ISG's Q3 2025: Contradictions Emerge on AI Market Maturity, Labor Strategy, European Growth, and APAC Delays

Date of Call: November 3, 2025

Financials Results

• Revenue: $62.4M, up 8% YOY (comparison excludes ~$3.5M from divested automation unit in prior year)
• EPS: $0.09 per diluted share (adjusted), up from $0.05 prior year; reported GAAP EPS $0.06, up from $0.02 prior year

Guidance:

• Q4 revenue target: $60.5M to $61.5M (includes expected slower year-end holiday period)
• Q4 adjusted EBITDA guidance: increase 15%–20% YOY, targeting $7.5M to $8.5M (continuing margin expansion)

Business Commentary:

• Strong Financial Performance and AI Demand:
• ISG delivered Q3 revenues of $62 million, up 8% (excluding divested automation unit) year-over-year, with adjusted EBITDA increasing by 19% to $8.4 million.

• Growth was driven by strong demand for AI-related services, with AI revenue rising to $20 million, four times the level from one year ago.

• Regional Performance and Market Dynamics:

• The Americas region saw revenues increase by 11% to $42 million, with a return to growth in Europe, where revenues were up 7% to $16 million.

• Europe's recovery was attributed to AI-driven transformations and cost optimization, while the Americas benefited from double-digit growth in consumer and health sciences verticals.

• Recurring Revenue Expansion:

• ISG's recurring revenues reached $28 million, up 9%, representing 45% of overall revenue.

• The growth was supported by double-digit increases in platforms like GovernX and ISG Tango, and the Research business, driven by AI adoption and client demand.

• Operating Efficiency and Cost Management:

• ISG improved its adjusted EBITDA margin by 200 basis points to 13.5%, attributed to an expansion in higher-margin platforms and services.
• Efficient use of AI in client delivery and sourcing, particularly through the ISG Tango platform, contributed to margin expansion.

Sentiment Analysis:

Overall Tone: Positive

• Management called Q3 "excellent," highlighted AI momentum (AI-related revenue $20M, ~4x year-ago) and recurring revenue growth (+9% YOY). Adjusted EBITDA rose 19% to $8.4M with margin expansion of ~200 bps to 13.5% and $11.1M operating cash flow, supporting a positive outlook.

Q&A:

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): Just wanted to start maybe with the EBITDA margin expansion. It was mentioned that you had a nice improvement in mix, which I'm assuming is the divestiture of the automation portion of the business and then also some nice efficiency in OpEx. How would you characterize the stickiness or stability of the efficiency improvement? Should we expect this margin to kind of continue?
  Response: Margin expansion is sustainable—driven by AI-enabled efficiencies (ISG Tango), higher-margin mix and growing recurring revenue; management expects continued margin expansion.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): My second question here and kind of a follow-up to that, maybe dialing in a little more on Europe. It's great to see growth kind of returning to that market. I was hoping you could spend maybe a little more time talking about the pipeline you're seeing there? Are you -- do you feel like you're still working with customers that are maybe on the cutting-edge first movers? Or are you starting to get into maybe the meat and potatoes of that client base?
  Response: Europe pipeline is growing with increased appetite—especially for cost-optimization using AI; transformation deals are slower but two very large transformations (one expected ~40% savings) underpin return-to-growth while management remains cautious on macro.

• Question from Marc Riddick (Sidoti & Company, LLC): Maybe we could talk a little bit about -- in your prepared remarks, you made mention of some of the potential drivers. You also touched on the potential for interest rate cuts being a benefit. Maybe, I mean, obviously, it's pretty early, but are you beginning to see that already? And as far as loosening of purse strings, are you getting the sense that, that's still a large enterprise-driven issue? Or are we beginning to see some of the smaller movers tend to act on AI?
  Response: Loosening rates improve sentiment and client confidence, potentially unlocking spending; AI use cases are showing scalable returns which is prompting broader adoption beyond just large enterprises.

