Q3 2023 Alithya Group Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen. Welcome to LITIA's third quarter fiscal 2023 results conference call. I would like to send a meeting over to Rachel Andrews, vice president, communications and marketing at LITIA. Please go ahead, Miss Andrews.
Speaker 3: Good morning and thank you once again for joining us for Alicia's third quarter fiscal 2023 results conference call. The press release and MDNA was 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.
Speaker 3: 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 risk and uncertainties sections of our MDNA available on our website.
Speaker 3: All figures discussed on today's caller in Canadian dollars, unless otherwise stated, and we may refer to certain indicators that are non-IFRS measures. Please refer to the cautionary note in our presentation and to the non-IFRS measures section of our MDNA for more details. Presenting this morning, our Paul Raymond.
Speaker 3: Alicia's president and chief executive officer, and Claude Tbil, chief financial officer. I will now turn the call over to Paul Raymond.
Speaker 4: Good morning everyone. Thank you for joining us on the call this morning to discuss Aletheia's third quarter 2023 financial performance.
Speaker 4: So this morning, I'm pleased that this close another very strong quarter for Alitia, as we enter the final months of our 2023 fiscal year, despite the ongoing global uncertainties.
Speaker 4: There are many important takeaways from this quarter, but if I were to highlight only a few, I draw your attention to one another strong quarter revenue growth at 19%, two, a return to the 30% growth margin levels, and three, our first $10 million adjusted a bit the quarter. And perhaps one more thing, a significant...
Speaker 4: cash generation and debt reduction. We continue to grow our reputation as the trusted advisor that are existing and new clients turn to to help resolve their clinical digital transformation challenges. In the third quarter, we added 37 new clients and generated 83% of our revenue from repeat clients.
Speaker 4: On the gross margin front, as we explained in the past, we continue to increase our permanent employment employee ratio as we replace some contractors and grow our portfolio to higher value services. We're now back at the 30% gross margin threshold and we continue to focus on improving this as we roll out our smart shorting strategy.
Speaker 4: Finally, we reached the $10 million adjusted EBITDA as we continue to implement our strategic plan at the progress on all fronts.
Speaker 4: It should also be noted that Q3 include an extended holiday season for some of our clients as a temporary cost cut-acmeasure, which translates to less billable hours for a week here, as well as a slowdown in some of their e-learning activities.
Speaker 4: We believe Alivia is in a favorable position to be that go to trusted advisor that our clients needed in these uncertain times. There will not be left technology in our lives ten years from now.
Speaker 4: As our clients navigate through their challenges, they are looking for trusted partners who can rapidly deploy proven technology solutions to help accelerate automation and improve their efficiency.
Speaker 4: We have demonstrated that our model is sustainable, and as we reach critical mass, that Elidia is in a fabled position to generate increased value from our rapid growth.
Speaker 4: During this past quarter, we continued to fill our healthy pipeline with projects for the quarters to come. We also took great strides towards the fulfillment of objectives outlined in our long-term strategic plan, as we continued to implement measures designed to go up the value chain and to improve efficiencies.
Speaker 4: We see continued opportunities ahead to increase our profit be profile as well.
Speaker 4: Our business continues to be fueled by strong bookings in Canada and the United States, despite global economic uncertainty and recessionary warning signs, which I will address in a few
Speaker 4: We are also encouraged by our funnel and our bookings remain the best predictor of what's to come.
Speaker 4: As I said, we added 37 new clients in the third quarter and our bookings reach $137 million, which translates into a book to Bill Ratio of 1.04. However, it's important to keep in mind that when we remove the recurring revenues from our two large 10-year contracts with Venevon Kibbikow, the book to Bill Ratio for the rest of our business would be 1.2.
Speaker 4: As for a trail in 12-month basis, the bookings were $509 million, which translates into a book to the ratio of one, but again, this ratio is higher when taking the 10-year contracts into account.
Speaker 4: Now, more on our smart shorting strategy. So one of our key priorities has been the scaling up of our smart shorting operations, which currently accounts for about 5% of our billable workforce.
Speaker 4: For us, SmartShore provides an option for a wider pool of available talent, including highly qualified experts who enable us to reduce project cost for clients, and to increase our competitiveness and value.
Speaker 4: Since opening our first smart shore operation in Morocco in 2021, we've added highly qualified experts in Eastern Europe and India through our M&A strategy and through new high rings.
Speaker 4: DataM solution is just one example of our M&A integration strategy as paying dividends, along with leveraging the cross-selling opportunities and prospects for longer-term generation. In line with the latter, we're quite pleased with our dataM solution's sequential revenue growth of over 20%.
