiscal 2018, how’s that going to be altered?

Well, I think next year, again, the revenue recognition will change, so that for example for an RPA deal where we have to wait until we have implementation, so we could be working on a four-month engagement, have no revenue during the first four months, and then start booking revenue over an eight-month period; with RPA, we’ll be able to report the software in the months that we sell these software and we’ll be able to book the delivery -- the advisory services to implement the RPA software, beginning in the month when the engagement starts. So, it’s sort of -- it accelerates the revenue recognition. In addition, in the contingency based revenue, we’re now -- we book it all in the month where we complete the engagement. In 2018, we’ll be starting to book revenue the first month the engagement started, we’ll estimate the amount of revenue that that engagement will generate, and it might be a four-month implementation where we we’re clearly -- we’re looking all our revenue in the fourth month. And starting in 2018, we’ll be able to spread the revenue over the first four months. So, it has the impact of accelerating revenue versus the 2017 method and it also has a more alignment power incurring the cost on those engagements. So, they’ll be both, you have cost and revenue being booked at the same time, where now we have months where there’s just cost and no revenue on that particular engagement.

Got you, very helpful.

More to come on that as we disclose the impact of that next year.

Got you, very helpful.

And obviously, this is not unique to ISG; this is a new standard that’s going to impact many companies, particularly any company that has a software or a contingency based deal.

Got you. And last quick question and I’ll jump back in the queue. I hear you guys mentioned in your prepared remarks, in Europe, UK, kind of being at a stable and moving past the Brexit uncertainty. Maybe if you could provide a little color there, is this anecdotal type evidence talking to your clients or are there any other sort of trends you’re seeing in there that make you feel fairly confident about those statements?

Couple of things, Marco. One is, the first half was essentially flat, maybe up a tick, but essentially flat. So, at the beginning of the year, we said look, we’re going to plan on a stable UK environment, back half of last year, we know that decisioning slowed or stopped or went to a snail’s pace. We’re now seeing an uptick on our robotic services there because it’s a bit quicker. And no matter what happens to their operations, it can transfer easily. I think one of the other analysts asked the question about financial services. We’re seeing much more activity now in the financial services stream, we’re in those businesses. So, again, we’re going to knock on wood here because we don’t know exactly what the uncertainty will be but certainly the activity level has increased. And we would expect if that activity level turns into some real engagements that we would see an uptick in the UK sooner rather than later.

And that is all the time that we have for questions today. At this time, I’d like to turn the call back over to Mr. Holt for any additional or closing remarks.

Okay. Thank you. This is Mike. Let me just close by saying thank you to our approximately 1,300 professionals around the world. It is really their ability to help our clients achieve operational excellence and faster growth, especially through our digital transformation services for the reason for our strong performance in the first half. And I want to thank all of you on the call for your continued support and confidence in ISG. Have a great day and thanks for joining us.

This concludes today’s call. Thank you for your participation. You may now disconnect.