(ALYA) 2023 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to Alithya's Third Quarter Fiscal 2023 Results Conference Call. I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications & Marketing at Alithya. Please go ahead, Ms. Andrews.

Good morning, and thank you once again for joining us at Alithya's Third Quarter Fiscal 2023 Results Conference Call. The press release and MD&A with complete financial statements and related notes were issued this morning and are now posted on our website. The webcast presentation can also be found on our website in the Investors section. Please be advised that this call will contain statements that are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For more information, please refer to the cautionary notes in our presentation and to the forward-looking statements and Risks and Uncertainties section of our MD&A available on our website. All figures discussed on today's call are in Canadian dollars, unless otherwise stated. And we may 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. Presenting this morning are Paul Raymond, Alithya's President and Chief Executive Officer; and Claude Thibault, Chief Financial Officer. I will now turn the call over to Paul Raymond. Paul?

Thanks you, Rachel. Good morning, everyone. Thank you for joining us on the call this morning to discuss Alithya's Third Quarter 2023 financial performance. So this morning, I'm pleased to disclose another very strong quarter for Alithya as we enter the final months of our 2023 fiscal year despite the ongoing global uncertainties. There are many important takeaways from this quarter, but if I were to highlight only a few. I draw your attention to, one, another strong quarter of revenue growth at 19%; two, a return to the 30% gross margin levels; and three, our first $10 million adjusted EBITDA quarter. And perhaps one more thing, is significant cash generation and debt reduction. We continue to grow our reputation as the trusted adviser that are existing and new clients turn to, to help resolve their clinical digital transformation challenges. In the third quarter, we added 37 new clients and generated 83% of our revenue from repeat clients. On the gross margin front, as we explained in the past, we continue to increase our permanent employee ratio as we replace some contractors and grow our portfolio to higher value services. We're now back at the 30% gross margin threshold, and we continue to focus on improving this as we roll out our smart shoring strategy. Finally, we reached the $10 million adjusted EBITDA as we continue to implement our strategic plan and the progress on all fronts. It should also be noted that Q3 included an extended holiday season for some of our clients as a temporary cost-cutting measure, which translate into less billable hours for Alithya as well as a slowdown in some of their e-learning activities. We believe Alithya is in a favorable position to be the go-to trusted adviser that our clients needed in these uncertain times. There will not be less technology in their lives 10 years from now. As our clients navigate through their challenges, they are looking for trusted partners who can rapidly deploy proven technology solutions to help accelerate automation and improve their efficiency. We have demonstrated that our model is sustainable, and as we reach critical mass, that Alithya is in a favorable position to generate increased value from our rapid growth. During this past quarter, we continued to fill our healthy pipeline with projects for the quarters to come. We also took great strides towards the fulfillment of objectives outlined in our long-term strategic plan as we continue to implement measures designed to go up the value chain and to improve efficiencies. We see continued opportunities ahead to increase our profit by profile as well. Our business continues to be fueled by strong bookings in Canada and the United States despite global economic uncertainty and recessionary warning signs, which I will address in a few moments. We are also encouraged by our funnel and our bookings remain the best predictor of what's to come. As I said, we added 37 new clients in the third quarter, and our bookings reached $137 million, which translates into a book-to-bill ratio of 1.04. However, it's important to keep in mind that when we remove the recurring revenues from our 2 large 10-year contracts with Beneva and Quebecor, the book-to-bill ratio for the rest of our business would be 1.2. As for a trailing 12-month basis, the bookings were $509 million, which translates into a book-to-bill ratio of 1. But again, this ratio is higher when taking the 10-year contracts into account. Now more on our smart shoring strategy. So one of our key priorities has been the scaling up of our smart shoring