Good morning, and welcome everyone to the Information Services Group First Quarter 2025 Conference Call. This call is being recorded and a replay will be available on ISG's website within 24 hours. Now, I would like to turn the conference over to Barry Holt for his opening remarks and introduction. Please go ahead.

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 first quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement. It's important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished last night to the SEC and the risk factors section in ISG's Form 10-K covering full-year results. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements 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-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 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 selective financial data on a constant currency basis. Non-GAAP measures are provided as additional information that should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For a reconciliation of 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, Barry, and good morning, everyone. Today we will review our strong Q1 results, including our accelerating margins, our view of the current market, and our outlook for Q2. Our momentum continues. After finishing 2024 with a strong fourth quarter, ISG began this year with an even stronger first quarter. Our execution was superb and our underlying fundamentals are in great shape. We delivered Q1 revenues of $60 million, up 5%, excluding results from our divested automation unit. Growth was led by our largest revenue region, the Americas, up 17%. This is the largest year-over-year growth quarter in the Americas in the last two years. During our fourth quarter call, I indicated that we expected acceleration in 2025, beginning with the Americas during the first half of the year, followed by Europe and the rest of the world later in the second half. Our results reflect that outlook. For Q1, our adjusted EBITDA was up 68% to $7.4 million, with our adjusted EBITDA margin up more than 550 basis points to 12.4%. Our enhanced profitability is the result of our improved business mix and our disciplined operating approach, including Q1 utilization of 745 basis points year-over-year. Recurring revenues continue to be an important pillar of our success. In Q1 they reached $26 million, up slightly from Q4 and represented 44% of our overall revenue. AI continues to be at the heart of everything we do, with AI increasingly embedded in all areas of technology and services. We have served more than 200 clients with AI-focused research and advisory services in the trailing 12 months, up from the 150 we noted last quarter. As AI evolves, so do our offerings. For example, last month, ISG research published a strategic guide to agentic AI for enterprise leaders. With our strong expertise…

Thank you, Mike, and good morning, everyone. As Mike stated earlier, our revenue comparison with the first quarter of 2024 excludes our divested automation unit, which contributed about $8 million a year ago. This provides a more accurate view of our go-forward business. Revenue for the first quarter was $59.6 million, up a solid 5% versus the prior year. For the quarter, currency had a $600,000 negative impact on revenue. America's revenue was $41 million, up 17%. Europe revenue was $13.8 million, down 13%. And Asia-Pacific revenue was $4.8 million, down 15%. First quarter adjusted EBITDA was $7.4 million, up sharply from $4.4 million in the year ago period, and resulting in an EBITDA margin of 12.4%, up 554 basis points year-on-year, driving this solid improvement was consulting utilization of 77.7%, up from 70.2% in the year-ago quarter. For the quarter, ISG delivered operating income of $3.4 million compared with an operating loss of $2.4 million in the prior year. Our reported net income for the quarter was $1.5 million or $0.03 cents per fully diluted share compared with a net loss of $3.4 million or $0.07 per fully diluted share in the prior year. First quarter adjusted net income was $3.7 million or $0.07 per share on a fully diluted basis compared with adjusted net income of $0.7 million or $0.01 cent per fully diluted share in the prior year's first quarter. Our headcount as of March 31, 2025, was 1,320, which was basically flat with 4Q 2024. We ended the quarter with cash of $20.1 million, down from $23.1 million at the end of the fourth quarter. For the quarter, net cash provided by operations was $1 million. During the quarter, we paid dividends of $2.2 million and repurchased $3.3 million of stock. Our next quarterly dividend will be paid June 27th to shareholders of record as of June 6th. Fully diluted shares outstanding for the quarter were $50.3 million, down $300,000 from the prior quarter. At the quarter's end, we had approximately $15 million remaining on our share repurchase authorization. Our quarter-end gross debt to EBITDA ratio was 2.1 times, at the bottom of our 2 times to 2.5 times target range, and down from 2.4 times at December 31, 2024. For the quarter, our average borrowing rate was 6.5%, down from 7% last quarter. Overall, our balance sheet remains solid and continues to offer us the flexibility to support our business over the long term. Mike will now share concluding remarks before we go to Q&A. Mike?

