Alithya Group Inc (ALYA) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to Alithya's Fourth Quarter 2020 Earnings Conference Call.

(Operator Instructions)

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 remind everyone that this conference call is being recorded on Friday, June 19, 2020.

I will now turn the conference over to Pierre Boucher, President, MaisonBrison.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us for Alithya's fourth quarter and fiscal 2020 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, Senior Vice President and 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, Pierre, and good morning, everyone.

(foreign language) Today, I will discuss our response to the COVID-19 pandemic, our continued growth in fiscal 2020 and our continued diversification journey, which positions us well for our objective to become a North American leader in digital transformation services.

Let me begin with our response to pandemic.

First and foremost, Alithya and most of its customers are fortunate to operate as essential services providers.

In response to the COVID-19 crisis, we proactively implemented business continuity plans focused on 3 priorities: protecting our people, protecting our clients and protecting the company.

We responded quickly by implementing an immediate work-from-home policy for all of our employees, before we were required to do so by the authorities as well as offering our clients uninterrupted support and helping them migrate the cloud environments as they were also forced to adapt to teleworking conditions.

In addition, we took active steps to manage our liquidity by further optimizing our cost structure, restricting all nonessential expenses, limiting capital expenditures, reducing management and Board compensation as well as reviewing and taking advantage of all available government programs.

We are closely monitoring developments, and we'll consider additional initiatives as this situation evolves.

Now turning to our fiscal 2020 results on Slide 5. Fiscal 2020 was an exceptional year in Alithya's journey to become a leader in digital transformation services in North America.

We reached record-breaking results in terms of revenue, gross margins, adjusted EBITDA and cash flow generated from operations.

Our revenues reached $279 million, up 33% as compared to 2019, primarily driven by the contribution from acquisitions and growth on higher-value services.

This was partially offset by the Alithya U.K. divestiture and ongoing spending reductions from a select group of our large Canadian clients.

On the organic growth side, we have been working hard to mitigate some of these reductions through growth in new existing clients of higher value-added service.

Excluding these reductions of these select clients, organic growth in Canada actually increased 14.6% year-over-year, a testament to the resilience of our business model.

During the year, we successfully completed the integration of our Edgewater acquisition and successfully divested our small U.K. operations.

We were also very active on the acquisition front.

We completed 3 acquisitions, namely Matricis in October 2019, Travercent in December 2019 and Askida in February 2020.

These acquisitions will clearly accelerate our growth going forward, reinforce our platforms on both sides of the border, broaden our service offering and provide Alithya with the scale to target larger clients and more complex projects.

We are already witnessing the benefits of these new additions in recent large project wins.

In all, these acquisitions represent a total value of more than $45 million, which we financed with a combination of debt and equity.

Turning to Slide 6 for profitability.

Gross margin reached $83 million or 29.7% of revenues, up from $54.3 million or 25.9% of revenues last year.

This marked improvement was driven mainly by increased margins from acquisitions, growth in higher value-added services revenues and increased use of permanent employees versus contractors.

Our gross margin expansion journey continued in fiscal 2020, with margins approaching 30% from the low 20s just 2 years ago.

Adjusted EBITDA almost leveled to $11.8 million or 4.2% of revenues due to higher gross margins and the adoption of IFRS 16 leases, partially offset by a combination of recurring and nonrecurring expenses, related to being a public company and expanding the business.

In fact, this represents the highest EBITDA level since going public.

We generated $8.7 million in cash flow from operations, a marked improvement over the -- of $28.3 million versus the use of cash of $19.6 million in 2019.

We also completed the year in a solid financial position.

Slide 7 and 8 provide a historical growth profile of Alithya.

Over the past few years, we have grown our top line by over 30% annually on average, and our gross margin has improved from the low 20s to close to 30% today.

We were able to do this by selectively diversifying our business.

Turning to Slide 9. After close to 2 years since going public, Alithya is a very different company.

We diversified our business by industry, by geography and by client.

Two years ago, we were highly concentrated in the finance sector.

