Good day and welcome to the Information Services Group 2017 Fourth Quarter and Year End 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 the Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's fourth 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 that was furnished last evening 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 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 a greater transparency of key measures used to evaluate the company's performance. The non-GAAP measures, which we will touch on today, include adjusted EBITDA, adjusted net earnings and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided as additional information, and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last evening with the SEC. And 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, everybody. Today, we will review our record fourth quarter and full year results, we will brief you on our key operating and client highlights, discuss our 2018 focus, which will be on automation, robotics and cloud or what we call ARC and provide our guidance for 2018 revenue and EBITDA. Overall, 2017 was an outstanding year for ISG. We delivered record results and made the step change in our financials we planned with the Alsbridge acquisition. One of the keys to our success was the speed of our integration. Within the first 100 days, we were essentially operating as one firm, going to market as one ISG and bringing our combined capabilities to bear to serve our clients. As a result, we were able to deliver synergies of more than $7 million ahead of schedule, grow our digital and recurring revenues, expand our global client base and our existing client relationships and work together to develop new, innovative products and services that will contribute to our future growth. Let's take a look at the highlights. For the fourth quarter, we delivered record fourth quarter revenues of $67 million, up 23%; record fourth quarter adjusted EBITDA of $8.9 million, up three times from the prior year and record operating income of $4 million. For the full year, we reported record revenues of $270 million, up 25% and record adjusted EBITDA of $33.5 million, up 69%. In terms of our key revenue streams, our recurring revenues in the fourth quarter were $18 million, up 14%. And for the year, they reached $74 million, up 22%. Our Digital Solutions accounted for 40% of our revenues in the fourth quarter. That's double the share from the prior year and it reached $100 million for the full year. Within…

Thanks, Mike and good morning, everyone. Fourth quarter revenues were $66.6 million compared with 54.3 million in the prior year, which was an increase of 23% on a reported basis and 20% in constant currency. Currency positively impacted reported revenues by 3% or 1.7 million. Reported revenues were $39.3 million in the Americas, up 32% from the same period in 2016; 21.5 million in Europe, up 18% and 5.9 million in Asia Pacific, down $400,000. Fourth quarter 2017 adjusted EBITDA was 8.9 million, which was up three times from the $2.9 million reported in the prior year. We reported fourth quarter operating income of $4 million compared with an operating loss of 8.6 million in the fourth quarter of 2016. Included in the fourth quarter operating income of 2017 was $200,000 in acquisition related severance and integration costs versus 6.4 million in 2016. The net loss for the fourth quarter was 2.7 million compared with a net loss of 8.2 million in the fourth quarter of 2016. Let me comment on our fourth quarter tax provision. With the enactment of the US Tax Cut and Jobs Act in December, the US Federal corporate rate has been reduced from 35% to 21%. In the fourth quarter, we recorded $2.1 million in provisional tax expense, a charge that impacted both GAAP and adjusted earnings per share by $0.05. This is related to the requirement affecting many companies to re-measure our deferred tax balance as well as from the one-time mandatory tax on previously deferred earnings of certain non-US subsidiaries. Our effective tax rate for the quarter and year was also impacted by such items as the amount of foreign sourced income. Note that for the full year of 2017, we paid only $2.4 million in cash taxes. Our reported fully diluted loss…

