Alithya Group inc.

Good morning. Welcome to Alethea's second quarter of fiscal 2026 results conference call. I would now like to turn the meeting over to Alethea's management team. Please go ahead.

Thank you for joining us today for Alethea's second quarter fiscal 2026 results conference call. The press release, along with the MD&A containing condensed financial statements and related notes, was published this morning and is now accessible on our website. The webcast presentation can also be found on our website in the Investors section. Please be advised that this call will contain forward-looking statements which are subject to various risks and uncertainties that may cause actual results to differ materially from those anticipated. These statements include our estimates, plans, expectations, and statements regarding future growth, operational results, performance, and business prospects that do not solely relate to historical facts. These statements may also refer to future events, including expectations around client demand, business opportunities, leveraging our services, IP, AI, and expertise to meet client needs, excelling in a competitive market, achieving our three-year strategic plan, and deploying our SmartShort capabilities. For more information, Please refer to the cautionary notes included in our presentation and the forward-looking statements and risks and uncertainties section of RMDNA, which are accessible on our website. All figures discussed on today's call are in Canadian dollar unless otherwise stated, and we may refer to certain indicators that are non-IFRS measures. Please refer to the cautionary note included in our presentation and to the non-IFRS and other financial measures section of ORMDNA for more detail. Presenting this morning are Paul Rehman, the lease's president and chief executive officer, Bernard Dockrill, chief operating officer, and Pierre Blanchet, chief financial officer. I will now turn the call over to Paul Rehman. Paul?

Thank you, Dominic. Good morning, everyone, and thank you for joining us today. Before we begin, I want to take a moment to thank our clients for their trust and to recognize the dedication of our teams across all of Aletheia. Our people's commitment to excellence continues to drive our success and deliver meaningful impacts for our clients. Aletheia is not small, it is focused. Our second quarter operational results demonstrate the benefits and long-term potential of our strategy as we continue to execute our plan. Our company has transformed. And we are seeing the benefits of this approach in a challenging economic environment. So despite Q2 being our summer quarter, Elite has continued to progress on many fronts. The first KPI that should stand out from our second quarter is our gross margins. We continue to work our way up the value chain. Our gross margin percentage is now above many large integrators in our sector. This is not luck. our focus on higher value services has now reached a maturity level that enables us to differentiate at a larger scale and fight above our weight. We win on the quality of our services and our delivery reputation. This brings us to the second KPI that should retain your attention. Our revenues have decreased in the past as our shift to higher value projects has replaced some of our past commodity services. However, in Q2, Despite market uncertainties and a wavering economy, it is not our global year-over-year revenue growth of 11.5% that should hold your attention, but rather our industry-leading 34.8% growth in our U.S. operations. This impressive result by most standards comes from a combination of organic growth and the rapid integration of our e-Verge acquisition. We realigned our U.S. operations a few years ago with our long-term strategy. Since then, our enterprise application and transformation services have become a key differentiator and a strategic priority for clients looking to leverage enterprise-wide AI solutions. It is also showing the potential of our platform in the largest market in the world for these services, the USA. When you combine the strategic focus with strong execution, you get these growth results. This realignment is the same that we are implementing across all our operations. Finally, the third KPI that should pique your interest is the continued progress of our adjusted EBITDA margins and cash flow generation. Our trailing 12 months adjusted EBITDA is now over $52 million, which is a new high watermark for Aletheia. Our transformation into a high-value trusted advisory has brought us to this point at just the right time. The industry is evolving fast. AI is influencing everything we do, and our clients are looking for value creation and new ideas more than ever. Cost savings will only get you so far. We have demonstrated that we can be the trusted advisor to accompany our clients in their AI-driven digital transformation. And we know our model is scalable. You could say Aletheia has arrived. Before I pass it over to Pierre, I will also mention the non-cash impairment charge we took in the second quarter as part of the ongoing repositioning of our business. And with that, I'll pass it over to Pierre to provide some financial highlights for the second quarter of fiscal 26, followed by Bernard to share some operational updates.

