Alithya Group Inc (ALYA) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Alithya Third Quarter Fiscal 2021 Results Conference Call.

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

Thank you very much. Good morning, everyone, and thank you for joining us for the Alithya Third 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 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 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 our MD&A for more details.

Now I would like to turn the call over to Paul.

Thank you, Rachel, and good morning, everyone. Bonjour. In the context of the third quarter operating environment, where resiliency and agility are rewarded, I'm very pleased with the results delivered by our team. One, we generated revenue growth over 7% on a constant currency basis. We signed record bookings in the quarter as we continue bringing on new clients while renewing and expanding our relationships with existing clients who continue to place their trust in Alithya. Our optimism is also supported by the continued growth in demand for our digital transformation services as clients plan for a very different future, and our recruiting successes confirm this. Let's have a look at our operations, beginning with Canada.

I am pleased to report that we are maintaining sustained revenue growth across our Canadian operations. I would like to draw your attention to 2 things. One, this momentum is being fueled by our largest historical clients, where we are seeing growth both year-over-year and sequentially; and two, our digital solutions center is benefiting from the positive impacts of last year's acquisitions. We have assembled a strong and unified team that is dedicated to helping our clients transform their businesses, driven by the vision of becoming a world-class digital solutions center. The Alithya way is now a recognized approach, which, when combined with our additional scale, results in now being invited to participate in much larger projects.

Now turning to the United States. The utilization rate is still lower year-over-year but has improved significantly sequentially and is on a positive trend. We are optimistic about the upcoming quarters and remain confident in our decision to maintain our very talented workforce to be ready to support this growing demand. Our team in the U.S. have delivered a substantial number of Microsoft and Oracle enterprise solutions to customers in a variety of industries and geographies. In fact, during the third quarter, our teams ensured the implementation of 22 ERP and CRM projects and successfully completed the implementation of more than 20 EPM initiatives. This is a trend that will continue to have traction into the upcoming quarters.

In Europe, our team has demonstrated its resilience and agility in largely offsetting the pandemic impact from a significant client through new bookings and new clients. In fact, in the third quarter, revenues in Europe fell by less than CAD 100,000 compared with the same period last year. I am very proud of our European team's ability to overcome in very challenging times.

In addition to accelerating growth, this quarter represents a record in terms of bookings. Over the past few quarters, we have invested in our sales force and now are reaping the benefits. These benefits are clearly demonstrated by the growth of our order book, which provides us with visibility and momentum for the quarters ahead. The demand for our digital transformation services, combined with our team's recognition as a high-value partner by our clients, has resulted in these record high bookings during the quarter. Our new contracts totaled CAD 126.1 million, which translates into a new book-to-bill ratio of 1.86 for the quarter. This includes the previously announced renewal of our 2-year framework agreement with Desjardins Group in the financial services sector.

These wins also help validate our decision to accelerate investments by building out our sales infrastructure and capabilities. For example, earlier this year, we implemented the Microsoft Dynamics customer relationship management solution inside Alithya, which has enabled us to better serve our customers and is in place to support the growth in the years to come.

As we enter the last quarter of our fiscal year and look ahead to fiscal 2022, I am optimistic about our team's ability to leverage this tailwind and convert it into profitable growth. During our last call in November, I told you that Alithya had launched a massive recruitment campaign in order to attract the level of talent needed to deliver the contracts we've signed. Today, I'm pleased to inform you that our campaign is attracting top talent. Over 175 new experts joined the Alithya family as full-time employees in the third quarter. This will not slow down.

I'll now ask Claude to go over some of the financial highlights. I'll then close with comments on the mergers and acquisition environment and strategic highlights before taking your questions. Claude?

Thank you, Paul, and good morning. Let's review certain Q3 highlights. Revenues for the quarter increased by CAD 4.4 million, or 6.6%, to CAD 70.6 million, driven by both our Canadian operations and our U.S. operations. Assuming a constant U.S. dollar, the overall increase would have been 7.1%. More specifically, revenues in Canada increased by CAD 3.3 million, or 9%, to CAD 40 million, while revenues in the U.S. increased by CAD 1.2 million, or 4.5%, to CAD 27.6 million. In both cases, our 2 most recent acquisitions contributed to the reported third quarter growth, which was offset by the negative impacts of COVID. We are reporting that revenues from our large historical Canadian clients are continuing to show stabilization, and in certain cases, growth, also contributing to the strength of the quarter.

