Information Services Group Inc (III) 2021 Q1 法說會逐字稿

Good day and welcome to the Information Services Group First Quarter 2021 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 and good morning. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's first quarter 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 begin, I would like to read a forward-looking statement. It is important to note that this communication may contain forward-looking statements, which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated.

For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statements contained in our Form 8-K, which was furnished last night to the SEC, and the Risk Factors section in ISG's Form 10-K covering full year results. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements to these documents filed with the SEC. You will be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-one (sic) [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.

During this call, we 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 we will touch on today, include adjusted EBITDA, adjusted net earnings and the presentation of selected financial data on a constant currency basis. 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 was filed last night with the SEC.

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. This morning, I will review our record first quarter results, provide guidance for the second quarter and discuss our initiation of our first-ever quarterly dividend.

ISG is off to its strongest start ever. Last year, our clients were dealing with the crippling effects of the global pandemic. This year, while the pandemic is far from over, our clients across many industries are now increasing their digital investments, moving beyond their initial COVID cautiousness in anticipation of renewed growth.

This rising demand for all things digital, coupled with the benefits of our new ISG NEXT operating model, and our disciplined operating approach is reflected in our record fee revenues and profitability in Q1. Our results across the board exceeded expectations. Q1 revenues of $67 million were up 7% over the prior year, excluding the impact of billable T&E, which was near 0 with our ban on travel. The growth would have been even higher except for the fact that this year, we had no in-person events, which generated $2 million in revenues in Q1 last year. We saw good growth in the Americas and Asia Pacific, and Europe continued to perform despite continued lockdowns in the region.

Our recurring revenues reached $21 million for the quarter and represented 33% of our firm-wide total. We achieved record first quarter EBITDA of nearly $9 million, up 2.4x versus the prior year. The impact of ISG NEXT is reflected in our adjusted EBITDA margin, which was 13% versus 6% in the prior year, and in our consulting utilization, which was 75% for the quarter, up 700 basis points from the prior year. With a focus on delivering end-to-end solutions via our ISG iFlex global delivery network, ISG NEXT also is helping drive increased revenue.

Our balance sheet has never been stronger. We generated record first quarter cash from operations of $12 million, and our quarter end cash balance of $48.6 million was up 2.8x versus $17.4 million in the prior year. And our debt balance was down 11% versus the prior year to $78 million, with the net debt-to-EBITDA ratio now under 1.

Clients are turning to ISG in increasing numbers, looking for expert advice and guidance on how to reaccelerate their digital transformations coming out of the pandemic. In Q1, we served 483 clients, up 11% versus last year. Of that total, 66 were brand-new to ISG, an increase of 25% year-over-year, all won in a work-from-home selling environment.

Now turning to our regions. The Americas delivered a terrific Q1 performance, with $38 million of revenue in the quarter, up 7% versus the prior year if we exclude the impact of billable T&E. Our discussion of regional results in Europe and Asia Pacific likewise will exclude T&E.

In the Americas, we saw double-digit growth in our insurance, health sciences and consumer services verticals, with automation and network services growing double digit from a service line perspective. Key client engagements during the first quarter include USAA, the state of Louisiana, Acquia Healthcare, Stanley Black & Decker, [Mosaic], Iron Mountain and Exelon.

In Q1, ISG signed our largest automation deal ever, an engagement worth more than $10 million with a top 5 entertainment company to provide automation integration, implementation and production support services. And we recently were awarded a $1 million automation development engagement with a major health care company. This latest engagement added to our ongoing data and analytics, network and software advisory consulting work with this client.

ISG also has been competitively awarded a $1 million engagement to advise a Canadian financial institution on technology solutions to support a very specialized scope of services. These include cash in transit, ATM forecasting, (inaudible) storage and security and foreign exchange currency management. This reflects the broad array of services we can offer our clients to help support their technology road maps.