Speaker 4: We are also targeting gross margin improvements through a reduction in the number of subcontractors we engage to carry out our projects. In the third quarter, transitioning to regular employees reduced our subcontractor workforce by 6% in Canada.
Speaker 4: It must be remembered that the transactions to apply R3D in April 2021 included hundreds of some contractors added to our workforce and we have significantly reduced that number since through full-time employee conversion. In fact, we're proud to have returned to pre-R3D gross margin levels in just 18 months.
Speaker 4: which is a significant feat considering that a two-year timeline was initially targeted to do so.
Speaker 4: With further ingestioning of subcontractors to regular employees fill out on the horizon and with smart, shorting operations gaining momentum, our objective is to continue to improve our growth margins in the future.
Speaker 4: Another contributor to gross margin improvement is our push to increase sales of subscription-based services. Subscriptions, software, and other revenues now represent 12.4% of our total revenues. Thank you.
Speaker 4: With that being said, I'd also like to take a moment to provide a bit of additional color on our geographic basis.
Speaker 4: In Canada, a renewable energy digital business continues to benefit from major nuclear refurbishment projects, equating an emerging trend that may prove to have long-term benefits for the planet and for Libya.
Speaker 4: Globally, there is a growing consensus that the attainment of global carbon reduction objectives will require increased use of nuclear energy.
Speaker 4: Currently, Alitia is helping three major Canadian energy clients to prepare the landscape and to develop their digital strategies for doing just that. And we foresee deeper integration projects on the horizon for Alitia as those efforts for growth.
Speaker 4: On the local front, we signed a major three-year contract with a large Canadian retailer to assist them in replacing and optimizing their mission-critical systems supporting back-office operations.
Speaker 4: And in the U.S., despite a slowdown in the manufacturing sector, our healthcare sector business remains robust. Additionally, initiatives are being developed and implemented to increase the scale of our managed services within our large Oracle projects, which remain solid.
Speaker 4: In terms of year-over-year business, our combined US bookings have cumulatively increased by 10% this fiscal year.
Speaker 4: In Europe , Allevia's operations have not been impacted by the economic slowdown being experienced in some sectors across the continent. Despite current economic pressures being felt by Europe's business community, we generated over 25% organic growth with existing and new clients.
Speaker 4: Before I hand the presentation over to our Chief Financial Officer, Claude Sebel, I'd like to say a few words about our recent announcement concerning our new Chief Operating Officer.
Speaker 4: On January 12th, we announced the appointment of Bernard Doggle with Chief Operating Officer Effective January 30th.
Speaker 4: 2023. Shlouda Hussau, who previously held a position, will be leaving the organization at the end of the current fiscal year on March 31.
Speaker 4: to embark on a very well-deserved retirement after having served for over eight years as Leave????
Speaker 4: I'd like to take a moment to welcome Bernard to the Elidia family. Bernard brings more than 25 years of experience in the managed services system integration consulting in the IT industry to Elidia, and he now oversees all of Elidia's operations.
Speaker 4: I'd also like to take this opportunity to sincerely thank Chloe Russo or his invaluable contribution to a levy's growth and success.
Speaker 4: including the oversight of the merger and integration of more than 10 acquisitions under his watch.
Speaker 4: Claude will stay on as my special advisor during the trend is impaired until is official retirement at the end of March.
Speaker 4: Clote has been a partner and a confidant, and he remains a great friend, and I wish him much health and happiness to enjoy the retirement life ahead. I will now pass it over to Clote Smooth to discuss the financial metrics of our third quarter. Clote, thank you all. Good morning.
Speaker 4: Let's look at the numbers in more details. Please turn to slide 8.
Speaker 4: Revenues for the quarter amounted to $130.8 million, an increase of 19.2%, or $21.1 million, compared to revenues of $109.7 million for the third quarter of last year.
Speaker 4: Vitalist and Dayton contributed revenues of $12.6 million during this third quarter.
Speaker 4: Excluding the impact of the acquisitions, which occurred on February 1st and July 1st, 2022, respectively, growth was 7.5%.
Speaker 4: In other words, we recorded good, sustained organic growth once again. In Canada, have revenue increased organically by 6% to $77.5 billion?
Speaker 4: Due to growth across most of our operations,
Speaker 4: including continued growth from the two long-term contracts signed concurrently with the acquisition of April 2021. In the US revenues increased 47.9% to $48.9 million, do again to the vitalist and data acquisitions.