Regarding the Matricis acquisition, as it was completed on October 1, 2019, it no longer has an impact on year-over-year comparability. I would also point out that our recent acquisitions, on an aggregate basis, are reporting solid organic growth over the period before they joined Alithya.

Lastly, on a sequential basis, our consolidated revenues increased by CAD 2.2 million, or 3.2%, compared to the second quarter. Gross margin increased CAD 0.3 million to CAD 20.4 million, or 28.9% of revenues, from CAD 20.2 million, or 30.4% of revenues, last year. As a percentage, it is a decrease, but it remains a solid performance, especially in the U.S. and France, in the context of COVID, a lower U.S. dollar and increasing costs in one large project. It is also a notable sequential improvement of 160 points versus our recent second quarter.

SG&A expenses amounted to CAD 20.4 million, up CAD 2.7 million, or 15.1%, from CAD 17.7 million last year. This increase was primarily driven by the additional expenses related to our recent acquisitions as well as increased employee compensation. When looking at adjusted SG&A expenses, i.e. expenses before nonrecurring, nonoperational and noncash elements, the increase diminishes to CAD 1.5 million, or 7.5%; again, mainly explained by our 2 most recent acquisitions and increased headcount. As such, this underlines careful expense management and reflects gradually and successfully implementing synergies in our combined operations.

Adjusted EBITDA amounted to CAD 2.3 million, or 3.2% of revenues, versus CAD 3.5 million, or 5.3%, for the same period last year. This variation is attributable to our increased revenues and gross margin, which was offset by increased SG&A. As in previous quarters, high amounts of noncash depreciation and amortization make up the bulk of the quarter's accounting loss.

Now turning to our liquidity and financial position. Net cash flow from operating activities amounted to CAD 1.1 million in the third quarter, compared to CAD 8.1 million in the same period last year. This variation was mainly attributable to the fact that last year had an unusual amount of positive change in noncash working capital, which did not reoccur in Q3 this year, even though the amount was still positive.

We ended the quarter, again, in a solid financial position. At the end of December, we had CAD 17.1 million of net bank borrowing, which is net of our CAD 12.7 million in cash and restricted cash. It is an improvement of CAD 9.8 million compared to a net bank debt of CAD 26.9 million at the end of March 2020.

We are currently in the process of applying for the forgiveness of our U.S. PPP loans. As of today, we have obtained confirmation from the Small Business Administration for one of our 5 PPP loans, representing USD 475,000 out of the total of USD 6.3 million. As indicated in our financial statements, this first forgiveness was recorded to the P&L during the third quarter. For the remainder, we have used the funds for qualifying expenses and otherwise complied with all relevant rules and regulations of the PPP program.

The PPP has been an important tool in implementing our decision to support our valuable workforce despite the temporary COVID decline in the U.S. However, there still can be no assurance that the company will obtain forgiveness in whole or in part for the remaining 4 PPP loans.

We are still continuing to benefit from the Canadian emergency wage subsidy program, albeit at a reduced level, considering the improving performance of our Canadian operations, and we are monitoring the new rules to be confirmed over the coming weeks and months.

Overall, we are in a great financial situation, having used a small portion of our available senior credit facility on a net basis to navigate the current ongoing uncertainty and keep pursuing our business plans and objectives. Turning back to Paul.

Thank you, Claude. To summarize, our third quarter results showed revenue growth in Canada and the U.S. as well as increased gross margins in the U.S. and Europe. In the current context, our accelerating growth demonstrates the resiliency and agility of our business model as well as sustained demand for our high-value services. We have made progress in the execution of our 3- to 5-year strategic plan. In terms of our response to COVID, we continue to make the right decisions in terms of protecting our people and our business for the long term.

I would like to take this opportunity to express my sincere thanks to all the people for what they do day in and day out for our clients. We have an amazing team, and I'm extremely proud to represent them here today.

