Good afternoon, and welcome to today's Information Services Group 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 Holt for his opening reMarcs and introductions. Mr. Holt, please go ahead.
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 today's call to brief you on the divestiture of ISG's automation business. 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 discussion 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 results, please refer to the forward-looking statement disclaimers contained in ISG's press release announcing the divestiture and ISG's annual report on Form 10-K, covering full-year results filed in March 8th, twenty twenty-four, including the Risk Factors section appearing in ISG's Form 10-K, along with 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. 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. And now, I'd like to turn the call over to Michael Connors. Mike?
Thank you, Barry, and good afternoon, everyone. This morning, as you saw, we announced the sale of our automation unit to UST, a leading technology solutions provider based in California. I will cover three topics on this call, and then we will open it up to any questions. First, I will brief you on the transaction and our rationale for the sale. Second, I'll share our thoughts on the use of proceeds. And finally, I will provide an updated guidance for Q3. First, the transaction. ISG sold its robotic process automation unit to UST for $27 million in an all-cash transaction, with $7 million of the proceeds placed in escrow.
Of this amount, $4 million is to be released contingent on meeting certain contractual conditions with clients over the next 90 days, and the remaining $3 million is to be released upon achievement of revenue targets through the end of the first quarter of 2025. We have known UST and their team for years as a quality tech provider in the Marcet and believe our people have found a great new home. So why did we decide to sell our robotic process automation unit at this time? First, a little history. We are business builders. We are innovative. This automation unit is a great example. It was established as a startup in 2017 to meet the emerging demand for RPA. Since then, we have grown the unit from under $2 million of revenue to nearly $30 million today.
The unit offers a combination of implementation services as well as software licensing. The latter, a contributor to our recurring revenue streams, working with leading software providers, including Automation Anywhere, Blue Prism, NICE, and UiPath. In addition, our automation advisors help clients identify use cases and establish automation centers of excellence to enable them to quickly build and scale their bot workforces. As the unit expanded, we came to the conclusion, ultimately, that it was not a strategic fit with our position as an independent third-party advisory firm, primarily due to the unit's reliance on software licensing, which represents a key part of its revenues.
As we have discussed on our quarterly calls over time, we organized the automation unit from the early days to easily lift it out of ISG with the intention of monetizing its value the moment we felt it was not well aligned with our Marcet positioning. We were successful in executing against this strategy. Going forward, ISG remains focused in four areas: sourcing, including cost optimization, digital transformation, including AI, technology research, and governance and compliance. Now, let me turn to the use of proceeds. First, we have strengthened our balance sheet with this transaction. Over time, and based on corporate needs, we expect to manage our leverage somewhere between two point zero and two point five times, which is below the two point eight times debt to EBITDA ratio we have averaged over our 17 year history.
Second, we see the sale as a great opportunity to expand our firm's capital allocation program, which includes reinvesting in the business, managing our debt, and returning capital to shareholders in the form of dividends and share repurchases. As of the end of the second quarter, we had approximately $21 million of buyback authorization remaining. Third, both our sourcing and research efforts have been riding the tidal wave of client interest in AI. Our expertise in AI is helping our clients turn pilot projects into breakthrough initiatives that scale within an enterprise. The proceeds from this sale give us even more leeway to invest further in Gen AI research, advisory services, and platforms, and finally, we updated our Q3 guidance to reflect the impact the sale process had on this business. As a result, we are forecasting revenues to be in the range of $60-$61 million.
This includes approximately $4 million of automation revenues in the quarter, and we modestly adjusted our EBITDA forecast to a range of $6.5-$7 million. To summarize, we successfully divested our automation business, and we immediately improved our balance sheet. We see that as a compelling outcome, trading nearly $30 million of revenue, including about $18 million of recurring revenues, for $20 million of cash and an improvement over time in our profitability. And I might add, we remain committed to driving our recurring revenues to be about 50% of our total firm revenue over time. So thank you very much for calling in today. And now let me turn the session over to our operator for any questions you may have.
Thank you. Today's question-and-answer session will be conducted electronically. If you would 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 touchtone keypad. We'll pause for a moment to allow any questions into the queue. And our first question comes from the line of Joe Gomes from Noble Capital Markets. Your line is open.
It's Joe Gomes. Thanks for taking the question and, good afternoon.
Hey, Joe. Good afternoon.
Third question. Any type of gain that you're expecting on this or on, hopefully, not a loss on the sale, and how would that be recognized?