ISG has also been awarded a 2-year $1.5 million cloud transformation engagement with a leading global provider of advanced analytics and clinical research services for the life sciences industry. ISG will support a 2-year initiative to migrate our client from Microsoft cloud platforms, one of the larger smart hosting cloud migrations in the health care and life sciences industries, with more than 15,000 servers and 20 petabytes of storage. And all of this was accomplished in a remote selling and delivery environment.

Now turning to Europe. Our Q1 revenues of $23 million were up 4% versus the prior year. The lockdown in most of Europe impacted the year-over-year comparisons. During the quarter, EMEA delivered double-digit revenue growth in our research, GovernX and network businesses. Among our industry segments, our insurance and media verticals grew by double digit versus the prior year.

Key client engagements in Europe in the first quarter included Allianz, Wintershall, Volkswagen, [PKB Informatics] and Luminor Bank. We continue to expand our relationships with existing clients. For example, we introduced ISG GovernX at a major global life sciences company under a new multimillion-dollar 3-year engagement with this long-standing ISG client. At another client, a major European auto manufacturer, ISG has been awarded a 3-year $4 million contract to support the business platform of the client's financial services arm. The client's digital platform will offer all relevant products and services online in 2021. The engagement includes customer sign-on services, digital workplace and collaboration services.

Finally, revenues in Asia Pacific were up 24% versus the prior year, driven by growth in the banking, insurance, energy and health science industry verticals. Key clients in the quarter include (inaudible) Services, IAG, Suncorp, [Victoria Elite], AMP Services and the Standard Charter Bank.

Now let me turn to guidance. Even with the improving situation in the U.S., the pandemic continues. The effect on our clients is most pronounced at the moment in Europe due to continued lockdowns. There are also a continued uncertainty within certain industry segments on travel and hospitality and leisure, like casinos and cruise lines, although we are beginning to see early signs of renewal in these sectors.

Despite this, we see the demand environment for all things digital strengthening overall in the first half of 2021 versus a year ago, and this is the ISG sweet spot. As clients become more bullish about their post-pandemic recovery, there is growing appetite to reaccelerate digital transformation. We see that accelerating, starting slowly, especially in Europe, and picking up speed throughout the course of the year.

Digital transformation is still the top priority for most every client we work with. COVID-19 has shown every company the power of digital to connect people, attract new customers and enable a new era of business efficiency growth. And with that comes growing interest in cloud adoption, for agile business models, network modernization and workplace-of-the-future technologies, everything that's needed to better engage with customers, develop new business opportunities and improve collaboration and efficiency within an organization.

For the second quarter, we see an overall strengthening in the demand environment for ISG services, particularly versus the second quarter last year. We remain somewhat cautious given that the pandemic is still impacting parts of the world at varying degrees, including the current lockdowns in Germany and France.

The situation in India is tragic. But thanks to work-from-home measures already in place, we do not see a major impact on ongoing client delivery by India service providers. Now with more vaccines on the horizon and economies beginning to open up, we are positive in our outlook. We are forecasting double-digit growth over the -- over last year, with Q2 revenues of between $65 million to $67 million and adjusted EBITDA between $8 million and $9 million. This compares to revenue of $57 million in the prior year.

Our forecast takes into account several pandemic-related factors. In Q2, we are planning no revenues from in-person, ISG-produced destination events. And we are planning near 0 of client T&E reimbursement revenue. We also expect compressed revenue in a few industry segments, including travel, but balanced with double-digit growth in digital services.

Now turning to our dividend. Last night, we announced that our Board of Directors has approved the initiation of a quarterly cash dividend to common shareholders. ISG will pay a cash dividend of $0.03 per share of common stock on June 18 to shareholders of record on the close of business, June 4.

The Board expects the third quarter dividend, which is scheduled to be announced on August 9, will also be set at $0.03 per share. This rate would then equal $0.12 per share over 4 quarters. The Board's decision to initiate a quarterly dividend as we enter our 15th year as a public company demonstrates our long-held commitment to reward our long-term shareholders through a robust capital return program. Our ability to return significant capital over time is made possible by the consistent delivery of our operating and financial plans to drive sustainable, profitable revenue growth and strong free cash flow generation.