On the acquisition side, we continue our disciplined approach to actively pursue a number of acquisition opportunities, and we remain committed to our strategic goal of eventually doubling the size of the company through a combination of organic growth and acquisitions.

Looking ahead to the next quarter, we are very optimistic. Despite the pandemic challenges that persist, our teams continue to be instrumental in assisting our customers, and their motivation and commitment are stronger than ever. As I've mentioned numerous times, our employees choose Alithya because they seek to work on exciting projects and wish to be owners of the company they work for. I'm pleased to hear on a regular basis that our teams value their work because they help our clients transform and improve their businesses.

In addition to this tremendous display of enthusiasm and the excellent feedback provided by our customers and teams, our KPIs and other tracking tools are showing us promising results as well. So before we go to questions, I would like to leave you with my 3 takeaways from these past quarters.

One, our revenues are increasing compared to the same period last year. Secondly, we have continued to build our trusted partner reputation as demonstrated by our record bookings. And finally, the success of our recent hires is a tribute to Alithya's strong reputation and attraction ability in a tight labor environment.

Claude and I will now be pleased to answer any questions you may have. Michelle?

(Operator Instructions)

And your first question will come from Paul Steep, Scotia Capital in Canada.

Paul, could you maybe talk just about where you're seeing some of the booking strength, I guess, relative to your Microsoft and Oracle practices? Maybe start with the U.S., and then if we can maybe talk a little bit more about Canada.

Sure. Thank you for the question. We're actually seeing the bookings across the board over one. Every region and every business unit has had a very strong quarter. So we're very, very positive on both Microsoft and Oracle. We've announced in the past quarter a few wins where the fact that we now have both the EPM and ERP arm together, we've won much larger projects than we have in the past and have been able to go after larger projects than in the past. So we're really seeing the benefits of the cross-selling from our acquisitions, both on the Oracle front and the Microsoft side as well.

And then maybe just with regards to bidding for larger projects, what's sort of changed in terms of clients' requirements there? Obviously, you're stepping up in terms of size of resources you can apply. But maybe, is there anything noteworthy about what you're seeing from client demand, maybe, that there might be a change from the past, given the pandemic?

Yes, sure. So one of them we made public, and I've talked about it before, but I use it just because it's a very good example of other initiatives that we're working on today, and it was the Nemours project. So Nemours is a hospital group in the U.S. We were not invited initially to bid on this because of our size. After we completed the Travercent acquisition, combined with their healthcare expertise in ERP, combined with our EPM expertise as well, we put the 2 together, and combined with our size, we were able to go back, get included in the request for proposal, which we were included -- excluded before, and we're able to win that and beat some of the big fours at it.

So today, we can now bid on much larger projects. So one of them that we mentioned, we won one of the largest cities in Canada for the implementation of their ERP for the same reason. Alone, we would not have been able to do it, but our combined scale and the skills from these acquisitions has positioned us for those. So we can now go after these larger projects, which we could not go after before. So that's very positive for us.

Great. And maybe just the last one; on the M&A environment, you talked about the fact that you'll remain active out there. Is it at a point now where we're sort of a year -- almost a year into this new semi-normal, that maybe you've seen some of the owners come back to you with, now, a different focus and maybe a willingness to reengage and revisit on price? Or what would you say the end market's looking like?

All right, thank you. So there was a pause for a while, as I've mentioned in the past, in the first 6 months of the pandemic. After that, things restarted. I think it also weeded out some of the people who were just kind of testing the market. As you know, we're very disciplined in our approach to M&A, so we don't like -- we won't do stupid deals or pay anything and everything, so we're very disciplined. We have a very good track record for our past acquisitions and integrating them and cross-selling and growing, generating growth from these. So we still have a very healthy funnel. The idea is doing the right one at the right price. And it's not for lack of opportunities. There are many opportunities out there. It's just doing it the right way. So we're always working on those.

And your next question will come from Deepak Kaushal from Stifel GMP from Canada.

