Information Services Group: Q3 AI Momentum Strengthens Turnaround, Valuation Now Less of a Headwind

What happened

Information Services Group’s Q3 2025 print confirms the operational “turn” we highlighted previously, with continued improvement in revenue, EPS and free cash flow and a further step-up in profitability. AI-related revenue surged to 32% of total sales, four times the level a year ago, underscoring that ISG’s AI-centered advisory positioning is now translating into tangible demand. Recurring revenue held a solid 45% of the mix, helping support a 200-basis-point expansion in adjusted EBITDA margin to 13.5% and pointing to a more predictable, scalable cost structure. Despite these positives, the stock has sold off and now trades around 9.2x EV/EBITDA, a level that appears undemanding relative to its improving growth and margin profile and to larger advisory peers. This setup contrasts with our prior DeepValue view that the shares traded at a material premium to DCF and a rich P/E multiple with leverage risk, suggesting that stronger AI-driven growth is emerging just as the market has become more skeptical on the story.

Implication

For investors, Q3’s evidence of accelerating AI-related revenue and higher recurring mix reduces the risk that ISG is merely riding a transient consulting upcycle and instead supports a more durable, higher-margin profile. The move to a 13.5% adjusted EBITDA margin with room for further expansion, if utilization holds and mix continues to shift toward AI and platforms, makes today’s ~9x EV/EBITDA look more reasonable versus both the company’s history and advisory peers. That said, balance sheet metrics (Net Debt/EBITDA ~2.5x and modest interest coverage) keep financial risk relevant, so incremental free cash flow deployment toward deleveraging remains a key factor in unlocking a higher valuation. Investors should therefore focus on the trajectory of AI-related bookings, the stability of the 45% recurring-revenue base, and quarterly FCF generation to validate that this margin and growth step-up is sustainable. In portfolio terms, III now screens as a more attractive small-cap compounder candidate for investors comfortable with advisory cyclicality, best sized modestly and averaged into on volatility rather than chased aggressively after sharp rallies.

Thesis delta

Our prior stance was a HOLD, driven by limited margin of safety versus DCF and concern that leverage was elevated for a small, cyclical, people-intensive advisory business. With Q3 confirming a clear inflection in AI-driven revenues, recurring mix and EBITDA margin, and with the market multiple compressing to roughly 9x EV/EBITDA after the selloff, valuation is no longer an outright constraint on the thesis. We move to a more constructive posture—still mindful of leverage and cycle sensitivity—but now see a plausible path to a full BUY if the company uses improving free cash flow to de-lever and demonstrates several more quarters of sustained AI-led growth and margin expansion.