Alithya Group Inc. (ALYA) on Q3 2022 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. Welcome to Alithya's Third Quarter Fiscal 2022 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 Andrews: Good morning, everyone. And thank you for joining us for Alithya's third quarter fiscal 2022 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, our Chief Financial Officer. Before we begin, I'd like to specify that this conference call is intended for the financial community. 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 into the forward-looking statements and Risks and Uncertainties section of our MD&A available on our website. Let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated, and be aware that we will refer to certain indicators that are non-IFRS measures. Please refer to our cautionary note in the presentation in the MD&A for more results. Now, I would like to turn the call over to Paul.
Paul Raymond: Good morning, everyone, bonjour. I look forward to discussing some of the highlights of another Alithya record quarter for revenues and client go-lives. But before I dive into the highlights of our third quarter, I'd like to take a moment to reflect on our most recent acquisition. On February 1, as you remember, we announced Alithya's acquisition of Vitalyst, a U.S.-based learning and workforce development company with a blue-chip customer base of Fortune 1000 companies and the leading Microsoft partner in their field. Here are the key highlights of this transaction. One, Vitalyst will accelerate our entry into the massive learning and workforce development industry, recently valued at over CAD50 billion in North America alone. The transaction also enhances Alithya's revenue mix with new high-margin subscription-based revenue -- recurring revenue streams; and three, it presents strong organic growth prospects and promising cross-selling potential with Alithya's current services and client base. And by the way, it also enhances our already solid partnership with Microsoft. On a final note, our new proprietary Adaptive Learning platform now enables us to provide post-implementation change enablement to our customers. We can, therefore, accompany them over the long-term in their digital transformation journey. Alithya will now be able to evolve the Adaptive Learning platform as well to fit the needs of our Oracle Practice moving forward, a reminder that this acquisition occurred during our fourth quarter and is therefore not reflected in the financial results that we are disclosing today. Now, on to Q3, another record quarter. Let's go through our three key takeaways for the quarter. First, Alithya has posted, once again, continued industry-leading growth and another record quarter in terms of revenues with more than 55% year-over-year growth. We also continued to experience substantial organic growth across all of our geographies, including a record quarter for go-lives posted by our Microsoft Practice for enterprise cloud implementations. Including Microsoft and Oracle Cloud Enterprise Solutions, we had a record 27 successful client go-lives in the quarter. Our Oracle Practice experienced record bookings as well for the US in Q3. This is largely due to a sense of urgency amongst health care sector clients to accelerate their digital transformation plans. With the current challenges and pressures that the health care industry faces, it is more important than ever to provide technology solutions that reduce risk and help clients to focus on improving patient care. We also continue to deepen our public sector market penetration in Canada. In January, we started a CAD3 million services contract with a federal government agency, the Parliamentary Protective Service. We also continue to leverage our Quebec government qualification that allows the Company to serve as a trusted adviser to other public organizations. In addition to paving the way to establishing a track record of ongoing successful projects with government agencies, the qualification positions Alithya to take advantage of our recent Quebec government announcement that all of its departments will be migrating to the cloud within the next three years. Secondly, in line with the continued growth of our business, our recruitment campaigns continue on all fronts as we strive to expand the knowledge and expertise of our workforce. We continue to be very successful in attracting new employees looking for exciting challenges with a rapidly growing digital transformation leader. We recently hired 192 employees, and our growth-related job openings have increased by 92% over the same period last year. We also continue to strengthen our internal resources dedicated to skills development for our professionals, which includes a series of specialized academies that focus on core expertise. To mention another highlight from the acquisition of Vitalyst earlier this month, Alithya will now be able to leverage the Adaptive Learning platform in order to sharpen the skills of our own professionals. And thirdly, despite the impacts from employee downtime due to COVID and well-deserved vacations from any of our people in December, we posted a record quarter for billable hours and total revenue in the quarter at close to CAD110 million. Q3 also saw the completion of our integration of R3D as of December 31, right on schedule. We're also on track with the ramp-up of our long-term agreements totaling CAD600 million in guaranteed revenues over the next decade with QMI and Beneva as announced in our first quarter. This brings me to some highlights on some of our new partnerships. So, our success in greater scale and attracting attention from industry-leading solution partners, Alithya is in the process of finalizing its AWS advanced tier services partner accreditation, enabling us to now access the full spectrum of AWS