Pierre? Merci Paul. Good morning everyone. I'm happy to join this conference call and highlight some of the company's achievements this past quarter. Our second quarter of fiscal 2026 was marked by year-over-year growth with improvement across several of our key metrics. Let's begin with a review of these numbers. In the second quarter, consolidated revenue came in at $124.3 million, up $12.8 million, or 11.5% on a year-over-year basis. Looking at our continued profitability, We are reporting another quarter of the early year improvement on gross margin in dollars and as a percentage of revenues. Gross margin reached 34.4% in the quarter, up from 30.6% last year. This performance reflects our focus on delivering higher value services, improving utilization rates across four geographies, and leveraging efficiently our smart shoring capability. Let's look at our performance by region, starting with Canada. Revenues in Canada reached $55.2 million in the second quarter, down $4.4 million, or 7.4% on a year-over-year basis. The decrease in revenue was due primarily to reduced revenues from government contracts and certain clients' projects reaching maturity. partially upset by revenues from the acquisition of XRM Vision, higher billing rates, and a continued recovery in the banking sector. Our gross margin in Canada as a percentage of revenue increased compared to the same quarter last year, mainly due to a positive margin contribution from XRM Vision, higher hourly billing rate, a decrease in the use of subcontractors, and an increase in utilization rate. On the sequential basis, gross margin as a percentage of revenue also increased. In the U.S., revenues increased by $16.3 million, or 34.8%, to $63.1 million. The increase is due primarily to organic growth in enterprise information services, higher billing rates in certain areas of the business, revenue from the Everge acquisition, and a favorable U.S. dollar exchange rate. The U.S. now represents over 50% of our revenues. Gross margin as a percentage of revenues from our U.S. operation increased compared to the same quarter last year, primarily due to increased utilization rates, increased use of our smart shoring capabilities, and higher billing rates. In our international business, revenue was slightly higher versus price in year, with lower gross margin as a percentage of revenue. The increase in revenue was primarily due to organic growth in enterprise transformation services. International gross margin as a percentage of revenue decreased compared to the same quarter last year, mainly due to one client's project coming to maturity, which historically had a higher gross margin. When looking at the geographies we operate in, our U.S. operation continued to represent a growing share of total revenues. Combined with our ongoing expansion of smart short capabilities, this has contributed to a stronger consolidated gross margin aligned with our strategic objectives. Now looking at SG&E expenses, we are continuing to focus on optimizing our cost structure to ensure greater efficiency and long-term performance. In the second quarter, SG&A amounted to $31.3 million, an increase of $4.5 million, or 28% year-over-year. The increase in SG&A primarily reflects costs associated with the acquisition completed since the same quarter last year, increased employee compensations, professional fees, and share-based compensation. This is partially upset by decrease in the information technology and communication costs and business development costs. SG&E as a percentage of revenue increased to 25.2% in Q2 compared to 23.2% in the same quarter last year. On a sequential basis, SG&E increased by $.7 million from $30.6 million. The increase takes into account salary increases that came into effect at the beginning of our fiscal year and expenses from our recent acquisitions. Looking at adjusted EBITDA, we are reporting $12.8 million or 10.3% of revenues in Q2, up compared to $9.3 million or 8.2% of revenues last year. The increase was due primarily to increased gross margin, partially offset by increased hedging. As Paul mentioned, this represents an adjusted EBITDA of over $52 million on the trailing 12-foot basis. Net loss of the second quarter was $31 million due to an impairment charge of $38 million. The variation includes impairment charge of $26.5 million from the Quebec portion of the Canadian cash generating unit and 11.5 from the industry solution cash generating unit. This environment became necessary for both cash generating units as we continue to our repositioning to align with our long-term strategic plan, just like we did with our U.S. operation over the past few years. Our adjusted net earnings came in at 9.5 million, or 10 cents per share, year over year, representing an increase of $4.2 million. Finally, turning to our cash flow and financial position. Cash generating from operating activities in Q2 was 11.7 million, offset by non-cash items of 10.6 million. resulting in a net cash from operating activity of 1.1 million in the quarter, a decrease of 1.9 million compared to the same quarter last year. As part of our capital allocation strategy, we put in place a normal course issue within the quarter, which allows us to purchase shares under certain conditions determined by the PSX. As of September 13, 2025, net debt increased by $28.1 million to $122 million from $94 million as of March 31, 2025. This change is mainly driven by the acquisition of leverage and the payment of a balance of sale. Our leverage ratio stands at 2.3 times net debt over our trading 12-month adjusted EBITDA compared to 2.4 times for the first quarter. I will now let Bernard share the operational highlights.

