Good morning and welcome everyone to the Information Services Group Fourth Quarter 2024 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.

Thank you, operator. Hello and good morning. My name is Will Thoretz. I'm a 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 Michael Sherrick, 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 guaranteed of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished last night to the SEC and the Risk Factors section in ISG's Form 10-K covering full year results. You should also read ISG's Annual Report on Form-10K's and any other relevant documents including any amendments or supplements to these documents filed with the SEC. You'll be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-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 most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed last night with the SEC. And now, I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Thank you, Will, and good morning, everyone. Today, we will review our strong Q4 results, our further improved balance sheet, trends we are seeing in the market and our outlook for Q1. ISG finished the year with a strong fourth quarter. We began the quarter by selling our automation unit for more than $20 million in cash, which significantly improved our balance sheet. We delivered revenues of $58 million and adjusted EBITDA of $6.5 million, improving our EBITDA margins by more than 200 basis points from a year ago. With our strong cash position, we further reduced our debt by $7 million in the quarter. For the year, total debt reduction was 25% or $20 million. When you combine the $7 million of debt reduction with dividends of $4.5 million and share repurchases of $2.3 million, we created almost $14 million of value in Q4. On an operating basis, our profitability improved with adjusted EBITDA up 11%. This is due to our disciplined operating approach, our higher utilization in Q4 up more than 700 basis points year-over-year and our improved business mix. Our focus on operational excellence also is reflected in our strong cash flow from operations. With $6.6 million in Q4, coupled with nearly $9 million in Q3, we generated over $15 million in cash in the last two quarters. On the top line, revenues in our largest region, the Americas, were up 6% versus the prior year excluding automation. This is an early sign of the improving market conditions we expect in 2025, starting here in the U.S. And our recurring revenues for the quarter were 45% of firm wide revenues led by our GovernX supplier management platform. For the full year excluding the automation unit recurring revenues were $108 million. A few weeks ago, we announced a…

Thank you, Mike, and good morning, everyone. Before I start, I just want to reiterate that, all of our revenue comments this morning will compare fourth quarter 2024 revenue to fourth quarter 2023, excluding automation. We think this provides a more accurate view of our business performance going forward. For the fourth quarter, revenue was $57.8 million, down 2% versus the prior year. Currency had a $300,000 positive impact to revenue in the quarter. Americas revenue was $37.9 million, up 6%. Europe revenue was $14.9 million down 15% and Asia Pacific revenue was $5 million down 16%. Fourth quarter adjusted EBITDA was $6.5 million, up 11% from $5.9 million in the year ago period, resulting in an EBITDA margin of 11.3%, up a solid 240 basis points from 8.9% in the year ago quarter. This improvement in profitability allowed us to deliver absolute EBITDA dollar growth despite the year-over-year decline in revenue. ISG had a fourth quarter operating income of $200,000 compared with an operating loss of $3.5 million in the prior year. I would note that these results included transaction costs of $2.2 million for the automation divestiture. Adjusting for these costs, operating income was $2.4 million. Our reported net income for the quarter was $3 million or $0.06 per fully diluted share, compared with a net loss of $2.9 million or $0.06 per fully diluted share in the prior year. Our 2024 results included a net gain of $2.3 million on the sale of our automation unit. Excluding this gain, our GAAP EPS was $0.01 per share. Fourth quarter adjusted net income was $3 million or $0.06 per share on a fully diluted basis, compared with adjusted net income of $3.1 million or $0.06 per fully diluted share in the prior year's fourth quarter. Headcount as of December…

Thank you, Michael. To summarize, we delivered a strong quarter with Q4 revenue and adjusted EBITDA both at the high end of our guidance. Adjusted EBITDA was up 11% and the Americas, our largest region, returned to growth with revenues up 6%. Recurring revenue remained strong, representing 45% of our firm-wide revenue. We delivered strong cash flow and strengthened our balance sheet with the sale of our automation business. Our strong cash position allowed us to lower our debt by $7 million in the quarter, 25% for the year. And with dividends and share buybacks, we created nearly $14 million of value in the quarter. AI is at the center of everything we do at ISG, and this bodes well for our future, as we capitalize on the AI-driven wave of growth that will accelerate in the months and years ahead. 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. So, thank you very much for calling in this morning. And now let me turn the session over to our operator for your questions.

Thank you. [Operator Instructions] And we'll go first to Joe Gomes at Noble Capital Markets.

