Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
III > SEC Filings for III > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for INFORMATION SERVICES GROUP INC.

Form 10-K for INFORMATION SERVICES GROUP INC.


7-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with Item 6 "Selected Financial Data" and our audited consolidated financial statements and the related notes included in Item 8 "Financial Statements and Supplementary Data". In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. These forward-looking statements are subject to numerous risks and uncertainties. Statements, other than those based on historical facts, which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements. Such forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to our operations and business environment that may cause actual results to be materially different from any future results, express or implied, by such forward-looking statements. These forward-looking statements must be understood in the context of numerous risks and uncertainties, including, but not limited to, those described previously in section 1A "Risk Factors."

BUSINESS OVERVIEW

Information Services Group, Inc. (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company serving more than 500 clients around the world to help them achieve operational excellence. We support private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to us for unique insights and innovative solutions for leveraging technology, our deep data source, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Connecticut, we have approximately 800 employees and operate in 21 countries.

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offering and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top strategic accounts or other significant client events. Other areas that could impact the business would also include natural disasters, legislative and regulatory changes and capital market disruptions.

We derive our revenues from fees and reimbursable expenses for professional services. A majority of our revenues are generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. There are also client engagements in which we are paid a fixed amount for our services, often referred to as fixed fee billings. This may be one single amount covering the whole engagement or several amounts for various phases or functions. From time to time, we earn incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual milestones or objectives. Such revenues may cause unusual variations in quarterly revenues and operating results.


Table of Contents

Our results are impacted principally by our full-time consultants' utilization rate, the number of business days in each quarter and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that result in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.

EXECUTIVE SUMMARY

ISG had a breakout year in 2013, turning in our best overall operating performance since our inception and crossing a significant threshold when we passed the $200 million revenue mark for the first time. It was a year marked by growth-and innovation-as we developed a range of new products and services to meet the changing needs of our clients.

As we address perpetual change in information technology and business processes across a global marketplace that remains in constant flux, one thing remains a constant: our mission to serve our clients and enable them to achieve operational excellence.

The Shifting Marketplace

A lot has changed since ISG, through its predecessor company, TPI, pioneered the sourcing advisory industry more than two decades ago. Client requirements have evolved from pure economies-of-scale and labor-arbitrage propositions into complex technological and operational solutions aimed not only at lowering costs, but improving overall performance.

Companies, requiring flexibility and agility in large-scale global operations, are opting for mixed models of delivery. These models combine shorter-term deals with multiple providers, each offering specialized capabilities, with captive and internal shared-service operations. Increasing labor automation, shrinking technology costs, and the impact of SMAC (social, mobile, analytic, cloud) technologies are among the marketplace trends driving this shift.

In response, service providers are moving away from customized offerings and replacing them with standardized service models that rely more on automation and "as-a-service" (XaaS) solutions.

This highly complex environment is creating unprecedented opportunity for ISG. Now, more than ever, enterprise clients need expert advice to develop new operating models and understand the benefits they will derive from them. They also need better governance and controls to realize those benefits. Service providers, too, need a much deeper understanding of client needs so they can tailor their offerings and distinguish themselves in an increasingly crowded marketplace.

ISG is uniquely qualified to serve the needs of both enterprises and service providers-on all counts.


Table of Contents

A Culture of Innovation

Continuous innovation is an imperative in this ever-changing environment. It is also part of the DNA of ISG.

Every employee here is a member of our R&D group, generating ideas that help solve immediate client problems or prove to be game-changers.

Our major innovations include ISG Managed Services, developed by employees who saw an opportunity to help clients maximize the benefits they get from their supplier relationships, and ISG Momentum Research, which leverages our data to help service providers enhance their offerings and differentiate themselves in the marketplace.

Most recently, ISG teams have developed our proprietary AccessISG service portal to provide on-demand access to information, insights and experts. Not only does this enhance our "stickiness" with clients between engagements and generate subscription revenues, it also allows us to address segments of the market that are interested in technology and operating solutions but lack the ability to enter into full-scale engagements.

