Alithya Group inc Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, welcome to Alithya’s Second Quarter Fiscal twenty twenty two Results Conference Call. I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications & Marketing at Alithya. Please go ahead, Ms. Andrews.

Thank you, Julie. Good morning, everyone. And thank you for joining us for Alithya’s second quarter fiscal twenty twenty two results conference call. The press release and MD&A were issued with complete financial statements earlier today and posted on our website. The webcast presentation can also be found on our website in the Investors section. Presenting this morning are Paul Raymond, Alithya’s President and Chief Executive Officer; Claude Thibault, Chief Financial Officer; and Claude Rousseau, Chief Operating Officer. Before we begin, I would like to specify that this conference call is intended for the financial community. Also, please be advised that this call will contain statements that are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the cautionary note on our presentation and to the forward-looking statements and risks and uncertainties section of our MD&A available on our website for more details. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated, and be aware that we will refer to certain indicators that are non-IFRS measures, please refer to the cautionary note in our presentation, and to the non-IFRS measures section of our MD&A for more details. Now, I would like to turn the call over to Paul Raymond.

Thank you, Rachel, and good morning everyone. Before we begin our call today, I'd like to take a moment to acknowledge that today is Remembrance Day in many countries, or Veterans Day in the US. This is the day when we remember Armistice Day of nineteen eighteen. As a veteran myself, I believe it's important to underline and remember the sacrifices of those who fought for freedom. So please make sure to take a pause at 11:00 AM this morning, and thank you for indulging me on this before we start. Now on the business side, I'm thrilled to announce another record quarter in terms of organic growth and gross margins for the company. This second quarter for fiscal twenty twenty two performance occurred during what is normally our softer seasonal period or the summer. We are therefore very encouraged by the early indicators of a broad post-pandemic recovery in our operations and digital transformation acceleration. We continue to focus on our twenty twenty four strategic objectives. So this morning, I'd like to delve into some items that our senior leaders shared with you during our Investor Day this past September. For those who did not have the chance to attend, I would like to point out that the recordings of our Investor Day are available on our website in the Investors section. I invite you to take a look at the valuable content focusing mainly on our operations. You can also hear some of our clients discussing how we are adding value to their business. Now, let's take a look at three key highlights for our second quarter performance on slide two. First and foremost, we experienced another quarter of industry-leading organic growth across all our geographies, further confirming our long-term strategy and our discipline. We are reporting growth for the fourth consecutive quarter and solid numbers for the second quarter of this fiscal year. To highlight that organic growth, Claude Thibault, our CFO will present performance indicators, both including and excluding revenues from our latest acquisition. Second, speaking of our last acquisition, we are on track with the integration. R3D’s highly complementary operations are seamlessly integrating into Alithya’s current structure, allowing for both short and mid-term synergies. Additionally, new transformation projects with long-term clients Beneva and Québecor continue to roll out further contributing to the strength of our overall performance. Claude Rousseau, our COO will give you more color on our operations very shortly. Finally, our recruitment efforts are going very well as demonstrated by our strong organic growth. We would not have been able to deliver these record revenues during our normally slowest quarter of the year without the dedication of our existing and hundreds of new professionals who joined us during the past six months. On Investor Day, I spoke about the Alithya Leadership Academy geared towards our managers, as well as the other onboarding and continuing education platforms that help us to welcome and train all our team members. Today, I'm pleased to announce the expansion of our Associate Academy, where new graduates joining Alithya in our Microsoft and more recently Oracle practices take part in an extensive onboarding program to launch their careers and prepare them to add value to the company and our clients. The Associate Academy is focused on recruiting graduating students from multiple academic backgrounds. When they start at Alithya, the recruits are assigned to one of three technology practice areas: finance and operations, human capital management, and planning, profitability, and analysis. We promote these training and recruitment initiatives in colleges and universities throughout North America, and we are setting the stage for our future quarters by attracting the best of the best to join our ranks. Now over to Claude Thibault for more details on our financial results. Claude?

