What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-09 compared with 2024-11-08 · 57 added, 131 removed, 152 unchanged (55% of the section changed)

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Forward-looking statements include, but are not limited to, statements concerning 2025 revenue growth rates and capital expenditures.

Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of wars, such as the war in Ukraine and the conflict in the Middle East.

tariffs, trade barriers and restrictions, as well as wars, such as the war in Ukraine and the

conflict in the Middle East.

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 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.”

For a discussion of material risks and uncertainties that we face, see the discussion in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A of Part II, “Risk Factors.”

BUSINESS OVERVIEW

Information Services Group, Inc.

III) (the “Company,” “ISG,” “we,” “us” or “our”) is a leading global technology research and advisory firm.

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

sourcing advisory;

managed governance and risk services;

network carrier services;

technology strategy and operations design;

change management;

market intelligence and technology research and analysis.

Founded in 2006, and based in Stamford, Connecticut, ISG employs approximately 1,500 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking,

market influence, deep industry and technology expertise and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data.

III) (the “Company,” “ISG,” “we,” “us” or “our”) is a global AI-centered technology research and advisory firm.

A trusted partner to more than 900 clients, including 75 of the world’s top 100 enterprises, ISG is a long-time leader in technology and business services sourcing that is now at the forefront of leveraging AI to help organizations achieve operational excellence and faster growth.

The firm, founded in 2006, is known for its proprietary market data, in-depth knowledge of provider ecosystems and the expertise of its 1,300 professionals worldwide working together to help clients maximize the value of their technology investments.

For more information, visit www.isg-one.com.

The information on or accessible through our website is not part of and is not incorporated by reference into this Quarterly Report on Form 10-Q, and the inclusion of our website address in this Quarterly Report on Form 10-Q is only for reference.

The content on our website is available for informational purposes only.

It should not be relied upon for investment purposes, nor is it incorporated by reference into this Quarterly Report on Form 10-Q or any other filings.

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans.

As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions.

Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and their impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events.

Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events.

Other areas that could impact the business would also include natural disasters, pandemics, wars, legislative and regulatory changes and capital market disruptions.

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We also derive our revenues from certain recurring revenue streams.

These include such annuity-based ISG offerings as ISG GovernX, Research, Software as a Subscription (Automation licenses), ISG Inform and multi-year Public Sector contracts.

These include such annuity-based ISG offerings as ISG GovernX, ISG Research Lens, ISG Inform and our multi-year Public Sector contracts.

These offerings are characterized by subscriptions (i.e., renewal-centric as opposed to project-centric revenue streams) or, in some instances, multi-year contracts.

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The number of business workdays is also affected by the number of vacation days taken by our consultants and holidays in each quarter.

We typically have fewer business workdays available in the fourth quarter of the year, which can impact revenues during that period.

Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods.

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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 SEPTEMBER 30, 2024 AND SEPTEMBER 30, 2023

Geographical revenue information for the segment is as follows:

Three Months Ended September 30,

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2025 AND MARCH 31, 2024

The following table presents a breakdown of our revenue by geographic area:

Three Months Ended March 31,

Geographic Area

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Total revenues

Revenues decreased $10.5 million, or approximately 15%, in the third quarter of 2024.

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

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

Revenues decreased $4.7 million, or approximately 7%, in the first quarter of 2025 compared to the first quarter of 2024.

The revenue for the Americas were flat with an increase in Consulting partially offset by a decrease in Automation and Network & Software Advisory Services (“NaSa”) (excluding the prior year Automation revenue due to sale of the Automation service line, revenues would have reported an increase of 17%).

The decrease in revenue in Europe was primarily attributable to a decrease in Automation, NaSa, GovernX and Research service lines (excluding the prior year Automation revenue, revenues would have reported a decrease of 13%).

The revenue decrease in Asia Pacific was primarily attributable to a decrease in our Consulting, GovernX and Research service lines.

The translation of foreign currency revenues into U.S.