Thank you, David. Overall, we are pleased with our operating trends and the momentum we are building in the market. They reinforce the confidence we have in our ability to strategically deliver value to our clients and shareholders. To summarize 2017, we delivered record revenues of 270 million, we reported 39% revenue growth in our largest region, the Americas and 10% growth in Europe, including more than double-digit growth in the UK. We generated record adjusted EBITDA of 33.5 million. And our EBITDA margin was up over 300 basis points to a bit over 12%. Our digital services revenue now represents 40% of our total and climbing. We delivered strong growth in RPA during 2017 and expect significant double digit growth in 2018, as demand remains high and we leverage our Grant Thornton alliance. Our cash balance is strong at $28 million, after buying back $3 million in shares and paying down $9 million in debt. Looking ahead, we continue to pivot and focus the firm on all things digital for our clients. In 2018, we are focusing on the ARC technologies; automation, robotics and cloud to drive our clients' digital transformations and grow our business. We have provided guidance for 2018 and are excited about our prospects for the year, driven by digital growth, especially in RPA and growing digital influence as evidenced by our partnership with Plug and Play. As always, we are focused on creating shareholder value for the long term and we are steadfast in our mission to deliver operational excellence to our clients. Overall, our foundation is solid, recurring revenues, digital and automation services, a growing list of blue chip clients and a talented global team of 1300 professionals on the ground in the middle of the digital revolution. Thanks very much for calling in this morning and now let me turn the session over to the operator for questions.

[Operator Instructions] Our first question comes from Vincent Colicchio from Barrington Research.

Curious, is your approach to guidance the same as previous years, in other words, you're taking a similar look at what your visibility is in terms of percentage terms of your outlook?

Yes. I mean I think we are trying to be conservative. I'll say that Vince. I mean I think we are very excited. We think we've got great momentum in the marketplace and we're very solid on our guidance. And as I said, we plan to provide an update to guidance midyear.

Okay. And then your pipeline for RPA. Has that continued to grow at the same rate you saw last quarter?

Yes. RPA is very high and we have good momentum in the robotics process automation and we expect significant growth in '18 over '17. And as you know, we grew significantly from a, essentially a start up to as I said greater than 15 million in revenues. So, we are looking for growth at 50% plus if you will in that range for our RPA business.

And then the UK business, I may have missed it, but for 2018, do you expect double digit growth to continue and will that be largely due to a catch up effect or something else going on?

We haven't itemized by country, Vince, but I think what we are seeing in the UK, I think fourth quarter was very significant around 30%. I think for the year, around 13% or 14% for the year. But as I mentioned, I think on the last call by the introduction of our automation services, because clients are still sorting out headquarters and some of these other locations where they're going to have work, the automation is transferable anyway - anywhere. So whether they stay with all operations in the UK or they move some to Paris or Frankfurt or whatever, the automation has clicked into them that they can proceed now regardless of some of the decisions they'll be making over the next year or so. We think that the UK has turned its corner and we would expect growth out of the UK in '18 for sure.

Our next question comes from Sarkis Sherbetchyan from B. Riley FBR.

So if I just kind of start parsing the fiscal '18 guidance, if I just simply look at the low end of the range on EBITDA and revenues, it seems like you're expecting fairly flat year over year EBITDA margin and then if we assume the higher end of that range, maybe a little bit of an uptick, any help on the cadence or just kind of the rationale behind modest flat to up EBITDA margin?

Well, I think, we grew by over 300 basis points this past year. So, we took that into consideration. We don't want to get ahead of our skis and the margin will depend on the ultimate mix that we end up able to sell during the course of the year, with our RPA business growing, so we have software licenses, some of our recurring revenues, if it grows at the rates we would hope, then that mix will allow us to have a higher increase in the margins. But I think we're trying to be conservative with approximately a 50-basis point improvement and depending on what the mix is, we'll be a bit lower or could be significantly higher as we proceed through the year, which is why we said we would do an update in mid-year this year, Sarkis.

And if I were to just kind of look at the first half of fiscal '17, the gross margin profile was a little lower than what we saw in the second half of fiscal '17, maybe any color around kind of the margin profile entering '18, would you expect the first half to kind of mimic what we saw back in fiscal '17 or do you think that the strength of the second half gross margin kind of continues on, just any help around how we should think about that cadence?

Yeah. I mean, it's just pretty consistent with the full year on 2018. It tends to be slightly lower in the first quarter and build slightly during the year, just to the level of revenues, in relation to the cost of the business, but overall, it should be pretty consistent year to year gross margin.

