Information Services Group - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $61.565M, up 7% year over year excluding the divested automation unit; adjusted EBITDA was $8.298M with a 13.5% margin, and adjusted EPS was $0.08.
• III beat Wall Street consensus on revenue ($59.98M*) and EPS ($0.07*), aided by a $0.8M FX tailwind, strong Americas growth (+16% ex-automation), and higher utilization; note S&P tracks “Primary EPS,” which aligns with adjusted EPS here.
• Management guided Q3 revenue to $60.5–$61.5M and adjusted EBITDA to $7.5–$8.5M, and declared a $0.045 per-share dividend (payable Sep 26, 2025).
• Strategic catalysts: AI-centered positioning, AI-related revenue ~20% of total, sold-out AI Impact Summit events, and the acquisition of Martino & Partners to expand Italy footprint and recurring public-sector work.

What Went Well and What Went Wrong

What Went Well

• Americas revenue reached $39.5M (+16% YoY ex-automation) on double-digit growth in technology advisory, network, software research, and GovernX, with strong wins across consumer, energy, utilities, health sciences, and public sector.
• Profitability and cash generation improved: adjusted EBITDA margin rose +241 bps to 13.5%, with $11.9M operating cash flow and cash balance up to $25.2M at quarter-end.
• AI momentum accelerated: “AI-related revenue was 2.5x higher than a year ago” and ~20% of total revenue; “ISG delivered an excellent second quarter…” with sold-out AI Impact Summit events and expanding AI capabilities (ISG Tango $11B TCV).

What Went Wrong

• Europe remained soft year over year: revenue $16.6M (-7% ex-automation, -12% reported); APAC was essentially flat with $5.4M (-1% reported) amid lingering macro/geopolitical uncertainty.
• Reported revenue declined 4% YoY to $61.565M due to the automation divestiture (ex-automation +7%); GAAP EPS stayed at $0.04 with a more normal tax rate vs unusually low prior-year rate (CFO: ~39% vs 12%).
• Management noted tariff-related caution and timing variability (Europe’s slower response), requiring continued cost optimization and disciplined operating approach into 2H25.

Transcript

Speaker 7

Good morning and welcome everyone to the Information Services Group's second quarter 2025 conference call. This call is being recorded, and a replay will be available on ISG's website within 24 hours. Now I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introductions. Mr. Holt, please go ahead.

Speaker 1

Thank you, Operator. Hello and good morning. My name is Barry Holt. I'm a Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's second quarter conference call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer, and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement. It's important to note that this communication may contain forward-looking statements which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated.

For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8K that was filed last night to the SEC and the Risk Factor section in our Form 10K covering full-year results and our Form 10Q covering first quarter 2025 results. You should also read ISG's annual report on Form 10K and any other relevant documents, including any amendments or supplementary documents filed with the SEC. You'll be able to obtain free copies of any of ISG's SEC filings on either ISG's website at www.isg-1.com or the SEC's website at www.sec.gov. ISG undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

During this call, we will discuss certain non-GAAP financial measures, which ISG believes improves the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance. The non-GAAP measures, which we will touch on today, include adjusted EBITDA, adjusted net earnings, and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided as additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8K, which was filed last night with the SEC. I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Speaker 3

Thank you, Barry, and good morning everyone. Today we will review our outstanding Q2 results, accelerated by our pivot to AI, our acquisition of Martino & Partners in Italy, our view of the current market, and our outlook for Q3. Our team executed extremely well, and ISG delivered an excellent second quarter, demonstrating our ongoing momentum with clients and our solid fundamentals. We delivered Q2 revenues of about $62 million, up 7%, excluding results from our previously divested automation units. Growth was led by our largest revenue region, the Americas, up 16%. Our adjusted EBITDA was up 17% to $8.3 million, with our adjusted EBITDA margin up 240 basis points to 13.5%. Our enhanced profitability is a result of our improved business mix, disciplined operating approach, and sound execution of our strategies.

