ISG (III) Q3 2026 Earnings Call Transcript

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DATE

Nov. 2, 2026

CALL PARTICIPANTS

• Head of Corporate Communications - Will Thoretz
• Chairman and Chief Executive Officer - Michael P. Connors
• Executive Vice President and Chief Financial Officer - Michael Sherrick

TAKEAWAYS

• Revenue -- $65.1 million, increasing 4.4% year over year driven by a return to growth in Asia Pacific and continued expansion in Europe.
• Adjusted EBITDA -- $10 million, representing 19% growth year over year and the eighth consecutive quarter of double-digit expansion.
• AI-Related Revenue -- $34 million, growing 56% year over year and now accounting for more than 50% of total firm-wide revenue.
• Asia Pacific Revenue -- $6.2 million, up 47% on a reported basis reflecting a rebound in government spending in the region.
• Europe Revenue -- $17 million, up 6.2% on a reported basis due to performance in software and governance services.
• Americas Revenue -- $41.9 million, down 1% on a reported basis as certain client decision-making shifted from the third quarter into the fourth quarter.
• Recurring Revenue -- $30.5 million, up 7% year over year to reach a new quarterly high for the company.
• GAAP Net Income -- $3.4 million, up 10.3% compared with $3.1 million in the prior-year period.
• Adjusted EPS -- $0.10, rising from $0.09 per fully diluted share in the third quarter of 2025.
• EBITDA Margin -- 15.4%, expanding nearly 200 basis points year over year to reach a four-year high.
• Cash Flow from Operations -- $12.3 million, the highest quarterly amount generated by the company in five years.
• Utilization Rate -- 74%, an increase of 190 basis points year over year while maintaining a relatively flat headcount.
• Q4 Revenue Guidance -- $64 million to $65 million, targeting sequential and year-over-year growth.
• Q4 Adjusted EBITDA Guidance -- $9 million to $10 million, maintaining the company's focus on double-digit bottom-line growth.
• Cash Balance -- $28.5 million at quarter end, a 20% increase from the second quarter of 2026.
• Debt-to-EBITDA Ratio -- 1.6x, decreasing from 1.9x at the end of Dec. 2025.
• Borrowing Rate -- 5.4%, representing a decline of 87 basis points year over year.
• Public Sector Revenue -- up 15% globally, driven by increased client focus on cost optimization and automation.
• Energy Vertical Revenue -- up 35% year over year, reflecting strong demand for AI-integrated operating models.
• Capital Returns -- $6.9 million returned to shareholders in the quarter through $4.5 million in share repurchases and $2.4 million in dividends.

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RISKS

• Connors stated, "The reason for the pace, it's simply there's a lot of macro uncertainty as well in the market," referring to external factors that influence the speed at which clients commit to large technology projects.
• Connors noted that in the Americas, "certain client decisions that were a bit slower to unfold" led to the shift of some engagements from the third quarter into the fourth quarter.

SUMMARY

Information Services Group, Inc. (NASDAQ:III) reported third-quarter results that demonstrated a significant acceleration in artificial intelligence adoption across its global client base. Management reported that AI-related revenue exceeded internal expectations, reaching half of total revenue ahead of the company's 2027 target date. The company noted that growth in the Asia Pacific region rebounded while Europe maintained momentum in governance and software services. Financial performance was characterized by the eighth consecutive quarter of double-digit adjusted EBITDA growth and the highest quarterly operating cash flow in five years. Management maintained its focus on a long-term goal of high-single-digit revenue growth with a 1.5-fold flow-through to the bottom line.