Speaker 4: a favourable US dollar exchange rate as well as organic growth also. As for our international operations, they also reported a strong quarter in terms of growth, increasing 24.6% to $4.4 million versus $3.5 million for the same quarter last year, and this despite negative currency impact.
Speaker 4: Now, let's take a look at our Q3 gross margin, which increased by 38.8% or by 10.9 million dollars to 39.2 million dollars up from 28.3 million dollars last year.
Speaker 4: As a percentage of revenues, our third quarter consolidated gross margin reached the 30% bar.
Speaker 4: That is up 4.2 percentage points over the same quarter last year from 25.8%.
Speaker 4: Q3 represents the four consecutive quarter of sequential gross margin percentage improvement.
Speaker 4: The increase in Canada is derived from increased revenues from permanent employees relative to subcontractors.
Speaker 4: Hi, your average revenue per employee.
Speaker 4: employee and higher margin offerings.
Speaker 4: In the US, Gross margin as the percentage of revenues increased, both in comparison to the same quarter last year and on a sequential basis.
Speaker 4: The positive margin impact from the acquisition of vitals to data.
Speaker 4: Improve project performance in other areas of the business.
Speaker 4: An increased average revenue per employee are domain drivers behind this progression.
Speaker 4: Now let's look at this GNA. Total gross is GNA expenses in the third quarter total of $31.2 million and increased of $6.2 million or 24.28%
Speaker 4: compared to $25 million in the same quarter last year.
Speaker 4: The increase was primarily driven by the vitalist and data macro-sitions.
Speaker 4: And an unfeable US dollar exchange rate impact $1 million.
Speaker 4: which were partially upset by overall reductions in other expense categories.
Speaker 4: On a sequential basis, expenses increased by $800,000.
Speaker 4: from $30.4 million for the second quarter.
Speaker 4: Driven by sequential increases in certain discretionary spending categories such as travel, business development, information technology and communication costs.
Speaker 4: as well as an untrubable US dollar exchange rate impact on our US dollar denominated expenses.
Speaker 4: both partially offset by reductions in certain other expense categories.
Speaker 4: While we need to be careful about the timing of certain discretionary expenses as we just saw in the third quarter.
Speaker 4: And about certain headwinds like inflation, return to some pre-COVID spending levels, and possible currency variations.
Speaker 4: We aim to continue reducing our SGN expenses.
Speaker 4: With certain initiatives still to be fully reflected.
Speaker 4: As such, we remain committed to our mid-term objective of 20% of revenues.
Speaker 4: which will also come in part from continued revenue growth.
Speaker 4: Overall, our third quarter adjusted a bit that amounted to $10 million, an increase of 122% or $5.5 million.
Speaker 4: Compared to an adjusted EBITDA of $4.5 million during the same quarter last year.
Speaker 4: Let's last with 5.5 million dollars.
Speaker 4: An increase of 2 million from $3.5 million for the same period last year.
Speaker 4: The main driver of the increase of the increase
Speaker 4: Are increased depreciation and amortization of intangibles from the two recent acquisitions?
Speaker 4: as well as the increased business acquisition and integration costs.
Speaker 4: also driven by such acquisitions. As such, our accounting net loss of $5.5 million must be viewed in relation to the $9 million of non-cash depreciation and amortization expense.
Speaker 4: plus $1.3 million of non-recurring, business acquisition, integration, and reorganization costs.
Speaker 4: Despite our higher revenues in gross margin, the increased loss was also driven by increased net financial and in compact expenses and again some increases in SGN expenses.
Speaker 4: Looking at long-term trends on slide 9, we can see the impact of our acquisitions and more importantly of our stronger getting growth achieved over the past several quarters.
Speaker 4: Regarding gross margin, we see a similar trend in dollars.
Speaker 4: As a percentage of revenues, a number of factors occurred in fiscal 2022.
Speaker 4: which had put some pressure on our performance.
Speaker 4: But Q3 of this year marks the fourth quarter in a row.
Speaker 4: showing a sequential improvement.
Speaker 4: highlighting our efforts on improving labour mix, utilization rates, and general project performance.
Speaker 4: and also reflecting the higher historical gross margins for quite a less than and data.
Speaker 4: Our long-term adjusted EBITDA trend also reflects our growth and gross margin improvements.
Speaker 4: I reiterate that the increased net loss of Q3 is mainly the result of non-operational and non-cash elements.
