Information Services Group Inc (III) 2008 Q1 法說會逐字稿

Good day everyone and welcome to the Information Services Group first quarter 2008 earnings results conference call. Today's conference is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Mr. Barry Holt. Please go ahead, sir.

Hello. I'm Barry Holt. I lead Communications for Information Services Group. I would like to wish you a good afternoon and welcome everyone to the Information Services Group's first quarter 2008 earnings conference call. I am joined today by Michael Connors, ISG's Chairman and Chief Executive Officer; and Frank Martell, ISG's Executive Vice President and Chief Financial Officer.

Before we begin I would 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 statements contained in our Form 8-K filed yesterday, May 12, 2008, and the risk factor section in ISG's Form 10-Q covering first quarter results which will be filed on May 14, 2008.

You should also read the ISG annual report on Form 10-K for the fiscal year ending December 31, 2007, and any other relevant documents including any amendments or supplements to these documents which have been filed with the SEC when they become available. You will be able to obtain free copies of any of ISG's SEC filings on the SEC website www.SEC.gov. ISG undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please use our current report on Form 8-K filed yesterday, May 12, 2008. You will also have an opportunity at the end of this presentation to ask questions. And now I would like to turn the call over to Michael Connors who will be followed by Frank Martell. Mike.

Thank you, Barry, and good afternoon. Today, Frank Martell and I will recap the ISG first quarter 2008 results and outline the important progress both from a business and financial perspective that ISG has made in our first full quarter as an operating Company.

By almost every measure ISG is off to a strong start in 2008 compared to prior year our fully diluted cash earnings per share for the quarter was up fourfold. Our EBITDA doubled, our operating income tripled and our revenues grew by 5%. Revenues were in line with our first quarter business plans and we were slightly ahead of our plan for profitable growth. Our three-year vision is to build a world class industry leading information based services Company. An important first step in delivering on this vision is for ISG to achieve sustained best-in-class margins. We are making good initial progress toward achieving this goal through a focus on higher margin revenues. We are also increasing the utilization of our billable advisors and on the pricing side we have realized a higher percentage of our targeted billing rates. We continue to drive productivity in our sales, general, and administrative costs which in total were reduced in the first three months of 2008 from prior year levels.

On the top line, the America's region, our largest, delivered one of its strongest revenue growth performances in recent quarters fueled by strength in its core ITO and HRO service offerings. In Europe and Asia Pacific we delivered growth against a very strong prior year comparative period, and importantly we built significant momentum which should benefit our second quarter and full-year results. During the first quarter, the collective ISG and TPI team has been very focused on implementing our value creation plan which is the framework for building out our three-year vision. Let me take a moment and summarize what we have accomplished so far in the first quarter.

First, we invested in expanding our penetration into industry verticals such as healthcare, energy, and the public sector in the United States. While at the same time, enhancing the TPI position in its traditional strongholds in the manufacturing and financial services sectors globally. Second, we had several important client engagements during the first quarter. We advised the Prudential on the largest ever commercial outsourcing transaction in the UK. We advised SunTrust which completed one of the largest outsourcing transactions ever in the U.S. banking sector and also in the quarter we advised Royal Dutch Shell on one of the most significant IT and telecom transactions in the past five years.

We expanded our service offerings by adding a new unit this quarter to focus on contact center services or call centers and we also expanded our government services to take advantage of our post contract service offerings. We increased our sales services and our Chief Financial Officer services and our FFO services or financial services such as the work we just mentioned with SunTrust. We established the basic infrastructure needed to effectively implement a more leveraged resource model including expanding our global India operations this quarter and opening up a new resource hub in Detroit, Michigan. We expanded our geographic footprint this quarter by penetrating deeper into Southeast Asia and we are continuing our push into Europe to take advantage of the growth opportunities in these regions. We launched an employee stock purchase plan to assist our employees around the world to invest in ISG stock and align further our mutual interest with shareholders. And finally, this quarter we continued to build the TPI brand. We completed the first quarter TPI index which is the authoritative voice on the sourcing industries key developments and trends.