• The company is addressing the changing economics of AI usage, specifically the shift from individual assistants to autonomous agents. CEO Connors stated, "Even as the cost per token falls, usage can rise sharply as enterprises move from individual AI assistants to agents, executing complex workflows across multiple systems."
• Management introduced an autonomy level pricing model to link AI performance with commercial value. Connors noted this model "links increasing AI autonomy to agreed pricing and performance measures," allowing clients and providers to share productivity gains.
• Public sector demand is rising as government entities seek optimization through automation. Connors indicated that most governments are in the "first inning" of AI adoption, representing a multiyear tailwind for sourcing and transformation services.
• The company expects a recovery in the Americas during the fourth quarter after a temporary slowdown. Connors indicated the pipeline is solid and that the region is expected to "pop nicely" as delayed client decisions normalize.
• Operational efficiency remains a priority, with consulting utilization reaching the mid-70% range. CFO Sherrick noted that the company will continue to balance headcount and the use of contractors to "load balance demand" as AI-driven projects scale.

INDUSTRY GLOSSARY

• Adjusted EBITDA: A non-GAAP financial measure that excludes non-cash stock compensation, interest, taxes, and other special charges to reflect core operating performance.
• Agentic AI: Artificial intelligence systems designed to act as agents that can execute complex workflows autonomously across multiple enterprise systems.
• AIOps: Artificial Intelligence for IT Operations, which uses AI to automate and enhance IT processes.
• Global Capability Center (GCC): An in-house center established by a company in a different country to perform specific business functions like IT or research.
• S/4HANA: An enterprise resource planning software suite developed by SAP that allows for real-time data processing.
• Tokenomics: In an AI context, the study of the cost and consumption of tokens, which are the basic units of data processed by large language models.

Full Conference Call Transcript

Operator: Good morning, and welcome, everyone, to the Information Services Group Third Quarter 2026 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. Will Thoretz for his opening remarks and introductions. Mr. Thoretz, please go ahead.

Will Thoretz: Thank you, operator. Hello, and good morning. My name is Will Thoretz. I am Head of Corporate Communications for ISG. I'd like to welcome everyone to ISG's third 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 would like to read a forward-looking statement. 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 this morning to the SEC and the Risk Factors sections of our most recent Form 10-K and 10-Q filings. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements to these documents filed with the SEC.

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 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 8-K, which was filed this morning with the SEC. And now I would like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike?

Michael P. Connors: Thank you, Will, and good morning, everyone. Today, we will review our strong Q3 results, the progress we have made over the last 8 quarters since becoming an AI-centered firm, our view of the market and how it is evolving and our outlook for Q4. ISG delivered another excellent quarter in Q3 with strong cash generation, expanding margins and solid revenue growth. For the quarter, our revenue was $65 million, up 4.4%, led by 6% growth in Europe and 47% growth in Asia Pacific, reflecting a strong return to growth in the region. Adjusted EBITDA was $10 million, and our EBITDA margin was 15.4%, its highest level in 4 years.

Our recurring revenues, importantly, were up nearly 8% to a new quarterly high of $30.5 million, powered by ISG Research. AI is our key growth driver, and its impact is expanding across ISG. About 2 years ago, we made a deliberate strategic pivot to become an AI-centered firm. Today, we are seeing the results in both the scale of our AI business and the opportunity it creates across our portfolio. Our AI-related revenues in Q3 grew 56% to almost $34 million. That represents over 50% of our total firm-wide revenues in the quarter, a level we did not expect to achieve until later in 2027. Our overall financial performance continues to strengthen.

We have now delivered double-digit EBITDA growth in each of the last 8 quarters, reaching $10 million in Q3, up 19% year-over-year, and we expect double-digit growth in EBITDA in Q4 as well. And that same time, we have expanded our EBITDA margin over 400 basis points, including a margin of 15.4% this quarter, up nearly 200 basis points year-over-year. Over the last 8 quarters, we have generated $52 million in cash from operations, including $12.3 million this quarter, our best cash quarter in 5 years. AI is amplifying the value of our entire portfolio. Our research helps clients decide where to invest. Our advisory and sourcing capabilities help them turn those decisions into better operating models and commercial agreements.