We also had an excellent cash quarter, producing nearly $12 million of cash, one of our best quarters ever for cash generation. Recurring revenues continue to be an important pillar of our success. In Q2, they reached $28 million, up 7% sequentially, and represented 45% of our overall revenue. Our AI-centered approach is resonating with our clients. In Q2, our AI-related revenue was two and a half times higher than it was a year ago. In both the second quarter and first half, nearly 20% of our total revenue was AI-related. We served more than 350 clients with AI-centered engagements in the second quarter, and that's up 50% from Q1. Further demonstrating the market's interest in AI, we've produced two sold out AI Impact Summit events in Q2, one in Boston and the other in Frankfurt, Germany, and we have three more slated for the second half.

We also published our State of Agentic AI Market Report, which has become our most downloaded research report ever. These autonomous AI systems are taking the market by storm and are now a significant aspect of most of our client engagement. We continue to leverage AI to expand the capabilities of our groundbreaking sourcing solution, ISG Tango. More than $11 billion of total contract value now flows through the platform, and that's up 20% from Q1. As expected, ISG Tango has opened up the mid-market to us, increasing our total addressable market. Over the years, ISG has grown through our enduring and trusted client relationships, our innovation, and our commitment to excellence. We have also grown by expanding our capabilities and geographic reach through a series of tuck-in acquisitions.

As noted in our earnings release, we have signed a definitive agreement for our latest acquisition, Martino & Partners, a highly respected advisory firm based out of Milan, Italy, focused on recurring revenue streams in the public sector. This transaction represents a further investment in our European business, and we expect it to close in early September. Italy has emerging growth potential fueled by EU-funded programs aimed at technology modernization and a focus on AI and cost optimization. With the acquisition of Martino & Partners, we'll add more than 20 new clients, expand our public sector reach beyond the central government to serve municipal entities with recurring revenue contracts, and gain a stronger presence in northern Italy where many leading commercial enterprises are located. We also add to our leadership bench with Co-Founder Andrea Martino slated to become CEO of our combined ISG Italy business.

Overall, our momentum continues, even as Europe remains a bit cautious. Uncertainty has become the norm, but enterprises are adjusting and moving forward. Two market factors are driving our performance. One, clients are riding the AI wave and investing aggressively in modernizing their technology operations and infrastructure to support it. This includes enhancing their data management capabilities as they prepare for broad-scale adoption of AI across their businesses. We prepared for this last year and are seizing the moment. Two, to fund these investments, clients remain focused on cost optimization. They continue to look to us to help them manage their cloud infrastructure and software costs by tapping into our broad ecosystem expertise and our growing software research and advisory capabilities. Our towering strength is helping clients optimize their use of technology to drive greater efficiency. Combined with our all-out effort on AI, it is a powerful one-two punch.

We are well positioned, and we look forward to continuing our success in the second half. With that, let me turn to our region. The year-over-year comparisons by site here exclude revenues of about $7 million from our divested automation unit in last year's second quarter. Our Americas region delivered another excellent quarter. Revenues were up 16% to $39 million, driven by double-digit growth in our technology advisory, network, software, research, and government-based businesses and in our consumer, energy, utilities, health sciences, and public sector industry verticals. Key client engagements during the second quarter included Greyhound Foods, who is a significant mid-market client, along with Finntine and PSEG. During the quarter, ISG expanded its work with a large U.S.-based national healthcare company, generating additional revenues of $1 million.

We are providing a range of services, including government-based software and network, to rationalize the client's tech spend and drive cost savings as part of an acquisition and divestiture of two businesses. In the energy sector, we continue to expand our business with a long-time client, a leading electric and gas utility company. During the quarter, we added $1.2 million of revenue, supporting the client's SAP implementation, conducting a software assessment, and developing a data center and network strategy. Turning to Europe, this market is showing early signs of a rebound, with revenues up 21% sequentially from Q1 to $16.6 million. For Q2, Europe delivered double-digit revenue growth in our banking and health sciences industry verticals. Key client engagements in Europe in the second quarter included Allianz, Volkswagen, and BASF. During the quarter, we continued to expand our work with a leading multinational healthcare company.