Thank you, Michael. To summarize, ISG has momentum. After a strong Q4, we delivered an even stronger Q1. Led by double digit growth in the Americas, our revenues of $60 million exceeded our expectations. And our adjusted EBITDA was up a robust 68% as our margin expanded more than 550 basis points. Despite the uncertainty around tariffs, and maybe because of it, we see good market demand with a focus on leveraging technology for cost optimization and competitive advantage and that plays right into our sweet spot and bodes well for the success of ISG. As always, we are focused on creating shareholder value for the long-term, and we are steadfast in our mission to deliver operational excellence for our clients. So thank you very much for calling in this morning. And now let me turn the session over to the operator for your questions.

Thank you. [Operator Instructions] And we'll take our first question from Dave Storms at Stonegate.

Good morning.

Good morning, Dave.

I just wanted to start with -- maybe starting with the Americas. How would you characterize that pacing relative to your expectations? Would you expect a similar jump in growth going into Q2 or was a lot of your expectations of a strong one-half in America is already seen in Q1 here?

So, Dave, thanks for the question. First of all, just a little context for my response to that is, right now in the US, we are seeing some very strong demand. And it's both on the transformation side and on the optimization side. It varies depending on which industry and which industry is a little more impacted by the tariff conversations. But we would expect Q2 to be double digits again in the Americas.

Understood. That's very helpful. And then just looking at Europe, I know you've mentioned a couple of times now that you're expecting a rebound in the second half here. Are there any end markets that you're expected to lead the charge? Any end markets that you're starting to see green shoots in already? Anything like that would be helpful.

Okay. So the issue in Europe, and I just came back from there, is still a lot of uncertainty. And their uncertainty is probably captured threefold. One, clearly tariffs and what does it mean. So not unlike the US. But there they also have a lot of geopolitical cloud still, think the Ukraine War, et cetera. And so that is difficult. And third, they're just getting through a bit of an election cycle. And that also has uncertainty. And even if you think about what's happened in Germany, we have new leader there, but we also have a difficulty getting a coalition together. So you add all those factors together, I would say, there's still a cloud of uncertainty around a lot of the buying behavior. Having said that, what we are seeing in the pipeline is an increase in the pipeline in Europe. We saw it with some of our advisory services, our consulting around cost optimization, around using AI for efficiencies, increasing. So, I think if the tariff situation begins to clear a bit, that is our expectation that some of this pipeline will be released and that's what gives us our thought process for the back half of the year. Not in Q2, but we would expect to see Q3, Q4. Q2 will be better, but I don't see growth in Q2, but we do see it beginning to ramp starting in Q3 and Q4 then. That's how we see it at the moment, Dave.

That's very helpful. Thank you. I'll get back in queue.

Thank you.

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

Hey, good morning.

Good morning, Mark.

So I wanted to touch a little bit on the strong start to the year in the dive of Q2 and sort of how that plays into where you finished with utilization. It seems like the utilization was strong not only just numerically, but it seems maybe from a seasonal perspective as well. I mean, a number that high in the first quarter, maybe you talk a little bit about your comfort levels there and if there's any hiring needs that might come from that, how should we be thinking about that?

Hey, Marc, it's Michael. So appreciate the question. I think that a couple of things. Obviously, hats off to all of our resources. It was an extremely strong utilization and everybody really contributing. We're probably at the high end of the range of where we really want to operate on a continual basis. So we would not expect any significant improvement or uptick from here. With regard to seasonally, I'm not sure I would say there was anything seasonal in it. I think the seasonal really impacts us more in -- really in Q3 and in Q4, right, as we start to get towards latter part of the summer and you have the pressure in Europe from vacations and then Q4 just traditional vacation. So I think utilization we're comfortable with where it is. Wouldn't expect to see it go up. And our hiring again, we're being prudent and disciplined given uncertainty. Our hiring is aligned to the demand in the pipeline that we that we see.