Speaker 4: With sustained organic and acquisition growth, our continuing long-term initiatives to generate higher growth margins and a steady focus on S-GNA, we believe we are well in our way to achieving our three-year financial objectives.
Speaker 4: Now turning to liquidity and financial position on page 11.
Speaker 4: As indicated in our statement of cash flows, our operations generated $34.9 million of positive cash flow in the third quarter.
Speaker 4: From a combination of good cash flow from operating activities of $8.8 million
Speaker 4: Plus significant positive working capital variations.
Speaker 4: This added to a positive currency impact of our US dollar death.
Speaker 4: and a positive post-closing adjustment of the data mac position.
Speaker 4: results in a sequential net debt reduction of $35 million.
Speaker 4: which combined with a growing TTM-adjusted EBITDA amount results in a significantly declining leverage ratio.
Speaker 4: from 5.4 times at the end of September .
Speaker 4: to 3.3 times at the end of December . While quarterly working capital variations typically alternate between positive and negative amounts, we do not believe this will have a significant impact on the general de-leveraging trend, which our current performance is expected to continue to generate.
Speaker 4: Now back to you Paul. Thank you, Claude. So to recap, I'd like to reiterate the key takeaways from the presentation of our third quarter fiscal 2020 results. First, Alidia has been able to sustain strong rightward growth in certain times, but our latest quarter indicating 19% of your year growth and 37 new clients.
Speaker 4: as seen in our third quarter, adjusted the bid of $10 million. And finally, a significant debt reduction, which feeds into our M&A strategy.
Speaker 5: We will now take your questions, Julie.
Speaker 2: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys.
Speaker 2: One moment please for your first question. Your first question comes from Jérôme Dubreuille from Desjardins. Please go ahead.
Speaker 6: Thanks for taking my questions. For me, first, congrats on the lower leverage, very noticeable in the quarter here. That brings the question of capital allocation. How has leverage been pushed back from certain investors in the past?
Speaker 6: I want to see if you feel more comfortable going back to M&A now or if you're happy with the new leverage situation.
Speaker 5: Thank you for the question. No, we're very happy with the debt reduction and we said last time we'd be focusing on that. So we were in the fourth quarter now. So we're mid February .
Speaker 5: I like the way we're going. M&A has always been at the top of mind. The three key things that we look for, right, is the right deal and the right price, but also they have to be for sale.
Speaker 5: So I believe that we're in a position now that the right deal comes along or we're happy with it Yeah, we have more flexibility now to pull the trigger, but hasn't been a concern for us that there are ways to get there so we We like the position that we're in right now
Speaker 6: Okay. Second question would be with the on the legacy business that you had maybe in terms of the staffing now we're seeing also decent, decent organic growth wonder how much left legacy business is there in Alitia and do you expect this will further decline the future?
Speaker 5: Yeah, we have very little legacy business left. However, we still have some contractors that we brought on board as part of the R3D acquisition to rent because we had to ramp up really fast that contract as we've said in the past. So this quarter we were able to really decrease.
Speaker 5: Decrease the amount of some contractors and reduce that and replace them with permanent employees So so what that does is we you know our revenue per employee goes up the margins improve the It has a great impact on our business and that is our long-term objective as well So so in the coming award. We're definitely going to continue to
Speaker 5: to do that, as we have time to catch up, right? So it gives us that flexibility to be able to use more permanent employees and less subcontractors. The other thing that we have now that we did not have a year and a half ago is the smart touring component. So we did not have centers in Morocco and Eastern Europe and India two years ago. So that's all.
Speaker 2: question comes from Amr Ezzat from
Speaker 7: Good morning to the ground on the quarter.
Speaker 4: I'd like to get an update on how conversations with clients are evolving. Last we spoke, Paul, you mentioned that client conversations were healthy and focused on gaining efficiencies.
Speaker 4: So there was no wheels low down just wondering if these conversations are still productive. Are you starting to see some anxiety set in?
Speaker 5: Thanks for the question, Mark. So yes, so the conversations we have with our customers right now are very much focused on how do we accelerate efficiency projects.
Speaker 5: You know, if you look at our results for the quarter, we actually had some negative impacts that I think were temporary. We had several customers that at the last minute in December said they decided to take a longer shutdown for holiday period and cost cutting measures or whatever. So that was a...
Speaker 5: An impact on utilization rates for some of our clients. So despite that, we've had a really good quarter. And that was a temporary measure. The other negative impact that we've seen is a slowdown in some of the learning spend. So I think that's probably a global thing where people are spending a bit less on training.
