Alithya Group inc.

Good morning and thank you once again for joining us for Alethea's second quarter fiscal 2024 results conference call. The press release and MD&A with complete financial statements and related notes were issued this morning and are now posted on our website. The webcast presentation can also be found on our website in the investors section. Please be advised that this call will to differ materially from those anticipated. These statements include, without limitation, our estimates, plans, expectations, and other statements regarding the future growth, results of operation, performance, and business prospects of Aletheia that do not exclusively relate to historical facts. or which refer to future events, including statements regarding our expectation of our clients' demand for our services and our ability to take advantage of business opportunities and meet our goals set in our three-year strategic plan. For more information, please refer to the cautionary note in our presentation and to the forward-looking statements website. All figures discussed on today's call are in Canadian dollars, unless otherwise stated, and we may refer to certain indicators that are non-IFRS measures. Please refer to the cautionary note in our presentation and to the non-IFRS and other financial measures section of our MD&A for more details. Presenting this morning are Paul and Officer and Claude Thibault, Chief Financial Officer. I will now turn the call over to Paul Hemant. Paul?

Thank you, Benjamin. Good morning, everyone, and thank you for joining us for the review of our second quarter fiscal 2024 financial results. Despite our lower revenues this past quarter, we are particularly optimistic in respect to progress in key areas that I would like to discuss. I would first like to highlight three notable areas of achievement from our second quarter, and then we can dig deeper into how they impact our results and influence our confidence for the future. First off, we are pleased with our continued progress in terms of gross margin as a percentage of revenues. We continued our favorable progression, both sequentially and year-over-year, largely due to greater project efficiencies, improved utilization, a reduction of subcontractors, and continued focus on growing our higher margin segments. Second, during a historically slow summer quarter, and despite lower year-over-year revenues, we continued to make progress in reducing our SG&A spending. Along with other ongoing initiatives, that trajectory better positions us to increase our profitability faster once the world returns to a healthier economic context. Thirdly, we continue to feed our strong pipeline of bookings for the future, both in terms of newly proposed projects with existing clients and through the addition of 36 new clients in the quarter, which is a good achievement for a company our size. I would note that this latest accomplishment reflects Aletheia's growing reputation for not only offering robust solutions from leading technology partners, but also for our ability to provide professionals with the end-to-end expertise required to ensure successful outcomes for our clients. So now let's dig a little deeper into those highlights, including the factors driving them. Gross margins are a source of pride in our Q2 results. both as a percentage of revenues and in terms of making progress in our offering of higher margin products and services to our clients. Excuse me. Despite persistent industry factors beyond our control that our CFO will further explain later, we are back above our minimum gross margin threshold of 30%, again in a declining top-line quarter. This is the result of ongoing initiatives in several areas, One of those areas is our reduction of subcontractors, and Q2 saw our ratio decrease by five percentage points, while simultaneously augmenting our utilization rates. Additionally, we're able to maintain sequential stability in terms of the number of professionals we employ in our higher margins, smart shoring jurisdictions, and we remain focused on increasing our size and reach in that realm. In terms of SG&A's spending, despite the inflationary pressure that we have been feeling for a couple of years now, we were able to exercise strong control over our spending and to flatten our expenses. In fact, sequentially, we experienced a decrease in spending of $2.6 million and a year-over-year reduction of 1.6%. At times, that process requires some difficult decision that's part of a push for greater efficiency, and you will see this in the restructuring costs taken in Q2. As a result, considering the slower conditions that we're seeing in certain areas of the information technology services sector, we are doing well, and we are taking great strides to operate with greater efficiency as things start to improve. Those cost reduction and efficiency efforts are not completed, as we will discuss further in the presentation. Our Q2 revenue amounted to $118.5 million down year-over-year, primarily due to a cyclical decrease in IT spending in the Canadian financial services sector. Additionally, cautious spending decisions by some of our clients also had adverse effects on our U.S. training and digital adoption services. However, to counter some of those headwinds, we continue to show up our offering of AI-enabled solutions targeting greater efficiency. Another client-centric trend is causing a slower start to some projects as well. Investments have