Alithya Group Inc (ALYA) 2020 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to Alithya's First 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 Wednesday, August 14, 2019.

I will now turn the conference over to Gladys Caron, Vice President, Communications and Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us for Alithya's First Quarter 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 at alithya.com.

The accompanying webcast presentation can also be found on our website in the Investors section.

Presenting this morning are Paul Raymond, our President and Chief Executive Officer; and Claude Thibault, our 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 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.

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 in 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, Gladys, and good morning, everyone.

Bonjour.

I'm very happy to be with you today to share our latest results.

Let me begin with a brief overview of the first quarter.

We started the year with solid results as a contribution from our U.S. acquisition continues to improve and to make its mark.

After only eight months since the acquisition, I'm pleased to say that we are seeing continued sequential improvements in operations, overall.

We are very satisfied with the contribution to our results.

This confirms that our assessment of the potential of this company was right and allows us now to benefit from a solid platform for growth in the U.S. Our revenues for the quarter were up 73.7% to $72.2 million and the U.S. acquisition reports growing revenues compared to the first quarter of last year in constant currency and accounted for $32.1 million of the increase.

Our gross margins continued to improve as well, driven by the strong contribution of our U.S. acquisition and the continued transformation of our business.

Additional business for new and existing clients as well as resumed growth with certain larger clients in Canada were offset by the timing in the start of certain new contracted projects.

However, considering the lower number of billable days compared to the first quarter of last year, and the unusually high revenues reported in such quarter, overall, performance was similar on a year-over-year basis.

The integration of our U.S. acquisition is progressing ahead of schedule and has proven to be a great fit for the organization.

As we pursue the integration and progressively generate more cross-selling opportunities, the full potential of this acquisition will continue to materialize over the coming quarters.

We are building the business for the long-term and have clearly created a strong foundation to do so.

I would also like to add by mentioning that we achieved for the 14th-year in a row, the prestigious 2019-2020 Inner Circle from Microsoft business applications and the Microsoft Dynamics 365 Finance and Operations Partner of the Year.

This worldwide recognition is based on sales achievements and ranks Alithya in the top echelon of Microsoft's Cloud Business Application global network of partners.

We are very proud of this achievement and I would like to thank all of our professionals who contributed to this recognition as well as the customers who put their trust in us to help make their business more efficient.

We are also pleased to have recently achieved a top three ranking on the 2019 top 100 ERP value-added reseller list.

This independent top 100 list is comprised of companies who specialize in the sale and implementation of enterprise resource planning or ERP and accounting software, and is based on our annual revenues.

Our position in this list exemplifies what we strive to provide for all of our customers, which is real business value as a trusted adviser.

Claude will now review our Q1 results and financial positions.

Claude?

Thank you.

Good morning.

Since Paul has already covered our top line growth, I will now focus on some profitability and balance sheet metrics.

Please turn to Page 5. Gross margin more than doubled in the first quarter, increasing to $21.2 million compared to $8.9 million in the corresponding quarter last year.

This significant growth was primarily driven by the contribution from the U.S. acquisition.

As a percentage, gross margin increased to 29.3% from 21.3% from the same quarter last year, which is the third consecutive quarter of sequential increase in our gross margin.

Gross margin in the U.S. continues to show progression on a year-over-year basis as well as on a sequential basis when compared to the fourth quarter of last year.

This increase was partially offset by margin impacts from the timing and the start of new contracted projects, which conversely have benefited gross margin in the same quarter last year.

Despite these timing considerations, we can report that we are seeing continued progress in terms of overall performance and in terms of general business mix.

In the first quarter, SG&A expenses reached $18.9 million, up from $10.9 million, of which $9.5 million is explained by the U.S. acquisition.

Excluding the acquisition, the increase is mainly due to employee compensation costs related to the rise in corporate headcount related to managing the additional functions and duties associated to becoming a public company.

That partially offset by a reduction of occupancy cost of $0.5 million, approximately, due to the adoption of IFRS 16 regarding leases.

On a sequential basis, when compared to the fourth quarter of last year, SG&A decreased by more than 6% to $18.9 million from $20.2 million.

As previously discussed, management targets to gradually continue to decrease administrative expenses related to the U.S. acquisition over the coming quarters.

With respect to our adjusted EBITDA, it increased 71.1% in the first quarter from $1.8 million to $3 million.

The positive contribution from the U.S. acquisition was partially offset by a combination of nonrecurring and recurring expenses associated with becoming a public company and expanding the business as well as by the positive impact of the adoption of IFRS 16.