cloud-based services and solutions. As you know, the Quebec government has awarded some 40 cloud computing contracts totaling more than CAD55 million over the past 1.5 years. A recent CAD10.5 million contract won by AWS alone represents more than 15% of the value of the agreements concluded since January 2020. Therefore, Alithya's AWS certification will open up more doors for us for a broader cloud consulting and solutions implementation offering moving forward. We also continue the critical process of developing strategic partnerships and achieving certifications with other industry leaders our clients care about. For example, our partnership with Vitech, a global provider of cloud native benefits and administration software for the insurance industry, will enable Alithya professionals to unlock a transformative suite of applications embraced by our current and future insurance customers. We also gained accreditation as a systems integrator of solutions from Talent, a California-based technology company with a global clientele. This enables us to expand our offering of both on-premise and cloud-based migrations. Despite the context surrounding cohort around the world, we are encouraged by our continued strong bookings. They are the best predictor of what is to come. In Q3, bookings reached CAD125 million, which translated into a book-to-bill ratio of 1.14. As for the trailing 12 months, even excluding our CAD600 million 10-year contract, other bookings are in excess of CAD330 million. That translates into a book-to-bill ratio above one. Our continued superior bookings reflect not only strong demand for our digital transformation services from our existing clients, but also the fact that we are gaining market share and new customers who are now turning to Alithya. Before I turn things over to Claude, I would just like to shine a light on the significance of the collective achievements of our company in Q3. Powered by our rapid growth, the completion of the R3D integration and the addition of our latest acquisition, Vitalyst, Alithya's scale now enables us to fine-tune our cost structures in order to reap the benefits of past investments. This scale and strong financial position also enables us to continue our accretive acquisition strategy. I will now pass it over to Claude to cover some of the financial highlights. Claude?
Claude Thibault: Bonjour, good morning. Please turn to Slide 8 for the key third quarter highlights. Revenues for the quarter increased 55.4% or by CAD39.1 million to CAD109.7 million. Excluding the impact of the R3D acquisition, which occurred on April 1, 2021, true organic growth was 33.5% or 35.1% on a constant currency basis, in other words, significant and accelerating organic growth. In Canada, revenues increased 80.2% to CAD72.1 million due to organic growth in all areas of our Canadian operations, a general recovery of activity levels and revenues of CAD15.4 million from the R3D acquisition, including intercompany revenues; and finally, growth from the two associated long-term contracts. In the US, revenues increased 22.2% to CAD33.7 million as we experienced strong organic growth in all areas. The increase was partially offset by foreign exchange variations as the increase would have been 26.4%, assuming a constant US dollar. As for our international operations, they are showing a similar strong performance. Looking at gross margin, it increased by CAD7.9 million or 38.3% to CAD28.3 million for the third quarter. As a percentage of revenues, the third quarter gross margin was 25.8% or, if excluding the impact of the R3D acquisition, 28.1%. That is down from 28.9% for the same quarter last year. As previously mentioned, the R3D revenues historically show a higher proportion of billable subcontractors and a corresponding lower gross margin profile. When excluding R3D, the decline in gross margin percentage mainly comes from, A, an increase in subcontractors revenues relative to those from permanent employees, coupled with an increase in the average cost of subcontractors, explained in part by the tightening labor market; B, increased costs in certain customer projects; and C, decreased software revenues, which typically carry higher margins. SG&A expenses in Q3 totaled CAD25 million, an increase of CAD4.6 million or 22.4%. This increase is primarily driven by the R3D acquisition as well as by certain increases in employee compensation and recruiting costs, in line with our strong organic growth, partially offset by decreases in share-based compensation and the favorable US dollar exchange rate. As a percentage of revenues, total SG&A decreased to 22.8% for the three months ended December 31, 2021 compared to 28.9% last year. As Paul mentioned, we have now completed the migration of R3D's commercial and administrative functions into Alithya's infrastructure, resulting in certain additional cost savings to come. Overall, our third quarter adjusted EBITDA amounted to CAD4.5 million, an increase of CAD2.2 million compared to the same quarter last year. As in previous quarters, the amount of non-cash depreciation and amortization totaling CAD4.8 million is notably greater than the quarter's accounting loss of CAD3.5 million. Looking at long-term trends on Slide 9. We can see the impact of our acquisitions and more importantly of our strong organic growth of the past several quarters. Regarding gross margin, we see a similar trend in dollars, but recent challenges in percentages for the reasons I mentioned before. We believe most of these factors are largely cyclical, subject to some natural recovery over time. And we aim to reverse the trend also with a number of targeted initiatives, focusing on labor mix and costs due to utilization improvements, setting prices adjustments and focusing future growth in our higher-margin segments. On Slide 10, our long-term