Thank you, Paul, and good morning. I invite you to turn to the third slide of our presentation for certain second quarter fiscal twenty twenty two highlights. Bookings reached ninety point nine million dollars, which translated into a book-to-bill ratio of zero point eight six. As mentioned by Paul, this is very good for our summer quarter which is usually slower from a business development perspective. As for the trailing twelve months, bookings are in excess of one billion dollars, which translates into a book-to-bill ratio of two point nine or almost three years of backlog. Our continued superior bookings reflect not only strong demand for our digital transformation services, but also the fact that many new customers are turning to Alithya. Please turn to slide four. Revenues for the quarter increased fifty four percent to one hundred and five million dollars. Excluding the impact of the R3D acquisition, revenues increased thirty one point two percent or thirty four point two percent on a constant currency basis. In other words, significant accelerating organic growth. With the rare sequential growth from Q1 into Q2, we believe the results we are presenting today are quite positive. In Canada, revenues increased sixty nine point seven percent to sixty six point one million dollars due to organic growth in all areas of our Canadian operations. This increase is also due to the general recovery of activity levels, revenues of fifteen point six million dollars from the R3D acquisition, and growth from the two associated long-term contracts. In the U.S., revenues increased thirty two percent to thirty five point seven million dollars as we experienced strong organic growth in all areas and the general recovery of activity levels. The increase was partially offset by foreign exchange variations. Revenues would have been thirty seven point eight million dollars with a constant U.S. dollar, resulting in a currency-neutral organic increase of forty percent. Europe is showing a similar strong performance. It should be noted that we have started the gradual migration of R3D’s activities into Alithya’s existing operations in preparation for the full integration planned for the coming quarter. As such, all new projects and all new hiring are no longer occurring in the R3D entity. This somewhat distorts the R3D numbers disclosed in our notes to financial statements, but on a combined basis, that does not change our significant organic growth in Quebec. Looking at our gross margin, gross margin increased by nine point eight million dollars or fifty two percent to twenty eight point five million dollars for the quarter. As a percentage of revenues for the second quarter, gross margin was twenty seven percent or twenty nine point one percent when excluding the impact of the recent acquisition of R3D. That is up from twenty point four percent for the same quarter last year. The increase was primarily driven by increased gross margin in the U.S. and Europe due to increased utilization rates. The historically lower margins of R3D are explained by a higher proportion of billable subcontractors, which we are in the process of gradually improving. On a sequential basis, from Q1 into Q2, excluding the impact of the recent acquisition, and excluding government subsidies and losses from one large customer project, which had been recorded in the first quarter of this year, gross margin as a percentage of revenues increased in all geographies. Reported SG&A expenses totaled twenty four point nine million dollars, an increase of four point seven million dollars or twenty three point five percent from twenty point one million dollars during the same period last year. This increase is primarily driven by the R3D acquisition, as well as by increases in employee compensation and recruiting costs. In line with our strong organic growth, partially offset by decreases in share-based compensation and a favorable U.S. dollar exchange rate impact. As a percentage of revenues, total SG&A decreased to twenty three point six percent of revenue for the three month ended September thirty twenty twenty one compared to twenty nine point five percent last year. SG&A expenses from R3D are expected to continue to decrease from additional administrative and operational synergies in connection with its ongoing integration. On slide six, you can see that overall, our second quarter adjusted EBITDA amounted to five million dollars, an increase of four point two million dollars compared to the same quarter last year. Again, strong organic growth, the contribution from the R3D acquisition, as well as increased gross margins were partially offset by increased SG&A expenses. As in previous quarters, the amount of non-cash depreciation and amortization totaling four point seven million dollars is significantly greater than the quarter's accounting loss. Now turning to our liquidity and financial position on slide seven. Net cash used in operating activities was seven point five million dollars in the second quarter, which is comprised of a three point four million dollars positive inflow from our statement of operations, minus ten point nine million dollars non-cash working capital variation. The negative working capital variations are in part explained by our continued organic growth, but also include a number of timing elements, which aren't subject to declining if not reversing in future quarters. Regarding overall debt level variation, in addition to the above, we secured a ten million dollars sub-debt from Investissement Quebec, which however came in at the very end of the quarter and did not allow enough time to reduce cash balances, again started revolving credit facility. Taking into consideration our twenty six point eight million dollars in cash on hand, we ended the quarter with twenty nine point six million dollars of net bank borrowing, while we increased and extended our available revolving facility to seventy million dollars into twenty twenty four, allowing for good flexibility for possible future acquisitions. Our normal course issuer bid or NCIB launched on September twenty is progressing as planned. While we view the NCIB at this time as an accretive use of our capital, we remain fully committed to securing future acquisitions to complement our growing market presence and capabilities. At this point, Claude Rousseau, our COO will bring down our second quarter successes with respect to our various practices and geographies. Thank you. Claude?