• Question from Marc Riddick (Sidoti & Company, LLC): You always -- you're sort of broad-based as far as your client exposure and industry vertical exposure. Are there any kind of callouts or standouts either during the third quarter or what you're seeing early in the fourth that you think are worth mentioning?
  Response: Hot industries: consumer, health sciences, energy & utilities and public sector—each showing strong demand for AI-enabled optimization or growth initiatives.

• Question from Marc Riddick (Sidoti & Company, LLC): The balance sheet having improved as much as it has over the last few years, now just below 2 times. Maybe you could talk a little bit about maybe the potential for acquisition pipeline out there, maybe what the pipeline looks like, valuations are looking like and maybe if there are any areas or any things that you have your eye out on at the moment?
  Response: Actively evaluating M&A to expand AI capabilities and recurring revenue; will pursue fair-value opportunities and may act in 2026 if targets align.

• Question from Vincent Colicchio (Barrington Research Associates, Inc., Research Division): Nice quarter. I'm just -- I'd like to talk a little bit about the labor market. So your labor was flat. Is that by plan? Or is it getting increasingly difficult to hire people?
  Response: Headcount flat by design—automation and AI efficiencies (we 'eat our own dog food') allow surgical hires; modest incremental hiring possible but overall planned stability.

• Question from Vincent Colicchio (Barrington Research Associates, Inc., Research Division): And then, I don't recall your exposure to the federal market. Remind me of that? And are you being meaningfully impacted by the shutdown?
  Response: Zero U.S. federal exposure; focus is state/local and higher education—no meaningful impact from the federal shutdown.

• Question from Vincent Colicchio (Barrington Research Associates, Inc., Research Division): And then, on the government -- on the other side of the world, what's going on in the public sector in APAC? And just some color on when we might see that turn?
  Response: European public sector is strong; Australia has lagged but management expects APAC public-sector spending to recover around Q2 next year as pipeline converts.

• Question from Vincent Colicchio (Barrington Research Associates, Inc., Research Division): And then last one for me. Are you seeing a meaningful traction with Tango in the mid-market?
  Response: Tango is driving mid-market entry: platform handles >$15B total contract value, ~25% of users are mid-market, positioning mid-market ($1B–$10B) as a growth driver.

• Question from Joseph Gomes (NOBLE Capital Markets, Inc., Research Division): I think earlier in the year you were talking about, you expected to see some improvement there after some elections had gone through. And just trying to get a better handle on what is kind of pushing out a return to growth in that market, especially on the federal spending?
  Response: Post-election APAC public spending is building more slowly than expected; pipeline exists but conversion pace under the new regimes is delayed—impact is modest (~$1M scale).

• Question from Joseph Gomes (NOBLE Capital Markets, Inc., Research Division): Are you seeing any secondary impacts from like the government shutdown on any of the areas, whether it would be state and local or the education market?
  Response: No secondary impacts; U.S. public sector revenue grew ~30% in the quarter, indicating robust state/local/higher-education demand.

• Question from Joseph Gomes (NOBLE Capital Markets, Inc., Research Division): On the recurring revenues, it looks like they were basically flat with what occurred in the second quarter, the same $28 million of revenue and about 45% of the overall. What do you think needs to happen to start seeing some of the faster growth on the recurring revenue side of the business?
  Response: Recurring revenue up 9% YoY to ~$28M this quarter; management expects full-year recurring ~ $110M and >$120M next year—growth driven by platform and research expansion and scaling existing offerings.

• Question from Joseph Gomes (NOBLE Capital Markets, Inc., Research Division): Maybe can you give us a little update on the Martino acquisition and how that is progressing?
  Response: Martino integration nearly complete and expected by year-end; strategic add-on for Italy with positive recurring revenue contribution and leadership retained.

• Question from Gowshihan Sriharan (Singular Research, LLC): Finally, with so much boardroom focus on AI, are you sensing any increased effort from the traditional IT consultants or the hyperscalers to encroach on your advisory relationships?
  Response: No—traditional consultants and hyperscalers are relationship partners and clients rather than direct competitors for ISG's advisory work.