EBITDA trend reflects our growth but also our recent gross margin percentage challenges, as well as some increases in SG&A despite their gradual expected decrease as a percentage of revenue. I would like to take a moment to put our recent results in the context of our long-term business objectives, which we have often been communicating over the past few years. For revenues, we pursue sustained organic growth and selected strategic acquisitions in order to reach the CAD600 million mark. Our organic growth and acquisitions of the last year have taken us close to the CAD0.5 billion mark, and we certainly intend to maintain the efforts on both fronts. For gross margin, we believe our long-term strategies, some discussed on this call, remain appropriate and relevant for gradual recovery and further improvement, including as it relates to the two long-term agreements stemming from the R3D acquisition. We also intend to keep targeting acquisitions with a higher gross margin profile and the recent Vitalyst acquisition is certainly a very good example of that. For SG&A, we believe that we have now reached a certain critical mass and a stabilization of certain SG&A categories, including with regards to corporate and head office costs. Going forward, these expenses should grow more slowly than our revenues. And as such, we intend to continue our downward trend of SG&A as a percentage of revenues with some acquisition synergies still to come, including longer-term savings relating to rent. Also, most acquisition targets that we look at typically have a lower SG&A percentage profile even before potential synergies, which should further compound the trend. In a nutshell, that is the step-by-step playbook of how Alithya believes that it can realistically aim to achieve its three-year objective of CAD600 million in revenues with an EBITDA margin of 3% to 13%. Now turning to our liquidity and financial position on Slide 11. Net cash from operating activities improved to CAD10.1 million in the third quarter, a significant increase from the third quarter of last year. Excluding our positive working capital variations, the third quarter cash flow from operating activities was CAD2.3 million, which represents over 50% of the reported adjusted EBITDA. Moreover, considering that we have fairly stable interest expenses and CapEx and fairly low effective tax rates with our available tax pools, this conversion percentage should increase exponentially with any future growth in EBITDA. On Slide 12, we see total debt decreasing from CAD84.5 million, down to CAD61.6 million during the third quarter, with a similar decrease of our net bank borrowing. This comes from cash flow generated by operating activities, as mentioned before, a transfer of cash balances to debt and the new financing facility, reducing bank borrowing. This decrease of total debt, combined with a higher trailing adjusted EBITDA, shows a steady four-quarter deleveraging trend, bringing us to a 3.1 ratio of total debt to trailing 12-month adjusted EBITDA. Looking at these metrics following the Vitalyst acquisition on Slide 13, we see the pro forma total debt-to-TTM EBITDA multiple decreasing to 2.6. This reflects the debt and equity raised for the acquisition and the current profitability of the target. Looking forward, even considering the historical profitability of Alithya and Vitalyst, we are expecting deleveraging dynamics to continue. Of note, we also announced in the context of the Vitalyst acquisition an increase of our senior credit facility from CAD60 million to CAD125 million. As such, considering our permitted 5.5x maximum ratio, this provides us with ample capital to continue on our growth strategy, even though we intend to maintain, as always, our prudent use of debt. In closing, our normal course issuer bid launched on September 20 is progressing as planned. Since its beginning, Alithya has repurchased and canceled 330,000 Class A shares for a total cash consideration of CAD1.1 million. Back to you, Paul.
Paul Raymond: Thank you, Claude. So, our industry-leading growth is a reflection of the quality of the work of our people and at the level of trust that our customers have in our ability to guide them through their complex digital transformations. Accordingly, Alithya will continue to focus on those core values that guide us towards the objectives set forth in our three-year strategic plan, which foresee the delivery of more than CAD600 million in revenue and between 9% to 13% EBITDA by the end of that period. As we wrap up Q3, we're also very pleased with the strides we are making in mounting a comprehensive environmental, social and governance strategy that is in line with Alithya's values and the many initiatives already underway. For example, our management incentive plan already includes ESG criteria, and we were the first technology services company in Canada that joined the 30% club years ago. We are one of the few IT services companies that provide all of its employees with paid leave to give back to their communities. We have paperless work environments, work from home and employee assistance programs and many more. As with everything we do, we want to be a leader in the field of sustainability. So it should be of no surprise that we're establishing progressive ESG guidelines that meet the expectations of all of our stakeholders and reflect much of the valuable work our people have done over the years to improve the communities where we live and work. To that end, and in the association with a leading Canadian ESG consulting firm, Alithya completed all of the steps of their Phase 1 recommendations in Q3, and we now turn our attention to Phase 2, and we look forward to sharing our ESG framework with you in the near future. But thank you for being with us this morning, and Julie will now be opening up for questions.
