Information Services Group Reports Reduced Revenue On Forex Headwinds (NASDAQ:III)

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A Quick Take On Information Services Group

Information Services Group (NASDAQ:III) reported its Q3 2022 financial results on November 3, 2022, missing expected revenue but beating EPS estimates, again.

The company provides digital transformation consulting and technology services worldwide.

III has produced contracting topline revenue due to foreign exchange headwinds, and the U.S. looks poised for a recession, so I’m on Hold for III in the near term.

Information Services Overview

Stamford, Connecticut-based Information Services Group was founded in 2006 and provides technology research and digital transformation advisory services 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:

  • ISG GovernX

  • ISG Inform

  • ISG ProBenchmark

  • ISG Executive Insights

  • ISG Enterprise Change

The firm acquires customers via its direct sales, business development and marketing efforts as well as through partner referrals.

III recently announced another acquisition, that of Change 4 Growth, to add capabilities to its enterprise change management offerings.

Information Services’ Market & Competition

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

U.S. Digital Transformation Market (Seeking Alpha)

Major competitive or other industry participants include:

  • Globant

  • EPAM

  • Slalom

  • Accenture

  • Deloitte Digital

  • McKinsey

  • BCG

  • Ideo

  • Cognizant Technology Solutions

  • Capgemini

  • Company in-house development efforts

Information Services’ Recent Financial Performance

  • Total revenue by quarter has plateaued in recent quarters:

9 Quarter Total Revenue

9 Quarter Total Revenue (Seeking Alpha)

  • Gross profit by quarter has also leveled off recently:

9 Quarter Gross Profit

9 Quarter Gross Profit (Seeking Alpha)

  • Selling, G&A expenses as a percentage of total revenue by quarter have followed the trajectory shown below:

9 Quarter Selling, G&A % Of Revenue

9 Quarter Selling, G&A % Of Revenue (Seeking Alpha)

  • Operating income by quarter has risen materially in recent quarters:

9 Quarter Operating Income

9 Quarter Operating Income (Seeking Alpha)

  • Earnings per share (Diluted) have trended higher recently:

9 Quarter Earnings Per Share

9 Quarter Earnings Per Share (Seeking Alpha)

(All data in above charts is GAAP)

In the past 12 months, III’s stock price has fallen 44.5% vs. the U.S. S&P 500 index’ drop of around 20.1%, as the chart below indicates:

52 Week Stock Price

52 Week Stock Price (Seeking Alpha)

Valuation And Other Metrics For Information Services

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Amount

Enterprise Value / Sales

1.03

Revenue Growth Rate

7.1%

Net Income Margin

6.3%

GAAP EBITDA %

12.3%

Market Capitalization

$0

Enterprise Value

$0

Operating Cash Flow

$0

Earnings Per Share (Fully Diluted)

$0.36

EV/EBITDA

8.42

(Source – Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Discounted Cash Flow Calculation

Discounted Cash Flow Calculation (GuruFocus)

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $5.54 versus the current price of $4.67, indicating they are potentially currently undervalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary On Information Services

In its last earnings announcement (Source – Seeking Alpha), covering Q3 2022’s results, management noted the negative impact of foreign exchange headwinds due to a strong US dollar against major currencies such as the Euro and British Pound.

Recurring revenue rose by ‘double digits’ and adjusted EBITDA margin increased to 16% on higher margin digital advisory and research services.

Related to the company’s acquisition of Change 4 Growth, management asserts that demand for organizational change management [OCM] is expected to grow at a CAGR of ‘more than 15 percent over the next five years, as companies continuously adjust to new technologies, new competitors, and ever-changing market forces.’

As to its financial results, total revenue contracted year-over-year by 3.2% due to currency impacts, while gross profit and operating income rose slightly.

Earnings per share grew year-over-year, from $0.09 in Q3 2021 to $0.11 in the quarter just ended.

Looking ahead, management increased Q4 guidance for expected revenue of $71 million at the midpoint of the range and adjusted EBITDA of $10.5 million at the midpoint.

The primary risk to the company’s outlook is further strengthening of the US dollar combined with a slowing global economy, potentially delaying new business and project implementations.

While my discounted cash flow analysis indicates the potential for upside in the stock, I’m cautious about the combination of greater foreign exchange headwinds and a downturn in 2023, which many senior economists are now predicting with a 100% chance, according to a recent Bloomberg survey.

My outlook on III in the near term is a Hold.



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