Executive Summary / Key Takeaways

• Information Services Group (ISG) is strategically repositioned as an AI-centered technology research and advisory firm, leveraging deep investments in AI to drive its core investment thesis.
• The company is experiencing accelerated growth in AI-related revenue, which quadrupled year-over-year to $20 million in Q3 2025, and is expanding its client base for AI-focused services.
• ISG's proprietary AI-powered platforms, such as ISG Tango, are enhancing operational efficiency, improving margins, and successfully opening up the lucrative mid-market segment.
• Strong financial performance in Q3 2025, with an 8% revenue increase (excluding divestitures) and a 19% rise in adjusted EBITDA, demonstrates the effectiveness of its AI-driven strategy and disciplined operations.
• A robust balance sheet, marked by significant debt reduction and strong cash flow generation, provides ample flexibility for strategic investments, including potential M&A and share repurchases, while maintaining a consistent dividend.

The AI Imperative: Reshaping ISG's Core

Information Services Group, Inc. (ISG) has fundamentally transformed its identity, emerging as a global AI-centered technology research and advisory firm. Founded in 2006 with a vision to lead in information-based advisory services, ISG's journey has been marked by strategic acquisitions and a relentless pursuit of innovation. This culminated in a pivotal repositioning in early 2025, reflecting a two-year investment in AI across its people, platforms, and products. This strategic pivot positions ISG at the forefront of helping enterprises navigate the profound shifts brought about by artificial intelligence.

The broader technology services market is currently propelled by AI, driving demand for cloud computing and infrastructure modernization. Enterprises are increasingly moving AI use cases from experimentation to full-scale deployment, expanding their focus beyond mere cost efficiency to competitive advantage and growth. This macro trend creates a fertile ground for ISG's specialized expertise. The company's overarching strategy involves strengthening its market position, expanding geographically, developing new industry sectors, and growing through targeted acquisitions, all underpinned by its AI-centric approach.

In this dynamic landscape, ISG operates as a specialized player in technology research and advisory. While larger competitors like Accenture (ACN), IBM (IBM), Capgemini, and Cognizant (CTSH) offer broader, integrated solutions, ISG carves out its niche through focused advisory and agility. The company's independent and objective third-party advisor role fosters deep trust with its clients, with approximately 85% of its clients being recurring year after year. This specialized positioning allows ISG to compete effectively in targeted segments, leveraging its operational execution and strategic adaptability.

Technological Edge: The AI-Powered Core

ISG's core differentiated technology is its pervasive "AI-centered approach," deeply embedded across its offerings and internal operations. This technological differentiation is not merely a buzzword but a tangible driver of value for both clients and shareholders.

At the heart of ISG's technological prowess is ISG Tango, an AI-powered sourcing platform. This groundbreaking platform has seen remarkable adoption, with over $15 billion of total contract value (TCV) flowing through it as of Q3 2025, representing a more than 30% increase from Q2 2025. ISG Tango accelerates time to value for enterprises and technology providers by enhancing efficiency, speed, and productivity in sourcing transactions. This efficiency directly contributes to improved margins for ISG. Crucially, ISG Tango has also opened up the mid-market segment (companies with $1 billion to $10 billion in revenue), a market previously challenging for ISG to penetrate. Over 25% of the platform's clients are now mid-market entities, leveraging Tango to gain faster value for money and access to AI expertise they often lack internally.

Another key platform is ISG GovernX, a supplier management platform that incorporates AI for intelligent contracting. This platform has been a significant contributor to ISG's recurring revenue growth, which saw a double-digit increase in the Americas in Q3 2025. GovernX enhances client stickiness and improves the efficiency of supplier relationship management.

Beyond platforms, AI is deeply integrated into ISG's research and advisory services. The company's AI-related revenue reached $20 million in Q3 2025, a fourfold increase from a year prior. Year-to-date in Q3 2025, ISG supported 350 clients with AI-related advisory and research services, an increase of over 200% from the same period last year. This demonstrates the strong demand for ISG's independent AI expertise, guiding clients on critical choices from partners to pricing and governance. This premium, high-demand work provides ISG with strong pricing power. The firm consistently publishes detailed AI market surveys and reports, such as its "state of agentic AI market report," which became its most downloaded research report ever, solidifying its thought leadership.

Internally, ISG leverages AI to improve the efficiency of client delivery. This internal automation, including the development of AI agents to assist consultants, has contributed to a relatively flat headcount of 1,316 professionals as of September 30, 2025, consistent with Q2 2025. This operational efficiency helps maintain a solid consulting utilization rate, which was 72% in Q3 2025 and 75% year-to-date, aligning with the company's long-term targets and contributing to margin expansion. Furthermore, ISG's Training-as-a-Service (TaaS) offering, a multi-year recurring revenue stream, is also being scaled with the assistance of AI, enabling more efficient development and delivery of training materials for large-scale technology transformations like SAP S/4HANA implementations.