Thank you, Pierre, and good morning to everyone with us today. Our results truly highlight the depth of our expertise across our teams and our ability to demonstrate value for our clients amidst uncertain market conditions. In the second quarter, we delivered year-over-year double-digit revenue growth in our global operations. As Paul and Pierre highlighted, our U.S. segment grew by 34.8% year-over-year, This is a result of our focus strategy within this market as we expect to grow faster than others. The acquisition of eVerge has accelerated this growth along with continued demand for our services. Bookings for the quarter were $90.9 million. This translates into a book to bill ratio of 0.73 for the quarter and 0.91 on a trailing 12 month basis. The book to bill ratio for the quarter is 0.80 when revenues from the two long-term contracts signed as part of an acquisition in the first quarter of fiscal year 2022 are excluded, and 1.01 on a trailing 12-month basis. We also signed 22 new clients during the quarter, including a global leader in engineering and construction within our Oracle practice in collaboration with a recently acquired eVerge team. By combining Alithea's multi-pillar approach With the enhanced human capital management capabilities from Everge, we have opened new doors, enabling us to pursue opportunities that were previously out of reach for both parties. The uncertainty in the market continues to result in longer sales cycles and many larger engagements being contracted in multiple smaller phases, which has impacted bookings in the quarter. As we look forward, we are focused on solutions that deliver the greatest value to our clients and continue to be in demand. This is reflected in our pipeline, which grew by double digits over the same quarter last year. The largest increase in our pipeline is for new business within existing clients and a larger proportion of higher value project services. One area in which we received growth potential is our AWS related services as organizations continue to transition from legacy systems toward cloud-based solutions. Our teams deliver high-value cloud migration and modernization projects, leveraging proven, repeatable processes. Our recent work with Baneva, a major Canadian mutual insurance and financial services company, is a testament to our expertise. We deployed our cloud migration factory methodology to migrate several applications to AWS. The project was delivered on budget and ahead of schedule achieving immediate savings and operational stability for Beneva. As Paul said, we are not small, we are focused. And that starts with our focus on being experts in the industries we serve and our commitment to stay current with the latest trends, technologies and tools so we can best support our clients. For example, for a global B2B food company, our experts in FDA regulatory requirements migrated their on-premise ERP applications to the cloud on time and under budget, solving several complex manufacturing challenges. For a global pharmaceutical manufacturer, we completed a multi-site ERP implementation, leveraging our custom pharmaceutical solution and deep sector expertise to align our clients' operations with FDA and USDA validation requirements. We also enabled our client with AI-powered tools so they can harness the robust capabilities at scale. And to ensure our teams remain at the forefront of innovation, we've invested in continuous learning, including AI-related competencies, accumulating over 5,000 hours of training during the second quarter. To help our clients get the most of their investments in technology, we continue to invest in our IP, proprietary frameworks, to accelerate the time to value for our clients. Our diverse portfolio of IP spans multiple business applications and industries and differentiates Alithea in the market. For example, our Alithea Food Express Accelerator, a proprietary framework designed to support rapid deployment of D-365 for food and beverage manufacturers. For Raskin Foods, a leading contract manufacturer We are leveraging this IP and our industry expertise to implement D365 for finance and supply chain. Similarly, within the healthcare sector, we're developing the Alithea Vital program, a strategic enabler that combines Oracle ERP, human capital management, supply chain management, advanced analytics, and AI tailored for healthcare. Vinyl will empower healthcare systems to harness data to address challenges related to labor productivity, workforce scheduling, and cost of care. Another example is our Microsoft Copilot-enabled data agents we developed for our clients operating in complex manufacturing environments, helping them overcome limitations within their existing systems by enabling fast, accurate access to detailed inventory data. Our focus continues with our partnerships among leading solution providers, including Oracle, Microsoft, AWS, and Salesforce. Our track record, commitment, and investment with these providers enables us to provide our clients with the right solutions for their business challenges, including the adoption of Gen AI and agents. Oracle invited Lithia, among a select few Tier 1 partners, to assist in building AI agents for Oracle Fusion Cloud applications. I'm proud to say that two of our agents, a sourcing assistant agent and a resource manager assistant agent, will be available on Oracle's marketplace and will be accessible to all Fusion customers. Our commitment, expertise, and ability to innovate is recognized by our partners. In October, we were named finalists in the 2025 Oracle Partner Awards in the Global Industry Solutions category for Health and Life Sciences. We earned this nomination for our work implementing workforce scheduling at Oklahoma State University Medical Center, becoming the first healthcare client to implement this solution. And finally, as we execute our focus growth strategy, we continue to build our global talent pool through our SmartShore delivery centers. Following our recent acquisitions, we now have more than 13% of our workforce in our SmartShore centers. We have access to the top talent and can scale to deliver global projects with higher margins and fewer contractors. In summary, we continue to make steady progress on all pillars of our growth strategy and remain focused on executing our plan.

