Business Context and Reporting Period
Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: ISG operates as a fact-based sourcing advisory firm specializing in the assessment, negotiation, and management of service contracts for IT infrastructure, software applications, and IT-enabled business processes. The company serves primarily Forbes Global 2000 corporations across the Americas, Europe, and Asia Pacific.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $34,299 | $45,554 |
| Operating Income | $2,053 | $3,912 |
| Net Income | $541 | $1,663 |
| Earnings Per Share (Diluted) | $0.02 | $0.05 |
| Cash and Cash Equivalents | $50,601 | $44,379 |
| Long-Term Debt (net of current) | $92,863 | N/A |
| Net Cash Used in Operating Activities | $(9,091) | $(2,091) |
Liquidity: As of March 31, 2009, the company held $50.6 million in cash and cash equivalents. Total debt outstanding under the term loan facility was $93.8 million. There were no borrowings under the $10.0 million revolving credit facility during the quarter.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by 25% ($11.3 million) compared to Q1 2008. This was driven by a 26% drop in Americas revenue (partially due to a 42% decrease in revenue from General Motors) and a 23% drop in international revenue. The decline was exacerbated by client uncertainty due to the global economic downturn and unfavorable foreign currency exchange rates.
- Expense Reductions: Direct costs decreased by 42% ($10.9 million) due to a reduced advisory staff, lower bonus provisions, and reduced travel expenses. Conversely, Selling, General, and Administrative (SG&A) expenses increased by 13% ($1.8 million) due to higher marketing, new product development, and increased reserves for uncollectible accounts.
- Cash Flow: Net cash used in operating activities increased significantly to $9.1 million (from $2.1 million in Q1 2008), primarily due to severance payments and the payout of bonuses earned in 2008.
Outlook, Risks, and Unusual Items
- Cost Reduction Program: In April 2009, following a review of cost productivity, the company initiated a program to reduce under-utilized resources, adjust compensation levels, and lower discretionary expenses. The cost of this program is estimated between $2.0 million and $3.0 million, primarily for severance, with completion expected by Q4 2009.
- Restructuring: The company is completing a Value Creation Plan (VCP) initiated in 2007. As of March 31, 2009, approximately $4.2 million of restructuring costs had been incurred, with remaining actions expected in Q2 2009.
- Client Concentration Risk: The 20 largest clients accounted for approximately 48% of 2008 revenue. The automobile sector (including General Motors, GMAC, and Chrysler) accounted for 14% of 2008 revenue. The financial viability of these large clients poses a material risk to future revenues and receivables.
- Foreign Exchange: The company faces significant foreign currency risk as 45% of 2008 revenue was generated outside the U.S. The strengthening of the U.S. dollar negatively impacted reported results.
Investor Verification Checklist
- Verify the impact of the new $2.0M–$3.0M cost reduction program on Q2 and Q3 2009 operating margins.
- Monitor the financial stability and contract status of the top 20 clients, particularly those in the automobile sector (General Motors, GMAC, Chrysler).
- Assess the trajectory of cash burn given the $9.1 million operating cash outflow and the $50.6 million cash balance.
- Review the effectiveness of the company's strategy to offset revenue declines in the Americas and Europe through new product development.
- Confirm the timeline for the completion of the remaining restructuring actions from the 2007 Value Creation Plan.