Operator: Thank you. Your first question comes from Kevin Krishnaratne with Desjardins.
Kevin Krishnaratne: I had a question first on the gross profit in the quarter, and then I'll ask about forward trends. But just in the quarter, you talked about a number of factors impacting it, certain customer projects, tightening labor market, software mix and then a higher load of unbillable hours at year-end. Can you just -- I think those are the four elements, can you just walk through any way to quantify, at least maybe...
Claude Thibault: I think we just lost Kevin, but I'll answer the question. Kevin, if you can still hear us, I think you wanted more details on the comments on the billable climate margin. So thank you for the question. Basically, as I was mentioning, it was a record quarter for billable hours. At the same time, we also had a high number of non-billable hours, especially at quarter end, with COVID and more vacation and project ends and starts. So, I guess, the positive of that is the people who were non-billable at the end of Q3, which are billable in Q4. So, same cost, more revenues with more and more of the billable time. So, it's a positive. I think it was a temporary thing. We also listed a list of other small things that impacted in the quarter, but we see those as temporary quarter-end type stuff. And we're very, very confident with where we're going with that. And if you get back on the line, the second part of your question...
Kevin Krishnaratne: So you talked about...
Paul Raymond: Sorry, did you hear the answer?
Kevin Krishnaratne: I heard the answer, yes. And so, I guess, I mean, there are just a number of things. Is there any way to quantify, though, maybe perhaps even the customer projects, like what would it have been ex some of these one-time transitory impacts?
Paul Raymond: Maybe I can just to add a little color, give you one concrete example. So, in the quarter, we had 27 go-lives, which is a record -- all-time record for us. So these are ERP, CRM, all of our enterprise solution projects, so, Oracle, Microsoft. So whenever a project end, the team gets shifted to a new project. So there's usually a lag in between there. So, the closer to the end of the year, those go-lives were -- means that people aren't restarting a new project December 15, I think, before everybody goes up on holiday. So, a lot of the go-lives that were later in the quarter means the team is basically start building on the new projects in January. So, we use the opportunity to let these people take some well-deserved vacation and downtime over the holidays. We also have some customers that shut down all the days altogether because of the Omicron shutdowns and the COVID situations in different countries. So, we use the opportunity to encourage our people to take vacation.
Kevin Krishnaratne: So, as I think about -- yes, so then going forward, you talked about a number of initiatives, labor mix, price adjustments and then obviously looking towards building higher-margin businesses. Can you talk about maybe the timing of that trajectory on gross margin improvement? And then, if you can help us sort of think about near-term modeling on gross margin exiting this year into the next year. And obviously, I know we've got Vitalyst is in there as well, and that will probably help the margin too.
Paul Raymond: Again, here, maybe let me give you a color, one very simple factor here that influence your modeling. If you look at our business, one of the things that we've been saying is about moving to higher value employee-based projects. So, R3D, as you remember, is mostly subcontractor driven, which has very low gross margins. I mean, it's in the teens. So, we said we'd be shifting that over two years. Part of that shift is coming through the agreement we have with the Quebec government which is on track. It's exactly where we wanted it to be. So that's a big part of it. If you look at just our employees, we're way above 30% in terms of gross margins for our employees, which is what we wanted, where we want to be. So the -- one of the biggest initiatives that we have going forward is replacing those subcontractors with our full-time people. So, if everything else being equal, if we can just get that one under control over the next two years as part of our agreement, it would have a huge impact on gross margins.
Kevin Krishnaratne: So, you aspire to get the business to a 30% margin and then higher in time on layering on even more higher-margin businesses?
Paul Raymond: Exactly.
Kevin Krishnaratne: And sorry, just one -- I just want to take one more question on the GM, the software mix. So, you called that out. So I'm just curious, broadly what was the mix of software versus services in this quarter versus a typical quarter? Like how different was that mix?
