Information Services Group, Inc.

Hello, my name is Barry Holt; I am the Senior Communications Executive at ISG. I’d like to wish you a good morning and welcome to ISG’s 2012 second quarter and first half results conference call.

I am joined today be Michael  Connors, Chairman and Chief Executive Officer, and David Berger, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to read our forward-looking statements. It is 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 8-K that was furnished yesterday to the SEC and the risk factors section in ISG’s Form 10-K covering full year 2011 results.

You should also read ISG’s annual report on Form 10-K for the fiscal year ending December 31, 2011 and any other relevant documents including any amendments or supplement to these documents filed with the SEC when they become available. You will be able to obtain free copies of any of ISG’s SEC filings on either ISG’s website at www.isg-one.com or the SEC’s website at www.sec.gov.

ISG undertakes no obligation to update or revise any forward-looking statement that reflect subsequent events or certain statements. 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 8-K, which was submitted yesterday.

And now, I’d like to turn the call over to Michael Connors, who will be followed by David Berger. Mike?

Thank you, Barry, and good morning everyone. Today, David and I will review the second quarter and our first half business highlights and financial results, report on the success we have had in growing our managed services business, highlight our ongoing commitment to increasing shareholder value and conclude with some comments on our guidance for revenues and adjusted EBITDA for the full year.

Our second quarter revenues were nearly $51 million contributing to our record first half revenues of nearly $97 million, up 9% in constant currency. Our second quarter adjusted EBITDA was $5.4 million, with first half adjusted EBITDA of $8.4 million, up 27% in constant currency.

And in the quarter we continued to return free cash flow to our stakeholders, deleveraging the balance sheet by repaying $1.75 million of debt.

From a geographic standpoint in the second quarter, the Americas recorded year-over-year revenue growth of 22%. Asia-Pacific grew 24% in constant currency, offsetting EMEA which was down 18%.

In the second quarter, we served 303 clients with 32 that were new clients to ISG. From an industry perspective, we witnessed strong demand during the quarter in the manufacturing vertical and from a services perspective in managed services, transaction services and project management.

Client wins for the quarter included the city of Fort Worth, Texas, State Farm, the Australian government, Marriott, KFW and retailer BestBuy. In addition, we advised CEMEX, a large global building materials company on the largest sourcing contract in Latin America, a $1 billion agreement recently announced with IBM, covering IT, finance and HR among other areas.

This is another example we believe of the power of ISG and our ability to provide a broad set of products and services to our clients. CEMEX has become an anchor client in our expansion in the Latin America this year and we believe has the potential to be one of our largest global clients.

Now during the quarter, more than 200 clients and service providers gathered in McLean, Virginia to participate in our annual industry conferences. This ISG hosted event focused on how economic reality, a changing competitive landscape and the evolution of technology are affecting sourcing strategies today.

The sentiment of our clients and service provider was positive and I believe reflective of our 22% growth in the Americas in the first half and our potential that we see for the balance of this year.

We had our best quarter ever since our launch of ISG managed services a couple of years ago, having $8 million of multiyear contracts. ISG managed services provides post contract governance to help organization maximize the full value of their supplier agreements.

The unit now helps manage relationships with more than 70 different service providers and count among its clients global leaders in the automotive, transportation, technology and logistics sectors among others.

During the second quarter we also announced an agreement with Enlighta. It’s a leading provider of outsourcing governance and software solutions to incorporate governance software into our post contract sourcing management solutions for our clients, thus enhancing our product offering.

We are very pleased with the organic growth that ISG managed services has achieved for us, and during the first half of 2012 we recorded revenues in this unit of approximately $8 million, up 50% from a year ago.

In order to sustain our momentum in key areas, during the quarter we invested in an additional 33 professionals in the Americas, Germany and managed services as we believe these investments will pay off later in the year and into 2013.

Now, let me highlight our ongoing commitment to enhancing shareholder value. As you know, we have seen a 24% increase in our stock price in the first half.