We've also developed a dedicated Sourcing Integration and Management (SIAM) Practice to help clients achieve optimum performance in multi-sourcing environments, and an Engineering Services Practice, to address this emerging and fast-growing segment of the sourcing marketplace.

Our Strategy for Growth

Research. Consulting. Managed Services. These are the pillars of our business, and where we will focus our energies as we continue to build ISG into a leading, global information-based services firm in the years ahead.

Research: One of the things that sets ISG apart is our deep data assets. We will continue to build upon this core strength by expanding our collection and analysis of data from every engagement, deepening our vertical industry knowledge, and expanding into new domains and industries.

Consulting: We will continue to expand client relationships by leveraging the full range of our end-to-end services and offering higher-value solutions, from strategy development and operations design to change management and service integration. Leveraging our IT and industry-specific expertise, we also will grow our services that help clients achieve optimal performance in such areas as human resources, finance and accounting, customer service and corporate real estate.

Managed Services: After an operating model is designed, and IT and operational service providers are selected, our Managed Services help clients achieve maximum value from these relationships. These long-term assignments provide a steady stream of recurring revenues with annuity-like characteristics, and we will continue to expand them both in scope and number. In addition to Managed Services, we also plan to continue growing our Public Sector business, which, because of the long-term nature of government contracts, offers the same recurring revenue profile.

Going forward, we expect most of our growth to come from these organic business-building initiatives. Yet we always remain open to acquiring complementary businesses that enhance both the service we deliver to our clients and the financial performance we deliver for our shareholders.


Table of Contents

The Opportunity Ahead

In the end, our ability to transform intelligence into action, create business solutions and drive results for our clients will determine our success.

Our highly experienced advisors, with their significant domain expertise, bring unmatched value to our clients. Their combined talent will continue to be one of our most important assets. At the same time, our clients are demanding more efficient operating models, and we will continue to respond to that need, while leveraging our talent base for the new opportunities that lie before us.

We'll achieve our growth objectives by leveraging our products and services at every stage of the business lifecycle, continuing to grow our recurring revenue streams, becoming more efficient in resourcing our consulting business, and capitalizing on emerging trends and new growth areas.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND DECEMBER 31,
2012

Revenues

Revenues are generally derived from engagements priced on a time and materials basis and are recorded based on actual time worked as the services are performed. Revenues related to materials (mainly out-of-pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark-up and can be charged and reimbursed separately or as part of the overall fee arrangement. Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

We operate in one segment, fact-based sourcing advisory services. We operate principally in the Americas, Europe, and Asia Pacific. Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas.

Geographical information for the segment is as follows:

                                         Years Ended December 31,
                                                                   Percent
              Geographic Area     2013        2012       Change     Change
                                              (in thousands)
              Americas          $ 114,603   $ 104,925   $  9,678        9.2 %
              Europe               75,127      62,671     12,456       20.0 %
              Asia Pacific         21,252      25,149     (3,897 )    (15.5 )%

              Total revenues    $ 210,982   $ 192,745   $ 18,237        9.5 %

The net increase in revenues of $18.2 million or 10% in 2013 was attributable principally to a 20% increase in Europe revenues to $75.1 million and a 9% increase in Americas revenues to $114.6 million. The increase in revenues was primarily due to higher levels of sourcing activity in the Americas and Europe regions, attributable to increases in Consulting, Research and Managed Services. These increases were offset by a 16% reduction in Asia Pacific primarily due to lower volumes in sourcing related engagements which was only partially offset by growth in Managed Services. The translation of foreign currency into US dollars also had a slight negative impact on performance compared to prior year. Billable staff at December 31, 2013 totaled 653, as compared to 619 at December 31, 2012.