Okay, great. And then maybe you could shift over to use of cash with the leverage now coming down to the lower end of your comfort range. It seemed as though there was a pick-up in share repurchase activity in the first quarter, maybe talk a little about that, as well as maybe what you're seeing potentially for acquisition pipeline, availability, and valuations?

Yes. So I'll take the first part, and then I'll pass to Mike on M&A. So you are right, we're at the low end of the range. And so, as you think about our cash allocation opportunities, right? In terms of buyback, dividend, M&A, and then investment in the business, we have an active process of looking at all four of those and assessing all four of those to see where we can create the most value. So we'll continue to look at all four, especially to your point now that we're at the low end of our range, and we expect to continue to see EBITDA improvement. On the M&A pipeline and what we're seeing, I'll turn it over to Mike.

Yes. So we continue to be active in the market. We are looking for additional recurring revenue streams that we can put into kind of our distribution channels. We're also continuing to look at everything around digital and AI that might accelerate our growth in those areas. So we will continue to look. There's always a delta between the ask and what we would like to be able to purchase at. So there's always that. That's really no change despite the differences in the markets, but we would expect to utilize some of our cash at the M&A level. But keep in mind, the way we do most all of our deals is a little bit of cash, a little bit of stock and a little bit of earn-out, and that's worked out quite well for us over the years. So that's how we would view it, Marc.

Great. And then last one for me. I just wanted to touch a little bit. I know that your exposure to federal government is pretty much de minimis, if anything. But I wonder if you could talk a little bit about if you've seen much in the way of response on the state and local level? Are you -- is it too early to have those conversations? Are you beginning to have conversations with state and local government customers and where they may be looking to move? Thanks.

Yes. So first of all, in the U.S., on the public sector, we actually had double-digit growth in the first quarter in the U.S. and think about it in the -- I'll call it, more of the red states because there's more receptivity, frankly, in terms of willingness on cost efficiencies. So think about it in terms of the kind of the DOJ for the state department, if you will. Our pipeline is also quite solid in the public sector in the U.S. So state and local is strong for us. And again, to your point, we do no federal. So we have no exposure to the federal kind of DOJ work that's going on in the market. So we feel good about the public sector. They're having a good year.

Excellent. Thank you very much.

Thanks, Marc.

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

Yes. Mike, good morning. Curious how you're addressing the rapid interest in AI and your rapidly growing needs. Are you hiring aggressively there? Are you able to hire aggressively there? Are you facing high turnover with employees that either develop or currently have AI skills?

Yes. So good question. So from an AI standpoint, we are almost in every instance, now have an AI component in almost all of our work. So the first thing we did is we trained 90% of our client-facing around AI, and we have an ongoing, if you will, skill-up program related to that because there's constant changing, of course, in AI. So that's one. Two is the hiring -- the surgical hiring that we are doing is around transformation is around AI, and that is what we bring in. We are also trimming, if you will, skill sets that maybe we don't need as much. When we think about AI, if I think about it from the client standpoint and then kind of reflect it back to us, One is most clients are looking to how to secure funding for AI, and they do that by looking at what else they have and what they're spending and how can they shift it. So one is securing the funding. Two is how can I use AI to increase productivity. Third is how can I then get some scalable kind of cost-effective use of AI in my particular business. And then really, they're looking at, I would call it a Wave 2 scenario, which is how do I accelerate it, whether you're using Agentic AI or other areas in addition to kind of Gen AI use cases that are sitting out there. So as we think about how clients are kind of one step at a time looking at it, we are right there with them. We've had 200 clients in the last 12 months, 50 unique new clients in the first quarter. We went from 150 to 200, as we mentioned. So this is a very hot area and why we kind of pivoted our firm to say and look at ourselves as more of an AI-centered technology research and advisory firm. So that's how we think about it, Vince.

And next question, Americas strength, you appear to be on quite solid footing right now with what you're delivering in the Americas. So I'm curious, your commentary on second half being strong for Europe and APAC, does that assume a slowing in Americas or based on your pipeline or will that continue to be strong throughout the year?