And our governance services help sustain value over time. For us, AI is not just an aspiration, it is delivering results right now. Our client engagements around the world show how these capabilities work together. Turning first to the Americas. Revenues were $42 million, essentially even with last year. The region saw double-digit growth in research and by industry, strong growth in our energy and public sector verticals. The Americas had some engagements move into Q4, and we expect a robust fourth quarter in this region. Among our key client engagements in the quarter, much of which included AI were Lockheed Martin, ExxonMobil and Estee Lauder.

During the quarter, we won a significant $1 million engagement with a large regional health insurer in the U.S. We are working with this new client to establish a global capability center to support its AI-enabled tech and cybersecurity operations. We expect the capability center to deliver run rate savings of roughly 40%. Also in the quarter, we continued to expand a multimillion-dollar relationship with a large state government entity. This multiyear engagement includes enterprise change management services to support the state's migration to SAP S/4HANA, which will continue into next year. In Europe, our momentum continued with another strong quarter.

Revenues were up 7% in constant currency to $17 million, driven by growth in our software and governance businesses and in our health sciences and consumer industry verticals. Key client engagements in Europe in the third quarter included Roche, the health care retailer of Boots Group and chemical company, Evonik. During the quarter, we continued to expand our relationship with a leading consumer products company to reduce costs and advance its AI journey. This client has engaged ISG for a full range of services, including software, network and governance. For example, in the quarter, we saved the client 15% on its software product licenses as part of our overall engagement.

We also continue to expand our multimillion dollar relationship with a leading medical technology company. In the latest quarter, we added significant new work negotiating a contract extension with an incumbent provider, supporting a transition to a new applications provider to leverage AIOps and provide change management services to improve employee adoption of new technology platforms. In Asia Pacific, we saw a strong rebound with Q3 revenues up 47% to $6.2 million. We saw double-digit growth in our advisory services and research and broad-based growth across industries, including consumer, energy and the public sector. The rebound in government spending noted last quarter is particularly encouraging.

Key clients in the quarter included the New Zealand utility company, Mercury, along with public sector clients, the Australian Department of Home Affairs and the Australian Taxation Office. During the quarter, we continued to expand our relationship with leading food retailer. In our most recent engagement, we are supporting a major business process transformation initiative, covering finance, accounting and HR services. ISG is leading the selection of strategic partners offering AI-enabled solutions to strengthen operations and deliver cost-effective services at scale. Now turning to our view of the broader technology market. Our recently published state of enterprise AI research report identified several gaps between AI's promise and the value enterprises are realizing, including data quality, technology integration and operating costs.

The economics of AI consumption illustrate the challenge. Even as the cost per token fail falls, usage can rise sharply as enterprises move from individual AI assistants to agents, executing complex workflows across multiple systems. Total AI spending, therefore, can increase even as unit prices decline. Consider an enterprise with 50,000 employees each using AI assistance at an assumed cost of $600 per employee per year, its annual budget for this client is $30 million. But that cost quickly balloons to $69 million when the company turns to agentic AI, which typically requires 5x more tokens than individual employee use. Consumption is only one part of the equation.

Enterprises must also account for data preparation, integration, infrastructure, software and human oversight. Higher spending can be justified, but only when it delivers greater business value. These changing economics play directly to ISG's strengths. We help clients determine where the business case holds, what they should pay and how to capture the productivity gains AI makes possible. Our proprietary autonomy level pricing model, for example, links increasing AI autonomy to agreed pricing and performance measures. This helps clients and providers share the resulting value. This builds on our role as an independent authority on technology economics. Our research and market intelligence inform investment decisions. Our sourcing expertise helps secure the right commercial terms.

And our governance services helps clients manage performance, risk and spending as technology evolves. As AI becomes more capable, the need to translate that capability into measurable returns becomes more important. We believe that creates opportunity for ISG. With that, let me turn to Q4 guidance. For the fourth quarter, we are targeting revenues of between $64 million and $65 million and adjusted EBITDA between $9 million and $10 million, which will continue our year-over-year growth and margin expansion and close the year with momentum. Now let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael?