We had almost all our revenues generated in Canada, and our top 8 clients represented 70% of our business.

Today, our revenues are diversified by industry, with finance representing less than 30%.

Furthermore, with our U.S. acquisitions, our revenues are almost evenly split between Canada and the U.S., and our top 8 clients now represent less than 31% of our revenues.

We are proud of our evolution and remain focused on becoming a digital transformation leader in North America.

Furthermore, our diversification provides us with a much stronger foundation to face the potential challenges of upcoming quarters.

Claude will now review our fourth quarter results and our financial position.

Claude?

Thank you, Paul, and good morning to all.

Let me review certain Q4 numbers.

Please turn to Slide 10.

Revenues increased slightly to $73.2 million from $72.6 million for the same period last year.

This increase was driven by our latest acquisitions, coupled with good growth from new and existing clients.

It was partially offset by the continued spending reductions from several of our larger Canadian clients; a decrease from Oracle legacy products and services in the U.S.; and to a lesser extent, by the early impacts of COVID-19 in the month of March, including in France, where they occurred a little before.

Gross margin amounted to $20.9 million or 28.6%, down slightly from $21.3 million or 29.3% last year.

This variation is mainly explained by our normal variations in our revenue mix during the quarter and the early impacts of COVID-19.

As we indicated before and without factoring in our acquisitions, the company long-term strategy to move towards higher value-added services, increasing the use of permanent employees, will continue to drive gross margin improvements over time.

SG&A expenses amounted to $21.9 million, up 8.8% from $20.2 million last year.

This increase is explained by additional expenses related to recent acquisitions, partially offset by the divestiture of our U.K. operations as well as certain nonrecurring items.

We continue to target decreasing administrative expenses as a percentage of total revenues as consolidation synergies materialize and larger scale allows for more fixed overhead leverage.

Adjusted EBITDA amounted to $2 million or 2.8% of revenues versus $2.2 million or 3.1% for the same period last year.

In addition to the variations explained above, the small decrease is also explained by increased costs related to expanding our business, coupled with early impacts from COVID-19, partially offset by higher value-added services and a $0.5 million positive impact from IFRS 16 on lease accounting.

Of note, excluding those early impacts of COVID-19, adjusted EBITDA would have been slightly higher than the same quarter last year.

At the end of the quarter, we performed our regular annual goodwill and intangible impairment test.

In the context of COVID-19 and the significantly increased uncertainty surrounding global economic conditions in general and surrounding our clients, different geographies, markets and industries, in particular, and using conservative assumptions, we decided to record an impairment charge of $28 million for intangibles and goodwill.

That includes a reduction in the accounting value of our American trade names.

Our strategy of transitioning our acquisitions on to the Alithya brand as soon as possible is proving well accepted and very successful.

As a result, net loss during the quarter was $34 million or $0.59 per share, again, including the noncash impairment compared to a net loss of $2.7 million or $0.05 per share for the same period last year.

Now turning to our liquidity and financial position on Page 11.

Operating activities used $3 million in liquidity in the fourth quarter, a marked improvement versus a use of liquidity of $6.7 million last year.

Despite completing 3 acquisitions, investing in some real estate CapEx and dealing with the onset of COVID-19, we ended the year in a healthy financial position.

At March 31, 2020, we had $26.9 million of net bank borrowing, which reflects $11 million in cash and restricted cash.

This compares with a net bank of $10.2 million at March 31, 2019.

Subsequent to the end of the quarter, certain of our U.S. subsidiaries obtained loans totaling USD 6.3 million under the U.S. Government Paycheck Protection Program, or PPP.

That program offers certain conditions, allowing for the forgiveness of these loans in whole or in part.

We are using the funds for eligible purposes, and we are following all prescribed rules in order to maximize such forgiveness.

However, there can be no certainty whether we will obtain forgiveness, what the amounts forgiven will be and when all this might be confirmed.

In Canada, we obtained approximately

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for our smaller subsidiaries and for the initial 2 months of the program only.

Finally, we also obtained some government assistance in France from the (foreign language).

