Alithya Group Inc.
Q3 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Alithya Third Quarter Fiscal 2021 Results Conference Call. I would like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing. Please go ahead, Ms. Andrews.

[Rachel Andrews:]

Thank you very much. Good morning, everyone, and thank you for joining us for the Alithya Third Quarter Fiscal 2021 Results Conference Call. The press release and MD&A with complete financial statements and related notes, were issued earlier today and are posted on our website. The webcast presentation can also be found on our website in the Investors section. Presenting this morning are Paul Raymond, Alithya's President and Chief Executive Officer; and Claude Thibault, Chief Financial Officer. Following their comments, we will open the call for questions.

[Paul Raymond:]

Thank you, Rachel, and good morning, everyone. Bonjour. In the context of the third quarter operating environment, where resiliency and agility are rewarded, I'm very pleased with the results delivered by our team. One, we generated revenue growth over 7% on a constant currency basis. We signed record bookings in the quarter, as we continue bringing on new clients, while renewing and expanding our relationships with existing clients who continue to place their trust in Alithya. Our optimism is also supported by the continued growth and demand for our digital transformation services, as clients plan for a very different future. And our recruiting successes confirm this. Let's have a look at our operations, beginning with Canada. I'm pleased to report that we are maintaining sustained revenue growth across our Canadian operations. I would like to draw your attention to two things. One, this momentum is being fueled by our largest historical clients, where we are seeing growth, both year-over-year and sequentially. And two, our Digital Solutions Center, is benefiting from the positive impacts of last year's acquisitions. We have assembled a strong and unified team that is dedicated to helping our clients transform their businesses, driven by the vision of becoming a world-class digital solution center. The Alithya way is now a recognized approach, which, when combined with our additional scale, results in now being invited to participate in much larger projects Now, turning to the United States, the utilization rate is still lower year-over-year, but has improved significantly sequentially, and is on a positive trend. We are optimistic about the coming quarters, and remain confident in our decision to maintain our very talented workforce, to be ready to support this growing demand. Our team in the US have delivered a substantial number of Microsoft and Oracle enterprise solutions to customers in a variety of industries and geographies. In fact, during the third quarter, our teams ensured the implementation of 22 ERP and CRM projects, and successfully completed the implementation of more than 20 EPM initiatives. This is a trend that will continue to have traction into the upcoming quarters.

[Claude Thibault:]

Thank you, Paul, and good morning. Let’s review certain Q3 highlights. Revenues for the quarter increased by $4.4 million or 6.6% to $70.6 million, driven by both our Canadian operations and our US operations. Assuming a constant US dollar, the overall increase would have been 7.1%. More specifically, revenues in Canada increased by $3.3 million or 9% to $40 million, while revenues in the US increased by $1.2 million or 4.5% to $27.6 million. In both cases, our two most recent acquisitions contributed to the reported third quarter growth, which was offset by the negative impacts of COVID.

[Paul Raymond:]

Thank you, Claude. To summarize, our third quarter results showed revenue growth in Canada and in the US, as well as increased gross margins in the US and Europe. In the current context, our accelerating growth demonstrates the resiliency and agility of our business model, as well as sustained demand for our high value services. We have made progress in the execution of our three to five-year strategic plan. In terms of our response to COVID, we continue to make the right decisions in terms of protecting our people and our business for the long-term. I would like to take this opportunity to express my sincere thanks to all the people for what they do, day in and day out for our clients. We have an amazing team, and I am extremely proud to represent them here today. On the acquisition side, we continue our disciplined approach to actively pursue a number of acquisition opportunities, and we remain committed to our strategic goal of eventually doubling the size of the company through a combination of organic growth and acquisitions. Looking ahead to the next quarter, we are very optimistic. Despite the pandemic challenges that persist, our teams continue to be instrumental in assisting our customers, and their motivation and commitment, are stronger than ever. As I’ve mentioned numerous times, our employees choose Alithya because they seek to work on exciting projects, and wish to be owners of the company they work for. I'm pleased to hear on a regular basis that our teams value their work, because they help our clients transform and improve their businesses. In addition to this tremendous display of enthusiasm, and the excellent feedback provided by our customers and teams, our KPIs and other tracking tools, are showing us promising results as well.

[Operator:]

. And your first question will come from Paul Steep, Scotia Capital in Canada. Your line is open.

[Paul Steep:]

Good morning, Paul. Could you maybe talk just about where you're seeing some of the bookings strength, I guess, relative to your Microsoft and Oracle practices? Maybe start with the US and then we can maybe talk a little bit more about Canada. Thanks.

[Paul Raymond:]

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

[Paul Steep:]

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

[Paul Raymond:]

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

[Paul Steep:]

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

[Paul Raymond:]

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

[Paul Steep:]

Thank you.

[Operator:]

And our next question will come from Deepak Kaushal from Stifel GMP from Canada. Your line is open.

