Q4 2022 Alithya Group Inc Earnings Call
At least yes fourth quarter and fiscal 2022 financial results.
I would now like to turn the meeting over to Rachel Andrews, Vice President Communications and marketing at least yeah. Please go ahead Ms Andrews.
Good morning, everyone and thank you once again for joining us for our lithium fourth quarter and fiscal 2022 results conference call. The press release and MD&A with complete financial statements and our 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 before we.
We began I'd like to specify that this conference call is intended for the financial community.
Also 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 the 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 <unk> measures.
Please refer to the cautionary note in our presentation and to the non <unk> measures section of our MD&A for more details.
<unk>. This morning are Paul Raymond Elite, He is president and Chief Executive Officer, as well as Claude Thibault, Our Chief Financial Officer, now I would like to turn the call over to Paul Raymond Paul.
Sure and good morning, everyone boardroom.
I am very pleased to be here with you. This morning to speak about another quarter of record revenues for Lithia to closeout, our 'twenty to 'twenty two fiscal year.
The quarter was marked by industry, leading growth in revenues and adjusted EBITDA, both on a sequential basis and year over year.
On that note before I dive deeper into the drivers behind our fourth quarter numbers I'd like to take a moment to discuss our latest transaction the acquisition of data and consulting group, which is expected to close on July one.
As you have seen in the past we continue to adhere to a very disciplined approach to mergers and acquisitions. Our strategy remains focused on a balanced approach to organic growth and on acquiring quality companies at the right time for the right price.
We look for complementary companies that can leverage our platform to accelerate growth and generate synergies from our scale.
The acquisition of data really epitomizes that strategy and there are three main takeaways from the transaction that I would like to share with you.
First and foremost data as a leader in specialized digital transformation services and software that primarily targets the insurance industry and public sectors, which are two staples of elite <unk> existing operations.
As a lead there continues to penetrate deeper into the global insured tech market. The acquisition of data at six of the top 10 health insurers in the United States to our growing client base. Additionally, I spoke earlier about the importance of synergies there.
The acquisition of data as a suite of 14 intellectual property based products to our toolbox, which greatly enhances our flexibility in addressing an even wider range of customer projects and finally data generates a growing proportion of revenue from its SaaS offering our software as a service, which will bolster our <unk> offer a cloud.
Solutions that are always in growing demand.
Now back to our fourth quarter performance, we closed out the year with another quarter of record revenue and our signed contracts continue to feed our healthy pipeline of projects. So we head into fiscal 2023 with a solid book to Bill ratio of two four for the past 12 months. Furthermore, with the announcements of three acquisitions in our lab.
Two quarters alone. This will also add to our bookings going forward.
In the past quarters, we spoke a great deal about the relevance of bookings, which translate into future revenue.
In the fourth quarter, our Paas bookings contributed to a record of $120 million in revenue or 54% increase over the same quarter in fiscal 2021, we are very proud of this industry leading achievement.
At the same time Q4, where this was another exceptionally strong quarter in terms of new bookings, particularly in the manufacturing and health care verticals in the United States and the financial services in Canada, those new bookings have replenished our healthy pipeline as we head into fiscal 2023, allowing us to maintain our momentum.
Also we are more than happy to have welcomed to alleviate more than 120, new customers throughout the fiscal year.
Now on a regional basis.
India experienced 63% revenue growth across our Canadian operations that is a significant number driven by general post pandemic recovery in many sectors of the economy and the accelerating need for a trusted digital transformation partner part of that growth is also attributable to <unk> acquisition of <unk> in April 2021.
With synergies reached through the completion of the Companys administrative integration into our <unk> operations in Q3 and revenue generated by two long term contract signed with Minerva and can they call as part of that acquisition.
On that note I am pleased to inform you that after one year of doing business with these two major clients, we are on track and generating more than $60 million in billable hours promise per year.
Of note future bookings from Mediobanca, Banca <unk> contracts will not be included unless the contractual revenue minimums are exceeded.
Organic growth was also the name of the game in the United States, where <unk> experienced a 40% year over year increase in revenues, particularly as previously mentioned and the manufacturing and health care verticals.
Our U S growth included a $5 million revenue contribution from the newly acquired vital S. M.
And that from only two months on the books in the quarter. We are also encouraged by the continued growth and momentum of both our Oracle and Microsoft practices in the U S, particularly the latter which is now generating returns on substantial bookings reported in previous quarters.
