Q1 2023 Alithya Group Inc Earnings Call

Good morning, ladies and gentlemen, welcome to Lithia is first quarter fiscal 'twenty 'twenty three results conference call.

I'd now like to turn the meeting over to Rachel injuries, Vice President Communications and marketing at Alicia. Please go ahead Ms Andrews.

Thank you very much good morning, everyone and thank you once again for joining us for <unk> first quarter fiscal 2023. This results conference call. The press release and MD&A with complete financial statements and related notes were issued this morning and are now posted on our website. The webcast presentation can also be found on our website in the investors section.

Before we begin I would 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 note in our presentation and to the forward looking statements and risks and uncertainties section of our MD&A available on our website.

All figures discussed on today's call are in Canadian dollars, unless otherwise stated and we may refer to certain indicators that are non <unk> measures. Please refer to the cautionary note in our presentation and to the non <unk> measures section of our MD&A for more detailed.

Presenting this morning are Paul Raymond Alicia President and Chief Executive Officer, as well as close to your Booth, our Chief Financial Officer, now I'm delighted to turn the call over to Paul Raymond.

Yes, sure and good morning, everyone and thank you all for joining us on the call. This morning.

I'm pleased to share the details of the beginning of a new fiscal year, we're kicking off the second year of our three year strategic plan with continued revenue growth and strong bookings.

It continues to carbon is positioned to win competitive landscape and to build upon our reputation for trust and execution excellence in that regard I would like to take a moment to put our recent results in the context of our long term business objectives.

In terms of revenues, we continue to pursue sustained organic growth and selective strategic acquisitions in order to reach the $600 million Mark currently organic growth and acquisitions over the past year have brought us to the half a billion dollar annual revenue run rate for gross margin, we believe our long term strategies remain appropriate and relevant.

For gradual improvement, we also intend to leverage our new offshore capabilities and to keep targeting acquisitions with higher gross margin profile and the recent data and vital this acquisitions are certainly very good examples of that.

For SG&A, we believe that we have now reached a certain critical mass and a stabilization of certain expense categories, including corporate head office costs moving forward, we expect those expenses to grow at a slower pace than our revenues, hence we intend to continue our downward trend on SG&A as a percentage of revenues with some acquisitions.

<unk> still to come including longer term savings relating to reps and.

In a nutshell.

That is the step by step playbook of how Alicia believes it can realistically achieve its three year objective of $601 million in revenue with an EBITDA margin of 9% to 13%.

So before jumping ahead to a review of our operations, let's first take a look at three key highlights of our first quarter performance.

First and foremost Alicia has achieved industry, leading organic growth again.

Our revenues amounted to $127 million in the first quarter, that's a 23% increase compared to the same quarter last year.

It's also important to note that we are reporting a repeat revenues our revenues from repeat customers for the first time in the first quarter, 85% of our revenues came from clients. We also serve during the same quarter last year in other words, that's 85% of repeat revenues.

Business continues to be fueled by strong bookings in Canada and in the United States. Despite the global economic context, which I will address in a few minutes. We are encouraged by our funnel and our bookings remained the best predictor of what's to come so to start our new fiscal year, our bookings reached $145 million, which track.

Late into a book to Bill ratio of 115.

It's important to keep in mind that when we removed our recurring revenues from our two large 10 year contracts, we'd been ivanka back out the book to Bill ratio for the rest of our business would be above one three.

Third we achieved sequential growth in terms of gross margins as a percentage of revenue. It increased by 40 basis points sequentially to 26, 9%. Despite companywide annual salary increases which came into effect at the beginning of the first quarter of this year.

So despite unfavorable comparisons to last year's first quarter, which included significant PPP loan recognition, we showed sequential growth of our gross margin as we deploy our plan to gradually move away from sub contractors and begin to leverage our new offshore capacity.

For our lead you in the future is now and that extends to all of our practices across all of our geographies. In fact this quarter was marked by the addition of 15, new clients, which reflects the reputation of trust that Alithia continues to garner.

Let's take a more granular look at these geographies in the United States. It was a record quarter in terms of bookings with the addition of some major new logos, including large insurers offering dental covered a large insurer offering dental coverage to millions of Americans. This new customer signed a contract that could reach $10 million with our oral.

<unk> enterprise cloud practice that is at a record for Oracle practice, who will accompany them through important stages of their digital transformation processes.

Of note, our Oracle and Microsoft practices, including violist, both in Canada, and the United States now represent over 40% of our total revenues.

