Earnings Call Transcript - ALYAF Q2 2021

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Alithya's Second Quarter 2021 Earnings Conference Call. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to now remind everyone that this conference call is being recorded on Thursday, November 12, 2020. I will now turn the conference over to Rachel Andrews, Vice President, Communications and Marketing. Please go ahead.

Rachel Andrews, Vice President, Communications and Marketing

Good morning, everyone. And thank you for joining us for Alithya's Second Quarter Fiscal 2021 Results Conference Call. The press release and MD&A with complete financial statements and related notes were issued earlier today and are 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; and Claude Thibault, Chief Financial Officer. Following their comments, we will open the call for questions. Before we begin, I would like to specify that this conference call is intended for the financial community. Also, please be advised this call will contain statements that are forward-looking, and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the risk and uncertainties section of our MD&A available on our website for more detail. 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 our MD&A for more details. Now I would like to turn the call over to Paul Raymond.

Paul Raymond, President and CEO

Thank you, Rachel. Good morning, everyone. Before I begin, I would like to say that despite the daily challenges faced by our employees in the wake of this pandemic, they continue to show passion and dedication for Alithya and our clients, and I sincerely want to thank all of our 2,200 professionals across North America and in Europe for their hard work. So we are very pleased with our second quarter results, and our growth, yes, growth, despite the impact of the pandemic in certain geographies. They demonstrate the resiliency of our business model as well as the growing demand for our digital transformation services. So the three key points in the quarter are: first, we generated year-over-year revenue growth. Second, our Canadian operations reported their best gross margins on record and generated double-digit growth. And finally, our third quarter, which is historically stronger than the second quarter. So we are expecting this to materialize as we start benefiting from the new contracts and improvements in our U.S. operations. So revenues for the quarter increased 1.5% to $68.4 million, driven by our Canadian operations, which was partially offset by our U.S. and European businesses, which continue to be impacted by COVID-19. What is important to highlight is that compared to the first quarter, although our consolidated revenues decreased since Q1, as they historically do in the summertime, they did so at a much lesser extent than usual. From Q1 to Q2, on a constant currency basis, the consolidated decrease would have been only 1.8%. This should be a strong indicator for the sustained demand for our services. In addition, we are proud that the three acquisitions we completed last year continued to generate organic growth, both year-over-year and sequentially, as well as superior margin. This is a testament to our strategy, successful cross-selling activities and synergy generation. Furthermore, some large Canadian clients, which we've talked about at length, which had started to stabilize in the first quarter, have now begun to ramp up, which is also a very positive sign for the future. Despite solid top line results, our profitability is less than last year due to the lower utilization rate in the U.S. This is the result of the pandemic, coupled with our strategic decision to support our employees and protect our expertise during this temporary downturn. We believe this is in the company's best medium- and long-term interests. We finished the quarter in a solid financial position, which will be further improved if we receive the PPP loan forgiveness. In the quarter, our bookings totaled $62.3 million, while our book-to-bill ratio was just under 1 or 0.91. It is normal to have a small dip from our superior first quarter as our second quarter is seasonally softer with vacation periods being a slower time for business. Our year-to-date book-to-bill ratio stood at over 1 or 1.03. As I've said before, I would like to remind everyone, however, that we believe a 12-month trailing book-to-bill ratio is a better indicator of our future perspectives as notable variations can occur when looking at quarterly numbers alone, as we can see in the second quarter. Having started reporting this new metric from April 1, we will be providing annual measures by the end of this fiscal quarter. In the quarter, we also added 12 new clients and signed several other agreements to implement Enterprise Cloud Solutions, including a recent one for the Florida Municipal Power Agency. At the end of the quarter, we also renewed our historic agreement with Desjardins, one of our major historical clients for the provision of services and the delivery of technology projects, starting October 1, 2020. We are delighted that Desjardins has reiterated its confidence in Alithya, particularly knowing the rigorous process that it applies to the selection of its suppliers. This will appear in our Q3 bookings. Finally, since going public two years ago, we have been on a journey to diversify our business by industry, by geography and by client. Today, our revenues are well-diversified, and as a result, our exposure to the hardest-hit industries by the pandemic is much smaller. Claude will now review our second quarter results and our financial position.