On a dollar-for-dollar basis, our adjusted EBITDA has increased sequentially for the past 4 quarters from $0.9 million in the second quarter of 2019 to $3 million this quarter.

It is our stated commitment to continue such trend over the short, mid and long term.

We reported net loss of $1.5 million or $0.03 per share compared to a net loss of $2.2 million or $0.06 per share for the same period last year.

I would point out that this quarter's net loss of $1.5 million must be viewed, among others, in relation to $2.6 million of amortization of intangibles coming from previous acquisitions, which is a noncash element.

Now turning to our liquidity and financial position on Page 6. Cash flows provided by operating activities generated a robust $4.2 million in liquidity versus a use of liquidity of $1.2 million last year.

This improvement is primarily explained by a better management of our working capital items.

Use of cash was mainly to pay down debt and invest in some capital expenditures.

As a result, we ended the first quarter in a healthy financial position.

As of June 30, 2019, we had $7 million of net bank borrowing, which reflects $14.7 million in cash, short-term deposits and restricted cash.

This compares with a net bank debt of $8.7 million at the end of the previous quarter.

We had total debt of $29 million -- $23.9 million on June 30, including long-term debt and the current portion of long-term debt.

If we take a moment on Page 7 and look at the evolution of our revenues and profitability, we have doubled the size of the company in just the last 3 years, and our profitability, taking into account the fact that we became a public issuer, which put pressure on our cost, is on a positive trend.

Thank you.

Turning back to Paul.

Thank you, Claude.

Thanks to the strategy we initiated a few years ago, Alithya is now a company of over 2000 professionals, on the road to becoming a North American strategy and digital transformation leader.

We are now the second-largest integrator in Canada and are in a solid financial position.

As shown on Page 9, our services are more and more diversified and thanks to our strategic partnership with leading cloud enterprise solution providers, we are very well positioned to accompany our clients of all sizes in their digital transformation.

Going forward, we will continue to increase scale through organic growth and strategic acquisitions in order to extend our footprint in North America and to increase our value-added service offering.

We will also continue to invest in our professionals to reinforce their engagement.

All this, while providing our investors, partners and stakeholders with long-term growing returns on investment.

So before we conclude, I would like to point out that we have published last Monday, our management information circular, which outlines the business to be conducted at our Annual General Meeting of Shareholders that will be held on September 18 at 10 a.m.

at the Saint-James Club in Montréal.

We invite you all to attend either in person or via our webcast.

Finally, I also want to take the time to thank all of our customers for their trust in us and all of the Alithya team for their incredible dedication, work and passion for quality.

This great team, now with the contribution of our U.S. employees, has allowed us to create a powerful platform in a digital transformation industry.

We will now be pleased to answer any questions you may have, and I'll turn it back to you.

(Operator Instructions) Your first question comes from the line of Amr Ezzat with Echelon.

Paul, there's been a lot of talk recently on the economic slowdown and I'm just wondering, from your vantage points, how resilient, I guess, you feel your revenues are in each of Canada and the U.S. in the slowdown scenario relative to your peers and the industry in general?

Thanks, Amr, for the question.

We -- given where we are focused, so we're -- if you look at how our business is set up with large customers in some growing industries in North America -- we do have a presence in Europe, which is going very well, but the bulk of our business being in North America, we haven't seen that impact our customers so far.

So that's the first thing.

The second piece is the type of projects that we do now, if you look at the majority of our business being in the digital transformation space and I know that, that term is used loosely by many people, but basically, all of our customers want to move away from traditional systems and go to the cloud and update their systems.

So usually once those projects start and we're seeing it in the bookings of new ERP projects, they don't stop.

They keep going and usually in downturns, that's when companies invest in being more efficient and doing projects like that, that will save the money or make them faster or make them better or make them more agile.

So we haven't seen -- I'm reading about it as well, just like you and everything that's out there, but we haven't seen an impact from that so far.

That's helpful.

Can you give us more color on the change surrounding your stance on providing commentary on your short-term outlook?

I believe in your PR, you're saying you won't be commenting anymore.

Well, just a quick one, if you go back last quarter, we said the same thing.

We -- it was never our intent to provide quarterly guidance.

So we still -- we're still on track for our objectives and that's what we are following, but we just want to make sure that people don't get used to the fact that or expect us to provide quarterly guidance at every call.

That's not our intent.

Understood.

But you're still standing by the 12-months sort of guidance you gave with the closing of the Edgewater acquisition?

Correct.

That was the objective on a run-rate basis adjustment by Q3.

And we're still sticking by that.

That's still our objective.

Objective?

Objective would be a better word.