[Deepak Kaushal:]

Oh, hey guys. Good morning. Thanks for taking my questions. Paul, I had a follow up on Paul Steve's question earlier, and you mentioned Travercent. I was wondering if you could talk a little bit more about Travercent. You’re a year into that acquisition now. it's focused on healthcare and we're in the middle of a global pandemic. What are some of the opportunities and challenges that have come up since the pandemic, starting with Travercent? And how are you guys managing through those or taking advantage of those business?

[Paul Raymond:]

Thanks for the question, Deepak. So, focused on that one, but I don't want to take away from the other acquisitions we've done, because they've all been very accretive for us. And as Claude mentioned, we're generating growth from these acquisitions as well. Travercent was very specific to a certain market sector, which was healthcare, especially in the hospital sector in the US, and they were number one in what they were doing in terms of number of implementations of Oracle, cloud, ERP in healthcare. So, bringing them on board, combining that with our existing skills on the EPM side and our cloud practice, we're able to accelerate that. So if you look at the growth they had before alone, we've grown that several fold since they've joined us, because we're going at it together. The other thing that is useful is now with that skillset, we can also bid in Canada on large projects where we have relationships and presence, where they did not because they were based in the US and focused in the US. So we see many opportunities there for cross-selling, both geographically and in complementary sectors. So healthcare, as you all are aware, had to change dramatically in the past year, with the cloud-based services and telehealth and all these other things. So, moving to the cloud for their internal platforms is critical. So we have seen an acceleration there. I don't think this is going to slow down. It's not going to go away after the pandemic. So we see a tremendous potential for growth there, and the similar sectors. So the expertise we've developed there, we can actually cross-sell into the public sector. So for example, a large city or universities and higher Ed type environments. So, we see a lot of opportunities there, and we're very happy with those acquisitions.

[Deepak Kaushal:]

Excellent. So, to leave out Askida then. Maybe I'll ask you about that. I know they have a QA software and they have some IP there. So I'm just wondering if you can give us a sense of how that - how you guys have been able to leverage that IP to drive higher IP sales and margin for the business.

[Paul Raymond:]

Great. Thank you. So, yes, we're very happy with that acquisition as well, and generating some significant growth there as well in two ways. One, they had complimentary clients where we were not present. So now we're cross-selling our other services into those customers. And from our perspective, as the IP, we're leveraging it across our ERP practices, because the beauty of cloud ERP systems is that you're always up to date and on the latest version. The challenge for the customers is, you have to upgrade every quarter to the latest version. Whenever you do that, there's significant testing involved to make sure you didn't break anything with the upgrade. In the past, customers would do this manually. With our solution, we can now automate this. And then the beauty of what we've done, we've talked about our investments we've done in our infrastructure over the past couple of years to be able to support a larger company, but we rolled out Oracle cloud internally as our ERP. We have rolled out Microsoft CRM internally as part of our CRM. So we actually use the tools that we sell to our customers. So we can actually use our internal environment as a test bed for these solutions that we then can cross-sell to a customer. So with Askida, we developed a new solution to be able to roll it into our Oracle proposals as an example, so that when the upgrades come through and their clients need the upgrade every quarter, that we now have a solution that we can sell to every customer, piggybacked on our ERP projects to generate future revenue in licensed sales on this IP. So it’s been very complementary.

[Deepak Kaushal:]

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

[Paul Raymond:]

Yes. We're looking at the - all of the above, Deepak. It's a good question. We try to be - we try not to disclose too much, because it could impact or draw some competition to some of the targets that we're looking at. But yes, I'd say all of the above. We like acquisitions that bring us a new skillset, complementary skillset, or a new industry that is also complementary. So again, if I look at the last three that we've done, Travercent was to position us in healthcare and Oracle cloud. Askida was to position us in the testing and the IP. Matricis was to be able to cross sell IoT type projects and machine learning across all of our customers. So we looked for these best of breed companies out there that would be very complementary, that would be easy to bolt on. And we also are looking for transformational ones as well. I mean, we've done the Edgewater in the past. There's no reason why we couldn't do something else the same size as Edgewater. So we look for those as well.

[Deepak Kaushal:]

Excellent. Okay. Well, thank you for taking my questions. I appreciate the extra color, and I'll pass the line.

[Operator:]

And your next question will come from Gavin Fairweather from Cormark in Canada. Your line is open.

[Gavin Fairweather:]

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

[Paul Raymond:]

Sure. So, our book-to-bill, as I said, is - it was very good in all of our geographies and in all of our practices. We we've seen in the US, and Claude mentioned it, sequential growth in our billable hours and utilization in the US. As you know, last year they - in the second quarter, they were hit by the slowdown in new projects starting up. So what this tells us, because of these bookings in Q3, we know that the next quarters, things are only going to improve, because utilization goes up as these new bookings come in and these projects start up. So that's why we're very happy with the momentum and the visibility we have for the coming quarters, because of bookings like that. As you know, in the US, we need to replenish those projects a lot more than in Canada, because in Canada, we have a lot of recurring business from existing customers. In the US, we have to sell new customers, new projects all the time. So whenever you see that, it's very encouraging and promising for the quarters ahead, which also supports the decision we made to hang on to our people, because we need them now. So, we're very happy with that decision.