Michael Sherrick: Thank you, Mike, and good morning, everyone. Revenue for the third quarter was $65.1 million, up a solid 4.4% year-over-year. FX had a $200,000 positive impact. By region, Americas revenue was $41.9 million, relatively flat versus the prior year. Europe delivered revenue of $17 million, up 6.2% and Asia Pacific was $6.2 million, up a strong 46.8%. Adjusted EBITDA for the quarter climbed to $10 million, up 18.7% year-over-year. Adjusted EBITDA margin expanded nearly 200 basis points to 15.4%. Operating income was $6.5 million, up 40.6%, driving operating margin of 9.9%, up 255 basis points year-on-year. Our operating margin is at a 4-year high, fueled by solid pricing and our continued focus on cost optimization.

GAAP net income was $3.4 million or $0.07 per fully diluted share compared with $3.1 million or $0.06 per fully diluted share last year. Adjusted net income was $5 million or $0.10 per fully diluted share, up $4.7 million or $0.09 per fully diluted share a year ago. Headcount at quarter end was 1,273, essentially flat with last quarter, while consulting utilization remained solid at 74%, up 190 basis points year-over-year. We ended the quarter with cash of $28.6 million compared with $23.7 million at the end of the second quarter. For the quarter, net cash generated from operations was $12.3 million compared with $5.2 million generated in the second quarter.

We continue to expect strong operating cash flow for the remainder of the year. During the quarter, we paid dividends of $2.4 million and repurchased $4.3 million of stock. Our next quarterly dividend will be paid December 18 to shareholders of record as of December 4. At quarter end, fully diluted shares outstanding were 50.5 million, and our gross debt-to-EBITDA ratio was 1.6x, down from 1.9x at December 31, 2025. Our average borrowing rate for the quarter was 5.4%, down 87 basis points year-over-year. Overall, our balance sheet remains solid, 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?

Michael P. Connors: Thank you, Michael. Let me summarize. First, our strategy is delivering. We produced strong cash flow, double-digit adjusted EBITDA growth for the eighth consecutive quarter and solid revenue growth with our recurring revenues reaching a new quarterly high, adding stability to our business as we grow. Second, AI is our key growth driver. It now represents more than half of our revenues and is amplifying the value of our entire portfolio. And third, AI is changing the economics of technology, creating a growing need for the independent expertise we are known for. ISG helps clients make better technology investment decisions, secure greater commercial value and then sustain that value through governance.

As always, we are focused on creating shareholder value for the long term, and we are steadfast in our mission to deliver operational excellence and higher ROI 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 your questions.

Operator: [Operator Instructions] Your first question comes from the line of Dave Storms with Stonegate Capital. Your next question comes from the line of Joe Gomes with NOBLE Capital.

Joseph Gomes: So I just want to start off on the Americas. They were relatively flat, and you noticed or noted that there was some shifting into the fourth quarter. I was wondering if you could give us a little more detail there, Mike, as to why they shifted and if they actually were in the third quarter where it sounds like you were expecting them, what would have that meant for the quarter overall?

Michael P. Connors: First, Joe, thanks. The Americas is in good shape. Q3, there were certain client decisions that were a bit slower to unfold and several slipped into Q4. The pipeline is very solid, and we expect the Americas region to pop nicely in Q4. I don't want to predict what Q3 would be. But I think when you see Q4, you will see when you add Q3 and Q4 together, it's more normalized.

Joseph Gomes: Okay. And then on the AI-related revenue, great job there. Just how much of that represents incremental client spending versus existing engagements that now include AI? I don't know if you can kind of break that out for us.

Michael P. Connors: Well, I think the way to look at it is this is picking up really good steam for us. I mean we basically have 4 core offerings around AI for our clients. We help them really put AI at scale. They basically ask us the question, how can we, as a client, redesign their operating model and move beyond just some pilots. So that's number one. Second is they have us do work around workforce readiness. I think we've discussed this in the past. The issue of AI is interesting, but if clients don't or the employees don't engage and embrace, it takes a lot longer.

