Information Services Group Inc (III) 2011 Q4 法說會逐字稿

Good day, everyone and welcome to the ISG 2011 fourth-quarter 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 would like to turn the conference over to Mr. Barry Holt. Please go ahead, sir.

Thank you, operator. Hello, my name is Barry Holt. I am Senior Communications Executive at ISG. I would like to wish you a good morning and welcome everyone to ISG's 2011 fourth-quarter and full-year results conference call. I am joined today by Michael Connors, Chairman and Chief Executive Officer and David Berger, 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 that will be filed this morning with the SEC and the Risk Factors section in ISG's Form 10-K covering full-year 2010 results.

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 either ISG's new 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 statements 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 later today. 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. Thanks for joining us. Today, David and I will review the fourth-quarter and full-year business highlights and financial results; we will comment on our new go-to-market approach that we rolled out at the beginning of the year; highlight our ongoing commitment to increasing shareholder value; and conclude with some comments on our guidance for revenues and adjusted EBITDA for the full year 2012.

I am pleased to report to you today our strong fourth-quarter and full-year operating results. Our full-year revenues of nearly $185 million were up 40% versus the prior year with fourth-quarter revenues of nearly $45 million, up 41%. Full-year adjusted EBITDA was $19 million, up 18% versus the prior year with a fourth-quarter adjusted EBITDA of $5.9 million, up 77% versus the prior year.

As you may recall, we had a slow start to 2011, but by the second quarter, we witnessed strong demand trends that continued through year-end and now into 2012. We delivered on the full-year revenue and adjusted EBITDA commitments we made to you last year.

Our cash position for the fourth quarter improved materially, strengthening our balance sheet. Our cash balance rose by over $7 million in the quarter to $25 million, driven by strong cash collections during the quarter. This figure includes debt payments of $1 million and share repurchases of $600,000 in the quarter. David will provide more details of those later in the call.

From a geographic standpoint, Europe recorded year-over-year revenue growth of 83%, Asia-Pacific at 28% and North America recorded a growth rate of 14%, all figures in constant currency.

Now during 2011, we added significant value to over 500 clients, including over 200 that were new to the firm. About 18% of these clients utilize more than one of our service brands, which is indicative of both the success of our acquisitions earlier this year and also of the great selling opportunity we believe we have ahead.

From an industry perspective, we witnessed strong demand during the quarter in global manufacturing, healthcare, pharmaceuticals and the public sector verticals. From a services perspective, we had strong demand in outsourcing transactions, analytics, IT strategy and design and managed services. And from a regional perspective, we witnessed strong demand for outsourcing transactions in Asia-Pacific and analytics and IT strategy in managed services in the United States.

Client wins for the quarter included Comcast, the Australian government, Motorola, Marriott, Honeywell, Bank of New York and State Farm.

Now let me turn to our new go-to-market approach d for 2012. Over the last 12 months, we have worked to develop a fresh go-to-market approach, one that we believe will bring additional value to our clients, allow us to capture a larger share of client spend, position ISG as the organization best equipped to deliver strong growth and execute a go-forward business strategy that is responsive to the evolution of our core markets.

The genesis behind our decision to move to one globally integrated brand began with the success we experienced in jointly selling TPI, Compass and STA Consulting Services last year. We decided to build on this success by further integrating not just our go-to-market brands, but the way we deliver our services and interact with our clients.

By combining our businesses under the ISG brand, we can now offer clients one source to drive operational excellence in their organizations. Uniting our capabilities under the ISG brand is a natural evolution and we believe will increase the value we bring to our clients.

The legacy brands of TPI, Compass and STA Consulting will continue to be used to identify specific products and services for which we have long been known, such as TPI sourcing, the TPI Index and Compass Benchmarks. The early feedback has been very positive. IT executives at a few of our larger clients commented to us that they have been dealing with multiple people from TPI and Compass over the years and now look forward to having one ISG account executive point of contact.

We have reshaped the organization around sales, business development and client delivery with a consistent market and service focus. In addition to continuing to promote our global expertise in IT, we have a specific market focus in further developing our business advisory services, cloud solutions and program management services.

Based on our selling success in the market this year and the favorable response from our clients, we expect that our globally integrated approach to be a catalyst for sustained growth with our clients over the next several years.