operations, which currently accounts for about 5% of our billable workforce. For us, smart shoring provides an option for a wider pool of available talent, including highly qualified experts who enable us to reduce project costs for our clients and to increase our competitiveness and value. Since opening our first smart shore operations in Morocco in 2021, we've added highly qualified experts in Eastern Europe and India through our M&A strategy and through new hirings. Data solution is just one example of how our M&A integration strategy is paying dividends, along with leveraging the cross-selling opportunities and prospects for longer-term generation. In line with the latter, we're quite pleased with our data solutions sequential revenue growth of over 20%. We are also targeting gross margin improvement through a reduction in the number of subcontractors we engaged to carry out our projects. In the third quarter, transitioning to regular employees reduced our subcontractor workforce by 6% in Canada. It must be remembered that the transaction to a prior R3D in April 2021 included hundreds of subcontractors added to our workforce, and we have significantly reduced that number since through full-time employee conversion. In fact, we're proud to have returned to pre-R3D gross margin levels in just 18 months, which is a significant feat considering that a 2-year time line was initially targeted to do so. We furthered (inaudible) of subcontractors to regular employees still out on the horizon and where our smart shoring operations gaining momentum, our objective is to continue to improve our gross margins in the future. Another contributor to gross margin improvement is our push to increase sales of subscription-based services. Subscription, software and other revenue now represent 12.4% of our total revenues. With that being said, I'd also like to take a moment to provide a bit of additional color on our geographic basis. In Canada, our renewable energy digital business continues to benefit from major nuclear refurbishment projects, echoing an emerging trend that may prove to have long-term benefits for the planet and for Alithya. Globally, there is a growing consensus that the attainment of global carbon reduction objectives will require increased use of nuclear energy. Currently, Alithya is helping 3 major Canadian energy clients to prepare the landscape and to develop their digital strategies for doing just that. And we've received deeper integration projects on the horizon for Alithya as those efforts progress. On the local front, we signed a major 3-year contract with a large Canadian retailer to assist them in replacing and optimizing their mission-critical systems supporting back-office operations. And in the U.S., despite a slowdown in the manufacturing sector, our health care sector business remains robust. Additionally, initiatives are being developed and implemented to increase the scale of our managed services within our large Oracle projects, which remain solid. In terms of year-over-year business, our combined U.S. bookings have cumulatedly increased by 10% this fiscal year. In Europe, Alithya's operations have not been impacted by the economic slowdown being experienced in some sectors across the continent. Despite current economic pressures being felt by Europe's business community, we generated over 25% organic growth with existing and new clients. Before I hand the presentation over to our Chief Financial Officer, Claude Thibault, I'd like to say a few words about our recent announcement concerning our new Chief Operating Officer. On January 12, we announced the appointment of Bernard Dockrill as Chief Operating Officer effective January 30, 2023. Claude Rousseau, who previously held the position, will be leaving the organization at the end of the current fiscal year on March 31, to embark on a very well-deserved retirement after having served for over 8 years as Alithya's COO. I'd like to take a moment to welcome Bernard to the Alithya family. Bernard brings more than 25 years of experience in the managed services, system integration consulting in the IT industry to Alithya, and he now oversees all of Alithya's operations. I'd also like to take this opportunity to sincerely thank Claude Rousseau for (inaudible) valuable contribution to Alithya's growth and success, including the oversight of the merger and integration of more than 10 acquisitions under his watch. Claude will stay on as my special adviser during the transition period until his official retirement at the end of March. Claude has been a partner and a confident and he remains a great friend, and I wish him much health and happiness to enjoy the retirement life ahead. I will now pass it over to Claude Thibault to discuss the financial metrics of our third quarter. Claude?