As it stands today, especially with this additional funding, we believe we have good financial flexibility as maybe required to weather the current environment.

Turning back to Paul.

Thank you, Claude.

While this unprecedented crisis had limited impacts on our fourth quarter results, we do expect it to impact our results over the next few quarters.

In fact, from April to mid-June, we observed a longer sales cycle as well as delays in some projects, even though most clients remain committed to their projects long term.

Furthermore, our pipeline remains healthy, providing a good base to build on.

While COVID-19 has created short-term uncertainty all over the globe, we believe demand for digital transformation services will remain strong as companies will increasingly need to improve operational efficiencies.

Given this context, Alithya is well positioned to benefit from future growth opportunities as it has successfully built its reputation as a trusted and experienced partner.

Turning to Slide 13 for a few key takeaways.

I would first like to say that we remain fully committed to our 3- to 5-year strategic plan as detailed on Slide 14.

Since going public, we placed great emphasis on expanding our gross margins, and we delivered on that front in 2020.

Over the next few years, the upward trend will continue to be driven by acquisitions, value-added services, investing in our talent and greater scale.

Alithya is now resting on a much stronger foundation, allowing us to support future growth and also face potential headwinds.

As I indicated before, our exposure to our top 8 clients has been significantly reduced in the past 2 years, even though we continue as their strategic partner.

Considering organic growth of 14.6% in Canada, excluding a few select clients, means we were successful in offsetting these important declining IT investment cycles.

Acquisitions remain an important component of our growth strategy as detailed on Slide 15.

The 3 acquisitions completed last year represent approximately $35 million in annualized revenues.

Considering the scale of our existing platform, recent acquisitions were integrated quickly and smoothly and allowed for immediate focus on cross-selling opportunities.

On a short-term basis, our solid financial position is an important asset to weather the current crisis.

However, we remain open to opportunistic tuck-in acquisitions.

As the drive for digital transformation continues, we all believe, at Alithya, that we were well positioned to deliver on our long-term vision to become a North American leader in strategy and digital transformation.

COVID-19 is still very much a reality, but we are now seeing the light at the end of the tunnel.

The past 3 months have been unprecedented and difficult for everyone.

My sincere gratitude is first extended to our loyal professionals, who have clearly demonstrated their dedication to Alithya and their customers.

I would also like to thank our clients for their unwavering support and trust.

To you, our shareholders, my thanks for your support and patience.

Finally, I have special thanks for the incredible health care workers and other first responders who remain on call, still today, 24/7, trying to make all our lives better during these extremely challenging times.

We will now be pleased to answer any questions you may have.

Operator?

(Operator Instructions) Your first question comes from the line of Maher Yaghi of Desjardins.

Can you hear me well, please?

Yes.

We can hear you, Maher.

So I wanted to ask you, maybe you can help us in understand a little bit how the COVID-19 situation is affecting your business when it comes to managed services versus consultancy type work.

Can you maybe also split your revenues and in that sense and discuss a little bit how is it different between the U.S. and in Canada?

Okay.

Thank you for the question, Maher.

I'll take the first one.

So most of our customers are in essential services.

So none of them have stopped.

We have a couple of exceptions.

We had in France.

As you know, Air France is a big customer of ours.

And of course, they've stopped just about everything.

Claude mentioned there's a special program in France for companies it was the (foreign language).

So they actually covered the salaries of employees, but that impacts our revenue in France.

It is a smaller portion of our business, but for our French operation, that was a big piece.

We had one customer in the U.S. which was a cruise line.

And as you can imagine, they've slowed down, but it was a very small customer.

Every other customer is still going so we didn't have to stop.

I'd say in the first few weeks, like everybody else, there was a lot of uncertainty.

People weren't too sure what to do.

We had customers who needed help in moving to teleworking.

They had never done it before.

So that generated some work.

There were some slowdowns in some customers, I'd say, early on.

But that's also stabilized.

I think we're seeing a longer sales cycle on some of our larger projects.

But as you can imagine, all of the projects that were on the go have been stopped.