Speaker 5: significant growth as we cross sell that or introduce that to other customers because their offerings which are IP based are really focused on that on automating and generating efficiencies and modernizing legacy systems so making them more efficient.
Speaker 5: So now we're seeing a pick. I think it's more of a
Speaker 5: I mean, it's the same type of projects we're doing, but the perspective from the client side is a bit different. They're saying, you know, this project that we're doing, this modernization project, is really the drive efficiencies. It's not because it's a nice thing to have or whatever. They're really focused on the projects that are driving efficiencies. So for us, we see that as a positive.
Speaker 4: So inflation may be slowing down a bit, but we're still in a high inflationary period. Then you spoke to your smart showering strategy as well as your continued push for permanent employees.
Speaker 4: So I wonder when we think about growth spars and going forward, are there targets that you guys can share with us? You know, can we see you guys go from a 30% to a 35% plus? Is that realistic or am I out there?
Speaker 5: I think over time that's realistic. We try to compare ourselves with the best in the industry, the Mars. So, you know, we went from 25, 26 last year at this time to 30. I think there's still room for improvement. You know, we only, like I said, we only have 5% of our workforce.
Speaker 5: leveraging smart shortings. Some of our very large competitors are up to 50%. So, you know, as our scale grows, we definitely will be using more of our smart-shoring capacity to complement our local teams.
Speaker 5: So to me, I think there's significant upside potential on the gross margin over time.
Speaker 4: And after again, maybe one last one just following up on the Jerome's question. Is there a target that to EBITDA you guys are targeting that we should be thinking about? And I understand that quarter to quarter, if you execute on M&A, it could change, but is there a long-term target?
Speaker 4: Well, we always said that 2 to 3 times was our comfort zone.
Speaker 4: So it's a fairly broad range.
Speaker 4: We're generating cash flow, so the operations themselves will be deleveraging. The question is on M&A. When M&A comes about, we take a bit of a specific look if the acquisition is accretive.
Speaker 4: the price we're paying, the synergies that could be available. So that will drive our appetite for leverage. And obviously stock price drives our appetite for equity dilution. So we always want to do a combination of equity in depth.
Speaker 4: and we adjust the dial depending on both measures.
Speaker 4: So now yeah, we're with this that reduction which we have been somewhat expecting
Speaker 4: The dial is going back a little bit more to that, so dilution should be protected. Everything else being equal.
Speaker 4: But the range if you want to
Speaker 4: If you want a precise number, we said before, two to three times is probably our comfort zone.
Speaker 4: a precise number as we said before, two to three times is probably our comfort zone. The broad least speaking.
Speaker 7: Great, fantastic. Congrats again, Alpesto.
Speaker 2: Thank you. Your next question comes from Vincent Collegio from Barrington Research. Please go ahead.
Speaker 8: Yeah, Paul, I thought I'd ask about the two R3D contracts. Is there a potential upside that going forward for those two?
Speaker 5: Yeah, good morning Vince. Great question. So the contract, the way it structures is really a minimum.
Speaker 5: So the organizations and questions have significant IT spends way above the minimum commitment. So yes, there's potential there for to do a lot more. And as you know, those two organizations are going through integrations and the significant change. So again, whenever that happens, there are significant opportunities for
Speaker 5: I know you do price increases in January . How do those flow through where they meet your expectations? Our price has increased throughout the year, depending on the date of contract renewal, some are January , some are late in the year. We also price that into all of our new contracts.
Speaker 5: so far we've been able to price in the increases as they follow the market. Also a big chunk of our business now is project driven.
Speaker 5: So within those projects we have more flexibility in how we deliver and how we price and how we structure the delivery of the project. Again, leveraging smartshoring and nearshoring and all these things to give us more flexibility in the margins on the projects.
Speaker 8: And one more if I could. I noticed the fixed fee revenue contribution declined sequentially. Is that just ebb and flow and should we expect that to start to recover again going forward?
Speaker 9: Yeah, I suggest that the flow of evidence.
Speaker 9: Yeah, it's just that bit of flow evidence. OK, thank you. Nice quarter.
Speaker 2: Thank you. Next question comes from Deepak Kushal from BMO Pethymarket. Please go ahead.
Speaker 10: Hi, good morning guys. Can you hear me okay?
Speaker 10: Yeah, yeah, good morning, Deepa. Hey, thank you. Just, um, exceptionally strong cash remops. Um, I'm just wondering if you could give some more color on the nature of that word and capital reversal. Seems like a lot of it's from a reversal and unbuild revenue. Is that a specific contract? Is that related to R3D?
