Information Services Group Inc (III) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Information Services Group second-quarter 2011 earnings results conference call. Today's conference is being recorded, and a replay will be available on ISG's website within 24 hours. At this time for opening remarks and introductions, I'd like to turn the conference over to Mr. Barry Holt. Please go ahead, sir.

Thank you, operator. Hello. My name is Barry Holt. I'm a Senior Communications executive at ISG. I'd like to wish you a good morning and welcome everyone to ISG's 2011 second-quarter earnings conference call.

I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and David Berger, Executive Vice President and Chief Financial Officer.

Before we began, 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 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 will be furnished today to the SEC and the risk factors section in ISG's Form 10-K covering full-year 2010 results, which was filed with the SEC on March 16.

You should also read ISG's Annual Report on Form 10-K for the fiscal year ending December 31, 2010, 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 obtain 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. 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 will be submitted today.

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 David Berger. Mike?

Thank you, Barry, and good morning, everyone.

I'm going to cover three areas with you this morning. First, to review the second-quarter business highlights and financial results. Second, I'll provide you an update on our go-to-market brands and our three new growth initiatives that we launched this quarter. And finally, I'll conclude with our outlook for the second half and reaffirmation of our guidance for our revenues and adjusted EBITDA for the year.

Now during our first-quarter earnings call, I indicated to you that our broader portfolio of products and services was driving increased demand. And I'm pleased to report today that we have completed our second-best revenue quarter in our history and our best EBITDA quarter since 2008.

Our second-quarter revenues were $50.3 million, up 51% versus the prior year and up 24% sequentially versus the first quarter. Our EBITDA of $6.5 million was up 55% versus the prior year. This was a good quarter, and we are very pleased with the results.

The integration of our acquisitions are going well, and based on our broader portfolio of products and services, we are seeing enhanced client demand across all of our brands and geographies.

We served 275 clients in the quarter. That's up 21% from a year ago, and 17% of these clients were new to the firm.

From a geographical standpoint, Europe was the leader, recording year-over-year revenue growth of 133%, followed by Asia Pacific at 51%, and the United States, where we recorded a growth rate of 12%.

Adjusted EBITDA grew 55% to $6.5 million, excluding $400,000 in restructuring costs. We are currently ahead of the annualized cost synergy targets I originally communicated to you.

Now moving to the second point of our discussion, I'd like to update you on our brands and three key growth initiatives. With respect to our brands, the market response to our joint TPI and Compass sales efforts has exceeded our initial expectations. We have now secured over 20 new clients, with joint sales exceeding $5 million.

And we continue to strengthen our cloud computing credentials. In June, we announced that TPI joined the Carnegie Mellon University-led group that will be developing the first set of standards for evaluating and comparing cloud computing services. Comprised of IT services experts from business, government, and academia, the Cloud Services Measurement Initiative Consortium was established to address the need for industry-wide globally-accepted measures for calculating the benefits and risks of the myriad cloud business offerings on the market.

As a member, TPI will collaborate on research initiatives and contribute funding and resources.

We also launched three new growth initiatives this quarter to prepare us for further growth in 2012, and let me outline those to you. The first is our expansion of our business Advisory Services unit. This includes finance and accounting, human resources, procurement, and enterprise improvement services.

We hired Terry Kuester to lead our further expansion in this area. Terry comes to us from Deloitte where he had been a partner since 2002 and most recently the practice leader for profitability improvement for clients such as SunTrust, Bank of America, Capital One, and Ford. Terry was one of the founders of the finance transformation practice at PWC, and led the establishment of the global benchmarking alliance for the banking industry.

Terry has significant experience in selling and delivery in a broad range of highly analytical, strategic, and tailored service-offering skills aimed at improving clients' financial, operational, and marketplace performance. We are very pleased to have Terry join our firm.

Second, we are expanding further and deeper into healthcare technology and business advisory services to take advantage of healthcare reform sweeping the United States. We hope to announce some initial successes in this area in the near future.

Third, based on our experience, the IP with STA Consulting, and client feedback, we are moving into the strategy execution space, establishing PMO or program management services for clients requiring program and project management expertise in executing their IT or business project portfolios.

So overall, good progress with our go-to-market brands, and when complemented by our growth initiatives, we are positioning ourselves to drive new revenue opportunities in 2012.

