Alithya Group Inc (ALYA) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alithya Q1 Fiscal 2022 Results Conference Call. Today's conference is being recorded.

I would now like to turn the meeting over to Rachel Andrews, Vice President of Communications and Marketing. Please go ahead.

Good morning, everyone, and thank you for joining us for Alithya's First Quarter Fiscal 2022 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; Claude Thibault, Chief Financial Officer; and Claude Rousseau, Chief Operating Officer, who will all be present for the ensuing question period. 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 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. Over to you, Paul.

Thank you, Rachel, and good morning, everyone. (foreign language) I'm very pleased to be here today to discuss a record first quarter performance in which we exceeded all internal and external expectations. As demonstrated by our strong bookings in the past quarters, our teams have surged ahead into fiscal 2022 by capitalizing on our high-value digital transformation offerings. Our plan to retain our valuable professionals during the pandemic is paying off by enabling us to transform bookings into accelerated profitable organic growth. Over the past 18 months, our management team has proven its ability to maintain a steady course through uncharted waters. This is directly responsible for our successes in the first quarter of 2022. We looked at the future with great optimism and confidence as we embark on an ambitious new chapter of expansion and recruitment to meet the growing demand for our services while ensuring the retention of our more than 3,300 professionals and keeping an eye on the global pandemic. I will discuss this in greater detail shortly, but first, let's take a look at the 3 key highlights of our record first quarter performance.

Please turn to Slide 2. First and foremost, we achieved industry-leading organic growth in bookings in this unprecedented environment. We continue to strengthen Alithya's position as a trusted adviser and strategy in digital transformation, and we expanded our presence to new customers and new essential service industries. This has enabled our teams to post outstanding organic growth in all of our geographies, both year-over-year and sequentially. Second, we are on track with the integration of R3D Consulting, our latest game-changing acquisition that closed this past April 1. R3D's operations are highly complementary and are integrating seamlessly into Alithya's current structure, allowing for short and mid-term synergies.

Additionally, the 2 10-year contracts with Beneva and Quebecor that accompany the acquisition have already generated significant high-value revenue during the first quarter. Third, our leaders are doing a great job in recruiting and retaining the best people. As Alithya continues to expand its operations in North America and Europe, a growing demand for our transformation services requires new and creative approaches to finding highly skilled IT professionals to support our clients' needs. Therefore, we've opened a subsidiary office in Morocco, where we intend to leverage that country's rich and readily available talent pool. We've already started recruiting highly skilled individuals based out of Morocco, and they're already contributing to significant global projects entrusted to us by our clients. To put all this and more into greater perspective, let's break down our first quarter successes with respect to our various practices and geographies.

Please turn to the third slide of our presentation. Let's start with Canada. As I mentioned during our fourth quarter call, we sell with the wind at our backs for the first quarter of this new fiscal year with the contribution of strong bookings, new logos, and Alithya's latest acquisition, R3D. That momentum continues today as this portion of the business generated $20 million of revenue in the quarter. While adding revenues from R3D obviously results in sequential growth from the fourth quarter to the first quarter, I would like to point out that R3D itself is also reporting strong organic growth, both year-over-year and sequentially.

We are also seeing important growth from the ramp-up of the 10-year contracts associated with that transaction. Successes like that are a testament to the winning formula applied by our management team, who continue to pursue new opportunities for acquiring quality companies with a cultural fit and potential for combined accelerated growth. This acquisition strategy is complemented by the strength of sustained organic growth, which is a category where Alithya leads the industry in Canada. Our first quarter saw revenues increased by 78% in Canada year-over-year and 50% sequentially. Even when we exclude the R3D impact, Alithya experienced organic growth in all sectors.

At this point, I will turn the call over to another Claude, Claude Rousseau, our Chief Operating Officer, so that he can present to you the progress made so far in connection with the operational integration of R3D as well as an overview of the synergies we can expect to achieve. This is the first time our COO joins us for the analyst call, and I am convinced you will find great value in his commentary. Claude Rousseau joined Alithya 7 years ago and oversees all of our business units, sales efforts, business development, playing an instrumental and global role in furthering all of our pursuit. He brings a wealth of experience to our team, and I'm sure you'll find his insights very helpful. Claude, thank you for joining us today, and over to you.