Thank you, Paul. Good morning. Let's look at the numbers in more details. Please turn to Slide 8. Revenues for the quarter amounted to $130.8 million, an increase of 19.2% or $21.1 million, compared to revenues of $109 million for the third quarter of last year. Wireless and Data contributed revenues of $12.6 million during this third quarter. Excluding the impact of the acquisitions, which occurred on February 1 and July 1, 2022, respectively, growth was 7.5%. In other words, we recorded good sustained organic growth once again. In Canada, revenues increased organically by 6% to $77.5 million due to growth across most of our operations, including continued growth from the 2 long-term contracts signed concurrently with the acquisition of April 2021. In the U.S., revenues increased 47.9% to $48.9 million due again to the Vitalyst and Datum acquisitions, a favorable U.S. dollar exchange rate as well as organic growth also. As for our international operations, they also reported a strong quarter in terms of growth, increasing 24.6% to $4.4 million versus $3.5 million for the same quarter last year, and this despite negative currency impact. Now let's take a look at our Q3 gross margin, which increased by 38.8% or by $10.9 million to $39.2 million, up from $28.3 million last year. As a percentage of revenues, our third quarter consolidated gross margin reached the 30% bar. That is up 4.2 percentage points over the same quarter last year from 25.8%. Q3 represents the fourth consecutive quarter of sequential gross margin percentage improvement. The increase in Canada is derived from increased revenues from permanent employees relative to subcontractors, higher average revenue per employee and higher margin offerings. In the U.S., gross margin as a percentage of revenues increased both in comparison to the same quarter last year and on a sequential basis. The positive margin impact from the acquisition of Vitalyst and Datum, improved project performance in other areas of the business and increased average revenue per employee are the main drivers behind this progression. Now let's look at SG&A. Total gross SG&A expenses in the third quarter totaled $31.2 million, an increase of $6.2 million or 24.8% compared to $25 million in the same quarter last year. The increase was primarily driven by the Vitalyst and Datum acquisitions and an unfavorable U.S. dollar exchange rate impact of $1 million, which were partially offset by overall reductions in other expense categories. On a sequential basis, expenses increased by $800,000 from $30.4 million for the second quarter, driven by sequential increases in certain discretionary spending categories such as travel, business development, information technology and communication costs as well as an unfavorable U.S. dollar exchange rate impact on our U.S. dollar-denominated expenses, both partially offset by reductions in certain other expense categories. While we need to be careful about the timing of certain discretionary expenses as we just saw in the third quarter and about certain headwinds like inflation, return to (inaudible) spending levels and possible currency variations, we aim to continue reducing our SG&A expenses with certain initiatives still to be fully reflected. As such, we remain committed to our midterm objective of 20% of revenues, which will also come in part from continued revenue growth. Overall, our third quarter adjusted EBITDA amounted to $10 million, an increase of 122% or $5.5 million compared to an adjusted EBITDA of $4.5 million during the same quarter last year. Net loss was $5.5 million, an increase of $2 million from $3.5 million for the same period last year. The main drivers of the increase are increased depreciation and amortization of intangibles from the 2 recent acquisitions, as well as the increased business acquisition and integration costs, also driven by such acquisitions. As such, our accounting net loss of $5.5 million must be viewed in relation to the $9 million of non-cash depreciation and amortization expense, plus $1.3 million of non-recurring business acquisition, integration and reorganization costs. Despite our higher revenues and gross margin, the increased loss was also driven by increased net financial and income tax expenses and again, some increases in SG&A expenses. Looking at long-term trends on Slide 9, we can see the impact of our acquisitions, and more importantly, of our strong organic growth achieved over the past several quarters. Regarding gross margin, we see a similar trend in dollars. As a percentage of revenues, a number of factors occurred in fiscal 2022, which had put some pressure on our performance. But Q3 of this year marks the fourth quarter in euro showing a sequential improvement, highlighting our efforts on improving labor mix, utilization rates and general project performance, and also reflecting the higher historical gross margins of Vitalyst and Datum. Our long-term adjusted EBITDA trend also reflects our growth and gross margin improvements. I reiterate that the increased net loss of Q3 is mainly the result of non-operational and non-cash elements. With sustained organic and acquisition growth, our continuing long-term initiatives to generate higher gross margins and a steady focus on SG&A, we believe we are well on our way to achieving our 3-year financial objectives. Now turning to liquidity and financial position on Page 11. As indicated in our statement of cash flows, our operations generated $34.9 million of positive cash flow in the third quarter from a combination of good cash flow from operating activities of $8.8 million, plus significant positive working capital variations. This added to a positive currency impact of our U.S. dollar debt and a positive post-closing adjustment of the Datum acquisition, results in a sequential net debt reduction of $35 million, which combined with a growing TTM adjusted EBITDA amount results in a significantly declining leverage ratio from 5.4x at the end of September to 3.3x at the end of December. While quarterly working capital variations typically alternate between positive and negative amounts, we do not believe this will have a significant impact on the general deleveraging trend, which our current performance is expected to continue to generate. Now back to you, Paul.

