Information Services Group Inc (III) 2009 Q1 法說會逐字稿

Good day and welcome to the Information Services Group first quarter 2009 earnings results conference call. Today's conference is being recorded. A replay will be available at InformationSG.om in 24 hours.

At this time for opening remarks and introductions I would like like to turn the conference over to Mr. Andrew Park. Please go ahead, sir.

Thank you. Hello. My name is Andrew Park, I am a member of the Communications team at ISG. I would like to wish you a good afternoon and welcome everyone to the ISG's first quarter 2009 earnings conference call. I am joined today by Michael Connors, Chairman and Chief Executive Officer; and Frank Martell, 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 statement contained in our Form 8-K furnished last night to the SEC and the risk factors section in ISGs Form 10-K covering fourth quarter and full year results which was filed with the SEC on March 13, of this year. You should also read ISG's annual report on Form 10-K for the fiscal year ending December 31, 2008, and Form 10-Q for the first quarter of 2009 and any other relevant documents including any amendments or supplements to these documents filed with the SEC when they become available.

You will be able to attain free copies of any of ISG's SEC filings on the SEC's 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 refer to our current report on Form 8 submitted last night. You will have an opportunity at the end of the presentation to ask questions and now I would like to turn the call over to Michael Connors who will be followed by Frank Martell.

Thank you, Andrew, and good afternoon, everyone. Today Frank and I will recap ISG's first quarter 2009 results and outline the progress from a business and a financial perspective that ISG has made during the past three months. Over the past year a half, the major economies as we all know across the world have experienced a series of unprecedented economic crisis starting with the US housing market downturn a little over a year ago. Recessionary pressures gathered steam throughout 2008 as consumers cut back on spending and the credit marks froze up. The impact of these pressures have cascaded across geographic borders and in almost every industry vertical.

Despite unprecedented levels of Government intervention from fiscal stimulus programs to direct capital infusions in the major banking and insurance firms, the breadth and depth of the recession clearly intensified during the latter part of last year into the first quarter of 2009. As we discussed on our earnings call throughout 2008, the leadership team at ISG continuously monitors the impacts of the evolving turmoil in our business and we continue to do so in the months ahead.

In challenging markets we believe it is important to leverage our industry leadership and our leading brand and focus on profitable revenue growth. With regard to building our core franchise, we continue to selectively invest in new products and services and drive relentlessly for cost productively and best-in-class operating metrics. These efforts are central to achieving our current year objectives and long-term strategic plan.

Over the past three months, we continue to grow our revenues in the Europe, Middle East and Africa or EMEA region and Asia Pacific in local currency terms. We benefited from solid demand for sourcing advisory services in the Nordics, Central Europe across Southeast Asia and in Australia. On are ported basis, international revenues declined versus prior year as unfavorable currency translation continued to put a significant drag on reported results. In the Americas region we experienced continued revenue compression. Although we have a dynamic pipeline of potential new business, many of our current and prospective clients particularly in the United States continue to defer decisions or adapt a more tactical approach for moment decision making related to sourcing.

Somewhat reflecting the move to a more tactical approach to sourcing by many clients we experienced a surge in our revenues related to renegotiations and postcontract management services during the past three months. These services offer clients with existing sourcing arrangements the opportunity to tap into immediate short-term savings with low to no investment risk.

ISG's market leadership emanates from its world class and loyal blue chip clients. During the first quarter we added significant value to over 190 unique clients clients eight major industry verticals. During the past three months, our advisors have been involved in almost 300 separate client engagements globally. A small sampling of our first quarter client roster includes companies such as Banc of America, J.C Penney, Mattel, Symantech, and UBS in the Americas. In EMEA it includes companies like Daimler, DOTS Bank, QBE Europe, Nokia Siemens, and Vodafone. And finally Asia Pacific we secured new business with the Commonwealth Bank of Australia and Singapore Airlines to name a few.