Thank you, Paul. I'm very, very happy to be here today to shed more light on our operation and answer any questions that may follow. I'd like to begin by giving a little more color on our latest and game-changing acquisition, namely R3D in April 2021. Let me remind everyone on the call that the acquisition includes 2 long-term contracts, totaling approximately $600 million in combined revenues during the initial 10-year terms. This represents minimum volume commitments of $60 million per year. As with previous acquisition, our objective is to gradually transform R3D revenue mix by increasing revenues from permanent employees relative to subcontractor revenues. With the integration of R3D, we are rapidly scaling up our operation in order to effectively compete for the industry's largest and most complex digital transformation projects and cloud migration, which are increasingly in demand by our customers.

We've also reevaluated our footprint in adjusted office space to create synergies and as a result of the acquisition. We recently reorganized our government and private sector businesses to integrate the new leaders joining us from R3D. The capable men and women leading these 2 sectors in Canada have been very busy. And as announced earlier this summer, we recently won 2 major multi-year contracts, delivering high-value services, including one with the Quebec government and another with a varying Canadian financial institution. Also, our specialized team are continuing to grow in specific industries where there is demand and understanding by the order value of what we do. For example, our visionary Higher Education practice has filled a void to provide universities around the world with tailored digital transformation plan that will enable them to provide digital access to a wide variety of services for their student populations. This practice is a great example of how our people are in shifting deep industry and technical expertise into new projects.

To support all of this growth as Paul mentioned, the opening of our office in Morocco will also -- will allow us to attract more talent capable of contributing to all of the demand we are seeing. By leveraging Alithya, Robert's framework to -- working. These new recruits will help bolster the expertise of teams across all of our geographies and help advance the innovative work of our digital solutions center. In just 2 years since its founding, Alithya Digital Solutions Center has grown to encompass dedicated team of more than 600 skilled professional, and our new Morocco office will help add to that number as we continue to expand our operation globally. We have an abundance of projects to inspire our new colleagues and are always on recruitment efforts aimed to convey to candidates that's at Alithya, we are big enough to all of them to work on major projects yet small enough to ensure they will remain in the heart of the action as the important members of the development teams.

Alithya has been a strong Oracle partner for over 25 years. Our Oracle practice continued to grow. And the recent major wins have provided us with opportunity to demonstrate how our teams effectively deliver Oracle Cloud solutions for ERP as well as corporate performance management, human capital management, and supply change management systems for a complete planning experience from financial to operations, labor, and human capital for greater transparency and cohesive decision-making. Since the acquisition of Travercent in December 2019, the delivery of Oracle solution to the healthcare sector has remained one of our strategy. In recent months, we will successfully implement the multiple Oracle cloud suite solutions for large healthcare providers across the United States. We are extremely proud of our Alithya Oracle healthcare practice, which is proving to be one of the best-in-class throughout the U.S. As for our Microsoft practice, Alithya was recently named to the prestigious Inner Circle group for the 16th year in a row. In a year, our deep business transformation for every company and virtually every industry on the planet. It's extremely rewarding for the Alithya U.S. team to be recognized by Microsoft itself. Paul, back to you.

Thank you, Claude. Large companies want to do business with larger but agile organizations in order to transform. And Alithya is now definitely one of the serious contenders in this landscape. Looking south to the U.S. market, our foresight in implementing prompt and clearly articulated measures to protect our professionals and our clients over the past 18 months showed courage and prove that betting on good people always pays off. Our commitment to persevering and establishing optimal remote working conditions has paved the way to an accelerated turnaround. In the first quarter, our U.S. operations experienced both year-over-year and sequential organic growth. In constant currency, revenues of $31.4 million represents a 17.1% year-over-year increase and a 9.2% sequential increase compared to the Q4 numbers. These increases are due to organic growth in most areas of our U.S. operations, notably in the Oracle business space. Recent clients have chosen Alithya based on our business performance and our capabilities as an organization, whether that be in creating IT, developing solutions, or having an industry-leading focus on digital transformation. Our European business also continues to grow, punctuated by an outstanding 59.5% organic increase in revenue in the first quarter, representing a 12.6% sequential increase. Over the fourth quarter of 2021, we began to see general recovery of activity levels and a resumption of business priorities under European continent. In fact, one of our long-time customers in the aerospace industry, which, as we know, was significantly impacted by COVID is also regaining momentum.