So, Mike, you touched on this a little bit in your prepared comments, but maybe you could do a little -- expand on a little bit. There's uncertainty in the economy, the federal government going back and forth on what they're doing is not helping confidence out there. And a lot of other industries or companies we've talked to were kind of frozen in place, in the decision making, because they're not seeing that long-term stable situation. And just what's going to give you guys the confidence that things are improving and will continue to improve?

Yes, good. Thanks Joe. Look, here's how we are seeing the market today versus even a quarter or two ago. Number one, the elections are done in the U.S. that creates certainty you know who it is. You know kind of what his policy directions are, corporate tax, et cetera. We know that, the tariffs are sitting out there and they are a bit of an unknown. And from our standpoint so far, we are not in the middle of that fray. We actually think, there may be a beneficial side to this kind of tariff noise, I'll call it in the market. And that's because our cost optimization offering is driving now, as some companies that maybe more impacted by tariffs if they hold consumer et cetera are looking for ways to be more efficient to take cost out now. And that has expedited in here in the United States and you're seeing that with the growth in the fourth quarter and I think you will see that, as we move into the first quarter. So, all of those tariffs as an example are putting some cost pressure on some enterprises. We think that, the driving of the cost out to either free up money for further transformation or to drop it to the bottom line is a net positive for ISG. Then, we look at some of the industries and where they are now versus where they were even a quarter or so ago. The banking and financial services industry in the United States was up 24% in the quarter for us. That is the first time that's turned the double-digits in a number of quarters. They are moving even despite some of the kind of noise in the market. They feel like, there's certainty in terms of…

Very much so. Thanks for that. And just one more follow-up for me. It's kind of a dual question. Obviously, with the sale, you now got a nice little cash kitty sitting on the balance sheet. You've talked about doing some more debt pay down. You've talked in the past about keeping an eye out on the M&A environment. But just kind of maybe rank, was you're looking at this year the uses of cash for you guys?

So, the way we think about it, our debt is sitting at around 2.4x today. That's going down to hover around 2x, as we evolve here in the first half of this year. I think we guided before that, we're very comfortable kind of toggling between kind of 2x to 2.5x. I don't know that I would see our -- the need to take our debt down anything levels below that. So, therefore, it frees up use of cash. We're looking at two areas M&A and stock buyback at the rates that the stock is. Of course, we're limited on volume levels that we can purchase, but we will be and are aggressive in the market for that. But also, on the M&A front, we continue to look at areas that can help to accelerate where we're headed on the whole digital and AI front. So, anything that we can drive toward recurring revenues is also, of course, of interest for us. So that's how we would think about it. So, think about it more on the M&A and the buyback front with the debt being kind of it will be closer to kind of the 2x level, if you will, as we go through the first half of the year. We'll feel very comfortable kind of where those levels are when you look at what our EBITDA will improve at. That help?

Yes, it does very much. Thanks. I'll get back in queue.

Thanks, Joe.

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

Could you give us a bit more color on the sales pipeline in the Americas, sort of what areas are strongest there?

Yes. So, I think for the U.S., what we're seeing is kind of two buckets. Our cost optimization bucket, which has always been pretty steady has picked up. I think I mentioned with the tariffs certain industry segments like consumer, I think are thinking that, they maybe felt harder than maybe even some of the other industry segments. So, we're seeing a pickup, as it relates in a few industries to accelerate the cost optimization. But importantly, I think in a number of the other industry segments, the idea to be able to utilize AI to become more efficient in their operations is increasing. You'll recall that, our view has been that the transformation side has been somewhat paused, because of the macro environment, with some certainty with the elections having taken place. I think that, some industry segments and you can tell by the growth in the U.S. and some of the segments I mentioned are now feeling like, they can begin to pursue and accelerate the transformation that includes an AI transformation in those companies. So, from our standpoint, the cost optimization and now an increasing level to work on AI and digital transformation will be the catalyst for the U.S. business over the next few quarters. Europe will be a bit slower and Asia Pacific will not kick in, I think until the government spending returns with the elections happening in Australia in over the next in -- a couple of months. I think we'll see that happen during the back half of the year once that gets settled down in that region in Australia. So, that's how we look at it, Vince.

And Mike Sherrick, what was the utilization rate number you cited? I missed that.

Utilization was 72%, up from 65% a year ago.

And can you remind us what level you're comfortable with at the upper end?