Our dedicated team successfully completed 21 go lives of enterprise cloud implementations.
Internationally, our European operations also experienced a record quarter with a year over year organic increase in revenues at 55% that performance is an encouraging sign of a healthy business in a region, where our customers were particularly hard hit by the pandemic and as we continue to leverage Sydney group synergies across all of our.
<unk> the Olivia digital solution center headquartered in the province of Quebec, and by extension, our Morocco hub have stepped in to assist our office in France in addressing its growing portfolio of new projects.
Filling that void of technical expertise remains one of the biggest challenge is at the forefront of a competitive industry, along with lingering global uncertainties and inflationary pressures accordingly accelerated growth, sometimes forces us to reluctantly higher sub contractors in order to fulfill our growing pipeline of projects and that in turn has a negative impact on our <unk>.
Margins that being said the harmonization of our internal training and initiatives our recruitment campaigns, our new offshore offices and our organizational culture is strengthening our ability to hire and maintain the best available, Thailand talent, which provides us with confidence and optimism as we enter fiscal 2023 indeed.
Our customers can now count on more than 3700 professionals to drive their digital projects and this is not including the 150 new colleagues. We are about to welcome on July 1st with the expected closing of the data in that transaction.
At the same time, we experienced an important growth in the number of permanent employees during fiscal 2023, namely an increase of almost 30%.
Please turn to slide six to discuss our gross margin objectives.
Given our new critical mass and growing maturity in Q4, we started accelerating our efforts to drive cost efficiencies and synergies across the company and achieve industry standard SG&A targets also as explained in our strategic 'twenty 'twenty. Two 2024 plan, we are continuing our initiatives to transition to higher value service.
The higher more permanent employees and to acquire complementary companies with higher margin profiles.
I would now like to turn the meeting over to Claude Thibault <unk>, Chief Financial Officer, who will expand on our financial highlights that I have outline close.
Boswell good morning.
Please turn to slide seven for our fourth quarter highlights.
Revenues for the quarter increased 54% or by $42 million to $120 million.
Excluding the impact of the Vitalist acquisition, which occurred on February one 2022.
And Dr <unk> acquisition, which occurred on April one 2021.
Organic growth was approximately 30%.
In other words strong sustained organic growth again.
We see approximately 30% because we fully integrated our treaty into relief yet on December 31, 2021, and we no longer track the specific our three D numbers separately.
In Canada revenues increased by 63%.
$74 $2 million due to organic growth in all areas of our operations a general recovery of the tea levels.
Revenues from the <unk> acquisition and finally.
Growth from the two associated long term contracts with <unk> and cubic house.
In the U S revenues increased 39, 4% to $41 $3 million.
As we experienced strong organic growth in all areas.
The general recovery of activity levels, and revenues of $5 million or two months of the vital this acquisition.
This increase was partially offset by some unfavorable U S dollar exchange rate impacts.
As for our international operations, they reported a record quarter in terms of revenues.
Increasing 55% to $4 $5 million.
From $2 $9 million for the same quarter last year.
Well, let's look at gross margin it increased by seven.
$7.6 million or 32, 5%.
With $31 $1 million in Q4.
As a percentage of revenues.
Fourth quarter gross margin was 25, 9%.
That is down from 31% for the same quarter last year.
As previously mentioned the our three D revenues historically showed a higher proportion of billable sub contractors and.
And a corresponding lower gross margin profile.
Yeah.
The decline in gross margin percentage also comes from an increase in the subcontractors revenues.
Relative to those from permanent employees couple.
Coupled with an increase in the average cost of those subcontractors.
Explained in part by the tightening labor market.
Secondly increased costs in certain customer projects.
And thirdly, the absence of Covid wage subsidies, which we had received into Q4 of last year.
Yeah.
The decrease however was partially offset by increased gross margins internationally.
And a positive margin impact from the vital list acquisition.
SG&A expenses in Q4 totaled $26 $2 million, an increase of $4 $5 million or 25%.
The increase was primarily due to an increase in Canada of employee compensation costs as headcount and salaries increased <unk>.
And an increase in information technology, and communication costs, mostly relating to the <unk> acquisition.
Which was partially upset by a decrease in noncash share based compensation.
U S and international expenses increased due to higher employee compensation costs.
As head count and salaries increased.