Paul Raymond: So it's not a miss. Software revenues will vary depending on the customer assignments that we have. In any event, software revenues are always below 5% of our top line. We aim to increase that obviously. But historically, we're talking about low dollar amounts. But the margin is very good. So, a difference of -- a small difference to the small amounts makes a big difference on the margin percentage.
Kevin Krishnaratne: I understand. Got you. Look, I'll switch gears just more to the top line. Really, really good results there, impressive organic gains. You talked about Oracle quite a number of times. So how did Oracle versus Microsoft perform in the quarter? Are you just seeing particular strength in Oracle? And do you want to touch on sort of what really is driving that, talk about your expertise in the health care vertical? Any incremental color you can just talk about on how you're seeing that strength was particularly strong?
Paul Raymond: Actually both those -- both Microsoft and Oracle are doing extremely well right now. It's just that where we were involved with our Microsoft and Oracle solutions are in different industries. So, again, Microsoft doing very well on their side, Oracle doing very well on their side. One of the things that we were talking about is, we are seeing a big acceleration on the health care side. I think COVID put in light a lot of the issues that many health care providers have around their systems and making sure that they have more time to give the patient care versus administrative issues and challenges as we've heard and seen in the past two years. So there's really an acceleration on that side. And given our very strong positioning on the health care side, we're getting a big chunk of that. So we're seeing a lot of growth there. But again, Microsoft doing very well, a record number of go-lives on our Microsoft side in the quarter. So, no signs of slowing down there.
Kevin Krishnaratne: Last one for me, maybe for both of you. Just thinking about future quarters, obviously very strong growth in Canada. You've been adding quite a bit of revenue quarter-over-quarter. I think you're coming up on a tougher comp year-over-year. In Canada, organic trends were 40% this quarter. And then, in the US, I think you're facing a bit of an easier comp, but revenues are trending there. Just how do we think about the near-term way of modeling the bookings translating to revenue just in light of the strong growth you've been recently posting?
Paul Raymond: I guess, maybe the one thing you could look at is our Q4, which is basically calendar Q1, January, February, March, that usually has less holidays or less downtime than others. March has many more billable days this year as Easter is not in March this year. The way the Christmas holiday, December, January fell this year, there are more vacations in December than the January from looking at the calendar. So, assuming we have the same number of people and , we'd be in better shape. So, we're pretty optimistic on Q4.
Kevin Krishnaratne: Yes. And so I'll leave it at that. Congrats on a good top line quarter for sure, given the seasonality and the schedule in the month of December. So congrats and I'll pass the line.
Operator: Your next question comes from Gavin Fairweather from Cormark Securities.
Gavin Fairweather: I thought we'd start out on the bookings. It looks like a nice strong bookings print in the quarter. Any kind of trends that you would call out by region or a vendor or a mix of work under the hood there?
Paul Raymond: Actually, it's really everywhere, Gavin. I think we've been talking about our shift to higher value and digital transformation, and we're really reaping the benefits of that. All of our business now is driven by digital transformation. I think we're one of the leaders in the sector and they're being recognized not just by our customers, but by new loan bills that are calling us and joining us. And of course, we're getting a lot of referral directly from Microsoft and Oracle on those solutions, but our digital solution center is also growing leaps and bounds and doing projects for customers and accelerating their move to the cloud. Like I said, the recent Quebec government announcement, they want to move every department to the cloud within the next three years. It's also something that's driving a lot of growth for us. So it's really everywhere right now.
Gavin Fairweather: And then, just thinking about your fiscal fourth quarter, obviously we've seen Omicron has kind of perked up and we've been living under COVID for, call it, a couple of years. So, I guess, to what extent are you thinking that that could present some challenges in terms of billings in the Q4? Or do you find that most of the projects are kind of able to move despite that?
Paul Raymond: I think, the number of go-lives in the quarter is kind of our best indicator of that, Gavin. We -- I mean, 27 ERP system go-lives are remotely executed. I remember at the beginning of the pandemic, some of you on this call, the first quarter, we've done a few and we were amazed that we were able to do them remotely. Now it's kind of de facto, we have to do it remotely. So the team has really developed an expertise around that. No sense of that slowing down. As you know, we just opened an offshore set in Morocco, which is also growing. So we know that's something we'll be able to leverage from a cost perspective going forward as well and also help with recruiting. So, we're very optimistic about the future and what remote and teleworking has given us as an opportunity and the acceleration of digital transformation that's come with it.
