2023-08-07 19:24:30 ET
Summary
- Information Services Group, Inc. reported Q2 2023 financial results, beating revenue and EPS estimates.
- The company provides digital transformation consulting and technology services globally.
- Forward revenue growth expectations are modest, leading to my Neutral [Hold] stance on the stock in the near term.
A Quick Take On Information Services Group
Information Services Group, Inc. ( III ) reported its Q2 2023 financial results on August 3, 2023, beating both expected revenue and EPS estimates.
The company provides digital transformation consulting and technology services worldwide.
I previously wrote about ISG with a Buy outlook.
Forward revenue growth expectations are rather mild, and the firm's apparent full valuation leads me to become Neutral [Hold] on Information Services Group, Inc. stock in the near term.
Information Services Group Overview And Market
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:
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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 customers via its direct sales, business development and marketing efforts as well as through partner referrals.
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:
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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.
ISG's Recent Financial Trends
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Total revenue by quarter has continued to grow, while operating income by quarter has turned downward in the most recent quarter.
Total Revenue Operating Income (Seeking Alpha)
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Gross profit margin by quarter has trended lower more recently; Selling, G&A expenses as a percentage of total revenue by quarter have varied within a narrow range.
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have trended lower in recent quarters.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP).
In the past 12 months, III's stock price has fallen 20.19% vs. that of the SPDR S&P Software & Services ETF's ( XSW ) rise of 4.71%, dramatically underperforming the wider index as the chart indicates below:
52-Week Stock Price Comparison (TradingView)
Valuation And Other Metrics For ISG
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 1.1 |
Enterprise Value / EBITDA | 9.5 |
Price / Sales | 0.8 |
Revenue Growth Rate | 4.3% |
Net Income Margin | 5.3% |
EBITDA % | 11.1% |
Market Capitalization | $249,650,000 |
Enterprise Value | $309,560,000 |
Operating Cash Flow | $3,660,000 |
Earnings Per Share (Fully Diluted) | $0.32 |
(Source - Seeking Alpha).
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Discounted Cash Flow Calculation - III (GuruFocus)
Assuming generous DCF parameters, the firm's shares would be valued at approximately $5.54 versus the current price of $5.09, indicating they are potentially currently slightly undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Commentary On Information Services Group
In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023's results , management highlighted its record revenue for the quarter.
The company has seen a "surge in demand" for its cost optimization service offerings, not unlike other consulting companies now as clients are more focused on cost-savings rather than "transformation" per se, at least in the current uncertain macroeconomic environment.
Management also noted the increase in share buyback authorization of $25 million, so the company now has around $29 million in available capital to buy back shares.
Leadership did not disclose any company, client, or employee retention rate metrics.
Total revenue for Q2 2023 rose 5.5% year-over-year, while gross profit margin fell by 2.8%.
Selling, G&A expenses as a percentage of revenue grew by 0.3% YoY, but operating income dropped a hefty 31.0%.
Looking ahead, consensus full year 2023 revenue estimates are $303 million, or 3.8% growth over 2022.
If achieved, this would represent an increase in revenue growth versus 2022's growth rate of 2.92% over 2021, indicating a slightly steeper growth trajectory.
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 "Uncertain" once, "Challeng[es][ing]" once, and "Macro" three times.
Analysts questioned company leadership about its AI-related initiatives. Leadership is focused on creating an ecosystem of solutions that address customer needs in AI, which it believes will be a decade long cycle like the transformation to the cloud has been.
Regarding valuation, my discounted cash flow calculation indicates the stock may be close to fully valued at its present level of around $5.10.
The primary business risk to Information Services Group, Inc.'s outlook is continued client delays throughout the consulting industry of their discretionary projects, reducing company revenue growth as we move towards a late-cycle environment.
For that reason and given a rather full DCF valuation estimate, I'm Neutral [Hold] on III at this time.
For further details see:
Revenue Upside In 2023 Appears Limited For Information Services Group