And variable compensation trended up along with revenues.
As well as increased information technology.
Communication costs.
Some of the overall increase of course coming from Vitalist.
As a percentage of consolidated revenues total SG&A amounted to 21, 8%.
Or to Q4, a notable decrease compared to 27, 9% last year.
This is a trend, which we intend to continue to pursue with.
With a target of 20%.
At the current scale of our developments. We believe we can now turn our focus to further synergies and operational efficiencies, which will help us get there.
Overall, our fourth quarter, adjusted EBITDA amounted to $6 million.
An increase of $2 7 million compared to the same quarter last year.
As in previous quarters, while we have an accounting net loss of $7 $3 million.
I would bring to your attention the nonrecurring expenses in the quarter of $6 $1 million.
And the noncash depreciation and amortization totaling $5 $2 million, resulting in a positive adjusted cash flow generation overall.
Looking at long term trends on slide eight we can see the impact of our acquisitions and more importantly of our strong organic growth over the past several quarters.
Regarding gross margin, we see a similar trend in dollars, but recent challenges and percentages as mentioned before.
We believe most of these factors are largely cyclical.
Subject to some natural recovery over time, and we also aim to reverse the trend with a number of targeted initiatives.
Focusing on labor mix and costs, including with our new more moral cooperation.
Utilization improvement selling price adjustments and by focusing future growth in our higher margin segments.
On slide nine our long term EBITDA trend reflects our gross but also our recent gross margin challenges.
As well as some increases in SG&A, despite their gradual decrease as a percentage of revenues.
We are again summarizing here, our long term business objectives, which we have been communicating over the years.
For revenues, our recent organic growth and acquisitions I've taken us close to the half billion dollar of March and we certainly intend to maintain the push on both fronts.
For gross margin, we believe our long term strategies remain relevant for a gradual recovery in further improvement.
Our SG&A as I just discussed we believe we will continue on a gradual decrease of SG&A as a percentage of revenues.
And we will reach our targeted levels.
It is how Alicia believes that it can realistically aim to achieve its three year objective of $600 million in revenues.
With an EBITDA margin of mine to 13%.
2024.
Now turning to liquidity and financial position metrics on slide 10.
In language or $6 $1 million of nonrecurring expenses during Q4.
Net cash used by operating activities was $4 $8 million.
Including some negative working capital variations, which are in large part the result of our strong organic growth.
On slide 11, we see long term that increasing to $106.7 million up from 61 $6 million with.
With a similar increase of our net bank borrowing.
This increase comes from acquisitions.
Negative cash flow from operations and an increase in our cash balances.
Minus the proceeds from the share issuance, which we did at the end of January in conjunction with the vital list acquisition.
Yes.
This increase in debt. However, it does not translate into a much higher debt to EBITDA ratio at the end of Q4 because of the strong historical profitability of vital list.
As such we still believe we are moderately leveraged and we expect to see a steady deleveraging trend going forward.
The acquisition of data I'm expecting to close on July the first.
Which will also bring good historical profitability.
And has built an acquisition financing terms will not have a significant leverage impact either.
In closing our normal course issuer bid launched back in September is progressing as planned.
It's the beginning Alicia has repurchased and canceled approximately half a million class a shares.
For total consideration of $1 $6 billion.
The operator will now be opening up for questions operator. Thank.
Thank you Mr. T Bill, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three Tom prompt acknowledging your request and if you would like to remove yourself from the question queue. Please press Star then two.
Are you using a speaker phone, we do ask that you. Please lift the handset before pressing any Keith. Please go ahead and slowly press star one now if you do have any questions.
And your first question will be from Nick Agostino with Laurentian Bank.
Yes, good morning, gentlemen.
If I could just start with my first question I noticed in your prepared remarks, you highlighted 29% increase in permanent employees on a year over year basis, and I'm. Just wondering if we get some color on how much of that increase was a.
He is maybe reflective of the Vitalist acquisition.
Much of that increase was tied specifically to the <unk> segment. If you can give us some breakdown there that'd be great.
Hey, good morning, Nick Thanks for the question.
I'm going on memory here in cloud correct me, but I believe vital has had about 150 employees.
At this time.
So the balance would be from the rest of the business.
But when you say the rash.
Are you hiring any permanent staff and targeting them specifically.