Now let me highlight our ongoing commitment to enhancing shareholder value. We believe our shares are undervalued. Although we have seen a 22% rise in our stock price since the beginning of the year, we still believe the market is behind in recognizing the true value of our firm. We believe the most important element to a rising share price is continued solid execution of our business plan and growth strategy, which we are delivering on and which should yield sustained revenue growth and double-digit EBITDA growth over the next several years.

Consistent with our goal to enhance shareholder value, we have also taken the following steps. We have repurchased over 1 million III shares during the back half of 2011 under a repurchase plan previously authorized by our Board. We will continue to make opportunistic purchases in the future as an effective use of our free cash flow.

Second, we have enhanced transparency by providing revenue and adjusted EBITDA guidance for the year. I will be commenting on our 2012 outlook in a moment.

Third, we launched a greatly enhanced investor website that provides important company information in one easy-to-use location. We enhanced our research coverage by adding two sell-side firms late last year. And Dave and I continue to meet with new prospective investors in our firm.

And finally, we reduce risk to our equity holders by further deleveraging the Company, paying down $6 million of debt in 2011 and we are committed to paying down another $7 million this year. Our outstanding debt remains at attractive below-market rates.

We are pleased with what we have accomplished from an operations standpoint in 2011 and look forward to continued progress this year. In terms of our guidance for 2012, we are looking for full-year constant currency revenue growth of between 6% and 8% and constant currency EBITDA growth of between 10% and 15%.

Our guidance is based on a number of factors. We are entering this year with a significant demand for our expanded services. While difficult to project our revenue within a quarter, we believe our first-quarter revenue will be up over 10% versus last year. And finally, in our largest region, North America, we have strong momentum. In Europe, though we remain cautious because of the macro environment, it is holding strong and we continue to see our growth in Asia-Pacific. So with that, let me now turn the call over to David Berger who will summarize our 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 later this morning. 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 $44.6 million during the fourth quarter of 2011, which was up 41% versus the prior year. On a constant currency basis, revenues were up 40%. For the quarter, reported revenues totaled $20.7 million in the Americas, $18.1 million in Europe, and $5.8 million in Asia-Pacific. ISG reported revenues totaled $184.4 million during full year 2011, which was up 40% over 2010 results and up 35% on a constant currency basis. For the full year, reported revenues totaled $86.7 million in the Americas, $74.4 million in Europe, and $23.3 million in Asia-Pacific.

ISG reported an operating loss of $59.9 million in the fourth quarter of 2011, including a $61.7 million non-cash charge for the impairment of goodwill and indefinite life assets and $900,000 in acquisition-related and restructuring costs. The non-cash impairment charge resulted primarily from the drop in market capitalization of the Company driven by declines in the share price and the revaluation of goodwill and intangible assets. This compares to an operating loss of $2.5 million for the fourth quarter of 2010, which included $2.3 million in acquisition-related costs.

ISG reported an operating loss of $60.8 million for the year ended December 31, 2011 compared to an operating loss of $51.7 million for the same period in 2010. Excluding the non-cash impairment charge of $61.7 million and $4 million in acquisition-related and restructuring costs in 2011, and a non-cash impairment charge of $52.5 million and $2.4 million in acquisition-related costs in 2010, operating income for 2011 of $4.9 million compared to $3.1 million in 2010.

Fourth-quarter 2011 adjusted earnings before interest, taxes, depreciation, foreign currency translation gains or losses, amortization and non-cash stock compensation impairment charges, excluding acquisition-related and restructuring costs, totaled $5.9 million compared with $3.3 million in the fourth quarter of 2010, which was an increase of 77%. These figures excluded the $900,000 in 2011 and $2.3 million in 2010 of acquisition-related and restructuring costs. Including the $900,000 of acquisition-related and restructuring costs in 2011 and $2.3 million in 2010, adjusted EBITDA for the fourth quarter of 2011 was $5 million compared to the fourth quarter of 2010 adjusted EBITDA of $1 million.