Turning to Slide 4. We also increased bookings to a new all-time high. First quarter bookings reached an astonishing $709 million, which includes the $600 million estimated value of the 2 new long-term contracts signed as part of the acquisition of R3D, namely with Beneva and Quebecor. This record translates into a book-to-bill ratio of 7.1 for the quarter. As for a trailing 12 months, bookings almost reached $1 billion. This translates into a book-to-bill ratio of 3.2. As demand for our services and expertise expand, as we can see by the aforementioned bookings, we must ensure our ability to attract the best talent from a highly competitive landscape. According to the latest forecast, digital transformation spending is continuing to accelerate. Customers are seeking partners who can think past the digital sprints of 2021. That means Building solutions and services that don't necessarily yet exist in order to further differentiate our customers' organization in an already crowded market. That task cannot be accomplished without a rich pool of IT experts. Our always-on approach to recruiting top talent will play a vital role in furthering our strategic vision.

In conclusion, despite the lingering uncertainties of a pandemic world and health scenarios that continue to evolve on a daily basis, Alithya has tested and proven its agility and ability to creatively deal with those challenges and execute our plan with discipline. We remain committed to becoming a North American leader in digital transformation and to delivering favorable returns to our investors, our partners, and our stakeholders. This record quarter is a clear demonstration of the sustainability of our long-term strategy to building a great company.

I will now give the floor to Claude Thibault, our CFO. Claude?

Good morning. I invite you to turn to the fifth slide of our presentation for certain first quarter fiscal 2022 highlights. Based on discussions we've had with some of you, you will notice that we are providing today a greater level of details on certain operational figures in order to better understand our financial performance. Revenues were already covered by Paul and Claude. The key metric here being overall organic growth, Q1 over Q1, excluding R3D at a constant currency of 23%. Of note, the negative impact of the U.S. dollar depreciation on revenues compared to the first quarter of last year is almost $4 million. While the R3D acquisition obviously results in sequential growth from Q4 to Q1, I would like to highlight, as Paul did, that R3D itself is reporting strong organic growth, both year-over-year and sequentially. This overall increase was again driven mainly by industry-leading organic growth in all of our geographies, leading to record revenues in Canada and the U.S. and a solid return to pre-COVID levels in France.

Gross margin increased by $7.9 million or 38.9% to reach $28.3 million in the first quarter. Gross margin reported as a percentage of revenues decreased to 27.5% during the same period. However, 3 important non-recurring elements must be taken into consideration into an understanding of the progression of our first quarter gross margin percentage. First, the decrease was driven in part by the R3D acquisition, whose revenues historically show a significantly higher proportion from subcontractors, generating a lower overall gross margin percentage. As discussed, we have a short, mid, and long-term plan to address this and bring R3D closer to Alithya's levels. Secondly, the percentage decrease was also driven by a $2.5 million impact from increased cost to completion on one large customer project in Canada. That project involves the development of complex software applications, which may have further commercial value and, therefore, have a long-term investment dimension. That project is nearing completion and no further cost increases or losses are expected going forward.

Thirdly, our gross margin benefited from some governmental wage subsidies, both this year and last, with a significant amount of PPP forgiveness recorded in this quarter -- in this first quarter of fiscal '22. Of note, as detailed on top of Page 6, when excluding the 3 elements above, which are reported in our filings of today, Alithya's normalized gross margin percentage, excluding R3D, is increasing in all geographies year-over-year, driven primarily by higher productivity rates everywhere. Reported SG&A expenses totaled $22.7 million, an increase of $3.3 million or 17.1% from $19.4 million during the same period last year. This increase was primarily driven by the R3D acquisition as well as increases in employee compensation in Canada, partially offset by some governmental wage subsidies. However, when looking at SG&A expenses on an adjusted basis and excluding R3D, they are actually improving on a sequential basis. Also shown on Page 6, our adjusted SG&A expenses as a percentage of revenues are decreasing from 26% to 21%. Moreover, overhead from the R3D business is expected to continue declining over the coming quarters from additional administrative and operational synergies. Overall, our Q1 adjusted EBITDA amounted to $7 million, an increase of 114% compared to the same quarter last year.