We are helping the client select a systems integrator for their adoption of SAP S/4HANA as part of a comprehensive business transformation program. For another client, a lean beverage company, we are supporting a complete restructuring of their applications estate and vendor ecosystem to enhance their AI capabilities. This includes selecting a data transformation partner to support this client's long-term AI strategy. Now turning to Asia Pacific, our Q2 revenues of $5 million were essentially flat from the prior year. Key clients from the quarter included IEMO, Endeavor Group, and Standard Chartered Groups. Among our Q2 engagements, we are supporting a leading Australia-based engineering services firm and selecting a finance and accounting provider while developing a broader tech change management and payroll services strategy. Now a few words on the overall market from our perspective. The outlook for tech services spending is somewhat mixed, with strong demand in the U.S.

and an improving outlook in Europe. To date, inflation does not appear to be as bad as originally feared, and tariff risks seem to be manageable. Indeed, if anything, uncertainty is breeding stronger demand for technology-led cost and supply chain optimization services, and that plays to our strengths. Looking ahead, we see interest rate cuts stimulating further tech spending in the next 12 months, with AI remaining the dominant long-term growth driver for the industry. With that, let me turn to guidance. We expect current demand trends to continue in Q3, driven by cloud, AI, data analytics, and infrastructure modernization spending. Clients, for the most part, are not standing still. They are determined to stay ahead of the curve.

For the third quarter, which includes the slower summer months in Europe, we are targeting revenues of between $60.5 and $61.5 million and adjusted EBITDA between $7.5 and $8.5 million, which will continue our year-over-year growth and margin accelerations. Now let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael.

Speaker 5

Thank you, Mike, and good morning everyone. As Mike stated earlier, our revenue comparison with the second quarter of 2024 excludes our divested automation unit, which contributed about $7 million a year ago. This provides a more accurate view of our go-forward business. Revenue for the second quarter was $61.6 million, up a solid 7% versus the prior year. For the quarter, currency had an $800,000 positive impact on revenue. Americas revenue was $39.5 million, up 16%. Europe revenue was $16.6 million, down 7%, and Asia Pacific revenue was $5.4 million, flat with the prior year. Second quarter adjusted EBITDA was $8.3 million, up 17% from the year-ago period and resulting in an EBITDA margin of 13.5%, up more than 240 basis points year on year. For the quarter, ISG delivered operating income of $4.7 million, up 28% compared with operating income of $3.7 million in the prior year.

Our reported net income for the quarter was $2.2 million or $0.04 per fully diluted share, compared with a net income of $2 million or $0.04 per fully diluted share in the prior year. Second quarter adjusted net income was $4.1 million or $0.08 per share on a fully diluted basis, compared with adjusted net income of $3.8 million or $0.08 per fully diluted share in the prior year's second quarter. I do want to point out that last year, both GAAP and adjusted EPS benefited from a recorded tax rate of 12% versus this year's more normal 39% tax rate. Headcount as of June 30, 2025, was 1,311, essentially flat with Q1. For the quarter, consulting utilization was a solid 76%. That compares with our average second quarter utilization of 74% and 79% in the year-ago quarter.

We ended the quarter with cash at $25.2 million, up over $5 million from $20.1 million at the end of the first quarter. A key driver of the increase was strong operating cash flow. For the quarter, net cash provided by operations was $11.9 million, fueled by solid operating performance and strong cash collection. During the quarter, we paid dividends of $2.4 million and repurchased $4 million of stock. Our next quarterly dividend will be paid September 26 to shareholders of record as of September 5. Fully diluted shares outstanding for the quarter were 50.1 million, down 500,000 from year-end 2024. At quarter's end, we had approximately $11 million remaining on our share repurchase authorization. Our quarter-end gross debt-to-EBITDA ratio was 2.0 times, down from 2.4 times at December 31, 2024, and at the bottom of our 2 to 2.5 times target range.

At quarter's end, our debt was unchanged, and for the quarter, our average borrowing rate was 6.2%, down from 7.3% in the year-ago period. Overall, our balance sheet is solid and continues to improve, providing us with a strong foundation to both operate and invest in the business. Mike will now share concluding remarks before we go to Q&A. Mike.

