Alithya Group inc.

Good morning, ladies and gentlemen. Welcome to Alitia's Third Quarter Fiscal 2022 Results Conference Call. I will now like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing at Alitia. Please go ahead, Ms. Andrews.

Good morning, everyone, and thank you for joining us for Alitia's Third Quarter Fiscal 2022 Results Conference Call. The press release and MD&A with complete financial statements and related notes were issued earlier today and are posted on our website. The webcast presentation can also be found on our website in the Investors section. Presenting this morning are Paul Raymond, Alitia's President and Chief Executive Officer, and Phil DeCibou, our Chief Financial Officer. Before we begin, I'd like to specify that this conference call is intended for the financial community. Please be advised that this call will contain statements that are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For more information, please refer to the cautionary note in our presentation and to the forward-looking statements and risk and uncertainties section of our MD&A available on our website. Let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated, and be aware that we will refer to certain indicators that are non-IFRS measures. Please refer to our cautionary note in the presentation and the MD&A for more results. Now, I'll turn the call over to Paul.

Good morning, everyone. I look forward to discussing some of the highlights of another Alitia Record quarter for revenues and client goal lives. But before I dive into the highlights of our third quarter, I'd like to take a moment to reflect on our most recent acquisition. On February 1st, as you remember, we announced Alitia's acquisition of Vitalist, a U.S.-based learning and workforce development company with a blue chip customer base of Fortune 1000 companies and the leading Microsoft partner in their field. Here are the key highlights of this transaction. One, Vitalist will accelerate our entry into the massive learning and workforce development industry, recently valued at over $50 billion in North America alone. The transaction also enhances Alitia's revenue mix with new high-margin subscription-based recurring revenue streams. And three, it presents strong organic growth prospects and promising cross-selling potential that Alitia's current services are client-based. By the way, it also enhances our already solid partnership with Microsoft. On a final note, our new proprietary adaptive learning platform now enables us to provide post-implementation change enablement to our customers. We can therefore accompany them over the long term in their digital transformation journey. Alitia will now be able to evolve the adaptive learning platform as well to fit the needs of our Oracle practice moving forward. A reminder that this acquisition occurred during our fourth quarter and is therefore not reflected in the financial results that we are disclosing today. Now on to Q3, another record quarter. Let's go through our three key takeaways for the quarter. First, Alitia has posted once again continued industry-leading growth and another record quarter in terms of revenues with more than 55% -over-year growth. We also continue to experience substantial organic growth across all of our geographies, including a record quarter for GoLives posted by our Microsoft practice for enterprise cloud implementations. Including Microsoft and Oracle cloud enterprise solutions, we had a record 27 successful client GoLives in the quarter. Our Oracle practice experienced record bookings as well for the UF and Q3. This is largely due to a sense of urgency amongst healthcare sector clients to accelerate digital transformation plans. With the current challenges and pressures that the healthcare industry faces, it is more important than ever to provide technology solutions that reduce risk and help clients to focus on improving patient care. We also continue to deepen our public sector market penetration in Canada. In January, we started a $3 million services contract with a federal government agency, the Parliamentary Protective Service. We also continue to leverage our Quebec government qualifications that allows the company to serve as a trusted advisor to other public organizations. In addition to paving the way to establishing a track record of ongoing successful projects with government agencies, the qualifications position, positions, the lead here, sorry, to take advantage of a recent Quebec government announcement that all of its departments will be migrating to the cloud within the next three years. Secondly, in line with the continued growth of our business, our recruitment campaigns continue on all fronts as we strive to expand the knowledge and expertise of our workforce. We continue to be very successful in attracting new employees looking for exciting challenges with a rapidly growing digital transformation leader. We recently hired 192 employees and our growth related job openings have increased by 92% over the same period last year. We also continue to strengthen our internal resources dedicated to the skills development for our professionals, which includes a series of specialized academies that focus on core expertise. To mention another highlight from the acquisition of Vitalist earlier this month, Alicja will now be able to leverage the adaptive learning platform in order to sharpen the skills of our own professionals. And thirdly, despite the impacts from employee downtime due to COVID and well-deserved vacations from any of our people in December, we posted a record quarter for billable hours and total revenue in the quarter at close to $110 billion. Q3 also saw the completion of our integration of R3D as of December 31st, right on schedule. We're also on track with the ramp up of our long-term agreements totaling $600 million in guaranteed revenues over the next decade with QMI and Beneva as announced in our first