I will now turn it back to Paul, closing remarks.

Thank you, Bernard. As you can see, it was a positive quarter for Aletheia.

We continue to demonstrate our ability to create value for our clients, our employees, and our shareholders. Our financial position is strong, providing us with the flexibility to execute on our strategic plan. As we believe our shares are significantly undervalued, we will continue to use our cash wisely and buy back our stock when appropriate, reinforcing our confidence in Aletheia's long-term value and our commitment to delivering shareholder returns. We will now open the line for questions. Joelle?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jérôme Dubreuil with Desjardins. Your line is now open.

Welcome, Timon. Thanks for taking my questions. The first one is on the U.S. results. Very strong congrats there. I'd like to dive a bit there. Maybe if you can talk about which verticals are working best because we haven't seen resumption in discretionary spending with some of your peers. And maybe so we can talk about the verticals and if there's significant cross-selling from past deals too.

Good morning, Jerome. Thanks for the question. I'll comment on the first part and then I'll let Bernard comment on the industries. But I think what people misunderstand about our business, coming back to what I said at the beginning, we're different than the other players. We are really focused on niche, high-end market for solutions that are in very high demand for large organizations who want to roll out enterprise-wide AI. If you want to roll out AI at scale, you need data. You need one source of truth. Many organizations in the past years have gone through acquisitions, divestitures, consolidations, and most organizations, regardless how well they run IT, have multiple different systems with different sources of data, and they're struggling to get all their data in one place to leverage AI like it should be. So rolling out an ERP platform is a great way of getting there. And you can see that these hyperscalers, Microsoft, Oracle, AWS, I mean, you name them, are putting a lot of money and adding capability to their platforms around AI. So we see huge demand for those services around what we do. And that's the bulk of what we do today. We've gradually gotten there. And of course, the U.S. being the largest market in the world and where the most investments in AI are going into, it is influencing demand for our services. In terms of the industries, I'll let Bernard comment on that because he's more familiar with the funnel and how we're doing.

