Alithya Group Inc. (NASDAQ:ALYA) Q3 2023 Earnings Call Transcript February 14, 2023
Operator: Good morning, ladies and gentlemen. Welcome to Alithya Third Quarter Fiscal 2023 Results Conference Call. I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing at Alithya. Please go ahead, Ms. Andrews.
Rachel J. Andrews: Good morning and thank you once again for joining us for 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?
Paul Raymond: Merci Rachel and 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 am pleased to disclose another very strong quarter for Alithya as we enter the final months of our 2023 fiscal year despite the ongoing uncertainties. There are many important takeaways from this quarter but if I were to highlight only a few I will 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, a significant cash generation and debt reduction. We continue to grow our reputation as the trusted advisor that are existing and new clients you turn 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 the past we continued to increase our permanent employee ratio as we replaced some contractors and grew our portfolio to higher value services. We are now back at 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 continued to implement our strategic plan into 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 translated into less billable hours for Alithya as well as a slowdown in some of their key learning activities.
We believe Alithya is a favorable position to meet the go to trusted advisor that our clients needed in these uncertain times. It will not be less technology in our 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 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 profitability 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 two large 10-year contracts with Beneva and Québecor, 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. Datum 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 and solutions sequential revenue growth of over 20%. We are also targeting gross margin improvements 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 acquire 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 two-year timeline was initially targeted to do so.
With further transitioning of subcontractors to regular employees still out on the horizon and with 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 a 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 three major Canadian energy clients to prepare the landscape and to develop their digital strategies for doing just that. And we proceed deeper integration projects on the horizon for Alithya as those efforts progress. On the local front, we signed a major three-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 healthcare sector business remains robust. Additionally, initiatives are being developed and implemented to increase the scale of our managed services within our large global projects, which remain solid. In terms of year-over-year business, our combined U.S. bookings have cumulatively 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 12th, 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 31st, to embark on a very well deserved retirement after having served for over eight 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 overseas all of Alithya’s operations. I’d also like to take this opportunity to sincerely thank Claude Rousseau for his invaluable 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 confidant 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 both to discuss the financial metrics of our third quarter. Claude.
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Claude Thibault: 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 $109.7 million for the third quarter of last year. Vitalyst and Datum contributed revenues of $12.6 million during this third quarter. Excluding the impact of the acquisitions, which occurred on February 1st and July 1st, 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 two 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, our domain 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 impacted $1,000,000 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 returned to some pre-COVID 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 two 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 a row 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 three-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 5.4 times at the end of September to 3.3 times 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.
Paul Raymond: Thank you, Claude. So to recap, I’d like to reiterate the key takeaways from the presentation of our third quarter fiscal 2023 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’ve made tremendous progress in improving our gross margins 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.
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