quarter. This brings me to some highlights of our new partnerships. So our success in greater scale and attracting attention from industry-leading solution partners, Alicja is in the process of finalizing its AWS Advanced Peer Services partner accreditation, enabling us to now access the full spectrum of AWS cloud-based services and solutions. As you know, the Connecticut government has awarded some 40 cloud computing contracts totaling more than $55 million over the past year and a half. A recent $10.5 million contract won by AWS alone represents more than 15% of the value of the agreements concluded since January 2020. Therefore, Alicja's AWS certification will open up more doors for us for a broader cloud consulting and solutions implementation offering moving forward. We also continue the critical process of developing strategic partnerships and achieving certification with other industry leaders our clients care about. For example, our partnership with Vitek, a global provider of cloud-native benefits and administration software for the insurance industry, will enable Alicja professionals to unlock a transformative suite of applications embraced by our current and future insurance customers. We also gain accreditation as a systems integrator of Solutions from Talent, a California-based technology company with a global clientele. This enables us to expand our offering of both on-premise and cloud-based migrations. Despite the context surrounding COVID around the world, we are encouraged by our continued strong bookings. They are the best predictor of what is to come. In Q3, bookings reach $125 million, which translates into a -to-bill ratio of 1.14. As for the trailing 12 months, even excluding our $600 million 10-year contract, other bookings are in excess of $330 million. That translates into a -to-bill ratio above 1. Our continued superior bookings reflect not only strong demand for our digital transformation services from our existing clients, but also the fact that we are gaining market share and new customers who are now turning to Alicja. Before I turn things over to Claude, I would just like to shine a light on the significance of the collective achievements of our company in Q3. Powered by our rapid growth, the completion of the R3D integration, and the addition of our latest acquisition, Vitalis, Alicja's scale now enables us to fine-tune our cross-structures in order to reap the benefits of past investments. This scale and strong financial position also enables us to continue our creative acquisition strategy. I will now pass it over to Claude to cover some of the financial highlights. Claude? Mr. Buzz, bonjour, good morning. Please turn to slide 8 for three per quarter highlights. Revenues for the quarter increased .4% or by $39.1 million to $109.7 million. Excluding the impact of the R3D acquisition, which occurred on April 1, 2021, true organic growth was .5% or .1% on a constant currency basis. In other words, significant and accelerating organic growth. In Canada, revenues increased .2% to $72.1 million due to organic growth in all areas of our Canadian operations, a general recovery of activity levels, and revenues of $15.4 million from the R3D acquisition, including inter-company revenues, and finally growth from the two associated long-term contracts. In the U.S., revenues increased .2% to $33.7 million as we experience strong organic growth in all areas. The increase was partially offset by foreign exchange regulations, as the increase would have been .4% assuming a constant U.S. dollar. As for our international operations, they are showing a similar strong performance. Looking at gross margin, it increased by $7.9 million or .3% to $28.3 million for the third quarter. As a percentage of revenues, the third quarter gross margin was 25.8%, or if excluding the impact of the R3D acquisition, 28.1%. That is down from .9% for the same quarter last year. As previously mentioned, the R3D revenues historically show a higher proportion of billable subcontractors and a corresponding lower gross margin profile. When excluding R3D, the decline in gross margin percentage mainly comes from A, an increase in subcontractors' revenues relative to those from permanent employees, coupled with an increase in the average cost of subcontractors, explained in part by the tightening labor market. B, increased costs in certain customer projects, and C, decreased software revenues, which typically carry higher margins. S&P and A expenses in Q3 total $25 million, an increase of $4.6 million, or 22.4%. This increase is primarily driven by the R3D acquisition, as well as by certain increases in employee compensation and recruiting costs, in line with our strong organic growth, partially set by decreases in share-based compensation and a favorable U.S. dollar exchange rate. As the percentage of revenues total, S&P and A decreased to .8% for the three months ended December 31, 2021, compared to .9% last year. As Paul mentioned, we have now completed the migration of R3D's commercial and administrative functions into Aletia's infrastructure, resulting in certain additional cost savings to come. Overall, our third quarter adjusted agenda amounted to $4.5 million, an increase of $2.2 million compared to the same quarter last year. As in previous quarters, the amount of non-cash depreciation and amortization, totaling $4.8 million, is notably greater than the quarter's accounting loss of $3.5 million. Looking at long-term trends on slide 9, we can see the impact of our acquisitions, and more importantly, of our strong organic growth of the past several quarters. Regarding gross margin, we see a similar trend in dollars, but recent challenges in percentages, for the reasons I mentioned before. We believe most of these factors are largely cyclical, subject to some natural recovery over time, and we aim to reverse the trend also with a number of targeted initiatives, focusing on labor mix and