So here -- and as I mentioned before, once you start a digital transformation project or an ERP implementation, you don't stop in the middle of it.

It has given us challenges in how we implement those projects because as you can imagine, the ERP projects, people usually go on-site to the customer.

We've been able to deliver all those projects and continue by doing it remotely.

It's been a very interesting challenge for our teams and our customers, but it's actually working very well.

So that's been interesting.

What was the second part of your question, again?

Is there a difference in how revenue mix is between Canada and U.S. and which one you think would be affected more by the COVID-19 pandemic?

It's an interesting question.

It's not as much by country as by customer.

So for example, financial services, I'd say there was some hesitation that -- in the first few weeks, but everything is running full steam now.

Manufacturing, the business that we do in manufacturing, is mostly in the food business.

And as you can imagine, food has not slowed down.

It actually accelerated during the pandemic.

There was a lot of restructuring within those organizations on the whole logistics and supply lines, and that impacted -- created some disturbance, but anyway, it was ongoing.

Energy hasn't really slowed down, and we still have to generate.

We're not in the oil and gas business.

So that -- we didn't have any impacts there.

So I'd say it varies more by customer than by country.

Okay.

And when it -- when I look at your fourth quarter results, we saw some pressure on gross margins and higher SG&A count amount that was expensed, how much of that is due to COVID and, let's say, increase in M&A activity?

And what would you say a more normalized level should have been on those 2 level -- 2 metrics?

So are you talking about gross margin or EBITDA margin?

Gross margin, sequentially down quarter-over-quarter.

I was just wondering what was the reason for that.

And also the higher SG&A amount in the quarter in Q4.

Okay.

So gross margin, sequentially, Q4, which is the first quarter of the calendar year, is always very much lower than Q3 because of the reset of government benefits.

So as you may know, when you start the year, every -- all employees are sort of starting over for the government benefits.

That's both in Canada and the U.S., start seizing up in the second calendar quarter, our Q1, and then Q2 and Q3 fiscal, so that is Q3 and Q4, are much better from that perspective.

That's point number one.

The impact of COVID we have estimated to be at least $300,000, so as we are talking about mid- to late March, in France, a little before.

So basically, clients, certain clients have reacted quickly.

They were not prepared to do remote working, for example.

So we had staff temporarily unable to invoice.

Some of that reversed, but that's the amount we are providing, at least $300,000.

And that's both top line, gross margin and bottom line.

Because, again, we did not have to react that quickly to reduce costs that we could have reduced.

In terms of SG&A, same thing regarding on salaries, regarding the government benefits reset on Jan 1. Our acquisitions year-over-year brought with them a certain level of SG&A.

What specifically is your -- sorry, what specifically are you looking…

Well, I'm trying to -- in terms of the SG&A level that you expect to be ongoing -- incurring in the next couple of quarters, what would be a more normalized level that we should be thinking about?

We can't provide specifics.

How, for example, how the expenses that are really impacted by COVID, be it travel, business development, training, recruiting and so on, will be decreasing significantly from Q3 -- sorry, from Q4.

Although that may be temporary once COVID gets behind us, normal levels should resume.

This thing about benefits reset, obviously, into Q1, we'll be easing off.

So directionally, expenses, SG&A will be lower going forward.

Although there is some impact in the other direction.

We only had a Askida for 2 months in Q4.

In Q1, we're going to have Askida for 3 months, but the amount is marginal when we talk about SG&A, but it should be going down.

Okay.

And my last question, I'll leave other people to ask as well some -- few questions.

You mentioned in the press release what your organic growth rate would have been if we excluded a few of your large clients.

When should we start -- or are you seeing enough stabilization in those 4 or a few clients that you have that are affecting your results negatively so that we begin to see eventually that organic growth more visibly on your reported results?

Or we still don't have -- we have not reached, let's say, the potential bottom on those large key accounts yet?

Yes.

A great question, Maher.

If you had asked me that question 4 months ago, my answer would have been much clearer.

Right now, in the context of COVID, until we get more clarity on the next quarter, it's very difficult to say.