Yeah, well, thanks, Jerome, for the question. And, you know, first I'll start, you know, the U.S. had good results. A lot was driven by our enterprise application and transformation practice and our Microsoft practices. As you know, we focus there in the healthcare space on the Oracle side and in the process manufacturing. You saw a couple examples I used around food, beverage. And these organizations are looking to take advantage of AI and other things. And to get there, they do need to modernize the back end. So you've seen some of that there. One of the big drivers in the quarter was our EPM practice. That's our Enterprise Performance Management practice, where we see a large you know, multi-billion global organizations. And they're looking to get better insights from their financial information for planning and whatnot. So that's an area where we've seen growth. And you actually, you know, hit on it as well. Over the last 18 months, we've been really focused on cross-selling and getting our teams to develop that motion to be able to bring more to our clients from other areas of the business. And that has driven some of our growth as well as we're seeing more of that. It's going to continue to be a focus for us as we move forward.

That's great. Second question for me is on the bookings. The week or this quarter, so we're wondering if we should be expecting some slowing down the organic growth next quarter, or maybe it was just some maybe one-time event like with the government business in the in Canada. So if you can comment on that and what this double-digit pipeline growth exactly means. Thanks.

Yeah, thanks, Jerome. Bookings, and I'll highlight what I said in the call. Two things we're seeing is decisions are taking longer than they have traditionally, and that's some of the uncertainty in the market that we're seeing. But the other phenomenon we're seeing is large deals are getting broken up into smaller phases. So typically, we would have had a you know, an 18 month booking, it'll end up being a three or four month. So that impacts the booking side of the house. So we're seeing some of that in the market. The pipeline, as I mentioned, and some of this is a direct result of the cross-selling activities where we're seeing pipeline growth of new business within our existing clients. And again, typically that's a higher win rate business from where we've already established the relationship there. So we're seeing that there, but just in the past quarter. And then Q2 traditionally has been a softer quarter for us in bookings, just due to the fiscal years of our key partners that we work with. It is a slower quarter. They go through a restructuring typically in the summertime. So we do see some softness there in Q2.

Thank you.

Your next question comes from Gavin Fairweather with Cormark.

Your line is now open.

Oh, hey, good morning. Thanks for taking my questions and congrats on the strong results. Maybe just to start on your macro comments about longer sales cycles and projects being kind of topped up into smaller pieces. Curious how much that applies to the U.S. as well as Canada. I think your prior commentary was that the macro environment was kind of a tale of two markets with the U.S. continuing to be quite strong. Curious for any differences you're seeing between the two main geographies in the current state.

Yeah, thanks, Gavin. Good question. When I look at the pipeline and the growth in the pipeline, we've got growth across all geographic segments and the same comment with the existing clients. We're seeing that in Canada as well as the US on that, as well as the proportion that's in more of the project services work versus the traditional consultant work that we've done in Canada. So a little more of a switch there on that. But I don't see anything unique to Canada. or the U.S. I just think kind of where we are in our evolution, we're further ahead in the U.S. and we're seeing the results there earlier than we will see them in Canada.

Appreciate that. And then maybe just on the U.S. gross margin, I know you don't specifically disclose it, but I suspect and I think you've talked about it being kind of around that 40% previously. I'm curious if you're seeing further upside opportunities there. I mean, you kind of rang off all the different drivers of strong performance this quarter in terms of utilization and smart shoring and higher value projects. Do you see an ability to drive that further or are we kind of topping out on U.S. gross margins?

As I look at the U.S. theme across the company, there are some areas of business that we're operating very well, but there are areas that I still see opportunity to increase utilization. And also when I look at the SmartShare operations, those areas for improvement in certain areas where I think we can do more as we look at the business and we're pursuing new business and we're bidding on new business. We are structuring our deals with a larger portion of that being done smart shore. So that I do believe provides some upside there. But in other areas, we're kind of at the targets where we expect it to be.

Maybe, Gavin, I'll add to what Bernard was just saying, that every proposal that we put in now has an offshore component. So you've seen the steady growth of that. We're over 13% now. We stayed in the past, you know, our kind of our long midterm view is to get the 30%.

So that alone is going to be improving gross margins across the board as we keep pushing that.