During the first quarter ISG continued to expand our industry vertical penetration and expertise. Globally we recorded increased revenues year on year in the consumer sector, retail and restaurant, travel, transportation and hospitality and our manufacturing verticals. Increases in these emerging sectors were partly fueled by our investments in additional resources for our dedicated industry vertical sales, and service teams in the US and our expansion in Europe. Offsetting these gains were lower revenues in the automotive vertical as well as a lower level of megadeals in the US and in Europe which drove revenue compression in the media and telecom vertical, financial services and energy verticals.

As I mentioned in the past, one of the fundamental underpinnings of our market leadership is our global footprint. We continue to build on this strength. It is a competitive advantage for us, specifically in the first quarter of 2009, we launched TPI into China with the opening of a training and assessment center in [Jiangjao]. We believe this venture to be the first of its kind in China and offers us the opportunities to assist Chinese firms to participate more aggressive in supplying and using sourcing services. In addition, we increased resources in our Latin America market and in Central Europe. These are markets we believe have emerging demand for sourcing advisory services.

During the first quarter ISG also continued to fund investments in new products and services. In this regard, TPI momentum and TPI governance services both launched in late 2008 continued to gain traction in the marketplace. TPI momentum, a distinct business unit within ISG is dedicated to providing information and insights to outsourcing and offshoring service providers to help provide enhanced services to their sourcing clients.

This quarter TPI momentum launched the Company's first ever comprehensive data and research based syndicated products. TPI momentum market trends and insights series and our TPI contract knowledge base. TPI governance services, which is a business unit focused on helping our clients to mediate cost leakage and achieve the quality and performance service levels contemplated under their service provider agreements, signed off its third major contract relationship. In addition, we continue to enhance our automated management platformed and tools in conjunction with our technology partner Digital Fuel. With well over 2700 active sourcing arrangements around the globe post Contract management and governance is expected to be an area of predictable revenue growth for ISG as we move into the future. In our view these new service offerings as well as continued investments in our geographic expansion and our existing core business will support sustainable organic growth and further our margin enhancements.

We believe that ISGs global leadership and geographic footprint have positioned us to manage through this current economic downturn and support our clients needs to drive improvements in their key technology and business operations. We believe we will be a stronger and more powerful Company in the post recession economy. As I outlined earlier many companies, particularly in the US continue to defer decisions or adopt a more tactical approach to decision making in the near term related to sourcing. Ultimately as the level of global economic activity improves, we expect most companies will look to fundamentally reset or reduce costs and improve their long-term competitiveness. We continue to believe many of our clients will eventually move ahead with decisions on major sourcing transactions because the ROI is compelling.

To put ISGs first quarter results into perspective I would like to update you briefly on the relevant trends we are seeing in the broader sourcing markets over the past several months. To do this I will quote from our recently issued first quarter 2009 TPI index. For the past 26-quarters the TPI index has been the authoritative voice on the sourcing industries overall developments and key trends. Our data shows that the overall sourcing market remained relatively soft in the first quarter in terms of the number and value of sourcing contracts awarded. Over the first three months of this year there were 141 new sourcing contracts awarded globally. The total contract value or TCV associated with sourcing deals closed in the quarter totaled almost $19 billion which translates to an annual contract value of approximately $3.7 billion or down 27% from a year ago.

In terms of TCV, the industry slowed in the second half of '08 after a very strong run from the fourth half of '08 after a very strong run from the fourth quarter of 2007 through the second quarter of 2008. The principle reason for the slowdown was a reduction in number of what are called megadeals typically a TCV over $1 billion, or an ACV over $100 million. During the past three quarters, TCV associated with mega contracts totaled $3.3 billion compared with $8.5 billion for transactions closed in the preceding three quarters.

Our vision remains to build a world class industry leading information based services Company. Despite all of the challenges and head winds, we believe ISG is executing against its goal to develop a more profitable and focused Company. In just 16 months, as an operating Company, we have diversified our revenues into a greater number of industry verticals, launched several important new service offerings, launched our first information products, grew our international operations, expanded our margins, and we have achieved much higher levels of liquidity. Beyond our focus on organically building our TPI platform we are also continuing to pursue potential acquisitions. Activity level in this area has intensified in the first quarter as we pursue possible opportunities to build our overall scale, add new data and research services and expand the capabilities of our advisory services. Acquisitions remain an integral part of ISG's long term strategic growth plan.