That said, we believe the market is still behind in recognizing the true value of our company. We believe the most important element to a rising share price is continued solid execution of our business plan and growth strategy on which we are delivering and which should yield sustained revenue growth and double-digit EBITDA growth over the next several years.

Consistent with our goal to enhanced shareholder value we have also taken the following steps; we continue to reduce risk to our equity holder by further deleveraging the company, paying down an additional $1.75 million of debt in the second quarter and we are planning to pay down a total of $17 million through 2013. Our outstanding debt, as you know, remains at attractive below market rates.

Second, we have enhanced transparency by providing revenue and adjusted EBITDA guidance for the year and I will be commenting on our outlook in a moment. And finally we continue to meet with prospective investors, a number of whom are now shareholders of ISG.

Now, let me address our full year guidance. Demand was stable on the whole through the first half.

We are pleased that our broad product and service offerings are taking hold, which is reflected with revenues in the Americas up 22%, Asia-Pacific up 27% and near double-digit growth in Germany in the first half. As we look to the second half, we continue to balance our positive outlook with the need to monitor the macroeconomic issues especially in Europe and what we believe will be a short term flattening of demand in Australia’s public and financial sectors as a slow over of the macroeconomic environment.

I have just returned from Europe and in talking with our core clients believe that our focus on operational excellence is resonating and we expect our second half in Europe to be stronger than our first half.

We continue to expect to deliver full year of constant currency revenue growth of between 6% and 8%, and EBITDA growth of between 10% and 15%. Our guidance is based on a number of factors; the revenue momentum we experienced in the first half, our focus on operational excellence, current business trends 1 month into our third quarter and our lead activity in our longer term sales pipelines.

So with that, now let me turn the call over to David Berger, who will summarize our financial results.

Thanks, Mike, and good morning everyone. Before I discuss our financial results, I would like to reiterate that ISG has presented GAAP financial results as well as certain non-GAAP financial information in our earnings release.

During this call, I will discuss certain non-GAAP financial measures which ISG believes improves the compatibility 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 I will touch on today include adjusted EBITDA, adjusted net earnings and the presentation of selected financial data on a constant currency basis.

A complete reconciliation of non-GAAP financial measures is included in our earnings release which was furnished to the SEC on Form 8-K yesterday. 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.

ISG reported total revenues of $50.5 million during the second quarter of 2012, up 5% versus the prior year in constant currency. Reported revenues were up 0.4% with reported revenues being negatively impacted by $2.2 million versus the prior year due to the strengthening of the dollar.

For the quarter, reported revenues totaled $27.2 million in the Americas, up 22% and $7.1 million in Asia-Pacific, up 24% offsetting an 8% decline in Europe to $16.2 million with growth rates in constant currency.

ISG reported operating income of $2.3 million for the second quarter of 2012. This compared to operating income of $2.5 million in the second quarter of 2011.

Adjusted net income was $2.4 million or $0.06 per share on a diluted basis compared with adjusted net income of $2.6 million or $0.07 in the prior year’s second quarter.

Reported diluted earnings per share was $0.02 per share compared with $0.02 per share for the same period in 2011.

Second quarter adjusted EBITDA of $5.4 million compared with $6.1 million in the second quarter 2011.

The strengthening dollar negatively impacted EBITDA by $300,000 in the quarter. In addition, we added 33 employees in the quarter to accommodate anticipated growth in managed services, the Americas and Germany as we hired in advance to support future demand.

The benefits of these investments and resources support our full year guidance and outlook.

First half revenues of $96.8 million were up 9% in constant currency and 6% on a reported basis. This is a record first half revenue performance for ISG.

Adjusted EBITDA for the first 6 months of 2012 of $8.4 million compares to $4.5 million of adjusted EBITDA in the first half of 2011. Excluding the $2.5 million in deal related and restructuring costs in 2011 and a $600,000 negative impact of FX, first half adjusted EBITDA was up 27% versus the prior year.