Thank you, Claude. So to recap, I'd like to reiterate the key takeaways from the presentation of our third quarter fiscal 2020 results. First, Alithya has been able to sustain strong revenue growth in uncertain times with our latest quarter indicating 19% year-over-year growth and 37 new clients. Second, we made tremendous progress in improving our gross margin, and we have initiatives in place to expand upon that success in the next quarters and beyond. Third, the continued implementation of our long-term strategic objectives is bearing fruit as seen in our third quarter adjusted EBITDA of $10 million; and finally, a significant debt reduction, which feeds into our M&A strategy. We will now take your questions. Julie?

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Well, thank you, everybody, for joining us today, and we'll see you on our next call.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and that you please disconnect your lines. Thank you.

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Your first question comes from Jerome Dubreuil from Desjardins.

Two for me. First, congrats on the lower leverage, very noticeable in the quarter here. That brings the question of capital allocation. Now you leverage has been the pushback from certain investors in the past. I want to see if you feel more comfortable going back to M&A now or if you're happy with the new leverage situation?

Jerone Dubreuil, thank you for the question. No, we're very happy with the debt reduction, and we said last time we'd be focusing on that. So we're in the fourth quarter now. So we're mid-February. I like the way we're going. M&A has always been at the top of mind. The 3 key things that we look for, right, is the right deal at the right price, but also they have to be for sale. So I believe that we're in a position now that if the right deal comes along or we're happy with it, yes, we have more flexibility now to pull the trigger, but it hasn't been a concern for us. There are ways to get there. So we like the position that we're in right now.

Okay. Second question would be on the legacy business that you had maybe in terms of the staffing, now we're seeing also decent organic growth. Wonder how much left legacy business is there in Alithya, and do you expect this will further decline in the future?

Yes, we have very little legacy business left. However, we still have some subcontractors that we brought on board as part of the R3D acquisition, the ramp -- because we had to ramp up really fast that contract, as we've said in the past. So this quarter, we were able to really decrease the amount of subcontractors and reduce that and replace them with permanent employees. So what that does is we -- our revenue per employee goes up, the margins improve. It has a great impact on our business, and that is our long-term objective as well. So in the coming quarters, we're definitely going to continue to do that as we have time to catch up, right? So it gives us that flexibility to be able to use more permanent employees and less subcontractors. The other thing that we have now that we did not have a year and a half ago is the smart shoring component. So we did not have centers in Morocco and Eastern Europe and India 2 years ago. So that's also something that we can leverage to bring on board permanent employees to support our customers, which also, again, improves the gross margins and helps us reduce the subcontractors. So we're going to be doing more of that.

Your next question comes from Amr Ezzat from Echelon Partners.

Good morning. Congrats on the quarter. I'd like to get an update on how conversations with clients are evolving. Last we spoke, Paul, you mentioned that client conversations were healthy and focused on gaining efficiencies. So there was no real slowdown. I'm just wondering if these conversations are still productive. Are you starting to see some anxiety set in?

Thanks for the question, Emr. So yes, so the conversations we have with our customers right now are very much focused on -- if you look at our results for the quarter, we actually had some negative impacts that I think were temporary. We had several customers that at the last minute in December, and they decided to take a longer shutdown for holiday period and cost-cutting measures or whatever. So that was an impact on utilization rates for some of our clients. So despite that, we've had a really good quarter. And that was a temporary measure. The other negative impact that we've seen is a slowdown in some of the learning spend. So I think that's probably a global thing where people are spending a bit less on training until they figure out what's going on. But other than that, the rest of our business, we're actually seeing a pick up the -- our bookings are healthy. The projects are focusing more in efficiency. And that's why you're seeing like our Datum business had significant growth as we cross-sell that or introduce that to other customers because their offerings, which our IP base are really focused on that on automating and generating efficiencies and modernizing legacy systems, so making them more efficient. So now we're seeing a pickup -- I think it's more of a I mean it's the same type of projects we're doing, but the perspective from the client side is a bit different. They're saying, this project that we're doing, this modernization project is really to drive efficiencies. It's not because it's a nice thing to have or whatever. They're really focused on the projects that are driving efficiencies. So for us, we see that as a positive.