Table of Contents

Operating Expenses

    The following table presents a breakdown of our operating expenses by
functional category:

                                                     Years Ended December 31,
                                                                               Percent
   Operating Expenses                         2013        2012       Change     Change
                                                          (in thousands)
   Direct costs and expenses for advisors   $ 123,985   $ 114,429   $  9,556        8.4 %
   Selling, general and administrative         67,823      62,909      4,914        7.8 %
   Depreciation and amortization                7,473       8,857     (1,384 )    (15.6 )%

   Total operating expenses                 $ 199,281   $ 186,195   $ 13,086        7.0 %

Total operating expenses increased $13.1 million or 7% in 2013 with increases in direct expenses (8%) and increases in selling, general and administrative ("SG&A") expenses (8%) offset by a decrease in depreciation and amortization (16%). The increases are due primarily to increases in headcount, compensation, contract labor expenses, STA Consulting earn-out and stock compensation. These cost increases were partially offset by lower professional fees, marketing and bad debt expenses. The impact of foreign currency translation into US dollars also drove costs lower compared to the same prior 2012 period. We recorded $3.4 million of stock compensation expense, included in selling, general and administrative expense, compared to $2.8 million in the prior year due to the vesting of 879,000 market-based restricted share units with an associated charge of $1.7 million in the third quarter 2013 driven by the strong growth in our stock price. During the year ended December 31, 2013, we increased the contingent consideration liability for the STA Consulting earn-out by $1.3 million based on the latest estimates of future profit levels compared to a reduction of $1.9 million recorded in the same prior 2012 period.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and pension plan contributions. Bonus compensation is determined based on achievement against our financial and individual targets, and is accrued monthly throughout the year based on management estimates of target achievement. Statutory and elective pension plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities.

Selling costs consist principally of compensation expense related to business development, proposal preparation and delivery, and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. Additionally, we maintain a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the TPI Index and assembling proposals.

We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of client project management skills. Also included in training and professional development are


Table of Contents

expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.

Selling, general and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises, all occupancy expenses are recorded as general and administrative.

The decrease of $1.4 million in depreciation and amortization expense was primarily due to a decrease in amortization as a result of intangible assets that were fully amortized in 2012. Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets. We also capitalize some costs associated with the purchase and development of internal-use software, system conversions and website development costs. These costs are amortized over the estimated useful life of the software or system.

We amortize our intangible assets (e.g. client relationships and databases) over their estimated useful lives. Goodwill, trademark and trade names related to acquisitions are not amortized but are subject to annual impairment testing. As of November 1, 2011, trademark and trade names acquired in our acquisitions were reclassified to definite lived assets and are amortized over their estimated useful lives.

Gain (Loss) on Extinguishment of Debt

On April 26, 2013, the Company settled a portion of the subordinated convertible notes issued in connection with the acquisition of Compass. The payee agreed to accept from the Company an amount equal to $650,000 as satisfaction in full of all indebtedness of $1.1 million owing by the Company to such payee. As a result of this transaction, the Company recognized a gain of $0.5 million in the second quarter of 2013 representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due to the payee.

On May 3, 2013, the Company entered into a five year senior secured credit facility (the "2013 Credit Agreement") comprised of a $45.0 million term loan facility and a $25.0 million revolving credit facility. In connection with entering into the 2013 Credit Agreement, the Company repaid in full all obligations and liabilities owing under, and terminated its prior credit agreement. As a result of this transaction, the Company realized a loss of $0.4 million in the second quarter of 2013 relating to the write down of unamortized debt financing costs relating to its prior credit agreement.


Table of Contents

Other (Expense), Net

    The following table presents a breakdown of other (expense), net:

                                               Years Ended December 31,
                                                                        Percent
                                         2013       2012      Change     Change
                                                    (in thousands)
          Interest income              $     20   $     45    $   (25 )    (55.6 )%
          Interest expense               (2,712 )   (3,146 )      434       13.8 %
          Foreign currency loss             (45 )     (209 )      164       78.5 %

          Total other (expense), net   $ (2,737 ) $ (3,310 )  $   573       17.3 %

The decrease of $0.6 million was primarily the result of lower interest expense due to a decrease in debt and debt issuance amortization costs.