ISG continues to maintain a strong liquidity position to support the implementation of our business plan. Cash equivalence was $14.2 million at June, 30, a decrease of $2.8 million from March 31, 2012.

The decrease in our cash balance from March was principally attributable to the non-operating use of cash including $1.75 million in debt repayment and $2 million of acquisition related earn out payments.

Our accounts receivable balance increased slightly from $46.9 million as of March to $47.7 million as of June 30.

Our Days Sales Outstanding was 77 days.

Total outstanding debt at June 30 was $66.6 million compared with $68.3 million at March 31. We repaid $1.75 million of debt during the quarter.

Our outage borrowing rate in the second quarter for our term loan was 3.88%.

We spent $1 million in the first half on capital expenditures in line with our plan.

As Mike indicated earlier, the terms of our guidance for 2012, we expect to deliver revenue growth of between 6% and 8% and adjusted EBITDA growth of between 10% and 15%, both in constant currency.

Volatility in exchange rates could impact our reported growth. Assuming exchange rates stay at current levels we expect currency headwinds on revenues in the second half of between 3% and 4%.

Mike will now share concluding remarks before we go to Q&A.

Thanks, David. We are pleased with our first-half 2012 with revenues up 9% and EBITDA of 27% in constant currency.

For the first half ISG delivered on our growth objectives despite a challenging macroeconomic environment. We’ve seen strong growth in both our first 2 quarters in the Americas and Asia-Pacific, both growing greater than 20%, and in our managed services business it was up 50%.

The market downturn in some ways is a catalyst for clients to improve operational excellent and take advantage of our new broader range of products and services. I remain confident in the full year guidance provided, although we will continue to monitor the macroeconomic environment especially in Europe and Australia.

We realize our second half revenue outlook in Europe is stronger than many other companies. But we believe the strength of our brand, our data and analytics capability and the reputation of our people is a competitive advantage.

We have the pieces in place to achieve our vision, to create an industry leading, high growth Information based Services business. We have focused our over 700 professionals on a single mission, delivering operational excellence to our clients.

We have taken measures to further deleverage our balance sheet through debt repayments and although we believe the market is behind in recognizing the true value of our company, we see early signs of that improving as it follows our business performance. We truly have harnessed the power of one.

Thanks very much for calling in this morning and now let me turn the session over to our operator.

I was wondering if first we can talk a little bit about the headcount that you had in the quarter. Obviously increased it year-over-year and I understand your commentary as far as moving ahead of anticipated demand.

Maybe you can talk a little bit more about what you’re seeing from your clients that kind of drove you to do that and then perhaps discuss additional plans for headcounts in the second half of the year.

Thanks, Marco. Well, first of all what we have been seeing during the second quarter is a stronger demand of our product and service offerings, primarily in the U.S., in Germany and in parts of Asia and in managed services and we have a pipeline in managed services, for example, and that’s where we go in and we provide the governance work for clients on their behalf both on premise as well as in our captive to help them manage supplier agreements.

Our pipeline is very strong. We had growth of 50% in the first half of the year and normally what happens there is if we anticipate a potential contract we go out to the market, we hire people for that contract in anticipation of a signing.

We hit it on the mark I would say most all the time. So we go out, we select them, we train them and we get them ready to go and upon assigning them we can put people on the ground at the client premise and we put people in our captive in India and it usually takes a couple of months after that for the revenue produce.

So we have a little bit of a lag when we bring them on, but once we have them on it helps reinforce the signing of those contracts from a managed services standpoint. From our other standpoint in terms of our broader strategy work, design work, transactions, our project management work, you may recall we launched project management last year as a new business line.

This is where we go in. We help clients either in their IT area or in their business process area, manage a multitude of complex projects for their firm and what we do there is we bring on a team of people.