Please turn to Slide 7. As in previous quarters, the amount of non-cash depreciation and amortization, totaling $4.9 million is greater than the quarter's accounting operating loss. Our accounting net loss of $2 million for the quarter must also give you in conjunction with a greater amount of business, acquisition, and integration costs, namely $4 million related to R3D. Net cash flow from operating activities amounted to a positive $500,000 in the first quarter compared to $7.4 million in the same period last year. Like last year, this positive amount resulted primarily from favorable changes in non-cash working capital items. We ended the quarter at $30.6 million of net bank borrowing, which is net of our $13.9 million in cash and restricted cash on hand. The increase during the quarter is explained by the acquisition of R3D.

Lastly, a quick note for modeling purposes. Our second quarter is typically seasonally soft given the vacation cycles, and we believe this year may see similar impacts. Thank you. Turning back to Paul.

Thank you, Claude. We will now be pleased to answer your questions. And Madison, you can open up the line, please.

(Operator Instructions) We'll go ahead and take our first question from Paul Steep with Scotia Capital.

Paul, could you talk a little bit about the pipeline, in particular, both may be in Canada and the U.S. in terms of what you've recorded this quarter and how we'd want to think about that ongoing growth and further momentum in the business?

Paul, thank you for the question. So a good way to look at it. And if you look at the past year, we've been reporting a book-to-bill ratio above 1. We were around 1.2 on average in the past year. And so when you look at that, typically, in our type of business, it takes a couple of quarters to convert those bookings into revenue. So if you look at the past quarters, they are a great indication of the trend that we just saw. Claude Thibault was mentioning earlier, when you take out the adjustments for the acquisitions and the exchanges and so on, our growth -- organic growth is around just under 20%. So usually, you can translate the book-to-bill ratio on an annual basis into what the next year or next quarter is going to be looking at -- you really have to look at it on a rolling basis. But we've had very strong bookings in the past year and again, this quarter. So we're pretty confident about the future based on those. Does that answer your question, Paul?

Yes. Maybe talking a little bit about Morocco. Just talk about the ramp-up of how we'd want to think about loading into that center and then presumably the meaningful margin lift that you get from moving things to another geography?

Sure. I'll pass that question over to Claude Rousseau, our COO, because he is very closely involved in the ramp-up of the Morocco office. Claude?

Yes. Thank you. Thank you, Paul, for the question. Regarding Morocco, we already hired more than 50 consultants on there. Those positions are complementary about what we are doing in Montreal, in North America. And that's the reason we will be more than 100 employees in Morocco by the end of this year. That's the reason that's a target we have. We already sound talented resources and people. We are very pleased about the support. We sent out one of our key guys in Morocco in order to open the office and support the transition and ensure the projects and the quality of the projects will be as well aligned with the quality and the value of Alithya. And that's exactly where we are going. In terms of margin, we are working to finalize exactly the final value, but no doubt it's creating value. But the most important point is not regarding only the margin. That's our capacity to deliver on projects for our customers and deliver quality projects. That's the most important part, Paul.

Yes. I think, Paul, just to reemphasize the last point that Claude just mentioned, I think it's very important for people to realize the #1 reason we're opening the office there is to find people. The improvement on the cost is just gravy. The challenge, again, finding people in our industry, and there's a great pool of talented people there readily available. And that's the #1 reason why we're going there.

Great. And then I guess maybe 2 to wrap up, and I'll pass the line for Claude. Could you just talk to us a little bit about the ramp in the quarter from the new contracts with those 2 lead clients that came with R3D? And how much that contributed in the quarter? And then could you also remind us about for the intangible amortization, how much of the PPA actually got taken in this quarter? Or should we assume that, that fully loads into next quarter?

I think that question was for Claude Thibault?

So on the first one, the first one is talking about the revenues from the 2 long-term contracts, right? How that's ramping up?

Yes.