Paul, Claude, I had a follow-up on Paul Steep's question earlier, and you mentioned Travercent. I was wondering if you could talk a little bit more about Travercent. You're a year into that acquisition now; it's focused on healthcare, and we're in the middle of a global pandemic. What are some of the opportunities and challenges that have come up since the pandemic starting with Travercent? And how are you guys managing through those or taking advantage of those (inaudible)?

Thanks for the question, Deepak. So I focused on that one, but I don't want to take away from the other acquisitions we've done because they've all been very, very accretive for us. And as Claude mentioned, we're generating growth from these acquisitions as well.

Travercent was very specific to a certain market sector, which was healthcare, especially in the hospital sector in the U.S., and they were #1 in what they were doing in terms of number of implementations of Oracle, cloud, ERP and healthcare. So bringing them on board, combining that with our existing skills on the EPM side and our cloud practice, we're able to accelerate that. So if you look at the growth they had before alone, we've grown that several-fold since they've joined us because we're going at it together.

The other thing that is useful is now with that skill set, we can also bid in Canada on large projects where we have relationships and presence where they did not because they were based in the U.S. and focused in the U.S. So we see many opportunities there for cross-selling, both geographically and in complementary sectors.

So healthcare, as you all are aware, had to change dramatically in the past year with the cloud-based services and telehealth and all these other things. So moving to the cloud for their internal platforms is critical. So we have seen an acceleration there. I don't think this is going to slow down. It's not going to go away after the pandemic, so we see a tremendous potential for growth there and in the similar sectors. So the expertise we've developed there, we can actually cross-sell into the public sector. So for example, a large city or universities and higher-ed-type environments. So we see a lot of opportunities there, and we're very happy with those acquisitions.

Excellent. So not to leave out Askida, then, maybe I'll ask you about that. I know they have a QA software and they have some IP there. So I'm just wondering if you can give us a sense of how that -- how you guys have been able to leverage that IP to drive higher IP sales and margin for the business?

Great. Thank you. So yes, we were very happy with that acquisition as well and generating some significant growth there as well, in 2 ways. One, they had complementary clients where we were not present. So now we're cross-selling our other services into those customers.

And from our perspective is the IP, we're leveraging it across our ERP practices because the beauty of cloud ERP systems is that you're always up to date and on the latest version. The challenge for the customers is you have to upgrade every quarter to the latest version. Whenever you do that, there's significant testing involved to make sure you didn't break anything with the upgrade. In the past, customers would do this manually. With the -- with our solution, we can now automate this. And the beauty of what we've done -- we've talked about our investments we've done in our infrastructure over the past couple of years to be able to support a larger company, but we rolled out Oracle Cloud internally as our ERP. We have rolled out Microsoft CRM internally as part of our CRM. So we actually use the tools that we sell to our customers. So we can actually use our internal environment as a test bed for these solutions that we then can cross-sell to the customer.

So with Askida, we developed a new solution to be able to roll it into our Oracle proposals, as an example, so that when the upgrades come through and the clients need to upgrade every quarter, that we now have a solution that we can sell to every customer, piggybacked on our ERP projects, to generate future revenue and license sales on this IP. So it's been very, very complementary.

Excellent. It sounds like the dogs are eating the dog food, I guess, if that's the expression. I think that's right. And then my last question, guys, just on the M&A side. I know in the past you've kind of explored or considered areas like in broader ERP like SAP, consulting or integration, or even new areas like supply chain. Where does that fall in the priority list? Or what does that look like in terms of your pipeline for M&A and diversification?

Yes. We're looking at all of the above, Deepak. It's a good question. We try to be -- we try not to disclose too much because it could impact or draw some competition to some of the targets that we're looking at. But yes, I'd say all of the above.

We like acquisitions that bring us a new skill set, complementary skill set, or a new industry that is also complementary. So again, if I look at the last 3 that we've done, Travercent was to position us in healthcare and Oracle Cloud. Askida was to position us in the testing and the IP. Matricis was to be able to cross-sell IoT-type projects and machine learning across all of our customers. So we look for these best-of-breed companies out there that would be very complementary, that would be easy to bolt on. And we also are looking for transformational ones as well. I mean we've done Edgewater in the past; there's no reason why we couldn't do something else the same size as Edgewater. So we look for those as well.