costs, utilization improvements, setting prices adjustments, and focusing future growth in our higher margin segments. On slide 10, our long-term EBITDA trend reflects our growth, but also our recent gross margin percentage challenges, as well as some increases in S&P NAs, despite their gradual expected decrease as a percentage of revenue. I would like to take a moment to put our recent results in the context of our long-term business objectives, which we have often been communicating over the past few years. For revenues, we pursue sustained organic growth and selected strategic acquisitions in order to reach the $600 million mark. Our organic growth and acquisitions of the last year have taken us close to the $500 billion mark, and we certainly intend to maintain the efforts on both fronts. For gross margin, we believe our long-term strategies, some discussed on this call, remain appropriate and relevant for gradual recovery and further improvement, including as it relates to the two long-term agreements stemming from the R3D acquisition. We also intend to keep targeting acquisitions with a higher gross margin profile, and the recent vitalist acquisition is certainly a very good example of that. For S&P NAs, we believe that we have now reached a certain critical mass, and a stabilization of certain SG&A categories, including with regards to corporate and head office costs. Going forward, these expenses should grow more slowly than our revenues, and as such, we intend to continue our downward trend of SG&A as a percentage of revenues, with some acquisitions of energies still to come, including longer-term savings relating to rent. Also, most acquisition targets that we look at typically have a lower SG&A percentage profile, even before potential synergies, which would further compound the trend. In a nutshell, that is the -by-step playbook of how Aletia believes that it can realistically aim to achieve its three-year objective, $600 million in revenues, with an evidence margin of 23 to 13%. Now turning to our liquidity and financial position on slide 11. Net cash from operating activities improved to $10.1 million in the third quarter, a significant increase from the third quarter of last year. Excluding our positive working capital variations, the third quarter cash flow from operating activities was $2.3 million, which represents over 50% of the reported adjusted EBITDA. Moreover, considering that we have fairly stable interest expenses in capex, and fairly low effective tax rates with our available tax pools, this conversion percentage should increase exponentially with any future growth in EBITDA. On slide 12, we see total debt increasing from $84.5 million down to $61.6 million during the third quarter, with a similar decrease of our net bank borrow. This comes from cash flow generated by operating activities, as mentioned before, a transfer of cash balances to debt, and the new CDAE financing facility, reducing bank borrowing. This decrease of total debt combined with a higher trailing adjusted EBITDA shows a steady four-quarter delveraging trend, bringing us to a 3.1 ratio of total debt to trailing 12-months adjusted EBITDA. Looking at these metrics following the vitalist acquisition on slide 13, we see the pro forma total debt to TPM EBITDA multiple decreasing to 2.6. This reflects the debt net that we raised for the acquisition, and the current profitability of the target. Looking forward, even considering the historical profitability of the Ligia and Vitalist, we are expecting the leveraging dynamics to continue. Of note, we also announced in the context of the Vitalist acquisition, an increase of our senior credit facility from $60 million to $125 million. At stretch, considering our permitted 5.5 times maximum ratio, this provides us with ample capital to continue on our growth strategy, even though we intend to maintain, as always, our proven use of debt. In closing, our normal course issuer bid, launched on September 20th, is progressing as planned. Since its beginning, Alicia has repurchased and canceled 330,000 past eight years for total cash consideration of $1.1 million. Back to you, Paul. Thank you, Floyd. So our industry leading growth is a reflection of the quality of the work of our people and of the level of trust that our customers have in our ability to guide them through their complex digital transformations. Accordingly, Ligia will continue to focus on those core values that guide us toward the objectives set forth in our three-year strategic plan, which foresee the delivery of more than $600 million in revenue and between 9% to 13% by the end of that period. As we wrap up Q3, we're also very pleased with the strides we're making in mounting a comprehensive environmental, social, and governance strategy that is in line with Ligia's values and the many initiatives already underway. For example, our management incentive plan already includes ESG criteria, and we were the first technology services company in Canada to join the 30% club years ago. We are one of the few IT services companies that provide all of its employees with paid leave to give back to their communities. We have paid -do-less work environments, work from home and employee assistance programs, and many more. As with everything we do, we want to be a leader in the field of sustainability. So it should be of no surprise that we're establishing progressive ESG guidelines that meet the expectations of all of our stakeholders and reflect much of the valuable work our people have done over the years to improve the communities where we live and work. To that end, and in association with a leading Canadian ESG consulting firm, Ligia completed all of the steps of their phase one recommendations in Q3. We now turn our attention to phase two, and we look forward to sharing our ESG framework with you in the near future. Thank you for being with us this morning, and Julie will now be opening up questions.