Okay. Well, I'm not sure how much details we wish to disclose here. We are satisfied with the pace we're going at, as we mentioned. We did report that R3D itself is reporting strong organic growth sequentially. Some of that performance is coming from the commercial agreements. But you should know that we are booking some of those revenues in the old Alithya business. So even with some bleeding there, even with that, R3D itself is showing very good organic growth in part from those 2 commercial agreements. So I think we stick with our indication that between 12 to 24 months, is when we will reach the full cruising speed on the commercial agreements. We're sticking with that outlook, I guess, even we don't provide outlook. And if anything, the most recent quarter reassures us with that prediction, with that indication. The second question, as you know, the acquisition was done on April 1. So we basically have a full quarter of R3D on the books. And the answer -- the short answer is, yes. What you see there as amortization is pretty much reflective of the run rate we will see on R3D.

All right. (Operator Instructions) We'll go ahead and take our next question from Nick Agostino with Laurentian Bank Securities.

Good morning. This is Salman Rana on behalf of Nick Agostino. First of all, congratulations on the results. My first question has to do with the new revenue and margin levels. So now with R3D fully in the mix, is this revenue margin level in Europe is sustainable? Or are there any expected changes to the current profile?

Nick, thank you. Thank you for the question. So basically, as we were explaining earlier, if you look at R3D, the type of work that they do is very high-value work. However, the way they staff the work in the past was very subcontractor intensive. And as we saw with our own business, going back several years, that margins on subcontractors are significantly lower than when we use our own personnel and we manage the projects ourselves and have full responsibility. So part of the transition and the integration of R3D is migrating that ratio from more subcontractors than permanent staff to the opposite. And typically, we do that as we ramp up the new contracts and the new projects, and our plan is to do that over the next 24 months as well.

Okay. That's very helpful. The timeline especially. So my next question is about the proprietary products. So any update on how revenue contribution from your proprietary products has been like? And any plans to add to that existing list of your IP?

Yes. We don't disclose the IP revenue separately yet. We're waiting for it to be a more important part of our portfolio. But yes, we are always looking for interesting targets that bring new IP to us. We really like what we've accomplished so far with our testing IP. And now we're seeing more new verticals by leveraging our solutions that we have today and converting those into recurring revenue in our own IP. So yes, it's on our target list for the M&A, and it's something that we're investing in today.

Okay. Great. And my next question is about the higher education practice. Now that was a very interesting news release that we got a few weeks ago. Any indications or insights on what the potential TAM you think there is? And how has the pickup there been to date?

So yes, thank you for the question. We see a significant potential in higher ed. We're already in several Canadian universities that there are thousands of universities and colleges. When you just go across the border to the south, they have the exact same challenges that our Canadian universities have. And that's why we saw a huge opportunity there, and we saw a market that was underserved. And based on the response we're getting so far to that new offering, we're very confident that we can take a leading position in that market as well.

Great. And just one last question as it relates to your U.S. business. Now the new digital transformation wins that you're getting, are those as a result of displacing other IT consultancies? Or are these clients completely new to the digital transformation process?

All right. Thank you. So the question is if we're displacing anybody. If I look at our growth rate and compared to what the industry is supposed to be, my deduction would be, yes. I believe we're taking not only growing based on new market demand, but also taking market share away from some other players. The customers are really looking for somebody who is big enough to help them through the digital transformation. But at the same time, it has that small agile culture that can basically turn around and bring in creative solutions to help them do their digital transformation faster. And that's what we're seeing, and that's the feedback we're getting from the customers. They like us because we're big enough. We have the critical mass to do the big projects. But at the same time, they see us as very agile and very creative in how we do our projects. So we -- and we can see it from the organic growth we're seeing. We looked at the competitors and the companies that we compete against, nobody has this level of organic growth in the past quarter.

Okay. We can go ahead and take our next question from Kevin Krishnaratne with Desjardins Securities.

Paul, sorry, my apologies, I joined a little late. Apologies if some of these questions have been answered. But just following on that last question there, the strong growth that you saw in the quarter. Can you -- it sounds like is a lot of that coming then from brand -- net new customers? Or are you getting expansion work with existing? How do we think about the mix of where that growth is coming from?