Our three D or yes, yes, yes, yes, yes, great question. So there is a significant increase of permanent people tied to the two new agreements that we signed if you remember when we talked about the <unk> acquisition <unk> was mostly.
A subcontractor base of business very high percentage of some subcontractors. So of course, we still have to deal with those contracts, but all of the new business that we're getting from the.
The two large agreements that we have.
There was a significant increase there full time employees instead of contractors.
Okay, Great I appreciate that and then just wondering about a I think on prior calls you talked about pricing.
Pricing increases on contracts as they rollover in that stuff.
Can you may be tough weather.
Had any implementations on that front and how it's being received in the marketplace.
Yeah. So so yes.
It's ongoing all the time any contract that we have that's renewing or new proposals that are going out.
Are all being priced in with some <unk>.
Increases.
We have not seen it.
The market's absorbing it right now and as you can see from our bookings.
That's not our challenge that the challenges we win these a lot of projects because of what we do.
Finding people.
Is the challenge and of course, when we get into these these these strategic projects for our customers. The last thing we want to do is turn down the project. So even though we're very selective on what we bid on.
We are in very high demand. So we are keep.
Keeping up with that demand short term by having some contractors, where we can't find the permanent staff fast enough. So as Claude was mentioning we see that as a transition area issue or a temporary issue.
On the <unk> front, we had a two year plan as we said in the past with young we finished the first year of that and we're on track. So by the end of this year, we think that's going to be that's going to be resolved on the new business, we think the the.
Morocco operation is going to help us a lot because we can hire a lot of full time people. There. So that's going to reduce our reliance on subcontractors.
And also the latest acquisition data that's going to come into effect July one so it's not on the AR and the family yet, but very soon would also bring us some remote capacity in India and eastern Europe . So we're looking forward to that one then actively planning on scaling that business real fast.
Yes.
Okay, and then maybe.
Two.
This performance.
On the call you you just indicated that you're looking to accelerate efforts to drive cost efficiencies and synergies I think in your presentation. You mentioned rent reduction beat being one of those I guess initiatives that you're undertaking can you maybe highlight when you talk about accelerating what.
What are the expectations now as far as synergies that you're hoping to to get out of it.
Over the next year.
Yes, sure Greg Great question, Nick So we.
We've been looking at.
At this for quite some time, we've talked about it that our SG&A percentage as a percentage of revenue would be going down over time with scale.
We completed three acquisitions in the past the.
Two quarters.
<unk> integrated our three D. During the past year as well so we're on a run rate over the half of $1 billion Mark as we speak if you look at our revenue and multiply by four we're in really good shape and given the high activity. We've had on the M&A side recently, and we're seeing a lot of opportunities in the operations for cost synergies in here.
It's it's basically eliminating our back office support jobs that we have.
Redundancies in.
We're seeing a lot of synergies and consolidations from that and if you saw in our Q4 numbers. There was some severance in there for those types of things.
The plan is to get to the industry average is around 20%, we're still running close to 22% or 21.8 I believe in the quarter. So we need and we believe we can get under 20% on the existing business.
And that's what we're pushing towards and.
The team is committed to that so we are.
So we see a we see a lot of opportunity there right now.
Okay, and just so Nick if I just if I can add we are not providing specifics on this.
Or a few reasons, we're managing significant growth. So it's not like we are.
We can just make decisions without that taken into consideration and some of the gain in percentage will come for our ongoing growth. So.
You've got to balance the two and there was timing as well when will we be.
Making does are taking those actions and so on but we're not providing specifics in terms of dollars and timing.
I can give you maybe maybe Nick I can give you a couple of real examples of how we're seeing that so an example was the rent as you mentioned as we bring in new businesses, we don't need more offices, so that one's an easy one.
Some external services that we've used in the past we now have the scale to do it internally and then save a lot of money. So there are things like that leveraging offshore, which we did not do in the past, but which the pandemic has enabled us to do and especially with our Morocco operations. Now. So now there are a lot of opportunities at which point, which we would call low hanging fruit.
Right now based on that growth that we've had that we're looking at.
But as Colin said, we need to balance that with the <unk>.
The growth because there are no plans on slowing now.
Okay. That's all for me appreciate that.
Thank you once again as a reminder, ladies and gentlemen, if you do have a question. Please press star followed by one on your Touchtone phone.
Next question will be from Gavin Fairweather at core Mark. Please go ahead.