Your next question comes from the line of Amr Ezzat of Echelon Partners.

I just want to go back to the gross margin dynamics.

You guys just mentioned that the sort of normalized impacts or like you could adjust your gross margins by $300,000 due to COVID.

But if I'm looking at the year-on-year number, if I make that $300,000 adjustment, it seems like you would have still been like flat year-on-year on the gross margin front.

And I'm just trying to understand the dynamics there, like Travercent and Matricis both contributing to your quarter or it seems like from your notes, at least, that they're 40% gross margin businesses.

So just wondering if you could quantify what other things are impacting, I guess, your gross margins year-on-year?

So as we said, a fair chunk of that variation is revenue mix.

So even though the fundamental direction is how you put it, should be going up over time.

Sometimes in a given quarter, we may have some of certain projects, less of another type, and that impacts the mix.

We have increased significantly, as Paul was mentioning, the number of permanent employees.

Those are impacted by this benefit reset factor.

While before, with contractors, it's flat line throughout the year.

So we have a bit of a greater impact from that this quarter.

Other than that, our recent acquisitions are smaller.

They have a bit of a different business model, being more IT-based.

And so I would say that volatility from quarter-to-quarter may be greater there, certain quarters will be higher than average, certain quarters will be lower than average.

So the impact on Q4 per se, especially Askida, which was only there for 2 months, remains to be fully seen in our gross margin.

But overall, we're maintaining the general directions we've been talking about, certainly.

Okay.

If -- okay.

Just switching gears, your impairment charge of $28 million, just looking at your financial notes, it seems to be subdivided into 2 parts, $15 million due to COVID and the balance of $13 million was related, as you cited in your prepared remarks, to both the EPM and ERP business in the U.S. So is my understanding correct that only a portion of the impairment was due to COVID?

Then can you give us more light on the dynamics there?

I'm surprised to see the U.S. ERP business taking an impairment charge, the legacy EPM, I'm not so surprised.

Okay.

So we should not look at it the way you're looking at it, if I may.

We looked at what was being done by the other comparable companies.

We spoke to our auditors, we looked at what was being done.

So it's basically a broad generic approach that we took, increased uncertainty, increased risks, more conservative forecasting and what does the numbers look like if we're going to do that.

So it's not really passing judgment on this business unit is doing very good, this business unit, not so much, et cetera, et cetera.

So that's how it's being reported because that's how it should be.

But the approach was not that.

It's really -- let's take the opportunity to look at our balance sheet, let's take the opportunity to maybe assume the worse for this purpose, clean up the balance sheet and so we don't have to talk about that going forward.

It's really how we should look at this.

And then we -- once that decision was made and made sense, we basically allocated that amount, about $12 million.

We allocated it between business units pretty much equally.

Certain minor differences, to your point, Microsoft, we've been saying that, has been performing better than Oracle.

So there's a consideration there, but not more than that.

So it's roughly half and half between goodwill and the brand writing off the accounting value of our brands in the U.S. So roughly half and half.

Sorry.

So are these 2 -- like I'm not sure like how you guys subdivide the business units, are these 2 independent business units in the U.S., so you have to run like 2 impairment tests?

With this purpose, yes.

Okay.

Understood.

Okay.

Maybe one last one, and I'll jump back in the queue.

On your adjusted numbers, I guess, like when I'm looking at EBITDA, you have like $400,000 in severances, then $400,000 in your internal ERP, both are significant upticks from previous quarters.

Can you give us an update there and what should we be expecting going forward on both severance and your internal ERPs?

Yes.

So severance, at the end of March, we took the opportunity to make certain headcount reductions in SG&A, not so much in COGS.

And so we recorded the severance amount there.

We are not expecting this to be recurring.

However, the positive impact of those headcount reductions should be showing off in our upcoming quarters.

And we are also accounting, to a certain extent, the severance and retention payments in our U.S. subsidiaries, that's coming to an end as well, but there's a few dollars in Q4 there as well, not material, to be honest.