• Question from Gowshihan Sriharan (Singular Research, LLC): In terms of AI business, how are the clients quantifying the ROI? And how much of that savings are you able to directly link back to a follow-on project?
  Response: Clients prioritize cost optimization and risk reduction; ISG delivers AI roadmaps that produce measurable optimization savings which can fund follow-on projects or growth initiatives depending on industry.

• Question from Gowshihan Sriharan (Singular Research, LLC): On the uncertainty around H-1B visa policies under the current administration, any impact of positive or negative on your competitive space or delays either from your side or on the client side?
  Response: Visa-policy uncertainty creates advisory opportunities as enterprises rethink staffing and delivery models; management views it as potential tailwind for advisory demand.

Contradiction Point 1

AI Market Maturity and Client Engagement

It involves differing perspectives on the maturity of the AI market and the extent to which clients, particularly smaller enterprises, are engaging with AI initiatives, which are crucial for business growth and strategic positioning.

Are you seeing effects from potential interest rate cuts, and are small businesses starting to adopt AI initiatives? - Marc Riddick (Sidoti & Company, LLC)

2025Q3: Smaller enterprises are increasingly engaging with AI projects, contributing to overall growth momentum. - Michael P. Connors(CEO)

How advanced is the data infrastructure for AI, and what inning are we in? - Vincent Alexander Colicchio (Barrington Research Associates, Inc., Research Division)

2025Q2: We're seeing a lot of activity and engagement with AI, and I would say that it is still a relatively early stage, but we are seeing a lot of engagement. - Michael P. Connors(CEO)

Contradiction Point 2

Labor Market and Staffing Strategy

It reflects differing explanations for the flat labor market and the company's staffing strategy, which directly impacts operational efficiency and cost management.

Why is the labor market stagnant, and are there hiring challenges? - Vincent Colicchio (Barrington Research Associates, Inc.)

2025Q3: The flat labor market is by design, as ISG is leveraging automation capabilities to efficiently meet staffing needs, leading to surgical hires. - Michael P. Connors(CEO)

Are you turning away business due to AI-related labor shortages? - Vincent Alexander Colicchio (Barrington Research Associates, Inc., Research Division)

2025Q2: We are enthusiastically embracing the application of AI in the applications we have, but we are not at a place where we can say that we're turning away business that we previously would have taken. - Michael P. Connors(CEO)

Contradiction Point 3

European Growth Timeline

It highlights differing expectations for the timeline of European growth recovery, which could impact strategy and investor expectations.

Can you provide an update on the pipeline and current market conditions in Europe? - David Storms (Stonegate Capital Partners, Inc.)

2025Q3: The European pipeline is growing, with a focus on cost optimization projects which are progressing faster than transformation efforts. ISG is involved in two large-scale transformations expected to generate significant cost savings. - Michael P. Connors(CEO)

Which end markets in Europe will drive the recovery this year? Are there visible signs of a rebound yet? - David Storms (Stonegate)

2025Q1: European demand is increasing with more interest in consulting services, especially around cost optimization and AI. Growth is expected beginning in Q3 and Q4, not immediately in Q2. Uncertainty remains due to geopolitical factors and elections. - Michael P. Connors(CEO)

Contradiction Point 4

APAC Growth Delay

It involves differing explanations for the delay in APAC's return to growth, which could affect strategic planning and investor perceptions.

What is causing the delay in APAC's growth recovery, particularly related to federal spending? - Joseph Gomes (NOBLE Capital Markets, Inc.)

2025Q3: APAC's growth is delayed due to slower-than-expected spending from the new government regime. The public sector is crucial for growth, and ISG anticipates a recovery in the second quarter of 2026. - Michael P. Connors(CEO)

Will APAC's slow start this year recover in the second half as anticipated? - Joseph Gomes (Noble Capital Markets)

2025Q1: APAC had a slow start to the year. Clearly, the government there is taking a much more conservative approach to spending. We anticipate it will recover in the second half of the year. - Michael P. Connors(CEO)