Information Services Group (III) Q2 2025: AI Revenue Jumps 2.5x as Recurring Streams Hit 45%
AI-driven consulting demand and recurring revenue expansion powered Information Services Group’s (ISG) standout Q2, as the firm’s Americas business and AI engagements delivered double-digit growth and margin lift. Strategic moves in Europe and disciplined capital allocation signal a business positioned for further margin expansion, while management’s outlook points to continued strength in technology modernization and cost optimization services.
Summary
- AI-Driven Engagements Accelerate: Nearly 20% of revenue is now AI-related, with client demand surging across key verticals.
- Recurring Revenue Foundation Strengthens: Recurring revenue streams climbed to 45% of total, supporting margin expansion.
- Strategic Expansion in Europe: Acquisition of Martino and Partners widens public sector reach and deepens Italian market presence.
Performance Analysis
ISG posted a robust quarter, with revenue growth led by the Americas region and a clear pivot toward high-value AI and technology modernization projects. Excluding the prior year’s divested automation unit, Americas revenue surged, driven by double-digit gains in technology advisory, network, software, and research. Europe rebounded sequentially, with banking and health sciences leading the way, while Asia-Pacific held steady year-over-year.
Profitability gains were notable, as adjusted EBITDA margin expanded 240 basis points to 13.5%, reflecting improved business mix and disciplined execution. Cash generation was a highlight, with nearly $12 million in operating cash flow—one of ISG’s best quarters ever—enabling ongoing dividends and buybacks. Recurring revenues reached $28 million, up 7% sequentially, now accounting for 45% of total revenue and underlining the stickiness of ISG’s core advisory and research business.
- AI Revenue Inflection: AI-related revenue grew 2.5x year-over-year and now represents nearly one-fifth of total sales.
- Americas Outperformance: The region contributed the majority of growth, with key wins in healthcare, energy, and utilities.
- Cash Flow Execution: Strong collections and operating leverage drove a $5 million sequential increase in cash.
Consulting utilization remained healthy at 76%, and headcount was stable, reflecting productivity gains from internal automation and upskilling in AI. ISG’s balance sheet improved, with gross debt to EBITDA now at the low end of management’s target range.
Executive Commentary
"Our AI-centered approach is resonating with our clients. 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 350 clients with AI-centered engagements in the second quarter, and that's up 50% from Q1."
Michael Connors, Chairman and Chief Executive Officer
"Our balance sheet is solid and continues to improve, providing us with a strong foundation to both operate and invest in the business."
Michael Sherrick, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. AI as a Core Growth Engine
ISG’s business model, advisory and research services for technology transformation, is now firmly anchored in AI. AI engagements have become a central pillar, with nearly 20% of total revenue, and client demand is broad-based across energy, healthcare, banking, and public sector verticals. The firm’s role as an independent advisor—free from vendor bias—strengthens its value proposition as enterprises seek guidance on AI sourcing, infrastructure, and data strategies.
2. Recurring Revenue and Platform Leverage
Recurring revenue streams, including multi-year advisory contracts and research subscriptions, have reached a new high at 45% of total revenue. ISG Tango, the firm’s sourcing platform, has expanded its reach, now processing $11 billion in contract value—up 20% quarter-over-quarter. This platform not only expands ISG’s total addressable market, especially in the mid-market, but also embeds the company deeper into client operations.
3. Geographic Expansion and M&A Discipline
The acquisition of Martino and Partners, a Milan-based advisory firm focused on public sector and recurring revenue contracts, marks a targeted push into Italy. This move doubles ISG’s local presence, broadens its municipal reach, and positions the company to capitalize on EU-funded digital modernization. Management maintains a disciplined, surgical approach to M&A, prioritizing recurring revenue and AI capabilities.
4. Margin and Productivity Focus
Margin expansion is underpinned by strong pricing for AI-related work and ongoing cost discipline. The company has upskilled over 1,100 employees in AI and is deploying internal AI agents to enhance consultant productivity. Headcount remains flat, signaling that automation and talent leverage are offsetting the need for aggressive hiring.
5. Sector and Vertical Penetration
ISG’s growth is concentrated in sectors with high transformation urgency, including energy, utilities, healthcare, and public sector—each up double digits. The firm’s ability to deliver both end-to-end and targeted AI solutions allows it to address both leaders and laggards in digital adoption, broadening its addressable opportunity set.
Key Considerations
ISG’s Q2 marks a clear inflection in both business mix and operational momentum, with several strategic levers now in motion for the second half.
Key Considerations:
- AI Pricing Power: Strong demand for AI consulting is supporting higher pricing and margin expansion, but sustainability will depend on continued client urgency and willingness to invest.
- Cash Generation Not Fully Repeatable: Q2’s record operating cash flow benefited from timing and collections; management expects solid but lower levels in subsequent quarters.
- European Traction Building: Sequential growth in Europe signals early signs of recovery, but geopolitical and macro uncertainty could temper the pace of year-over-year gains.
- M&A as a Growth Lever: The Martino and Partners deal underlines ISG’s intent to deepen recurring revenue and public sector exposure, with further disciplined acquisitions likely as pipeline opportunities arise.
Risks
Execution risk remains around sustaining AI-led growth, particularly as not all clients are ready to scale or invest due to cost and data readiness barriers. European market uncertainty and macro volatility could slow momentum, while capital allocation discipline will be tested as M&A activity increases. Management’s forward-looking statements hinge on continued client willingness to fund technology transformation in a shifting economic landscape.
Forward Outlook
For Q3, ISG guided to:
- Revenue between $60.5 million and $61.5 million
- Adjusted EBITDA between $7.5 million and $8.5 million
For full-year 2025, management signaled continued growth and margin expansion:
- Year-over-year revenue and margin growth
Management highlighted several factors that will influence results:
- Ongoing demand in cloud, AI, data analytics, and infrastructure modernization
- Seasonal softness in Europe during summer, but a stronger pipeline and anticipated year-over-year growth returning in the second half
Takeaways
ISG’s Q2 demonstrates a business in transition, moving decisively toward AI-driven consulting and recurring revenue streams while maintaining operational and capital discipline.
- AI Revenue Mix Shift: Nearly one-fifth of sales are now AI-related, giving ISG a durable growth vector as enterprises accelerate digital adoption.
- Margin Expansion Anchored in Recurring Streams: Platform leverage and higher pricing for AI work are driving sustainable profitability improvements.
- Watch for European Recovery and M&A Integration: The pace of European rebound and success of the Martino and Partners integration will be key to sustaining momentum in the second half.
Conclusion
ISG’s Q2 results underscore the firm’s successful pivot to AI and recurring revenue, with disciplined execution and targeted expansion supporting both growth and margin gains. The business is well-positioned for continued outperformance, provided it can sustain AI consulting demand and navigate macro and sector-specific risks.
Industry Read-Through
ISG’s results reinforce the accelerating demand for AI consulting and technology modernization across enterprise and public sector clients. The firm’s success with recurring revenue and platform-based sourcing reflects a broader industry shift toward stickier, high-value advisory relationships. Competitors and adjacent players should note the rapid rise in AI-related engagements, the pricing power of specialized consulting, and the importance of recurring revenue models in weathering market volatility. European tech services demand may be poised for a rebound, but uncertainty and client caution remain industry-wide headwinds to monitor.