Okay. So net-net, still pretty healthy organic growth is expected?

Yes.

Fantastic. Then I appreciate the color on the gross margin front. So there are a couple of things happening. Obviously, inflation may be slowing down a bit, but we're still in a high inflationary periods, then you spoke to your smart shoring strategy as well as your continued push for permanent employees. So I wonder when we think about gross margin going forward, are there targets that you guys can share with us? Like can we see you guys go from a 30% to a 35% plus? Is that realistic, or am I out there?

I think over time, that's realistic, we try to compare ourselves with the best in the industry, Emr. So we went from 25% to 26% last year at this time to 30%. I think there's still room for improvement. Like I said, we only have 5% of our workforce leveraging smart shoring. Some of our very large competitors are up to 50%. So as our scale grows, we definitely will be using more of our smart shoring capacity to complement our local teams. So to me, I think there's significant upside potential on the gross margin over time.

Fantastic. Then maybe one last one, just following up on Jerome's question. Is there a target net debt to EBITDA you guys are targeting that we should be thinking about? And I understand that quarter-to-quarter, if you execute on M&A, it could change, but is there a long-term target?

Well, we always said that 2x to 3x was our comfort zone. So it's a fairly broad range. We're generating cash flow, so the operations themselves will be deleveraging. The question is on M&A. So when M&A comes about, we take a bit of a specific look if the acquisition is accretive the price we're paying, the synergies that could be available. So that will drive our appetite for leverage. And obviously, stock price drives our appetite for equity dilution. So we always want to do a combination of equity and debt. And we adjust the dial depending on both measures. So now yes, we're with this debt reduction, which we had been somewhat expecting. The dial is going back a little bit more to that. So dilution should be protected, everything else being equal. But the range, if you want a precise number, as we said before, 2x to 3x is probably our comfort zone, broadly speaking.

Great. Fantastic. Congrats again.

Your next question comes from Vincent Colicchio from Barrington Research.

Yes, Paul, I thought I'd ask about the 2 R3D contracts. Is there potential upside going forward from those 2?

Yes, good morning, Vincent. A great question. So the contract, the way it's structured is really a minimum. So the organizations and questions have significant IT spend way above the minimum commitment. So yes, there's potential there to do a lot more. And as you know, those 2 organizations are going through integrations and a significant change. So again, whenever that happens, there are significant opportunities for investments in technology and digital transformation. So yes. Yes, we're -- and they are major shareholders of Alithya, so they have a vested interest in pending business our way in addition to the contract.

And curious about -- I know you do price increases in January. How do those flow through or they meet your expectations?

Yes, our prices increase throughout the year, depending on the date of contract renewals, some are January, some are later in the year. We also priced that into all of our new contracts. And the whole market is aware. I mean our customers have the same challenges we have in recruiting and marketing and marking salaries to market. So that hasn't been an issue so far. We've been able to price in the increases as they follow the market. Also a big chunk of our business now is project-driven. So within those projects, we have more flexibility in how we deliver and how we price and how we structure the delivery of the project, again, leveraging smart shoring and the near-shoring and all these things to give us more flexibility in the margins on the projects.

And one more, if I could. I noticed the fixed fee revenue contribution declined sequentially. Is that just ebb and flow? And should we expect that to start to recover going forward?

Yes, it's just ebb and flow even.

Okay. Thank you. Nice quarter.

Your next question comes from Deepak Kaushal from BMO Capital Markets.

Can you hear me okay?