Yes.

Yes.

Objective.

Then I guess you spoke a bit in your PR and in the call on the U.S. business and the growth there and maybe you could correct my numbers if I'm wrong.

If I'm looking at the Edgewater filings, their ERP and EPM businesses last year were $25.5 million U.S. or CAD 33.5 million and you guys reported $32.1 million this quarter.

I'm just trying to reconcile the delta, is it all FX?

Or were there unusuals last year that pressed sort of the comparable number higher?

Okay.

So a few things.

By last year, we were reporting in U.S. GAAP, now we're IFRS.

So you need to take that into consideration.

We -- you need to remove classic consulting, which I think you did.

Then there is currency and then there's the number of billable days.

I have similar patter in the U.S. that Easter last year was in Q4.

This year is in Q1.

But all this considered, we are reporting in constant dollars, some moderate growth in the U.S. Even before considering the change in number of billable days, we are reporting moderate growth, without providing an exact number and also you need to remember the nature of the business in the U.S., which is a bit different than what we have in Canada, the timing of starts and ends of projects, we need to be careful when comparing quarter-to-quarter, but still we're reporting some moderate growth, which is, in closing, more than we -- if you remember, when we announced the acquisition, we were announcing that for the next -- the coming 12 months.

We have some adjustments to do to the business and overall, we were expecting flat revenues generally speaking and we are actually doing better than that objective we had.

Understood.

That's helpful.

Then on Canada.

In your prepared commentary, the same language I believe in the last couple of quarters, delays in project start time.

I'm wondering if there are any other factors there.

That's more -- the delay is coming more from decline or is it the tight labor market may be impeding your growth at all?

The short answer is it's client related, but maybe Paul, you want to answer that?

No.

Listen, we're seeing sequential growth in our large customers there in Canada.

So that's positive.

It's really timing because we have some large contracts both on the ERG side and with some customers that depending on when we get the go-ahead to start can have a major impact in a quarter.

Great.

Maybe just one last one for me.

Good job on your SG&A, down sequentially, even I think if I adjust for IFRS 16.

I'm just looking to get some more clarity on -- or maybe I'm not sure if you're comfortable sharing that number, how much non-recurring SG&A is still embedded in your SG&A number?

It's hard to say.

So I will not be -- I cannot provide you a precise number, but in this past quarter, we still had a number of things we were doing for the first time as a public company being the circular, being the annual report.

So you can assume that legal fees, accounting fees and so on our higher than I'm targeting to have in the coming quarters.

Plus you need to remember that we have still some synergies to come from the U.S. acquisition.

The bulk of that is behind us, to be honest, but we still will find some savings in the coming quarters.

Understood.

So for modeling purposes, if you guys deliver like flat SG&A to maybe a little bit lower, that sort of the targets, that's what I understood.

Yes.

We're not going to give a fixed number, Amr.

Thanks for the question.

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

Your line is open.

Nice to see the Canadian business back to growth here, just quickly, curious for your thoughts given that this [build] that you have on whether that demand picture, which improved with larger customers, is it sustainable, whether you see that kind of continuing in quarters ahead?

Yes.

Thanks for the question, Gavin.

Yes.

It's not just pick up in demand.

It's really as we've been saying for the past few quarters, we are transforming the business as well as integrating the U.S. operation.

And that's why you can see the reflection in the gross margins overall is that type of business that we're going after is higher value add for our customers and therefore, higher-margin.

If all we wanted was growth at all costs, it would be very simple.

However, you wouldn't like the margin, and we wouldn't like it either and when you go after lower margin business and that's what we're seeing in some of our competitors, it's very difficult to find good people.

When we have interest in projects and higher value projects, it's easier to attract good people and keep them.

So we've really -- as part of the transformation of the business, focused on that type of business going forward.

So we don't want any business, we want good quality business.

Okay.

That's great.

And then secondly, just on M&A, the Edgewater integration is clearly well in hand here.

Maybe if you could just comment on the deal environment that you're seeing, the deal flow that you're seeing and how you're feeling about just the overall acquisition cadence going forward?

Okay.

The -- overall, to your point, thank you, and we were very happy with the progress of the Edgewater acquisition and the Edgewater acquisition has two things: one is in terms of the services it brought us in the quality of people and the quality of the customer base, but also it gives us a great, great foundation in the U.S. to integrate other acquisitions.

So we're still very actively looking.

As I said in the past, we are very disciplined in how we go about it.

We think what we did with Edgewater is a good demonstration of what a lot of people thought was not a best acquisition.

We were able to demonstrate that it was a worthwhile endeavor for us to pursue.