And your next question will come from Gavin Fairweather from Cormark in Canada.

I just wanted to dig a little bit into the bookings. You talked about the book-to-bill being positive across regions, which is great to hear. I guess, just specifically in the U.S., can you talk about whether projects are kicking off as you would expect and going well?

Sure. So our book-to-bill, as I said, is -- was very good in all of our geographies and in all of our practices. We've seen in the U.S., and Claude mentioned it, sequential growth in our billable hours and utilization in the U.S. As you know, last year, in the second quarter, they were hit by the slowdown in new projects starting up. So what this is -- what this tells us, because of these bookings in Q3, we know that in the next quarters, things are only going to improve because the utilization goes up as these new bookings come in and these projects start up. So that's why we're very happy with the momentum and the visibility we have for the coming quarters because of bookings like that.

As you know, in the U.S., we need to replenish those projects a lot more than in Canada because in Canada, we have a lot of recurring business from existing customers. In the U.S., we have to sell to new customers, new projects all the time. So whenever you see that, it's very encouraging and promising for the quarters ahead. Which also supports the decision we made to hang on to our people because we need them now. So we're very happy with that decision.

Yes, for sure. And maybe just to follow-on on that. Can you talk about how much slack or kind of (inaudible) utilization there would be within that U.S. business? I mean I think historically, you were probably doing around CAD 30 million on the Edgewater business with kind of top line (inaudible) obviously added to that. So could we think about there being capacity in the business to move quarterly billings up, maybe north of CAD 40 million a quarter?

So if you look at the run rate we had pre-COVID in the U.S., we hung on to our people. The key people we needed to deliver projects, we've hung on to. So there's no reason if the business is there that we can't get back to those levels with the existing workforce we have in the U.S. We always need to replenish because you do have a turnover, but there's no reason we can't get to those levels.

Okay, great. And then just lastly for me, can you just talk a bit more broadly about some of the investments you're making in the sales force? And maybe talk about the size of the sales team now, how many people you're looking to add? And then kind of the time frame that it takes to produce salespeople to ramp up towards your expected productivity.

So we have invested in growing our sales force and transforming it. As you know, selling larger projects is very different than selling the smaller stuff, so we've invested in more strategic sales. We've invested in our platform, and we also invested in recruiting. As you can imagine, back in April last year, when everybody was freezing everything, we weren't hiring much. In the past quarter, we hired 175 new employees. So you need to ramp up the recruiting team for that. We had a very good base, so we actually invested in our recruiting team as well. And we still have several hundred open positions on new projects that we're going after. So it was very important for us to invest in those 2 parts, because they go together.

And your next question comes from Suthan Sukumar from Eight Capital from Canada.

It's actually Adhir on for Suthan. I just wanted to dig a bit deeper on the overall spending environment. You touched on it a little bit before, but with rolling lockdowns in North America, what are you seeing from -- in terms of clients, in terms of their spending priorities? Are they getting more comfortable in this environment? And generally, how do you see that playing out for the rest of calendar 2021?

Thank you for the question. So in terms of the demand side, as you can imagine, everybody now realizes this thing is going to be around for a while. So the cloud transformation-type projects have accelerated and we have more demand across the board that we're seeing for that. So we -- from where we're at in terms of our strategy, we're very happy with where we're going, how we're positioned. And if you look at any kind of statistics out there, whether it's from Gartner or IDC or any of these other organizations, you'll see that the spend on cloud-based environments, or transformation towards cloud-based environments, is accelerating. And we're seeing this in very large customers as well, which is very positive. So we don't see any sign of that slowing down.

I think one of our advantages is the relationships that we have in place. So when these customers are doing this, they're not going for the lowest bidder. They're not looking for what I would call staffing-type organizations. They're looking for organizations that provide value-added service that can guide them, that can help plan where they need to go, that can drive those projects for them and accompany them. And that's where we're at today.

So that's why we're very well positioned. That's why we're seeing the kind of growth numbers that we're seeing now, which is what we expected. And we said in the past that as soon as people get used to this new environment, we thought we had the right approach and the right solutions, and it's paying off today. So that's very positive.

