Information Services Group Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: In Q2, revenues reached $61.6 M (up 7% YoY) and adjusted EBITDA climbed 17% to $8.3 M, with margins expanding by 240 basis points to 13.5%.
  • Positive Sentiment: Operating cash flow was nearly $12 M, marking one of ISG’s strongest cash-generating quarters.
  • Positive Sentiment: ISG’s AI pivot drove 2.5× year-over-year growth in AI-related revenue, accounting for ~20% of total Q2 revenue, while client AI engagements rose 50% sequentially and the ISG Tango platform now supports $11 B in contract value.
  • Positive Sentiment: The company signed a definitive agreement to acquire Martino & Partners in Italy, bolstering public sector reach, recurring revenue streams and local leadership for an early-September close.
  • Positive Sentiment: For Q3, ISG targets $60.5 M–$61.5 M in revenue and $7.5 M–$8.5 M in adjusted EBITDA, signaling continued year-over-year growth and margin acceleration.
AI Generated. May Contain Errors.
Earnings Conference Call
Information Services Group Q2 2025
00:00 / 00:00

There are 2 speakers on the call.

Operator

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

Operator

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.

Speaker 1

I'm joined today by Michael Connors, Chairman and Chief Executive Officer and Michael Sherick, 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 statements contained in our Form eight ks that was furnished last night to the SEC and the Risk Factors section in our Form 10 ks covering full year results and our Form 10 Q covering first quarter twenty twenty five results.

Speaker 1

You should also read ISG's annual report on Form 10 ks and any other relevant documents, including any amendments or supplements to these 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.isg1.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.

Speaker 1

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 eight ks, which was filed last night with the SEC. And now I'd like to turn the call over to Mike O'Connor, who will be followed by Michael Cherich. Mike? Thank you, Barry, and good morning, everyone.

Speaker 1

Today, we will review our outstanding Q2 results accelerated by our pivot to AI, our acquisition of Martino and Partners in Italy, our view of the current market and our outlook for Q3. Our team executed extremely well and IRC delivered an excellent second quarter, demonstrating our ongoing momentum with clients and our solid fundamentals. We delivered Q2 revenues of about $62,000,000 up 7%, excluding results from our previously divested automation unit. Growth was led by our largest revenue region, The Americas, up 16%. Our adjusted EBITDA was up 17% to $8,300,000 with our adjusted EBITDA margin up two forty basis points to 13.5%.

Speaker 1

Our enhanced profitability is a result of our improved business mix, disciplined operating approach and sound execution of our strategy. We also had an excellent cash quarter producing nearly $12,000,000 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 28,000,000 up 7% sequentially and represented 45% of our overall revenue. Our AI centered approach is resonating with our clients.

Speaker 1

In Q2, our AI related revenue was 2.5 times higher than it was a year ago. And in both the second quarter and first half, nearly 20% of our total revenue was AI related. We served more than three fifty 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 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 Agenix AI market report, which has become our most downloaded research report ever.

Speaker 1

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 ground based braking sourcing solution, ISG Tango. More than $11,000,000,000 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.

Speaker 1

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 acquisitions, Martino and 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 and 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.

Speaker 1

We also add to our leadership bench with cofounder 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.

Speaker 1

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.

Speaker 1

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. So we are well positioned, and we look forward to continuing our success in the second half. With that, let me turn to our regions. The year over year comparisons by site here exclude revenues of about $7,000,000 from our divested automation unit in last year's second quarter.

Speaker 1

Our Americas region delivered another excellent quarter. Revenues were up 16% to $39,000,000 driven by double digit growth in our technology advisory, network, software, research and GovernX businesses and in our consumer, energy, utilities, health sciences and public sector industry verticals. Key client engagements during the second quarter included TreeHouse Foods, who is a significant mid market client, along with Finteam and PSE and G. During the quarter, ISG expanded its work with a large U. S.-based national health care company, generating additional revenues of $1,000,000 We are providing a range of services, including GovernX software and network to rationalize the client's tech spend and drive cost savings as part of an acquisition and divestiture of two businesses.

Speaker 1

In the energy sector, we continue to expand our business with a longtime client, a leading electric and gas utility company. During the quarter, we added $1,200,000 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 $16,600,000 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.

Speaker 1

During the quarter, we continued to expand our work with a leading multinational health care company. We are helping the client select a systems integrator for their adoption of SAP S4HANA as part of a comprehensive business transformation program. For another client, a leading 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.

Speaker 1

Our Q2 revenues of $5,000,000 were essentially flat from the prior year. Key clients in the quarter included IEMO, Endeavor Group and Standard Chartered Group. 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.

Speaker 1

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 costs 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 twelve months with AI remaining the dominant long term growth driver for the industry.

