Information Services Group(III) - 2023 Q4 - Annual Results

Financial Performance Summary This section provides a comprehensive overview of the company's financial results for Q4 and full-year 2023, highlighting revenue, profitability, and cash flow performance Fourth-Quarter 2023 Results ISG's Q4 2023 performance was significantly impacted by slower client decision-making and a large bad-debt reserve. Revenues declined 11% YoY to $66.2 million. The company reported a GAAP net loss of $2.9 million, primarily due to a $4.8 million reserve for a specific client's collection risk. Consequently, adjusted EBITDA fell 47% to $5.9 million, with the margin contracting to 8.9% Q4 2023 Key Financial Metrics | Metric | Q4 2023 (in millions) | Q4 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Reported Revenues | $66.2M | $74.2M | -11% | | Operating (Loss) Income | ($3.5M) | $7.2M | - | | Net (Loss) Income | ($2.9M) | $4.3M | - | | GAAP Diluted (Loss) EPS | ($0.06) | $0.09 | - | | Adjusted Net Income | $3.1M | $6.5M | -52% | | Adjusted Diluted EPS | $0.06 | $0.13 | -54% | | Adjusted EBITDA | $5.9M | $11.1M | -47% | | Adjusted EBITDA Margin | 8.9% | 15.0% | -610 bps | - A significant factor in the quarterly loss was a $4.8 million reserve recorded for amounts owed by a client, due to collection risk. Excluding this reserve, net income would have been $0.8 million and GAAP EPS $0.02[3][11] Q4 2023 Revenue by Region (YoY) | Region | Q4 2023 Revenue (in millions) | Change vs. Q4 2022 | | :--- | :--- | :--- | | Americas | $40.1M | -8% | | Europe | $20.2M | -15% | | Asia Pacific | $5.9M | -12% | Full-Year 2023 Results For the full year 2023, ISG achieved record revenues of $291.1 million, a 2% increase YoY, outperforming the broader IT and business services industry. However, profitability declined, with operating income at $14.6 million and net income at $6.2 million, significantly lower than 2022, partly due to the Q4 bad-debt reserve. A key positive was the 16% growth in recurring revenues, which reached a record $125 million and now constitute 43% of total revenue Full-Year 2023 Key Financial Metrics | Metric | FY 2023 (in millions) | FY 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Reported Revenues | $291.1M | $286.3M | +2% | | Operating Income | $14.6M | $29.5M | -51% | | Net Income | $6.2M | $19.7M | -68% | | GAAP Diluted EPS | $0.12 | $0.39 | -69% | | Adjusted Net Income | $20.1M | $26.9M | -25% | | Adjusted Diluted EPS | $0.40 | $0.53 | -25% | | Adjusted EBITDA | $37.7M | $43.3M | -13% | | Adjusted EBITDA Margin | 12.9% | 15.1% | -220 bps | - Achieved record recurring revenues of $125 million, up 16% from the prior year. Recurring revenues now represent 43% of overall revenue, an increase of 500 basis points[3][4] Full-Year 2023 Revenue by Region (YoY) | Region | FY 2023 Revenue (in millions) | Change vs. FY 2022 | | :--- | :--- | :--- | | Americas | $173.2M | +4% | | Europe | $89.7M | Flat | | Asia Pacific | $28.1M | -5% | Other Financial and Operating Highlights The company maintained a healthy cash flow, generating $9.7 million from operations in Q4 and $12.3 million for the full year. The cash balance increased to $22.6 million by year-end. ISG continued its capital return program, paying $2.2 million in dividends and repurchasing $1.7 million of shares in the fourth quarter, while keeping its debt level stable - Generated $9.7 million of cash from operations in Q4 2023, compared to $6.6 million in Q4 2022. Full-year cash from operations was $12.3 million[17] - Cash balance totaled $22.6 million at December 31, 2023, up 21% from the end of Q3 2023[17] - In Q4, the company paid $2.2 million in dividends and repurchased $1.7 million of shares. Total debt outstanding was $79.2 million, unchanged from the prior year[18] Business and Strategic Developments This section details the CEO's perspective on market conditions and the company's strategic initiatives, including the launch of a new AI-powered sourcing platform CEO Commentary and Market Environment CEO Michael P. Connors acknowledged a soft fourth quarter due to slower client decision-making in an uncertain macro environment but considered the full-year 2% revenue growth solid, especially as the overall IT services industry declined by 6%. He expressed optimism for 2024, expecting client spending to accelerate as inflation cools and interest rates potentially decrease, positioning ISG to benefit from a resurgence in technology and AI investments - The CEO noted that the firm's 2% topline growth for the year was solid, considering the overall IT and business services industry was down 6%[4] - Profitability was impacted by slower client decision-making and a strategic decision to retain advisory talent in anticipation of a market uplift later in 2024[4] - The company expects client spending to accelerate as 2024 progresses, driven by cooling inflation, potential interest rate cuts, and a resurgence in technology investments, including enterprise AI[4] Launch of ISG Tango™ Sourcing Platform ISG announced the launch of ISG Tango™, a new AI-powered sourcing platform that digitizes and automates sourcing transactions. This strategic initiative is designed to improve transaction speed and efficiency for its enterprise clients and, importantly, to expand ISG's market into the underserved midmarket by offering a more affordable, platform-based advisory solution. This launch complements the company's new Enterprise AI Advisory business - ISG launched ISG Tango™, a groundbreaking sourcing platform that digitizes all elements of its sourcing transactions business[5] - The platform is powered by AI and leverages ISG's