Speaker 10: and will you continue to see that kind of seasonality in cash remarks? I'm not sure, it wasn't very clear the fact, can you repeat the question? Sorry, I think I'm having an issue with my headset, hang on.
Speaker 10: All right. Hello. Can you help? Yeah, we can hear you. We just missed the beginning of your question. Yeah, just very strong cash remops. I'm just wondering on the nature of the working capital reversal. It looks like it's coming from under revenue. Is that contract specific? Can you give us some more details on how that came about? How that came about?
Speaker 4: Will your cash flow cycle going forward always be that seasonal or that involved? The anomaly was more at the end of Q2. We had seen the amount of unbuild revenue is increasing.
Speaker 4: It was more a matter of internal
Speaker 4: Set up. It has a lot to do with the what day of the week the end of the quarter falls sometimes and yes we had a couple projects.
Speaker 4: that pushed that up. So the anomaly was there. The amount at the end of Q3 is more indicative of our future.
Speaker 4: So no, you should not expect a big reversal of that positive we got in Q3.
Speaker 10: Okay, okay, fantastic. And then just stepping back.
Speaker 10: seeing your solid organic growth, your gross margin shifts, your operating leverage coming back.
Speaker 10: When I think at a high level of the mix of your business, can you talk a little bit about what percentage is recurring, but how that breaks down between project versus managed services.
Speaker 10: versus IP based and how you might expect that to evolve going forward? Is it decreasing managed services becoming a bigger and bigger part of your business?
Speaker 10: and how you might expect that to evolve going forward? Are you seeing managed services becoming a bigger and bigger part of your business as you go forward?
Speaker 5: Yes, I got a great question, so 83% of our business is repeat, so existing customers.
Speaker 5: So you can you can take that as a sign that we're doing you know higher value projects for those customers as the time goes on The new customers as well the new clients are all the projects that are based on 37 in the quarter There are based on our newer higher value offerings. So again Helps with the gross margin as well
Speaker 5: We have, we report now the subscription base recurring revenue that we have. And of course, managed services side of things is something that's growing and it's going to be growing significant thing more as we go. So if you look at the acquisitions we've done in the past.
Speaker 5: They've all been very specialized high-end companies that were very good at one type of project. With the addition of vitalists that has a very strong managed services offering and the addition of data that has a very strong IP based modernization offering, these are things that we combine with all of our existing.
Speaker 5: operations to make sure that we cross-sell those things so that now when we sell an Oracle project, an Oracle implementation project, well we can also sell the managed services that goes with it. Or if we sell a Microsoft project, we can also sell the managed services, the training, the ongoing support, and instead of it being a one-, two-, or three-year project, well it becomes a 10-year relation.
Speaker 10: is that from IP higher managers, how do you see that, you know, mix playing out in terms of drivers for that expansion?
Speaker 5: So the first one is the type of business that we do. So if you look at our businesses, we have some areas where the gross margins are over 40%, some areas that are over 50%. So as we roll out those offerings across all of our client base,
Speaker 5: So that's one of the drivers. So the type of offerings that it says the number one driver the second one is really that the mix
Speaker 5: of how we deliver that. So as I said, just in the past quarter alone, we reduced the subcontractor head count by about 6%. So having more permanent employees, that also helps. And the other one is the mix of the location. So when we bring in our smart shoring, as you can imagine, the cost of doing the work, whether it's Morocco, Eastern Europe or India, or a lot of low...
Speaker 5: when we did the R3V, I mean we went from 30% down to 25% in a few quarters just because of the change in the people, some contractors. We said it would take us two years to get back to where we were. It took us 18 months to get back to 30. So to me, I think that's not to me, that's a new floor. We need to do, we need to
Speaker 10: been able to find a way to get acquisitions done.
Speaker 10: that was just done. You know.
Speaker 10: However, you know, wherever your capital position is.
Speaker 10: But from a seller's perspective, are you seeing any changes in the last?
Speaker 10: quarter or so given the changes in the macro or the uncertainty or that still kind of
Speaker 11: As you all.
Speaker 5: It's interesting. In some areas we're seeing a big change, in other areas, no change at all. As you know, we've always been very disciplined in our M&A, and I want to avoid a fire still. We don't want to buy something because it's cheap.