Speaker 1

So 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 $60,500,000 and $61,500,000 and adjusted EBITDA between $7,500,000 and $8,500,000 which will continue our year over year growth and margin acceleration.

Speaker 1

Now let me turn the call over to Michael Sheriff, who will summarize our financial results. Michael? Thank you, Mike, and good morning, everyone. As Mike stated earlier, our revenue comparison with the 2024 excludes our divested automation unit, which contributed about $7,000,000 a year ago. This provides a more accurate view of our go forward business.

Speaker 1

Revenue for the second quarter was $61,600,000 up a solid 7% versus the prior year. For the quarter, currency had an $800,000 positive impact on revenue. Americas revenue was $39,500,000 up 16%. Europe revenue was 16,600,000 down 7%, and Asia Pacific revenue was $5,400,000 flat with the prior year. Second quarter adjusted EBITDA was $8,300,000 up 17% from the year ago period and resulting in an EBITDA margin of 13.5%, up more than two forty basis points year on year.

Speaker 1

For the quarter, ISG delivered operating income of $4,700,000 up 28% compared with operating income of $3,700,000 in the prior year. Our reported net income for the quarter was $2,200,000 or $04 per fully diluted share compared with a net income of $2,000,000 or $04 per fully diluted share in the prior year. Second quarter adjusted net income was 4,100,000.0 or $08 per share on a fully diluted basis compared with adjusted net income of $3,800,000 or $08 per fully diluted share in the prior year second quarter. I do want to point out that last year both GAAP and adjusted EPS benefited from a reported tax rate of 12 versus this year's more normal 39% tax rate. Headcount as of 06/30/2025, was $13.11, essentially flat with Q1.

Speaker 1

For the quarter, consulting utilization was a solid 76%. That compares with our average second quarter utilization of 7479% in the year ago quarter. We ended the quarter with cash of $25,200,000 up over $5,000,000 from $20,100,000 at the end of the first quarter, a key driver of the increase with strong operating cash flow. For the quarter, net cash provided by operations was $11,900,000 fueled by solid operating performance and strong cash collections. During the quarter, we paid dividends of $2,400,000 and repurchased $4,000,000 of stock.

Speaker 1

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 50,100,000.0, down 500,000 from year end 2024. At quarter's end, we had approximately $11,000,000 remaining on our share repurchase authorization. Our quarter end gross debt to EBITDA ratio was two point zero times, down from 2.4 times at 12/31/2024, and at the bottom of our two to 2.5 times target range. At quarter's end, our debt was unchanged.

Speaker 1

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 and A. Mike? Thank you, Michael.

Speaker 1

To summarize, ISG delivered an excellent second quarter, continuing our momentum. Our revenues of $62,000,000 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 two forty basis points. And we had one of our strongest cash quarters ever, generating about $12,000,000 in cash. Looking to the future, we signed a definitive agreement to acquire Martino and Partners and strengthen our position in Italy, a market with emerging growth potential.

Speaker 1

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

Operator

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. And again, if you would like to ask a question, you can do so by pressing the star and one on your touch tone keypad.

Operator

And we'll pause a moment to allow any questions into the queue. The first question comes from the line of David Storm with Stonegate. Your line is now open.

Speaker 1

Good morning. Good morning. Just wanted to start with the strong cash generation in the quarter. I know you mentioned that there was strong cash collection and cloud operating performance. Could you give us a sense of how sustainable that is?

Speaker 1

Is that cash collection a new initiative? Or was that the impact of maybe one large outstanding balance? David, it's Michael. So I appreciate the question. I guess a couple of things.

Speaker 1

One, if you remember last quarter, said that our Q1 operating cash flow was impacted to some extent on timing. And so we saw some of that. And that's really reflected if you look at the day sales outstanding, that's down about ten days quarter on quarter. So 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 1

Understood. That's very helpful. And then in the prepared remarks, you mentioned that you're seeing customers not standing still. There seems to be a bit of a reversal for maybe the elongated sales cycles you're 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 that you're seeing?

Speaker 1

Dave, look, I think it definitely has accelerated in many areas, primarily driven by a number of industry verticals energy, utilities, banking, pharma, health care 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. So we have had a bit of an acceleration of can you move fast. And 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 $1,000,000,000 It's closer up to $2,000,000,000 of spend around services and software and asked us if we could do a quick assessment, create the art of the possible.

Speaker 1

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 plotting along a bit, clients were taking much longer to make decisions, it would never have happened in that kind of time frame. That's a example. We have several of those.

Speaker 1

So the pipeline is full. There is 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, but there's at least a sizing of what those are and what kind of products in particular are being tariffed. And they are then responding and reacting and trying to either get ahead of it or to help mitigate some of that. And so we're right in the middle of it.