ISG's durable and cash-generative business model generated a record $44 million in cash flow from operations in 2020, and a record $12 million in the first quarter of 2021 has allowed us to reinvest in our business. In addition, we have prudently managed our debt levels, lowering our debt balance by 38% since December of '16.

As we move into 2021, the initiation of a dividend is a logical progression and adds another element to our capital allocation strategy. We believe the dividend will provide predictable ongoing returns and underscores our commitment to deliver long-term value to our shareholders while continuing to allow for share repurchases, debt repayment and bolt-on acquisitions.

As you know, we recently announced that David Berger is retiring in June from his role as Executive Vice President and Chief Financial Officer of the firm after nearly 12 years with ISG. David will remain with ISG for a period of months, working on some ongoing M&A projects and assisting our new CFO, Bert Alfonso, in his transition into ISG. Bert will oversee all areas of finance, legal affairs and M&A for ISG. He will serve as your principal Investor Relations contact. I'd like to personally thank David for your contributions to our firm, his leadership and importantly, his friendship.

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

Thanks, Mike. I sincerely appreciate your kind words. I, too, will miss working with you and the entire ISG team. It's been a tremendous ride, with 9 of our 10 acquisitions completed during my tenure and with more still in the pipeline as you [mentioned].

Looking at the quarter, we managed through a difficult operating environment to deliver record results in Q1. Revenues for the first quarter were $66.6 million, up 4% on a reported basis and up 1% in constant currency compared with the first quarter last year. Currency positively impacted reported revenues by $2.4 million versus the prior year, excluding the -- excluding reimbursable client travel costs of $1.5 million, which accounted for approximately a 240 basis point decline versus the prior year. Revenues were up 7% versus last year. Reported revenues, excluding T&E, were: $38.1 million in the Americas, up 7% versus the prior year; $22.7 million in Europe, up 4% versus the prior year; and $5.7 million in Asia Pacific, up 24% versus the prior year.

Record first quarter 2021 adjusted EBITDA was $8.6 million, up 2.4x of last year's first quarter. We reported record first quarter operating income of $5 million compared with an operating loss of $700,000 in the first quarter of 2020. Net income for the quarter was $3.4 million, and fully diluted income per share was $0.07 per share compared with a net loss of $1.4 million and a fully diluted loss per share of $0.03, respectively, in the prior year.

First quarter adjusted net income of $5.5 million or $0.10 per share on a fully diluted basis compared with adjusted net income of $1.1 million or $0.02 per share on a fully diluted basis in the prior year's first quarter. Consulting utilization for the first quarter was 75% versus 68% in the prior year, reflecting the impact of our new ISG NEXT operating model. Our balance sheet continues to have the strength and flexibility to support our business over the long term.

Net cash provided by operations reached the first quarter record of $12.1 million compared with $4.6 million in the prior year. We ended the quarter with $48.6 million of cash, up 2.8x from $17.4 million in the prior year.

We repaid $1.1 million of debt in the quarter, lowering our debt balance to $77.7 million and our net debt-to-EBITDA ratio to 0.9x, and we repurchased $3 million in ISG shares. Our average borrowing rate for the quarter was 2.5% almost half of last year's rate, and we had 48 million shares outstanding as of April 30.

Before I hand it back to Mike, let me say, it's been a pleasure working with all of you, our investors. On behalf of the firm, I appreciate your loyalty and trust in ISG as a valuable long-term investment.

So with that, let me turn it back to Mike, who will now share concluding remarks before we go to Q&A. Mike?

