Information Services Group Inc (III) 2012 Q1 法說會逐字稿

Good day and welcome to the ISG 2012 first-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'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 am a Senior Communications Executive at ISG. I'd like to wish you a good morning and welcome everyone to ISG's 2012 first-quarter 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'd 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 was furnished this morning to the SEC, and the Risk Factors section in ISG's Form 10-K covering full-year 2011 results. You should also read ISG's Annual Report on Form 10-K for the fiscal year ending December 31, 2011, and any other relevant documents, including any amendments or supplements to these documents filed with the SEC when they become available. You'll be able to obtain free copies of any of ISG's SEC filings on either ISG's 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 statement to reflect subsequent events or circumstances. Non-GAAP measures are provided as an 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 was submitted this morning.

And now I'd like to turn the call over to Michael Connors, who will be followed by David Berger. Mike?

Thank you, Barry, and good morning, everyone. Today, David and I will review the first-quarter business highlights in our financial results, comment on our 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 EBITDA for the full-year 2012.

We experienced a strong start to 2012 with accelerating global demand for our services throughout the quarter, yielding mid-teens revenue growth and results that build on our solid three previous quarters. Our first-quarter revenues of just over $46 million were up 15% versus the prior-year in constant currency, which was a record first quarter for ISG. First-quarter adjusted EBITDA was $3 million, six times the prior year's first-quarter adjusted EBITDA of $500,000. And in the quarter, we continued to return free cash flow to our stakeholders, deleveraging the balance sheet by repaying $1.75 million of debt, while repurchasing over $700,000 of stock.

From a geographical standpoint, the Americas recorded year-over-year revenue growth of 21% and Asia-Pacific totaled 31% in constant currency terms. EMEA was essentially flat year-over-year despite a tough macroeconomic climate in Europe. During the quarter, we added significant value to more than 280 clients, including more than 20 that were new to ISG. From an industry perspective, we witnessed strong demand during the quarter in manufacturing; business, financial services, and insurance -- what we call our BFSI segment -- and our public sector verticals.

From a services perspective, we had strong demand in outsourcing transactions, our benchmarking and analytics, strategy work, and managed services. Client wins for the quarter included State Farm, Shell, National Grid, Merck, KFW, Bank of America, CenturyLink, and Boeing. We announced last month that our managed services unit had surpassed $10 billion in total contract value under management for clients.

ISG managed services provides post-contract governance to help organizations realize the full value anticipated from their sourcing agreements. The unit was launched about three years ago, and now helps manage relationships with more than 70 different service providers, and counts among its client's global leaders in the automotive, transportation, software, and logistics sectors, among others. We are very proud of the organic growth that ISG managed services has achieved in such a short period of time.

Now let me turn to our go-to-market approach for 2012 and beyond. As I commented on previously, we have worked to develop a fresh go-to-market approach -- one that brings additional value to our clients; captures a larger share of our clients' spend; positions ISG as the organization best-equipped to deliver strong growth; and enables us to respond more quickly to the evolution of our core markets. By combining our businesses under the ISG brand, we now offer clients one source to drive operational excellence in their organizations. The power of the combined brand's capabilities is making a difference in the market.

Client feedback from combining our sales and client delivery services under the ISG brand has been positive. Let me give you one example of how operating under the one ISG works with our clients. For the past few months, ISG has been working with the CEO, the CIO and the CFO of a very large, multi-billion-dollar manufacturing company in leading them through a large and complex change process within their company. This has been a team effort that has touched most of the end-to-end ISG products and services portfolio. We started with principally primary market research to understand their market and cost structure.

We moved to an assessment of their current shared services organizations; a strategy; and then followed by a request for a solution from suppliers. The scope has included finance and accounting, human resources, a contact center, IT, and the application's development functions. Our support of this large manufacturing company's journey has led to the client to continue to engage ISG for workforce and operations transition management and communications and change management. And our on-the-ground project management team is the glue that keeps all of this activity on track. It's a great example of the power of ISG.

Now, let me highlight our ongoing commitment to enhancing shareholder value. The 27% rise in our stock price in the first quarter, we believe, is an early indication that the market is beginning to recognize the true value of our Company. 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've also taken the following steps. We continue to reduce risk to our equity holders by further deleveraging the Company, paying down $1.75 million of debt in the first quarter, and we are planning to pay down a total of $17 million through 2013. Our outstanding debt remains at attractive, below-market rates. In addition, we've repurchased over 500,000 III shares in the first quarter under a repurchase plan previously authorized by the Board. And we will continue to make opportunistic purchases in the future as an effective use of any cash -- free cash flow.

We have also enhanced transparency by providing revenue and adjusted EBITDA guidance for the year. And I will comment on our 2012 outlook in a moment. And, finally, we continue to meet with new prospective investors.