We remain excited about the future have an an aggressive program slated for 2009 as well as our strategic plan going forward. We believe ISG is very well positioned to provide our clients with must-have advisory and data services to help them improve their operations and navigate through this current economic cycle. As we move forward we will continue to launch the global economic uncertainty and the impact on client decision making. We have a global footprint and we are making advantage of the growth opportunities that are at hand while managing through this tough environment in the months ahead. I will now turn the call over to Frank who will summarize ISG's financial results for the first quarter of 2009.

Thanks very much, Mike. And good afternoon everyone. To facilitate a full analysis of our financial performance we presented GAAP financial results as well as certain non-GAAP financial information in our earnings release. During this call, I am going discuss certain non-GAAP financial measures which we believe improve 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 I will touch on today include EBITDA, cash earnings which is defined as net income plus amortization of intangible assets and noncash stock-based compensation And finally I will present selected financial data on a constant currency basis. A complete reconciliation of non-GAAP financial measures is included in our earnings release which was filed on Form 8-K yesterday. 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 US GAAP.

As Mike mentioned ISG continued to proactively negotiate through the unprecedented financial and economic turmoil of recent quarters. In terms of top line growth our operations in Europe, Middle East, Africa and Asia Pacific continued to deliver increased levels of revenue in local currency terms. The rate of growth in Western Europe this quarter slowed from last year's run rate primarily due to a lower number of mega transactions in the market and clients, particularly in the UK adopting a more cautious approach to implementing sourcing strategies in the face of growing economic uncertainties in these markets.

The primary challenges to our underlying growth rates remain in our Americas region where many companies, as Mike explained, look for immediate short term savings and as a result tend to defer more strategic sourcing decisions with attractive but longer term ROI potential. As they did in last quarter of 2008, foreign currency translation rates had a significant impact on ISGs reported revenues for the first quarter of 2009 compared with the same prior year quarter. Specifically, ISG reported total revenues of $34.3 million during the first quarter of 2009 a 25% decrease from $45.6 million in the first quarter of 2008 and an 8% decline from the fourth quarter of 2008. Revenues decreased 17% year-on-year excluding the impact of currency translation. Fee revenues which are revenues before client reimbursable expenses totaled $31.9 million during the first quarter of 2009 a decrease of 24% year on year. Fee revenues were down 16% before the impact of currency translation. Revenues in the Americas decreased 26% for the quarter versus the first three months of 2008. Revenues for the international operations increased 4% on a constant currency basis from a record performance in the first quarter of last year. Reported international revenues for the first quarter of 2009 were down 23% compared with quarter one 2008 including the impact of currency translation.

Consistent with the levels we have seen in the past several years, slightly more than two-thirds of our first quarter 2009 engagements came from existing or former clients reinforcing a continued high level of client satisfaction and loyalty. Importantly, despite the top line compression in the Americas and the currency translation impacts I discussed earlier we were able to maintain double digit EBITDA margins and protect profitability levels during the first three months of 2009 through a continued aggressive drive for operating efficiencies. ISG benefited from the flow of better than expected savings rates from its previously announced 2008 value creation plan which resulted in improved gross margins and enhanced leverage of our billable resources.

During the quarter we increased our SG&A spending levels as we upped investment in marketing and business development activities and the introduction of new products and service. Our strong focus on cost productivity has allowed us to continue to reinvest in new products and services which we believe will generate significant future profitable revenue growth. Operating income for the first three months ended March 31, 2009, totaled $2.1 million compared with $3.9 million during the same 2008 period. Excluding the impact of year on year currency translation on reported revenues and expenses, operating income decreased $1.4 million or 40% from first quarter 2008 levels.