Speaker 1

Thank you, Michael. To summarize, ISG delivered an excellent second quarter, continuing our momentum. Our revenues of $62 million exceeded expectations, led by another double-digit growth quarter in the Americas and accelerated by our all-in focus on AI. We grew our adjusted EBITDA by 17% and our margins by 240 basis points, and we had one of our strongest cash quarters ever, generating about $12 million in cash. Looking to the future, we signed a definitive agreement to acquire Martino & Partners and strengthen our position in Italy, a market with emerging growth potential. Our expanding AI capabilities and long-term focus on operational excellence, we believe, positions us well for continued year-over-year growth and margin expansion. As always, we are focused on creating shareholder value for the long term, and we are steadfast in our mission to deliver operational excellence to our clients.

Thank you very much for calling in this morning, and now let me turn the session over to the operator for any questions.

Speaker 7

Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, you can do so by pressing star and one on your telephone keypad. If you find that your question has been answered and you would like to remove yourself from the queue, you may do so by pressing star one again. If you would like to ask a question, you can do so by pressing the star and one on your touchtone keypad. We'll pause a moment to allow any questions into the queue. The first question comes from the line of David Storms with Stonegate. Your line is now open.

Speaker 2

Good morning.

Speaker 1

Good morning.

Speaker 2

Just wanted to start with the strong cash generation in the quarter. I know you mentioned that there was a trump up question and solid operating performance. Could you give us a sense of how sustainable that is? Is that cash collection a new initiative or was that the impact of maybe one large outstanding balance?

Speaker 5

Hey, David. It's Michael. I appreciate the question. I guess a couple of things. One, if you remember last quarter, I had said that our Q1 operating cash flow was impacted to some extent on timing, and saw some of that. That's really reflected, if you look at the day sales outstanding, that's down about 10 days quarter on quarter. We saw very strong collections from invoicing and due dates. I think that I wouldn't expect this level to repeat quarterly in the second half, but we would expect to continue to see strong operating cash flow as we look at the second half, but not at the levels that we just experienced.

Speaker 2

Understood. That's very helpful. Thank you. In the prepared market, you mentioned that you're seeing customers not standing still. This seems to be a bit of a reversal from maybe the elongated sales cycles you were seeing earlier in the year. Could you just maybe give us a sense of what your pipeline looks like right now around timing and maybe some of the interest there?

Speaker 1

Yeah. Dave, look, I think it definitely has accelerated in many areas, primarily driven by a number of industry verticals: energy, utilities, banking, pharma, healthcare are all up double digits for us. Part of it is the optimization push to garner some additional incremental savings so that can be used to put through on AI initiatives and other kind of growth initiatives in these large firms. We have had a bit of an acceleration of, can you move fast? I'll give you one example. We have a very large cosmetics company who reached out to us via relationships that we had, asked us if we could come in and take a look at their entire portfolio, which is more than $1 billion.

It's closer to $2 billion of spend around services and software, and asked us if we should do a quick assessment, create the art of the possible, and then if we find potential big savings, could we help them execute it before the end of the year? That all happened in about a six-week period of time. Last year, when things were plodding along a bit, clients were taking much longer to make decisions. It would never have happened in that kind of timeframe. That's an example. We have several of those. The pipeline is full. There are some elongated periods, but there's also some very quicker spurts that are happening, partly because there is a little more certainty around the tariffs, and clearly that moves from day to day. There's at least a sizing of what those are and what kind of products, products in particular, are being tariffed.

They are then responding and reacting and trying to either get ahead of it or to help mitigate some of that. We're right in the middle of it. We kind of planned for this last year, as you know, and it's serving us quite well. That's the change in the pipeline, acceleration, if you will.

Speaker 2

That's very helpful. Thank you all. I'll get back to you.

Speaker 7

The next question comes from the line of Marc Riddick with Fidelity. Your line is open.

Speaker 0

Hey, good morning.

Speaker 1

Morning.

Speaker 0

I wanted to start with, maybe you can share for me some thoughts as to what you're seeing with, maybe some of the industry verticals with clients and if there are some that are sort of leading the way with, AI-driven activity. Also, maybe as sort of a tag along, I think we talked in the past about it's working with state and local governments and the states, and maybe you could talk a little bit about what you're seeing from them or if you're seeing much from responsibilities from the federal government. Thanks.