In June, nearly 250 clients and service providers gathered in Chicago at our annual client conference in the Americas to discuss innovation, and the transformation taking place in the IT, business process, and sourcing arenas. During this conference, we gained increased confidence based on CIO and CFO agendas and their receptivity to our expanding product and service offerings to support them.

Lastly, we reaffirm our full-year guidance of revenue of approximately $180 million and adjusted EBITDA between $19 million and $21 million. Our view of this is based on four factors. One, our first-half results are tracking in line with our original revenue and adjusted EBITDA expectations communicated to you in the first quarter.

Two, while difficult to project our revenue on a quarterly basis due to the nature of our work, we have more visibility than usual based on our Q2 sales momentum, coupled with several larger client engagements in the third quarter.

Three, we are very pleased with the progress on both the revenue and cost side of our acquisitions, giving us heightened confidence that we will meet the financial objectives which we set following the announcement of our two acquisitions.

And finally, we have great momentum in Asia-Pacific, with Europe and North America seeing a strengthening of demand for the first time in almost two years.

So based upon these factors, strong Q2 results, a positive outlook for the third quarter, progress on acquisitions, and improved momentum across the globe, we believe we are on track to achieve our goals for the year. We remain watchful of the global economy, but to date we do not see signs of our demand slowing. We are excited about the second half of 2011 and look forward to building on our positive second-quarter momentum.

So with that, now let me turn the call over to David Berger who will summarize our ISG financial results.

Thanks, Mike, and good morning, everyone.

Before I discuss our financial results, I would like to reiterate that ISG has presented GAAP financial results as well as certain non-GAAP financial information in our earnings release. During this call, I 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 I will touch on today include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant-currency basis.

A complete reconciliation of non-GAAP financial measures is included in our earnings release, which will be furnished to the SEC on Form 8-K today. 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.

ISG reported total revenues of $50.3 million during the second quarter of 2011, which was up 51% versus the prior year and was an increase of 24% from the first quarter of 2010.

Excluding the impact of foreign exchange, revenues were up 41%. For the quarter, reported revenues totaled $22.3 million in the Americas, $22 million in Europe, and $6 million in Asia-Pacific.

Second-quarter 2011 adjusted earnings before interest, taxes, depreciation, foreign-currency translation gains and losses, amortization and non-stock -- non-cash stock compensation and impairment charges totaled $6.1 million, compared with adjusted EBITDA of $4.2 million in the second quarter of 2010. Now this figure includes $400,000 in restructuring costs associated with the acquisitions. If you exclude the $400,000 in restructuring costs, adjusted EBITDA for the second quarter of 2011 was $6.5 million.

We anticipate booking between $2.5 million and $3 million of total restructuring charges in 2011, of which $1.5 million was reflected in the first half.

ISG reported operating income of $2.5 million for the second quarter of 2011, including the $400,000 in restructuring costs. This compares to the $1 million in operating income reported in the second quarter of 2010 with the higher income being driven off of the higher revenues.

The adjusted net income of $2.6 million, or $0.07 per share, compared with $1.9 million, or $0.06 per share, in the prior year's second quarter. Reported fully-diluted earnings per share of $0.02 compared to $0.01 for the same period in the prior year.

Cash and cash equivalents totaled $12.9 million, a net decrease of $8.1 million from March 31, 2011, levels. The decline in cash was driven primarily by the timing of cash collections, which is projected to improve in the second half of the year, and principal and interest payments.

Total outstanding debt at June 30, 2011, was $72.1 million, compared with $73.1 million at March 31, 2011. ISG made principal repayments of $1 million during the second quarter of 2011.

Mike will now share concluding remarks before we go to Q&A.

Thanks, David.

I am very pleased to report the strong results for the second quarter, and remain excited about the outlook for our firm and the second half of this year.

Based on this, I remain confident in our full-year guidance that we have provided. The combination of our three brands -- TPI, Compass, and STA Consulting -- we believe is strategically powerful, timely, and capable of creating substantial growth opportunities over the near and long term, and we will continue to execute our strategy to leverage the full product set and strong go-to-market approach.