In terms of our guidance for 2012, we expect to deliver full-year constant currency revenue growth of between 6% and 8%, and EBITDA growth of between 10% and 15%. Our guidance is based on a number of factors -- the revenue momentum we experienced in the first quarter; our current business trends one month into the second quarter; and our lead activity in our longer-term sales pipelines. This is all, of course, balanced as we monitor the macroeconomic issues, especially in Europe.

So with that, now let me 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 informations 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, which 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 was furnished to the SEC on Form 8-K 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 $46.3 million during the first quarter of 2012, up 15% versus the prior-year in constant currency. Reported revenues were up 14% with reported revenues being negatively impacted by $600,000 versus the prior year, due to the strengthening of the dollar. For the quarter, reported revenues totaled $23.9 million in the Americas; $15.6 million in Europe; and $6.9 million in Asia-Pacific.

ISG reported operating income of $200,000 for the first quarter of 2012. This compares to an operating loss of $5.2 million reported in the first quarter of 2011 that included $2.1 million in acquisition-related and restructuring costs. The adjusted net income of $1 million, or $0.03 per share, compared with $70,000 loss, or zero cents in the prior year's first quarter. Reported fully diluted earnings per share was a loss of $0.02 per share, compared with a loss of $0.06 for the same period -- same prior-year period in 2011.

First-quarter 2012 adjusted EBITDA totaled $3 million, which compared with a $1.6 million loss in the first quarter of 2011. The adjusted EBITDA for the first quarter of 2011 included $2.1 million of acquisition-related and restructuring costs. The reported adjusted EBITDA for the quarter was negatively impacted by $300,000 versus the prior year, due to the strengthening of the US dollar.

ISG continues to [remain] a strong liquidity position to support the implementation of our business plan. Cash and cash equivalents was $17 million at March 31, 2012, a decrease of $7.5 million from December 31, 2011. The decrease in our cash balance from year-end 2011 was principally attributable to the timing of new business generation and the non-operating use of cash, including $1.65 million in debt repayments and approximately $700,000 in repurchases of stock. As of March 31, we still had $8.2 million available under our authorizations to buy back stock.

Our accounts receivable balance increased from $42.9 million as of December 31, 2011, to $46.9 million as of March 31, 2012. Our day sales outstanding was 78 days. The rise in the accounts receivable balance was due to the timing of revenue generation. We had a very strong revenue month in March. Total outstanding debt at March 31, 2012, was $68.3 million compared with $70.1 million at December 31, 2011. Our average borrowing rate in the first quarter for the term loan was 3.83%.

As Mike indicated earlier, in terms of our guidance for 2012, we expect to deliver revenue growth of between 6% and 8%, and EBITDA growth of between 10% and 15%. I should note these projections are in constant currency, which is what we control. Volatility in exchange rates could impact our reported growth.

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

Thanks, David. We are pleased with our strong start to 2012 as well as the market acceptance of our rebranding as ISG. And I remain confident in our full-year guidance provided. We have the pieces in place to achieve our vision, 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.

We have taken measures to further deleverage our balance sheet through share repurchases and debt repayments. And as I mentioned earlier, we see early signs of the market recognizing the value of our Company as it follows our business performance. We truly are harnessing the power of one.

Thanks very much for calling in this morning. And now let me turn the session over to our operator for any questions.

Thank you. (Operator Instructions) Marco Rodriguez, Stonegate Securities.

It's actually Laura Engel calling in on behalf of Marco Rodriguez. How are you?

Good morning, Laura. How are you?

Good. A few questions. Looks like gross margins came in a bit lower than anticipated, and lower than what has historically been done at this revenue level. Were there any one-time costs or investments that negatively affected the results? And how should we be thinking about these gross margins as we move through the rest of the fiscal year?

Typically, we start out the year slightly lower as we add headcount to support growth later in the year. We also have -- in the beginning of the year -- you have a higher benefit cost. So, I mean, we expect to get back more -- in the latter half of the year, the gross margin will improve.

Okay. And then now that you're past all the restructuring, is the SG&A, excluding stock option expense, in Q1 a good number to use for modeling purposes going forward?

Yes.

Okay. And then you discuss your guidance and reiterating certain guidance on a constant currency basis. Are you still reiterating the 3% and 8% ForEx headwind for revenues and EBITDA?

Yes, but obviously, it's all going to depend on the movement of foreign exchange. But as we noted in the first quarter, we had a $600,000 top line, $400,000 bottom line in the first quarter. So it just depends on the relative movement on foreign exchange. But looking out, that's a good estimate.

Okay. And can you provide some additional color on how you guys think about hedging?

Well, we basically have a natural hedge, so we're billing in the currency where -- our revenue is being billed where -- and our costs are in the same currency. So you have a built-in natural hedge. So, I mean, the FX that you see on the P&L is intercompany loan translation. Other than that, we really don't -- we don't hedge currency.

Okay. So it's not an approximate percentage of your revenue or any specific metric?

Well, you know, 50% -- over 50% of the revenue is outside the US, so that's why we're having the impact of the FX on the -- in the business that you questioned.