Good morning. Please now turn to the next slide of our presentation. Let's begin with our public sector practice in Quebec. During our Investor Day held on September fifteen, we introduced our senior leadership for a growing business unit comprised of more than five hundred and fifty professionals. We are strongly positioned with major clients through our strategic service offering and recurring business. Thanks to the entire team, we are becoming the reference in digital and business transformation in the public sector as we partner with major departments of the Quebec provincial government. As we speak, our win ratio for the public sector in Quebec is excellent. Moving forward, our team is focusing on a landscape marked by winning strategic and higher value-added contracts with higher total contract value. Of course, with our gross margins, as we focus on higher value projects for our customers, this in turn contributes to the improvements of our overall gross margin. On the strength of our professional expertise, Alithya has developed a long track record of successful project realizations with government agencies and other public sector funds. By addressing numerous government agency challenges, our professionals have gained a clear understanding of public sector sensitivities and constraints. As a result, recent announcements regarding new major contract wins both validate and enhance the company's public sector experience. Moving forward, growth of our public sector practice will be driven by the integration of our latest acquisition and by the continuous professional development of our teams. Now, remaining focused on Quebec, but looking at the second quarter performance of our commercial business, the insurance sector was a major contributor. The insurance industry is particularly dynamic and whether it be for major clients such as Beneva or Quebecor Bank, who owe a significant share of the Canadian market through system modernization projects generate significant income with important margins. On that note, I would also like to mention that the quarterly revenues provided in our guaranteed long-term agreement with Beneva and Québecor are on track. Québecor with its subsidiary Videotron is one of the three largest telecommunication companies in Quebec that we can ask customers. We are also seeing very dynamic activity in that sector. Innovations have always been one of Québecor's major competitive advantages. Alithya Digital Solutions center teams contribute to many of Québecor's innovation projects, including one strategic project we have been working on for three years. In September, Québecor unveiled a YouTube digital platform which merged all of their news and entertainment content in a single location. Tube is differentiated by its vast quantity of multi-sourced multi-format content delivered in an easy-to-navigate environment that promotes content discoverability. We are very proud of the work our teams are doing on this project. Another sector that we have discussed with you and where we see tremendous potential is the Higher Education sector. I would like to remind you that at Alithya, our education practice did not exist during the second quarter of the previous fiscal year. Today, the practice is experiencing incredible growth as our architecture services position us at the top of the value chain. We see tremendous opportunity for developing Oracle and Microsoft solutions in this market. Building upon the optimism and momentum, we proudly announced a privileged partnership last week that will enable us to implement CRM modules specifically designed for universities and colleges. Now turning to our activities in Ontario and Western Canada, we are leveraging our operations technology and cybersecurity background to deliver digital strategies for new projects. Last week, during the United Nations Climate Change Conference, also known as COP26, the issue of renewable energy other than fossil fuels was on everybody's agenda. Whether it be Japan or France, notable governments discussed the revival of the nuclear industries. In Canada, the nuclear industry is a key pillar of our energy supply, and Alithya is currently active on more than fifty renewable energy projects throughout the country. From the control room to the board room, customers can rely on more than forty years of Alithya engineering expertise. In Ontario, where the majority of our operations in the sector are concentrated, more than sixty percent of adequacy is generated by new nuclear power. In fact, in the past decade, Ontario has closed down five coal power generating stations, thanks in part to the increased availability of Nuclear Power from one of our major customers, Bruce Power, with whom we started two large nuclear generating units. Now, let's start looking at the border. In the United States, our operations generated organic growth in most areas, particularly in our record cloud business. We can clearly see a general recovery of activity level as evidenced by our results. On a sequential basis, the revenues in the U.S. increased by fourteen percent. Furthermore, if we look at the first six months of fiscal twenty two, our revenue reached sixty seven million dollars for the U.S. as opposed to fifty seven million dollars for the same period last year, representing an eighteen percent increase, all organic growth and a clear indication of both pandemic recovery in the U.S. In order for us to continue delivering quality projects, we need to attract and retain competent professionals everywhere, including in the U.S., where the market is fragmented and very competitive. Alithya continues to innovate its recruitment and retention process in order to position the company as the employer of choice. Our European business also continues to grow, highlighted by an outstanding forty seven percent organic increase in revenues in the second quarter. As mentioned during our last quarter call, this is a result of new customers added during the pandemic and pre-pandemic clients regaining momentum. We also have new and exciting projects in this geography, Alithya France is currently collaborating with an unnamed industry company engaged in environmental management to optimize waste treatment and improve quality of life. Both artificial intelligence and IoT will be applied to this project, particularly in the manufacture and design of sensors for reducing the emissions of gases that are harmful to the environment. Now regarding our office in Morocco, our staff recruitment operations are ramping up. Our office is open, and new employees have already been hired. To learn more about this project, I invite you to watch a video about the Alithya Digital Solutions Center, which is available on the investors page of alithya.com. Now, I'll turn the floor over to Paul Raymond. Paul, back to you.