The "so what" for investors is clear: ISG's AI-powered technological differentiators create a robust competitive moat. These technologies directly translate into higher-margin revenue streams, expanded market reach, and enhanced operational efficiency, all contributing to improved financial performance and a stronger market position in the rapidly evolving technology services industry.

Financial Performance: Momentum in the AI Era

ISG's financial performance in the third quarter of 2025 underscores the positive impact of its AI-centered strategy and disciplined operational execution. The company reported revenues of $62.364 million, an increase of approximately 2% year-over-year. Excluding the impact of the previously divested automation unit, revenues were up a strong 8% compared to Q3 2024. Profitability saw significant expansion, with adjusted EBITDA climbing 19% year-over-year to $8.4 million. This resulted in an adjusted EBITDA margin of 13.5%, a notable 200 basis point improvement from the prior year. Net income for the quarter was $3.056 million, or $0.06 per diluted share, while adjusted net income reached $4.676 million, or $0.09 per diluted share.

Recurring revenues continue to be a foundational element of ISG's business, representing 45% of overall revenue in Q3 2025 and growing 9% year-over-year to $28 million. This growth was primarily driven by the strong performance of platforms like GovernX and ISG Tango, as well as the research business. For the full year 2025, management anticipates recurring revenues to reach approximately $110 million, with a target of over $120 million in 2026.

Geographically, the Americas region continues to be a powerhouse, with revenues up 11% (excluding automation) to $42.151 million in Q3 2025. This growth was broad-based, fueled by double-digit increases in research, software, GovernX, and key industry verticals such as consumer, health sciences, and public sector. Europe, after a period of caution, returned to growth for the first time in two years, with revenues up 7% (excluding automation) to $16.010 million, driven by strong performance in its advisory business and in banking, financial services, consumer, and health sciences. Asia Pacific, however, saw a 15% decline in revenues to $4.203 million, primarily due to sluggish public sector spending in Australia.

ISG's operational efficiency is further reflected in its consulting utilization rate of 72% for Q3 2025, aligning with its historical average for the quarter and a year-to-date rate of 75%, which is in line with its long-term target. The company's headcount remained relatively flat at 1,316 as of September 30, 2025, demonstrating the productivity gains from its internal AI initiatives.

The company's liquidity position is robust, with net cash provided by operations reaching $11.1 million in Q3 2025. This contributed to a healthy cash, cash equivalents, and restricted cash balance of $28.828 million as of September 30, 2025, up from $23.158 million at December 31, 2024. ISG's gross debt-to-EBITDA ratio improved significantly to 1.95x at quarter-end, falling below its target range of 2x to 2.5x and down from 2.4x at December 31, 2024. The average borrowing rate also decreased to 6.2%, 110 basis points lower year-over-year. This strong financial health provides ISG with considerable flexibility for capital allocation, including a consistent quarterly dividend of $0.04 per share and approximately $8.20 million remaining on its share repurchase authorization.

Strategic Initiatives and Market Penetration

ISG's strategic initiatives are tightly aligned with its AI-centered vision, focusing on expanding capabilities, market reach, and recurring revenue streams. The recent acquisition of Martino Partners s.r.l. in Italy, completed on September 1, 2025, is a prime example. This acquisition, for a total consideration of EUR 2 million (USD 2.30 million cash at closing, USD 250,000 in ISG common stock, and EUR 350,000 cash by April 30, 2028, plus earn-out payments), significantly bolsters ISG's European business. Martino Partners expands ISG's client base and geographic footprint in Italy, particularly in the public sector, by adding new municipal entities to its existing central government client base.

The ISG Tango platform has been instrumental in the company's successful penetration of the mid-market, defined as companies with revenues between $1 billion and $10 billion. This segment, which often lacks the internal expertise for complex AI initiatives, presents a significant growth opportunity for ISG.

The company is also seeing strong demand across specific industry verticals. "Hot industries," as identified by management, include consumer, health sciences, energy, utilities, and the public sector. For instance, consumer companies are seeking cost optimization due to tariff impacts, while energy and utilities firms are investing in AI to support growth amid surging demand. ISG's public sector business in the U.S., which focuses exclusively on state, local, and higher education governments (with no U.S. Federal Government exposure), was up almost 30% in Q3 2025, driven by the adoption of AI to enhance efficiency.

Key client engagements in Q3 2025 highlight ISG's value proposition. The company is assisting a large U.S.-based healthcare company in negotiating over $1 million in software, network, and technology services contracts. It is also working with a top consumer products company on an engagement exceeding $1 million, aiming to create an AI-driven technology operating environment expected to yield approximately 40% cost savings. In Europe, ISG is partnering with a global leader in business travel services on a $1 billion enterprise-wide sourcing program, leveraging AI for finance, accounting, technology services, and product development. Another engagement involves supporting a global leader in workforce services with a $1.2 billion AI-powered initiative to transform operations using agentic AI and new AI pricing models. These examples demonstrate ISG's ability to secure large, impactful engagements by delivering measurable value through its AI-centered expertise.