Speaker 1

We kind of planned for this last year, as you know, and it's serving us quite well. But that's the change in the pipeline acceleration, if you will. That's very helpful. Thank you. I'll get back in queue.

Operator

The next question comes from the line of Mark Riddick with Sidoti. Your line is open.

Speaker 1

Hey, good morning. Good morning. So I wanted to to start with maybe you could share some interesting 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 leading the way with AI driven activity. And and also maybe as a a sort of a as a tag along, I I think we talked in the past about exposure to state and local governments and and maybe in The States and maybe you could talk a little bit about what you're seeing from them or if you're seeing much from shifting 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.

Speaker 1

There's it grew it is growing for us and it's you know, about 30% in The US during during this quarter, just to give you a a year over year comparison. Why is this? Our sense is and, again, I 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 the Doge and the federal government. And just to remind you, we have no exposure to Doge and the federal government contract.

Speaker 1

We have none. But on the state and local, they have taken that, I think, and used it as a way to help as a catalyst to help begin to optimize some of their services. So that is what we're seeing, and that's why the public sector business is up you know, double digits in The US. So that's in response to your public sector question. On the commercial side, you know, it it is a variety, everything from aerospace to energy to the utilities.

Speaker 1

And just to give you a few examples there, the energy and the let's take the utility companies. Clearly, the need with all of the AI acceleration going on, all the hyperscalers, The utilities are also feeling it, 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 their loan growth, and they want to be able to accelerate it, and they need dollars to do that. And so we have been doing a lot of optimization work with the utility industry, and that was up was up looking at our staff here. That was up 28% in the quarter.

Speaker 1

If we take another one like the whole health care industry is also under fire, especially here in The United States, and and that is up significantly double digits. Again, there, 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. So, know, again, I would highlight energy, utilities, banking, pharma, health care and the public sector as the ones that are moving at pace right now and are driving a lot of our demand. That's very helpful. I appreciate it, Mike.

Speaker 1

Quick question on just as a follow-up. I wanted to maybe, first of all, touch a little bit on the acquisition announcement. Maybe you could talk a little bit about how that how Martino and Partners came to be and maybe your thoughts on what you're seeing as far as the potential pipeline going forward and the things you're sort of shaking free a bit? Or how are feeling about the opportunities that you're seeing in front of you? Yes.

Speaker 1

So first on Martino and 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. And we identified a number of targets. And we closed in on Martino and Partners really for a couple of reasons.

Speaker 1

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. So 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 reach 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. And then importantly, from a leadership standpoint, we were very impressed with the two leaders of this business, one by the name of Andrea Martino, who we going to make the CEO of all of our Italian businesses and his co founder, Claudia de Roma. And between them and our teams, we think we have a strong leadership team.

Speaker 1

So that's why we kind of pursued Martino and Partners. In terms of the broader M and 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. And 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. And we think the market is is good, and we've always been disciplined in our approach there.

Speaker 1

So maybe more to come on that as we move forward. I hope that answers that, Mark. Certainly does. Thank you very much. Yep.

Speaker 1

Thank you.

Operator

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

Speaker 1

Nice quarter, Mike. Thanks. Good morning, Vince. Good morning. So we all know how important data is to AI.

Speaker 1

I'm just curious, you know, how advanced are we in terms of improving infrastructure with with the data to to enable AI? Are we yeah. What inning are we in per se? Well, first of all, I think just in terms of the overall market, you know, I'd call it second inning. It's very it's very it's very early.

Speaker 1

And and so 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. But 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 kind of create, you know, information and data architectures that would feed AI models for them.

Speaker 1

We help them kind of develop their cybersecurity strategies for AI and data. So there's a number of areas that we're helping the client base with. It is very early innings. But if I was kind of putting in an order, I would say, one, many of the clients want first, want to secure funding for AI. How do I do that?

Speaker 1

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? Then they want to be able to see if they can scale and do it in kind of a cost effective way and then try to align their delivery model and using AI to help them do that. So that's kind of the kind of, if you will, the sequence that we see clients asking for our advice and our research and our information then. That's very helpful, and it does appear to be a sweet spot that should continue.

Speaker 1

Yeah. Curious on the labor side. Do do you are you turning any business away due to a shortage of labor related to AI? No. We I think we are in a pretty good spot.

Speaker 1

We 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. So you probably noted that our headcount is roughly flat from from the previous from the previous quarter. And that's all a matter of automation using AI ourselves, building our own AI agents, working with our consultants. But we feel good.

