Information Services Group(III) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company's Q3 2022 financial statements show decreased assets and liabilities, mixed revenue performance, and significant cash outflow from financing activities Condensed Consolidated Balance Sheets Balance Sheet Summary (as of September 30, 2022 vs. December 31, 2021) | Balance Sheet Item | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $19,749 | $47,521 | ▼ $27,772 | | Total current assets | $97,943 | $116,110 | ▼ $18,167 | | Total assets | $214,007 | $236,794 | ▼ $22,787 | | Total current liabilities | $43,608 | $56,838 | ▼ $13,230 | | Total liabilities | $120,365 | $138,401 | ▼ $18,036 | | Total stockholders' equity | $93,642 | $98,393 | ▼ $4,751 | Condensed Consolidated Statement of Income and Comprehensive Income Income Statement Highlights (Unaudited) | Metric (in thousands, except per share) | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $68,836 | $71,095 | $212,100 | $208,263 | | Operating income | $7,430 | $7,263 | $22,311 | $18,121 | | Net income | $5,556 | $4,421 | $15,443 | $11,951 | | Diluted EPS | $0.11 | $0.09 | $0.30 | $0.23 | Condensed Consolidated Statement of Stockholders' Equity - Total stockholders' equity decreased from $98.4 million at the end of 2021 to $93.6 million at September 30, 2022, primarily due to treasury share repurchases ($15.8 million) and cash dividends ($5.4 million), partially offset by net income of $15.4 million[8] Condensed Consolidated Statement of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 | Cash Flow Activity (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,595 | $39,464 | | Net cash used in investing activities | ($2,614) | ($1,500) | | Net cash used in financing activities | ($24,782) | ($25,812) | | Net (decrease) increase in cash | ($27,784) | $10,769 | - Major uses of cash in financing activities for the nine months ended September 30, 2022, included $12.1 million for treasury share repurchases and $5.4 million for cash dividends paid to shareholders[10][84] Notes to Condensed Consolidated Financial Statements - The company operates as a single reportable segment providing technology research and advisory services, with revenues primarily from the Americas, Europe, and Asia Pacific[12][37] - As of September 30, 2022, the company had $123.4 million in remaining performance obligations, with the majority expected to be recognized as revenue within the next twelve months[32] - On October 31, 2022, the company acquired substantially all assets of Change 4 Growth, LLC for $3.0 million in cash, $0.6 million in ISG common stock, and potential future earn-out payments[44] Geographical Revenue (in thousands) | Region | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Americas | $42,174 | $42,825 | $123,059 | $121,254 | | Europe | $19,321 | $20,138 | $66,039 | $66,595 | | Asia Pacific | $7,341 | $8,132 | $23,002 | $20,414 | | Total | $68,836 | $71,095 | $212,100 | $208,263 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports Q3 2022 revenue decline due to currency, nine-month revenue growth, decreased liquidity from share repurchases, and increased Adjusted EBITDA and Net Income Business Overview - ISG is a global technology research and advisory firm specializing in digital transformation services, including automation, cloud, data analytics, and sourcing advisory[47] - The company's strategy focuses on growing its existing service model, expanding geographically, developing new industry sectors, productizing data assets, expanding managed services, and growing through acquisitions[48] - Revenues are derived from project-based fees (time and materials, fixed fee) and recurring revenue streams like ISG GovernX, Research, and multi-year Public Sector contracts[49][51] Results of Operations for the Three Months Ended September 30, 2022 and 2021 Q3 2022 vs Q3 2021 Revenue by Geography (in thousands) | Geographic Area | 2022 | 2021 | Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Americas | $42,174 | $42,825 | $(651) | (2)% | | Europe | $19,321 | $20,138 | $(817) | (4)% | | Asia Pacific | $7,341 | $8,132 | $(791) | (10)% | | Total revenues | $68,836 | $71,095 | $(2,259) | (3)% | - The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific by $4.0 million in Q3 2022 compared to the prior year[54] - Total operating expenses decreased by 4% in Q3 2022, mainly due to lower contract labor ($2.7 million) and license fees ($1.5 million), partially offset by higher travel and entertainment expenses ($0.9 million)[55][57] - The effective tax rate for Q3 2022 was 18.0%, significantly lower than 34.9% in Q3 2021, primarily due to the impact of earnings in foreign jurisdictions and the vesting of restricted stock units[65] Results of Operations for the Nine Months Ended September 30, 2022 and 2021 Nine Months 2022 vs 2021 Revenue by Geography (in thousands) | Geographic Area | 2022 | 2021 | Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Americas | $123,059 | $121,254 | $1,805 | 1% | | Europe | $66,039 | $66,595 | $(556) | (1)% | | Asia Pacific | $23,002 | $20,414 | $2,588 | 13% | | Total revenues | $212,100 | $208,263 | $3,837 | 2% | - The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific by $9.5 million for the nine months of 2022[66] - Total operating expenses were nearly flat for the nine-month period, with decreases in contract labor ($4.6 million) and license fees ($1.7 million) offset by increases in travel ($2.6 million) and compensation costs ($2.1 million)[67] Non-GAAP Financial Measures - The company uses non-GAAP measures like Adjusted EBITDA and Adjusted Net Income to provide investors with a clearer view of core operations by excluding items like non-cash stock compensation, amortization of intangibles, and acquisition-related costs[77][78] Non-GAAP Reconciliation Summary (in thousands) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $5,556 | $4,421 | $15,443 | $11,951 | | Adjusted EBITDA | $10,736 | $10,215 | $32,122 | $28,598 | | Adjusted Net Income | $7,198 | $5,949 | $20,387 | $17,743 | Adjusted Net Income Per Diluted Share | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income per diluted share | $0.11 | $0.09 | $0.30 | $0.23 | | Adjusted net income per diluted share | $0.14 | $0.12 | $0.40 | $0.34 | Liquidity and Capital Resources - As of September 30, 2022, cash, cash equivalents, and restricted cash were $19.8 million, a net decrease of $27.8 million from year-end 2021[84] - The decrease in cash was primarily driven by treasury share repurchases ($12.1 million), cash dividends ($5.4 million), and negative foreign exchange effects ($5.0 million), partially offset by $4.6 million in cash from operations[84] - The company has a senior secured credit facility maturing in March 2025, which includes a term loan and a $54.0 million revolving facility, with no outstanding borrowings under the revolver as of September 30, 2022[85][87] - The company announced a quarterly dividend of $0.04 per share, with the Q4 dividend approved on November 1, 2022, payable in December 2022[91] Item 3. Quantitative and Qualitative Disclosure About Market Risk As a smaller reporting company, ISG is not required to provide detailed information regarding market risk - The company is a smaller reporting company and is not required to provide the information for this item[95] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[97] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[98] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reported no material legal proceedings - None[100] Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for fiscal year 2021 - The risk factors included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 have not materially changed[101] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company continued its quarterly dividend program and repurchased equity securities, with $7.3 million remaining under its share repurchase program - The company has a quarterly dividend program of $0.04 per share of common stock, with the fourth-quarter dividend approved for payment on December 19, 2022[102] - As of September 30, 2022, approximately $7.3 million remains available under the company's share repurchase program[103] Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Securities Purchased (In thousands) | Average Price per Security | | :--- | :--- | :--- | | July 2022 | 114 | $6.72 | | August 2022 | 415 | $6.89 | | September 2022 | 115 | $5.68 | Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including CEO and CFO certifications and Inline XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and financial statements formatted in Inline XBRL (101, 104)[106]