Excluding acquisition-related and restructuring costs, adjusted EBITDA for 2011 was $19 million compared to adjusted EBITDA for 2010 of $16.1 million, which is an increase of 18%. These figures exclude $4 million in 2011 and $2.4 million in 2010 of acquisition-related and restructuring costs. Including the $4 million of acquisition-related deal and restructuring costs in 2011 and $2.4 million in 2010, full-year adjusted EBITDA was $15 million in 2011 compared to $13.7 million in 2010.

Diluted adjusted earnings per share for the fourth quarter of 2011, excluding acquisition-related and restructuring costs, was $0.05 per share versus the $0.04 diluted adjusted earnings per share for the fourth quarter of 2010. Diluted adjusted earnings per share for full year 2011 was $0.16, excluding acquisition-related and restructuring costs, compared to 2010 adjusted earnings per share of $0.18. Including the acquisition-related costs and restructuring costs, diluted adjusted earnings per share for 2011 was $0.09.

Finally, ISG continues to maintain a strong liquidity position to support the implementation of our business plan. Cash and cash equivalents of $24.5 million at December 31, 2011 was an increase of $7.4 million from September 30, 2011. The increase in our cash balance from the third quarter was principally attributable to cash collections. Our accounts receivable balance declined from $49.7 million as of September 30, 2011 to $43.2 million at year-end.

Total outstanding debt at December 31, 2011 was $70.1 million compared with $71.1 million at September 30, 2011. We repaid $6 million of debt during 2011. Our average borrowing rate in the fourth quarter for our term loan was 3.85%. We repurchased $600,000 of ISG shares during the fourth quarter, $1.2 million in total during 2011. As of December 31, we still had $8.9 million available under our authorization to buy back stock and during the first quarter of 2012, we repurchased an additional $400,000 of ISG stock.

As Mike indicated earlier, in terms of our guidance for 2012, we are looking for full-year constant currency revenue growth of between 6% and 8% and constant currency EBITDA growth of between 10% and 15%. We are projecting revenues for the first quarter to be up over 10% over the prior year. I should note that these projections are in constant currency, which is what we control. Volatility and exchange rates could impact our reported growth.

As Mike mentioned earlier, ISG remains focused on investing for future profitable revenue growth and on transforming our cost base into a more flexible and leveraged model with higher utilization rates, enhanced price realization and tight management of SG&A spending. We have proactively driven significantly higher cost efficiencies and productivity into the business while maintaining our liquidity levels. The continuing execution of our strategic business plan remains our number one priority.

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

Okay, thank you, David. We believe we have the pieces in place to achieve our vision, which is the same as it has been since ISG was founded -- to create an industry-leading, high growth, information-based services business. We have focused our 700 professionals on a single mission -- delivering operational excellence to our clients. Clients look to us for our unique insights and innovative solutions for leveraging technology, our deep data sources and more than five decades of experience in information and advisory services.

Our focus on emerging technologies like cloud computing and recurring revenue opportunities such as managed services is core to our strategy, as well as our expanding geographical focus. The time and energy we invested in developing our acquisitions and the merging of them into one powerful entity are now showing results and we continue to evaluate additional tuck-in opportunities as we look to expand our product and service offerings in the interest of building long-term shareholder value.

As the economy and our business have become more robust, we have taken measures to further deleverage our balance sheet through share repurchases and debt repayments. And although we are not happy with our share price performance in 2011, we see early signs of that improving as it follows our business performance.

We truly have harnessed the power of one. The continuing execution of our strategic business plan remains our number one priority and we believe will translate into shareholder value. Along with the continued emphasis on profitable revenue growth, we believe our financial goals are achievable. Thanks very much for calling in this morning and now let me turn the session over to the operator for questions.

(Operator Instructions). Klaus von Stutterheim, Deutsche Bank.

Hi, thanks. Good quarter. And we appreciate the attention to the stock price too. David, can you tell us what were the DSOs for the quarter and how does that compare to the prior two quarters?

It was 75 for this quarter, which was down significantly from the prior quarters.

Right, that's great. And then another question. For your troops, so to speak, what is the turnover rate and how does that compare to the industry?

Klaus, that is one of the, I think, big benefits we have as a firm and have for a long time here. Our turnover rate is below industry standards. We tend to be in the low to mid-teens in terms of the turnover rate and we were there again this year. We have gone somewhere between 9% and 16% over the last four or five years. I think industry averages are significantly higher than that. And when we look at kind of our core billable consultants and what we call our data analysts, it is even lower than that. So our turnover rate, I think, is in good shape. We have enough attrition to allow people to move up through the organization and not too much.