Thank you, Claude. I will now be pleased to answer any of your questions. Julie, we can open the line please.

Thank you.

Yes, good morning. This is Salman on behalf of Nick Agostino. First of all, congrats on the quarter. Paul, my first question is on the fixed price contract, which you guys were talking about last quarter. How has the progress been there? I believe that contract was based in Canada and was nearing completion when you guys reported your fiscal quarter one?

Yes, thanks for the question, Amar. Yes, that project, as we reported last quarter, was the last time we took an adjustment on it. That project is on track and everything is good. There are no adjustments this quarter related to that.

Okay, great. And you did talk a little bit about the higher education practice. It seems like Alithya’s team has some really good initial positive signs there. Any update on how it's fared so far like any traction like how many universities or colleges have been signed up in Canada? Any plans on when the company seeks to expand in the U.S. and the potential revenue opportunity with the partnership with Frequency Foundry?

So the question is on the progress of our higher education practice. I'll turn it over to Claude Rousseau. And maybe Claude, if you can also talk about the new partnerships we signed in that sector.

Yes, thank you very much for the question. First of all, let me cover the geographic aspect. It’s a very important point. Before we expand our activities in the U.S., we need to accomplish and continue to learn and put in place everything we need to know for growth. It's not only a question of getting new customers, but we need also to leverage the expertise and add more folks related to that kind of expertise. All in all, it’s going really well. But before it goes out, we need to continue to prove our point in Canada. Talking about the Foundry, the second part of the question: Foundry specializes in education. That's the reason for the agreement we signed with them. The relationship is complementary to the expertise we have in terms of advising and supporting our clients in creating value and technology beyond the scene with the Foundry company. That’s the reason why this mix is good for us; we have the technical expertise to implement CRM. As you know, in higher education, CRM is absolutely critical in their operations. With the expertise, we bring additional value and end-to-end solution to our customers. That’s why the Foundry was really very essential in order to offer a full solution to our clients.