I don't think this is going to slow down. I think based on what we're seeing from even the solution providers, every number that we see from Microsoft, from Oracle, from some of the other enterprise solutions, they're all showing significant growth in their cloud-based solution sales. We've focused on very key industries where we wanted to be #1 or #2; that way, we know we're always on the list. We're always going to get calls when somebody is looking at a solution.

And on the Microsoft side, we again made the top 1%. So put that in perspective. Microsoft has thousands of partner integrators. I mean we're in the top 2 or 3 in North America. So it's -- so when something happens on the Microsoft side, in agri-food or in the industries where we specialize, we get a call. When something happens in the healthcare area, we get a call on the Oracle side. So these things have positioned us really well, and it's a big differentiator for us. So we see that accelerating.

And that's why the acquisitions that we're looking at are complementary to that. And the people who want to sell and join with us is because they see the potential upside of joining an organization because we have the track record. We can have them talk to the previous acquisitions, and they can testify to the benefits they saw of joining a company like ours. So that's why we put all those things together, and we really believe we have the right strategy for this time and for post-COVID as well.

So your next question then will come from Amr Ezzat from Echelon.

So just a follow-up; I'm pleasantly surprised to see your sales up sequentially during the seasonally weak quarter, and I'd just like to hone in on the dynamics. You mentioned in Canada, you've got large accounts coming back and a good number of projects across all geographies. Just wondering, do you feel like this is just pent-up demand with projects coming back that were paused? I.e., how sustainable is this in your view?

Thanks for the question, Amr. There might be a little bit of that, Amr, in terms of pent-up demand, but the -- what we're seeing is that customers at the beginning of the pandemic weren't too sure how long this thing was going to last and what they had to do. I think as people realize that this is going to be the new normal, that people working remotely is not going to go away, that their systems need to adapt to that new reality, whether it's for cybersecurity reasons, giving people access in a secure fashion to their systems. So all these things combined, all of these companies are trying to become more agile, more cloud-based and more in tune with where the industry is going and where they need to be for their employees and for their own customers.

So what we're seeing is not -- I do not believe it's just pent-up demand. What we're seeing is a deep transformation in how our clients and customers want to work and want to -- how they want to work in the future. So if I look at the type of projects we're doing, I don't think those are going to slow down, based on what we're seeing.

Fantastic. If you'll allow me, just one other quick one. On the gross margin side in your prepared remarks, Claude, you mentioned increased cost on one large project. Can you give us a sense of when this project is sort of tailing off and how material the impact on the margins are from that specific project? Is it a case where we'd expect to see a good bump in margins post completion?

Yes. I'll comment on the project, Amr, and I'll let Claude give you a bit of color on the numbers after. So this -- it's a very specific project. We have hundreds of projects on the go all the time, by the way. So this is one specific project where we're helping a very large and important customer of ours, where we do many other projects as well, in building out some IP. So some new intellectual property of something they're using internally and something that they want to sell. There's R&D involved, so it's always interesting when you do that. And in this particular case, once the system is in place, we actually get royalties from the sales that the customer is doing for the future.

So we believe it's a good investment. We know where the problem is, and it's interesting because if you take that project out of our numbers, the gross margin in Canada and overall would improve and look very much in line with last year. So we know where the problem is. We're fixing it, and we're confident of the payback we're going to have on that project in the future.

Claude, I don't know if you could give more color on the numbers?

Well, we decided not to provide specific numbers. Although what you just said, Paul, by triangulation, you can figure out, it is a sizable amount. That's why we were singling out in our disclosure this quarter.

In terms of the future, by definition, the accounting rules make it so that we would need to book the whole anticipated loss in this past quarter. So as we stand today, we are not expecting significant impacts going forward from that project, is what I would answer.

So as we have no further questions in queue, I turn the call back over to the presenters for closing remarks.

Thank you, Michelle, and thank you, everybody, for being with us today. Before we go, as usual, I would like to say thank you to all our first responders and healthcare workers on the front line, fighting to keep us safe from this pandemic. We will never be able to recognize them enough. So thanks again, take care and stay safe.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.