Gavin Fairweather: And earlier, you talked about the leverage in the business as you shift your mix more towards FTE from subcontractors. Obviously the hard part is finding the FTEs in the current laborenvironment. So maybe just walk us through how you're feeling about your ability to kind of execute on shifting that mix. And then, maybe just touch on the Morocco development hub and the size of that operation and how scalable you think it is and how that plays into that shifting mix towards that piece.
Paul Raymond: So the first part -- last part was on Morocco and the shifting the first part again, Gavin, the first part of your question, sorry?
Gavin Fairweather: I mean, you talked about the leverage of shifting from some in the business and just your ability and how you're planning to execute on that given the environment?
Paul Raymond: So the hiring, we're still doing quite well despite what we're seeing out there. Again, we hired over 190 people in the quarter. We were opening up a lot of new positions. The team is doing an amazing job in hiring in the current conditions, as you know. I think, our biggest selling feature is the type of projects that we do. We keep attracting people who want to work on newer technology and exciting projects. We have a similar challenge to everybody in terms of turnover and the likes. I like to believe, based on the numbers I've seen, we're doing better than what's happening out there, which is good. We're also -- I think, the highest turnover rate you're seeing out there in many companies is the people that have been hired in the last two years, right? People hired during COVID, which have not been able to have that human interaction with other individuals within the Company, so we're getting very good at managing remotely. I mean, we have all the tools. The team has set up that way. We were working that way in the US before the pandemic. So, we're kind of built for this environment right now and strangely enough, so it's doing very well. And as things start reopening, I guess that's only going to be positive in terms of trying to bring some people back to do some face-to-face meeting and team building events and so on and so forth. So we like our positioning on the hiring front. Our most successful recruiting is actually referrals from other employees. I mean that's where we have the biggest positive results when the referrals come from our own people, which is working very well, but we have a very effective recruiting team that manages all that. That Morocco is ramping up, I'd like it to go faster. The challenge is not finding the people. As I've mentioned this before, one of the challenges in Morocco and each geography has their own thing, but people have to give two to three months' notice in that country before they change jobs. So, it's ramping up. We're very happy with it. And the intent would be to make it bigger than what we had originally planned. But we are looking at other options as well. As you know, we're always active on the M&A front. Vitalyst is a great example, great margins, a model that's decoupled from headcount, which is great. And we're also looking at targets that have offshore extensions as well. So we're at scale now. If you look at our run rate right now, CAD110 million in the quarter, multiply that by four, add in Vitalyst. I mean, we're basically with very little growth, we're going to be over CAD500 million next year, if I just do the math in my head. So we're basically one -- two acquisitions away from our three-year plan. So, one thing that would make sense with the scale that we have today is to have more offshore capability for our projects, which would also help with the recruiting and the workforce issues globally. So, these are all things on our menu for the next little while.
Gavin Fairweather: And then, just lastly for me, just on pricing. I mean, you mentioned that as a lever for gross margins, particularly given the strong demand environment. Can you perhaps share what kind of price increases you're looking at on when you're bidding on new business?
Paul Raymond: It varies tremendously, Gavin, in all of the areas that we're at. But again, as we've said in the past, our aim when we bid on projects is not to win because of price. We want to win because we have the best solution or the best reputation or we're the ones who the customers believe will deliver the project with the least risk possible. So, by doing that, we're not as driven by producing costs but more driven by the quality of what we deliver. So, we're really focused on that. So, yes, we're seeing price increases around -- across the board and our offerings. But at the same time, being able to leverage offshoring and lower cost centers to help us with the delivery on the cost side, I think, would have a much greater impact on our gross margins.
Operator: And your next question comes from Paul Steep from Scotia Capital.
Paul Steep: Paul, could you talk just maybe a little bit about obviously some of the bookings and maybe the transition in the business, how we should think about the duration reflecting that a lot of it's still consulting business, but if there's anything else you want to call out in terms of maybe longer-term contracts, ex the R3D deals. Just give us a sense of where that's been trending over time.
