Alithya Group Inc. (ALYA) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Alithya's Second Quarter 2021 Earnings Conference Call. . 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 now remind everyone that this conference call is being recorded on Thursday, November 12, 2020. I will now turn the conference over to Rachel Andrews, Vice President, Communications and Marketing. Please go ahead.
Rachel Andrews: Good morning, everyone. And thank you for joining us for Alithya's Second 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.
Paul Raymond: Thank you, Rachel. Good morning, everyone. Before I begin, I would like to say that despite the daily challenges faced by our employees in the wake of this pandemic, they continue to show passion and dedication for Alithya and our clients, and I sincerely want to thank all of our 2,200 professionals across North America and in Europe for their hard work. So we are very pleased with our second quarter results, and our growth, yes, growth, despite the impact of the pandemic in certain geographies. They demonstrate the resiliency of our business model as well as the demand -- the growing demand for our digital transformation services. So the 3 key points in the quarter are: first, we generated year-over-year revenue growth. Second, our Canadian operations reported their best gross margins on record and generated double-digit growth. And finally, our third quarter, which is historically stronger than the second quarter. So we are expecting this to materialize as we start benefiting from the new contracts and improvements in our U.S. operations. So revenues for the quarter increased 1.5% to $68.4 million, driven by our Canadian operations, which was partially offset by our U.S. and European businesses, which continue to be impacted by COVID-19. What is important to highlight is that compared to the first quarter, although our consolidated revenues decreased since Q1, as they historically do in the summertime, they did so at a much lesser extent than usual. From Q1 to Q2, on a constant currency basis, consolidated decrease would have been only 1.8%. This should be a strong indicator for the sustained demand for our services. In addition, we are proud that the 3 acquisitions we completed last year continued to generate organic growth, both year-over-year and sequentially as well as superior margin. This is a testament to our strategy, successful cross-selling activities and synergy generation. Furthermore, some large Canadian clients, which we've talked about at length, which had started to stabilize in the first quarter, have now begun to ramp-up, which is also a very positive sign for the future.
Claude Thibault: Thank you, Paul, and good morning. Please turn to Slide 8 for certain Q2 numbers. Revenues for the quarter increased 1.5% to $68.4 million, mainly driven by our Canadian operations and partially offset by our U.S. and European activities. More specifically, revenues in Canada increased 13.4% to $38.9 million due to the contribution from our Matricis and Askida acquisitions completed last year and growth at certain key clients, partially offset by the negative impact of COVID-19. Conversely, revenues in the U.S. decreased 9.5% to $27.1 million due primarily to the negative impact of COVID-19, partially offset by the contribution of our Travercent acquisition completed last year. Similarly, Europe revenues decreased 24.3% to $2.4 million, mainly due to the impact of COVID-19, impacting mostly one important client.
Paul Raymond: Thank you, Claude. So in summary, our second quarter results demonstrated revenue growth and very strong growth in our Canadian revenues and margins. This was tempered by a short-term investment to support our U.S. operations. Our revenue growth in this context demonstrates the resiliency of our business model as well as sustained demand for our digital transformation services. Given the ongoing pandemic and the impacts of the second wave around the world, we continue to implement our business continuity plan, including managing our operating expenses prudently, taking advantage of government programs and monitoring all developments very closely. We will take proactive steps to continue to protect our employees, our clients and the company as required. Our bookings and pipeline remain healthy, and we are currently engaged in a comprehensive hiring campaign to pursue our shift to a higher value permanent employee base enterprise and to support our growth. Our third quarter is expected to benefit from major contracts we signed. For example, the deal with Desjardins Group is expected to generate significant revenues for Alithya over the course of the next quarters. Therefore, you should anticipate a good book-to-bill ratio in Q3. Also of note, our recent second quarter revenues were better than our third quarter revenues last year, and Q3 is historically better than Q2. In sum, we believe we have a strong foundation to support future growth, even as we face potential headwinds from the COVID-19 crisis.
Operator: . Your first question comes from the line of Paul Steep from Scotia Capital.
Paul Steep: Paul, could you maybe talk just a little bit about the M&A environment and what you're seeing there?
Paul Raymond: Yes. Thanks for the question, Paul. So we -- at the beginning -- in Q1, at the beginning of the pandemic, we kind of saw a halt out there. Everybody was kind of wondering what was going to happen. We definitely saw that turnaround in Q2. And I wouldn't say everything is back to normal, but I'd say a lot of very high-quality targets out there, and people are much more serious. So the people we talk to are actually more serious. So the people out there aren't just going on fishing expeditions to try to get an offer. But we noticed that there is a level of seriousness in the targets that we talk to that is, I'd say, high -- to a higher degree than before. Does that help?