We also held our U.S.-based annual client and service provider leadership meetings. Over 300 clients and service providers attended these sessions reflecting the continuing high level of focus around the benefits of sourcing in a globalizing and competitive world and the significant position TPI plays in the industry.

The sourcing industry which TPI services continues to be a growing and dynamic sector. It is over $650 billion in size. Based on the first quarter TPI index, there were 122 new commercial contract awards valued at $25 million or greater during the first three months of this year. The total contract value or TCV associated with these deals totaled $21 billion which translates to an annualized contract value or ACV of $4.4 billion. This level of ACV was the second highest ever quarterly total and a 19% increase from quarter one, 2007. Taken together the TCV associated with contract awards in the fourth quarter of 2007 and the first quarter of this year, totaling $50 billion is the highest level in recent years. Contributing to this strong performance was the award of a record 27 mega relationship deals which encompass contract values greater than $100 million a year.

Looking forward, as measured by annualized revenues the TPI index is forecasting a 2008 growth in the overall broader sourcing market in the high single digits. When viewed by geography and similar to 2007, growth in the Americas is forecast in the mid single digits range while Europe and Asia Pacific are predicted to grow by double digits. You can get an informed view on the sourcing industry by dialing into our quarterly TPI index conference calls. Our next call is scheduled for mid July, and we will post the date and time on our website by the end of June. As we move into the remaining quarters of 2008, the ISG team is extremely pleased with our progress. ISG selected TPI as its initial platform Company for several important reasons.

First, TPI is the clear market leader in this space. Two, sourcing is an enormous industry fueled by irreversible globalization and the resulting need for every Company to become more efficient and remain competitive. Third, TPI has a global footprint. Data assets and a strong track record of delivering consistent organic growth. Fourth, we believe that TPI's organic growth potential can be augmented in the coming years through acquisitions which will deliver scale, syndicated revenue streams and additional adjacent capabilities. And five, we believe that there are opportunities to continue to improve the existing TPI margins to achieve what we refer to as best in class levels through various productivity measures and you have seen some of this progress on this front in the recently concluded first quarter.

Let me now turn the call over to Frank Martell, our CFO who will summarize our financial results for the first quarter of 2008.

Thanks, Mike. And good afternoon, everyone. ISG as you know completed the acquisition of TPI on November 16, 2007. For the periods prior to the acquisition of TPI, ISG was a special purpose acquisition Company and therefore had no operations. To facilitate a full analysis of our financial performance, ISG presented GAAP financial results as well as certain non-GAAP information in our earnings release. To ensure appropriate comparability between 2008 and 2007 pro forma results have been prepared for the first quarter of 2007 on the basis of the acquisition of TPI had occurred on January 1, 2007. I will focus primarily on ISG's pro forma results this afternoon.

As Mike mentioned ISG enjoyed very solid organic growth in the first quarter and we continue to focus on investing in the future potential revenue streams. Importantly, we are able to deliver increased profitability through higher price realization, better utilization of our resources and reductions in SG&A spending levels. In terms of revenue growth, ISG reported revenues of $45.6 million during the first quarter of 2008. ISG's first quarter revenues were up 5% compared with pro forma first quarter 2007 totals of $43.4 million. From the perspective of fee revenues, which are revenues before client reimbursed expenses, revenues increased 5.3% year-over-year from pro forma first quarter 2007 results. As (inaudible) ISG had no reported revenues during the first quarter of 2007.

Revenues in the Americas were up 7% for the quarter. On strong demand for sourcing transaction, negotiation, and renegotiation services as well as consulting and analytics. Revenues from international operations were up 3% from record first quarter 2007 performances. ISG ended the first quarter with 201 active client engagements, up 22% from 165 for the same prior year. Approximately 74% of our first quarter 2008 revenues came from existing or former clients demonstrating continued strength of our relationships. Regarding profitability in margin ISG successfully increased EBITDA and operating income at a rate significantly in excess of our revenue growth. In this regard, first quarter 2008 earnings before interest, taxes, depreciation, or EBITDA, which is a non-GAAP measure totaled $7 million, double the $3.5 million earned on pro forma base in the first quarter of 2007.