[Gavin Fairweather:]

Yes, for sure. And maybe just to follow on that, can you talk about how much slack or kind of split air utilization there would be within that US business? I mean, I think historically, you were probably doing around 30 million on these network businesses, kind of topline enterprise obviously added to that. So, could we think about there being capacity in the business to move quarterly filling up maybe north of 40 million a quarter?

[Paul Raymond:]

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

[Gavin Fairweather:]

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

[Paul Raymond:]

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

[Gavin Fairweather:]

Okay, I'll pass along. Thank you.

[Operator:]

And your next question comes from Suthan Sukumar from Eight Capital from Canada. Your line is open.

[Adhir Kadve:]

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

[Paul Raymond:]

Thank you for the question. So in terms of the demand side, as you can imagine, everybody now realized that this thing's going to be around for a while. So the cloud transformation type projects have accelerated, and we have more demand across the board that we're seeing for that. So we - from where we're at, in terms of our strategy, we're very happy with where we're going, how we're positioned. And if you look at any kind of statistics out there, whether it's from Gartner or IDC or any of these other organizations, you'll see that the spend on cloud-based environments or transformation towards cloud-based environments, is accelerating. And we're seeing this in very large customers as well, which is very positive. So we don't see any sign of that slowing down. I think one of our advantages is the relationships that we have in place. So when these customers are doing this, they're not going for the lowest bidder. They're not looking for what I would call staffing type organizations. They're looking for organizations that provide value-added service that can guide them, that can help plan where they need to go, that can drive those projects for them and accompany them. And that's where we're at today. So that's why we're very well positioned. That's why we're seeing the kind of growth numbers that we're seeing now, which is what we expected. And we’ve said in the past that as soon as people get used to this new environment, we thought we have the right approach and the right solutions, and it’s paying off today. So, that's very positive. I don't think this is going to slow down. I think, based on what we're seeing from even the solution providers, every number that we see from Microsoft, from Oracle, from some of the other enterprise solutions, they're all showing significant growth in their cloud-based solution sales. We focused on very key industries where we wanted to be number one or number two. That way, we know we're always on the list. We’re always going to get calls when somebody is looking at a solution. And on the Microsoft side, we again made the top 1%. So, put that in perspective. Microsoft has thousands of partner integrators. I mean, we're in the top two or three in North America. So it's - so when something happens on the Microsoft side and agri-food, or in the industries where we specialize, we get a call. When something happens in the healthcare area, we get a call on the Oracle side. So these things have positioned us really well, and it's a big differentiator for us. So we see that accelerating, and that's why the acquisitions that we're looking at, are complementary to that. And the people who want to sell and join with us is because they see the potential upside of joining an organization, because we have the track record. We can have them talk to the previous acquisitions, and they can testify to the benefits they saw of joining a company like ours. So that's why we put all those things together, and we really believe we have the right strategy for this time and for post-COVID as well.

[Adhir Kadve:]

Okay. That's great. Thank you very much for the color. I'll pass the line.

[Rachel Andrews:]

Hi, Michelle. We'll have time to take one last question. Thank you.

[Operator:]

Okay. So your next question then will come from Amr Ezzat from Echelon. Your line is open.

[Amr Ezzat:]

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

[Paul Raymond:]

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

[Amr Ezzat:]

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

[Paul Raymond:]

Yes. I'll comment on the project, Amr, and I'll let Claude give you a bit of color on the numbers after. So, this - it's a very specific project. We have hundreds of projects on the go all the time, by the way. So this is one specific project where we're helping a very large and important customer of ours, where we do many other projects as well, in building out some IP. So, some new intellectual property, something they're using internally, and something that they want to sell. There's R&D involved. So it's always interesting when we do that. And in this particular case, once the system is in place, we actually get royalties from the sales that the customer is doing for the future. So we believe it's a good investment. We know where the problem is, and it's interesting because if you take that project out of our numbers and the gross margin in Canada and overall, would improve, and look at very much in line with last year. So we know where the problem is. We’re fixing it and we're confident of the payback we're going to have on that project in the future. Claude, I don't know if you can give more color on the numbers.

[Claude Thibault:]

Well, we decided not to provide specific numbers, although what you just said, Paul, by triangulation, you can figure out, it is a sizeable amount. That's why we were singling out in our disclosure this quarter. In terms of the future, by definition, the accounting rules make it so that we would need to book the whole anticipated loss in this past quarter. So, as we stand today, we are not expecting significant impacts going forward from that project, is what I would answer.

[Amr Ezzat:]

Great. So that’s fantastic color. Thanks.

[Operator:]

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

[Paul Raymond:]

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

[Operator:]

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