Claude Thibault, Chief Financial Officer

Thank you, Paul, and good morning. Please turn to Slide 8 for certain Q2 numbers. Revenues for the quarter increased 1.5% to $68.4 million, mainly driven by our Canadian operations and partially offset by our U.S. and European activities. More specifically, revenues in Canada increased 13.4% to $38.9 million due to the contribution from our Matricis and Askida acquisitions completed last year and growth at certain key clients, partially offset by the negative impact of COVID-19. Conversely, revenues in the U.S. decreased 9.5% to $27.1 million due primarily to the negative impact of COVID-19, partially offset by the contribution of our Travercent acquisition completed last year. Similarly, Europe revenues decreased 24.3% to $2.4 million, mainly due to the impact of COVID-19, affecting mostly one important client. On a positive note, on a sequential basis, our consolidated revenues decreased only 1.8% on a constant currency basis, which is a much smaller sequential decrease than usual, going into our seasonally softest quarter of the year. Gross margin amounted to $18.7 million or 27.4%, down from $20.7 million or 30.7% last year. This variation was driven primarily by reduced gross margin from the U.S. and Europe due to the negative impact of COVID-19 on utilization rates, partially offset by increased gross margin in Canada due to the changing mix of revenues and some governmental wage subsidies. Of note, our Canadian operations reported their best gross margin on record, reflecting the progress of our long-term strategy and very high utilization rates, especially in the latter part of the quarter. Certain Canadian subsidiaries obtained $2.5 million through the Canada Emergency Wage Subsidy program since the beginning of the pandemic, of which $1 million was recorded in the second quarter, mainly accounted for in cost of revenues. SG&A expenses amounted to $20.2 million, up $1.6 million or 8.5% from $18.6 million last year. This increase was primarily driven by the additional expenses related to our three acquisitions last year. This was partially offset by decreased pre-acquisition expenses, mainly from cost-saving measures implemented in response to COVID-19 as well as synergies. In addition, if we look at SG&A expenses after adjustments, including noncash share-based compensation, as further explained in our MD&A, the increase from last year is only $0.4 million, again despite the three acquisitions completed after Q2 of last year. Adjusted EBITDA amounted to $0.8 million or 1.2% of revenues versus $3.2 million or 4.8% for the same period last year. This variation can be attributed to reduced gross margin of our U.S. operations, partially offset by the contribution from acquisitions, increased margins from higher value-added business, and reduced pre-acquisition SG&A. As a result, net loss during the quarter amounted to $5.5 million or $0.09 per share compared to a net loss of $2.3 million or $0.04 per share for the same period last year, still reflecting, as in previous quarters, high amounts of depreciation and amortization. Now turning to our liquidity and financial position. Net cash flow used in operating activities amounted to $6.1 million in the second quarter compared to the $0.6 million used in the same period last year. This variation was mainly attributable to unfavorable cyclical changes in working capital and decreased net income. For the six-month period, we generated a positive $1.3 million of cash flow from operations compared to $3.6 million for the same period last year. We ended the quarter in a solid financial position. At the end of September, we had $15.6 million of net bank borrowing, which is net of our $11.9 million in cash and restricted cash, an improvement of $11.3 million compared to a net bank debt of $26.9 million at the end of March. These numbers are net of the PPP monies received this past May. We are currently in the process of applying for the forgiveness of our PPP loans. We believe we have used the funds for qualifying expenses and otherwise comply with all relevant rules and regulations of the program. However, there still can be no assurance that the company will obtain forgiveness in whole or in part. If approved, our financial position would be improved, and we would be able to recognize the USD 6.3 million against our cost of revenues in the U.S. As Paul explained, the PPP has been an important tool in implementing our decision to maintain the bulk of our valuable workforce despite the temporary COVID decline in the U.S. We are also continuing to benefit from the Canadian Emergency Wage Subsidy program and are monitoring the new rules to be confirmed over the coming weeks and months. As it stands today, we are using a small portion of our available senior credit facility on a net basis, and we believe we are in a good financial position to navigate the ongoing uncertainty and keep pursuing our business plan and objectives. I will turn it back to Paul.

Paul Raymond, President and CEO

Thank you, Claude. So in summary, our second quarter results demonstrated revenue growth and very strong growth in our Canadian revenues and margins. This was tempered by a short-term investment to support our U.S. operations. Our revenue growth in this context demonstrates the resiliency of our business model as well as sustained demand for our digital transformation services. Given the ongoing pandemic and the impacts of the second wave around the world, we continue to implement our business continuity plan, including managing our operating expenses prudently, taking advantage of government programs and monitoring all developments very closely. We will take proactive steps to continue to protect our employees, our clients and the company as required. Our bookings and pipeline remain healthy, and we are currently engaged in a comprehensive hiring campaign to pursue our shift to a higher value permanent employee base enterprise and to support our growth. Our third quarter is expected to benefit from major contracts we signed. For example, the deal with Desjardins Group is expected to generate significant revenues for Alithya over the course of the next quarters. Therefore, you should anticipate a good book-to-bill ratio in Q3. Also, of note, our recent second quarter revenues were better than our third quarter revenues last year, and Q3 is historically better than Q2. In sum, we believe we have a strong foundation to support future growth, even as we face potential headwinds from the COVID-19 crisis. Finally, we finished the quarter in a solid financial position, which will allow us to continue to focus on the execution of our strategic plan, which is to increase our scale through organic growth and acquisitions and deliver on our long-term plan of becoming a North American leader in strategy and digital transformation. We will now be pleased to answer any questions you may have.