Mix, it's really -- thank you for the question. It's really everywhere. It's in all our geographies and all our practices, existing customers, new customers, we're really firing on all cylinders right now. I think the -- I think I was saying earlier in my presentation, I think last year, we saw a lot of knee-jerk reactions in terms of people spending on digital transformation because they didn't have a choice because of the pandemic. What we're seeing now is much more planned and thought-out transformation. So people are taking more time and doing stuff more strategically. And that's where we're seeing a lot of growth, but in all of our customers, because of the track record we have, the reputation we have, they see us as one of the leaders out there in this space. So it's really across the board.

Okay. Were there any particular -- can you talk about like the nature of the deals? Was it a high number of deals or a few large deals that kind of like drove the result in the quarter? And how do we think about going forward, is there any kind of follow-on work or related work from the wins that you won in Q1 that we see in Q2 and Q3? I mean, I'm looking at your commentary in the PR on a cautious outlook. So I'm just trying to understand how do we think about what you saw in this quarter and how that might trend in the following quarters.

Okay. So I'll try to break it down on the numbers that we just went through, maybe to give it a bit more color. So if I start with our smallest region, which is Europe and France, we had organic growth there year-over-year is almost 60%, 6-0. That's basically existing customers, a significant new logo, new business from new customers because, as you know, last year, we lost our largest -- we didn't lose the customer, but that is, they stopped operating. One of the larger carriers there in Europe. So that business is just starting to come back, which basically means we replaced all that business with new customers and new projects. So again, France is firing on all cylinders. And as the aerospace industry restarts, as we're seeing, I was on a plane yesterday. The Toronto there's no sign of a pandemic, I can guarantee you that. The plane was full, the airports were full.

So we know that's going to take off again. So for us, that's basically gravy to have our customers coming back, which is great. Then I take it to the U.S., as we said, in past quarters, we -- there's always a bit of a cloud on our Oracle business as we were transitioning from the on-prem to the cloud. We're there. I mean, we had record bookings in our Oracle business, very strong. The cloud business is now outpacing everything, and we added several new logos. We've expanded out of healthcare, basically the reputation we have as the Oracle cloud leader in healthcare in the U.S. as having repercussion on other industries. So we've expanded that now into financial services and high tech. We're now in Silicon Valley. We have customers in Silicon Valley looking at us as cloud -- Oracle cloud integrators, which is great. Our Microsoft business, again, we -- I'd have to look it up, but I don't think there are too many companies out there that can say they made the inner circle of Microsoft for the 16th year in a row.

It's unprecedented. And it's because of the quality and the quantity of business that we do with Microsoft in the cloud and the ERP and the CRM side. So again, that's firing on all cylinders. Our U.S. operations grew year-over-year, 17% on a constant currency basis, which is amazing organic growth by any standard. And then the Canadian operation, I mean, what can I say, I mean, even if you remove the R3D acquisition, we're showing double-digit growth in Canada as well. So it's really everywhere. So it's tough to say. I'd like to single out all of our people in operations and practices, but it's tough. They're all -- everybody is doing extremely well.

Certainly, it sounds good the tone in the commentary, certainly quite optimistic. Thanks for sharing that breakdown call. Maybe just the last one then just on R3D. Now that they're under the Alithya umbrella, they -- can you talk about what they're seeing in terms of their pipeline, their ability to now compete on larger deals with more resources. Maybe just touch on that? And then I'll pass the line.

Sure. I'll turn that over to Claude Rousseau, who is very closely involved in the integration, as you can imagine. So maybe he can give you a bit of color. Claude?

Yes, thank you very much for that question. No doubt, we integrate, first of all, our capacity and the practices we have, and the expertise we have. It's the most important part. But that's the reason when we combine the 2 companies together, we are creating something different than the capacity we had before April 1. And that's exactly what we are really building on. And if we look, same thing in the public sector, private sectors, we have practices, we -- unfortunately, before we didn't have access to in terms of numbers, in terms of capacity. And that's the reason now we have more projects than ever. The public sector is going well. We are really building with the expertise on both parties, on both teams. But now the good news, we integrated the 2 teams together. And it's working very well. We have a strong leadership in place. And that's the reason we already built on what we have.

(Operator Instructions) We can go ahead and take our next question from Amr Ezzat with Echelon Partners.

