What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-10 · 101 added, 35 removed, 179 unchanged (43% of the section changed)

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As a result, these statements are subject to various risks and uncertainties.

For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2023 Annual Report on Form 10-K titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A of Part II, “Risk Factors.”

For a discussion of material risks and uncertainties that the Company faces, see the discussion in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A of Part II, “Risk Factors.”

BUSINESS OVERVIEW

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A trusted business partner to over 900 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations and service and technology providers achieve operational excellence and faster growth.

The firm specializes in digital transformation services, including automation, cloud and data analytics;

The Company specializes in digital transformation services, including automation, cloud and data analytics;

sourcing advisory;

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The volume of work performed for any particular client can vary widely from period to period.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

Geographical revenue information for the segment is as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Geographic Area

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Total revenues

Revenues decreased $14.2 million, or approximately 18%, in the first quarter of 2024.

The decrease in revenue for the Americas was primarily attributable to a decrease in our Advisory and Automation service lines, partially offset by an increase in our Research service line.

The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory service line, partially offset by an increase in our Network & Software Advisory Service (“NaSa”) service line.

The revenue decrease in Asia Pacific was primarily attributable to a decrease in our Advisory and NaSa service lines.

Revenues decreased $10.3 million, or approximately 14%, in the second quarter of 2024.

The decrease in revenue for the Americas was primarily attributable to a decrease in our Advisory and Network & Software Advisory Service (“NaSa”) service lines, partially offset by an increase in our Automation service line.

The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory and Automation service lines.

The revenue decrease in Asia Pacific was primarily attributable to a decrease in our Advisory service line.

The translation of foreign currency revenues into U.S.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year by $0.3 million.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $0.2 million.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Three Months Ended March 31,

Three Months Ended June 30,

Operating Expenses

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Total operating expenses

Total operating expenses decreased $4.8 million, or approximately 7%, for the first quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $5.1 million, compensation expense of $1.9

million and license fees of $1.4 million.

These costs were partially offset by higher severance and integration and other expense of $2.7 million.

Total operating expenses decreased $9.1 million, or approximately 13%, for the second quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $4.4 million, compensation expense of $3.5 million, stock-based compensation expense of $1.5 million, professional fees of $0.4 million and severance and

integration expenses of $0.4 million.

These costs were partially offset by higher license fees of $0.9 million and conference expense of $0.4 million.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit-sharing plan contributions.

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Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.

Depreciation and amortization expense in the first quarter of 2024 and 2023 was $1.5 million and $1.6 million, respectively.

Depreciation and amortization expense was $1.6 million for the second quarters 2024 and 2023 respectively.

Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements.

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The following table presents a breakdown of other income (expense), net:

Years Ended March 31,

Three Months Ended June 30,

Other income (expense), net

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Interest expense

Foreign currency transaction loss

Foreign currency transaction gain

Total other expense, net

The total decrease of $0.6 million, or approximately 32%, was primarily the result of lower interest expense associated with the write-off of deferred financing costs of $0.4 million in the prior year, higher interest income and lower foreign currency transaction losses.

The total increase in other expenses of $0.2 million, or approximately 16%, was primarily the result of higher interest expense attributable to higher interest rates, lower foreign currency transaction gains and higher interest income.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of our earnings among the various state and foreign tax jurisdictions in which our business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.

Our effective tax rate for the quarter ended March 31, 2024 was 6.4% compared to 32.9% for the quarter ended March 31, 2023.

The difference for the quarter ended March 31, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the quarter ended March 31, 2024 was lower than the statutory rate primarily due to non-deductible expenses and the impact of earnings in foreign jurisdictions.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2024.

Our effective tax rate for the quarter ended June 30, 2024 was 12.0% compared to 37.1% for the quarter ended June 30, 2023.

The difference for the quarter ended June 30, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the quarter ended June 30, 2024 was lower than the statutory rate primarily due to non-deductible expenses and the impact of earnings in foreign jurisdictions.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2024.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Geographic Area

(in thousands)

Total revenues

Revenues decreased $24.6million, or approximately 16%, for the six months ended June 30, 2024.

The decrease in revenue in the Americas was primarily attributable to a decrease in our Advisory and NaSa service lines, partially offset by an increase in our Automation service line.

The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory and Automation service lines partially offset by an increase in our NaSa service line.

The decrease in revenue in Asia Pacific was primarily attributable to a decrease in our Advisory service line.

The translation of foreign currency revenues into U.S.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year by $0.1 million.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Six Months Ended June 30,

Operating Expenses

(in thousands)

Direct costs and expenses for advisors

Selling, general and administrative

Depreciation and amortization

Total operating expenses

Total operating expenses decreased $13.9 million, or approximately 10%, for the six months ended June 30, 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $9.5 million, compensation expense of $5.3 million, stock-based compensation expense of $1.3 million and license fees of $0.5 million.