Thank you. At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Your first question comes from Kevin Krishnaranthi with Desjardins. Please go ahead.

Hey there. Good morning, team. I had a question first on the growth profit in the quarter, and then I'll ask about forward trends, but just in the quarter, you talked about a number of factors impacting it. Certain customer projects, tightening labor market, software mix, and then a higher load of unbillable hours at year end. Can you just, I think those are the four elements, can you just walk through any way to quantify at least maybe?

I

think we just lost Kevin, but I'll answer the question, Kevin, if you can still hear us. I think you wanted more details on the comments on the billable sign-in margin, so thank you for the question. Basically, as we were mentioning, it was a record quarter for billable hours. At the same time, we also had a high number of non-billable hours, especially at quarter end with COVID and more vacations and projects ends and starts. So I guess the positive of that is the people who were non-billable and the Q3, which are billable and Q4, so same costs, more revenues with more and more of the billable time. So it's a positive, I think it's a temporary thing. We also listed a list of other small things that impacted in the quarter, but we see those as temporary quarter end type stuff, and we're very, very confident with where we're going with that. If you get back on the line, I guess the second part of your question.

Am I on now?

Okay, yeah, we can

hear

you now.

Okay, perfect. So you talked about... Sorry,

did you hear the answer?

I heard the answer, yeah. Thank you for that. And so I guess, I mean, there are just a number of things. Is there any way to quantify though, maybe perhaps even the customer projects, like what would it have been, XMLEs one-time transitory impacts?

Maybe I can just to add a little color and give you one concrete example. So in the quarter, we had 27 goal lives, which is a record, all-time record for us. So these are ERP, CRM, all of our enterprise solution projects. So Oracle, Microsoft. So whenever a project ends, the team gets shifted to a new project. So there's usually a lag in between there. So the closer to the end of the year those goal lives were, it means that people aren't restarting a new project, you know, December 15th, I think, before everybody goes off on holidays. So a lot of the goal lives that were later in the quarter, meaning the team has basically started building on the new projects in January. So we used the opportunity to let these people take some well-deserved mutation and downtime over the holidays. We also have some customers that shut down for the holidays altogether because of the -the-cron shutdowns and the COVID situations in different countries. So we use the opportunity to encourage our people to take the HACCHA.

Yeah, for sure. Understood and well-deserved. So as I think about, yeah, so then going forward, you talked about a number of initiatives, labor mix, price adjustments, and then obviously looking towards building higher margin, you know, businesses. Can you talk about maybe the timing of that trajectory on gross margin improvement? And then if you can help us think about near-term modeling on gross margin exiting this year into the next year. And obviously I know we've got Vitalist is in there as well and that'll probably help the margin too.

Yeah, again here, maybe let me give you a color, one very simple factor here that influence your modeling. If you look at our business, one of the things that we've been saying is about moving to higher value employee-based projects. So R3D, as you remember, is mostly subcontractor driven, which has very low gross margin. I mean, it's in the team. So we said we'd be shifting that over two years. Part of that shift is coming through the agreement we have with Kidneka and Beneva, which is on track. It's exactly where we wanted it to be. So that's a big part of it. If you look at just our employees, we're way above 30% in terms of gross margins for our employees, which is what we wanted, where we want to be. So one of the biggest initiatives that we have going forward is replacing those subcontractors with our full-time people. So if everything else being equal, if we can just get that one under control over the next two years as part of our agreement, it would have a huge impact on gross margins.

Okay, so you'd aspire to get the business to a 30% margin and then higher in time on layering on even more higher margin businesses.

Exactly.