So they want us to help them with their leaders and teams absorb kind of AI into their work. The third is AI economics, and I used an example on purpose today, give you a flavor as to what all of these large enterprises that we are working with are encountering with an example I used was the tokenomics as some like to refer to it as. But essentially, what they're asking us to do is how can we turn productivity into real credible business economics. And then fourthly is around AI governance. How do we govern AI safely and visibly and at scale.

So as those things emerge, then I think what you see is our revenue moving north, especially when you think about all of the services firms in this space and what they are reporting on growth, some are negative, some are 1%, 2%, 3%. So we think we're moving in the right direction, and we feel very confident that our portfolio of offerings is going to drive us to what our long-term goal is, is to have high-single-digit revenue growth with kind of 1.5x on the bottom line flow-through. And as you can see, the flow-through has been moving at a much more robust pace than 1.5x revenue growth. So that's how I would describe it.

Joseph Gomes: Okay. And on the AI, just a little bit more. As you see the clients increasing their AI budgets, are you seeing significant or meaningful cuts in some of the other traditional advisory sourcing or transformation spending? Or is it still -- yes, they're increasing AI, but they're also still allocating budgets to those other services?

Michael P. Connors: Yes. I think, first of all, yes, the 2 buckets -- biggest buckets that they're spending money in are around transformation as it relates to AI and organization redesign. And then second is cost optimization to help either fund that or to deal with some industry or company-specific disruption. We've got a call today around 1:00 with a large consumer company who's going through some enormous, I'll call it, industry pain and their focus is on kind of a combination, hey, we need you to help us drive this cost optimization out as quickly as you can, but we'd like to end up with an AI forward-looking business when we're done.

So they're kind of both buckets at the same time, if you will. But those 2 are what is being funded, funded well. And I think we play pretty good in both of those buckets.

Operator: Your next question comes from the line of Dave Storms with Stonegate Capital.

David Storms: Mike, I just want to start with your comments around AI revenue as a percentage running a little ahead of the 2027 expectations. Would love to hear you talk maybe a little bit more about what's driving this? Is it in the pipeline, customers are moving to the pipeline faster? Is it the opportunity set is larger than you thought? How would you characterize that growth? And is it stable at that rate?

Michael P. Connors: Yes. Let me start, and then I'll ask Michael also to add in here on this one, Dave. I think what's happening is the transformation with using AI is such an enormous cost optimization opportunity that clients are looking to accelerate if they can. By that, when I say if they can, is if their organization is ready to move at a faster pace. And so that is what is driving the amount of AI work that we are doing.

I think I mentioned a couple of quarters back, we had estimated maybe at the beginning of the year, we had estimated that we felt we could probably reach 50% of our revenues with AI-related sometime during 2027, and that hit this quarter. And I think the reason it hit is because the transformation is yielding such significant results. It's not 5%, but it's some magnitude of that. It varies by client, of course. And it also varies about how much a client can absorb the change in one go, if you will. So that's how I would describe it. Michael, do you want to add to that?

Michael Sherrick: Yes. No, I mean, I think that says it well. I mean I think when I -- when you think about it, Dave, if you look at what we're seeing in 2026, right, the kind of the rise of the agentic agent, the advancement in the models, the number of use cases just continues to expand. And so you're seeing companies even ourselves internally, where we're accelerating the initiatives just given, again, the use cases and what you can actually apply the technology to.

So as that continues to sort of show a, I call it, almost a hockey stick of expansion, we would expect to continue to see more and more of our projects of our revenue be exposed to AI and be driven by AI.

David Storms: That's great commentary. I appreciate that. If I could maybe ask a follow-up question related to that. So you mentioned in the prepared remarks that you had a client do an expansion of work in Europe, I believe. Just dialing in on that one specifically, is that similar to what you're discussing where the customers organization themselves need to grow? Just trying to really understand this pipeline here.

Michael P. Connors: I'm sorry, Dave, could you -- you broke up just a little bit. I'm sorry to ask you to do this, but could you just repeat your question because we only got a piece of it.