We put them on the ground and normally those assignments last for 6, 12, 18 months at a time. So again we go out, we try to hire a little bit in advance, in anticipation of locking in those kind of agreements and we go and do that.

And then thirdly, the demand for our consulting services in the U.S. and in Germany in particular is pretty strong and so in anticipation of areas like energy, like healthcare, like technology where we’re seeing some further growth, we are going out into the market, bringing in some additional skill sets and then training them up and getting them ready to go for the back half of this year and into 2013.

So that’s our strategy and why we decided to move ahead in the quarter and hire a bit in advance of the revenue stream. The second half we will play it quarter by quarter.

Right now as we enter the third quarter and we think about Q4, Q1, Q2 next year, I would envision that we would also add additional people during the back half of the year on an incremental basis. But we don’t have a number yet for you, but we are watching that and watching the demand carefully and we’ll have to try to match up those resource growth with what we think the demand will be.

Okay, that’s helpful. And in terms of the timing aspect, if I understood you correctly, it’s about what you’re maybe hiring a couple of months in advance and then the project starts, it’s another couple of months lag until the revenue starts flowing through.

Is that…?

Yes. That’s roughly correct.

So depending on how much in advance we get our team we will get them up, we’ll get them trained and usually it takes a couple of months after that to get them moving.

Okay. And then just to get some more clarification here on the Americas.

You obviously saw some pretty strong growth in the quarter and year-to-date. Are there any kind of large engagements that are in there that brought that number up a bit higher?

Or is this rather a good run rate that you guys are thinking about for the remainder of the year?

Well, I think a couple of things here. One is I think that the team in the Americas are doing an excellent job selling our full array of products and services.

Everything from what we call the frontend which is an assessment which may include benchmarking, a review of their current state that then moves into the strategy and design work for our clients to help them put together a strategy going forward which most likely includes some aspect of cloud and then moving into the transaction site. So that work on the frontend is quite robust for us as it is on the back end for what we call our project management or our transition services as well and our governed services.

Once something is done then we can help them manage their supplier contracts. So we’re not giving specific geographical growth rates, but we believe that the pipeline is quite strong in the Americas.

And of course we moved into Latin America this year as we communicated to you that we were going to invest in that last year. We secured a very strong anchor client in CEMEX which basically has bought almost all of our products and services that we offer.

And so our focus has really been on increasing our revenues, expanding our largest clients into broader products and services and we expect that to continue during the second half.

Okay. And then, kind of, shifting gears here to the CEMEX announcement that you had the other day and you mentioned in your prepared remarks the opportunity that obviously is there for IBM.

Just how does that translate to you in terms of opportunities?

Well, what we did there is we went - CEMEX hired us. They were a brand new client for us.

They’re based in Monterrey, Mexico and we initially went it and do what we normally do which is help them with an assessment of their current cost base. And working with their CEO and CFO and CIO, we helped them put together a strategy going forward and with that work we ultimately went out to bid with a series of suppliers.

It was very close and ultimately the clients selected IBM. So we have been working there since towards the end of last year.

We have a great relationship with CEMEX and we expect that to continue over multiple years.

Okay. And in terms of the managed services business, obviously it seems to be doing very well.

Can you perhaps talk a little bit about - does the main aspect you’re seeing from clients, is that more of a pull that you’re explaining to the clients or are they coming to you for that? And then if perhaps you can talk about expectations for growth rates for that business line, any sort of target percent of revenues for the year-end.

So the way their government services, we think we have a very, very unique proprietary position here. To our knowledge there is no one doing what we are doing in the space and we believe that’s the case because of our data, our experience and the fact that our market share in the whole sourcing transaction space is so significant to anyone else in the market.

So we feel that we have a proprietary position with our clients that we understand the sourcing industry, we understand the supplier. We understand the win-win between service providers and clients and so it’s a natural extension of the work that we do.

