2023-06-01 16:18:41 ET
Summary
- Information Services Group, Inc. reported its Q1 2023 financial results on May 9, 2023.
- The firm provides a range of IT consulting, advisory and software to companies in all verticals.
- Information Services Group has shown new growth and its GovernX SaaS software business has increasing promise.
- While it may not be for the impatient, Information Services Group stock is a Buy at around $5.00 per share as the company continues to grow its SaaS recurring revenue business.
A Quick Take On Information Services Group
Information Services Group, Inc. ( III ) reported its Q1 2023 financial results on May 9, 2023, beating both expected revenue and EPS estimates.
The company provides digital transformation consulting and technology services worldwide.
While Information Services Group, Inc. may be only for patient investors due to near-term macroeconomic headwinds in certain sectors, I view the company as becoming a bigger SaaS play with the potential for a higher multiple in the future.
My outlook on III is a Buy at around $5.00 per share.
Information Services Overview
Stamford, Connecticut-based Information Services Group was founded in 2006 and provides technology research and digital transformation advisory services and related software worldwide.
The firm is headed by Chairman and CEO, Michael Connors, who was previously Chairman and CEO of Media Measurement & Information Group.
The company's primary offerings include:
-
ISG GovernX
-
ISG Inform
-
ISG ProBenchmark
-
ISG Executive Insights
-
ISG Enterprise Change
The firm acquires customers via its direct sales, business development and marketing efforts as well as through partner referrals.
Information Services' Market & Competition
According to a 2022 market research report by Grand View Research, the market for digital transformation services was an estimated $609 billion in 2021 and is forecast to reach $3.95 trillion by 2030.
This represents a very high forecast CAGR of 23.1% from 2022 to 2030.
The main drivers for this expected growth are the need by organizations of all sizes to improve their IT operations to increase efficiencies and reduce costs.
Also, the chart below shows the U.S. digital transformation market's historical and projected future growth trajectory by solution:
U.S. Digital Transformation Market (Grand View Research)
Major competitive or other industry participants include:
-
Globant
-
EPAM
-
Slalom
-
Accenture
-
Deloitte Digital
-
McKinsey
-
BCG
-
Ideo
-
Cognizant Technology Solutions
-
Capgemini
-
Company in-house development efforts
III's Recent Financial Trends
-
Total revenue by quarter has risen in recent quarters:
-
Gross profit margin by quarter fell in Q1 2023 :
Gross Profit Margin (Seeking Alpha)
-
Selling, G&A expenses as a percentage of total revenue by quarter have also dropped in the most recent quarter:
Selling, G&A % Of Revenue (Seeking Alpha)
-
Operating income by quarter has trended higher in recent quarters:
Operating Income (Seeking Alpha)
-
Operating leverage by quarter has oscillated near breakeven for the past several quarters:
Operating Leverage (Seeking Alpha)
-
Earnings per share (Diluted) fell year-over-year in Q1:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, III's stock price has fallen 23.69% vs. that of the SPDR S&P Software & Services ETF's ( XSW ) rise of 0.07%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $23.7 million in cash and equivalents and $79.2 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was only $0.8 million, of which capital expenditures accounted for $2.9 million. The company paid $8.0 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For III
Below is a table of relevant capitalization and valuation figures for the company:
Measure ((TTM)) | Amount |
Enterprise Value/Sales | 1.1 |
Enterprise Value/EBITDA | 8.8 |
Price/Sales | 0.8 |
Revenue Growth Rate | 3.0% |
Net Income Margin | 6.3% |
EBITDA % | 11.9% |
Net Debt To Annual EBITDA | 1.6 |
Market Capitalization | $245,780,000 |
Enterprise Value | $305,690,000 |
Operating Cash Flow | $3,660,000 |
Earnings Per Share (Fully Diluted) | $0.37 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Discounted Cash Flow - III (GuruFocus)
Assuming generous DCF parameters, the firm's shares would be valued at approximately $6.24 versus the current price of $5.09, indicating they are potentially currently undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Commentary On III
In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023's results, management highlighted the expansion of its recurring revenues, "up 27% versus the prior year and representing 42% of our firm-wide revenues this quarter."
As a result, the company saw topline revenue growth driven by its GovernX vendor compliance and risk management business.
Leadership also reiterated its goal to achieve $150 million in annual recurring revenue by the end of 2025.
The firm is also seeking to incorporate AI and machine learning capabilities internally to reduce costs and improve operational efficiency.
Management did not disclose any company or customer retention rate metrics.
Total revenue for Q1 2023 rose 8.1% year-over-year and gross profit margin fell 2.1 percentage points.
Selling, G&A expenses as a percentage of revenue fell 0.6 percentage points, a positive move, while operating income dropped 7.8% YoY.
Looking ahead, management only provided guidance for Q2 2023, expecting revenue to be $74 million at the midpoint of the range (4.7% YoY growth rate) and adjusted EBITDA to be $$10.5 million.
The company's financial position is moderate, with reasonable liquidity, some long-term debt and slight positive free cash flow; its net debt-to-EBITDA multiple was 1.6x.
Regarding valuation, the market is valuing III at an EV/Sales multiple of around 1.1x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
EV/Next 12 Months Revenue Multiple Index (Meritech Capital)
So, if it was valued as a software company, by comparison, III is currently valued by the market at a large discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
Risks to the company's outlook include an economic slowdown, lowered credit availability which may affect customer/prospect spending plans and lengthening sales cycles.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Recession" once, "Uncertain" two times, and "Macro" five times.
The negative terms refer to the negative environment the firm's clients and prospects are operating in, for certain industry verticals and geographies.
A potential upside catalyst to the stock could include continued progress toward the firm becoming a SaaS play, with a higher potential multiple on the stock.
While Information Services Group, Inc. may be only for patient investors due to near-term macroeconomic headwinds in certain sectors, I view the company as becoming a bigger SaaS play with the potential for a higher multiple in the future.
My outlook on Information Services Group, Inc. stock is a Buy at around $5.00 per share.
For further details see:
Information Services Group Continues SaaS Software Growth