Terrific. Great. Thanks.

Marco Rodriguez, Stonegate Securities.

Good morning, guys. Thank you for taking my questions. I was wondering if you could maybe perhaps provide a little bit more color in regards to your guidance. You gave some nice commentary in terms of demand for services increases, North America having some pretty good momentum and strength in Asia. But I was wondering if you could provide maybe a bit more color on the major assumptions in those categories.

Sure. Let me maybe go around regionally for a second. I will start with Europe. We see demand still very strong in what we call our [DOC] region, which is anchored by Germany. France also remains quite strong. The UK, I would say, is still sluggish, has been for now a couple of years in terms of the macro environment there. But the rest of Europe, I think especially in the DOC region, is holding on quite strong.

Asia-Pacific continues to grow. We have a great leader over there in Arno Franz. We have expanded our footprint. We are into Southeast Asia, into China, into the Australia/New Zealand marketplace. Our broader portfolio that includes the analytics and the benchmarking that Compass allowed us to bring is also giving us some turbocharge over in Asia-Pacific. And then over here in the Americas, we are getting good traction in our financial services. We call it our BFSI vertical, which is Banking, Financial Services, Insurance, is quite strong. We have a good start to the year in that industry vertical. Same thing in manufacturing and auto, very strong start to the year and in the technology and retail areas, that also, and the verticals here in the United States, is quite strong.

We also are continuing to see good momentum with our cloud solutions. We now have a cloud component we think that represents 20% to 30% of the engagements that we are involved with have some element of a cloud discussion going on with the CIO or CFO. So that is kind of where we are seeing the demand.

The analytics, the benchmarking, the design work that we are doing with strategy work to help clients better understand and navigate all the complexities of the service provider community, as well as with cloud computing, mobile technology, etc. is all helping us drive that early kind of workaround design, which leads to assessments and leads to things like transactions, transition. And then we are also, finally, Marco, on the managed services business that we launched a couple of years ago, that also, even though it is a long sales cycle, we are seeing a very strong pipeline in government services. So we continue to look at that area as an area of high demand.

Great. And then in terms of the momentum you are seeing there by region, are you seeing it as a function that your end clients are having increasing budgets or they are bringing back what they didn't spend during the recession?

I think it varies by region. I will start with Europe, and I will talk about Europe maybe in a broad sense. But I would say Europe, because of a macro overhang a bit in large part in a lot of pieces of Europe, the whole area of operational excellence and the cost reduction component, if you will, of what we do is very hot right now because they are looking to take costs out of the businesses, concerned about the macro environment, so it plays to our strengths.

Having said that, I would say the UK still despite that being an obvious area to attack, there is still some hesitancy on client spend in that area, but the rest of Europe is doing that. Over in Asia-Pacific, there is quite the strength in the Asian markets. There is strength in the government sector over in Australia and then over here in the US, I would say there is a bit of pent-up demand, number one and then number two, I think it is our ability to get a larger share of the client wallet. They may not be spending more dollars, but they are able to spend more dollars with us because we have a broader array of products and services and I think that is also driving our strength over here in the US.

Great, thanks. Just a couple of housekeeping items here. Utilization rate in the quarter and how do you see that kind of trending through fiscal '12?

Yes, it was around 67% for the year. We see that going up as we move through the year. As our volume picks up, we are obviously -- we will add headcount as we need it, but the first goal is to drive that utilization higher.

Okay. And how many consultants did you have at year-end?

Our total headcount was around 699 at the end of the year.

Okay. Then in regard to your guidance, just trying to get a little bit better of a feel for margins and SG&A, how you kind of look at that trending maybe next quarter and then how we should think about it as it progresses through the year.

We will continue to gain margin leverage through revenue growth, so SG&A will not grow at the rate of revenue growth.

And do you see gross margins, your direct costs --?

We see a slight improvement of gross -- overall EBITDA margin over the year because, obviously, with revenues growing at 6% to 8% and EBITDA growing at 10% to 15%, we see that the bottom line growing at twice the rate of the top line.