So I would say it’s both a combination of push and pull, Marco, to that specific part of your question. But we think that demand is there because the ROI for our clients is quite strong.

The biggest aspect of sourcing agreement is the leakage that clients see once they sign an agreement with a service provider and the leakage meaning that they felt that they were going to have an efficient and effective contract that would save them X dollars. We provide them a level of quality and innovation from the service providers and the leakage is at times that isn’t what is produced from them on a monthly, quarterly on annual basis.

So our work with them is to help them minimize that and mitigate any leakage they might have with those contracts and we have a strong ROI back to them to show them with our work in conjunction with them how we can help them absolutely optimize those agreements. And that’s why we think we have a strong position.

It is something that we have been developing, as you know, for the last couple of years. We’ve tried to keep this if you will somewhat under the radar, except with our client base.

But we feel now that we have a nice, strong first mover significant advantage and we expect growth rates to continue to be aggressive over the next few years.

Are you targeting any sort of a percent of revenues that this eventually becomes of your overall?

No, not at this point in terms of publicly. We are looking-- this is a great recurring revenue stream because most all of this work is multiyear recurring revenue.

But one statement I have made is that in total we’re looking to expand our recurring revenue base from somewhere under 10% to something closer to 20% to 25% over the next few years. So that is what we’re pursuing.

We’d like to get that recurring revenue out and we will make that much more, if you will, a much more number that is out in the open sometime hopefully beginning next year.

Okay. And did I hear you correctly on the prepared remarks that managed services is about $8 million year-to-date revenues and so that’s what, about 8% of your revenues so far?

Yes.

Yes.

I just was hoping you could speak to just the decline in Europe year-over-year, what’s going on there. And then just can you speak to whether or not you think Latin America will be able to supplement any kind of future European downturns or how you think that’s going to play out.

So first on Europe, Europe is kind of a tale of 2 parts of Europe from our perspective. The strength is really in Germany and it is quite robust as I think I mentioned in my remarks that it was nearly 10% growth during the first half of the year.

We see that pipeline in and around that range during the second half. France, which is another large market for us, is steady.

Second quarter was a little bit soft but the second half of the year will be stronger there as well. The real sluggishness in Europe continues to be the U.K.

and the Nordics. We don’t see the U.K.

or the Nordics necessarily changing during the second half of the year. Having said that, we think both Germany and France will be stronger during the second half of the year which is why we have said that we think our Europe will be stronger in the second half than the first half.

So the decline really is the macro environment. I would say the U.K.

has been a bit sluggish now for the last 12 to 18 months. We are looking to push into the government sector in the U.K.

So we have put some investment dollars into that during the first half of the year to try to pursue that. That is something that we’ll see how that unfolds during the second half of the year.

And then as you know, during the recession we made the decision to grow and invest in Asia. So we put money into Asia in 2009, 2010.

We are seeing that growth over in that part of the world and we made the decision to push forward into Latin America in 2012 and you can see that that’s helping contribute to our overall Americas growth. So that’s how we see the world if you will on balance there.

Is most of the growth stream just organic at this point?

Yes. That’s all organic growth.

Is there any possibility of making another acquisition or are you focusing more on the debt?

Yes. Well, first of all we are committed to taking down the debt.

So that’s #1. #2 though, as you know, part of our strategy is to continue to look at bolt-on acquisitions that would allow us to expand our recurring revenue base.

So looking at content, research, that kind of work as well as looking to any of the specific industry verticals where additional capability might be helpful in the area of public sector area of healthcare energy sector. So we have continual dialogues with companies.

That is part of our overall intermediate term strategy.

Okay operator, I think with that let me close by thanking all of our ISG’s over 700 professionals worldwide for your passion and dedication for the strong performance in the second quarter and our first half. It’s really through their efforts that we are poised to build on our market leadership in the years ahead.

And finally I’d like to thank all of you on the call this morning for your continued support and confidence. Thanks again and have a great weekend.