No. I mean I think we see the U.S. is strong. I mean I think it's going to be on a percentage growth basis, certainly stronger in the first half than the second half because you can't do 15% to 17% a quarter, but we do see good strong double-digit growth there. And one way that we look at it as we look at the disruption and we kind of put it into 3 buckets, the low-impact verticals, industry verticals, kind of the moderate and then the high impact and we kind of bucket them. And as we think about what they are asking us to do, when those that are the kind of lower impact, the ones that are not affected directly or as much like public sector, like defense, like health care, that is very, very strong in the U.S. When you look at kind of the moderate somewhat impacted, you have things like BFSI, you have energy, you have utilities, you have media, technology. And then you think about the high impact, so these are the ones having a really direct hit and really are wanting to move fast on cost optimization because of the high impact they're having. And we think about manufacturing, automotive, CPG, retail in that category. So we think about it as we go about our work and how we are focusing our work kind of in that low impact, moderate and high impact. And in the U.S., because there's a bit of a mix between all of those, that's why I think it's running on all cylinders. If you apply the same model into Europe, the thing with Europe is that the low impacts in Europe are not that many kind of industry segments because they also have the geopolitical, the whole kind of macro environment challenges in addition to the tariffs. So you don't see as many low impacts over there. So as this tariff situation clears, and as I said, I just came back from Europe and some think that this clears by the end of the summer, if true, and if that should happen, then I think that's why we think this will open up Europe a bit more in terms of our offerings and what they would be willing to spend during the latter half of next -- latter half of this year, Vince.

Thanks for all the color. Appreciate it.

We'll move next to Joe Gomes at NOBLE Capital.

Good morning.

Good morning, Joe.

I wanted to continue on the AI discussion. You mentioned you gained 50 new clients this quarter, and I think the goal that you mentioned on the fourth quarter call was to double that business from 150 to 300 this year. I was wondering maybe if the goal might be a little more ambitious than that now. And the second part of the question on AI, given the high demand for all things AI, are you finding any challenges in adding AI-based consultants and/or if there's any type of wage pressure for that -- the consultants focused on AI?

Good question, Joe. First of all, we do not see wage pressure. I think we have a good model of a combination of wage plus stock that helps us both on the traction as well as and importantly, on retention, if you will. But in terms of AI, I mean, we said, hey, look, let's double our client base there from 150 to 300. Certainly, we're sitting at 200 now at the end of Q1. We're not going to do another number. But I would say that as we turn into 2026, I would expect a large majority of our clients all to have an AI component. Now some will start slower because just like cloud, shockingly, and just like outsourcing shockingly, there are companies that have not done either one even at this date in 2025. So there's always the slower starters, if you will. So I can't say at what point all of them would be, but we certainly would envision that by the time we get into the middle of 2026, most all of our clients will have an AI component with it, but it does gain steam as you go through. In Europe, we need Europe to kind of come around and begin spending and utilizing it in a way other than a proof-of-concept type way and to do it in a real, let's begin to scale this way, and that will really generate the kind of client increase on AI. We do have good, I'll call it, firm pricing on all of our AI work. So that helps. And as we think about our margin acceleration from, call it, 8.5% closing out last year, you're seeing the mix when we talk about our mix, AI is clearly one of them. Recurring revenues is clearly a second one. You're seeing our margins gradually move up. And we're looking again to be a teenager in our margins soon. So all of these factors help with that, including things like the platform with Tango. So that's how we would think about it, Joe.

Okay. And then, on Tango, I mean, you've done a great job in getting the value of contracts under there. I think you mentioned $7 billion now. So how do we -- how should we think about kind of the revenue contribution? Basically, that business has gone from, we'll call it, a standing start to $7 billion, and how do we think about how that's adding revenue to the company?