And just to kind of reiterate, I think you've been heavily investing in some of the more digital service and solution sets and I suppose your fiscal '18 guide reflects that. Can you maybe help us understand the level of investment that will hit the P&L? I know you mentioned CapEx would be elevated for '18 compared to '17? Just kind of wanted to understand what type of investment you're also making in the P&L?

Good question. So, the capital expenditure for '18 will be a bit of an anomaly. Normally, we are somewhere in the 4 million range or 4.5 depending on growth. We expect that to be 1 million or 1.5 million higher as we kind of finish up some of the platforms that we've been building on the digital front. And I think I've stated before that we are moving from our startup spot here down to Harbor Point down in Stamford, which is a terrific deal, our square foot cost significantly less and we're getting some additional assistance actually from the city to make the move. So, all of those things are positive for us. And, we're not quantifying it, but it's a few million dollars a year to build up our digital capabilities and depending on how fast some of our automation services grow will depend on what we want to do from a headcount standpoint. So we've been able to manage and leverage our headcount by redeploying people into the hot areas. If you also follow our ISG index calls each quarter, you will see that kind of the traditional sourcing business and the industry is essentially flat to 1%, 2% up, whereas the asset service business is growing quite significantly. That's why we've done the pivot in the firm over the last 24 months to move toward more automation, more robotics and more cloud type work, because that's what the market is demanding. So that's how we've kind of looked at the differences between '17 over '16 and now '18 over '17 is to keep plowing the money into the digital services, into the automation services if that's where the growth is evolving and you'll see that as we cross through the year in 2018.

Our next question comes from Allen Klee from Sidoti.

Tell me if I understand this right, for your EBITDA guidance, it implies that it's up, I think, 4% to 10% year-over-year, low to high end. You typically guide I think 9 to 12 for your long term model. So is the reason here the two things you mentioned of the change in the accounting and also what you had said earlier that you're going to be reinvesting half of the tax savings into your employees in digital, so longer term, we would think that could accelerate the growth rate?

Yeah. Allen, let me take a shot at that. Thanks for that. Yes. I think again on our guidance for the year, we apply this in quite a measured way for the year .So as the year progresses, I think you'll see this evolve nicely and that's why we said we would be back at midyear, mid-year standpoint, but yes, we're putting money into digital and our long term continues to be the 8% to 12% EBITDA growth and the high single digit on the revenue growth and we're giving you what we feel is a measured guidance at this point in time at the beginning of the year.

And then if I could understand the tax rate a little better, even if you exclude the one-time tax hit for the quarter for the deferred tax readjustment, your tax rate still would have been around - over 100%. So could you maybe - is that related to contingent considerations that are not deductible or is it something else and maybe I could follow up on that and when the contingent considerations will go away?

Well, you have to realize our effective tax rate varies from quarter to quarter based on the mix of earnings of various states and foreign tax jurisdictions, in which the business is conducted as well as the level of non-deductible expenses incurred in any given quarter. So, yeah, an estimate for the year and I guess in the fourth quarter, when you take the full look. So in the fourth quarter, the rate was impacted by our inability to utilize some foreign tax credit and shortfalls and the term shortfalls on the restricted stock price, the difference between what it was in the fourth quarter versus what it was when the stock was issued. So in combination, not being able to use some losses and some revaluation in the stock price, it impacted our full year rate, which got booked in the fourth quarter. But overall, as just noted, our cash tax for the year was 2.4 million; next year, 5 million to 6 million. So, I mean, there's no issue. It's just the one year of provisional accounting.

You mentioned planning to double the number of events that you do in '18 versus '17. Could you help us, what the size of that business was in '17 and also how you think of the margins of events versus the company overall.