Yes, good morning, Deepak.

Thank you. Just exceptionally strong cash from ops. I'm just wondering if you could give some more color on the nature of that working capital reversal. It seems like a lot of it's from reversal and unbilled revenue. Is that a specific contract? Is that related to R3D, and will you continue to see that kind of seasonality in cash or loss?

I'm not sure. It wasn't very clear in the (inaudible). Can you repeat the question?

Sorry, I think I'm having an issue with my head -- hang on, I'll just pick up.

All right.

Hello? Can you hear?

Yes, we can't hear you. We just missed the beginning of your question.

Yes. Just very strong cash from ops. I'm just wondering on the nature of the working capital reversal. It looks like it's coming from unbilled revenue. Is that contract specific? Can you give us some more details on how that came about, and will your cash flow cycle going forward always be that seasonal or that volatile?

The anomaly was more at the end of Q2. We had seen the amount of unbilled revenues increasing. It was more a matter of internal set up. It has a lot to do with the what day of the week the end of the quarter falls sometimes. And yes, we had a couple of projects that pushed that up. So the anomaly was there. The amount at the end of Q3 is more indicative of our future quarters. So no, you should not expect a big reversal of that positive we got in Q3.

Okay. Okay. Fantastic. And then just stepping back, seeing your solid organic growth, your gross margin shift, your operating leverage coming back. When I think at a high level of the mix of your business, can you talk a little about what percentage is recurring, but how that breaks down between project versus managed services versus IP-based and how you might expect that to evolve going forward? Are you seeing managed services becoming a bigger and bigger part of your business as you go forward?

Yes, great question, Deepak. So 83% of our business is repeat to existing customers. So you can take that as a sign that we're doing higher value projects for those customers as the time goes on. The new customers as well, the new clients are all the projects that are based on 37 in the quarter. They are based on our newer higher-value offerings. So again, it helps with the gross margin as well. We report now the subscription-based recurring revenue that we have. And of course managed services side of things is something that's growing and it's going to be growing significantly more as we go. So if you look at the acquisitions we've done in the past, they've all been very specialized high-end companies that were very good at one type of project. With the addition of Vitalyst that has a very strong managed services offering and the addition of Datum that has a very strong IP-based modernization offering, these are things that we combine with all of our existing operations to make sure that we cross-sell those things so that now when we sell an Oracle project, an Oracle implementation project, well, we can also sell the managed services that goes with it or if we sell a Microsoft project, we can also sell the managed services, the training, the ongoing support. And instead of it being a 1-, 2- or 3-year project, well, it becomes a 10-year relationship with the clients. So yes, you can expect that to grow over time as well.

Okay. Okay. And so when we think about -- when I'm asking about the gross margin potential and you mentioned the 35% range, where is that coming from mostly going forward? Is that from the smart shoring? Is that from higher IP, higher managed services? How do you see that mix playing out in terms of drivers for that expansion?

Yes. So the first one is the type of business that we do. So if you look at our businesses, we have some areas where the gross margins are over 40%, some areas that are over 50%. So as we roll out those offerings across all of our client base, so that's one of the drivers. So the type of offerings, I'd say, is the #1 driver. The second one is really the mix of how we deliver that. So as I said, just in the past quarter alone, we reduced the subcontractor headcount by about 6%. So having more permanent employees, that also helps. And the other one is the mix of the location. So when we bring in our smart shoring, as you can imagine, the cost of doing the work, whether it's Morocco, Eastern Europe or India or a lot lower. So some of that is to help us be more competitive. So some of that saving goes to the clients. And the other savings, the other part actually goes to increasing our gross margin. So kind of all those 3, 4 items combined that help us drive it. And you saw it when we did the R3D, I mean we went from 30% down to 25% in a few quarters just because of the change in mix of the people, right, some contractors. We said it would take us 2 years to get back to where we were, it took us 18 months to get back to 30%. So to me, I think that's -- to me, that's the new floor. We need to improve on that, and our objective is to go up much higher than the 30%.

