Business Context and Reporting Period
Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: ISG operates as a fact-based sourcing advisory firm specializing in the assessment, negotiation, and management of service contracts, primarily for IT infrastructure, software applications, and IT-enabled business processes. The company serves Forbes Global 2000 corporations across the Americas, Europe, and Asia Pacific.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|---|
| Revenue | $31,518 | $65,817 | $96,247 |
| Operating Income | $1,376 | $3,429 | $9,464 |
| Net Income | $98 | $639 | $4,087 |
| Diluted EPS | $0.00 | $0.02 | $0.13 |
| Cash and Cash Equivalents | $45,806 (as of June 30, 2009) | ||
| Long-Term Debt | $81,812 (as of June 30, 2009) | ||
| Operating Cash Flow | $(2,926) (Six months 2009) |
Margins (Six Months 2009):
- Operating Margin: 5.2%
- Net Profit Margin: 1.0%
Material Changes vs. Prior Period
- Revenue Decline: Revenue for the six months ended June 30, 2009, decreased by 32% ($30.4 million) compared to the same period in 2008. This was driven by a 29% drop in Americas revenue and a 35% drop in international revenue.
- Profitability Compression: Net income fell 84% year-over-year for the six-month period, from $4.1 million to $0.6 million, due to the significant revenue contraction.
- Expense Reductions: Direct costs decreased 40% and SG&A expenses decreased 9% year-over-year, reflecting lower advisory staff levels, reduced bonus provisions, and cost-cutting measures.
- Cash Flow: Operating cash flow turned negative at $(2.9) million for the six months ended June 30, 2009, compared to a positive $4.2 million in 2008. This was primarily due to severance payments and the payout of 2008 bonuses.
- Debt Reduction: On June 29, 2009, the company made a voluntary principal prepayment of $12.0 million on its term loan, reducing the outstanding balance to $81.8 million.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the revenue decline to lower levels of sourcing activity in the U.S. and Europe caused by the global economic downturn, client uncertainty, and delayed decision-making. Specific declines were noted in IT-related sourcing in Europe and the automotive sector. International results were further impacted by unfavorable foreign currency translation (weakening Euro, British Pound, and Australian Dollar).
Restructuring: The company completed its Value Creation Plan (VCP) in the second quarter of 2009. Restructuring charges of approximately $1.7 million were recorded in the first six months of 2009.
Risks and Contingencies:
- Client Concentration: The 20 largest clients accounted for approximately 48% of 2008 revenue. The automotive sector represented 14% of 2008 revenue, with General Motors being the largest client. The viability of these clients poses a material risk.
- Foreign Currency: Significant exposure to foreign exchange rates as 45% of revenue is generated outside the U.S. The company does not use derivative instruments for hedging.
- Interest Rate Risk: The company has a variable rate term loan. A 100 basis point increase in interest rates would decrease pre-tax results by approximately $0.82 million annually.
Investor Verification Checklist
- Client Concentration: Verify the current status and engagement levels of the top 20 clients, particularly General Motors and other automotive sector clients, given the 48% revenue concentration.
- Cash Burn Rate: Monitor the negative operating cash flow of $(2.9) million and the $15.3 million decrease in cash balances to assess liquidity sustainability without further debt reduction or equity issuance.
- Debt Covenants: Review the specific EBITDA exclusions granted by lenders regarding restructuring charges and GM receivables to ensure compliance with the 2007 Credit Agreement.
- Revenue Recovery: Assess whether the 32% year-over-year revenue decline is a temporary cyclical dip or a structural shift in the outsourcing advisory market.
- Foreign Exchange Impact: Quantify the specific dollar impact of currency translation on reported earnings versus underlying operational performance.