Okay. And then just a few housekeeping items. What was the utilization rate in the quarter?

It's slightly above 70% for the quarter, which compared to, like, 63% last year in the first quarter.

Okay. And can you provide a consultant headcount?

Well, the -- our total headcount was around 733. It was up about 33 people in the quarter.

Okay. And then, lastly, can you provide the cash flow from operations number and CapEx for the quarter?

CapEx for the quarter was $700,000 and the cash flow from operations was a $4.8 million usage.

Okay. Great. Well, I appreciate your time and I'll get back in the queue. Thank you.

Okay, Laura. Thanks very much.

Neal Goldman, Goldman Capital Management.

Is the CapEx -- should one assume it's going to be about $2.8 million for the year?

No, it -- no. You should assume it's going to be under $2 million.

Under $2 million. And depreciation and amortization, round number is about [8.5]?

Yes.

Okay. So a $6.5 million swing in cash flow from that side. For debt, what's the maturities on the debt instruments?

Well, the -- we have a convertible note of 6.25 that is in 2018. And then on the term loan, we're committed to -- we're paying down $7 million this year, $10 million in 2013, with the balance coming due in November of 2014.

And how much is the term loan amount today?

$63 million.

So that's the bulk of it. Okay.

That's the bulk of it.

Okay. One thing that would be helpful going forward is to release your balance sheet quarterly with the earnings. Okay?

Yes, we will be releasing that tonight.

Yes, but you ought to do it in the release of earnings so people can see those kind of things. The convertible note, what's the coupon on that?

It's convertible at $4 a share.

And the coupon?

It's at a 3.875 fixed rate.

Okay. Europe is about what, 40-some-odd-percent right now?

Yes.

And you said it was flat in the quarter and it's a tough world out there. What are you forecasting for the year in these numbers on Europe itself?

We're not giving a breakdown of -- by region. Europe, to us, has been sort of mixed. We have strength in Germany right now and that offset slowness in the UK. So we had a flat quarter, up in Germany, down in the UK.

Okay. And those are the two major countries in terms of Europe?

Yes.

Okay. Very good. Thank you.

Thank you, Neal.

(Operator Instructions) Justin Ruiss, Sidoti.

Actually, my question got answered. I wanted to just know about just the situation in Europe and how it was foreboding, but I guess my question got answered. So thank you very much.

Okay. Justin, I will just add a little color just in terms of the operating environment, if you like. It's --

Sure.

It's kind of a tale of two cities right now, the kind of the hole we call the [DOC] region, which is kind of the Germanic regions, if you will, including Germany being the anchor, is pretty robust. There is a lot of demand for our kind of the end-to-end services, everything from our analytics to our assessments to the transactions to transition kind of work -- quite strong.

France has actually held up quite well. They're growing slightly. Of course, we just had the changeover there, so we'll see how the political environment changes the business environment, if at all. And the UK just remains quite sluggish, as it did last year. We don't see that changing dramatically this year.

We do -- are pushing and trying to penetrate into the UK government, where over the course of the next two to three years, they have a number of austerity programs that they want to implement. And we'd like to be a part of that. So we are in there on a business development effort. It will take a number of months. But that is one of the bright potential spots in the UK environment. But that's kind of how the landscape is evolving. And we'll continue just to kind of watch that. But that's how the landscape is kind of balanced over there.

Can you speak a little bit to how competition is over there?

Yes, so, competition over there is slightly different than here. It's kind of country-by-country. So, in the UK, we tend to run into a couple of the big four accounting firms. That tends to be the major competitor there. Over in Germany, it tends to be some smaller, local-type players, as well as the service providers trying to go direct to the clients without our participation. So we get a little bit of that.

And then in France, we tend to see Gartner more in France than we do the other markets. And then in the Nordics, it's kind of a hodgepodge throughout there. So that's kind of the landscape competitively in Europe.

Do you try to beat them out on price? Or is it quality of --?

No. We have a -- we think a pretty strong value proposition around number one, our market intelligence and data is bigger, better, deeper and richer than anybody. And that's normally the number one reason clients will hire us.

Number two is the experience and reputation that we've been doing this for 20 to 30 years. People know that we get a good strong return on investment and our people. So those three reasons are the, if you will, our value proposition. And we do not lead with price. We have a competitive price, but we have a, we think, a value-driven kind of price package for our clients.

Perfect. Thank you very much.

Okay, Justin. Thank you.

I also just wanted to correct one point. The term loan debt is $62 million, not $63 million as of March.

Gentlemen, there are no additional signals at this time.

Okay. Well, thank you, operator. Let me just close by saying I want to thank all of our 700 professionals around the world for their continued passion and dedication, and for their strong performance in the first quarter. It's really through all of their efforts that I think we are poised to continue to build our market leadership in the year ahead.

So, with that, I want to thank all of you for your continued support and confidence. And have a great day. Thanks very much.

This concludes today's conference. Thank you for your participation.