So, yeah, Allen, this is Mike. Again, we launched our ISG Events business by bringing in an executive that launched actually all the big Gartner events. And she's done a terrific job getting us started last year. And as I said this year, we'll double that. We don't share what that revenue is, but the EBITDA margins on events, once you get them up and going, are well into the 30s and that's why we like this business. So our objective is to get our events business to a $10 million events business over three years. So, we've started - last year was really our first big event year. We had, I believe, it was eight events and this year, we're planning on 17 events. So I'll give you a flavor as to how we're trying to expand that. It works for us because everybody is interested in automation and cloud and digital, the workplace of the future and these things and they're all playing right into the service offerings that we're building for our client base. So it works on a great revenue stream as well as it helps us with leads marketing in our brand.

And then any comment - or can you let me know the number of clients and utilization.

Yeah. The utilization that we commented for the year was 62%, which was up versus 59% last year and the number of clients for the year just under 700.

Our next question comes from Ben Klieve from NOBLE capital.

So a few questions from me. First, with regard to '18 guidance on the top end, sorry, the top line. The low end of your revenue guidance is a decent level of step up from 2017 results and I'm curious if you can elaborate a bit on the expected seasonality this year of revenues. Do you think it will be similar to '17 or do you think there'll be more aggressive ramp throughout the year?

So, first quarter is always a bit softer because clients have to build up. We also have a tail off of one of our states, West Virginia that will not appear in Q1 this year that appeared in Q1 last year. So that is why the buildup for the quarters, for the full year is what it will be, but I would look at it similarly as previous years, it tends to be seasonal with first quarter being lighter and you build up a solid second quarter, third quarter, even though you have a bit of vacations over in Europe and then you have the end of the year, but first quarter is the one that tends to be the softest on both the revenue and then on the EBITDA because you add in FICA and so on during the first quarter that weans itself out sometime during Q2.

Also I'm wondering if you can elaborate a bit on the opportunity with Grant Thornton. I know this is relatively new, so I may be getting ahead of my skis here a little bit, but I'm curious what traction you've seen here thus far. How advanced the conversations are? I mean, is this an opportunity that you think has the potential to impact 2018 or is this really kind of building the bench for '19 and beyond.

So, a good question. So first of all, we do think this can help 2018. We signed the agreement in January. We've now held meetings with their partner group. They have a partner group in the advisory area and they have a partner group in their financial area, which is tax and audit. We've now held all of those meetings. We have an initial target group of, what they call, program clients and we are planning to use that as an incremental channel for us to sell into. When we look at our client base and what Grant Thornton's client base is, it was surprisingly little overlap and primarily is that Grant Thornton has a number of large private companies and I would call it kind of just below the Fortune 500 sets of clients, terrific client base. So, our plan is to attack that and we do think it will have an impact on our growth as we progress through 2018, probably not Q1, but I would expect it to happen in Q2 onwards.

And last, David, I want to make sure that I understand the accounting changes here correctly. It sounds like the changes in revenue recognition are not going to result in revenue getting pushed from 2017 to 2018, but rather the revenue was pulled out of 2017 and will be recognized below the revenue line in '18. Is that correct?

That's correct. So that is just - one time catch up is a book to equity in the first quarter and it's an estimate of what that impact is right now. But for 2018, you basically have a neutral impact of the change in revenue recognition. You have some revenue that will be accelerated, some will be slowed down, but it in total, you have 12 months' worth of revenue when you compare year to year, it is just unfortunate the $3.4 million that we mentioned of revenue due to the change will never be - we'll never see the face of the P&L to equity.

And was that 3.4, was that entirely a Q4 event or was that spread out throughout the year?

Well, what it is is, you've done work on engagement, particularly in the fourth quarter that you're not able to recognize. So, in RPA, we did reach the point where the software was implemented. So you continue to do work on the project. But we were not able to recognize it because the software wasn't operational. But starting in 2018, the revenue - the work on that engagement, we could start booking as we incur the revenue. So yes, the majority is a Q4 impact and when you look at the two revenue recognition methods.

Our next question comes from Marco Rodriguez from Stonegate Securities.