Speaker 5: We want to buy something because it's good and it has a great value and it's something that we believe we can leverage across the across our platform. So we're actively looking, we're always looking for interesting targets and you know you see our
Speaker 5: our debt position right now, we're in good shape. If we can't find the rare pearl in the short term, well, we're generating cash and building up the war chest. It's kind of a win-win, whatever happens, we're in a good position. When the right-offer cheek comes along, we'll be able to pull the trigger. So we have...
Speaker 5: We're actively looking.
Speaker 10: So is it fair to interpret that if I may? Fire sales are going up but strategic sales are steady and you're gonna stay disciplined is that the right way to interpret? Yeah, I'd say that's a good way to interpret it to the back
Speaker 10: Okay, thank you for all the color. I appreciate you taking my questions.
Speaker 10: I appreciate you taking my questions. No problem. Thank you for the question.
Speaker 2: Your next question on some Brian King Flimker from Allianz Global, please go ahead.
Speaker 12: Hi, thanks for taking my questions. Great to see the recovery in the gross margin. Can you share what percentage of your revenue was delivered by subcontractors in the December quarter compared to the December 21 quarter and what are reasonable near-term and long-term goals for delivery mix as it relates to subs?
Speaker 5: First is direct. Thanks for the question, Brian . So we don't publish the overall numbers, but we did some contractors. We didn't say they decreased by 6%.
Speaker 5: Overall, in the past quarter.
Speaker 5: And our objective is always to have more permanent employees than some contractors. I think there's always going to be subs in our world.
Speaker 5: But if I can get to a 7030, 75, 25 mix of permanent subs, I'd be very happy.
Speaker 12: and how far...
Speaker 12: You expect by the end of the year you'll be close to that goal or we'll take longer than that
Speaker 5: Yeah, we don't give guidance on that one, but it's our objective.
Speaker 12: Yeah, and then lastly, maybe I missed it, but can you highlight from an organic perspective, where demand is strong this versus weakest in terms of articles?
Speaker 5: Okay, good question because we, our funnel is pretty strong across the board. I think there's been a bit of decrease in manufacturing in general, not just for us, but just the industry in general. We're seeing the man in manufacturing going down a little bit. We're seeing the man in manufacturing going down a little bit.
Speaker 5: Okay, good question because we, our funnel is pretty strong across the board. I think there's been a bit of decrease in manufacturing in general, not just for us, but just the industry in general. We're seeing demand and manufacturing going down a little bit. But, uh...
Speaker 12: Our funnels are pretty strong across the board. And is there one, the next one that's weak, is there one or two where you see the most opportunity in terms of pipeline?
Speaker 5: No, it's pretty much, again, other than manufacturing and maybe training, which, you know, in uncertain times some companies are slowing down their training spend, which is a very small portion of our business.
Speaker 5: Other than that, we're seeing strong demand for efficiency type projects across the board.
Speaker 5: that. We're seeing strong demand for efficiency type projects across the board.
Speaker 2: Thank you. Your next question comes from Gavin Fairweather from Cormark. Please go ahead.
Speaker 13: Oh hey good morning congrats on all your progress.
Speaker 14: Like to happen septth
Speaker 13: I wanted to start out on art drawing, which is through.
Speaker 13: I mean, a topic on the call, I think you talked about 5% of your labor-based being in lower-cost geos. Obviously there are practical hurdles to driving that higher. So I guess...
Speaker 13: How do you think about how quickly you can kind of add resources in some of these offshore locations? Do you have any medium-term targets or goals you could share in terms of that mix for your business over time?
Speaker 5: Yeah, sure, thanks for the question again. Well, in one year we went from 0 to 5%.
Speaker 5: So in theory we should be able to double that in a year. So I'd say if you ask me for an objective, that would be my personal goal, would be to double that within a year.
Speaker 5: Of course, M&A can also impact that. We look at targets today that have offshore or smart shore components, so that could impact it.
Speaker 5: But we need to grow that. I think we need to get to a threshold of 30% real fast.
Speaker 5: to be able to compete with some of our larger players out there. And again, I think that's very doable through a combination of organic growth and M&A. I think we can do that within the foreseeable future.
Speaker 13: Okay, that's great. And so maybe just on an organic basis though, like as you're looking to hire an Eastern Europe or Morocco or in India, if we kind of take M&A and put it to the side? Excellent. The talent pool, if you look at the different areas,
Speaker 5: A geography is Morocco. We've been able to find a lot of very qualified individuals, a lot of friends speaking as well. So that's great to support our Canadian and European operations.
Speaker 5: in Eastern Europe and India, more English speaking, speaking, but again, amazing talent, the significantly larger talent pool than here. So no, it's very...