Okay, great. And I also noticed in the press release, the company mentioned that around four hundred people have been hired in the last two quarters. First of all, is the company seeing any wage or cost pressures to attract and retain employees? And of that four hundred, how much of that was from the Moroccan base?

Claude, do you want to answer that one?

Regarding the Morocco base, we are talking about anywhere between fifteen to twenty. The hiring process in Morocco is going very, very well, but new employees, as you can imagine, like in any other country, need to give notice to their current employers before they become Alithya employees. Regarding the recruitment aspect, we have different strategies. I don't want to expand too much on our strategy because it's pretty competitive strategic information, but we have several strategies regarding the hiring process. And that’s the reason we have a certain level of success. As we described in the Investor Day, no doubt, it's not only people that we are recruiting in Canada, but also people who are coming from overseas. We have an outstanding team, and we are doing an outstanding job to attract new talent, and that's exactly what we are doing in our day-to-day.

Okay. Perfect. And just one last question from my end before I jump back in the queue. In Q1, the company mentioned a six million dollar promissory loan forgiveness, which I also saw in the news release. Can you clarify if that amount was included in the adjusted EBITDA for Q1? Was that part of the adjusted EBITDA numbers in Q1?

I'm not sure I understood the question. Are you talking about the PPP loans in the U.S.?

Yes, the six million dollars forgiveness that the company gave in Q1, was that a part of the adjusted EBITDA number back then or not?

I'm sorry, I'm having a hard time understanding the question. We booked the full forgiveness, one hundred percent forgiveness in Q1. Whatever was left of the six point three million dollars. Nothing is recorded in this quarter. We are still waiting for confirmation of the last loan. We received five loans in five of our U.S. subsidiaries last year. All four of those were forgiven; we're still waiting for confirmation on one case. But we're told that those delays are quite normal with the volume that they're seeing in the United States. We do not understand why that one loan is taking more time. It appears it's being administered by different persons at different locations for whatever reason. Our position has not changed; we believe we will obtain a forgiveness in due course of that loan as well, but there was no impact in the second quarter on the P&L.

Okay

I hope I answered the question.

Sorry. Did that impact the Q1 adjusted EBITDA figure or not?

Was there an impact on Q1?

Yes, there was. If you read our disclosures, you will see all the exact amounts that hit the P&L, but it's roughly six million dollars Canadian just under that hit the P&L in Q1.

I just want to apologize. Please continue.

If you go to our presentation, the same deck you are seeing today on our website. If you go to the Q1 deck, you will see the exact dollar figure, just under six million dollars Canadian. Nothing in Q2.

Yes, I just wanted to know about the accounting procedure. But thank you for the color. And I'll jump back in line. Thank you again.

And that is a good point, it would appear our performance of Q1. If you remember, we recorded seven million dollars of EBITDA. Obviously, if you remove this, what we were just talking about, you see a significant increase in our EBITDA not only from last year but also from the first quarter.

Understood. Thank you.

And your next question comes from Amr Ezzat from Echelon Partners. Please go ahead.

Thank you for taking my questions and congratulations on a very strong quarter. I'm interested in understanding more about what is driving the strong growth in the U.S. I’m pleasantly surprised, as you mentioned, that this was typically a very seasonally weaker quarter. What’s really going on?

Thanks for the question, Amr. As we mentioned last quarter, if you go back and look at our booking for the last year, basically quarter after quarter we've been recording very strong bookings and the ramp-up of our projects typically in the U.S. takes a couple of quarters. Between the time we sign the contract, we define the requirements, and get the project going, usually the ramp-up is a couple of quarters. And given we kept our people at the beginning of the pandemic, we were able to accelerate those projects and accelerate the revenue capture of those projects because we already have the people, right? A lot of companies are struggling right now trying to hire people to catch up. We're in an opposite position; we have people. So because we get the senior folks, we can add on to the junior ones, which we've done through our academy that we talked about earlier. For the past two years, we've been hiring these college graduates, training them, and putting them on projects. It's a really, really good way for us to bring on-board new people and get them into the process. During the summer months, we had a very high utilization rate because of all these projects, which we're now adding people to. Again, we see this as very positive; these projects are growing, and we have a great backlog. So we're very encouraged by what we see happening out there. I agree with you; it was a very strong quarter for us, given it was the summer quarter.