Speaker 1

Okay. Good. Thanks, Mark. Let me start with the last, and then I'll pick up on the commercial side. On the state and local, I think I may have mentioned this last time. It grew, it is growing, and it's about 30% in the U.S. during this quarter, just to give you a year-over-year comparison. Why is it? Our sense is, and I mentioned this before, and it's not to be political, but a number of the Republican states are moving at a much accelerated pace to optimize and to figure out how they can use AI to become more productive and more efficient. As a result of that, and I think there's a little bit of a cloud with DOGE in the federal government, and just to remind you, we have no exposure to DOGE in the federal government contract. We have none.

On state and local, they have taken that and used this as a way to help, as a catalyst to help begin to optimize some of their services. That is what we're seeing, and that's why the public sector business is up double digits in the U.S. That's in response to your public sector question. On the commercial side, it's a variety. Everything from aerospace to energy to the utilities. Just to give you a few examples there, the energy and the utility companies. Clearly, the need with all of the AI acceleration going on, all the hyperscalers, the utilities are also feeling this, feeling it in terms of demand, and in terms of how they will reach and meet the kind of demand that is emerging for them.

As a result of that, they want to be able to accelerate bare-bone growth, and they want to be able to accelerate it, and they need dollars to do that. We have been doing a lot of optimization work with the utility industry, and that was up, looking at our stats here, that was up 0.8% in the quarter. If we take another one, like the whole healthcare industry is also under fire, especially here in the United States, and that is up significantly double digits. Again, they're looking to optimize how can they utilize AI, what ecosystem is out there that can help them materially change their cost structure as a result of AI, and help them, if you will, identify and execute against those kinds of strategies.

I would highlight energy, utilities, banking, pharma, healthcare, and the public sector as the ones that are moving at pace right now and are driving a lot of our demands.

Speaker 0

That's very helpful. I appreciate it, Mike. Quick question, just as a follow-up. I wanted to maybe, first of all, touch a little bit on the acquisition announcement. Maybe just talk a little bit about how Martino & Partners came to be and maybe your thoughts on what you're seeing as far as a potential pipeline going forward and the things you're sort of shaking free a bit or how you're feeling about the opportunities that you're seeing in front of you.

Speaker 1

Thanks. Yeah. So first on Martino & Partners, we're very, very excited about this. It's a small acquisition, but an important strategic one for our firm. We wanted to beef up our Italian capabilities because we expect over the next couple of years an expansion of spending by the Italian government, in particular around transformation, around digital, around AI, and we wanted to be well-positioned there. We identified a number of targets, and we closed in on Martino & Partners really for a couple of reasons. One, they serve a little bit of the central government, which we do, but they also serve, if you will, the equivalent of the state and local in the Italian market, and we did not.

That immediately expanded our client base to a further reach around the municipal kind of government entities, which have recurring, longer-term contracts and ones that get renewed fairly quickly, so to speak. The second thing is we felt that combining that business with our current Italian business would give us more capabilities in terms of numbers of clients, the rates, and certainly the number of professionals, as we'll double roughly the number of people that we have in Italy, and they bring about 20-some-odd people to the party. Importantly, from a leadership standpoint, we were very impressed. We were very impressed with the two leaders of this business, one by the name of Andrea Martino, who we are going to make the CEO of all of our Italian businesses, and his co-founder, Claudia De Roma. Between them and our teams, we think we have a strong leadership team.

That's why we kind of pursued Martino & Partners. In terms of the broader M&A environment, yes, we continue to look, as we always have, to expand our capabilities, expand our recurring revenue streams, expand our transformation and AI capabilities. For us, we've always been very surgical about our acquisition approach. We do have certain targets in mind that we think can enhance the value and create more value for our clients and our shareholders. We think the market is good, and we've always been disciplined in our approach there. Maybe more to come on that as we move forward. I hope that answers that, Mark.

Speaker 0

Fair enough. Thank you very much.

Speaker 1

Thank you.

Speaker 7

The next question comes from the line of Vincent Colicchio with Barrington Research. Please ask your question.

Speaker 4

Yeah, nice quarter, Mike.

Speaker 1

Thanks. Good morning.

Speaker 4

Good morning. We all know how important data is to AI. I'm just curious, you know, how advanced are we in terms of improving infrastructure with the data to enable AI? Are we, you know, within an OEM per se?