Yeah, Joe, so it's Michael here. So, from a tax perspective, we're not complete, but we don't expect to recognize a gain on the transaction. We would expect a loss. How much of a loss we're still working through, but we don't expect a gain from a tax consequence perspective.
Okay. And does this have. I know you talked about, you know, various potential uses of the cash, but in the interim, will this have any impact on your debt, any of the debt covenants?
No. I mean, I think what we said is that we are going to use a bunch of the proceeds to reduce our debt. Our plan is to be in that range that we discussed, 2-2.5, over time. And so, no, there's no issue on the debt covenants. Michael, you wanna add something?
Yeah. So Joe, for a transaction like this, we obviously had to work with our lenders for their consent in order to divest of assets. So, you know, by doing that, we obviously don't have any issues with our debt covenants. You know, I mean, all that was addressed. And what I would say is that post-transaction, Q4, we would expect to be around two and a half times leverage.
Okay. And then one last one for me, if I may. You know, Michael, you know, originally, I think, you know, when we were back in the twenty nineteen or so, like, the thought process that, you know, the value of this unit could be substantially higher than the number that came out today based on other transactions that were going on. I mean, is it really? Is that kind of just the state of the automation Marcet today, or given the fact that it was no longer strategic for you guys, that, you know, you were more willing to negotiate on price?
No, I think the way to look at it is with the movement into AI everywhere. I think the asset, we feel we got very good price. We think it's a win-win for both us and UST, and we're very pleased with the outcome that we received. But you should think about it as it's a different environment the last year or two than it was back in two thousand nineteen, pre Gen AI.
Okay. That was my expectation. Congratulations on that, and I will turn it over and get back in queue. Thank you.
Thank you, Joe.
Your next question comes from the line of Vincent Colicchio from Barrington Research. Your line is open.
Yes, Mike, how did the sales process work? Was this an asset shopped around?
Yeah, so we hired an advisor, Seth Lucas. We gave them certain parameters. UST, who we have known in the Marcet for a number of years and have a high regard for, evolved, and we were able to reach a level of a win-win on price and process, and that's how it got executed.
Thanks for that. And, secondly, are there any other non-strategic businesses that we may see you sell in the future?
We did not anticipate any. As you know, Vince, this is the one asset that we have discussed, that we created a kind of a in a box inside ISG, that we felt we would monetize at the right moment. And I don't see another one of those in the offering at this time for sure.
Thank you, Mike.
Yep, thanks, Vince.
Your next question comes from the line of Marc Riddick from Sidoti. Your line is open.
Hey, good afternoon, Mike.
How are you?
Good, good. I just wanted to sort of touch on, you talked about the most of the use of proceeds for debt reduction. Maybe you could talk a little bit about the opportunity in terms of share repurchase activity and maybe taking advantage of, you know, with that.
Yeah, I think it's Michael. I think we got most of your question. You know, obviously, this will give us the flexibility that we would want to continue and likely be more active in terms of share repurchases. The window opens up for us. So I think that this is, again, a win-win from the balance sheet and what we'll be able to do to create shareholder value and return capital.
And then, as a quick follow-up, could you talk a little bit about what this does for headcount and SG going forward? Thanks.
You went out a little bit. Can you, can you repeat? I didn't catch the whole thing, Marc. Sorry.
What this does for SG&A and headcount going forward?
Yeah, well, on the headcount standpoint, there's about a hundred and, you know, hundred and ten, hundred and twenty people that go with the sale, Marc.
And on the SG&A, so there's obviously there'll be some reduction as we move the sales capacity and other pieces of the automation group to UST. But then there's also some offset that we will have. You know, we're gonna be performing as part of the transition services a certain functions for them as it gets transitioned over, and that'll be a cost really over probably the first at least ninety days. So, we'll provide more detail on that and color on it, when we connect on Q3 and provide guidance for Q4.
Okay, great. Thank you very much.
Thanks, Marc.
And your next question comes from the line. Oh, please stand by. I do apologize that question was canceled. There are no further questions. I will now turn it back over to Mike Connors for his final closing remarks.
That's great. Well, look, in closing, I wanna thank our more than a hundred automation colleagues for their dedication in building this business from a startup over the past number of years. And I think we believe you're in great hands now with UST. I also want to wish UST the best of success in growing their automation business with the addition of this asset. We look forward to partnering with them to support their intelligent automation needs of any of our mutual clients going forward. And importantly, thanks to all of you on the call today for your continued support and confidence in our firm. Have a great evening.
This concludes today's conference call. Thank you for your participation. You may now disconnect.