Okay. So, we shouldn't be expecting weakness in the current quarter? Are your people going to take vacations after the strong utilization rates?

Well, people have been taking vacations despite that. As we said, we've hired over five hundred people in the last six months. So I guess some of that is what you're seeing is that even though people are taking vacation, we've added so many people that, even though some are taking vacations, the ramp-up of the new people is picking up the slack. That's why it looks like there was no slowdown, but the reality is, as we're adding a lot of people because of new projects.

That's great color. So in your Investor Day you spoke about the strategy with R3D and taking the margins higher just like what you guys did with Alithya and just like going for higher value-added projects. Can you maybe give us a very high-level insight into like EBITDA margin expansion and how you see that evolving? Is it reasonable for us to expect you guys to achieve double-digit EBITDA margins in a year?

Sure. Let me give you some color on that one. I think you can—Claude tried to provide more details in the numbers here during the call and on the slide. If you look at Q1, R3D we reported twenty million— it’s around twenty million dollars in revenue. If you remember, the gross margins were significantly lower than ours. In Q2, if you look at their revenue, we said it was around fifteen million dollars in the MD&A. We don't comment on the exact number, but it’s in that range. The overall business is growing significantly. If you look at Quebec alone our organic growth, even if you remove R3D, it's still significant double-digit over twenty percent organic growth. Why R3D looks low in Q2 than Q1 is we're transferring the new business that we signed under the Alithya brand. We did two new contracts with Québecor and Beneva as we signed new higher margin business instead of putting them in the old R3D entity; we put them into Alithya. If you remove the revenue coming from R3D in Q2, our gross margins are actually over twenty nine percent. Despite the pressures, despite the added costs, despite the inflation, salary increases, we're able to price in those increases into our projects. The projects that are beginning and ending are not a ten-year project; they are multiple projects within these long-term agreements. We can price the increases into our projects for the higher value business. The plan is that, as we've said, we're going to be integrating R3D into Alithya over the course of this year. December thirty one is when the full integration occurs. Because everything to do with salary and benefits retention in Canada, the best time to integrate people into your systems is January first; that's the most simple way of doing things from a technical perspective. We've invested in the platform as we've talked in previous quarters, we've invested in a centralized Oracle cloud platform that enables us to integrate acquisitions faster and put them all in the same system. This gives us better control and visibility. Over the next few months, the R3D legal entity is going to disappear; it's all going to be reported under Alithya. The agreements we've signed with Québecor and Beneva, the way they're structured, enable us to move that business from the lower gross margin to the higher gross margin; everybody is aligned on that. The customers are aligned on that, we're aligned on that; everybody benefits from that. The plan was to do it over twenty-four months starting April first of this year; it would take us twelve to twenty-four months of ramp-up, and we're on track for that as we speak.

Fantastic. That's great color. And maybe one last one, on the book-to-bill, I know it's volatile quarter to quarter; anything to read into this quarter, like how are conversations going with customers?

Sorry. I'm not sure I understood the question.

On the book to bill, it’s coming in below one. I know it's like volatile quarter to quarter. So, is there anything to read into that?

No, actually, if you look at the summer quarter last year’s, the same thing. Usually in the summer, our customers don't sign a lot of new contracts. Typically Q1 and Q3 are very strong and Q2, which is our summer month, is usually lower, but we're about the same place we were last year at this time.

Great. Just confirming. Thanks. I'll pass you.

Thank you very much.

This concludes today's conference call. You may now disconnect.