typically required a CIO sign-off, are now being circulated more broadly within organizations with increased scrutiny to ensure sustainable ROI. In response, Aledia is diligently working to present clients with the facts that they need to order to move forward. However, Q2 saw some projects start delays in line with that trend. Additionally, as Aledia's reputation grows, we continue to close on bigger contracts, particularly in our leading U.S. verticals of healthcare and manufacturing. And as we sign larger deals more frequently, they often require final approvals at the board levels, which takes more time. In the US, our Microsoft business delivered growth on a year-over-year basis, while our Oracle business also experienced a strong quarter. Both lines of business generate higher margins, and we are excited about the future, given the forecasts for growth in some of the key sectors that we service, and especially the US healthcare sector. In Canada, The financial services market remains tight but steady. Despite an important reduction in volume experienced from a few of our big financial services sector clients, our market shares are not decreasing, and the projects and spending remain on track for the long term. We also continue to make progress in the public sector, which accounts for a significant portion of our business in Canada. That progress is largely due to our ability to adapt to emerging trends in that segment. For instance, government agencies are increasingly breaking up their large-scale projects into smaller segments, dividing phases between multiple suppliers in order to manage risk. Looking ahead, we're inspired by strong bookings of $110 million and a book-to-bill ratio of 1.08 when excluding the impacts of the two long-term contracts signed in April 2021. Additionally, our cross-selling strategy continues to bear fruit, and we are looking forward to engaging in new projects with existing clients as they explore the benefits of Aletheia's broader offering of products and services. Simultaneously, we have 36 new clients to explore those same possibilities with, including a growing portfolio of proprietary products outside of our traditional Microsoft and Oracle offerings. So once again, Thank you for joining us this morning, and I will now turn the floor over to Claude Cibot, our Chief Financial Officer. Claude? Thank you, Paul. Good morning. As Paul mentioned, revenues for the quarter amounted to $118.5 million, a decrease of 8.1% compared to revenues of $128.9 million for the second quarter of last year. Of note, Aletheia had one less billable day in Q2 than in the same quarter last year, which in itself accounts for a reduction of just under 2%. In Canada, revenues decreased by 9.5% to $68 million due mainly to a reduction in IT investments in the banking services sector. However, we are seeing good progress in revenue increases in other areas of our Canadian business. Looking at our U.S. business, revenues decreased by 6% to $45.7 million. This decrease was primarily due to weaker demand for our digital scaling and change enablement services and some slower project starts, as mentioned earlier by Paul. Decreased U.S. revenues were partially offset by a favorable U.S. dollar exchange rate impact of $1.3 million between Q2 of this year and last year. As for our international operations, they also reported a softer revenue order, decreasing 8.3%, mainly due to reduced activities in Australia, but partially offset by a favorable foreign exchange rate impact of $500,000 year over year. Let's look at our Q2 gross margin dollars, which overall decreased by $3 million, or 8%, to $34.8 million. However, as a percentage of revenues, our second quarter consolidated gross margin increased to 29.4%, up from 29.3% for the same period last year. On a sequential basis, gross margin as a percentage of revenues also increased despite a sequential decrease in revenues that naturally puts pressure on gross margin performance. The increase in gross margin percentage is derived from better individual project and general utilization management, increased revenues from higher margin offerings, and finally fewer subcontractors. Let me take a moment to further comment on our Q2 gross margin percentage. In the second quarter, Aletheia recorded a $1.1 million provision adjustment on tax credits receivable from previous periods. reflecting certain changes in estimates and assumptions, with a notable portion relating to the activities of a previously acquired business. While this provision impacts our Q2 numbers, it is not related to the second quarter performance per se, and as such, if we excluded gross margin as a percentage of revenues, would have increased by 1% to 30.3% compared to this same quarter last year. it is not only a notable increase in itself but it also brings back brings us back above our minimum threshold of 30 percent and this during a quarter with declining revenues again it is very challenging to be increasing gross margin performance during a soft quarter soft revenue quarter including as it relates to utilization rates and as such all the factors and initiatives leading to this overall improvement in q2 bode very well for when our revenues resume a more typical organic growth pattern. Now let's look at SG&As, which also represent a notable second quarter improvement. Total gross SG&A expenses in the second quarter total $29.9 million, a decrease of $500,000, or 1.6%, compared to $30.4 million in the