Regarding ERP, also, as you may know, April 1 was the big migration of the U.S. on to our Oracle platform.

That took a -- quite a bit of work, as you can imagine, changing processes as well and staffing of these functions back to Montreal as was the plan.

So this also, as that being a big chunk, will be going down going forward.

It will not completely disappear.

We're still working on our the CRM modules, HR modules.

So there will be some of that going forward.

We're isolating it because it is a onetime thing for us once we're up and running, we're going to be good for many, many years and for much more revenues without incremental investing in this.

So did you guys have a specific budget?

I'm sorry, go ahead.

Did you guys have a specific budget for the ERP, like, going forward?

Like how much budget is left to be spent on the ERP?

We do have a budget.

I'm not sure we are disclosing that amount.

We also -- it's Paul.

Thanks for the question.

We also have to be careful, Amr, between what's the project cost of just the ongoing project putting it in place versus the cost of migrating acquisition on to the system.

In the last quarter, as Claude was mentioning, a big portion of the cost of the ERP was migrating the U.S. operations on to the platform, which was a transition project.

So every time we have an acquisition, we will be transferring them to this platform.

That's why we invested and put in place.

It's cloud-based.

It's been very useful in the past few months.

And it actually is helping us accelerate integrations going forward.

So…

Your next question comes from the line of Gavin Fairweather of Cormark Securities.

I was hoping you could talk about the 3 recent acquisitions.

And you talked about how they together will be providing kind of $35 million of annualized revenue.

Can you just talk about how they've been performing in the current environment?

Sorry, Gavin, the sound was breaking up.

Can you repeat the question, please?

Yes.

I'm just curious how the 3 recent acquisitions have been performing kind of in the recent environment from a top line perspective.

We still can't hear you, Gavin.

Talk louder and slower, please.

Louder or closer to the microphone, please.

On the 3 recent acquisitions, curious if you could just comment on how they've been performing during COVID?

Great.

Thank you.

Thanks for the question.

Sorry about that.

The -- so the 3 acquisition, one is an IoT specialist in AI, which we've integrated into the rest of our business, Travercent is a health care specialized business in cloud ERP and Askida is into the automated testing piece of our business.

So Askida was very late in the quarter.

So the impact on our business was limited as Claude was saying.

But the other businesses have not slowed down.

If anything, in health care, we're leveraging that expertise on other customers and other geographies.

So the Travercent acquisition, mixed with what we already had on the Oracle Cloud side, has actually generated some very positive cross-selling opportunities and wins recently.

So we actually won a few new projects leveraging that new acquisition.

Your next question comes from the line of Suthan Sukumar of Eight Capital.

Just wanted to touch on your client base.

What are you seeing in terms of their spending priorities currently?

And kind of how that's changed versus kind of 6 months ago?

And obviously, it's fluid, but how are clients considering their spend in investment across maybe in newer categories of spend versus some of the more traditional areas that would have focused on pre the crisis?

Yes.

Thanks for your question.

So the first thing I'd say it was very fluid in the last 3 months.

The first few weeks, it was kind of a scramble everywhere to find the -- including our customers, like, finding laptops to send their people home and setting up work-from-home infrastructure.

We were fortunate because we had already invested in those technologies.

As you know, we're all cloud-based here.

So sending our people home was very simple from a technical perspective.

We saw a lot of scrambling at the customers to do that as well.

So we did work on those issues.

There was a lot of uncertainty as well in those first few weeks.

Customers were not too sure what to do, especially for those of you like me, who went through the financial crisis of 2008 and 2009, there was a lot of craziness in the first few weeks of even people drawing down on their margin lines as you know.

I'd say that craziness has gone away.

The large projects we were doing did not slow down, but there was a lot of concern from customers all over, whether we would be able to do the same level of support remotely as we did from on-site.

That question has been settled.

And actually, we have some customers who very much prefer the new approach.

So I think a lot of people are going to be slow to going back to everybody into the office.

So we can support that model forever now.