Fantastic. Now I appreciate that color. It's very, very helpful. And if I can slide in the last one, just a quick update on the M&A environment. I mean to me, you guys have always been able to find a way to get acquisitions done, however, you -- wherever your capital position is. But from a seller's perspective, are you seeing any changes in the last quarter or so, given the changes in the macro or the uncertainty, or is it still kind of as usual?

It's interesting. In some areas, we're seeing a big change, in other areas, no change at all. As you know, we've always been very disciplined in our M&A and I want to avoid a fire sale. We don't want to buy something because it's cheap. We want to buy something because it's good and it has a great value and it's something that we believe we can leverage across our platform. So we're actively looking. We're always looking for interesting targets. And you see our debt position right now. We're in good shape. And if we can't find the rare pearl in the short term, well, we're generating cash and building up the war chest. So it's kind of a win-win. Whatever happens, we're in a good position. And when the right opportunity comes along, we'll be able to pull the trigger. So we're actively looking.

So is it fair to interpret that, if I may, fire sales are going up, but strategic sales are steady and you're going to stay disciplined. Is that the right way to interpret it?

Yes, I'd say that's a good way to interpret it, Deepak.

Your next question comes from Brian Kinstlinger from Alliance Global.

Great to see the recovery in the gross margin. Can you share what percentage of your revenue was delivered by subcontractors in the December quarter compared to the December '21 quarter? And what are reasonable near-term and long-term goals for delivery mix as it relates to subs versus direct?

Yes. Thanks for the question, Brian. So we don't publish the overall numbers, but we did -- the subcontractors, we did say they decreased by 6% overall in the past quarter. And our objective is always to have more permanent employees than subcontractors. I think there's always going to be subs in our world, but if I can get to a 70-30, 75-25 mix of permanent to subs, I'd be very happy.

And how far do you expect by the end of the year you'll be close to that goal, or will it take longer than that?

Yes, we don't give guidance on that one, but it's our objective.

Yes. And then lastly, maybe I missed it, but can you highlight from an organic perspective, where demand is strongest versus weakest in terms of verticals?

Okay. Good question. Because we -- our funnel is pretty strong across the board. I think there's been a bit of decrease in manufacturing in general, not just for us, but just the industry in general, we're seeing demand in manufacturing going down a little bit. But it's pretty -- our funnel is pretty strong across the board.

And is there one -- when it's weak, is there 1 or 2 where you see the most opportunity in terms of pipeline?

No, it's pretty much -- again, other than manufacturing and maybe training, which in uncertain times, some companies are slowing down their training spend, which is a very small portion of our business. Other than that, we're seeing strong demand for efficiency type projects across the board.

Your next question comes from Gavin fairweather from Cormark.

Congrats on all your progress. I wanted to start out on marching, which has certainly been a topic on the call. I think you talked about 5% of your labor base being in kind of lower-cost geos. Obviously, there are practical hurdles to kind of driving that higher. So I guess how do you think about how quickly you can kind of add resources in some of these offshore locations? And do you have any medium-term targets or goals that you could share in terms of that mix for your business over time?

Yes, sure. Thanks for the question, Gavin. Well, in 1 year, we went from 0% to 5%. So in theory, we should be able to double that in a year. So I'd say if you ask me for an objective, that would be -- my personal goal would be to double that within a year. Of course M&A can also impact that. We look at targets today that have offshore or smart shore components, so that could impact it. But we need to grow that. I think we need to get to a threshold of 30% real fast to be able to compete with some of our the larger players out there. And again, I think that's very doable through a combination of organic growth and M&A, I think we can do that within the foreseeable future.

Okay. That's great. And so maybe just on an organic basis, so like as you're looking to hire in Eastern Europe or Morocco or in India, like how are you funding the talent pools there if we kind of take M&A and put it to the side?

Excellent. The talent pool, if you look at the different areas, the geographies, Morocco, we've been able to find a lot of very qualified individual, a lot of French speaking as well. So that's great to support our Canadian and European operations. In Eastern Europe and India, it's more English speaking. But again, amazing talent, significantly larger talent pool than here. So no, very -- there not easy, but a lot easier to find people in those areas than in North America today.