Speaker 1

First of all, I think just in terms of the overall market, I'd call it second inning. It's very, very early. The whole kind of AI, if you will, is emerging, and clearly some industries are moving at it at a bit of a faster pace than others. When we think about the work that we're doing, we tend to work with trying to help them identify AI sourcing strategies. We help them, advise them on kind of the cognitive infrastructure that's needed to scale their AI. We help them create information and data architecture that would feed AI models for them. We help them develop their cybersecurity strategies for AI and data. There are a number of areas that we're helping the client base with. It is very early, very early innings.

If I was putting in an order, I would say, one, many of the clients first want to secure funding for AI. How do I do that? If I can optimize my cost elsewhere, that creates a pot of money that I can then use. They want to increase productivity, clearly, and can AI help them do that? They want to be able to see if they can scale and do it in a cost-effective way, and then try to align their delivery models, and using AI to help them do that. That's kind of the sequence that we see clients asking for our advice and our research and our information against.

Speaker 4

That's very helpful. It doesn't appear to be a sweet spot. That's good to continue. Curious on the labor side. Do you, are you turning any business away due to a shortage of labor related to AI?

Speaker 1

No. You know, we, I think we are in a pretty good spot. We are surgically bringing in certain talent, but we're also at the same time automating and using AI ourselves. We're also creating our own AI agents that help our consultants, if you will. You probably noted that our headcount is roughly flat from the previous quarter. That's all a matter of automation, using AI ourselves, building our own AI agents, working with our consultants. We feel good. We've also trained up over 1,100 of our colleagues, skilling them up in AI, and importantly, the number of kind of live engagements that we are doing. One way to think about that is to think about ISG Tango and the acceleration of that and all that goes with that.

There's about 80 clients now that have gone through Tango, about $11 billion of contract value that has gone through that. Almost all of those have an AI component and engagement part of the engagement that we have with our clients. We feel pretty good about the skill sets that we have. We can always use more, of course, but I would say that we have the talent on hand to deal with what we think is the demand that's in the market.

Speaker 4

One last question. How do you see the drills playing out in the second half? Will the Americas continue to lead, and will Europe continue to grow sequentially?

Speaker 1

Yeah. Good question. We continue to believe, as we started back in the fourth quarter, we expect the U.S. to continue to lead the growth, and we are feeling that the second half will be quite strong for the Americas. We also, as you saw in Europe, saw a bit of sequential growth. Now I think we'll be focusing on the year-over-year growth in Europe, and I believe we should see that, if not in the third quarter, it'd be pretty close. I think we'll see the year-over-year growth return to Europe starting in the third quarter, if not just a tad after that. We see that turning. The pipeline there is stronger. There is still a little bit more uncertainty in the European theater with all that is going on there, geopolitical, etc., so they will be slower to respond.

As we forecasted back in the fourth quarter, the U.S. would lead it, Europe would follow it, and we are seeing that now. We were encouraged, frankly, with the quarter-over-quarter growth in Europe. It came a tad earlier than we anticipated, but we expect year-over-year growth to return in Europe in the second half here for them.

Speaker 4

Thanks, Mike.

Speaker 1

Thank you.

Speaker 7

Next question comes from the line of Gelsie Shree with Singular Research. Please ask your questions.

Speaker 0

Good morning, guys. Can you hear me?

Speaker 1

Yes, good morning.

Speaker 0

Good morning. Congratulations on the three quarters.

Speaker 1

Thank you.

Speaker 0

On the question of your commentary about, it seems that there are times now shifting towards the end-to-end transformation deals on the AI and the more gradual modular engagements. How does that kind of impact the margins going forward?

Speaker 1

Thank you, Gelsie, for the question. We are seeing both. Of course, we've seen end-to-end. We've seen a bit of an acceleration, and I gave you one example of that. We also see a very targeted approach by clients as well, where they want to focus on infrastructure or focus on applications, etc. I would say anything with AI-related is, I would say, strongly priced because of the demand in that area. We certainly feel good about our margins as it relates to that. You can see our margin expansions from 2024 to 2025 is moving. I think we're probably in the neighborhood of, you know, we're targeting 300 basis points kind of improvement from a year ago, and I think you're seeing that play out.

Part of that is strong, strong pricing, but importantly, the demand and the execution and the release of that demand in the pipeline coming through.