Got it. And then, lastly, I was wondering if you could just maybe talk a little bit more about your capital allocation decisions here as it relates to paying down debt, stock repurchase and possible tuck-in acquisitions. How should we kind of be thinking about your process going through this year?

Well, obviously, the number one use of cash will be paying down debt, so we have a $7 million commitment. So that would be the primary use of cash during the year, probably similar to the levels of what we purchased in 2011 is what we would consider during 2012. And then as Mike said, we continue to look at a number of small tuck-in acquisitions that would enhance our portfolio. But, obviously, the $7 million would be the primary use of the cash flow generated for the year.

And I'm sorry, last quick question here in terms of just kind of housekeeping again. What was cash flow from operations for the year and CapEx?

The CapEx for the year was $1.7 million. Cash flow from operations, what you will see on our cash flow statement will be just under $1 million. We should just point out that, included in our cash flow from operations, were the deal costs and restructuring this year totaled $4 million and we had the carryover of the deal costs that were accrued last year that were paid this year, which was $2.1 million. So I mean you would have to adjust the $1 million for that $6 million to be in the $7 million range on a more -- when you exclude the one-time items.

Okay, great. Thanks a lot, guys.

(Operator Instructions). William Escamilla, William Blair & Co.

Thank you, gentlemen, can you hear me?

Yes, we can. Good morning.

Good morning. Could you address kind of where your customer concentration lies? Do you have many 10% customers and then how are you doing with them?

No, we have one client that represents nearly 5% of total revenue. That is the largest client. No others have any kind of material size, if you will. That particular client has been a client for us for 13 consecutive years. We have a very good relationship with them. It is a very large automotive client and so our strength is very good.

We also -- I think I mentioned to you that out of the 513 clients that we had, we have added 200 new ones via our acquisitions and new prospects, if you will, during 2011 to our portfolio and about 20% of our clients are buying multiple services from us. So that means they will be buying strategy, they will be buying niche marketing, they might be buying managed services. So that is where our client group is.

Just from an industry vertical standpoint, our financial services, what we call BFSI -- Banking, Financial Services, Insurance -- is kind of in the 20% plus range of our revenue. Manufacturing and auto is about 25% and the other industry verticals represent the balance if that helps.

Okay. And could you discuss the competitive landscape a little bit and who you're going up against and various things and maybe why you win?

So on the competitive front, it varies by region, so let me take it by region. Here in the US, the primary competitors that we have now are the big four and that is the Deloittes of the world and the PWCs of the world. We still get close to 70%, 75% of our business is done either sole-sourced or by a referral or a repeat client. So the remaining work that we go out and compete against here in the US we would tend to compete against them. We will compete against Gartner on the benchmarking side here in the US.

Over in Europe, it will be a couple of the big four and it might be at times PA Consulting and then some smaller players, independents kind of local by country. And then over in Asia-Pacific, it is primarily one or two of the big four that we see as our competitor upsets over there. So that varies a little bit, but the big four kind of are through that as they have kind of tried to dip into our space.

The reason we win when we do compete is really primarily around three reasons. Number one is our information and our data. We have the deepest kind of market information. This is not survey information. This is actual information where we can see the transactions that are going on in the marketplace and it is reflected in our TPI Index call that we have with all the analysts once a quarter, about 200 on the call that track all of the information that is going on in the marketplace. So number one reason clients pick us is because of our data and our market intelligence.

The second reason is because of our people and the experience of our people. We do not have a large MBA crowd. We have some junior analysts, some people we clearly bring up through the ranks, but our selling point is that we have been there, we have 20-year veterans, we have done it over and over. We can bring the experience hands-on to you.

And then the third reason for it is really reputation. Over the years that both Compass and STA and TPI have operated, those are the three reasons starting with data, then people and then our reputation.

All right. Thank you.

We have no further questions at this time. I will turn it back to you for any closing remarks.

Okay, well, look, let me just close by saying thank you for joining us this morning. And I also would like to thank our nearly 700 professionals around the world for their passion and dedication for helping us operate this business. It is really true their efforts that we feel we are poised to build on our market leadership in the year ahead. So thank you again for your continued support and confidence and have a great day.

That concludes our call for today. Thank you for your participation.