Paul Raymond: Thanks for the question, Paul. A very good point. If I go back five years ago, most of our work was time and material. There was very few projects where we had full control of the projects. Today, I have over 200 projects at any given time in the Company, and that's only going to increase. So these are projects where we take responsibility for the customers. Some are fixed price, some are not. But these are projects where we can manage the intake and produce an outcome, which, again, comes back to helping out on the gross margin because we can staff those projects with people that we choose based on what we think we need to deliver the project and not based on the resume and somebody. So, it's really selling our qualifications and our delivery capability. So our intent is to do more of that. We're seeing the impacts of that. We're seeing how positive it is. Most of the new business that we're picking up with the over CAD600 million contract with Beneva and QMI, our projects. So we are -- that is a big, big driver in terms of gross margins when you can focus on the outcomes and manage your costs and how you deliver that and, again, leveraging full-time employees and leveraging offshore and leveraging all these things. So we're finally at the critical mass around CAD0.5 billion where we can do those things. One of the other areas that we're doing a lot more of is these academies that we put in place where we hire college grads and train them in a very concentrated area of the business, whether it's in Microsoft or Oracle or another technology, which again is a great source for us in terms of recruiting. We typically pick college grads that do not have a technology background but have a business background, and train them on a business-driven technology, which is working very well. And again, that's an expensive proposition when you train these people that as an investment, but the payback is within a year. So, coming back to Claude's comments earlier, we are investing in growth, and we know there's a huge payback and we're seeing in the growth that we're getting. So, scale makes a big difference for a company our size. We're seeing as well in the SG&A percentage that keeps going down. And again, our objective is to get that under 20%. So, we're going in the right direction.
Paul Steep: And then, other to you, Claude, how should we think about -- I know over time we talked about integrating R3D and transitioning the staff from maybe a subcontractor to a full-time basis. Maybe talk to us a little bit about where you're at in that journey of discussing it with some of those folks and shifting them over to maybe being full time?
Claude Thibault: It's progressing. That's a constant effort. And as I mentioned in my notes, in Q3, it so happened that the trend unfortunately reversed with having to manage that significant growth and looking for resources to fill these services. We unfortunately needed to turn to subcontractors to a larger extent than we would like. But I would say is probably a midterm effort to get to where we want to go, even though it is progressing. In terms of the SG&A, we have some savings to come still. Most of it would be behind us. So I don't want to tell you that large numbers are still ahead of us in terms of reductions. But it still -- it will still move the needle going forward, and that is immediate. That will be completed over the fourth quarter for whatever was left to be saved on that front.
Paul Steep: Just on that same topic, just to manage it, I know we discussed it briefly earlier, given where you're adding the cadence of some of these projects, should we -- obviously Vitalyst will give you a bit of an offset on the gross line next quarter. But should we expect that you still presumably got some of the same subcontractors employed working through these projects? Should we think that maybe there's a little bit of pressure on GM into the next quarter and then over the year, it starts to ease as you further work out the plans that you've articulated?
Claude Thibault: On gross margin, it's really -- we need to look at recovery on short, mid and long-term. Before the third quarter, you've seen our gross margin. It was already at reduced levels following the R3D acquisition. So, I would say, on the short-term, we should be getting back to those levels -- those kinds of levels. Q3 was really a combination of different factors that just happened to come together impacting more than usual in the third quarter. Same factors that I explained, the labor mix, certain projects, we always have hundreds of projects on the go at all times. And sometimes, the challenges on projects seem to occur in a more concentrated fashion. This should average out going forward, a fairly short-term basis. Software revenues, there's no trend to be seen there. It's really not at random, but depending on the specific projects, specific software percentage that those projects have and when the billing occurs can have a significant quarter-to-quarter variation. So no reason to expect that Q3 is setting any trend to be continued. So, on the short-term, we can expect some of these negatives that all happen to be bundled together in Q3 to lease off. And then turning to the midterm, the labor mix is something we're working on continuously, as I said, and growth has a lot to do with it. I mean, we've been investing in growth, and we've been succeeding in obtaining growth, and Paul talked a lot about that, maybe focusing more on performance and how we deliver on that growth as best we can is probably in the cards over the midterm. And then long-term is everything else we talked about. Service mix, higher value-added projects and obviously acquisitions, that are -- will be driving that gross margin going up. So it's really needing to look at the three levels. Without providing specifics, we do not provide guidance, as you know.
Operator: Your next question comes from Amr Ezzat from Echelon Partners.