We have other targets that we're looking at and actively pursuing.

But again, we want to make sure we're paying the right price for the right company where the people want to stick around.

So we want to make sure that it ticks all the boxes before we pull the trigger, but the team is ready for the next one.

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

My first question is on cross-sell.

I -- in the press release, you guys noted 14 new ERP customers since the acquisition.

Can you speak to some of your early progress with -- from a cross-sell perspective, which markets are you seeing the biggest traction?

And of that 14 new customers, what markets were they in?

Okay.

Thanks for the question, Suthan.

Actually, on the 14, some of those are in Canada, which we see as very positive.

We're seeing a lot of traction from some of our Canadian customers for what we've developed in the U.S. So that's very positive.

We're seeing a lot of activity, I'd say more activity on the Microsoft side than the Oracle side in general, but we're seeing activity on both fronts.

So we're seeing that as positive, and as Claude was mentioning earlier, if you remember, when we started this whole integration process, we said that our plan in the U.S. was for slight growth because we assumed that Microsoft will be growing and Oracle would be shrinking because of the restructuring.

I say we're ahead on both counts.

The Oracle team is doing much better than we had assumed a year ago and Microsoft is doing well as well.

So we're seeing good uptake on both fronts.

That's helpful.

Just a quick question on the macro.

Just a follow-up to an early question here.

Are you guys seeing any slowdowns or any pauses in purchase decisions and spending from clients?

Not so far.

We're seeing -- I mean I read the same trade papers as you folks do.

I know that we have -- we're seeing a lot of concerns, for example, with companies that work with China or do a lot of manufacturing, so on and so forth.

But we're -- based on the customer base that we have, we haven't seen that so far.

So if it comes, it hasn't impacted us yet.

Okay.

Great.

And then I guess this last one is from an M&A perspective.

How was your pipeline developed since the last update last quarter?

And do you continue to expect to announce a transaction this year?

We're working very hard to try to get something done this year, but other than that, the pipeline is still very healthy.

We've said in the past, as soon as we thought that we'd be ready post-Edgewater, we'd move ahead.

So we believe we're ready.

It's -- again, it's making sure that the acquisitions that we do meet all the conditions that we have.

We're very disciplined about it and -- but it's not for lack of interest.

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

I wanted to ask you, in terms of your workforce, how much do you rely on freelancers to operate your business because we are seeing organizations more and more reduce the reliance on freelancers just for the -- due to risks in operation, and as you know, cybersecurity, et cetera, et cetera?

Thanks for the question, Maher.

It's a very good -- actually, it's a very good question.

We've always said our intent was to rely more on permanent employees than subcontractors for the exact same reasons that you brought up.

Our target is to be between 2/3 to 3/4 of our people being permanent employees.

There's always a [sub-some] contractors because of the type of business that often requested by customers that we have to reach out to, but what we aim to be -- the majority of current employees and we are in that range today.

So we're very happy with where we are at right now.

Is there a big difference in that percentage between Canada and the U.S.?

As the market in general or for us specifically?

No.

Your operations, specifically.

I think it's not just us but I think there's a -- if you look at our industry in general, there are a huge variations by geography.

In the U.S., in our case, it's mostly permanent employees but in the U.S., people will travel more than in Canada.

In Canada, people will live in a certain geography, tend to work in that geography.

So from a personnel perspective, U.S., higher percentage of full-time employees who travel in Canada, more the -- full-time employees are more stable and geographically based.

Okay.

And in Canada, specifically, as you say it's probably a higher percentage, what are the key actions as an organization you can do to reduce your reliance on freelancers because they do generate leads and so how do you switch that business profile around?

Sorry.

What do you mean by generate leads?

Well, how do you get to reduce the -- your reliance on freelance operators, employees, I guess, in your workforce?

Since they do have good expertise and how do you build that expertise, internally?

That's a good question.

The first thing is the type of business that we go after.

Like I was mentioning earlier, we are transforming the business at the same time as we're growing it and going after the type of projects.

So, for example, we have a digital solution center here in Montréal that is growing leaps and bounds.

Where we actually bring customer projects into the center to work on, that is all full-time staff.

We never bring sub-contractors into a project that we own and control and manage for our customer.

Typically, when we have subcontractors, it's directed by a customer.

So we try to go for the projects where we have control of the projects versus the subcontractors are more on a material basis.

Okay.

And just to focus a little bit on the top line here.

In your Canadian operation, you've mentioned in the past, you're trying to offset some of the declines you're seeing in some of your large contract revenues from large clients that you had in the past and reduce your reliance on them.