And sorry, I just want to poke one more question here on the GM, the software mix. So you called that out. So I'm just curious, you know, broadly, what was the mix of software versus services in this quarter versus, you know, a typical quarter? How different was that mix?

Okay, so it's not a mix. Software revenues will vary depending on the customer assignments that we have. In any event, software revenues are always below 5% of our top line. We aim to increase that, obviously, but historically we're talking about low dollar amounts. But the margin is very good, so a difference of, you know, a small difference for these small amounts makes a big difference on the margin percentage.

Okay, yeah, I understand. Gotcha. Look, I'll switch gears just more to the top line. Really, really good results there. Impressive organic gains. You talked about Oracle, you know, quite a number of times. You know what, so how did, you know, Oracle versus Microsoft perform in the quarter? Are you just seeing particular strength in Oracle? And you want to touch on sort of what really is driving that? You know, talk about your, you know, expertise in the healthcare vertical. You know, any incremental color you can just talk about on just how you're seeing that that strength is particularly strong.

Actually, both those, both Microsoft and Oracle are doing extremely well right now. It's just that where we were involved with our Microsoft and Oracle solutions are in different industries. So, again, Microsoft doing very well on their side, Oracle doing very well on their side. One of the things that we were talking about is we are seeing a big acceleration on the healthcare side. I think COVID put in like a lot of the issues that many healthcare providers have around their systems in making sure that they have more time to give the patient care versus administrative issues and challenges, as we've heard and seen in the past few years. So there's really an acceleration on that side, and given our very strong positioning on the healthcare side, we're getting a big chunk of that. So we're seeing a lot of growth there. But again, Microsoft doing very well. A record number of bill lines on the Microsoft side in the quarter. So no signs of slowing down there.

Okay. Last one from me, maybe for both of you, just thinking about future quarters. Obviously, very strong growth in Canada. You've been adding quite a bit of revenue quarter over quarter. I think it's coming up on a tougher conduit every year in Canada. Organic trends were 40% this quarter, and then in the US, I think you're facing a bit of an easier comp, but revenues are trending there. How do we think about the near term ways of modeling the bookings, translating the revenue just in light of the strong growth you've been recently posting?

Well, I guess maybe the one thing you can look at is QRQ4, which is basically calendar Q1, January, February, March, usually has less holidays or less downtime than others. March has many more billable days this year, and Easter is not in March this year. The way the Christmas holiday, December, January fell this year, there are more vacations in December than in January from looking at the calendar. So assuming we have the same number of people, and normally, we'd be in better shape, so we're pretty optimistic on Q4.

Yeah, and so I'll leave it at that. Congrats on a good top line quarter for sure, given the seasonality and the schedule in the month of December, so congrats, and I'll pass on.

Thank

you, Gavin.

Your next question comes from Gavin Fairweather from Carmark Securities. Please go ahead.

Oh, hey, good morning. I thought we'd start out on the bookings. It looks like a nice strong bookings print in the quarter. Any kind of trends that you would call out, you know, by region or vendor or a mix of work under the hood there?

Hey, good morning, Gavin. Thanks for the question. Actually, it's really everywhere, Gavin. I think, you know, we've been talking about our shift to a higher value and digital transformation, and we're really reaping the benefits of that. All of our business now is driven by digital transformation. I think we're one of the leaders in the sector, and they're being recognized not just by our customers, but by, you know, new logos that are calling us and joining us. And of course, we're getting a lot of referrals directly from Microsoft and Oracle on those solutions, but our Digital Solutions Center is also growing decent balance and doing projects for customers and accelerating their move to the cloud. Like I said, the recent government announcement, they want to move every department to the cloud within the next three years is also something that's driving a lot of roles for us. So it's really everywhere right now.

That's great. And then just, you know, thinking about your fiscal fourth quarter, obviously we've seen, you know, Omicron has kind of parked up and we've been living under, you know, COVID for, you know, called a couple years now. So again, to what extent are you thinking that that could, you know, present some challenges in terms of billing for the Q4 or do you find that most of the projects are kind of able to move, despite that?

Yes, I think the number of goal lights in the quarter is kind of our best indicator of that, Gavin. We, I mean, 27 ERP system goal lights remotely executed. You know, I remember at the beginning of the pandemic, some of you were on this call, you know, the first quarter we've done a few and we were amazed that we were able to do them remotely. Now it's kind of de facto. We have to do it remotely. So the team's really developed an expertise around that. No sense of that slowing down. As you know, we just opened an offshore center in Morocco, which is also growing. So we know that something will be able to leverage from a cost perspective going forward as well and also help with recruiting. So, no, we're very optimistic about the future and and what remote and teleworking has given us as an opportunity and the acceleration of digital transformation that's come with it.