We continue to invest in new growth opportunities, as I discussed today. Our focus on cloud computing and governance services opportunities also remains core to our strategy. And we continue to evaluate additional acquisition opportunities as we look to expand our offerings in the interest of building long-term value. The continuing execution of our strategic business plan remains our number-one priority.

I want to thank everyone for calling in this morning. I did want to mention that we did receive a couple of questions before our call, and I will address them. But first, let me just turn the session over to the operator to see if there are any questions before I address the ones that I received. Operator?

(Operator Instructions). [Paul Sansdeutinheim], Deutsche Bank.

Good morning, guys. Great quarter (multiple speakers). Can you -- cash was down due to cash collection you said, so that, then, the question is what would DSO in the first quarter -- what are DSO in the quarter that just ended, and what do you expect DSOs to be for the rest of the year?

Yes, our DSO was -- did strike up a little in the quarter. It was a little over 90 for the quarter, where we're more traditionally in the 60s.

Although I don't have an exact number for you, we do expect this to be a timing issue, and then we expect it to improve. We don't have any bad-debt issues; that's not the issue. Just some slower timing on collections, and we expect that to improve in the second half.

I want to make sure I heard that. DSOs went from 60 roughly (multiple speakers)

No, I actually don't have the first quarter with me. I could give you a call, but they're a little over 90. We historically have had, like, a 65 range.

So, have you collected some of this money?

Have we collected some in July?

Right. Any?

Or -- after the quarter?

Right. Yes, yes, that's what I'm asking.

I mean, yes, we do continue to collect, but there has been a slight slowdown in collections. We continue to diligently monitor the collections and we expect the cash [elections] -- the total cash balance to improve in the second half of the year.

Okay. Thanks.

Okay, Operator, if there -- are there any others in the queue? If not, I'm going to go to these questions that I received. There are three of them.

Not at this time. Please go ahead, sir.

Okay, thank you. Question number one was, the guidance looks great, but what's the likelihood that business that you won gets postponed in light of the economic turmoil around the globe and maybe the need for corporations to manage their cash?

A couple of things here. Clearly, we are keeping an eye on the economy. But having said that, we have very strong momentum going into the third quarter, as I mentioned. We also have several large client engagements that are now in process.

So that, coupled with the progress on both the revenue and the cost side of our acquisitions and the efforts of us jointly marketing in the marketplace, has given us the heightened confidence that will meet our financial objectives for the year.

Clearly, certain big companies are slowing in their payment schedules. You're seeing that reflected in our receivables, but we have never had any issues with bad debt. We do not expect those. But it's just simply a slowdown, I think, on some of the big companies on terms of how quick they are paying.

So we're going to keep a watchful eye on the economy, but we feel very good about the momentum that we have going into both the third quarter and the second half of the year.

The second question was, what were the utilization rates for the quarter and what about your bill rates? David, do you want to take that one?

Yes. Our utilization rate for the quarter was just under 70%, and that compared to about 67% in the prior year. Our bill rates are holding up. They remain over $300, and they're up almost 3% versus the prior year. So, we're pleased with that.

Okay, thank you. And then, the final question that we received was, quote, you've done a great job managing costs in the downturn, but now the demand is rising. Do you have the adequate resources to deliver on the new business volumes?

Good question, and clearly we watch this very carefully as our utilization rate and the productivity of our people are key. We are doing some selective hiring to complement our workforce in the governance services areas and in the hot areas around cloud computing, around our strategy and assessment service area, and skill areas where we need additional talent, such as bringing in Terry Kuester to help us expand our business advisory services area, bringing in folks that understand the strategy execution area around PMO, and bringing in additional people into the health care and public service area where we are seeing an increased demand in those industry verticals.

So, we are continuing to look at that. We are doing selective hiring where the skill sets are needed and where we can expand. And we will bring resources in as our volumes continue to expand.

With that, I think what I'll do is I will move to wrap up. I do want to thank all of our -- ISG's nearly 700 professionals around the world for their passion and dedication, for the excellent results and performance that they've turned in for the quarter. It is certainly through their efforts that we are poised, we believe, to build on our leadership in the months and years ahead.

I also would like to thank everyone on the call for your continued support and your confidence, and look forward to talking with you again in the third quarter. Have a great day.

Ladies and gentlemen, at this time we will conclude our conference call. Thank you again for your participation.