David Storms: Yes. Just around the new work and contract extension that you mentioned in the prepared remarks. Just trying to understand this pipeline specifically and how much of -- maybe this ties into Joe's question, how much of your current clients are -- you're waiting for them to have governance growth or are waiting for capabilities to then grow that AI spend?

Michael P. Connors: Okay. I think I got the question. I think if you're -- if I have it right, you're asking how many of our kind of current client base are looking to move maybe more rapidly around some of these AI opportunities, whether it's governance, economics, et cetera. And I think the answer is many of our base clients, and we have roughly 900 clients globally on an annualized basis. I think the 4 offerings I mentioned earlier around AI at scale and workforce readiness and AI economics and governance, all 4 of them, not all at the same time, those are paced.

But I think many of our current client base, including the example that I gave on the technology company earlier in my prepared remarks, there, they were looking at how economics -- AI economics, if you will, could turn productivity into real business value for them. And I think that's a current theme with a lot of our client base. The reason for the pace, it's simply there's a lot of macro uncertainty as well in the market. And that is another, I'll put it, cloud that sits over clients when they decide how fast can they pace and move and what is all this macro environment, you've got the midterms and so on.

What will that mean for me and my business? And so sometimes they just pace themselves. The demand is definitely there. The pace is really individual company and industry specific. But it is there, it's real, and there's great ROI and they know it. So it's a matter of the pace and how soon they feel they can move their organization forward with the industry and macro components also around that a little bit, Dave.

Operator: Your next question comes from the line of Marc Riddick with Sidoti & Co.

Marc Riddick: So I just wanted to touch on some of the prepared remarks that you had on client activity, particularly in the Americas. Maybe you can touch a little bit more on the -- in your prepared remarks, I think you mentioned government activity, state government activity. And I was wondering if you could talk a little bit about the potential for that driver and that client vertical, if you will, and maybe some of the potential that you could see going into next year as far as seeing a pickup in activity there because that seems to be an area that seems to be in need of activity?

Michael P. Connors: Yes. No, the public sector globally for us grew a little over 15%. So just to give you a little metric around that particular segment that you're asking about. So it's strong. Why is it strong? I mean they also see the need for optimization and are willing to utilize some automation where it makes some sense, where they feel it safely can be used. And so there is a pickup on that. There's a second major initiative in a number of states around SAP and what they are doing to utilize the full capabilities, if you will, of S/4HANA and other parts of that. So the public sector for us is strong.

I'm just looking here at the Americas number, it's around 14%. So you can see it's roughly globally 15%, the U.S. is 14.2%. So it's pretty strong, Marc. And I think they're recognizing and they're early. They are -- if some of these enterprises are in the second inning or so, third inning, I would say most governments are in inning #1.

Marc Riddick: No, that makes sense. And then maybe talk a little bit about the use of cash. There's been a cash build over the last few quarters, impressively so. So maybe you could talk a little bit about cash usage prioritization looking forward and what we might see there?

Michael Sherrick: Yes. No. So Marc, I mean, obviously, we had strong cash flow in the quarter, as you saw, continue to expect it to be strong for the remainder of the year. Our return in the quarter, dividend and share buyback was just under $7 million. So we clearly stepped that up versus what we did in the second quarter. We -- based on the cash flow and to your point, the cash position, we would expect to remain at a level like that as we look at the fourth quarter. So we feel good about where we are from a cash generation, and we're very comfortable with our level of returns.

Marc Riddick: And then maybe you could share any thoughts as to how you feel about the current pipeline as to maybe what's out there, valuations and levels of attractiveness at this point?

Michael P. Connors: Yes. So on the M&A front, as you know, we are always very active and have been for a number of years. It's picked up. I would say the delta between what a potential ask is and what a solution might be is still a little bit wider than we would want from our standpoint. Having said that, I also think that there are always opportunities to figure out how you kind of blend and get to the final point between those. But I think it's a good market. It's a reasonable market, and there are opportunities available. And that's how I would describe the market for us, Marc.