In the first quarter of 2007 on purely a reported basis, ISG had a negative EBITDA of $200,000. ISG's reported operating income for the first three months of 2008 was $3.9 million, up 190% from pro forma first quarter 2007 totals of $1.3 million. Operating income for the first three months of 2008 was up $4.1 million from our reported operating loss of 200,000 during the same 2007 period. The significant increases in both EBITDA and operating income for the first quarter-- for the first quarter of 2008 resulted primarily from revenue growth, higher gross margins and lower general and administrative expenses partially offset by public company related expenses which increased from $200,000 in the first quarter of 2007 to approximately $800,000 during the first three months of 2008.

Cash earnings per share for the first quarter of 2008 aggregated $0.15 on both a basic and fully diluted basis compared with $0.25 for all of 2007 and a basic and fully diluted pro forma cash EPS of $0.04 for the first quarter of 2007. The nearly fourfold increase in cash EPS was primarily attributable to a 99% increase in EBITDA and the impact of ISG's 2007 share repurchase program offset partially by higher taxes. Pro forma cash earnings per share which are defined EBITDA minus CapEx, net interest expense plus noncash equity based compensation as a non-GAAP measure which ISG believes provides useful information to our investors by excluding certain noncash expenses particularly amortization of intangible assets from acquisitions which are not indicative of ISG's core operations.

Finally, ISG continues to maintain a strong liquidity position to support the implementation of our three year plan. Cash and cash equivalents aggregated $44.4 million as of March 31, 2008, a net decrease of $2.8 million from year end 2007. The decrease was principally attributable to the timing of certain payments including 2007 performance based incentive awards, severance payments and certain acquisition-related expenses as well as the repurchase of ISG securities. ISG's total outstanding debt as of the end of March 2008 totaled $94.7 million.

As Mike mentioned our first quarter performance was in line with our expectations for revenue and better than plan in terms of profit margins. We continue to invest significantly in launching new products and services as well as expanding our international operations and further penetrating important new verticals in the United States. Lastly, we are focused on transforming our cost base into a more flexible and leverage model, higher utilization rates to support future business expansion at best in class margins. Thanks very much for your time today. Mike will now share some concluding remarks before we go to Q&A.

Thank you, Frank. ISG is squarely on track to reach our objective of building a high growth industry leading information based services Company. We cannot be more pleased with our acquisition of TPI and its performance during the first quarter of this year. We are working to fully implement our previously announced value creation plan that is aimed at building additional revenue streams and achieving best in class operating efficiencies. We remain committed to our three year plan vision of increasing our revenues and EBITDA margins. By approximately 50% and 500 basis points respectively over our 2007 levels. Thanks very much for calling in this afternoon and now let me pause and turn the session over to the operator to see what questions you may have.

(OPERATOR INSTRUCTIONS) It appears there are no questions. I would like to give everyone one final opportunity. (OPERATOR INSTRUCTIONS) It appears there are no questions at this time. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Okay. Thanks very much. Let me just conclude by saying we continue to progress against each of the milestones we have set in our three year plan. We have delivered a very strong result on almost every level in our first full quarter as an operating company. We remain focused on profitable revenue growth and achieving our goal of best in class performance levels. Higher margins will fuel our continuing investment in new products and services which will deliver financial and operating benefits in the coming quarters in line with our previously announced value creation plan. Finally, let me close by thanking all of our more than 460 outstanding professionals for their leadership and dedication to delivering the highest possible service levels and value to our clients while successfully transitioning this quarter to a public company environment. And to all of our investors for your continued trust and confidence in our team. Thank you very much and have a terrific day.

This concludes today's presentation. Thank you for your participation and have a wonderful day.