Information Services Group 2026 Q3 Earnings Call

Thank you, operator. Hello, and good morning. My name is Will Thoretz. I am Head of Corporate Communications for ISG. I'd like to welcome everyone to ISG's third quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, 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 was furnished this morning to the SEC and the risk factor sections of our most recent Form 10-K and 10-Q filings. 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.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.

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 this morning with the SEC. Now, I would like to turn the call over to Michael Connors, who will be followed by Michael Sherrick.

Mike? Thank you, Will, and good morning, everyone.

Today, we will review our strong Q3 results, the progress we have made over the last eight quarters since becoming an AI-centered firm, our view of the market and how it is evolving, and our outlook for Q4. ISG delivered another excellent quarter in Q3 with strong cash generation, expanding margins, and solid revenue growth. For the quarter, our revenue was $65 million, up 4.4%, led by 6% growth in Europe and 47% growth in Asia Pacific, reflecting a strong return to growth in the region. Adjusted EBITDA was $10 million, and our EBITDA margin was 15.4%, its highest level in four years. Our recurring revenues, importantly, were up nearly 8% to a new quarterly high of $30.5 million, powered by ISG Research. AI is our key growth driver, and its impact is expanding across ISG.

About two years ago, we made a deliberate strategic pivot to become an AI-centered firm. Today, we are seeing the results in both the scale of our AI business and the opportunities it creates across our portfolio. Our AI-related revenues in Q3 grew 56% to almost $34 million. That represents over 50% of our total firm-wide revenues in the quarter, a level we did not expect to achieve until later in 2027. Our overall financial performance continues to strengthen. We have now delivered double-digit EBITDA growth in each of the last eight quarters, reaching $10 million in Q3, up 19% year-over-year, and we expect double-digit growth in EBITDA in Q4 as well. In that same time, we have expanded our EBITDA margin over 400 basis points, including a margin of 15.4% this quarter, up nearly 200 basis points year-over-year.

Over the last eight quarters, we have generated $52 million in cash from operations, including $12.3 million this quarter, our best cash quarter in five years. AI is amplifying the value of our entire portfolio. Our research helps clients decide where to invest. Our advisory and sourcing capabilities help them turn those decisions into better operating models and commercial agreements. Our governance services help sustain value over time. For us, AI is not just an aspiration, it is delivering results right now. Our client engagements around the world show how these capabilities work together. Turning first to the Americas, revenues were $42 million, essentially even with last year. The region saw double-digit growth in research and, by industry, strong growth in our energy and public sector verticals. The Americas had some engagements move into Q4, and we expect a robust fourth quarter in this region.

Among our key client engagements in the quarter, much of which included AI, were Lockheed Martin, ExxonMobil, and Estée Lauder. During the quarter, we won a significant million-dollar engagement with a large regional health insurer in the U.S. We are working with this new client to establish a global capability center to support its AI-enabled tech and cybersecurity operations. We expect the capability center to deliver run rate savings of roughly 40%. Also in the quarter, we continued to expand a multimillion-dollar relationship with a large state government entity. This multi-year engagement includes enterprise change management services to support the state's migration to SAP S/4HANA, which will continue into next year. In Europe, our momentum continued with another strong quarter. Revenues were up 7% in constant currency to $17 million, driven by growth in our software and governance businesses, and in our health sciences and consumer industry verticals.

Key client engagements in Europe in the third quarter included Roche, the healthcare retailer Boots Group, and chemical company Evonik. During the quarter, we continued to expand our relationship with a leading consumer products company. To reduce costs and advance its AI journey, this client has engaged ISG for a full range of services, including software, network, and governance. For example, in the quarter, we saved the client 15% on its software product licenses as part of our overall engagement. We also continued to expand our multimillion-dollar relationship with a leading medical technology company. In the latest quarter, we added significant new work negotiating a contract extension with an incumbent provider, supporting a transition to a new applications provider to leverage AIOps, and provide change management services to improve employee adoption of new technology platforms.

In Asia Pacific, we saw a strong rebound with Q3 revenues up 47% to $6.2 million. We saw double-digit growth in our advisory services and research, and broad-based growth across industries, including consumer, energy, and the public sector. The rebound in government spending noted last quarter is particularly encouraging. Key clients in the quarter included the New Zealand utility company Mercury, along with public sector clients the Australian Department of Home Affairs and the Australian Taxation Office. During the quarter, we continued to expand our relationship with a leading food retailer. In our most recent engagement, we are supporting a major business process transformation initiative covering finance, accounting, and HR services. ISG is leading the selection of strategic partners offering AI-enabled solutions to strengthen operations and deliver cost-effective services at scale. Now, turning to our view of the broader technology market.

Our recently published State of Enterprise AI Research Report identified several gaps between AI's promise and the value enterprises are realizing, including data quality, technology integration, and operating costs. The economics of AI consumption illustrate the challenge. Even as the cost per token falls, usage can rise sharply as enterprises move from individual AI assistants to agents executing complex workflows across multiple systems. Total AI spending, therefore, can increase even as unit prices decline. Consider an enterprise with 50,000 employees each using AI assistants. At an assumed cost of $600 per employee per year, its annual budget for this client is $30 million. But that cost quickly balloons to $69 million when the company turns to agentic AI, which typically requires five times more tokens than individual employee use. Consumption is only one part of the equation.

Enterprises must also account for data preparation, integration, infrastructure, software, and human oversight. Higher spending can be justified, but only when it delivers greater business value. These changing economics play directly to ISG's strengths. We help clients determine where the business case holds, what they should pay, and how to capture the productivity gains AI makes possible. Our proprietary Autonomy-Level Pricing model, for example, links increasing AI autonomy to agreed pricing and performance measures. This helps clients and providers share the resulting value. This builds on our role as an independent authority on technology economics. Our research and market intelligence inform investment decisions. Our sourcing expertise helps secure the right commercial terms, and our governance services helps clients manage performance, risk, and spending as technology evolves. As AI becomes more capable, the need to translate that capability into measurable returns becomes more important.

We believe that creates opportunity for ISG. With that, let me turn to Q4 guidance. For the fourth quarter, we are targeting revenues of between $64 million and $65 million and adjusted EBITDA between $9 million and $10 million, which will continue our year-over-year growth and margin expansion and close the year with momentum. Now let me turn the call over to Michael Sherrick, who will summarize our financial results.