2023-11-06 15:49:51 ET
Summary
- Information Services Group, Inc. has reported Q3 2023 financial results, missing revenue but beating earnings estimates.
- The company provides IT consulting and software development services globally.
- Estimated revenue growth for 2023 is only 4% as clients stretch out project timelines and focus on cost takeout work.
- I remain on Hold for Information Services Group stock until management can meaningfully reignite revenue growth.
A Quick Take On Information Services Group
Information Services Group, Inc. ( III ) reported its Q3 2023 financial results on November 2, 2023, missing revenue but beating consensus earnings estimates.
The firm provides a range of IT consulting and software development services for companies globally.
I previously wrote about III with a Hold outlook, citing attenuated upside for revenue growth in 2023.
While the company has seen strength in Europe and with its recurring revenue streams, estimated revenue growth for 2023 is an anemic 4%.
I remain on Hold for Information Services Group, Inc. stock until management can reignite meaningful revenue growth.
Information Services Group Overview And Market
Information Services Group, headquartered in Stamford, Connecticut, was founded in 2006.
The company provides technology research, advisory services, and related software for enterprises seeking digital transformation.
ISG is led by Chairman and CEO Michael Connors, formerly Chairman and CEO of Media Measurement & Information Group.
The company’s primary offerings include:
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ISG GovernX
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ISG Inform
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ISG ProBenchmark
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ISG Executive Insights
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ISG Enterprise Change.
The firm acquires new customers through its direct sales, business development and marketing efforts as well as through partner referrals.
According to a 2023 market research report by Grand View Research, the market for digital transformation services was an estimated $731 billion in 2022 and is forecast to reach $4.9 trillion by 2030.
This represents a very high forecast CAGR of 26.7% from 2023 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.
The chart below shows the U.S. digital transformation market’s historical and projected future growth trajectory by solution:
Grand View Research
Major competitive or other industry participants include:
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Globant
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EPAM
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Slalom
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Accenture
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Deloitte Digital
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McKinsey
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BCG
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Ideo
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Cognizant Technology Solutions
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Capgemini
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Company in-house development efforts
Information Services Group’s Recent Financial Trends
Total revenue by quarter (blue columns) has continued to trend higher according to seasonal changes; Operating income by quarter (red line) has grown sequentially and year-over-year:
Seeking Alpha
Gross profit margin by quarter (green line) has trended lower YoY in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have fluctuated within a range, as the chart shows here:
Seeking Alpha
Earnings per share (Diluted) have turned lower in the last four quarters:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, III’s stock price has fallen 14.31% vs. that of the SPDR S&P Software & Services ETF’s ( XSW ) rise of 18.91%:
For balance sheet results, the firm ended the quarter with $18.7 million in cash and equivalents and $79.2 million in total debt, all of which was categorized as long-term.
Over the trailing twelve months, free cash flow was $6.8 million, during which capital expenditures were $2.4 million. The company paid $8.8 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Information Services Group
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 0.9 |
Enterprise Value / EBITDA | 8.6 |
Price / Sales | 0.7 |
Revenue Growth Rate | 6.2% |
Net Income Margin | 4.5% |
EBITDA % | 10.6% |
Market Capitalization | $209,280,000 |
Enterprise Value | $272,960,000 |
Operating Cash Flow | $5,660,000 |
Earnings Per Share (Fully Diluted) | $0.27 |
Forward EPS Estimate - 2023 | $0.44 |
Free Cash Flow Per Share | $0.14 |
SA Quant Score | Hold - 2.64 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Based on the DCF, the firm’s shares would be valued at approximately $4.83 versus the current price of $4.31, indicating they are potentially currently slightly undervalued.
Sentiment Analysis
The chart below shows the frequency of various keywords and terms in management’s most recent conference call:
Seeking Alpha
The company is facing foreign exchange headwinds and slower client decision-making due to macroeconomic concerns.
Analysts questioned leadership about the current demand environment and its Ventana acquisition.
Management replied that the increased focus by clients on optimization-oriented work will likely continue but is seeing different demand actions by different industries, with manufacturing and luxury are two relatively strong verticals.
The Ventana acquisition will likely open up new recurring revenue opportunities for III, allowing it to expand into software advisory services with little client overlap while providing a similar historical double-digit growth rate to ISG.
Commentary On Information Services Group
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted its ‘best top line performance ever’ during the quarter.
Revenue growth was driven by growth in the European region and in its recurring revenue segments.
The company's "sweet spot" of customer experience and reducing operating costs has been popular with clients.
Total revenue for Q3 2023 rose by only 4.4% year-over-year, while gross profit margin fell by 2.3%.
Management didn’t disclose any company, revenue or employee retention rate metrics.
Selling and G&A expenses as a percentage of revenue fell by 0.3% YoY, and operating income dropped by 16.2%.
The company's financial position is moderate, with debt 4x that of cash and equivalents and positive free cash flow generation in the past four quarters.
Looking ahead, consensus revenue growth estimates for 2023 indicate 4% growth over 2022.
If achieved, this would represent a slight increase in revenue growth rate versus 2022’s growth rate of 3% over 2021.
Per my discounted cash flow calculation, I estimate the stock may be slightly undervalued at its current level.
However, given the general revenue outlook in the consulting industry, as clients stretch out projects and focus on cost-takeout work, I’m not optimistic about the firm’s near-term outlook.
As such, I remain on Hold for Information Services Group, Inc. in the near term or until management can reignite overall revenue growth.
For further details see:
Information Services Group Faces Continued Client Project Delays