ISG's Q3 2025: Contradictions Emerge on European Market Growth, Recurring Revenue, AI Client Base, Labor Strategy, and AI's Impact on Spend

Date of Call: None provided

Financials Results

• Revenue: $62.4M, up 8% year-over-year (comparison excludes ~$3.5M from divested automation unit in prior-year quarter)
• EPS: $0.06 per diluted share reported versus $0.02 prior year; adjusted $0.09 per diluted share versus $0.05 prior year
• Operating Margin: Operating income $4.6M, up 7% year-over-year (prior year $4.3M); adjusted EBITDA margin 13.5%, up ~200 basis points year-over-year

Guidance:

• Q4 revenue expected to be $60.5M–$61.5M (includes slower year-end holiday period)
• Adjusted EBITDA expected to increase 15%–20% year-over-year, or be $7.5M–$8.5M

Business Commentary:

• Revenue Growth and AI Demand:
• Information Services Group (ISG) reported revenue of $62 million for Q3, up 8% year-on-year.

• The growth was driven by strong AI demand and the company's powerful combination of strategic, operational, and research capabilities.

• Regional Revenue Performance:

• ISG's Americas region delivered revenues up 11% to $42 million, led by growth in research, software, and consumer, health sciences, and public sector industry verticals.

• Europe returned to growth for the first time in two years, with revenues up 7% to $16 million.

• Recurring Revenue and AI Impact:

• Global recurring revenues were up 9%, led by double-digit growth in platforms business, including GovernX, ISG Tango, and the research business.

• ISG's AI-related revenue was $20 million, four times what it was a year ago, as AI-centered approach continues to drive exceptional growth and differentiation.

• Profitability and Efficiency Improvements:

• Adjusted EBITDA was up 19% to $8.4 million, reflecting a margin increase of 200 basis points to 13.5%.
• Earnings growth was driven by improved mix of higher margin platforms and services revenues, combined with a disciplined operating approach.

Sentiment Analysis:

Overall Tone: Positive

• Management called this an "excellent third quarter," citing $62M revenue (up 8%), adjusted EBITDA of $8.4M (up 19%) and a 200 bps expansion in adjusted EBITDA margin to 13.5%; $11M cash from operations and recurring revenues up 9% reinforced a positive outlook.

Q&A:

• Question from David Storms (StoneGate Capital): How sticky/stable is the EBITDA margin expansion — should we expect margins to continue?
  Response: Margins should continue to expand, driven by AI-enabled efficiencies (notably ISG Tango), a higher-margin mix of recurring and AI work, and disciplined OpEx control.

• Question from David Storms (StoneGate Capital): Can you expand on the Europe pipeline — first movers vs broader client base?
  Response: European pipeline is strengthening, led by cost-optimization AI deals and two very large transformations; growth returning but management remains cautious on macro pacing.

• Question from Mark Riddick (Sidoti): Are you beginning to see interest-rate easing or looser spending already; does it free up clients to act on AI?
  Response: Easing rates mainly improve sentiment and client confidence, which could accelerate tech spending and adoption of scalable AI initiatives.

• Question from Mark Riddick (Sidoti): Any industry standouts in Q3 or early Q4?
  Response: Top verticals driving demand are consumer, health sciences, energy/utilities, and public sector.

• Question from Mark Riddick (Sidoti): Thoughts on M&A pipeline and appetite given improved leverage?
  Response: Active on acquisition discussions focused on expanding AI capabilities and recurring revenue; opportunistic approach with potential deals in 2026.

• Question from Vincent Colicchio (Barrington Research): Headcount was flat — is that by plan or due to hiring challenges?
  Response: Headcount flat by design; automation and AI efficiencies allow targeted, surgical hiring rather than broad increases.

• Question from Vincent Colicchio (Barrington Research): Do you have federal government exposure or impact from the shutdown?
  Response: No federal U.S. exposure; focus is state, local and higher education — U.S. public-sector revenue was up ~30% with no shutdown impact.

• Question from Vincent Colicchio (Barrington Research): When will public-sector spending in Australia/Asia-Pacific recover?
  Response: Management expects APAC public-sector recovery (notably Australia) around Q2 of next year, as pipeline builds but pacing remains slow.

• Question from Vincent Colicchio (Barrington Research): Is ISG Tango gaining traction in the mid-market?
  Response: Yes — Tango is a key entry to the mid-market; over 25% of platform activity is now mid-market and is expected to be a multi-year growth driver.

• Question from Joe Gomes (Noble Capital Markets): What is delaying APAC growth after elections; what’s required to return to growth?
  Response: Pipeline exists but execution pace under the new regimes is slower than anticipated; public-sector activity is required to drive meaningful APAC growth.