I think we have over $9 billion now, by the way. We went from $7 billion in the fourth quarter to over $9 billion now in the first quarter. First of all, the biggest thing it does is it helps us accelerate margins. And the reason it helps accelerate margins is that we're able to complete the work much more efficiently and therefore, that from our client standpoint, they are able to achieve value for money faster. And so if we're able to do something in less time for the same amount of money, if you just look at it the same amount of money, clearly, our margin is going to be enhanced. And we are seeing that every day. The second part of it is, is Tango has enabled us to open up the mid-market for us. Our pricing in the mid-market was more challenged in the past because they -- in terms of what they could afford to do with an outside adviser. Now with Tango, they can get value for money much quicker. They can see the return much faster. And I think I gave you a couple of examples, including a major food distributor that we are in. Without Tango, we would not have had that multimillion dollar client. So it's a combination of the margin acceleration and the opening up of a new market and kind of the mid-market for us that what Tango is. That's how we look at in terms of our success with Tango. And at some point, I won't even report on how much value is going through Tango because we'll have almost all of our transactions and value going through Tango sometime by the time we get into 2026. So that's how we think about it. And that will help us, and you're seeing it with acceleration in margins with our sourcing business. So that's the beauty of Tango for us.

Thanks for that. I’ll get back in queue.

And next, we'll go to Gowshi Sri with Singular Research.

Good morning. Can you hear me?

Yes. Good morning.

Good morning. Congratulations on your progress. My first question is, given the rapid productivity gains in AI and IT services, how you guys are thinking about calibrating your delivery model and pricing strategy to capture both more value and defend your margins since you were saying that the margins have improved.

Well, I think -- Thanks for the question. Yes, I think we have a combination of things around AI. Number one, from a client standpoint, clearly, our AI advisory business is humming, especially in the United States. And we are using AI in our platforms like Tango, like GovernX in terms of intelligent contracting. The second area is we're doing a lot of work around AI to inform clients using our world-class research and software research capabilities to inform clients, and that enables us to expand our recurring revenues in software and in research. And then thirdly, ourselves, we are using AI to become more productive, if you will, with our operations. And the combination of all three of those will be enhanced margins with our clients and enhanced productivity, which you are seeing with our workforce, if you will. And that combination will help us to accelerate our overall margins.

Got you. And in terms with the shift to increased tariffs, what kind of increased activity are you seeing in work with global capability centers? Is that at its early stages from call centers to innovation? What is the real opportunity here? Is it that really at the early stages are multinationals really putting some thought into it?

Yes, I'll start and then Michael will jump in here. GCCs are hot, okay? These are global capability centers and hot in the sense that what our work is, is around advising clients around GCCs, whether Formula whether to shrink them or whether to sell them and do something else differently. And in fact, in July, I'm holding a CEO conference for half a day with some of the major GCCs globally in Bangalore because of how hot this whole area is, we've had quite a demand for this. So we've kind of created a kind of an invitation-only event for a few hours in Bangalore to cover this particular topic. But let me ask Michael Sherrick, who's really right on point for us on GCCs here to comment further.

Yes, got you. I think it's a really good question and a really good point on kind of the evolution of kind of the industry and this piece of AI is driving because it's moving so much beyond the technology component to business function and activities. And that's really what's driving this move to GCCs and the desire for the enterprise to control it differently than they would have done with labor arbitrage. So I think there's a lot more to come on this. We're very active in this space from an advisory standpoint and helping our customers, our enterprises. And as Mike said, we've got a whole bunch of things coming up on the calendar directly aligned to this as we continue to be out in the marketplace.

Okay. And just my last question. In terms of given your balance sheet in order to take advantage of all the new developing areas, what kind of investments you still need to capture the value proposition?

Yes. I think it's more -- I wouldn't use the concept of need. It's more staying on top of and relevance. So when you think about the tools and platforms that we have, it's ensuring that we are making the proper investments so that we are embedding AI technology into them across the board, whether it's Tango, whether it's how our enterprises and providers use our research. It's the maintained relevancy of the things that we've already built. So those are the areas that we are focused on, not necessarily anything new, but more just the enhancement and upgrading of existing.

Thank you, guys.

Thank you.

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

Well, 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 I want to thank to all of you on the call for your continued support and confidence in our firm. Have a great rest of the day.

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