Income Tax Expense

Our effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses incurred in any given period. We recorded an income tax provision for 2013 of $4.3 million as compared to a $2.6 million for 2012. Our effective tax rate for the year ended December 31, 2013 was 47.2% compared to 81.4% for the year ended December 31, 2012. Our effective tax rate is higher than the statutory rate primarily due to non-deductible expenses and the net increase in the valuation allowance of $1.0 million primarily related to the Company's foreign tax credits and foreign corporation losses.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND DECEMBER 31,
2011

The results for the year ended December 31, 2011 discussed below include the operations of Compass from January 4, 2011 to December 31, 2011 and STA Consulting from February 10, 2011 to December 31, 2011.

Revenues

    Geographical information for the segment is as follows:

                                          Years Ended December 31,
                                                                    Percent
              Geographic Area     2012        2011       Change      Change
                                               (in thousands)
              Americas          $ 104,925   $  86,735   $  18,190       21.0 %
              Europe               62,671      74,383     (11,712 )    (15.7 )%
              Asia Pacific         25,149      23,308       1,841        7.9 %

              Total revenues    $ 192,745   $ 184,426   $   8,319        4.5 %


Table of Contents

The net increase in revenues of $8.3 million or 5% in 2012 was attributable principally to a 21% increase in Americas revenues to $104.9 million and a 8% increase in Asia Pacific revenues to $25.1 million. The increase in revenues is primarily due to greater demand for Strategic Consulting, Research and Managed Services in the Americas and Asia Pacific regions. The increase was also driven by strong demand in the U.S. public sector for ISG services. These increases were offset by a 16% reduction in Europe primarily due to lower volumes in sourcing related engagements. The translation of foreign currency into US dollars also negatively impacted performance compared to prior year. Billable staff at December 31, 2012 totaled 619, as compared to 516 at December 31, 2011.

Operating Expenses

    The following table presents a breakdown of our operating expenses by
functional category:

                                                     Years Ended December 31,
                                                                               Percent
  Operating Expenses                         2012        2011       Change      Change
                                                          (in thousands)
  Direct costs and expenses for advisors   $ 114,429   $ 104,823   $   9,606        9.2 %
  Selling, general and administrative         62,909      67,717      (4,808 )     (7.1 )%
  Goodwill impairment charge                       -      34,314     (34,314 )   (100.0 )%
  Intangible asset impairment charge               -      27,380     (27,380 )   (100.0 )%
  Depreciation and amortization                8,857      11,034      (2,177 )    (19.7 )%

  Total operating expenses                 $ 186,195   $ 245,268   $ (59,073 )    (24.1 )%

Total operating expenses decreased by $59.1 million in 2012 with decreases in selling, general and administrative ("SG&A") expenses (7%) offset by increases in direct expenses (9%). Operating expenses were also lower due to the impairment charge of $61.7 million that was recorded in 2011. Higher direct costs were driven by higher compensation and benefits, contract labor and computer expenses. Lower SG&A levels were driven by a $1.9 million reduction in the contingent liability related to the STA Consulting earn out based on latest estimates of future profit levels and deal and restructuring costs totaling $4.0 million that were recorded in 2011. The impact of foreign currency translation into US dollars also drove costs lower compared to the same prior 2011 period.

Depreciation and Amortization Expense

The decrease of $2.2 million in depreciation and amortization expense was primarily due to a $2.4 million decrease in amortization as a result of intangible assets that were fully amortized in 2011.

Impairment of goodwill and intangible assets

During 2012, there was no impairment of goodwill or intangible assets. During the fourth quarter of 2011, we recorded a non-cash impairment charge of $34.3 million associated with goodwill and $27.4 million associated with indefinite lived intangible assets.


Table of Contents

Other Income (Expense), Net

    The following table presents a breakdown of other (expense), net:

                                               Years Ended December 31,
                                                                       Percent
                                         2012       2011     Change     Change
                                                    (in thousands)
          Interest income              $     45   $     75    $  (30 )    (40.0 )%
          Interest expense               (3,146 )   (3,458 )     312        9.0 %
          Foreign currency loss            (209 )      (38 )    (171 )   (450.0 )%

          Total other (expense), net   $ (3,310 ) $ (3,421 )  $  111        3.2 %

Income Tax Expense

Our effective tax rate varies from period to period based on the mix of . . .

  Add III to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for III - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.