Marc Riddick: And then I think you mentioned -- or Mike -- I'm sorry, mentioned in prepared remarks as far as utilization, I think, was up year-over-year. Maybe talk a little bit about where that is and comfort levels as to potential ranges that we might see going into 2027?

Michael Sherrick: Yes. No. So as I said, yes, it was 74%. I think it was just about 190 basis points. So it's strong. I mean our target is mid-70s. We thank all of our resource -- all of our colleagues for all their hard work in the quarter because obviously, mid-70s, especially in the third quarter when you've got summer holidays and such is a pretty strong level. We're looking to maintain that level, mid-70s as we go forward. And obviously, as we get into 2027, we'll assess our utilization and people requirements.

Marc Riddick: Great. And then last one for me. Mike, you mentioned in your commentary around a couple of industry verticals and comments, I think, in the consumer space. Maybe you could talk a little bit about maybe some industry verticals that maybe have picked up in activity levels over the last couple of quarters that maybe are a little under the radar screen or maybe that we don't get to talk about as much?

Michael P. Connors: Sure. So look, energy is up 35%. So I'll give you one of those. And think about that energy, AI, they're connected. So think about what is happening with all the energy companies and what they want to do to be able to expand and expand, they also need to find ways where they generate money to help them on their growth initiatives. Clearly, we can help them with that. And so the energy sector is up significantly. Health sciences is up double digits. So think about all the -- what is happening on both the pharma side of things as well as the health care scenario that's happening. Those also both require a lot of optimization.

Use of AI can help them and kind of turbocharge them a bit. And think about the utility companies themselves. So they tend to be one of the last ones to adopt. I'm looking at the utilities one up 26%. So I mean, there is, I would say, utilities, the public sector, health sciences, energy, those 4 are really the hot verticals right now that we see.

Operator: Your next question comes from the line of Gowshi Sriharan with Singular Research.

Gowshihan Sriharan: Congratulations on a strong quarter. My first question is your index is showing some clients building in-house and taking some captive -- taking over captive centers. I'm just trying to reconcile that with your comments about how that is changing your advisory opportunity and your strong normalization between Q3 and Q4 in U.S. activity.

Michael P. Connors: Yes. Look, Gowshi, it's Mike. It's a good question. I mean there's 2 things really happening. You've got one set of clients who want their own, I'll call it, global capability center that they own, they control, they manage, and they want to be able to see if they can't reap all of the optimization rewards that may go with that. On the other hand, you have a group of enterprises who don't want to be in that business. And so we're using our ecosystem, if you will, trying to pair up potential partners with those enterprises where that work can be moved to those technology providers is a second solution. So it really varies by company.

Even within a similar industry segment, they may have different choices, different decisions on that. So both of those, we advise on and whether the enterprise wants to own and operate or whether they want to be able to move their capabilities to a provider, we will help them, if you will, put that ecosystem together, Gowshi.

Gowshihan Sriharan: Okay. I know a lot of comment was made about this AI-driven revenue. Is the AI-driven review of older outsourcing contracts showing up as signed work yet? Or is that still at conversation stage?

Michael P. Connors: Sorry, I didn't hear the -- is which being shown up as, say it again, Gowshi.

Gowshihan Sriharan: The AI-driven review of older outsourcing contracts. So are old of the contracts being opened up for review? And are they showing up as work yet? Or is it still at conversation stage?

Michael P. Connors: Good question. So you're asking are the contracts in the past being opened up so that AI could be a component going forward? The answer is, absolutely. There are literally billions of dollars of contracts that are due up in the next 24 months. All of those will have an AI component. And second of all, if you're an incumbent on one of those contracts, it's likely the value of the like-for-like work will be significantly lower than it was under the current contract.

And this is where the providers are doing, I think, a good job of thinking through how they can expand in other services for the enterprise so that the downside on those new contracts with an AI component might not be as dramatically different as it might seem on the outset. I think that's what you were asking. But yes, it's definitely happening. It's active, and it will be very active over the next 24 months in our view.