Okay. Great to hear. And then just lastly for me, I kind of look at the U.S. business, pre Vitalyst and Datum, it kind of looks like organic growth in constant currency as being kind of flat the last couple of quarters. And I know this business is a bit more maybe transactional in nature, maybe you can just discuss the sales pipeline and backlog for this business and just kind of your overall expectations for the next few quarters?

So our backlog and sales pipeline is up year-over-year in the U.S. You have to take into consideration that the acquisitions, a lot of the growth that's coming from the acquisition is from existing customers that we had prior to the acquisitions. So it's kind of a combination. When you look at organic growth you have to be conscious of the fact that even though it's coming from the offerings from the acquisitions, very often, it's because it's an existing customer that we have in the rest of the business that we've been able to cross-sell to. So it's really a combination of the 2. But no, we're pretty happy with how the funnel is growing year-over-year in the backlog as well in the U.S. as a whole. And just to add, directionally, what Paul wanted to see is our bookings in the U.S., excluding Datum and Vitalyst, so in our historical business, the bookings this year are higher than 1 year ago. So we're kind of comfortable with the trend over there, generally speaking.

Your next question comes from Divya Goyal from Scotiabank.

Just wanted to say them in witless discussion. I wanted to get some color on how should we think about the 2 businesses on a go-forward basis. I did see that there was a slight step down between Q2 and the Q3 revenue, so if you could just help us guide there.

Sorry, we missed the beginning. Are you talking about the 2 recent acquisitions?

The Datum and Vitalyst acquisitions is what I was referring to. If you could help us see how could the acquisition how would the acquisition sort of pan out going forward. Q2, if -- from the numbers, we have them at $13.3 million versus Q3 came in at $12.6 million. So going forward, trying to understand what would be the run rate revenue for the 2 acquisitions?

So maybe, obviously, those 2 acquisitions are very powerful cross-selling platforms because they bring new services, new expertise to Alithya, which we can bring to our clients. So the expectation is certainly for that growth to accelerate and be strong going forward. We commented directionally about Datum having a good sequential increase. Obviously, we're starting from a small base. So it's easy to pile up the numbers and show good sequential growth, but we're expecting that to continue the reception with our teams internally. And with some clients, we pitch the technologies that they have is very good. So we're kind of optimistic there with Vitalyst, and Paul touched on that as well. The learning it's -- certain services that sometimes are perceived to be less critical and maybe more cyclical -- so cyclical, sorry. So over the short term, we are not really going to comment. But on the long term, mid- to long term, I mean, again, these are services that combine so well with everything we already do in terms of post implementation. So the team is great and the technology that they have to perform their services is very good. And they're also fairly small compared to our overall operations. So maybe we have a bit of a pause because of the economic cycle. But mid to long-term, we remain very bullish on those 2 acquisitions. Very bullish.

(Operator Instructions). Your next question comes from John Shao from National Bank.

Regarding your smart shoring, I'm just curious about your client feedback so far on the outsourcing activities. What is their preference or are they kind of indifferent? Do you see any client pushback so far?

Yes. Thanks for the question, John. The feedback is very positive so far. So the way -- the reason why we call it smart shoring is we try to be different from the other players, and I'll try to explain this. Typically, the very large outsourcers will take a piece of business from a client and send it offshore. And it's kind of a soup to nuts send it over the fence. They deal with people over there and look at it this way. We work very differently. So the people that we have in our centers in Morocco, Eastern Europe, India and so on, they're part of a team of an individual team or a project team. So a project team might be led in the U.S. or Canada or Europe, project manager and the whole team. And -- but the people on the team might be located in Canada, the U.S., Morocco or India. So we look at our smart shoring more like an extension of our teleworking people. So the people there are actually part on a daily basis of projects and progress. And so that also helps us with the recruiting in those geographies so that people feel they're part of a larger project, a global project and have more interactions with our teams and clients. So the feedback so far has been very positive.