data assets to automate contracting and provide real-time insights, accelerating time to agreement[6] - A key strategic goal for ISG Tango™ is to penetrate the underserved midmarket with an attractive and affordable platform-based offering, expanding revenue opportunities[7] Financial Outlook and Shareholder Returns This section outlines the company's financial guidance for Q1 2024 and details the declared quarterly dividend for shareholders First-Quarter 2024 Guidance For the first quarter of 2024, ISG anticipates revenues to be in the range of $65 million to $67 million and adjusted EBITDA to be between $6.0 million and $7.0 million. The company will continue to monitor the macroeconomic environment Q1 2024 Guidance | Metric | Guidance Range (in millions) | | :--- | :--- | | Revenues | $65M - $67M | | Adjusted EBITDA | $6.0M - $7.0M | Quarterly Dividend The ISG Board of Directors has declared a first-quarter dividend of $0.045 per share, payable on March 29, 2024, to shareholders of record as of March 19, 2024 - A first-quarter dividend of $0.045 per share was declared[3][20] - The dividend is payable on March 29, 2024, to shareholders of record as of March 19, 2024[20] Detailed Financial Statements This section presents detailed unaudited financial statements, including income statements, GAAP to non-GAAP reconciliations, and constant currency comparisons Condensed Statement of Income and Comprehensive Income This section presents the unaudited GAAP consolidated statements of income for the fourth quarter and full year of 2023, compared to the same periods in 2022. It details revenues, operating expenses, taxes, and net income (loss), along with basic and diluted earnings (loss) per share Income Statement Highlights (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $66,186 | $74,167 | $291,054 | $286,267 | | Operating (loss) income | $(3,522) | $7,169 | $14,612 | $29,480 | | Net (loss) income | $(2,869) | $4,283 | $6,154 | $19,726 | | Diluted (Loss) EPS | $(0.06) | $0.09 | $0.12 | $0.39 | Reconciliation from GAAP to Non-GAAP This section reconciles GAAP net income to non-GAAP measures like Adjusted EBITDA and Adjusted Net Income for Q4 and the full year 2023. Key adjustments include adding back non-cash stock compensation, intangible amortization, severance costs, and a significant $4.8 million accounts receivable reserve in 2023 Reconciliation to Adjusted EBITDA (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(2,869) | $4,283 | $6,154 | $19,726 | | Key Adjustments | | | | | | Account receivables reserves | $4,822 | $— | $4,822 | $— | | Non-cash stock compensation | $2,380 | $2,028 | $9,132 | $7,460 | | Adjusted EBITDA | $5,907 | $11,134 | $37,677 | $43,256 | Reconciliation to Adjusted Net Income (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(2,869) | $4,283 | $6,154 | $19,726 | | Key Adjustments | | | | | | Account receivables reserves | $4,822 | $— | $4,822 | $— | | Non-cash stock compensation | $2,380 | $2,028 | $9,132 | $7,460 | | Tax effect | $(2,802) | $(1,052) | $(6,551) | $(3,379) | | Adjusted net income | $3,086 | $6,521 | $20,076 | $26,908 | Constant Currency Comparison This table adjusts reported financial results for the impact of foreign currency fluctuations to provide a constant currency comparison. For the full year 2023, constant currency revenue was $285.6 million, representing a 1.7% increase over the prior year's adjusted figure. Full-year constant currency adjusted EBITDA was $38.2 million Constant Currency Data (in thousands) | Metric | Period | As Reported | Constant Currency Adjusted | | :--- | :--- | :--- | :--- | | Revenue | Q4 2023 | $66,186 | $65,109 | | Adjusted EBITDA | Q4 2023 | $5,907 | $6,108 | | Revenue | FY 2023 | $291,054 | $285,571 | | Adjusted EBITDA | FY 2023 | $37,677 | $38,151 | Supporting Information This section provides explanations for non-GAAP financial measures and includes important disclaimers regarding forward-looking statements Non-GAAP Financial Measures ISG explains its use of non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, and constant currency data. The company believes these metrics provide a clearer view of its core operating performance by excluding certain non-cash and special charges (like acquisition costs or large reserves) and currency fluctuations, thereby improving comparability between periods for investors and management - ISG uses non-GAAP measures to enhance the evaluation of its ongoing operating results by excluding non-cash and certain special charges[24] - Key non-GAAP measures provided are Adjusted EBITDA, Adjusted Net Income, Adjusted EPS, and financial data on a constant currency basis[25] - Constant currency figures are calculated by converting current and prior-period local currency results using the same exchange rates to eliminate the impact of foreign exchange fluctuations[26] Forward-Looking Statements This section contains the standard safe harbor statement, cautioning that forward-looking statements regarding future events and performance are not guarantees and are subject to various risks and uncertainties. It lists potential risks, including failure to secure new clients, competition, ability to retain employees, and macroeconomic conditions, that could cause actual results to differ materially from expectations - The press release contains forward-looking statements that represent management's current expectations and are not guarantees of future results[22] - Key risks include: failure to secure new engagements, ability to hire and retain qualified employees, competition, currency fluctuations, and general political and economic conditions[22]