Operator, Operator

Your first question comes from Paul Steep from Scotia Capital.

Paul Steep, Analyst

Paul, could you maybe talk just a little bit about the M&A environment and what you're seeing there?

Paul Raymond, President and CEO

Yes. Thanks for the question, Paul. So at the beginning of the pandemic, we kind of saw a halt out there. Everybody was kind of wondering what was going to happen. We definitely saw that turnaround in Q2. I wouldn't say everything is back to normal, but I'd say a lot of very high-quality targets out there, and people are much more serious. So the people we talk to are actually more serious. So the people out there aren't just going on fishing expeditions to try to get an offer. But we noticed that there is a level of seriousness in the targets that we talk to that is to a higher degree than before. Does that help?

Paul Steep, Analyst

That does help. Could you discuss the business mix in the U.S.? You continue to see success in the Microsoft practice; is the balance currently between Microsoft and Oracle? I have one last follow-up question as well.

Paul Raymond, President and CEO

Sure. So I'd say we're very encouraged because if we look at our backlog, the backlog has never been higher in the U.S. and that's why when we said we wanted to support our people, there's still a very high demand for qualified labor in our industry. There isn't a big overflow of people out there waiting for jobs. It's very difficult in this industry to find good people. So we have good people, and we wanted to hang on to them. We have a very strong backlog for both our Oracle and our Microsoft practices. So for us, when we saw the slowdown in the summer, a lot of that is for deals that we've already signed that are ramping up in Q3. So for us, it was a no-brainer to invest in hanging on to those people. I know that a lot of our competitors out there, whenever they have somebody who's available, they fire them and then do massive layoffs. We have very high-qualified labor. Finding them and keeping them is very important to us, and that's why we invested in the quarter in hanging on to those people. And we believe it's going to pay off in Q3 and Q4. So history will tell whether it was the right decision or not.

Paul Steep, Analyst

Great. And last one for me. Just on the new agreement with Desjardins. It's good to see. Could you talk about any differences or anything that you'd want us to note that might be different or sort of a further evolution of this partnership?

Paul Raymond, President and CEO

Sure. So I'd say on Desjardins, what's interesting is, one, we've been working together since the beginning of the company. So it's a very long-lasting and trusted relationship on both sides. We've accompanied them in their transformation, and they've also encouraged us in our transformation. So if I look at the revenue we have today versus what we had maybe two, three, four, five years ago, the value of the type of services that we do today are very different than what we did several years ago. So whereas several years ago, it was mostly staffing type work, today we do projects, digital transformation, a very high percentage of permanent employee-based type projects, so much higher value type business. And that's increasing going forward. And it's true for Desjardins, it's true for all of our customers, but given the size of Desjardins, it's a very positive trend.

Operator, Operator

Your next question comes from the line of Deepak Kaushal from Stifel GMP.

Deepak Kaushal, Analyst

Just to follow up on Paul's questions regarding Desjardins. I mean, Paul, can you give us a little bit more color? The revenue has come down quite substantially several years for Desjardins. Are you expecting it to stabilize here or increase? And what would be the commensurate trend on the gross profit, assuming that with more value-added services that margins will go up?

Paul Raymond, President and CEO

Thanks for the question. I’ll address that. First, our revenues increased year-over-year, with significant double-digit growth in Canada. This growth stems from our strategy aimed at achieving robust organic growth and cross-selling from our acquisitions. In Canada, not only did we see double-digit growth, but the quality of the business also improved, leading to higher gross margins. In France, which is a minor part of our business, the decline can primarily be attributed to one customer, Air France. We’ve mentioned this previously, and we are in the process of replacing that business. Considering the social programs in France, the impact is limited; while there is a slight effect on revenue, it is not significant and has less impact on margin. The primary factor affecting our revenue growth was the low utilization rate in the U.S. during Q2. This issue is specific and focused, and it is not linked to major clients like Microsoft or Oracle; rather, it spans our operations in the U.S. and is expected to be temporary. Year-over-year, this resulted in a couple of million dollars less in revenue. When fluctuations in top line revenue are related to utilization rates, they directly affect our bottom line, as our costs remain the same with unchanged staffing levels. We are confident that, given our current backlog and signed agreements, this revenue will return. If we adjust for the U.S. situation, we would show significant year-over-year growth, which is why we feel positive about the upcoming quarters. Does that address your question?

Deepak Kaushal, Analyst

Okay. Yes. Actually, sorry for misunderstanding. The question was related to Desjardins and not that renewal.