First quarter 2009 EBITDA totaled $4.4 million, 13.8% of fee revenues compared with first quarter 2008 EBITDA of $7 million or 16.6% of fee revenues. Excluding the impact of currency translation, EBITDA decreased $1.9 million or 30% from first quarter 2008 levels. The decline in both operating income and EBITDA reported during the first quarter of 2009 were primarily the result of lower revenue levels in the Americas as well as unfavorable currency translation. Higher gross margins resulting from ongoing cost productivity partially offset the impact of the lower revenues and the higher selling and market development costs I discussed earlier.

Reported fully diluted earnings per share for the first quarter of 2009 totaled $0.02 versus $0.05 for the same 2008 period. Fully diluted cash earnings per share which is a non-GAAP measure, the first quarter of 2009 was $0.10 compared with $0.15 in the first quarter of 2008. The decrease in fully diluted cash earnings per share which is a non-GAAP measure for the first quarter of 2009 was $0.10 compared with $0.15 in the first quarter of 2008. The decrease in fully diluted cash EPS is primarily attributable to lower revenues, increased market and business development costs and a foreign currency transaction gain in 2008 which had no 2009 counterpart partially offset by high gross margins, lower net interest expense and decreased income taxes.

Finally, and importantly ISG continues to maintain a strong liquidity position, as Mike mentioned, to support the implementation of our strategic business plan. Cash and cash equivalents aggregated $50.6 million at March 31, 2009, a net decrease of $10.5 million from year-end 2008. Cash and cash equivalents at March 31, 2009, were up $6.2 million when compared with March 31, 2008. The decrease in cash balances from year-end 2008 was primarily attributable to the dispersement of 2008 variable incentive plan payments during March of 2009 as well as certain capital expenditures, BCP related severance, and term loan interest and principle repayments. Our total outstanding debt at March 31, 2009, was $93.8 million.

In closing, in this extremely challenging time, ISG remains focused on improving all aspects of our business and to prepare ourselves to capitalize on the eventual turn in the current economic cycle. As Mike mentioned, we are investing in profitable revenue growth and we are transforming our cost base into a more flexible leverage model with higher utilization rates, better price realization and tight management of our SG&A spending. The continuing execution of our strategic plan remains our number one priority. Thanks everyone for your time today. Mike will now share concluding remarks before we go to Q&A.

Thank you, Frank. ISG's global leadership, or data products and services and our geographic footprint we think have positioned us to manage through this economic downturn. And more importantly support our clients needs to lower their cost and drive business improvements in our key technology and business operations. We are navigating through the challenging global economic conditions by driving best in class cost productivity levels, continuing to invest in our future with new products and services, and we are continuing to expand our market leading global footprint.

We believe sourcing strategies remain a compelling business case with a very strong ROI for our clients. When corporate confidence and decision making returns, we are confident that ISG's market leading products and services provide a unique platform to support our clients efforts to lower their cost and drive business improvements. We remain committed to reach our objective to build a high growth industry leading information based services Company. Our focus remains on profitable revenue growth and achieving best in class performance levels, and it is yielding sustained margins improvements and supporting an increased level of investments in new products and services. We believe will underpin our continued organic growth in the achievement of our long-range business plans. Thanks very much for calling in this afternoon and now let me turn the session over to our operator for any questions that you may have.

(Operator Instructions) We will go first to [Devon Krego] of Deutsche Bank.

Good afternoon. This is Devon Krego for Tim Fox. I am just curious as to what you are seeing in terms of the assessment pipeline and with your view in the client intentions when you think the pipeline is going to start converting?

Hi, Devon. How are you?

Good. Thanks.

Look, on the front end, I think we mentioned the is that the front end in terms of our assessments and the back end if you will on the managed service end of things is pretty robust. If you think about it what our clients are asking is to at the beginning, is to lay out what is the current state of my play, what is the current potential opportunity for me to optimize my cost structure. What is the time line to do it and what are my options whether it is offshoring or onshoring or shared services or what have you. So that work is pretty robust. What is stalled at the moment is taking that decision tree and doing what I would consider more normalized times that as CEO to move and increase my earnings per share I would say let's move forward and achieve those kind of cost savings. What we are seeing right now clearly is a stall in that decision making, because any time you do those kind of work you do add a little more risk to your organization, et cetera, and considering the current economic environment, not many are accepting a lot more risks at the current time. So, our sense is that the assessments are laying out a terrific ROI, but that the decision making is simply stalled. And I think the decision making tree is probably along the lines of the confidence level in corporate, especially in corporate America and certainly if some parts of Western Europe, once that confidence level begins to come back into the Board room I think you will begin to see that free up. That's our take, Devon.