We -- I think there's a lot of uncertainty out there in the environment -- economy in general, people, whether they're going to commit in the next couple of months, at least, to their long-term projects.

Most of our customers have told us they're still committed to their long-term projects.

They're just not too sure whether they start it now, wait a few more weeks, wait a month.

So we -- some areas of our business are doing very well, have not slowed down.

Others were kind of wait-and-see mode.

We're very, very cautiously optimistic, but it vary tremendously between industries, I'd say, more than between customers.

Okay.

Great.

That's helpful.

And you mentioned earlier about Travercent kind of you're starting to see some early signs of synergies with the acquisition and then sort of helping you drive some of the win rates that you're seeing in the quarter.

How should we think about kind of your pipeline right now?

How much of it is kind of qualified or mature at this point?

And how has that kind of changed since before the pandemic?

And is there kind of intrinsic kind of call-out around some of the backlog and the potential to close that backlog in the coming quarters?

Yes, that's a great question.

And I have 2 answers on that one.

The first one is our pipeline is very healthy.

We haven't had customers say we're canceling this project because of COVID.

The worst ones where we're going to delay it until we have more clarity, but none were canceled.

So our pipeline is very healthy.

The addition of Travercent, as you remember, in the U.S., our Oracle practice was very focused on the EPM piece, so the financial reporting consolidation piece of Oracle, whereas Travercent was very focused on the ERP side of the -- so we were able to immediately put those 2 together and go after much bigger projects, where instead of doing just one piece of the project, we now do the end-to-end piece.

And we were very successful with that and already have some very interesting opportunities and wins related to putting those 2 together.

So we see very positive impacts from that acquisition on both sides of the border, by the way.

The -- as to quantifying the funnel, I'm happy to say that one of those expenses that you saw in the ERP side, as Claude mentioned, is rolling out our new CRM system company-wide, which we put in place April 1. So you can expect that when we report Q1, you'll have a lot more information on our funnel and backlog and so on and so forth.

(Operator Instructions) Your next question comes from the line of Edson Lai of Stifel GMP.

So the press release called out $21 million of headwind from revenue from historical customers.

Were those mainly Canadian?

Or were some of that related to the historical Edgewater customers?

And is the COVID impact only $300,000 from that $21 million?

How should we think about that?

So the -- it's a great question, Edson, thank you.

First of all, those are Canadian customers.

They're from pre-Edgewater.

As we've been transitioning our business, and I was mentioning it earlier in my comments, if you go back and look at our business 3, 4 years ago, we had a lot of staffing or subcontracting business, which was much lower margin and much more temporary.

Since the past 3 years, we've transitioned the business to much more high-end, project-based digital transformation services, all of our acquisitions were in that direction as well.

So that today, our business is mostly employee-driven.

So these are full-time employees working on projects where we manage the project at a much higher margin.

So over that period, and especially in the last year, a few of our Canadian customers were transitioning through that as well.

So the staffing and lower-margin business has reduced dramatically in terms of their cyclical spend.

And we've been kind of walking around it or dancing around it in the past year on these calls.

And you've asked us for more clarity, so we wanted to quantify that and make it very clear.

So those customers, year-over-year, that lower-margin business decline represents about $21 million.

This has nothing to do with COVID.

That's just that cyclical spend with those customers.

And we replaced that business, so that's where the -- we looked at the rest of our customers and say, what happened?

Well, the rest of those customers in Canada, we eliminate those 4, actually grew almost 15% of better business.

And that's why year-over-year, you're seeing a significant improvement in our gross margins.

Does that answer your question?

Yes, for sure.

That's good clarity.

Can you talk about the wages subsidies programs and how they…

Sorry, Edson, just a second.

You had a second part of your question on the COVID and I'll let Claude…

Yes.

The $300,000 is very small -- I mean it makes a dent in our couple of million dollars of adjusted EBITDA for the quarter, $300,000.

But if you look at our metrics, we invoiced something like 70,000 to 80,000 hours per week.

If we've only lost 1,000 hours, let's say, in the week -- the 2 weeks at the end of March, times about, I don't know, $150 an hour, you get to our number.