Paul, Cloud. Congrats on the strong quarter. Most of my questions were answered, but maybe 1 or 2 on my end. First, on the human capital strategy. Can you give us a sense of utilization at how...

Sorry, Amr. We barely can hear you at an office the line or...

I am at the office using a normal line. Is that better?

Much better.

Fantastic. I'll yell a little bit. So congrats on a strong quarter. My first question is on your human capital strategy. Can you give us a sense at a high level of your utilization rates? I mean, you've had fantastic organic growth at all due to lack of staff.

That's a great question, Amr. So our strategy from the beginning, the outset, I've been saying this for 3 years, was to move to the higher value type offerings. As you know, historically, and we're seeing it with R3D as well. If you go back several years, the company had a mix of higher value and lower value stuff and subcontractors and so on and so forth. We -- this market, for us, is an amazing opportunity because it helps us focus on the higher value business out there. So we could be showing much higher organic growth numbers, but I think the keyword is profitable organic growth. We're really focusing on the higher value opportunities that we have with our existing and new customers. That has three impacts. The first one is we go after cool projects. So we go after the digital transformation projects, the high-value stuff that customers are ready to pay more because they see business value.

At the same time, it helps attract the best people because the people in technology want to work on the cool projects. So right away, it helps us focus on the type of business, the higher-margin, and the type of people. It also changes how we deliver the projects. So Claude was talking about our delivery centers, our CSNA. We -- it started 3 years ago, and we now have over 600 people there in the CSNA. These are our digital solution centers where we deliver solutions instead of delivering people, right? So the way we price our projects now entail projects, entail solutions. So it's really tough to answer the utilization question because we focus more on results and outputs than time. So -- but a way you can look at it in terms of improvements in utilization and the margins and type of business, is really on the gross margin.

And as Claude Thibault saying, we tried to make it very clear in what we provided you today to eliminate the noise of the one-time, the subsidies and the projects, and the investments to give you visibility on the improvement in our gross margins year-over-year, which basically means all of the business is going up. One of the big areas of improvement, and we knew it going in, and we've been very transparent about it, is R3D. So R3D came with some great projects, great customers, and 2 new contracts that are game-changers for us. And the opportunity we have with those 2 contracts is to transform the people side of the business at R3D to move away from the subcontractor work and move closer to using our own people and our own centers and now our own offshore center to help staff those projects. We did it with Alithya. We know how it works. We know how to do it. So we basically have the playbook on how to do it with the R3D folks, which is Claude Rousseau's top list priority in terms of integrating R3D is how do we move them up the value chain to our level of gross margin. So you can expect to see more on that in the coming quarters and the future. Does that answer your question, Amr?

Yes. That's -- and actually, like the additional disclosure is appreciated. The -- then maybe one for Claude. On the business acquisition and integrate sense of what is in there, then if I'm looking over the next 2, 3 quarters, how should we expect that number to evolve?

Well, it depends largely if we're going to have other acquisitions, which has always been part of our strategy.

On a standalone basis, let's assume like no acquisitions?

Well, it will be decreasing significantly. We booked pretty much everything that we were aware of as far as R3D is concerned in Q1, be it transaction fees, professional fees, severance for the people leaving the company. So it's going to be decreasing significantly. Maybe a couple of hundred thousand here and there of remaining items that would not have foreseen, but it's going to be decreasing significantly.

Okay. That's all I have for you. Congrats again.

You can look at previous quarters, our last acquisition before this was a few quarters ago. If you look at the number during those quarters, it'll give you a sense of where we should be.

It appears there are no further questions at this time. Mr. Raymond, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, Madison. So again, I mean, we're seeing the unwavering engagement, dedication, flexibility, and diversity of our skilled professionals continue to lead Alithya forward. I'm honored to represent them on this call today. We have exceeded all expectations and are seizing on new opportunities to accelerate profitable growth in all of our industries and geographies because of the trust of our amazing clients. I want to remind all our shareholders that our Annual General Meeting of Shareholders will be held as a virtual meeting on Wednesday, September 15, 2021. To access the circular of the meeting documents, you can visit our Investors section on the Alithya website. Thank you, everybody, for being on the call today, and stay safe.