Paul Steep: That does. Maybe talk about how the business -- how we should think about the mix of business in the U.S. you continue to have success in the Microsoft practice, the balance may be Microsoft, Oracle within the mix at the moment? And then I've got one last follow-up.
Paul Raymond: Sure. So I'd say we're very encouraged because if we look at our backlog, backlog has never been higher in the U.S. and that's why when we said we wanted to support our people, there's still a very high demand for qualified labor in our industry. There isn't a big overflow of people out there waiting for jobs. It's a very -- it's very difficult in this industry to find good people. So we have good people, and we wanted to hang on to them. We have a very strong backlog for our -- both our Oracle and our Microsoft practices. So for us, when we saw the slowdown in the summer, a lot of that is for deals that we've already signed that are ramping up in Q3. So for us, it was a no-brainer to invest in hanging on to those people. I know that a lot of our competitors out there, whenever they have somebody who's available, they fire them and then do massive layoffs. We have very high-qualified labor. Finding them and keeping them is very important to us, and that's why we invested in the quarter in hanging on to those people. And we believe it's going to pay off in Q3 and Q4. So history will tell whether it was the right decision or not.
Paul Steep: Great. And last one for me. Just on the new agreement with Desjardins. It's good to see. Could you talk about any differences or anything that you'd want us to note that might be different or sort of a further evolution of this partnership?
Paul Raymond: Sure. So I'd say on Desjardins, what's interesting is, one, we've been working together since the beginning of the company. So it's a very long-lasting and trusted relationship on both sides. We've accompanied them in their transformation, and they've also encouraged us in our transformation. So if I look at the revenue we have today versus what we had maybe 2, 3, 4, 5 years ago, the value of the type of services that we do today are very different than what we did several years ago. So whereas several years ago, it was mostly staffing type work, today we do projects, digital transformation, a very high percentage of permanent employee-based type projects, so much higher value type business. And that's increasing going forward. And it's true for Desjardins, it's true for all of our customers, but given the size of Desjardins, it's a very positive trend.
Operator: Your next question comes from the line of Deepak Kaushal from Stifel GMP.
Deepak Kaushal: Just to follow up on Paul's questions regarding Desjardins. I mean, Paul, can you give us a little bit more color, the revenue has come down quite substantially several years for Desjardins. Are you expecting it to stabilize here or increase? And what would be the commensurate trend on the gross profit, assuming that with more value-added services that margins will go up?
Paul Raymond: Thanks for the question. So I'll try to go through that question. First, our revenues did grow year-over-year. Significant growth in Canada, so double-digit growth in Canada, as Claude was explaining, which is the result of our strategy to generate strong organic growth and cross-selling from our acquisitions. So not only did we generate double-digit growth in Canada, but it's also growth and better business. So our gross margins were significantly higher as well in Canada. In France, which is a very small piece of our business, right, the decline is basically one customer. We've talked about it before, it was Air France. We're replacing that business in France. But given the context in France, the social programs they have for companies over there, it's less of an impact. It's a bit of an impact on revenue, but it's not significant, and it's less of an impact on margin. Our biggest impact on revenue growth was really the low utilization rate in the U.S. in Q2. So it's very narrow and very focused. We know where it is. And it was -- it's not Microsoft, Oracle, is that -- it's really across the board in the U.S. and it's temporary. And it was a significant -- if you look at the year-over-year, it's a couple of million dollars U.S., the change there in the top line. So when we have that, basically whatever that differences in top line is when it's tied to utilization rates basically it's straight bottom line impact. So it's top line and bottom line because we have the same people, we have the same costs. You just don't have the revenue that goes with it. So we're confident based on the backlog that we have now and what we've signed, that's going to come back. So just adjusting the U.S., we would be showing significant growth year-over-year. So that's why we're confident for the quarters ahead, Deepak. Does that answer your question?
Deepak Kaushal: Okay. Yes. Actually, sorry for misunderstanding. The question was related Desjardins and not that renewal.
Paul Raymond: Ah, Desjardins. So -- yes.
Deepak Kaushal: Sorry about that. I mean I think you heard the review. I understand the different moving parts in U.S. and Canada. For Desjardins in particular, clearly you're not going to get to the past revenue levels, but how do you look in terms of revenue versus over the last 12 months for that contract? And when do you expect gross profits for that business to stabilize and return to a growth path?
Paul Raymond: So last quarter we had mentioned that we had seen over the last year a decline in some of our larger Canadian customers. Last quarter we mentioned that we saw that stabilizing. This quarter we're actually seeing growth in those customers. So that's why when you look at our growth in Canada, which was double-digit this quarter year-over-year, some of that's from the acquisition, some of that's from the cross-selling and some of that is from new customers and existing large customers. So it's really across the board.