Speaker 0

On the client side, these are the struggles. What are the kind of hesitation or hurdles in scaling AI initiatives are there?

Speaker 1

It's primarily cost, to be honest. What we see is it's not that different from when cloud was emerging. If you think about a, if I can use a visual here, if you think about a barbell, on one end of the barbell, you have kind of the leaders that want to get out in front of this. They're willing to tackle it. They're willing to engage in a lot of change management to get there, and they'll move fast. We see that in areas like banking, for example.

You might have others at the other end of the barbell who say, "Hey, look, you know, I need to invest in order to gain my overall acceleration using AI." They will have, in some instances, kind of data management as a hurdle or as a barrier to get through, that their data management is not great, and you really need strong, clean kind of data management to really help move this along at pace. I'd say it's a matter of, are they willing to spend? Is it too volatile for them to spend at the moment? Is their data health, if you will, in order? They're kind of two extremes on that barbell, Gelsie.

Speaker 0

In some of the AI solution vendors, you know, are vendor-driven and kind of sales-heavy. How are you guys able to get, respond to or maybe provide a value proposition to the client? Or maybe by being vendor-agnostic frameworks? Can you talk a little bit about that?

Speaker 1

Yeah. I mean, our bread and butter is that we are an independent, objective, third-party respected researcher and advisor, and because of that, our clients trust us. That's why 85% of them are our paying clients year after year, and they trust us to be able to come to them and talk to them about what that ecosystem looks like right now and as it is emerging. We have relationships, as, Gelsie, as you know, with hundreds of the technology providers in the market, whether that's services or software. Our clients trust us that we lay out for them what we believe their credentials and capabilities are and ask them to kind of look at that list. We call it kind of a candidate's profile, provider qualification, CPQ for short. Our clients trust us to look at that.

We have that ecosystem come in, and our clients get a chance to see them in action and understand their capabilities. That's how we have positioned ourselves in both our research capability and our advisory capability, and it serves us, I think, pretty well.

Speaker 0

Just one last question. Given that there is a boost in cash generation, what is the thought for the capital allocation strategy? Any priority towards M&A in Europe, or invest internally to accelerate the AI tech capabilities?

Speaker 5

Hey, Gelsie. It's Michael. I think, look, I mean, I think, you know, we've had a pretty steady and consistent capital allocation plan, right? It remains the same as before, which is, you know, dividends, share buybacks, investing in the business, M&A, etc. Really no change, you know, whether we've got the higher level or lower level. It's the same discipline. It's the return on investment analysis that we do.

Speaker 0

Awesome. Thank you, guys. I'll take the last slide.

Speaker 7

The next question comes from Joe Gomes with Noble Capital. Your line is open.

Speaker 6

Hi. It's Jacob Mutchler from Joe Gomes. I just have a quick follow-up question on the last question that was asked. As far as potential M&A activity, are there any areas that are bureaucratic or any operating activities that would be a nice addition to your current portfolio?

Speaker 1

Our kind of target areas on the M&A is, you know, can we add more value to our clients? Can we add more value for our shareholders? Right now, that is kind of in the whole area, if you will, of research, of recurring revenues, of areas around transformation, digital AI, and those capabilities that can add some real value to the channels that we have access to in the C-suite of our clients. Because we have such a, I think, a very loyal, enterprise, large client following, we feel like if there were other capabilities that we could utilize in our channel, then our clients would trust that what we have to offer for them is good and they will have an open ear to what those capabilities are.

Our continued focus is on building overall value, and we can build that overall value by increasing our recurring revenue streams and adding capability into the channels that we have developed over the last 19 years.

Speaker 6

Thank you. That's all I had. All my other questions were answered. Thanks for your time.

Speaker 7

I'm showing no further questions. I'll turn the call back to Michael Connors for his closing remarks.

Speaker 1

Thank you to all our professionals worldwide for our continuing progress and for their collaboration and unwavering dedication to our clients and in driving our long-term success. Our people have a passion for delivering the best advice and support to our clients as they continue their AI-powered transformations, and I could not be prouder of them. Thank you all on the call today for joining us and for your continued support and confidence in our firm. Have a great day.

Speaker 7

This concludes today's teleconference. You may disconnect at any time.