That's great. And, you know, earlier you talked about, you know, the leverage in the business as you shift your mix more towards FTE from subcontractors. You know, obviously the hard part is finding the FTEs in the current, you know, labor environment. So maybe just walk us through, you know, how you're feeling about your ability to kind of execute on that mix and then maybe just touch on, you know, the Morocco development hub and, you know, the solid-bed operation and how scalable you think it is and how that plays into that shifting mix towards FTE.

So the first part, the last part was on the Morocco and the shifting, the first part again, Gavin, the first part of the question, sorry?

I mean, just, you know, you talked about the leverage of, you know, shifting from subcontractors in the business and just your ability and how you're planning to execute on that.

So the hiring, we're still doing quite well despite despite what we're seeing out there. Again, we hired over 190 people in the quarter. We're opening up a lot of new positions. The team's doing an amazing job in hiring in the current condition, as you know. I think our biggest selling feature is the type of projects that we do. We keep attracting people who want to work on tour technology and exciting projects. We have a similar challenge to everybody in terms of, you know, turnover and the likes. I like to believe that based on the numbers I've seen, we're doing better than what's happening out there, which is good. We're also, I think the highest turnover rate you're seeing out there in many companies is the people that have been hired in the last two years, right? People hired during COVID, which have not been able to have that human interaction with other individuals within the company. So we we're getting very good at managing remotely. I mean, we have all the tools, the team has set up that way. We were working that way in the U.S. before the pandemic. So we're kind of built for this environment right now, strangely enough. So it's doing very well. And as things start reopening, I guess that's only going to be positive in terms of trying to bring some people back to do some -to-face meeting and team building events and so on and so forth. So we like our positioning on the hiring front. Our most successful recruiting is actually referrals from other employees. I mean, that's where we have the biggest positive results is when the referrals come from our own people, which is working very well. But we have a very effective recruiting team that manages all that. Morocco is ramping up. I'd like it to go faster. The challenge is not fighting the people. I mentioned this before, one of the challenges in Morocco and each geography has their own thing, but people have to give two to three months notice in that country before they change jobs. So it's ramping up. We're very happy with it. And the intent would be to make it bigger than what we originally planned. But we are looking at other options as well. As you know, we're always active on the M&A front. Vitalist is a great example, great margins. A model that's decoupled from headcount, which is great. And we're also looking at targets that have offshore extensions as well. So we're at a scale now. You look at our run rate right now, 110 million a quarter, multiply that by four, add in vitalists. I mean, we're basically with very little growth, we're going to be over 500 million next year if I just do the math in my head. So we're basically one, two acquisitions away from our three-year plan. So one thing that wouldn't make sense with the scale that we have today is to have more offshore capability for our projects, which would also help with the recruiting and the workforce issues globally. So these are all things on our menu for

the next little while. That's great. That's super helpful. And then just lastly for me, just on pricing, I mean, you mentioned that is a lever for growth margins, particularly given the strong demand environment. Can you perhaps share what kind of price increases you're looking at when you're bidding on new

projects? It varies tremendously again in all of the areas that we're at. But again, as we said in the past, our aim when we bid on projects is not to win because of price. We want to win because we have the best solution or the best reputation or we're the ones who the customers believe will deliver the project with the least risk possible. So by doing that, we're not as driven by, you know, reducing costs, but more driven by the quality of what we deliver. So we're really focused on that. So yes, we're seeing prices increases around the, you know, across the board in our offerings. But at the same time, you know, being able to leverage offshoring and lower cost centers to help us with the delivery on the cost side, I think would have a much greater impact on our growth margins.

Great. That's it for me. Thank you.

Okay. Your next question comes from Paul Steep from Scotia Capture Home. Please go ahead.