Oh, Hey, good morning, it sounds like Youre, continuing to see very strong demand across the business, but just thought I'd ask if at all kind of the recessionary fears here can you give us a snapshot maybe into the top of your funnel are you still seeing that growing kind of at the pre booking stage or are you seeing any kind of signs of hesitation across any of your pre.
This isn't regions.
Sure. Good morning, Devin no actually we're not seeing our concern is and they are becoming a recession. Our concern is more the the inflationary pressure in finding people that I mean based on past experience and especially on what we're seeing now in the funnel.
If a recession were to hit.
Our customers would be accelerating digital transformation to try to save the save money become more efficient.
<unk> launched new products be more creative so no. We're not we're not seeing any kind of slowdown in our AR and our funnel activity.
Actually the new acquisitions are opening up new opportunities for us because of the cross selling that we're seeing in our existing customers and the new customers that theyre, bringing to the table. So.
Although very very optimistic going forward to that Kevin.
That's great and then maybe just on capacity utilization kind of by region. Thank in Canada versus the U S. I mean, you've been speaking to being kind of at capacity in Canada for some time, maybe zeroing in on on the U S. Given the strong bookings do you still have some headroom in the Oracle Microsoft practices has to occur.
Today, the strong bookings that you're seeing with your current ftes.
Yes, yes, so we've had some some some great bookings and you saw from the U S numbers. There that the growth is is on both sides both on the Microsoft and the Oracle side.
The other you know coming back to the potential savings and that we're seeing our Oracle practice is now global same as our Microsoft practice. So we're not confined to the U S. We now have Oracle teams in Canada, Oracle <unk> and Microsoft teams as well so when we look at projects. We can we can.
<unk> people for U S projects in the U S and in Canada, and now in Morocco. So so we're adding we're adding that capacity everywhere that we have operations in again.
The pandemic opened up the opportunity for us to do that work remotely our customers are very open to that especially in an inflationary world, where we have to be competitive.
We can leverage this offshore capacity that we have now it actually makes us more competitive and improves margins overtime. So so we're seeing a lot of opportunity in data our academies as well are working really really well we're hiring.
We're hiring students right out of college that do not have an it background and we train them on those platforms that program is working very well that the retention rate is incredible and we're accelerating that as well. So that's a great investment that we see them, bringing new people to the industry. So it's another way of finding finding.
Qualified people.
And just as a follow on on the Labor front, I mean, ive been hearing with some of the hiring freezes just over the past kind of a month or six weeks that there has been a moderate easing of the labor Crunch I mean, maybe early days, but have you started to see any kind of green shoots on that front I'm curious for your thoughts on that.
No like I was saying Gavin on our side, it's more we're finding opportunities for synergies in the back office.
The the people that we have are in very high demand. So.
Some of our people were moving from non billable roles the billable roles.
Sometimes it's replacing an outside provider with an internal individual because we have the scale to do it now.
So from that perspective.
Still have several hundred open positions in the business that we're we're we're working.
Aggressive lead that the staff, we have a recruiting machine we have about 80 recruiters in the company. That's all they do full time, but for global recruiting.
We're very active on the international recruiting front as well.
So that is a really still going on all cylinders on that front.
That's great and then just lastly for me I mean, obviously, a key part of the business case for the Vitalist acquisition was supposed to kind of cross sell are you know maybe early days on that front as well, but can you give us an update on how that piece of the strategy is coming together.
Yes, It says, it's coming together very well Gavin actually.
The week following the announcement, we had one of our existing customers, who called the Microsoft for some training and they said well you know that.
You shouldnt be calling a vital nacelle. So the week following the announcement, we actually had our first opportunity in one of our existing customers that came in through the back door. So that's working very well, we see a lot of opportunity there and again.
We see opportunities for efficiencies there as well because most of the people were located in the U S and now as that business grows we can locate anywhere. So again, we see some opportunities there to grow that business faster and become more efficient in how we deliver the services.
Thanks, I'll pass the line.
Yeah.
Thank you once again, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one on you touched on something.
And at this time, we have no further questions. Please proceed with your closing remarks.
Thank you <unk> Li Thank you everyone for being with US This morning.
Again, I'll reiterate that we're committed and focused on our three year strategic plan.
We enter fiscal 2023 with confidence and optimism and we look forward to discussing our first quarter results of 2023 and in August MFC and have a nice weekend.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
[music].
Okay.