Thank you, David. To summarize, we had a record-setting start to the year, revenue up 7% and EBITDA up 2.4x, revenue, EBITDA and EPS all beating expectations. Our balance sheet has never been stronger, $48.6 million of cash and net debt down to 0.9x EBITDA. Our new operating model, ISG NEXT, is driving a more profitable enterprise, with our Q1 margins of 13%, up from 6% the prior year. We see digital demand increasing as clients look to accelerate their digital transformations coming out of the pandemic.

ISG's momentum has also accelerated. Our Q2 guidance is up significantly over the prior year, and we announced the initiation of a quarterly dividend to reward our shareholders. As always, we are focused on creating shareholder value for the long term, and we are steadfast in our mission to deliver operational excellence to our clients.

So thank you very much for calling in this morning. Now let me turn the session over to the operator for your questions.

(Operator Instructions) We'll take our first question from Joe Gomes with NOBLE Capital.

Congrats on the quarter. Fantastic. So just wanted to -- a couple of quick questions, broader for you, Michael. How is the state business unfolding here, especially as we see the headlines at least that the federal government's pumping significant amounts of money into the state -- into the states? And are you seeing any positive impact on the business from your end?

So good question. First of all, our public sector business in the U.S. continues to be strong and steady. And as you know, these are longer-term contracts that we have with the state and local government.

Yes, we have our eye on all of that money beginning to flow into the different states. There are some restrictions on how they use it, but no restrictions that we are aware of around their transformation that they could do with a lot of their old integrated technology. So we are keeping an eye on it. Keep in mind, these things have long runways in terms of -- because they go through a whole process of RFPs and so on. But we think it could be a net positive for us over 18 months.

Okay. Great. And then I was wondering if you can give us a little more color on the significant ISG automation win, how that all came about. And who were you competing against for this? And do you see more of these significantly larger-than-normal deal -- potential deals out there?

So great question, Joe. So first of all, on the specifics, this is a very large top 5 global entertainment company. They went through a significant merger during COVID. And as a result of that, they have things like reward cards, et cetera, that they are looking to fully integrate, and they would like to use automation to help them on their journey.

So yes, we did compete with that. I think our independent third-party objective-agnostic approach was the winner, in addition to the talent and to the large-scale deals that we have done in ISG over the years in and around this industry secured this win. This is a win that's greater than $10 million. It could get even larger, and that will flow through for us during the second half of '21 and fully in '22. So you can see this over the next 18 months or so. That's number one.

Number two, we are beginning to see that clients are beginning to accelerate, moving from kind of center of excellence, let's try a process or 2. Many industry segments now, with the pandemic, are looking to accelerate their automation journey and to move to a much more scaling of that. And I think we will see that over the next couple of years.

As you may know, UiPath just went public, 300 -- $600 million in revenue and a 50x revenue multiple. So the industry itself is picking up some steam, and our automation business is also contributing to that. And we're also seeing the benefit of clients scaling their automation. So yes, Joe, we do see that increasing over the next 18 months or so.

Great. One last one for me, and I'll jump back in queue. So obviously, last year, for most of the year and as you mentioned, even here in the first quarter, the live events have taken a hit due to COVID restrictions. Any kind of time frame as when you see the live events starting to come back and contribute again to the top line?

So good question. At the moment, we are planning in our financials for the year to have very little. However, what we are doing internally is we are anticipating potentially in the United States, launching our first physical event of any size in September, so right at the end of Q3. So depending on how the world in the U.S. here responds over the next couple of quarters -- sorry, a couple of months, the vaccinations penetration that's here, the interest level from clients. So it's possible we will begin to see that at the very tail end of Q3. So that's what we're internally planning on along.

Okay. Great. David, thank you for all your help in the past, and have a great retirement.

Appreciate that, Joe.

We'll take our next question from Marco Rodriguez with Stonegate.

Michael, I was wondering if you can maybe spend a little bit more time on something in your prepared remarks where you talked about this new wave of digital transformation. Obviously, I'm assuming that there aren't people out there that you're still needing to convince as far as all things digital is concerned. So are your comments more around just people starting to get comfortable or end customers getting comfortable with the economy and they're sort of loosening their purse strings, if you will?