same quarter last year, and despite a negative U.S. currency impact of $0.4 billion. Therefore, this represents a year-over-year quarterly reduction of almost $1 million. This decrease comes mainly from remuneration and recruiting expenses, partially offset by increased business development and travel expenses, and higher internal improvement project costs. On a sequential basis, SG&As also decreased by $2.6 million from $32.5 million in the first quarter. This $2.6 million reduction reflects a non-recurring impairment charge of $1.4 million in Q1. But even when excluding that amount, there is a sequential quarterly reduction of $1.2 million, coming mainly from remuneration elements. We are pleased to see our efforts on that front starting to show actual net reductions in dollars. We look to maintaining the same continued discipline on SG&A spend going forward, and we are actually working towards achieving additional savings in the current context. Overall, as a result of decreased revenues in gross margin dollars, including the $1.1 million provision I mentioned, Partially offset by decreased SG&A expenses, our second quarter adjusted EBITDA amounted to $6.5 million, representing a decrease of $2.9 million, compared to an adjusted EBITDA of $9.4 million during the same quarter last year. Now, looking at our adjusted net loss, our Q2 adjusted net loss amounted to $0.2 million, representing a reduction of $3.6 million from a positive $3.4 million of adjusted net earnings for the same period last year. This marginally negative number is a result of the reduction in adjusted EBITDA and the notional effect of income taxes relating to adjustments, as can be seen on page 22 of our Q2 MD&A, without which adjusted net earnings would be positive. Of note, as adjusted EBITDA is lower, and as the amounts deducted to calculate the adjusted net earnings do not materially change from quarter to quarter, it is to be expected that the adjusted net earnings amount decreases proportionately more than the adjusted EBITDA amount. This is also true in the opposite direction, and any future improvement in adjusted EBITDA will translate into a proportionately higher adjusted net earnings amount, everything else being equal. Moreover, despite our reduced adjusted EBITDA and adjusted net earnings, it should be noted that Aletheia is still generating positive operational cash flow during the quarter, even after considering CapEx, lease liabilities payments, and interest, and even after considering our non-recurring business acquisition, integration, and reorganization disbursements. Despite our decline in revenues and gross margin dollars, we see well on page seven our rebounding gross margin percentage, which again would be even higher than 29% when ignoring the previous period impacts. As for our long-term adjusted EBITDA trend, because of our disciplined SG&A performance and the scale which we have now reached, the decrease in adjusted EBITDA is relatively smaller. Indeed, while our gross margin dollars are $6 million lower than our high watermark in Q4 of last year, our adjusted EBITDA is only $4 million lower, the difference indeed coming from overall SG&A reductions. Again, this points to potentially enhanced EBITDA performance going forward just as soon as revenues return to a sequential growth pattern. Now, turning to liquidity and financial position on page 9. Net cash used in operating activities was $17.3 million, representing an increase of $16.7 million. This amount resulted primarily from $20.9 million in unfavorable changes in non-cash working capital items. Those changes in non-cash working capital items consisted primarily of a $12.2 million decrease in accounts payable in accrued liabilities, a $6.2 million increase in accounts receivable, and a $3.1 million increase in unbilled revenues. The accounts payable and accrued liabilities reduction comes from both a reduced number of employees and subcontractors and a reduced number of accrued days at the end of the quarter. The increase in accounts receivable mainly comes from delays on certain large customer balances most of which do not pose any credit risk and have notably receded as of today. Finally, the increase in unbilled revenue mainly comes from our project type mix, as well as a few specific billing particularities at the end of the second quarter. As such, while this $20.9 million working capital usage is a high amount, It is largely a timing and mix issue, and among others, we already know that the reduction in number of days of accrued salaries will be reversing at the end of Q3. Now back to you, Paul. Thank you, Claude. So before we go to questions, let's recap on the three notable areas of achievement of our second quarter. So one, it's very challenging to be increasing gross margin performance during a soft revenue quarter, and as such, All the factors and initiatives leading to this overall improvement bode well for when our revenues will resume a more typical organic growth pattern. Two, we continue to make progress in reducing our SG&A spending, and we look to continue to improve this measure going forward. And finally, our continued strong bookings and our growing sales funnels are also very encouraging. So we will now take 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 touch-tone phone. You will hear a three-tone pop acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling 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. Please go ahead.