Paul Raymond, President and CEO

Ah, Desjardins. Yes.

Deepak Kaushal, Analyst

Sorry about that. I mean I think you heard the review. I understand the different moving parts in U.S. and Canada. For Desjardins in particular, clearly you're not going to get to the past revenue levels, but how do you look in terms of revenue versus over the last 12 months for that contract? And when do you expect gross profits for that business to stabilize and return to a growth path?

Paul Raymond, President and CEO

So last quarter we had mentioned that we had seen over the last year a decline in some of our larger Canadian customers. Last quarter we mentioned that we saw that stabilizing. This quarter we're actually seeing growth in those customers. So that's why when you look at our growth in Canada, which was double-digit this quarter year-over-year, some of that's from the acquisition, some of that's from the cross-selling and some of that is from new customers and existing large customers. So it's really across the board.

Deepak Kaushal, Analyst

Okay. And then when I think of the longer term, we're still focused on recovery from COVID, but when you look out a year to a few years from now, can you give us a reminder of what your sense is for the stable organic growth based on the acquisitions you've made to date? And where you are targeting EBITDA margins to come out at?

Paul Raymond, President and CEO

Sure. So we've been very transparent about our long-term strategy. We gave ourselves a 3 to 5-year plan, which we've communicated as well. We believe by changing the mix of our business over time, the higher value services as we're seeing now, the gross margin is going to increase as we're seeing in Canada and we've seen in the U.S. as well and the company as a whole. And COVID notwithstanding, which I believe is temporary as this crisis had a beginning and it will have an end. I think we're making the right decisions when we say we want to protect our people and protect the business. I think we have a very high-quality business that can generate superior gross margins today compared to what it was before, which I believe will be back after the pandemic. And we're seeing the model generating growth now. So again, at post-pandemic, I see strong organic growth and M&A activities. The M&A, we're going to keep doing in the higher-margin businesses that are complementary, as we've said in the past. We believe that those things combined will go down as a percentage of our costs over time so that we can reach much higher EBITDA margins in line with some of the larger players in the industry.

Operator, Operator

Your next question comes from the line of Jerome Gibre from Desjardins Bank.

Unidentified Analyst, Analyst

Yes. Everybody speaks about Desjardins. I understand, great firm. So maybe regarding the loan forgiveness in the U.S., this would obviously be very material. And just to clarify, and maybe I missed it, but when do you expect an answer on that front? And how would you quantify your odds of getting it?

Claude Thibault, Chief Financial Officer

Thank you. I will address this question. This is Claude. We have spent the funds on qualifying expenses while adhering to all applicable rules and regulations that we were able to comprehend. We sought professional guidance from experts in the region. The only concern is that the rules may change due to political actions, and they have changed multiple times in the past. We do not anticipate that the rules will become more strict or that eligibility will become more challenging. There is some uncertainty that we need to acknowledge. I would say it is fairly probable that it will happen under the current regulations. As for timing, there have been delays as the initial forgiveness decisions have been assigned to the banks that are administering these loans. The platforms for this process are now operational. By law, we will be filing in the next few weeks, and the banks are required to provide a response within 60 days. It's likely that there will be a rush to meet deadlines. I am uncertain if that will be feasible. As you know, we will report next quarter in mid-February, and I hope to have more concrete answers by then, but it has yet to be confirmed.

Unidentified Analyst, Analyst

Okay. That's helpful. And regarding the second wave we're seeing in certain geographies, are you seeing an initial impact that could be similar to what we've seen in the spring or maybe virtual delivery offsets most of that now?

Paul Raymond, President and CEO

Thank you, Jerome. We've been operating in this environment since March, and people have adapted to it. Our team has continued to work from home, and all the industries we serve are essential services, so we haven't noticed any impacts on our customers. We continue to deliver as we always have. In Q2, we implemented new ERP projects, and that progress will continue. My main concern, both as a CEO and as an individual, is related to the mental health challenges that arise from isolation. We have operations in France, so we see what's happening in Europe, where people now require permits to leave their homes for work, groceries, or other reasons. We're observing increasing restrictions in Canada, and the situation in the U.S. is quite severe right now. My primary worry is the overall impact on public mental health. From a business standpoint, things haven't changed significantly for us at this moment.

Operator, Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Paul Raymond, President and CEO

Thank you, Joanne. To conclude, I want to express my heartfelt gratitude to our professionals, clients, and shareholders for their continuous support and trust during these challenging times. We truly appreciate it. I also want to acknowledge all the frontline workers who are risking their lives daily to help manage this global health crisis. I strongly encourage everyone to follow the guidelines and respect the advice from health authorities, as it will help us overcome this situation more quickly. Thank you all for being on the call today, and please stay safe.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.