Gowshihan Sriharan: And then on the AI work, especially, I know you mentioned in the past, although utilization is about sort of you've leaned on subcontractors over the last -- past year. How does that margin compare with using your own consultants? And what is your thought going forward as you ramp up on this AI?

Michael Sherrick: Yes. So Gowshi, it's Michael. The comparable is pretty similar. And part of that is just because when you're using a contractor, you're effectively at 100% utilization, so you don't have any bench time and you obviously don't have benefits and other costs. So it's fairly comparable. On a go forward, I mean, again, we will continue to balance the business. We like contractors for certain skill sets and expertise, but also to help us load balance demand as we get it. So I mean, we don't have a set number. It's more a balancing act as we grow and meet our demand requirements.

Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research.

Vincent Colicchio: Most of my questions were answered, but curious, the current sales pipeline, how it compares to the year ago period?

Michael P. Connors: Yes. I mean, I think it's quite stronger than a year ago. As you can see, is the flow-through for the quarters. As we move into the fourth quarter, the year-over-year growth is going to continue. The EBITDA growth is going to continue, we think, at double digit. We like the demand environment. We like the pipeline. I think the only thing that holds back is the pace, and we can deal with that. Clients will move at the pace they feel comfortable. It's the demand that you want and the pipeline looks strong.

Vincent Colicchio: Yes, somewhat related, setting the macro aside, what is preventing you from achieving a higher rate of organic growth given the substantial opportunities? I guess you're partly saying it's the pace that clients are comfortable with. Anything aside from that?

Michael P. Connors: No. I think that's the only caveat. The pace is driven by the macro as well as what's going on within each company. We feel very good at 4.5% based on all the other services companies that are out there that are reporting. You can look at them. And we continue to hold that our high-single-digit and 1.5x that growth rate on the EBITDA, we will continue on a -- over the long term is very comfortable for us. And clearly, the flow-through is even significantly greater than the 1.5x. So we feel like we're in a good position.

Vincent Colicchio: And I guess one more. How stable do you think -- do you think you can keep employee levels relatively stable as you ramp revenue given your internal AI implementation?

Michael Sherrick: Vince, it's Michael. Look, I think, again, we're at about 74% utilization. So right at that mid-70s target. So as we don't give guidance beyond the quarter, but as we look out further and obviously, our aspirations to be towards our targets here and at our targets, we would expect that we would have to balance either headcount growth or contractor to continue to deliver the kind of growth that we're beginning to see and are putting up this year.

Operator: Your next question comes from the line of Dave Storms with Stonegate Capital.

David Storms: I just wanted to circle back on APAC and the recovery that you've had there, growing 47% in the quarter, up almost 20% sequentially. You also mentioned earlier that public sectors are probably in the first or second, maybe third inning. Just trying to maybe parse out how much of this growth in APAC is related to more of the traditional sourcing and advisory work versus maybe any new AI-related engagements that might help this be a little less lumpy going forward? Any thoughts there?

Michael P. Connors: Yes. Good question, Dave. I think, first of all, in Asia Pacific, the 4 -- let me just put it in context, the 4, I would say, industry that are hot in Asia Pacific right now are energy, consumer, the public sector and utilities. The public sector is very strong around sourcing, but with an AI component. So they're stronger around it because they, too, would like to understand how they could utilize AI to make themselves more efficient and effective as a government entity.

So I can't really separate the 2 because they're kind of intertwined now that to have a sourcing engagement with a government entity is in all likelihood, inclusive of using AI as a component of that. So that's how I would probably answer it, Dave, if that helps.

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

Michael P. Connors: Well, look, thank you for joining us. ISG is winning in the marketplace because we provide the independent advice and support clients need to improve their operating performance and I think achieve real value from their technology investments in this new age of AI. I want to thank all of our professionals worldwide for their dedication to our client success and their many contributions to our profitable growth this quarter. Working together as a global team, we are committed to delivering the ROI to our clients and long-term value to all of you, our shareholders. So thanks to all of you on the call for your continued support and confidence in our firm. Have a great rest of the day.

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

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