In Canada, <unk> business continues to be driven by strong bookings from the public sector as well as new contracts from existing clients.

In fact on July 28, we announced the signing of potentially more than $10 million and service agreements with the Quebec government Ministry for cyber security.

Our projects to be implemented over the next three years those projects will encompass alithia specializations across multiple domains and will involve more than 140 <unk> experts in application development and security just to name a few areas.

Our gross margins continue to improve as we convert some contractors into regular employees that is a gradual process that takes time, but a continuous step in our commitment to accompanying our clients on their digital transformation journeys.

In France, our operations experienced a very good quarter and we are particularly pleased with the fact that this was achieved through 100% organic growth in European market.

While talent attraction and retention a retention continued to be a major challenge in our industry. Alicia has demonstrated excuse me its ability to respond to those challenges and 1992.

30 years ago, <unk> started out with 11 professionals at one bold vision to become the trusted advisor to our clients.

It wasn't tall order back then but since that initial creation phase Alicia as advance from one strategic chapter to the next treading carefully, but confidentially through periods of diversification and growth and picking up speed as we win.

APAC, culminating in this latest phase of consolidation with numerous acquisitions, along our road Alicia has now reached a critical mass with 3900 highly skilled professional that means that 'twenty 300 professionals have joined are ranked in the past four years since going public in November 2018, and the <unk>.

Last year alone 400 team members have joined our growing professional family, which now has a footprint on five continents.

Now, let's take a closer look at our newly formed offshore delivery teams.

We are very pleased with the growth potential and margin improvement to come from our offshore operations.

Our first such center was opened in Morocco, This past year and now accounts over 40 professionals.

Closing of the data acquisition on July one.

Leader in IP services for insurers and other regulated entities such as governments will grow our workforce by 120 professionals, excluding the 30 datum.

Individuals who are based in the United States.

<unk> now has global teams of professionals in Canada, the United States and Europe , who are supported by delivery teams in Morocco, Spain, Eastern Europe and India.

We expect to accelerate the growth of our offshore activities in order to better support our clients in the future and to improve our efficiency.

This brings me to reiterate that we continue to embrace our clearly articulated plan, which focuses on serving our current and future customer base in Canada, the United States and Europe .

Our acquisitions continue to complement our strong organic growth in acquiring U S. Based data Alicia continues its steady penetration of the fast growing insured tech market and as a client base that includes six of the top 10 health insurers in the United States as well as a suite of proprietary products.

<unk> cloud based SaaS offerings. The response from our customers in the insurance market in Canada, and the United States have been enthusiastic and we have already begun offering data and this data capture services to our legacy customers. Additionally.

Additionally, our fiscal 2022 acquisition of vital this and its proprietary learning platform generated an $8 $4 million revenue contribution over the quarter vital list. This platform allows alleviate to assist customers with ongoing training and change management and their adoption of new technologies that complementary expertise now.

Turning to our service offering to the complete lifestyle extended our service offerings, sorry to the complete life cycle of the technology solutions that we deliver.

As Microsoft continues to expand the offering of its new Veeva suite for office 365 vital as collaborative tools positions alithia to accompany adopters of the platform as they accelerate their digital transformation projects.

Currently 25% of Fortune 500 companies are using Veeva and elite is leveraging our recently acquired violist technologies to build a brand new employee experience suite that we foresee as a high growth opportunity for us.

Those are both good examples of the leverage that we get from our long term disciplined approach to quality acquisitions.

As we continue to forge ahead with an agile and innovative plan our efforts have been validated by several exclusive industry accolades that remind us that we are in the right path in the past few months out of thousands of potential candidates Alicia was awarded the Microsoft partner of the year honors in two separate categories.

<unk> also received an impact award in Canada, recognizing Microsoft partners, who have demonstrated excellence in Microsoft dynamics 365, we also receive accolade as an oracle partner of the year a final list during the Oracle change agent Awards and lastly, we received two <unk> awards, which is a prestigious contest.

Canada, We won an award for an automation project that we delivered for National Banks, Canada, six largest bank and another award for the <unk> App for St. Just in children's hospital to help sick kids and their families.

Now back to our strategic plan.

Following a period of sustained growth, we began fiscal 2023 with a focus on our rationalization.

We implemented processes targeting companywide SG&A optimization in line order 2021 'twenty 'twenty four strategic objectives. This is especially timely as everyone is monitoring the global economic situation very closely.