If you were to exclude, let's say your -- one or two of your big customer in that list, how's the growth in the rest of the business?

Yes.

I'd say if you take our top 20 customers in line, they're actually growing sequentially, including our top 2 customers.

So they're in the top 20 list and it's growing.

Maybe I just want to come back on your previous question in relation to this one because I think they go together.

We made a decision to move away from the staffing business a while back.

We took out, if you remember and if you look at our numbers, we took out all of our payroll business and we're now netting that out.

That was over $50 million of business that we took out of our top line and removed that because it doesn't create value for our customers, right?

It's very low-margin business.

It's administrating people that we have no control over.

To your point earlier, brings no added value.

We did it to help some customers at the time, we needed somebody to take care of that.

We now have removed that from our numbers.

We're also reducing the subcontracting business significantly year-over-year.

So with all we wanted to do, we'll show revenue growth.

It would be very easy to go out and hire a bunch of subcontractors.

You would not be happy with the margins.

The margin on subcontracting business, as you're all aware, is very low and limited, because the customers don't see the value, right?

So we made that decision a while back to focus on value-added services.

It is impacting, or it looks like it's impacting our growth in the short term, but we believe in the medium to long term, the opposite effect is going to be happening.

Okay.

And just if I heard you correctly, you said your top 2 clients are growing sequentially now?

I said our top 20 are growing and the top 20 list includes the top 2.

Okay.

In total, the top 20 are growing?

Yes.

So now if I look at your M&A pipeline, you mentioned in the press release you're looking to expand geographically, you're expanding by skill-base, what's your first priority?

Is it geographical expansion or skill-based expansion?

It's -- really, it's all of the above.

Depending on the size of the acquisition, the team now, like I said, the U.S., we have a very good foundation and a good base.

Same thing in our business units in Canada.

Depending on -- if it's a small geographic acquisition, I mean we can do more than one at a time.

If it's a larger one, then it's a different story.

If it's a larger transformational acquisition, then again, we'll take the time to do it well.

But for some of these smaller ones that bring a niche scale or geography, we're looking at all of them.

So we have some of those in the pipeline that are very interesting.

And what has caused you not to be able to do any additional M&A since you -- the acquisition of Edgewater?

Is it the price they were asking, the skills that they provide, or just because you were not so fully, operationally, in control of Edgewater?

Okay.

So I'll try to take those one at a time.

So when we announced the acquisition of Edgewater and closed back in November, so that's less than 8 months ago, we were very clear with everybody that we wanted to integrate it and integrate it well before we added more stuff.

That doesn't mean that we stopped looking.

As you're probably aware, when we do an acquisition, it's never a last-minute thing.

We also -- it was our first foray into public markets.

So as Claude was mentioning earlier, there's been a lot of first in the last 6 months.

First year-end, the first reporting, first annual.

So there is -- we want to -- we're very disciplined in how we do things.

I want to make sure we do them well.

There are many targets out there that meet our criteria, including price.

Going public was actually a big help to us, because as you know, we'd like to do our acquisitions part in cash and part in stock.

So that's actually helping.

The visibility that we've gotten from being a public company is also helping.

We're seeing a lot of opportunities come our way.

Even though we say no a lot more often than we say yes, because as you know, everybody has limited time and resources.

So we don't want to waste anybody's time including our team's time.

So we try to focus on the ones that we think have a very high probability of closing.

But even with those, it takes time to do things well.

So we make sure that we're very disciplined again on how we price, how we integrate, the people want to stick around, how we do our due diligence, how this is going to work in the organization going forward, and very often, the best acquisitions are the ones we don't do.

So we're very disciplined, but we know it's part of our plan.

We're focused on the 3- to 5-year goals that we've stated and we're sticking to, to double the company, part organic and part acquisition.

So that's why we're confident in long-term plan and it's going to be tough to -- on a quarterly basis, to say, what we're ready to pull the trigger on and what we can't, as you're aware, in other words...

No.

I Understand.

You were very helpful.

I just wanted...

We're very happy -- we are happy with the funnel we have now.

We're very happy.

Yes.

I just wanted to -- the reasoning behind my question is to understand if it was your decision to not do any acquisitions up until now or that the market price for these acquisitions is beyond your reach?

That's what I'm trying to get.

Okay.

It's not a price issue.

There are no further questions at this time.

Ms. Caron, I turn the call back over to you.

Thank you for being on the call today and we look forward to speaking to -- with you at the next quarterly call on November 8. Thank you.

Have a nice day.

Thank you.

Thank you.

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

You may now disconnect.