Good morning. Paul, could you talk maybe a little bit about obviously some of the bookings and maybe the transition in the business? What did, how we should think about the duration reflecting that a lot of it's still consulting business, but if there's anything else you want to call out in

X the BR3D deals, just to give us a sense of where that's been trending over time? Thanks for the question, Paul. A very good point. You know, if I go back five years ago, most of our work was time and material. There was very few projects where we had full control of the projects. Today, I have over 200 projects at any given time in the company, and that's only going to increase. So these are projects where we take responsibility for the customers. Some are fixed rights, some are not, but these are projects where we can manage the intake and produce an outcome, which again comes back to helping out at the gross margin because we can stack those projects with people that we choose based on what we think we need to deliver the project and not based on the resume and somebody. So it's really selling our qualifications and our capability. So our intent is to do more of that. We're seeing the effects of that. We're seeing how positive it is, and most of the new business that we're picking up with the $600 million contract with Beneva and QMI are projects. So we are, that is a big driver in terms of gross margins when you can focus on the outcomes and manage your costs and how you deliver them. And again, leveraging full-time employees and leveraging offshore and leveraging all these things. So we're finally at a critical mass, around half a billion dollars, where we can do those things. You know, one of the other areas that we're doing a lot more of is these academies that we put in place where we hire college grads and train them in a very concentrated area of the business, whether it's in Microsoft or Oracle or another technology, which again is a great source for us in terms of recruiting. We typically pick college grads that do not have a technology background, but have a business background and train them on a business-driven technology, which is working very well. And again, that's an expensive proposition when you train these people as an investment, but the payback is within a year. So, you know, coming back to Close Comment earlier, we are investing in growth and we know there's a huge payback and we're seeing in the growth that we're getting. So scale makes a big difference for a company our size. We're seeing as well in the SG&A percentage that keeps going down. And again, our objective is to get that under 20%. So we're going in the right direction.

Great. And then either to you, Claude, how should we think about, I know over time we talked about integrating R3D and transitioning the staff from maybe a subcontractor to a full-time basis. Maybe talk to us a little bit about where you're at in that journey as, you know, discussing it with some of those folks and shifting them over to maybe being full-time.

It's progressing. That's a constant effort. And as I mentioned in my notes in Q3, it so happened that the trend that unfortunately reversed with, you know, having to manage that significant growth and looking for resources to fill these services, we unfortunately need it to turn to the subcontractors to a larger extent than we would like. But I would say is that probably a midterm effort to get to where we want to go, even though it is progressing. In terms of the SG&A, we have some savings to come still. Most of it would be behind us. So I don't want to tell you that the large numbers are still ahead of us in terms of reductions. But it's still, you know, it will still move the needle going forward and that is immediate. That is, will be completed over the fourth quarter for whatever was left to be saved on that front.

Just on that same topic, just to manage it, I know we discussed it briefly earlier. Given where you're advocating for some of these projects, should we, you know, obviously vitalists will have a bit of an offset on the gross line next quarter, but should we expect that, you know, still presumably got some of the same subcontractors employed working through these projects? Should we think that, you know, maybe there's

a little bit of pressure on GM into the next quarter and then over the year it starts to ease as you,

you know,

further work out the plans that you've articulated? On the gross margin, it's really, we need to look at recovery on short, mid and long term. Before the third quarter, you've seen our gross margin. It was already at reduced levels following the R3D acquisition. So I would say on the short term, we should be getting back to those levels, those kinds of levels. Q3 was really a combination of different factors that just happened to come together, impacting more than usual the third quarter. Same factors that I explained, the labor mix, certain projects. We always have hundreds of projects on the go at all times and sometimes the challenges on projects seem to occur in a more concentrated fashion. This should average out going forward on a fairly short term basis. Software revenues, there's no trend to be seen there. It's really not at random, but depending on the specific projects, specific software percentage that those projects have and when the billing occurs can have a significant quarter to quarter variation. So no reason to expect that Q3 is setting any trend to be continued. So on the short term, we can expect some of these negatives that all happen to be bundled together in Q3 to ease off. And then it's turning to the midterm. The labor mix is something we're working on continuously as I said and growth has a lot to do with it. We've been investing in growth and we've been succeeding in the thing in growth and Paul talked a lot about that. Maybe focusing more on performance and how we deliver on that growth as best we can is probably in the cards over the midterm and then long term is everything else we talked about. Service mix, higher value added projects and obviously acquisitions that will be driving that gross margin going up. So it's really needing to look at the three levels. Without providing specific steps, we do not provide guidance as you know.

That helps. Thanks again. Appreciate it.

Your next question comes from Honor Isaac from Esalen Partners. Please go ahead.