Yes. I mean, low to mid-70s, we definitely remain comfortable. We're running, I wouldn't call it overheated, but it's definitely hot as you get up towards those levels.

And Mike, any comments on APAC, thoughts on how that will progress this year?

Yes. I think it's going to be driven by the return to government spending in Australia. It's been slow. They have elections coming up in the April, May time frames. Everybody is kind of pulled back. There will be a new budget year coming up about the middle of the year. And once that returns, then our commercial business is good. We just need some more spending on the government side, and I think that you'll see the return to growth there. So, think about the second half there.

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

I wanted to touch a little bit on, maybe you could spend some time on the strategic repositioning and sort of how that might flow as far as throughout the year as well as maybe go-to-market strategies and things of that nature and sort of maybe what you've already done? Maybe I should take a step back, what you've already done in that vein and then what we should expect to see going forward?

Yes. No, good question. Look, let me give you some of the areas that we have been investing in and now are becoming more and more part of our business and why we reposition. We have -- in our research area, we have now flooded, if you will the market with AI specific information around what we call market guides, buyers guides or provider lens to understand for enterprises, where is AI going, what is actually out in the market, what are the ecosystems being built. There is a lot of written thought, research leadership out in the market for us. We started with the first state of the Gen AI report two years ago. Those have all been updated. Our Tango platform is AI-powered. That now has over $7 billion of contract value driving through that. That will get up into double-digits billions as we go through the year. The AI advisory business that we launched a little over a year ago, that is what is driving a lot of our advisory work, especially in the U.S. and in Germany and the UK, clients have a high appetite in demand that also will help us because our pricing will remain firm there because it's in higher demand. Our benchmarking, we have great data now over the past year, 15 months into our database around how AI is improving efficiencies. And so, when we're in front of enterprise clients, we can say with confidence what type of cost reductions they could expect with their partners using AI in terms of operations. We've launched AI Impact Summits to get enterprise clients together to exchange kind of best practices. We've trained up our entire 1,200 people that are facing clients with AI certification, so that they're well versed in this area as best as you can be. So, as we think about all of those areas, that's how we've now become so AI-centered as a firm and that's why we kind of defined our repositioning, because it's now into everything that we are doing the clients are demanding from us. So that's how we think about it, Marc.

That's really helpful. Thank you. And then wanted to just double check something timing wise. So, the sale of the automation unit had the component of the $20 million initially and then there was the second, I think it was $4 million or so, there was a timing thing there. Does the cash balance at the end of the year, did that include that $4 million or was the $4 million afterwards or how should we think about that?

Yes. Marc, it's Michael. So, you're spot on. So, it was $20 million upfront. There was a $7 million escrow. $4 million has been earned. Of the $4 million, $2 million has been collected. So, there's $2 million of the escrow that at year end was sitting on the balance sheet as a receivable. So that will be received in the first quarter.

Our next question comes from Dave Storms at Stonegate.

Just wanted to start with recurring revenue. It looked like it was flat quarter-over-quarter. And just wanted to kind of see what you thought your visibility was going into 2025? How this revenue might change with maybe upcoming contracts come to term, renewals, how the pipeline looks overall, anything of that nature?

Hi, David. It's Michael. So, excluding automation, which is how we are looking at it, on an absolute level, you're right, it was flat, which is not anything that would be surprising or of concern to us. It has to do with just timing of contracts and how things come on. So, when you think about it again, that segment, that piece of our revenue is heavily concentrated in things like GovernX, our research business, the long-term public sector contracts. So, we remain very optimistic. I mean, Mike highlighted the growth in public services. We expect to continue to see strong growth there and across the other two that I mentioned, as we look at 2025. So, we're looking for continued year-on-year growth in the recurring revenue absolute in 2025.

Understood. Very helpful. And then just one more for me. You mentioned a couple of key end markets like banking, the APAC government strength in throughout the year. Is there any other end markets that we should be keeping an eye on looking through 2025?

I think energy, I think utilities, think about all the what AI needs to be powered up. I think we're going to see both of those be quite healthy. I think the whole health sciences area will continue to you will see some real help there. I think on the technology front, you will see that. So, think about the Googles and the Salesforces, et cetera. You'll see that. I think the weak part will be automotive and a combination of the electric vehicle and what does that mean, and how does that proceed and tariffs and all those things. I expect that component of manufacturing, I would expect to be weak and possibly consumer depending on what happens with the tariffs. So, I gave you the positive ones and I would say, those might be the two might be lighter ones during the course of the year.