Yes. So look, I would put it -- let me talk about cloud for a minute. Clearly, people have moved workloads to the cloud for the last several years. However, the level, the speed, the acceleration is all picking up as a result of the pandemic. Why? Because the way work was performed was changed dramatically during 2020. So when we think about all things digital, and we talked about cloud in particular, we're talking about moving an accelerated piece of the workloads to the cloud. So everything from -- our work is everything from kind of cloud implementation strategy to cloud readiness inside of a firm to helping them develop an application portfolio that could migrate a strategy around migrating some of those applications. It's around kind of sourcing for cloud transformation. It's designing cloud governance, billing, charge-back.

There's a number of areas now that there is -- appears to be an increased level of investment emerging from the pandemic that's going to accelerate these digital transformations, where most companies, most industries were on -- to use a football analogy, were just beginning to march on their own 30-yard line. They are now wanting to move on a faster pace. That is kind of our sweet spot.

So that's what we mean by the acceleration of the digital journey, more investments by clients, an acceleration and expansion of what they may have started then in a pre-COVID environment has now pushed the accelerator down much harder. That's what we are seeing.

Understood. Very helpful. Then in terms of your competitive positioning, you sort of addressed this in a prior answer here to a question. I'm assuming that most people obviously are seeing the digital transformations, the adoption curves are steepening, and you obviously have a really good position in terms of your independence and your research aspects. But how are you kind of seeing yourself positioned? And if you're seeing any sort of competitive responses just given your positioning for the digital transformation for your clients?

So our competitive sets, Marco, essentially have not changed. It varies a bit, but we see the big 4 accounting firms out there around that. We see some of the service providers, especially on the automation side, out in the marketplace, and they're doing it for a different reason. They're doing it because they have a massive number of people that were doing work still on an FTE model. And as these contracts are beginning to terminate, these models are all changing to outcome. So it is in their best interest to automate as fast as they can automate their business. So they're looking for that from that standpoint, but it's not independent, it's not third party. So if I'm a Capgemini or I'm an Accenture or I'm one of these others, I'm looking to retain the work that I have with enterprise X. And one way I will do that is I will help automate. And the reason I'm wanting to automate is because I have all these people that I'm not going to need in a more automated environment.

So the landscape on competition, frankly, has not changed much. It's the same set of competitors for us. We just think we have a nice edge by being independent, by being third party, by having these relationships with 700 blue-chip clients where we can go in and say, "Hey, look, we can be your independent-objective third-party trusted adviser on all things digital." That's our market positioning.

Understood. And last question for me, just kind of around capital allocation with the new dividend being implemented. Maybe just kind of update us on your thoughts on any sort of prepayment of debt. Obviously, I know that the interest rate is pretty cheap and kind of stack up where M&A kind of fits into everything as well.

Yes. Thank you. So look, announcing a dividend doesn't preclude us from continuing -- us to pay down debt. We have a requirement of $4 million. Given the current interest rate environment, we don't really see accelerating that at this point. But with the strong cash generation that we did -- had occurred last year in the first quarter anticipated for this year, we see still being able to, in addition to the dividend, allow for repurchase of shares and the pursuit of acquisitions on an opportunistic [basis].

Got it. And I'm sorry, if I can just have one more quick follow-up on the M&A environment. What sort of opportunities are you guys kind of looking at? If you can kind of from a high level, just discuss that. And then what do the valuations sort of look like?

So Marco, it's Mike. I would say in acquisitions, we continue to focus primarily in 2 areas. Anything that is digital related that we think can accelerate or add a channel into kind of our distribution network that we have now, which is at the C-suite model. We continue to look at if there's something there that we could do to either add capability or accelerate some digital channel. That's one.

And then the second, all things, recurring revenues that we could use again to sell into our distribution channels that we have in the C-suite. There are a few other things that may come up opportunistically, but in terms of strategically going after, those are the 2 areas.