We can't hear you. Sorry. Good morning. This is Michael Vakvina on behalf of Hammer. Congrats on the strong quarter. So most of my questions have been answered so far, but I'll go through a couple quick ones. In your preferred remarks, you spoke about the leveraging. Can you provide some color in how you're looking at M&A going forward? Is your current 2.6 times net leverage a peak whereby you wouldn't look at acquiring anything further or just trying to get a sense of your appetite here?

Well, I think there's obviously two moving parts to this ratio. So the first one is what performance will be going forward in terms of EBITDA and we are not commenting on that other than what we said before. The other piece of the equation is depth in itself and obviously that depends if we are going to be doing additional acquisitions and we've always said that was certainly in our strategic plan to do acquisitions on a steady pace. But depending on the timing of that, every quarter that goes by, especially if we deliver a good cash flow as we did in Q3, the leveraging could occur very fast. Our sweet spot has always been around two times is what we aim for. Don't forget that the chart only shows the actual reported EBITDA. Our bank covenants actually looks at acquisitions on a pro forma basis so they give us credit for the trailing 12 months of the acquisitions even before we own them, which is how you should look at it because once you spend cash to make an acquisition, you should consider the potential profitability in that ratio. So it's tough to project the number because of those reasons, but our sweet spot, what I can tell you is our comfort zone is around two times. A little more when we have acquisitions that are very, that have a lot of recurrence to its revenue profile and that's the case with my hopes, certainly.

Thank you. And then back on your comments on utilization, I know you don't release your utilization rates, but can you give us a sense of where you are currently sitting relative to Q3? Are you close to fully utilized? Yeah, we're not talking about Q4 today, sorry Michael. No worries, that's all for me, thank you. Thank you.

And your last question for today comes from Nick Agostino from Laurition Bank Securities, please go ahead.

Yes, good morning, Gerna. Hey, good morning. Morning. So just on the gross margin side, I mean obviously it feels like, obviously in

this case you had lots of growth and you had to go out and get subcontractors to help you guys fulfill that growth. So it almost feels like added growth will impact your gross margin near term and slower growth, you can maybe offset that as you get more and more FTEs in the door. I'm assuming that that's the short term view that we should be having here and my question is, are you guys still comfortable now that you've completed the R3D integration, are you still comfortable that you can get to that 25% gross margin level, plus or minus, I think it's within a two to three year time period, just given the growth that you guys are seeing in front of you and the rate at which you're adding people within North America and within Morocco? Yeah, thanks for the question. On both of those you're absolutely right, there's a short term pressure just because we're ramping up so fast, but on the plan for the Bignolet-Quebecau ramp up and the gross margins on those contracts, we're right on track. We're very comfortable with the target at 25 and remember that contract is guaranteed margin. So if something happens and we can't make the margin, there's a mechanism for compensation in that, so that's why we're 100% confident on that one. Okay and that's very helpful and then just given you talked earlier about various markets and I'm just wondering in the recent past you talked about or highlighted some higher education initiatives that you have launched, can you give us an update on what you're seeing when it comes to the higher education market and the opportunities in that market and how maybe they contributed in the current quarter or what your expectations are for upcoming quarters? Yeah, thanks. So in terms of higher ed, we have very high expectations. We see that a little bit like what we're seeing in healthcare right now. You know a lot of higher education institutions have been struggling in the past two years with COVID, with remote delivery of services, with students being on site, off site, delivery of classes and so on and so forth. So we're seeing tremendous potential there. It's ramping up. They're not at the same speed or same level that we are in healthcare. I think they're a year or two behind healthcare. I think it's also the nature of those institutions. The decision making is very collegiate. It usually takes more time, but we see tremendous potential there similar to what we're living in healthcare today down the road.

Okay, that's helpful. And then my last question on prior calls and usually since there was talk about a paid and fixed price contract, can you just give us an update as to the status of contract and specifically if it has been or how close you are to completion? I'm going to leave it there.

Thanks. Yes, as we mentioned last quarter, that one is over and done with. There are no more overages of that project. It's mostly completed and implemented and everything else we're doing there is a new business with the customer. Okay, great. Thank you. Thank you.

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

Thank you very much, Julie. Thank you everybody for joining us today. Appreciate questions and looking forward to talking to you on the next call. Take care.

This concludes this conference call. Even now, disconnect.