• Question from Joe Gomes (Noble Capital Markets): Any secondary impacts from the U.S. government shutdown on state/local/education?
  Response: No impact observed; U.S. public-sector demand was up ~30% and remains a growth contributor.

• Question from Joe Gomes (Noble Capital Markets): What will accelerate recurring revenue growth?
  Response: Recurring revenue is growing (9% YoY); management expects full-year recurring revenue around ~$110M and projects >$120M next year to drive faster growth.

• Question from Joe Gomes (Noble Capital Markets): Update on the Martino acquisition integration?
  Response: Martino integration is nearly complete by year-end, combining Italian operations under Andreas Martino and contributing strategic recurring revenue.

• Question from Gao Xi Shi (Singular Research): Are traditional IT consultants or hyperscalers encroaching on your advisory relationships?
  Response: No — hyperscalers and large consultants are generally clients or partners rather than direct competitive threats for ISG’s advisory work.

• Question from Gao Xi Shi (Singular Research): How are clients quantifying AI ROI and converting savings into follow-on projects?
  Response: Clients prioritize cost-optimization ROI first via data, engineering and governance; ISG helps build roadmaps that scale AI initiatives and convert savings into margins or growth investments.

• Question from Gao Xi Shi (Singular Research): Any impact from H-1B visa policy uncertainty on your business or opportunities?
  Response: Visa policy uncertainty creates advisory opportunities as enterprises must rethink staffing models; ISG can advise on onshore/offshore tradeoffs and benchmarking.

Contradiction Point 1

European Market Growth Expectations

It involves differing expectations for growth in the European market, which is crucial for the company's overall financial performance.

Were there any notable events or developments during Q3 that should be highlighted? - Mark Riddick (Sidoti)

2025Q3: The European pipeline is growing, but the macro environment remains cautious. - Michael Connors(CEO)

Which European end markets are expected to lead growth over the next six months? - Dave Storms (Stonegate)

2025Q1: There's still uncertainty in Europe due to tariff issues and geopolitical factors. We expect growth to ramp up starting in Q3 and Q4. - Michael Connors(CEO)

Contradiction Point 2

Recurring Revenue Growth Outlook

It involves differing expectations for recurring revenue growth, which is a critical component of the company's financial strategy.

What needs to happen to drive faster recurring revenue growth? - Joe Gomes (Noble Capital Markets)

2025Q3: Recurring revenues are healthy, with 9% growth year-over-year and expected to reach $120 million next year. The growth trajectory is strong, and we expect continued expansion in this area. - Michael Connors(CEO)

What is the outlook for recurring revenue in 2025? - Dave Storms (Stonegate)

2024Q4: Recurring revenue remains flat due to contract timing but is expected to grow in 2025, driven by public sector growth and strong demand for AI services. - Michael Connors(CEO)

Contradiction Point 3

AI Client Base Expansion

It involves differing expectations and achievements in the expansion of the AI client base, which is a strategic focus for the company and directly impacts its growth trajectory.

Are you seeing meaningful traction with ISG Tango in the mid-market? - Vincent Colicchio (Barrington Research)

2025Q3: We're nearing a threshold where most clients will have an AI component, and we'll expect that to be the case by mid-2026. - Michael Connors(CEO)

Will the goal to double the AI client base this year be extended further? - Joseph Gomes (Noble Capital Markets)

2025Q1: We expect to double our AI client base from 150 clients today to 300 by year-end. - Michael Connors(CEO)

Contradiction Point 4

AI Labor Market and Talent Strategy

It highlights differing views on the labor market conditions and the company's strategy to address potential labor shortages in AI-related roles.

Is the labor market stagnant by design, or is hiring becoming harder? - Vincent Colicchio (Barrington Research)

2025Q3: The flat labor market is by plan, using automation in-house to create surgical hires. - Michael Connors(CEO)

Are you turning away business due to a shortage of AI-related labor? - Vincent Colicchio (Barrington Research)

2025Q2: No business turned away due to labor shortages. Our strategy involves targeted hiring, AI automation, and training. - Michael Connors(CEO)

Contradiction Point 5

Impact of AI on Spend and Demand

It involves the impact of AI on client spending and demand, which is crucial for understanding the company's growth strategy.

Are you seeing the loosening of purse strings, particularly from interest rate cuts, benefit spending? - Mark Riddick (Sidoti)

2025Q3: Interest rate environment is about confidence, and improving rates could positively impact spending. Clients are seeing opportunities to change their business models with AI at scale. Confidence is starting to pick up as businesses see potential returns. - Michael Connors(CEO)

Can you provide more details on the sales pipeline in the Americas? - Vincent Colicchio (Barrington Research)

2024Q4: U.S. growth driven by banking, energy, and public sector. Europe and Asia Pacific lag due to geopolitics and election delays. - Michael Connors(CEO)