Michael Vaccarino: This is Michael Vaccarino on behalf of Amr. So, most of my questions have been answered so far, but I'll throw in a couple of quick ones. In your prepared remarks, you spoke about deleveraging. Can you provide some color on how you're looking at M&A going forward? Is your current 2.6x net leverage at peak, whereby you wouldn't look at acquiring anything further? Or just kind of trying to get a sense of your appetite here?
Claude Thibault: Well, there's obviously two moving parts to this ratio. The first one is what performance will be going forward in terms of EBITDA, and we are not commenting on that other than what we've said before. The other piece of the equation is debt in itself. And obviously that depends if we are going to be doing additional acquisitions. And we've always said that was certainly in our strategic plan to do acquisitions on a regular -- on a steady pace. So -- but depending on the timing of that, every quarter that goes by, especially if we deliver good cash flow as we did in Q3, the deleveraging could occur very fast. Our sweet spot has always been around 2x is what we aim for. Don't forget that the chart only shows the actual reported EBITDA. Our bank covenants actually looks at acquisitions on a pro forma basis. So they gave us credit for the trailing 12 months of the acquisitions even before we own them, which is how you should look at it. Because once you spend cash to make an acquisition, you should consider the potential profitability in that ratio. So, it's tough to project the number because of those reasons. But our sweet spot, what I can tell you is, our comfort zone is around 2x, a little more when we have acquisitions that are very -- have a lot of recurrence to its revenue profile, and that's the case with Vitalyst certainly.
Michael Vaccarino: And then, back on your comments on utilization. I know you don't release your utilization rates, but can you give us a sense of where you are currently sitting relative to Q3? Are you close to fully utilized?
Paul Raymond: Yes. We're not talking about Q4 today. Sorry, Michael.
Operator: And your last question for today comes from Nick Agostino from Laurentian Bank Securities.
Nick Agostino: So, just on the gross margin side, I mean, obviously it feels like, obviously in this case, you had lots of growth, and you've had to go out and get subcontractors to help you guys fulfill that growth. So it almost feels like added growth will impact your gross margin near-term and slower growth. You can maybe offset that as you get more and more FTEs in the door. I'm assuming that that's a short-term view that we should be having here. And my question is, are you guys still comfortable, now that you've completed the R3D integration, are you still comfortable that you can get to that 25% gross margin level, plus or minus, I think it's within a two- to three-year time period, just given the growth that you guys are seeing in front of you and the rate at which you're adding people within North America and within Morocco?
Paul Raymond: On both of those, you're absolutely right. There's a short-term pressure just because we're ramping up so fast. But on the plan for the Beneva and Quebecor ramp-up and gross margins on those contracts, we're right on track. We're very comfortable with the target, the 25%. And remember, that contract is guaranteed margin. So, if something happens and we can't make the margin, there's a mechanism for compensation in that. So that's why we're 100% confident on that one.
Nick Agostino: And then, just given -- you talked earlier about various markets. And I'm just wondering, in the recent past, you talked about or highlight some higher education initiatives that you have launched. Can you maybe give us an update on what you're seeing when it comes to the higher education market and the opportunities in that market and how maybe they've contributed in the current quarter or what your expectations are for upcoming quarters?
Paul Raymond: So in terms of higher ed, we have very high expectations. We see that a little bit like what we're seeing in health care right now. A lot of higher education institutions that have been struggling in the past two years with COVID, with remote delivery of services, with students being on-site, off-site, delivery of classes and so on and so forth. So, we're seeing tremendous potential there. It's ramping up, but they're not at the same speed or same level that we are in health care. I think they're a year or two behind health care. I think it's also the nature of those institutions. It's -- the decision-making is very collegiate that usually takes more time, but we see tremendous potential there, similar to what we're living in health care today down the road.
Nick Agostino: And then, my last question, on prior calls and news releases, there was talk about a Canadian fixed price contract. Can you just give us an update as to the status of that contract and specifically if it has been or how close you are to completion?
Paul Raymond: Yes. As we mentioned last quarter, that one is over and done with. There are no more overages on that project. It's mostly completed and implemented and everything else we're doing there is a new business with the customer.
Operator: And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Paul Raymond: Thank you very much, Julie. Thank you, everybody, for joining us today. Appreciate your questions and looking forward to talking to you on the next call. Take care.
Operator: This concludes today's conference call. You may now disconnect.