That's great. Very helpful. And then maybe just lastly on Canada, we've talked about you walking away from some lower margin work and being very deliberate about the work that you're going after and you discussed you know, the work that you did in the U.S. business, you know, several years ago to really kind of transform the margins higher. So maybe you can just discuss kind of your longer term plans for the Canadian business and how you're thinking about the ability to kind of transform that to look more like the U.S. and what kind of timelines you think you can execute on that.

Yeah, great. Thanks for the question.

Well, if you look back at the U.S., it took us about three years, you know, from the start of the major shift to get where we're at today. We're in the middle of that in Canada. It's going faster in some areas than others.

But yeah, the plan is that within the next couple of years, we're going to be there. That's the plan. Appreciate that.

And then hopefully all this tariff issues and free trade stuff and everything else, all the noise around it goes away between now and then, which would also help, I think.

Yes, that would be nice. Thanks so much for the past one. Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1. Your next question comes from Vince Cochirichio with Barrington Research. Your line is now open.

Yeah, Paul, you had mentioned that the Q2 tends to be a slow booking quarter. I'm curious... Thus far in the current quarter, how bookings are trending?

Morning, Vince. Thanks for the question.

I can't comment on the current quarter, but Q2, which is our summer months for us, always slower. And as Bernard was saying, there's Three factors, one is the summer months, obviously a lot of less people working, but despite that we did better than last year. So year over year, our bookings have grown in the summer, which is a good sign. The other two things is if you look at our strategic partners, these hyperscalers, whether it's Microsoft, Oracle, these other guys, our bookings tend to follow their year end and their year end is in a different quarter than ours. And so typically if you look at the quarters where we have the highest bookings, usually tend to align with their year end. So it, you know, you look at where Oracle's finishing, that's usually a good quarter where Microsoft finishes. That's usually a good quarter. So, but I, I can't, I can't comment on the current booking. Sorry.

No, no worries.

And what are your, the funnel is strong as Bernard's saying, the funnel is growing. So.

Okay. And, uh, What are your thoughts on how well you're leveraging AI to generate programming efficiencies?

I think we're doing well. I think there's always room for improvement. I look at our operations today, Vince, and 13% for us, there are about 3,000 people, so just under 400 people in our smart shore centers. If you had asked me this question two years ago, I thought we'd be three times larger by now. I think we've maintained that size just because of the use of the AI tools. I think our people are much more efficient in our smart source centers than they were two years ago. You also have to remember that our people in our smart source centers aren't commodity I mean, we don't do maintenance and support and these types of things. We have Oracle experts and Microsoft experts and AI experts that support our clients around the world. So by definition, these people use these tools every day. And we're also helping Microsoft and Oracle integrate AI tools into their own platforms that we end up using after. I think we're ahead of the curve on that. Is there room to improve? Always. There's always room to improve. So we like to believe we're in front of the parade and we want to stay there.

And last question. In Canada, the government contract business was weak in the quarter. Do you have any expectations of a rebound there?

So, so yeah, a great question then. So we, as we said in the past, we are deliberately exiting some government, low margin government business. And it was a conscious decision. You might say it's difficult because it impacts our revenues in Canada, as Pierre was mentioning, but by the same token, our margins are growing. So the idea is, is as we do that, as we do that transformation, is how do we focus on the higher margin government projects? And we are winning some. We are growing our government business in areas of higher margin projects instead of the lower margin commodity stuff where you're only competing on price. When you compete on price, there's always somebody cheaper, and you never win in the long term, and you can't invest in the new things we want to do. So we made a conscious decision there. It reduces, but we're still winning some very interesting projects. We've won several around Microsoft. We talked about XRM earlier. We've won some project management or Microsoft project type stuff with some large organizations in the government that want to improve their project management. That's a very common theme right now in government circles. And you're also looking at, there's going to be massive investments In defense, in the future, there are many announcements today, but before that trickles down into the machine, I think you're several quarters away before that impacts the business. It usually takes time to trickle down.

The big announcements sound good, but they usually take quite some time to trickle down into the machine.

Thanks, Paul. Thank you for the question.

There are no further questions at this time, ladies and gentlemen.

This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.