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

Three Months Ended September 30,

Three Months Ended March 31,

Operating Expenses

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Total operating expenses

Total operating expenses decreased $8.6 million, or approximately 13%, for the third quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $3.3 million, contingent consideration adjustment of $2.4 million, license fees of $2.3 million and compensation expense of $1.6 million.

These costs were partially offset by higher bad debt expense of $0.6 million, acquisition costs of $0.6 million and stock-based compensation expense of $0.2 million.

Total operating expenses decreased $10.5 million, or approximately 16%, for the first quarter of 2025 compared to the first quarter of 2024.

The decrease in operating expenses was primarily due to lower automation license fees expense of $3.7 million, restructuring costs of $2.6 million, compensation expense of $2.4 million, contract labor expense of $0.6 million and travel and entertainment expense of $0.4 million.

These costs were partially offset by higher stock-based compensation expense of $0.2 million and professional fees of $0.1 million.

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

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Sales and marketing costs consist principally of compensation expenses 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.

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.

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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 was $1.6 million and $1.5 million for the third quarters of 2024 and 2023, respectively.

Depreciation and amortization expense was $1.1 million and $1.5 million for the first quarters of 2025 and 2024, respectively.

The decrease of $0.4 million was primarily due to the sale of our Automation business on October 1, 2024.

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:

Three Months Ended September 30,

Three Months Ended March 31,

Other income (expense), net

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Total other expense, net

The total decrease in other expenses of approximately 1% was primarily the result of higher interest income, offset by higher interest expense attributable to higher interest rates.

The total decrease in other expenses of $0.3 million, or approximately 20%, was primarily the result of lower interest expense attributable to a lower debt balance, partially offset by lower 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 September 30, 2024 was 60.2% compared to 33.2% for the quarter ended September 30, 2023.

The difference for the quarter ended September 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 September 30, 2024 was larger 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 September 30, 2024.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND SEPTEMBER 30, 2023

Geographical revenue information for the segment is as follows:

Nine Months Ended September 30,

Geographic Area

(in thousands)

Total revenues

Revenues decreased $35.1 million, or approximately 16%, for the nine months ended September 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 Research 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 $0.4 million.

Operating Expenses

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

Nine Months Ended September 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 $22.5 million, or approximately 11%, for the nine months ended September 30, 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $12.9 million, compensation expense of $6.9 million, license fees of $2.8 million, contingent consideration adjustment of $2.4 million, stock-based compensation expense of $1.1 million and professional fees of $0.5 million.

These costs were partially offset by higher severance and integration expenses of $2.2 million, bad debt expense of $0.7 million and acquisition costs of $0.6 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.

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 was $4.7 million for the nine months ended September 30, 2024 and 2023, 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:

Nine Months Ended September 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 nine months ended September 30, 2024 was 112.9% compared to 34.1% for the nine months ended September 30, 2023.

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

The Company’s effective tax rate for the nine months ended September 30, 2024 was larger 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 nine months ended September 30, 2024.

Our effective tax rate for the quarter ended March 31, 2025 was 37.9% compared to 6.4% for the quarter ended March 31, 2024.

The difference for the quarter ended March 31, 2025 was primarily due to the impact of an increase in pre-tax earnings.

The Company’s effective tax rate for the quarter ended March 31, 2025 was larger 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, 2025.

NON-GAAP FINANCIAL PRESENTATION

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We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis.

We provide adjusted EBITDA (defined as net income plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, interest accretion associated with contingent consideration, change in contingent consideration, acquisition-related costs, and severance, integration and other expense), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, interest accretion associated with contingent consideration, change in contingent consideration, acquisition-related costs, severance, integration and other expense and write-off of deferred financing costs, on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net tax effect of the items set forth in the table below.

We provide adjusted EBITDA (defined as net income plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, interest accretion associated with contingent consideration, acquisition and disposition-related costs, and severance, integration and other expense), adjusted net income (defined as net income plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, interest accretion associated with contingent consideration, acquisition and disposition-related costs, severance, integration and other expense, on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net tax effect of the items set forth in the table below.