And again, the top line impact becomes a gross margin impact because the costs don't change and becomes an EBITDA impact also because SG&A does not change in such short notice.

So that's how the $300,000 impact should be looked at.

Okay.

That's pretty helpful.

Can you talk about the wages subsidies programs and how that can offset the EBITDA headwinds going forward?

Like how resilient is the EBITDA margins of, let's say, 4% to 5%, which it's been in the past year.

How should we think about that?

Okay.

So each program is a bit different.

The biggest one is the Paycheck Protection Program in the U.S., $6.3 million.

If you've read the newspapers and you look at the media over the past few months, it's been a very interesting story.

The rules have changed.

Some companies have refunded the monies.

It looks like we qualify for that.

It is our opinion that we do qualify, and we're doing everything we can to achieve that.

However, they clearly have been so much vague, and they've changed so many times that we're very prudent.

So that, in itself, should it be forgiven.

And we're not saying it will, we will have to wait and see, but that would be a straight impact to the bottom line.

The Canadian program, the first month was a 15% test.

And as I said, 2 of our smaller subsidiaries qualified for that.

Mainly timing-related.

We're not saying we are seeing reductions in our top line of 15% at all.

But it so happened that for the month of March, in 2 cases, we hit that 15% magic number.

And if you qualify it, if you know the rules, if you qualify for the first month, you automatically qualify for the second month.

Even though the rule for the second month was 30%, 3-0.

We're not going to get -- well, I shouldn't be making forecast and outlook, but I don't think we're going to get to minus 30% anywhere.

So that's a onetime.

We disclosed the amount in our subsequent event note, you can look at that.

In France, the employees that are out of work because of COVID were not allowed, I mean, it's complicated labor law in France, but we're not allowed necessarily to lay off the people, so they're covered 80% of their salaries by the program, and there's an annual ceiling per employee.

So how that's going to shake out Air France, large clients, obviously, in France for us, not such a large client overall, but in France was a big client.

Severely impacted by COVID, have already started bringing back people.

So we're going to wait -- we need to wait and see how that shakes out.

Did I answer your question?

Yes.

That's perfect.

So it sounds pretty well insulated from, if I'd to guess, all 3 geographies on these wage subsidy programs?

Yes.

In -- sorry, go ahead.

Go ahead, sorry.

No, I was just was just about to say that luckily the rules in Canada are much clearer.

So we know what we put in our note is it will be an impact to the P&L to profitability, albeit a nonrecurring element, but it's going to be there in Q1.

Perfect.

That's helpful.

I have 2 more, if I may.

I wanted to talk about the net bank borrowing calculation.

Could you explain why you guys include the restricted cash but then adjust out some of the purchase payables and transaction costs, is this more in line with your covenant calculations?

Or do these adjustments limit your ability to raise more debt?

And would you guys consider doing so for further M&A?

Well, restricted cash is just when we made one acquisition a few years ago, that was how it was structured before we were public.

In reality, this is cash, just like the rest of our cash.

So that's why we include it.

That amount will be payable.

That is also in our long-term debt note.

That balance of sale will be payable in a couple of years.

Regarding that, we are -- I mean, you've seen the numbers.

And before we said, we were aiming to go to 2x adjusted EBITDA, 2.0 to 2.5x adjusted EBITDA.

We would not go much more than that.

So doesn't mean we will not consider acquisitions.

In fact, what we go after usually is profitable acquisitions.

We're not looking for turnaround situations all that much.

So we add EBITDA to the mix, much more than what additional leverage should be to stay within the numbers I talked about.

So it's prudent, yes.

We will still consider acquisitions.

There are no further questions at this time.

I will turn the call back over to the presenters.

Thank you, Takai.

So thank you, everyone, for your questions.

And again, I just want to be clear that our #1 priority is to generate long-term profitable growth to enhance shareholder value, and I assure you, this is our ongoing focus every day.

So thank you for being on this call today.

We look forward to speaking with you at our next quarterly call.

Have a nice day, and take care.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.