Relative to valuations, there's always from a buyer/seller -- there's always a bit of an inflated view from our perspective as the buyer that the seller's viewpoint on value is higher than what we believe it ought to be. So we'll continue to stay disciplined in that. We have walked away from a few things because we have not gotten the level of valuation that we had preferred. But we will be disciplined, and we will do the right things to add value to the overall firm.

Got it. Understood. Congratulations, David, on your retirement. I hope you have a great time.

Thanks, Marco.

We'll take our next question from Vincent Colicchio with Barrington Research.

Mike, nice quarter, very nice quarter. So what -- how did the sales pipeline change from the end of the last quarter to the end of this quarter? Just the point of the question is to get a sense of what the revenue trajectory may look like in the second half.

So the sales pipeline is building very nicely for 2021, 2022. Some of these have a little bit of a longer close cycle on them. But as I mentioned earlier, anything related digitally, the pipeline has picked up a lot since -- toward the tail end of last year.

The sales cycle is a little bit longer, especially in Europe, because there's still some uncertainty about the pandemic and when it ends. The U.S. is a little bit ahead of Europe. Australia is a little bit ahead of Europe. But that's how we've seen unfolding within the regions. And -- but the pipeline is looking good as we evolve through the year.

And the automation -- the large automation deal that you won, over what time frame will that be delivered?

That will be delivered over 2021 and into '22.

Okay. Clearly, the digital environment is sort of a tailwind for you, for your business. I mean if we look back to 2019 to now, I assume you think your organic growth potential of the company is higher now than it was then. Would you like to take a shot at sort of what kind of organic growth do you think you can do over, say, a 3- to 5-year time frame?

Well, our target, I think, we use kind of high single digits on the revenue line with EBITDA at kind of 1.5x revenue growth. We feel overall, over a long period of time, those are the right markers for us. That doesn't mean we won't have years when we can hit the double-digit top line growth. But that's our overall markers that we have given, and we remain kind of steadfast in those markers.

Okay. And any thoughts on government activity in APAC? I didn't hear you talk about that this quarter. Should that come back later in the year?

Yes. So the government business is nice and steady now in Australia. We talked before that at the Australian business, the government side is spending, that it serves us well for the whole region. And it continues to be steady for us. It is growing. But in addition to that, the commercial enterprises in Australia have also picked up speed relative to digital, and that's why you saw the pretty good growth in the quarter here in Asia Pacific. So I think the government business looks strong for this year in Australia and actually serves us well for the region for the year.

And congrats to David. We'll miss you, buddy.

Thank you, Vince.

(Operator Instructions) We'll take our next question from Marc Riddick with Sidoti.

So first of all, David, I want to congratulate you, and thank you for everything along the way. And hopefully, you look forward, once you're done because you're not completely done yet, but look forward to a very happy retirement there. So thank you for all of your efforts.

I appreciate that, Marc.

I wanted to touch a little bit on comments around the utilization. And I think -- so you're looking now at mid-70s. I was wondering if you could touch a little bit on maybe what you've seen there in the past as far as what the maximum level that you've seen in the past. And then what you think might be attainable now given the new business structure and kind of what you're seeing out there now.

Yes. Thanks for that. We're able to leverage our experts globally. And now with travel near 0, that has also had the impact of increasing our productivity. So 75%, I mean, that's a good level, and we're striving to continue to maintain that. And you see how that's improved our results with our margins in the quarter at 13% versus 6% last year.

Great. And then I was wondering if you could talk a little bit about your initial -- I know it's relatively early, but I was wondering if you could talk about some of the initial findings that you're seeing so far with NEXT and talk maybe a little bit about it. Are there any surprises so far? Is it along the way of what you thought it would be? I wonder if you could talk a little bit about that and the evolution there that you see going forward.