While the effects of world events are significant and far reaching alleviate strive to build a business that is as recession resistance as possible typically during periods of recession companies tend to look for efficiencies through automation and migration to lower cost cloud solution that is where we excel at helping our clients.

Additionally, with no major infrastructure investments underway at Lithia with cost reduction initiatives in progress and with a favorable debt situation. We believe that we are well positioned and business and financial terms as we look ahead with optimism to the rest of our fiscal year and to the achievement of our 2024 objectives.

I will now pass it over to the closed for more financial metrics.

Thank you Bob Boswell good morning.

Please turn to slide 11 for our first quarter highlights.

Revenues for the quarter increased 23, 2% or by $23 9 million for a total of $126 8 million.

Excluding the impact of the violist acquisition, which occurred on February one 2022.

Through organic growth was approximately 15% in other words, we experienced strong sustained organic growth once again.

In Canada revenues increased by 13, 3% to $78 2 million.

All due to organic growth in all areas of our operations, including continued growth from the two long term contracts signed concurrently with our acquisition of April 2021.

In the United States revenues increased 44, 3% to $44 6 million.

Due to a combination of a few factors, including the vital acquisition, which contributed $8 4 million.

Strong organic growth of approximately 12% in constant currency.

A favorable U S dollar exchange rate impact of $1 $7 million.

As for our international operations. They also reported a strong quarter in terms of revenues, increasing 32, 7% to $3 9 million from $3 million for the same quarter last year.

Now, let's look at gross margin, which increased by $5 $8 million or 22% to $34 $1 million in Q1.

As a percentage of revenues the first quarter consolidated gross margin was at 26, 9%.

That is down from 27, 5% for the same quarter last year.

Last year had been positively and significantly impacted by Covid subsidies as I will explain in a second.

On a sequential basis, comparing Q1 to Q4 of last year, we are showing an increase from 25, 9% in Q4, two again 26, 9% in Q1.

The sequential increase occurred despite our annual salary increases, which as usual came into effect at the beginning of the first quarter as Paul mentioned.

Gross margin as a percentage of revenues increased in Canada and internationally, but decreased in the United States.

The decline in gross margin percentage in the U S comes mainly from the U S. Covid subsidy, which had been recorded to cost of revenues last year.

And the amount of $4 6 million.

The decline in gross margin percentage is also explained by both annual salary increases taking effect in Q1.

And general market pressures on salary costs.

And finally by decreased utilization rates in certain areas of the business due to delays in the timing of new project starts.

The decrease in the U S. However was partially offset by the positive margin impact from the vital acquisition.

Which carries higher historical margins and had a very good quarter.

SG&A expenses in Q1 totaled $28 9 million.

An increase of $6 2 million or 27, 2%.

The increase was primarily due to $2 $6 million and expenses from violist.

The wage subsidies, which had been recorded against SG&A in the first quarter of last year.

Some increases towards pre COVID-19 spending levels in certain areas.

As well as salary increases, which again came into effect at the beginning of the first quarter.

Partially offsetting these elements.

As discussed back in June during our fourth quarter disclosure.

We have some reductions stemming from certain initiatives underway in order to pursue our target of SG&A eventually falling to 20% of revenues.

We expect to benefit from these initiatives gradually over the course of the coming quarters.

Overall, our first quarter adjusted EBITDA amounted to $6 2 million.

A decrease of $800000 compared to the same quarter last year.

However, excluding the impact of the forgiveness of $5 $9 million in PPP loans recorded in the first quarter of last year.

Adjusted EBITDA would have amounted to $1 1 million.

Therefore, translating into a notable profitability increase year over year.

I would like to remind you that data in this financial performance is not included in our Q1 disclosures since closing took place on July the first.

However, as mentioned at the time of acquisition for the 12 month period ended December 31, 2021, datum generated revenues of approximately $23 million.

And adjusted OIBDA of approximately $7 6 million.

As in previous quarters, while we are reporting and accounting net loss of $4 2 million.

I would draw your attention to the nonrecurring expenses of $1 9 million into quarter.

As well as noncash depreciation and amortization totaling $6 3 million.

Resulting in a positive number overall.

Looking at long term trends on slide 12, 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.

<unk> recent challenges in percentages as mentioned earlier with some small recovery.

We believe most of these factors are largely cyclical and are subject to some natural recovery overtime.

We also aim to reverse the trend with a number of targeted initiatives.

<unk> on labor mix and costs, including with our new offshore capabilities that Paul addressed a few minutes ago.

Utilization improvement.

Selling price adjustments.