Thanks for that. Also, if you could just provide some detail around the increased SG&A spending?

Yes, Devon, this . is Frank. Just as I mentioned the majority of that is, we had do to the revenue situation, we had the ability to crank up our market development and client development activities. So, what we did, was we had some, which would be normally billable costs, allocated to SG&A to drive that market development activity. In addition to that, we also had a, as Mike talked about, we had a fair amount of activity related to the new services, particularly TPI momentum and also the service governance business as well. So the underlying pure nonclient facing SG&A was down but the kind of the revenue directed SG&A was up.

Okay.

That was, without that, that kind of spurts the overall SG&A was down. The pure back office as you think about it.

Great. Thanks again. My last question is just finally, is Europe's path in your view, lagging what the US has already taken, the path that the US has already taken and could that be any kind of overhang on growth later in 2009 in your view?

I think on Europe's standpoint, is we still believe Europe is several years behind the US in terms of its maturity curve. And that the sourcing strategies being used in Europe has a long way yet to go. I think some of the experience we have seen in the Central Europe, et cetera help, I think help support that. And that I think the European scenario is simply a matter of the economy and the decision making and the stall that you are seeing in the US. But in terms of the sourcing strategies as a mechanism for optimizing their kind of market competitiveness, we think there's a long way to go in Europe but in the near terms clearly they are behaving somewhat like the US as it relates to kind of delaying and stalling on the big decisions.

Okay. Great. Thanks. That's it for me.

Okay, Devon, thanks very much.

We will go next to Fritz Gallagher of Lazard Capital Markets.

Nice work in the quarter.

Hi, Fritz.

I was just wondering if you can expand on your comment about the acquisition environment picking up and if the valuation gap between buyers and sellers is narrowing? Thanks.

Good question. First of all, I think as I mentioned we are very active. It continues to be one of our two streams of growth, one being the organic component of TPI, the other being what we hope will be a series of acquisitions. Yes, I do believe that there's a narrowing of mind set between the sellers in terms of the multiples of that, the expectation levels are there, but until you finally come to a conclusion you don't know if you're there but I would certainly say that the environment is much better now than it was during the second half of last year.

All right, great. And I guess one other thing, with momentum, now that it is up and running, what does the growth look like there maybe how many subscribers and how big you think it can get? And just if it is ahead of plan or tracking where you thought it would be?

On TPI momentum we launched that basically at the tail end of 2008, and we are very pleased with its progress. We have, we have not communicated a number of subscribers but we have a number of membership subscribers. In addition to that we have launched the first syndicated information products that we've ever had a Company in our 20 year history with a couple of releases during the last part of our first quarter. So we believe that both TPI momentum and TPI governance services will add to an annuity revenue stream for us over the next few years and just to put that into context again for you, what we are aiming for is a combination of both organic, and with acquisitions that over a three year period that we could have an annuity revenue stream that would represent roughly 20 to 25% of our revenue base. And that's coming from a base of 0. So we think we are making some progress despite the head winds, we are getting some great momentum, no pun intended in our two businesses there.

Thanks, guys.

Thanks, Fritz.

(Operator Instructions) We will pause for just a moment. There's no further questions. I will go ahead and turn the conference back over to your speakers.

Thank you very much. Let me just close by again thanking our more than 450 professionals around the globe for their dedication and for delivering really the highest possible value the to our clients during these difficult economic times. As importantly to all of you, our investors for your continued trust and confidence in our team. We are very pleased about the progress that we are making, and the future that we have for all of us. So thank you again for calling in today and have a terrific weekend.

This does conclude today's Information Services Group conference. We thank you for your participation.