Information Services Group Deserves More Attention

The company is an undervalued small cap with leading positions in technology research

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Mar 11, 2022
Summary
  • Information Services Group is a global research and technology consulting company.
  • The company is increasing its recurring revenue base.
  • Information Services Group is trading at a mid-teens price-earnings multiple.
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Information Services Group Inc. (

III, Financial) is a global technology research and advisory company. The company has over 700 clients, including a majority of the 10 largest enterprises in the world. Information Services helps corporations, public sector organizations and service and technology providers improve their operations and achieve faster growth. They do this through digital transformation services, including advising on automation, cloud, data analytics, market intelligence and risk management.

Founded in 2006, the Stamford, Connecticut-based company employs more than 1,300 professionals operating in over 20 countries. The company went public in 2007 and currently has a market capitalization of $355 million.

Business mix

The company has shifted its business strategy from legacy IT outsourcing advisory services to digital technology advisory services in recent years, such as automation and digital transformation strategy, which has improved the growth potential of the business. The benefits of this shift are expected to be faster growth and a larger addressable market.

Information Services is also making a concerted effort to expand its recurring revenue streams. These include such annuity-based offerings as ISG GovernX, research, software-as-a-subscription, ISG Inform and the multiyear public sector contracts. These are all are characterized by subscriptions (i.e., renewal-centric as opposed to project-centric revenue streams) or multiyear contracts. These offerings comprise approximately one-third of the company's revenue currently.

Financial review

On March 10, Information Services reported full-year 2021 results. The company reported record revenue of $277.8 million, an increase of 12% on a reported basis and 9% on a constant-currency basis compared with $249.1 million in 2020. By region, revenue was $160.2 million in the Americas, an increase of 13% versus the prior year; $90.3 million in Europe, up 4% versus the prior year, and $27.4 million in Asia Pacific, up 32% versus the prior year on a reported basis and up 22% in constant currency.

The company reported record operating income of $25.3 million, an increase of 173$ from operating income of $9.3 million in the prior year. It reported net income of $15.5 million and earnings per share and 30 cents, which were also record highs. Adjusted 2021 net income was $22.9 million, or 44 cents per share on a fully diluted basis. Full-year 2021 adjusted Ebitda also reached a record $38.8 million, up 37% from the prior year.

Balance sheet and cash flow

In addition, Information Services Group generated $41.9 million of operating cash flow for the year. The company’s cash balance totaled $47.5 million at year-end 2021. During the fourth quarter, it paid down $1.1 million of debt, repurchased $3 million worth of shares, paid dividends of $1.5 million and paid $2.6 million in contingent consideration. As of year-end, the company had $74.5 million in debt outstanding. Its gross debt-to-adjusted Ebitda ratio was 1.9 and was at a record low at the end of 2021.

Valuation

The company's earnings are expected to grow this year off of 2021 adjusted earnings of 44 cents per share. At 10% growth, 2022 earnings per share would be 48 cents, which would create a reasonable price-earnings multiple of 15.

The company’s dividend yield is 1.80% based on an annualized dividend payment of 12 cents per share.

Conclusion

As risks from the Covid-19 pandemic, supply chain disruptions and global military conflict subside, the stock appears to be undervalued and will likely reclaim its former 52-week in the high $9 range. Information Services Group would also make a good acquisition candidate for a larger consultancy or research company.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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