And by focusing our future growth in our higher margin segments.

Our long term adjusted EBITDA trend reflects our growth, but also our recent gross margin challenges as well as some increases in SG&A some from acquisitions.

Despite their targeted decrease as a percentage of revenues.

With sustained organic and acquisition growth.

Some long term initiatives to generate higher gross margins and a continued gradual decrease of SG&A as a percentage of revenues. We believe we are well on our way to achieving our three year financial objectives by 2024.

Now turning to liquidity and financial position on slide 14.

We can see a notable increase of net debt.

And of our net debt to trailing 12 months adjusted EBITDA multiple.

The increase in net debt from March to June comes mainly from $11 $4 million of cash used in operating activities during the quarter.

Including negative working capital variations of $13 8 million.

Coming mainly from a cyclical increase in Unbilled revenues.

In other words, excluding this cyclical working capital variations RP.

Our P&L generated $2 4 million of positive cash flow.

Our net debt to trailing 12 month adjusted EBITDA multiple has also been increasing over the past couple of quarters, but it must be noted that our reported trailing 12 months adjusted EBITDA of $22 million does not include a full year impact of our two recent and profitable acquisitions.

As a reminder, and as already disclosed at the time of acquisition.

<unk> was historically generating $12 9 million of adjusted EBITDA annually.

Of which we are only accounting for five months in our Q1 TTM multiple.

Also datum was historically generating $7 6 million of adjusted EBITDA.

Annually and we are not yet reporting any of it as of June 32022.

While the debt drawdown in preparation for the July one close already appears on our balance sheet.

Moreover, the financing structure of the data acquisition includes share issuances and earn out payments, which will not impact leverage.

As the profitability from our two recent acquisitions hits, our full reporting cycle and with continued positive cash flow expected from existing operations.

This points to a decrease of our net debt to trailing 12 month adjusted EBITDA multiple and despite the apparent trend shown on slide 14, we still believe that our capital structure is moderately leveraged.

Now back to you Paul.

Thank you Claude.

So to recap the three takeaways for this quarter first record quarterly revenues and annual run rate over half a billion dollars growth in all geographies and with 85% derived from repeat business.

A very strong book to bill ratio and industry, leading growth and finally sequential growth in gross margin as a percentage of revenues and initiatives to further expand margins by leveraging our expanding global capabilities, we will now take questions Julie.

Thank you at this time I would like to remind everyone in order to ask a question press star one on your telephone keypad to withdraw your question Press Star one again, thank you.

Your first question comes from Omar is that.

Echelon partners. Please go ahead.

Good morning, it's Michael back to me and I'm here on behalf of Ammar.

Just a couple of questions.

First on the margin side, you mentioned in your prepared remarks that some of the margin pressure was an increased salaries and compensation compensation.

Just wanted to make sure I heard correctly is the entirety of those increases already already reflected in this quarter or should we expect incremental increases in the next couple of quarters.

Okay. Thanks, Thanks for the question Michael Yes, so that it is already reflected in there. So basically the company does that annual increases on April one so the first day of our first quarter for the whole company and every geography. So it's already included in our Q1 numbers.

So despite despite that increase we still showed sequential growth in the gross margin, which is very good.

Okay. Thanks for clarifying that and then a question on the capital structure and M&A.

In your prepared remarks, you mentioned you were comfortable with the debt level.

Should we be expecting continued M&A or shifts to deleveraging after having completed a few acquisitions recently.

Thanks, Gary Great question, we if you look at the acquisitions, we've done in the past.

Including the last two.

I actually reduce they've actually reduced our EBIT the debt ratio because of the high multiples in the high EBIT the ratios of those companies and as a percentage. So the focus is on deleveraging. We believe we're going to be deleveraging quite rapidly, but we're always open to opportunities good opportunities.

Great. Thanks, I'll pass the line.

Thank you.

Again to ask a question press star one on your telephone keypad.

And there are no further questions at this time I will turn the call back over to Paul Raymond for closing remarks.

Thank you Julien.

Thank you all again for participating today I would also like to remind all of our shareholders at our annual General meeting will be held as a virtual meeting on Wednesday September 2014 to access in a circular you can visit the investors section on the <unk> website I would also like to take this opportunity to thank all of our clients for the trust that they place in us and to thank our passionate professionals.

We deliver high quality services and advice to those clients every day have a great day Nestor group.

This concludes today's conference call you may now disconnect.

Okay.

Okay.

The House has ended this call goodbye.

A question.