Speaker 5: They're not easy, but a lot easier to find people in those areas than in North America today
Speaker 13: Okay, great to hear. And then just lastly, for me, if I kind of look at the US business pre-vitalist and datum, it kind of looks like organic growth and constant current is being kind of flat the last couple quarters. And I know this business is a bit more maybe transactional in nature. Maybe you can just discuss the sales pipeline and backlog for this business.
Speaker 5: just kind of your overall expectations for the next few quarters. So our backlog in sales pipeline is up year over year in the US.
Speaker 5: If you have to take into consideration that the acquisitions, a lot of the growth that's coming from the acquisitions is from existing customers that we had prior to the acquisitions. So it's kind of a combination. When you look at organic growth, you have to be conscious of the fact that even though it's coming from the offerings, from the acquisitions very often.
Speaker 4: wanted to see is our bookings in the US, excluding data and then the vitalists. So in our historical business, the bookings this year are higher than when year ago.
Speaker 4: bookings in the US, excluding data minn vitalists. In our historical business, the bookings this year are hired and one year ago. We're kind of...
Speaker 4: Comfortable with the trend over there. Generally speaking. Great congrats on the progress.
Speaker 15: my questions.
Speaker 16: Thank you, go.
Speaker 2: The year next question comes from TVA Goiwele from Scorsche Bank, please go ahead.
Speaker 17: Good morning guys, good quarter. Just on this data and wireless discussion, I wanted to get some color on how should we think about the two businesses on a go forward basis. I did see that there was a slight step down between Q2 and the Q3 revenues. So if you could just help a guide there, thank you.
Speaker 17: Sorry, we missed the beginning. Are you talking about the two recent acquisitions? The data and why the list acquisitions is what I was referring to. If you could help us see how could that position, how would that position sort of fan outgoing forward? Q2, if from the numbers, we have them at the end.
Speaker 18: 13.3 million versus Q3 came in at 12.6. So going forward trying to understand what would be the run rate revenue for the two acquisitions. So maybe obviously those two acquisitions are very powerful cross selling platforms.
Speaker 4: because they bring new services, new expertise to Aletheia.
Speaker 4: which we can bring to our clients.
Speaker 4: The expectation is certainly for that growth to accelerate and be strong going forward.
Speaker 4: We commented directionally about Datum having a good sequential increase. Obviously we're starting from a small base.
Speaker 4: It's easy to pile up the numbers and show good sequential growth, but we're expecting that to continue. The reception with our teams internally and with some clients we pitch the technologies that they have is very good. So we're kind of...
Speaker 4: optimistic there with Vitalist and Paul touched on that as well the learning it's certain services that sometimes are perceived to be less critical and maybe
Speaker 4: So over the short term, we're not really going to comment, but on the long term, mid to long term, I mean, again, these are services that
Speaker 4: Combine so well with everything we already do in terms of post implementation so
Speaker 4: And the team is great and the technology that they have to perform their services.
Speaker 4: is very good. So, and they're also fairly small compared to our overall operation. So maybe we have a bit of a pause because of the...
Speaker 4: economic cycle, but mid to long term we remain very bullish on those two acquisitions.
Speaker 4: mid to long term we remain very bullish on those two acquisitions. Very bullish.
Speaker 17: That's good color. Thanks guys.
Speaker 2: Thank you, Divya. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from John Shao from National Bank. Please go ahead. Hey, good morning, guys, and thanks for taking my questions. Regarding your smart sharing, I'm just curious about your client feedback.
Speaker 5: Why we call it smart shoring is we try to be different from the other players and I'll try to explain this.
Speaker 5: Typically, the very large outsourcers will take a piece of business from a client and send it off shore.
Speaker 5: And it's kind of a soup to nuts. I sent it over the fence. They deal with people over there and I look at it this way we We work very differently so the people that we have in our centers in Morocco, Eastern Europe , India and so on They're part of a team of an individual team or a project team So a project team might be led in the US or Canada or Europe
on a daily basis of projects and progress. And so that also helps us with the recruiting in those geographies. So the people feel they're part of a larger project, the global project.
and have more interactions with our teams and clients. So the feedback so far has been very positive.
Okay, that's great, Tyler. Thank you.
Thank you. Presenters, there are no further questions at this time. Please proceed with your closing remarks.
Thank you everybody for joining us today and we'll see you on our next call.
Ladies and gentlemen, this concludes your conference call for today with thank you for joining and that you please disconnect your lines. Thank you.