So Marc, it's Mike. Yes, the ISG NEXT, I think, has performed exceedingly well and, I would say, a bit better than even our expectations early on here. And the model is basically based on a couple of principles. Principle one is that we can take our experts that we have around the world, and we can leverage them with any client, anywhere, anytime, and we should be able to generate more revenue because we have stronger experts in front of a client, in front of -- in this case, in a remote way.

And then second of all, the iFlex delivery network that we've created, which enables us to kind of flex the resources because they're not jumping on an airplane on a Monday morning, coming home on Thursday night. Clearly makes them more profitable, and it makes them available for multiple clients during the dead times. So this is what's also helping to get to the 75% utilization.

To the point that David mentioned, that is a pretty significant utilization level when you factor in holidays and time off as you add in -- as training time all around the world. Whether we can stay at that level every quarter, I mean, that's going to be somewhat dependent on how clients engage us and we come off of deals and so on. So there's a little bit of factor of client influence on that standpoint.

But in terms of NEXT overall, we are very pleased because we can take things like cybersecurity where we provide services around risk assessments and security enablement and security strategy. And we can take our cyber experts in Europe and our cyber experts in the United States, and we can leverage that pool together in our new model that we were not able to do when we were always to be on-site with our clients. Now this isn't going to be forever. Our sense is that we have a nice runway this year and into next year, and then we'll have to see how clients behave. We expect some of our clients to want our people or at least some of our people back on premises in 2022. But we will not be going back to the way it was pre-COVID or some period of time, if ever.

So those are some of the areas that we're seeing ISG NEXT and our iFlex delivery network operate, and it's resonating very well with our clients, as you can see with the increased number of clients, 11% up in the quarter, and some new clients that we also had. It's still very much working in a remote environment, and that's helping our productivity, Marc.

Okay. Great. And then if I could add just another. I wanted to touch a little bit on maybe how you've seen the business return, with the activity and the acceleration. I really appreciate the commentary that you've given. I was just wondering if you could talk a little bit about maybe the way it has come back, is there -- does that give you any more or less visibility than you've historically had with potential upcoming engagements? Or maybe what that -- or is it similar to what you've seen in the past? I wonder if you can you touch a little bit on that even in sort of an anecdotal fashion.

What we're seeing -- I think on the visibility point, I don't think it's changed that much just because of the nature of what we do, Marc. So I would say visibility is somewhat similar as we've always had it. Clearly, as recurring revenues increase, now being 1/3 of the business, that helps. But in terms of our more project-based business, I would say that visibility is somewhat similar from that standpoint.

What we are seeing, though, is an acceleration, and therefore, our pipeline is increasing. We talked about a bit earlier that we are seeing such increase in investments in digital transformation across the board in multiple industries. Even some of the industries who've been hit the hardest, like hotels, cruise lines, are beginning to engage us for the second half of the year coming up on work that they want to do, that they know they have to do. As their revenue begins to come back, they're in a stronger position then to put some money into these digital transformations that they know they need to do as well.

The automation deal that we talked about, that's a major entertainment company that was hit very hard by COVID, but they see this as an acquisition and a merger that they've completed. They've got to get it together. They want to take out a lot of costs. They believe automation can help them, and they can have a better customer experience with an integrated reward program, reward card program, et cetera. So that's how I would probably say we view it.

That concludes today's question-and-answer session. At this time, I will turn the conference back to today's speakers for any additional or closing remarks.

Well, thank you. And let me close by saying thank you to all of our professionals worldwide for stepping up to the challenges presented by the coronavirus and delivering these terrific first quarter results. Even working remotely, there's been no letup in our passion for delivering the best advice and support to our clients.

And allow me again to extend my sincerest best wishes to David on his retirement and to Bert on assuming his new role with ISG. We're going to miss David's contributions, and I'm going to miss his friendship. But we also look forward to Bert taking over without missing a beat.

And finally, thanks to all of you on the call for your continued support and confidence in our firm. Stay well, everybody. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.