I was wondering if maybe you guys could talk a little bit more about some of the demand driver you're seeing out there right now on the ARC side of your businesses. If you can maybe kind of parse through the demand cycles you're seeing in the different geographies that you're expecting for fiscal '18.

Yeah. Good questions. So look, we think both the US and in the major countries in Europe and I'll call them Germany and the UK in particular are the ones that we are seeing the higher demand in the ARC areas, so our automation, digital and cloud services. US and many of the industry segments, especially now the financial services segments of both banking and insurance and think about it from a standpoint of people, process and technology where there's a lot of that, then the automation capabilities can give you great ROI as a client and the ROIs we are seeing are north of 30%. So think about $100 million and you can take out 30%, it becomes a big ticket for the client base. We're seeing it in the retail as continued pressure on retailers on their margins, what they can do to help take out cost automations, move more workloads to the cloud, et cetera. So I would say both the US as well as Germany and the UK and particular in Europe is where we see the demand.

And do you think or do you have a feel as far as, in the sales cycle, have you guys gone beyond the educational aspect of educating the clients on all the type of automation type services or are we still trying to kind of seed the market a little bit if you will.

Yeah. It's a mixed - I would call it mixed. There are some clients. They almost all want to do proof of concept, so we do almost, on almost every instance, we do POCs. But then once they see it, so some clients that will move at a faster pace and we're seeing that in services sector in particular, so and baking, insurance, we're seeing acceleration now of automation. But in some of the other segments who are now dipping their toes into automation, it will go slower. So that's a little bit about our mix and our margins. So if these things can move at a faster pace, we'll be able to increase our margin - overall aggregate margin at a faster pace. It will just depend on how fast the client wants to accelerate, but it's a mixed by industry segment, Marco.

And then kind of coming back to the gross margin aspect, I know you guys mentioned mix as a potential positive going forward with the digital services and there was a prior question about the second half gross margins being somewhat elevated versus the first half and also somewhat historically. So just trying to get a better sense here. Do you believe that your gross margins could probably start to hit that mid-40% level versus the historical low-40s as you start to improve the mix on recurring revenues and digital?

Yeah. Over time, I don't think you're going to see a dramatic year-to-year increase in the margins, but over time, as we increase the recurring revenues, as we continue to improve utilization, change the mix of delivery, all of those will contribute to improved gross margin and EBITDA margin for the business.

And do you think that that's a fiscal '19 event or do you think it's later than that.

I think it is - starting in 2019, you'll start to see that.

We will now take a follow-up question from Allen Klee from Sidoti.

You guys have done a great job of growing your recurring revenue. Could you just provide your current thoughts on where that might be able to go over the next couple of years if any?

Yeah. Sure. Thanks, Allen. So we increased our recurring this year up to 74 million. That was greater than 20% growth on that. We were about 60, I think 60, 61 a year ago. I've stated that we are targeting internally. We want to get to 100 million of recurring revenue over a three year period of time. So, we're on our way. That will help contribute to the increased mix from a margin standpoint as well the automation business as we hit 100 million of digital revenues this past year for the first time ever. So that was two factors in particular contributed to the increase, 300 basis point plus increase in our margins this year. So we've got ourselves now on kind of a nice steady state going forward. So yes, the recurring revenues are continuing, we're continuing to expand those by adding in benchmarking as a subscription and some additional software as a subscription, both in terms of our robotics software and our analytical software, that we call program pro-benchmark. So yes, those things are all moving in the right direction, up 22% for '17 and we've got ourselves an internal goal to keep that moving this year. But 100 million is our target.

There are no further questions at this time. So I would like to turn the conference over to -

Okay. Well, then, thank you very much. Let me close by saying thank you to all of our professionals around the world for both their individual and collective contributions in writing the chapters in our growth story over the last ten plus years and for the significant strides I think they will take on behalf of our firm on the road ahead and thanks to all of you on the call for your continued support and confidence in our firm. Thanks for joining us and have a great day.

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