We'll go next to Gowshi Sriharan at Singular Research.

So, I apologize if you might have covered this in your prepared remarks. I had a slight technical difficulty. But in terms of your AI with 100 clients already served in the past year, could you help us share some of these AI-centric conversations that are maybe translating into committed revenue streams? Are clients moving beyond the exploratory phases into multi-year contracts and what percentage would you say are doing that?

Okay, good question. Yes, so what we are seeing around the whole AI is because of the efficiencies of using artificial intelligence to help to automate, there is both a speed and there is a cost element and we are seeing that now in almost every transaction, that we are working with our enterprise clients. We've been working with a chip maker, major utility company, a gasoline retailer in Canada, financial services companies, global hospitality and entertainment companies, a Canadian bank, insurance company. All of them now are looking on how AI ops uses AI including kind of GenAI, GenicAI to help automate the operations. And what that is doing is because of the efficiency we are seeing the contracts are going to go a little longer in its length, because they can take advantage of some of these cost efficiencies and they want to take them a bit longer. So, we're seeing the size of the contracts a bit larger, the length of the contracts being a bit longer, and we reflected that in our ISG index call that we did with the industry in January. So, those are the trends that we're seeing and I expect those to continue through the year.

Okay. Thanks for that. And in terms of APAC in Europe, I know you guys mentioned that it's probably kind of a wait and see on your end as the markets there improve. But is there a case for investments on your side? Is the brand perception in the U.S. much better for ISG than maybe in Europe is not as strong? Is there a case for reinvestment of the brand for Europe, APAC?

No. I would say our brand is strong globally. I mean, we are one of the key players in Germany which is the biggest market in Europe for example. We're strong in France. We're strong in Italy and we're strong in the UK. So, I don't think the brand has any impact at all. I think that, the overhang is the geopolitical environment that is holding back spending by some of our enterprise clients in Europe. And as I mentioned in Asia Pacific, it's just a matter of when the government spending picks up in Australia, in Canberra. And we expect it to pick up post their elections, which are before the end of the second quarter. So that's how we would think about and why we would see that Asia Pacific and Europe will lag the U.S. acceleration. But of course, the U.S. is our bread-and-butter business right now in our firm.

Awesome. You mentioned training-as-a-service kind of becoming scalable. Is this becoming a standalone, high margin revenue line? What's the kind of the TAM for this offering you think?

Yes. So that's a good question. So, our we call it TaaS, training-as-a-service. It's a recurring revenue stream. It's multi year. And what we go in and we help large enterprises understand the technology change. So, think about it from change management standpoint. And then, when there is change like S/4HANA for example, large installation with a top two aerospace company then all the people need to be trained and educated around the new technology. And so, they will contract with us for a multi-year to train them and basically training-as-a-service is how we sell it. So yes, that is a component of our recurring revenue growth out into the future. We are very bullish on that.

Will that be tied in with the AI story?

Yes. I mean, we are using AI. Actually, AI makes this more Yes. I mean, we are using AI. Actually, AI makes it efficient for us to scale our TaaS business. So, we're able to use AI to help on training, the development of training materials information and then the delivery of that training. So, yes, AI is enabling us to take this TaaS concept that we had two years ago and now begin to scale it.

And we'll move next to Marc Riddick with Sidoti.

I realized I forgot to ask one thing. And I was wondering if you could spend some time talking about what you're seeing with the potential for acquisitions and acquisition pipelines currently, and maybe what you're thinking about for what you're seeing out there, valuation-wise? Is there been any opportunities that are kind of beginning to uncover now relative to maybe three to six months ago?

Okay, good question. Yes, we are active as you know. We've done 14 in our firm here and we are always in the market, and we are active discussions, and we are focused around all things digital, all things AI, all things around recurring revenue. So, if we feel like we can accelerate our growth or fill some gaps like we did with the purchase of Ventana Research about eighteen months ago around software and the economy, we are going to jump on that. In terms of values, I mean, as always sellers think it's worth more than the buyer. So, nothing has changed on the dynamics. There, I would say that, to me, the valuations that are in the market are pretty fair. I would characterize them as. So, if we were able to find something that made sense and we can do it at a win, win and a fair evaluation as well as we do, we would jump on it. So, I think the market is pretty good. It's pretty ripe. It's picking up. And I think from valuations, to me, they're pretty fair.

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

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

This does conclude today's teleconference. You may disconnect at any time.