Speaker 1

We've also trained up over 1,100 of our colleagues, skilling them up in AI, and importantly, the number of kind of wide engagements that we are doing. And 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 $11,000,000,000 of of contract value that has that has gone through that. And so and all of those almost all of those have an AI component and engagement part of the and part of the engagement that we have with our clients. So we feel pretty good about the skill sets that we have.

Speaker 1

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 with the demand that's in the market. And one last question. So how do you see the GEOs playing out in the second half? Will Americas continue to lead?

Speaker 1

And will Europe continue to grow sequentially? Yeah. So good question. So we continue to believe that we started back kind of in the fourth quarter. We expect The US to continue to lead the growth, and we are feeling that the second half will be quite strong for The Americas.

Speaker 1

We also, as you saw in Europe, 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'll be pretty close. But 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.

Speaker 1

So 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, etcetera. So they will be slower to respond. But as we kind of forecasted back in the fourth quarter, The U.

Speaker 1

S. Would lead it, Europe would follow it, and we are seeing that now. And 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. Next

Operator

question comes from the line of Ghoshie Shree with Singular Research.

Speaker 1

Can you hear me? Yes. Good morning. Good morning. Congratulations on the on the question of your commentary about classic seems that there are times now shifting towards to 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

Well, I think from thanks, Ghanshi, for the question. We are seeing both. Of course, we see end to end, we've seen a bit of an acceleration, and I gave you one example of that. But we also see a very targeted approach by clients as well where they want to focus on infrastructure or focus on applications, etcetera. But I would say anything with AI related is, I would say, strongly priced because of the demand in that area.

Speaker 1

So we are are certainly feel good about about our margins as it relates to that. And you can see our margin expansion from 2024 to 2025 is moving. And I think we're probably in the neighborhood of we're targeting 300 basis points kind of improvement from a year ago. And I think you're seeing that play out. And part of that is strong pricing, but importantly, the demand and the execution and the release of that demand in the pipeline coming through.

Speaker 1

And on the client side, the stragglers, what are the kind of hesitation or hurdles in scaling AI initiatives out there? It's primarily cost, to be honest. So what we see is it's not that different from when cloud was emerging. And 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 the leaders that wanna get out in front of this. They're willing to tackle it.

Speaker 1

They're willing to engage in a lot of change management to get there, and they'll move fast. And 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.

Speaker 1

And 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. So I'd say it's a matter of are they willing to spend? Is it too volatile for them to spend at the moment? And is their data house, if you will, in order?

Speaker 1

So there's kind of two extremes on that barbell, Gaussian. Okay. Some of the AI solution vendors are you know, are vendor driven and kind of sales heavy. How are you guys able to maybe respond to maybe provide a value proposition to the client or maybe by being vendor agnostic framework. Can talk a little bit.

Speaker 1

Yeah. Our I mean, our bread and butter is that we are an independent objective, third party, respected researcher and adviser. And because of that, our clients trust us. That's why 85% of them are our same 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.

Speaker 1

And we have relationships as, Gaussie, as you know, with hundreds of the technology providers in the market, whether that's services or software. And 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 profile provider qualification, CPQ for short. And our our clients trust us to look at that. And then we we have that ecosystem come in, and our clients get a chance to see them in action and understand their capabilities.

Speaker 1

So that's how we have positioned ourselves in both our research capability and our advisory capability, and it serves us, I think, pretty well. And just my last question. Given that there is a boost in cash generation, what is the thought from capital allocation strategy? Any priority towards M and A and more M and A in Europe or invest internally to accelerate the iTech capabilities? Hey, Ashwin, it's Michael.

Speaker 1

I think, look, I mean, I think we've had a pretty steady and consistent capital allocation plan, right? So it remains same as before, which is dividend, share buyback, investing in the business, M and A, etcetera. Really no change whether we've got the higher level or lower level. It's the same discipline. It's a return on investment analysis that we do.

Operator

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

Speaker 1

Hi. It's Jacob Mutcher on for Joe Gomes. I just had a quick follow-up question on the on the last question that was asked. As far as potential M and A activity, are there any areas that appear attractive or any operating activities that would be a nice addition to your current portfolio? Well, we are our kind of target areas on the M and A is can we add more value to our clients?

Speaker 1

Can we add more value for our shareholders? And 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 and those capabilities that can can can add some real value to the to the channels that we have access to in the c suite of our clients because we have such a, I think, very loyal enterprise large client following. We 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, they will have an open ear to what those capabilities are. So our continued focus is on building overall value, and we can build that overall value by increasing our recurring revenue streams and adding adding capability into the channels that we have we have developed over over the last nineteen years. Thank you.

Speaker 1

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

Operator

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

Speaker 1

Well, thank you. And let me let me close by saying 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. So thank you all for on the call today for joining us and for your continued support and confidence in our firm. Have a great day.

Operator

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

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