Deepak Kaushal: Okay. And then when I think of the longer term, we're still focused on recovery from COVID, but when you look out a year to a few years from now, can you give us a reminder of what your sense is for the stable organic growth based on the acquisitions you've made to date? And where you are targeting EBITDA margins to come out at?
Paul Raymond: Sure. So we've been very transparent about our long-term strategy. We gave ourselves a 3 to 5-year plan, which we've communicated as well. We believe by changing the mix of our business over time, the higher value services as we're seeing now, the gross margin is going to increase as we're seeing in Canada and we've seen in the U.S. as well and the company as a whole. And COVID notwithstanding, which I believe is temporary as this crisis had a beginning and it will have an end. I think we're making the right decisions when we say we want to protect our people and protect the business. I think we have a very high-quality business that can generate superior gross margins today compared to what it was before, which I believe will be back after the pandemic. And we're seeing the model generating growth now. So again, at post-pandemic, I see strong organic growth and M&A activities. The M&A, we're going to keep doing in the higher-margin businesses that are complementary, as we've said in the past. We believe that those things combine together .
Deepak Kaushal: Hello?
Paul Raymond: These things will go down as a percentage of our costs over time so that we can reach much higher EBITDA margins in line with some of the larger players in the industry.
Operator: . Your next question comes from the line of Jerome Gibre from Desjardins Bank.
Unidentified Analyst: Yes. Everybody speaks about Desjardins. I understand, great firm. So maybe regarding the loan forgiveness in the U.S., this would obviously be very material. And just to clarify, and maybe I missed it, but when do you expect an answer on that front? And how would you quantify your odds of getting it?
Claude Thibault: Thank you. I will take this question. This is Claude. So I mean we -- as I said, we spent the monies for qualifying expenses. We followed all the rules and regulations that we were able to get and understand. We were getting professional advice from the south of the border. The only I guess hesitation is the rules change. And I mean there's political action down there and the rules change many times. We do not expect rules to become more stringent or for eligibility to be made more difficult. We're not expecting that. There's just some uncertainty that we need to be aware of. So if you ask me, it's -- I need -- I have to say it's fairly probable that it's going to happen based on the current rules. Regarding timing, there's been also issues. The forgiveness, the initial forgiveness decision has been delegated to the actual banks that have been administrating and funding these loans. So there's been some delays getting those platform. It's all electronic with the web interfaces. It's now ready to go. And by law, we were going to be filing over the coming weeks, few weeks. And by law, the banks need to provide an answer within 60 days. Now you can imagine there is a bit of a mad dash to the door. I'm not sure if that's going to be even possible. So hopefully, as you know, our next quarter reporting, it will be mid-February. I would like very much to be able to provide more definitive answers by that time, but it remains to be confirmed.
Unidentified Analyst: Okay. That's helpful. And regarding the second wave we're seeing in certain geographies, are you seeing an initial impact that could be similar to what we've seen in the spring or maybe virtual delivery offsets most of that now?
Paul Raymond: Thanks. Merci, Jerome. Given we've been working in this environment for -- since March now and that people are kind of used to it, all of our folks were still working from home anyway. So we haven't -- and all the industries we're in are essential services. So we haven't seen any impacts on our customers. We keep delivering the stuff that we've always delivered. We still in Q2 implemented new ERP projects, and that's going to keep on going. I think my concern personally as a CEO and as an executive and as a father and a leader and whatever is more the mental health issues across the board for people in isolation. I mean we saw it -- we see it -- we have operations in France, so we see it in Europe, what's happening. I mean people now need a permit to leave their houses, whether it's for work or groceries or whatever, they need a piece of paper. We're seeing more and more confinements in Canada. And in the U.S., the numbers are just unbelievable right now. So I'm more concerned with the impact on the population as a whole and mental health issue. From a business perspective, honestly it -- or fortunately, it hasn't changed much for us right now.
Operator: There are no further questions at this time. I will turn the call back over to the presenters.
Paul Raymond: Thank you, Joanne. So to conclude, I'd just like to reiterate my sincere gratitude to our professionals, our clients and our shareholders for their unwavering support and trust in these unprecedented times. We can't say it enough. And also to thank all of the frontline workers out there putting themselves at risks every day to help manage this global health crisis. And I would really encourage everyone to follow their guidelines and respect the -- what we're getting from the health authorities. It's only going to help us get out of this faster. So thank you very much, everybody, for being on the call today, and stay safe.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