These are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations that management believes are not indicative of ISG’s core operations.

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However, they are not measurements of financial performance under GAAP and should not be considered as alternatives to measures of performance derived in accordance with GAAP.

These non-GAAP financial measures exclude non-cash and certain other special charges that many investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future.

These non-GAAP financial measures exclude non-cash and certain other special charges that some investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future.

We believe that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands)

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Interest expense (net of interest income)

Income taxes expense (benefit)

Depreciation and amortization

Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

Acquisition and disposition-related costs (1)

Severance, integration and other expense

Foreign currency transaction loss

Foreign currency transaction (gain) loss

Non-cash stock compensation

Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands)

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Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

Acquisition and disposition-related costs (1)

Severance, integration and other expense

Write-off of deferred financing costs

Foreign currency transaction loss

Foreign currency transaction (gain) loss

Tax effect (2)

Adjusted net income

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income (loss) per diluted share

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Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

Acquisition and disposition-related costs (1)

Severance, integration and other expense

Write-off of deferred financing costs

Foreign currency transaction loss

Foreign currency transaction (gain) loss

Tax effect (2)

Adjusted net income per diluted share

(1) Consists of expenses from acquisition-related costs and non-cash fair value adjustments on pre-acquisition contract liabilities.

(1) Consists of expenses from acquisition and disposition-related costs and non-cash fair value adjustments on pre-acquisition contract liabilities.

(2) Marginal tax rate of 32%, reflecting U.S.

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

As of September 30, 2024, our cash, cash equivalents and restricted cash were $9.8 million compared to $22.8 million as of December 31, 2023, a net decrease of $13.0 million, which was primarily attributable to the following:

As of March 31, 2025, our cash, cash equivalents and restricted cash totaled $20.2 million compared to $23.2 million as of December 31, 2024, a net decrease of $3.0 million, which was primarily attributable to the following:

● net cash provided by operating activities of $1.0 million;

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● purchase of furniture, fixtures and equipment of $0.8 million;

● proceed from the sale of the automation business of $2.0 million;

● treasury shares repurchased of $2.6 million;

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

● payments related to tax withholding for stock-based compensation of $0.8 million;

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

For the first nine 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.

For the first quarter of 2025, applicable margin was decreased by 0.25% percentage of the revolving loans maintaining a Base Rate loans of 1.75% 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.

In addition, the Company is required to comply with a consolidated leverage ratio and consolidated interest coverage ratio.

● 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 $66.2 million and $79.2 million as of September 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 $66.9 million and $79.8 million as of September 30, 2024 and December 31, 2023, respectively.

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

The Company’s financial statements include outstanding borrowings of $59.2 million at both March 31, 2025 and December 31, 2024, 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 $59.5 million and $59.6 million as of March 31, 2025 and December 31, 2024, 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 6.7% and 6.9% as of September 30, 2024 and December 31, 2023, respectively.

The incremental borrowing rate used to discount future cash flows was 6.1% and 6.4% as of March 31, 2025 and December 31, 2024, 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 nine months ended September 30, 2024, the Company borrowed $10.0 million and repaid $23.0 million of the revolver loan.

During the first quarter of 2025, the Company borrowed $5.0 million and repaid $5.0 million of the revolver loan during the quarter.

The Company is currently in compliance with its financial covenants.

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The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders.

We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.

We may not be able to obtain financing arrangements in sufficient amounts or on terms acceptable to us in the future.

Dividend Program

On November 1, 2024, the Company’s Board of Directors (the “Board”) approved a fourth-quarter dividend of $0.045 per share, payable on December 20, 2024, to shareholders of record as of December 3, 2024.

On May 6, 2025, the Company’s Board of Directors (the “Board”) approved a second-quarter dividend of $0.045 per share, payable on June 27, 2025, to shareholders of record as of June 6, 2025.

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