III

Business Context and Reporting Period

Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: ISG operates as a fact-based sourcing advisory firm specializing in the assessment, negotiation, and management of service contracts (IT, communications, business processes) for Forbes Global 2000 corporations. The company became an operating entity following the acquisition of Technology Partners International (TPI) on November 16, 2007. Prior to this acquisition, ISG was a special purpose acquisition company with no operations.

Key Financial Metrics

Note: Q1 2007 data reflects TPI operations as the predecessor to ISG. ISG had no operations in Q1 2007 prior to the acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased by $2.2 million (5%) compared to the prior year period. This was driven by a 7% increase in Americas revenue ($27.2 million) and a 3% increase in international revenue ($18.4 million).
• Operating Expenses:
  • Direct Costs: Decreased by $0.5 million (2%) to $25.8 million, primarily due to cost reductions under the Value Creation Plan (VCP), partially offset by salary increases to support revenue growth.
  • SG&A: Decreased by $0.9 million (6%) to $13.2 million. Reductions in selling/marketing ($1.6M) and training ($0.4M) were offset by a $1.1M increase in general/administrative costs, largely due to $0.7M in stock-based compensation not present in the prior year.
  • Depreciation & Amortization: Increased significantly to $2.6 million from $0.5 million, driven by the amortization of intangible assets recorded in connection with the TPI acquisition.
• Interest Expense: Net interest expense increased to $1.1 million (net of income) due to debt incurred for the acquisition, compared to net interest income of $2.0 million in the prior year period (driven by IPO cash balances).
• Cash Flow: Operating cash flow improved significantly from a use of $7.4 million in the prior year to a use of $2.1 million in Q1 2008. The decrease in cash balance ($2.8 million) was primarily due to operating outflows, capital expenditures, debt principal payments, and share repurchases.

Guidance, Outlook, and Risks

• Restructuring (Value Creation Plan): ISG is implementing a VCP to achieve cost reductions and productivity improvements. Total charges are estimated at $6 million over 12-15 months. As of March 31, 2008, $1.0 million has been incurred, with the remaining balance expected to be paid over the next 12 months.
• Debt and Liquidity: The company maintains a $95.0 million term loan and a $10.0 million revolving credit facility. As of March 31, 2008, $94.8 million was outstanding on the term loan. The company purchased an interest rate cap in February 2008 to hedge 40% of borrowings against LIBOR increases above 7%.
• Market Risks:
  • Interest Rate Risk: A 100 basis point change in interest rates would result in an annual pre-tax change of $0.9 million.
  • Currency Risk: The company is exposed to foreign currency fluctuations as international revenue grows (39% of total revenue in 2007). No hedging instruments are currently used for currency.
  • Client Concentration: One client accounted for greater than 10% of revenue and accounts receivable in 2007, though this concentration decreased following the client's divestiture of certain business units.
• Forward-Looking Statements: Management notes that actual results may vary materially due to risks including competitive conditions, stock price volatility, and the realization of the VCP benefits.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to service the $94.8 million term loan given the current operating cash flow usage.
• Restructuring Execution: Monitor the progress of the $6 million Value Creation Plan to ensure projected cost savings are realized without impacting service quality.
• Client Concentration: Assess the stability of the largest client relationship, which historically represented over 10% of revenue.
• Stock-Based Compensation: Review the impact of the $0.7 million stock-based compensation expense and the $8.9 million in unrecognized costs on future earnings.
• Intangible Asset Amortization: Confirm the amortization schedule for the $116 million in net intangible assets, which significantly impacts operating margins.