Competitive Positioning and Differentiators

ISG maintains a distinct competitive position as an independent, objective third-party technology research and advisory firm. This independence is a crucial differentiator, fostering client trust in its ecosystem insights and provider evaluations. While larger, more diversified competitors like Accenture (ACN), IBM (IBM), Capgemini, and Cognizant (CTSH) offer a broad spectrum of IT services, ISG's strength lies in its specialized focus and agility.

Comparing ISG's financial profile with its larger counterparts, its latest TTM (trailing twelve months) gross profit margin of 41.77%, operating profit margin of 5.22%, net profit margin of 3.27%, and EBITDA margin of 9.32% reflect its niche positioning. These margins are generally lower than those typically seen in larger, more diversified consulting firms. For instance, while specific margin data for competitors is limited, their P/E and P/B ratios (ACN P/E 21.95, P/B 5.40; IBM P/E 35.92, P/B 10.18; CTSH P/E 16.88, P/B 2.41) suggest different valuation and profitability profiles. ISG's P/E of 32.24 and P/B of 2.69 indicate a market valuation that acknowledges its growth potential, particularly in AI, despite its smaller scale.

ISG's specialized platforms, such as ISG Tango and ISG GovernX, provide tangible competitive advantages. These platforms offer enhanced efficiency in sourcing and risk management, allowing ISG to differentiate itself from competitors whose broader technology focus might not address niche advisory needs as effectively. For example, ISG Tango's ability to accelerate time to value and open the mid-market segment directly impacts revenue opportunities and margin expansion, a benefit that might be harder for larger, less agile firms to replicate in targeted advisory areas.

The company's deep sector-specific expertise, particularly in energy, utilities, and the public sector, fosters faster innovation cycles and allows ISG to target underserved markets. This specialized knowledge provides a unique value proposition, enabling ISG to secure significant contracts and potentially achieve stronger profitability in these segments compared to competitors with more generalized approaches.

However, ISG's smaller scale and more limited global reach present competitive disadvantages. These factors can lead to higher customer acquisition costs and potentially lower overall revenue growth compared to global giants like Accenture, which benefit from extensive resources and a vast global footprint. While ISG's agility allows for rapid adaptation to emerging trends, its smaller size could pose challenges in competing for very large, integrated projects that require massive scale and diverse capabilities. The company's focus on Global Capability Centers (GCCs) as a "hot" area for advisory services represents a strategic response to evolving client needs, leveraging its expertise in operational models and provider negotiations.

Outlook and Risks

ISG's outlook remains optimistic, underpinned by its AI-centered strategy and anticipated market tailwinds. For the fourth quarter of 2025, the company is targeting revenues between $60.5 million and $61.5 million, with adjusted EBITDA expected to increase year-over-year by 15% to 20%, ranging from $7.5 million to $8.5 million. This guidance reflects continued year-over-year growth and margin expansion.

Management anticipates an improving interest rate environment to stimulate further tech spending as the market moves through 2026, with AI firmly established as the dominant long-term growth driver for the industry. The company expects its recurring revenue streams to continue their upward trajectory, targeting approximately $110 million for the full year 2025 and over $120 million for 2026. Geographically, the Americas are expected to maintain their strong growth trajectory, while Europe is anticipated to continue its rebound, particularly in AI-assisted optimization. Asia Pacific's growth is projected to reignite in the second half of 2026, contingent on a pickup in public sector spending in Australia following elections.

Despite the positive outlook, ISG faces several pertinent risks. Global macroeconomic conditions, including potential recessions or geopolitical instability, could impact overall sourcing market demand and client discretionary spending. The company's exposure to interest rate risk, stemming from its floating-rate debt, is a consideration, though management believes it is limited given the current debt-to-EBITDA ratio and forecasted rates. Foreign currency fluctuations also pose both translation and transaction risks, potentially affecting consolidated earnings. Client hesitation in scaling AI initiatives, primarily due to cost concerns and challenges with data management quality, could temper the pace of AI adoption. Additionally, the competitive landscape remains intense, and the ability to retain skilled advisors in a high-demand AI market is crucial. Changes in trade policies, such as tariffs, could also adversely affect business, though ISG has observed that these can also spur demand for cost optimization services.

Conclusion

Information Services Group (ISG) is firmly establishing itself as a pivotal player in the evolving technology landscape, driven by its strategic pivot to an AI-centered research and advisory model. The company's deep investments in AI-powered platforms like ISG Tango and GovernX, coupled with its specialized advisory expertise, are not merely enhancing internal efficiencies but are directly translating into accelerated revenue growth and significant margin expansion. This technological differentiation, combined with a robust balance sheet and strong cash flow generation, provides a compelling narrative for investors.

While ISG operates in a competitive environment alongside larger, more diversified firms, its focused approach and independent advisory position allow it to capture significant opportunities, particularly in the burgeoning AI and mid-market segments. The company's consistent financial performance, positive outlook for recurring revenues, and strategic geographic expansion initiatives underscore its potential for sustained value creation. Investors should recognize ISG's ability to leverage AI as a core propellant for growth, transforming market disruptions into long-term advantages for both its clients and its shareholders.