These costs were partially offset by higher severance and integration expenses of $2.3 million and conference expenses of $0.4 million.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit-sharing plan contributions.

A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities.

Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement.

Statutory and elective profit-sharing plans are offered to employees as appropriate.

Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts.

Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities.

The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

We maintain a comprehensive program for training and professional development.

Related expenses include product training, updates on new service offerings or methodologies and development of project management skills.

Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure and costs for finance, accounting, information technology and human resource functions.

General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems.

Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.

Depreciation and amortization expense in the six months ended June 30, 2024 and 2023 were $3.1 million and $3.2 million, respectively.

Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements.

Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets.

We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs.

These costs are amortized over the estimated useful life of the software or system.

We amortize our intangible assets (e.g., client relationships and databases) over their estimated useful lives.

Goodwill related to acquisitions is not amortized but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.

Other Income (Expense), Net

The following table presents a breakdown of other income (expense), net:

Six Months Ended June 30,

Other income (expense), net

(in thousands)

Interest income

Interest expense

Foreign currency transaction gain (loss)

Total other income (expense), net

The total decrease in other expenses of $0.4 million was primarily the result of higher interest income.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which our business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.

Our effective tax rate for the six months ended June 30, 2024 was (3.7%) compared to 34.7% for the six months ended June 30, 2023.

The difference for the six months ended June 30, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the six months ended June 30, 2024 was lower than the statutory rate primarily due to non-deductible expenses and the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the six months ended June 30, 2024.

NON-GAAP FINANCIAL PRESENTATION

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Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

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Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

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Adjusted net income

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net (loss) income per diluted share

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Acquisition-related costs (1)

Account Receivables Reserves

Severance, integration and other expense

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The volume of billings and timing of collections and payments affect these account balances.

As of March 31, 2024, our cash, cash equivalents and restricted cash were $14.1 million compared to $22.8 million as of December 31, 2023, a net decrease of $8.7 million, which was primarily attributable to the following:

As of June 30, 2024, our cash, cash equivalents and restricted cash were $11.9 million compared to $22.8 million as of December 31, 2023, a net decrease of $10.9 million, which was primarily attributable to the following:

● net cash provided by operating activities of $4.5 million;

● repayment of outstanding debt of $10 million;

● proceeds from revolving facility of $5 million;

● cash dividends paid to shareholders of $2.5 million;

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● treasury shares repurchased of $3.0 million;

● payment of contingent consideration earnout payment of $1.7 million;

● payments related to tax withholding for stock-based compensation of $1.5 million;

● proceeds from issuance of employees stock purchase plan shares of $0.2 million.

● proceeds from issuance of employee stock purchase plan shares of $0.4 million.

Capital Resources

On February 22, 2023, the Company amended and restated its senior secured credit facility to increase the revolving commitments per the revolving facility from $54.0 million to $140.0 million and eliminate its term loan.

The material terms under the 2023 Credit Agreement are as follows.

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The applicable margin is adjusted quarterly based upon the Company’s consolidated leverage ratio.

During the first quarter of 2024, the applicable margin was increased to a percentage equal to 0.75% for the revolving loans maintained as Base Rate loans or 1.75% for the revolving loans maintained as Term SOFR loans.

For the first six months of 2024, the applicable margin was increased to a

percentage equal to 1% for the revolving loans maintained as Base Rate loans or 2% for the revolving loans maintained as Term SOFR loans.

● The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or dispositions of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business.

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● The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control.

The Company’s financial statements include outstanding borrowings of approximately $74.2 million and $79.2 million as of March 31, 2024 and December 31, 2023, respectively, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of approximately $74.2 million and $79.2 million as of June 30, 2024 and December 31, 2023, respectively, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings was approximately $74.8 million and $79.8 million as of March 31, 2024 and December 31, 2023, respectively.

The fair value of the Company's outstanding borrowings was approximately $74.8 million and $79.8 million as of June 30, 2024 and December 31, 2023, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company’s incremental borrowing rate for similar borrowing arrangements.

The incremental borrowing rate used to discount future cash flows was 7.2% and 6.9% as of March 31, 2024 and December 31, 2023, respectively.

The incremental borrowing rate used to discount future cash flows was 7.4% and 6.9% as of June 30, 2024 and December 31, 2023, respectively.

The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions and interest rates.

During the three months ended March 31, 2024, the Company repaid $5.0 million of the revolver loan.

During the six months ended June 30, 2024, the Company borrowed $5.0 million and repaid $10.0 million of the revolver loan.

The Company is currently in compliance with its financial covenants.

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Dividend Program

On May 7, 2024, the Board approved a second-quarter dividend of $0.045 per share, payable on July 5, 2024, to shareholders of record as of June 14, 2024.

On August 2, 2024, the Company’s Board of Directors (the “Board”) approved a third-quarter dividend of $0.045 per share, payable on October 4, 2024, to shareholders of record as of September 6, 2024.

The dividends are accounted for as a decrease to Stockholders’ Equity.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis