Dec 6, 2019 (Thomson StreetEvents) — Edited Transcript of Alithya Group Inc earnings conference call or presentation Wednesday, November 13, 2019 at 2:00:00pm GMT

Alithya Group Inc. – Senior VP & CFO

Alithya Group Inc. – VP of Communications & IR

Alithya Group Inc. – President, CEO & Director

GMP Securities L.P., Research Division – Director and Technology & Communications Analyst

Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research

Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Alithya’s Second Quarter 2020 Earnings Conference Call. (Operator Instructions)

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.

I would like to remind everyone that this conference call is being recorded on Wednesday, November 13, 2019.

I will now turn the conference over to Gladys Caron, Vice President, Communications and Investor Relations. Please go ahead.

Gladys Caron, Alithya Group Inc. – VP of Communications & IR [2]

Thank you. Good morning, everyone, and thank you for joining us for Alithya’s second quarter 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 at alethia.com. They are also available on EDGAR and SEDAR. The accompanying webcast presentation can also be found on our website in the Investors section.

Presenting this morning are Paul Raymond, our President and Chief Executive Officer; as well as Claude Thibault, our Senior Vice President and Chief Financial Officer. Following their comments, we will open the call for questions.

Before we begin, I would like to specify that this call is intended for the financial community. Also be advised that the call may contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the risks and uncertainties section of our MD&A available on our website for more details.

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 MD&A for more detail.

Now I would like to turn the call over to Paul.

Paul Raymond, Alithya Group Inc. – President, CEO & Director [3]

Thank you, Gladys, and good morning, everyone. (foreign language) I’m very happy to be with you here today to share our latest results.

Let me begin with a brief overview of the second quarter. As we just reached our 1-year anniversary as a public company, we are very pleased with our progress against our long-term strategic plan. This required our company to rapidly adapt itself to the reality of being a public company and to operate across North America. Our management team and employees quickly rose to that challenge, and I want to use this opportunity to thank them all for that.

Our financial results for the second quarter of 2020 demonstrate that our strategy to evolve our service offerings towards higher value-added services is showing concrete results. And the successful integration and cross-selling opportunities derived from our U.S. acquisition, validates our business model.

Our revenues for the quarter were up $30.3 million or 81.6% to $67.4 million. This increase was driven by $30.9 million from the contribution of the U.S. acquisition, and it was partially offset by a slight decrease of $600,000 in pre-acquisition revenues of Alithya. Higher value-added service revenues increased, while lower-margin service revenues decreased. The company’s strategy to offer an increasing proportion of higher-value services continued to unfold. In fact, in each of the markets, the expanded service offering attracts a growing number of new clients.

Furthermore, our gross margin continued to nicely improve on a sequential basis despite the summer months. Again, this was driven by a strong contribution of our U.S. acquisition and the continued transformation of our business.

Talking about our acquisition. The integration went very well and continues to prove it was a great decision and a perfect fit for Alithya. As we pursue the final steps of the integration process and progressively generate more cross-selling opportunities, the full potential of this acquisition will continue to materialize over the coming quarters. We are building the business for the long term and have clearly created an exceptional North American platform.

We were very enthusiastic to announce on October 1 the acquisition of Matricis, which specializes in developing solutions that enable businesses to accelerate digital transformation through the leveraging of data. The company designs advanced applications and systems using techniques derived from the Internet of Things, artificial intelligence and operational intelligence. I will provide more details on the strategic value of this acquisition later on this call.

This acquisition is perfectly in line with the philosophy of our growth strategy. We are looking for targets that are scalable, accretive to profitability in the short and long term and larger expertise with the ultimate objective of better serving our clients. We have a strong pipeline of potential targets, and we are determined to pursue our acquisition road map with discipline.

I take the opportunity to mention that we recently divested our small U.K. operations, which was part of the Edgewater Technology acquisition. Because of its size and geographical location, it would have been — it would have required significant investment to scale it in the short term. We therefore decided to proceed to its sale to a local partner. This was a very good outcome for Alithya, the U.K. customers and the employees.

On a positive note, we were honored late October with the 2019 Employment Creators Award for the Montréal region. The award recognizes Alithya’s contribution to creating the most jobs in the metropolitan region during 2018. With the current employment situation in the IT industry, we are very proud to be recognized as one of the companies who performed the most to attract efficiently new employees.

Claude will now review our Q2 results and financial position. Claude?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [4]

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Thank you, Paul, and good morning. Since Paul has already covered our top line growth, I will now focus on some profitability and balance sheet metrics. Please turn to Page 4.

Gross margin more than doubled in the second quarter, increasing to $20.7 million compared to $7.7 million in the same quarter last year. The significant growth was driven by the highly accretive U.S. acquisition of last year and our continuing move to higher-value services. As a percentage, gross margin increased to 30.7% from 20.8% for the same quarter last year, representing the fourth consecutive quarter of sequential increase in gross margin percentage.

Gross margin related to the U.S. acquisition remains strong, while pre-acquisition gross margin of Alithya continues to show good improvement both on a year-over-year basis and on a sequential basis. The strategy of the company to move towards higher-value services as well as the increasing use of permanent employees as compared to contractors also contributed to the increase in gross margin.

In the second quarter, SG&A expenses reached $18.6 million, an increase of $10.6 million, of which $8.8 million is explained by the U.S. acquisition. Excluding the acquisition, the increase is mainly due to the employee compensation costs and professional fees related to the rise in corporate expenses associated with our expansion and becoming a public company. That was partially offset by a decrease in occupancy costs of approximately $0.5 million due to the adoption of IFRS 16 regarding leases. Of note, on a sequential basis compared to the first quarter, SG&A decreased from $18.9 million by 1.9%.

With respect to our adjusted EBITDA, it more than tripled in the second quarter compared to last year from $0.9 million to $3.2 million. This increase was driven by the contribution from the U.S. acquisition, increased margins from higher-value business and the positive impact of IFRS 16. This was partially offset by a combination of recurring and nonrecurring expenses associated with becoming a public company and expanding the business as well as an increase in our insurance costs.

On an absolute dollar basis, our adjusted EBITDA has increased sequentially for the past 4 consecutive quarters. It is our stated commitment to continue this trend over the short, mid- and long term.

We reported a net loss of $2.3 million or $0.04 per share compared to a net loss of $2.1 million or $0.09 per share for the same period last year. I point out that this quarter’s net loss of $2.3 million must be viewed in relation to the $2.5 million of amortization of intangibles coming from successful previous acquisitions, which is a noncash element.

As shown on Slide 5, one of the key indicators which underline well the potential of our growth strategy is our gross margin, which again increased significantly since last year from 20.8% to 30.7% this quarter.

Now turning to our liquidity and financial position on Page 6. Cash flows from operating activities used $0.6 million in liquidity in the second quarter, an improvement versus a use of liquidity of $2 million last year. Cash was mainly used to invest in capital expenditures for $0.4 million. As a result, we ended the second quarter, again, in a very solid financial position.

At September 30, 2019, we had $8.3 million of net bank borrowing, which is bank debt minus $18.1 million in cash, short-term deposits and restricted cash. This compares with a net bank debt of $8.7 million at the end of fiscal 2019. Please note that the terms of our revolving credit facility classify it as a long-term debt as per IFRS.

If we take a moment on Page 7 and look at the evolution of our revenues and profitability, we have more than doubled the size of the company in just the last 3 years. Despite that significant growth and the fact that we became a public issuer, which put notable pressure on our costs, our adjusted EBITDA is on a positive trend.

I will turn it back to Paul.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [5]

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(foreign language) Thanks to the solid execution of our strategy we initiated a few years ago, Alithya is now a company over 2,000 professional with a solid North American platform and a healthy presence in Europe. We are on our way to become one of the leaders in the digital transformation industry. The 8 acquisitions we concluded, detailed on Page 8, expand our platform and allow us to offer broad service offerings. As the second largest system integrator in Canada and with a strong presence in the U.S., we now have access to larger clients and more complex projects like never before.

Turning to Page 9, the last acquisition. Matricis is a good example of a transaction that creates synergies with our service offerings and geographic reach. The company employs approximately 40 data scientists, engineers and technology professionals who design advanced applications in the system using techniques derived from the Internet of Things, commonly known as IoT. They also offer artificial intelligence, or AIoT, an upcoming technique combining IoT and artificial intelligence, as well as operational intelligence services. Essentially, what Matricis does is to connect systems between each other so that companies can make the most of their data. To do so, they are using a series of state-of-the-art platforms and technologies.

As shown on Slide 10, Matricis brings a specialized and complementary expertise to our portfolio that is in growing demand from our customer base. This provides us with multiple new high-end cross-selling opportunities to better support our customers and participate in the market bound to increase exponentially in the coming years. For example, they connect legacy systems with ERP, EPM and CRM systems so that data can flow and be used seamlessly. This is an expertise of high interest to our existing clients and the industry in which we operate.

Moving to Page 11. Matricis has developed specialized services and solutions applicable more specifically to the financial services, health care and manufacturing sectors, 3 of our priority sectors. Their expertise will allow us to offer even more sophisticated add value services to our clients in these verticals.

As you can see, they fit perfectly into our strategic framework, illustrated on Page 12, as the company responds specifically to our priorities, their services allow us to broaden our offer in the value chain to support our growth in the current geographic markets where we are present and is supported by their best-in-class professionals.

Now turning to Page 13. We are committed to pursue our strategic plan, aiming at rapidly increasing our scale with strategic acquisitions and organic growth while providing our investors, partners and stakeholders with growing return on investment and continuously increasing employee engagement.

In conclusion, going forward, we will continue to increase our scale through organic growth and judicious strategic acquisition in order to double the business over the next 3 to 5 years. We have a very healthy pipeline of potential acquisition and remain focused on our proven approach in completing the right ones. We are looking to expand our footprint in North America and to increase our service offerings. Leveraging capabilities and creating synergies between our teams is also our priority as we pursue the integration of our acquisitions. All this to say that we are well positioned to deliver on our long-term vision of becoming a North American leader in strategy and digital transformation.

We will now be pleased to answer any questions you may have. Simon?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Deepak Kaushal with GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [2]

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Paul, Claude, just wondering if you could give us some more color on the organic growth picture in the core business as well as for the U.S. acquisition. What would be the proper comparables year-over-year?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [3]

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Sure. Well, if you go back — thanks for the question, Deepak, first of all. If you go back when we announced this deal, our plan for the U.S. for this year was to be flat. And when we said — we said was we expected the Microsoft business to grow and some restructuring in the Oracle business, and that’s exactly what happened. So if you look from an organic perspective, our Microsoft business is growing double-digit in the U.S., and that’s offset by the changes in the restructuring that we’ve done in the Oracle business. So that’s on the U.S. side.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [4]

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Okay. And how about the Canada side?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [5]

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So — and on the Canada side, there are 2 things that are happening. One is at the beginning of the year, we had some customers that made some significant changes in how they were operating where we didn’t lose market share, but they changed their model. But we leveraged that and then basically have shifted our business. So we’ve reduced the lower-margin business over the past year and increased the higher-margin business, which have offset each other. So if you look from an organic growth perspective, we have a very good organic growth in the higher-margin business, and it’s been offset by the lower-margin business that we’ve reduced.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [6]

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Okay. And are you able to give us a sense of — pardon me?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [7]

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I said that’s why you’re seeing the gross margins increasing year-over-year significantly.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [8]

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Yes. No, it’s a good increase on gross margin side. But on the organic growth side, I mean, can you give us a sense of a metric like intuitively, do you feel like you’re growing at a mid-single digits or double digits? Because I think in the past, you were kind of signaling a double-digit type of growth on the organic side.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [9]

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Well, our objective is — yes, our objective is always — we’re targeting in the high single-digit in terms of growth. That’s our target. So we work towards that. Now some of the growth that we’ve had in the right areas have been offset by the reduction in the lower-margin business, but that’s still our long-term objective is in the high single-digit.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [10]

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Okay. Okay. Great. One of your peers seem to be signaling a shift from — in demand from SI&C to more of a managed service or end-to-end service with the potential risk of a slowdown in the next several quarters. What are you seeing from your customers? What’s your kind of view on the macro front and your demand outlook for the next 6 to 12 months?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [11]

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Good question. So we’ve added, in the double digits, new customers in the past quarter. So we’re seeing — we’re not seeing demand slow down. We are seeing the decision cycle getting longer, but we’re not seeing the demand slow down. So for example, we have some new clients that we’ve signed and the projects haven’t started yet. We’re waiting for them to start, but the contracts are signed. So for us, that’s very positive. Start cycle seems to be longer. So I don’t know if that’s a sign, but we’re watching it closely.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [12]

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Okay. Okay. Sounds good. I have one more kind of housekeeping question, and then I have a kind of a bigger picture question. I think in the past, you guys have given us some guidance on expected run rate for revenue $300 million to $320 million and adjusted EBITDA run rate $22 million to $24 million on a pro forma basis. I don’t see that in the filings. I don’t know if I missed it. Is that something you’re moving away from? Or can you give us an update on that kind of target?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [13]

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Yes. This is Claude speaking. The — as we just — we disclosed last quarter in our press release, we mentioned we would stop making references to specific short-term numbers. So what you’re referring to, which dates back to over a year ago when the U.S. acquisition was blooming, was becoming a shorter and shorter-term metrics. So we announced we would stop making reference to it. What we can say, however, is that the assumptions supporting those objectives in the context of our overall 3 to 5-year strategic plan have not materially changed.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [14]

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Okay. Okay. And then — okay. And then just one last question for me, if I may, more of a bigger picture question, Paul. On the Matricis, you mentioned one of the strategic segments you’re going after is health care. Can you give us maybe a little bit more context on the history in the health care industry and where you’re seeing the opportunities in particular for that industry segment? And is it a big part of the business historically?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [15]

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Yes. So yes, thanks for the question. So historically, health care has been underfunded. And that’s everywhere, not just in Canada where we’re seeing it in their jurisdictions. So there’s a lot of legacy systems out there. We’re seeing a pickup in the desire to replace those platforms, so the ERP business, and also in terms of access to data. And in some jurisdictions in health care, they have massive amounts of data. And Canada is a good example because the way the health care system works, all the data is centralized, and there’s tremendous value in that data. What we’re seeing is the providers are trying to capture that data to monetize it, so to provide better service, to be able to shape how they deliver the services and so on and so forth.

So the Matricis is already involved in several hospitals in Québec in extracting that data and connecting it to the ERP systems and providing management with value. So we see tremendous opportunity for that and demand for that in all of our jurisdictions, so also in the U.S. So basically, even though they were small in terms of size, very strategic in terms of value because it’s something that we can rapidly deploy to our other operations.

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Operator [16]

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Your next question comes from the line of Amr Ezzat with Echelon Partners.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [17]

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Paul, just following up on Deepak’s question with regards to the dynamics in Canada. Sequentially, you’re down like 10% or 11% from last quarter. And I understand obviously that a part of it is the usual summer seasonality. But can you maybe quantify how much of it is seasonality versus project delays? Then do you have like any color for us like with the Matricis acquisition on your growth profile in Canada going forward, i.e., when do you expect to see it start contributing to sales growth? And I do understand that, like, the margin growth is impressive, so congratulations on that.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [18]

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Thanks, Amr. So on the seasonality, it is significant. We have the summer months where — a lot of vacations. So I’d say the majority is that. The rest is the slowdown or delayed start, I should say, in 2 large projects. One is in Ontario, and the other one in the U.S. So those 2 projects alone, we would have been where we wanted to be. Now they’ve started since then. So we’re confident for going forward. But those 2 things were the major — the majority of the impact in the summer quarter. That was the first question.

The second one was on Matricis.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [19]

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Yes, like, not Matricis, but Canada in general, like including Matricis, like where — when do you expect to start seeing like your — like Canada contributing to sales growth, I guess?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [20]

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Well, if you look at Canada only, so we did have growth in Canada. And again, it depends on how you look at it. So for example, there’s a piece that came from our U.S. acquisition that is based in Canada. We have grown that since we’ve acquired it. So if you look at growth in Canada, there is growth. So one of the challenges that we have, and that’s going to change after the 1-year mark, is showing our revenue to you and explaining better by jurisdiction rather than by the old Alithya and the old acquisition and these things. So they’re integrated now. So going forward, our plan is to show by geography and to give you more visibility into that so that you actually see where the growth is coming from. And right now, because of the way we’re showing it, I don’t think helps. So that’s one of the things we’re going to change.

On Matricis, I’d like to get back to them because it is relatively small in terms of size. So before you see a significant impact coming from that, it’s going to be — it’s not going to be next week. However, we do see that as a way to impact the rest of our business everywhere. So for example, let’s talk about health care. We’re already in the health care market in the U.S. So — and we work at the executive level on the financial reporting and so on and so forth. So having the access, right, the ability to connect to the data on the ground, whether it’s in the health care, the other area that we see significant potential is in manufacturing. As you know, we’re a leader in the ERP and discrete manufacturing because of our Microsoft relationship. So again, we see tremendous potential there to integrate that with our existing offering to be able to provide even more data to our manufacturing customers as well. So the challenge is going to be growing that business exponentially in the coming quarters.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [21]

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Okay. That’s helpful. On Matricis, I’m not sure if you could share with us at a high level their revenue and profitability profile. Then can you speak to us about the M&A landscape? You see a lot of opportunities for tuck-ins that are much smaller but presumably very profitable.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [22]

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Yes. So we did not disclose on Matricis, but to give you an idea, so this is — it’s basically 40 people. And we published how much we paid for it, and we paid the same multiples that we paid traditionally. We’re in the 5 to 7x in terms of EBITDA of what we pay. And we followed our same approach of the 50-50 cash and stock to make sure that the people stick around and have an incentive to grow the business. So that works.

If you look at what we have in terms of potentials out there, there are many very nice, very profitable companies in that range. So we haven’t changed our metrics in terms of what we’re ready to pay. And there are many nice opportunities out there. What we like about the high margin and what I’ll say smaller, I’ll say, let’s say, $5 million to $30 million in revenue, what we like about those when they’re very profitable, they’re very simple to integrate, right? Because if it’s — the business is very profitable, we focus a lot more on the growth of the combined entities than restructuring the acquisition as we did with the U.S. acquisition where we had to spend a lot of time in restructuring instead of focusing on the other side. So those provide a nice opportunity.

That being said, there are some larger ones out there as well. And we are exploring those as well. So we — as we said before, our intent would be to try to do with smaller and larger ones on an ongoing basis. But we have a pretty healthy funnel right now of nice opportunities. And we have the balance sheet to do that. So again, we’re very disciplined in how we do it. When they meet all of our criteria, we can pull the trigger very fast.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [23]

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When you say large, are we talking like Edgewater large, larger, smaller?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [24]

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I’d say $50 million and above is what I could qualify as larger.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [25]

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Great. Maybe one last one, on your gross margin performance. Again, like it’s moving in the right direction, and in your prepared remarks, you said that it’s at least partly because of more higher value-added services that you guys are doing. I’m wondering if you can share with us at a high level when you’re looking at your current business how much of it is what you call high-value services as a percentage of the total revenues and where can you drive this number to.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [26]

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So I’ll give you a very concrete example. Last year, we had a very large contract with one of our key customers, which was in the EPM business. It was a multimillion dollar contract. Because we did not have that capability over a year ago, we subcontracted it. So you have a multimillion-dollar contract that we’re subcontracting at a very low margin. And when I say that, I mean, it’s basically — it’s less than 10%, right? So you have a big chunk of revenue with a very low margin that impacts the overall margin of the business. Since the acquisition, our U.S. acquisition, we’ve actually replaced that subcontractor. So we have a much smaller revenue coming from that piece of business but at a margin that’s in line with what we aim as a business.

So basically, with much less revenue, you’re actually generating more margin on a dollar perspective, percentage-wise as well, but even on a dollar basis. So we much rather that business for many reasons. Everybody is aware of the challenge in finding qualified people and technology. That finding the right people, the good people want to work on the cool projects. And they want to work on the nice projects, the ones that are with the newer technologies and the ones where basically we add more value. So if you look in terms of a focus of the business, I’d much rather focus on higher-value business that’s generating more margin, that is easier to attract people and retain people than go after the high-volume, low-margin business that basically has a very high churn.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division – Analyst [27]

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That makes a lot of sense. Then if you’re looking at your current revenue run rate, how much of it is, like, I guess, contracted revenues that you guys can still bring in?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [28]

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It’s less and less. So if you look from a permanent employee perspective, right, so we always said we were aiming for the 2/3 to 3/4 of our business coming from our own employees, our permanent staff, and we’re in that range today. So we’re very confident that we have the right mix today.

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Operator [29]

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Your next question comes from the line of Gavin Fairweather with Cormark.

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Gavin Fairweather, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [30]

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We talked a little bit about the shift in mix in the Canadian business and how that’s playing through to higher gross margins. Maybe you can just chat about — when you look at your backlog and, in particular, those 2 projects kind of starting up, it sounds like in Q4, whether you think that, that can continue to play through in the quarter you have in terms of pushing that gross margin higher.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [31]

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Yes. So when we sign these larger projects, typically, they’re multiyear, multi-quarter projects. So they take more time to get started. But once they get started, we know that they’re going to be around for a while. So yes, the ones in particular talking about our longer-term projects.

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Gavin Fairweather, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [32]

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Okay. And then maybe just shifting gears into the U.S. Maybe you can just chat a little bit about the Oracle business of Edgewater and the restructuring efforts and kind of how far through that process you think you are towards getting to the point where you’re starting to see the revenue climb in more cloud-based projects.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [33]

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Yes. We said we’d get it done within the first year of the transaction. So we’re hitting the 12 months now. So the bulk of the changes have been done.

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Gavin Fairweather, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [34]

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Okay. And then just on the other side of the U.S. business, the Microsoft piece. It sounds like that business is performing kind of quite well. We have been seeing some softness in kind of U.S. manufacturing gauges. So do you think that, that kind of performance can continue when you look at your backlog?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [35]

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Yes. So from what we’ve seen, we don’t see any signs of slowdown in that area. It’s been a very good year there, both in the U.S. and in Canada. And we’re not seeing any signs of slowdown. And actually, the Matricis acquisition, as I was mentioning before, we see a lot of potential synergies between that new acquisition and that business. And we — again we — again, made the inner circle at Microsoft. So we’re bullish on that business right now.

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Gavin Fairweather, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [36]

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Okay. Great. Good to hear. And then maybe one for Claude. So nice step-down in OpEx once again this quarter. I realize we’re layering in Matricis starting October 1. But if we put that to the side, is this kind of a good run rate for Alithya plus Edgewater, just assuming that most of the synergies are now taken out?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [37]

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You mean, second quarter?

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Gavin Fairweather, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [38]

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Yes. So if we look at the $18.2 million, I think, in cash operating expenses in Q2, I’m assuming that most of the Edgewater synergies are kind of taken out of that number and that would be a good run rate for the business kind of pre-acquisition. Is that right?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [39]

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Well, we have elements to hope for lower numbers. We are still having, as we said, unusual — unusually high professional fees. Now we have no number of projects underway. So we will need to see how that shakes out. But we have elements to believe expenses may be trending lower somewhat. And we do have some savings remaining to be realized in the U.S.

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Operator [40]

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Your next question comes from the line of Andrew McGee with National Bank.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division – Associate [41]

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My first question is regarding the U.S. side of your business. I know you’re targeting a lot of higher-margin contracts, but I wonder if there’s — I’m wondering if there’s any active effort in running off some of the lower-margin contracts and whether that’s something that you’re actively assessing.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [42]

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Well, we have been doing — you’re talking about our own lower-margin contracts? Or…

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Andrew Brice McGee, National Bank Financial, Inc., Research Division – Associate [43]

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Yes. So just on the Edgewater side and whether you’re evaluating the portfolio of contracts that you’ve acquired and whether or not you’re taking kind of an active lens in running off just some of the lower-margin work.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [44]

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Yes. So that was looked at and was part of the integration plan that we put in place.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division – Associate [45]

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Okay. And is there more to be done?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [46]

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In the U.S., most of it’s done. So the rest will be — it won’t be significant.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division – Associate [47]

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Okay. That’s good. And then my second question is just in relation to some of the integration efforts and as we think about your operating expenses going forward, I’m wondering if there’s any seasonality that we should be taking into consideration.

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [48]

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There is some but not so much as per the operating expenses. Operating expenses, as Paul explained, in line with the decrease in top line, are somewhat lower, in terms of the corporate SG&A is not so much of a factor. But there is some of that, indeed.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division – Associate [49]

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Perfect. And then just lastly, I know you’ve kind of touched on the acquisition landscape. But I’m wondering if you can kind of give us a sense of the size of the funnel that you’re looking at in — maybe in comparison to what you might have been looking at in the last year and whether or not that, that’s targeting any certain geographic landscapes or whether or not it’s more technology focused.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [50]

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Okay. If I compare it to a year ago, it is significantly larger. And the reason is simple is since going public, the visibility that we’ve received has been significantly higher. We receive several teasers on a weekly basis. We pass on 9 out of 10 of them. The reasons why we pass, we have a very — as I mentioned before, we have a very disciplined approach. So we have parameters that we look at in terms of what we’re looking for. Our target right now is North America to grow scale. There’s tremendous opportunity for us to grow scale in North America. Then it goes by practice. So if you have the practices that we have today, we want to scale those. So for example, Matricis, even though was smaller in terms of size, to us, it was very strategic in supporting the existing practices that we have today and the existing geographies. So we look at the geographies, we look at the practices and we look at the customer base. So we’re also looking to penetrate new markets and new customer base and customer bases.

So we have a pretty healthy funnel in terms of — it’d be difficult to quantify the size for you, but there’s a lot of companies out there. And if anything, I think the current concern, I’d say, out there, what will happen, will there be a recession, no recession, whatever. I think it’s playing in our favor.

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Operator [51]

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Your next question comes from the line of Suthan Sukumar with Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division – Principal [52]

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In the opening remarks, you guys talked about having strong customer wins this quarter. Just curious to know if there are any particular pockets of strength with respect to end-to-end markets or regions or platforms that were factored for the booking strength this quarter.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [53]

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It was actually in all of our geographies. Many new logos, which was good, a couple of very large ones, and it’s in most of our practices as well. So it’s both on the ERP side then on the custom application side and on the government sector as well. We’ve actually closed a lot of stuff there. As I was mentioning earlier, the thing that I see in terms of what’s different, if somebody was asking me what has changed, I’d say the closing cycle is longer, but we’re still signing up a fair amount of new customers, which is very good.

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Suthan Sukumar, Eight Capital, Research Division – Principal [54]

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Okay. Great. And just with respect to your recent acquisition, I mean, it sounds like you guys gained some acquired IP as part of that acquisition. What are the plans to kind of drive commercialization for that? As I understand, it is quite early days on that front. And how should we think about the role of IP as part of your client engagements going forward?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [55]

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So — thank you. So IP is something that we’ve mentioned that we are looking at and taking a close look at. IP makes sense if you already have a significant penetration in a given market. So for example, with Matricis, they have IP around IoT in health care. So if you look at the market that they were addressing, which was relatively small, which was basically in Québec, but despite that, they’ve done very well. So now you expand that to the rest of Canada and the U.S., the potential market is significant.

So it’s something that we’re reviewing as part of that acquisition is how do we leverage that IP in terms of growing not just the IP and the recurring revenue that comes with it but also the services around it. And it’s something that we look at in the potential targets that we’re acquiring as well, is if they have IP and is it IP that we can redeploy to the rest of the organization. So it’s something that — it’s on our radar, and we’re looking at it.

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Suthan Sukumar, Eight Capital, Research Division – Principal [56]

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Okay. No, that’s helpful. And then maybe just to touch on an earlier question with respect to M&A, more along the lines of how your focus or — rather how your focus has kind of changed over time with respect to end markets or platforms or practices. Has your M&A strategy or focus evolved over the past few periods with respect to some of these other focus areas? Just curious to know if there’s certain areas that are becoming more interesting over time.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [57]

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It hasn’t changed. It’s evolved, but it hasn’t changed. What evolves is, for example, we acquired Matricis in IoT here. So my next acquisition will not be focused on IoT here. We have that piece. We’ll look at expanding it. So as we add the pieces, it evolves the bigger map that we have. But other than that, the target areas have not changed.

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Operator [58]

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Your next question comes from the line of Maher Yaghi with Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [59]

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Paul, you’re talking about your gross margin improvement year-on-year, but when I look at the contribution and that gross margin improvement from 20.8% to 30.7%, I kind of estimate that close to 8% to 9% of that is coming from the acquisition of Edgewater. So I’m trying to figure out what the gross margin contribution from the improvement in higher-margin business is helping that number because it seems, to me, a lot of it is all from Edgewater.

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [60]

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Okay. So it’s a bit — we do not provide, as you know, specific numbers on each. Directionally, what we said is we — our margins remain very good in the U.S. from historical levels. So — and in Canada, we did see an improvement, a notable improvement, both sequentially and year-over-year. So that’s a fact in the old Alithya business. So maybe you…

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [61]

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So your old margins in Canada were running at 21%, let’s say, to 22%, 23%. And when you acquired Edgewater, it went to 28% the first quarter in December. And now it’s at 31%. So would you say 1% to 2% margin improvement in gross margins due to Canada?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [62]

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No. Maybe your assumptions, you just mentioned, the old averages were precisely that averages. And if you look at specifically the quarters we’re referring to might have been lower. So again, a bit hesitant to provide specific numbers. The fact remains sequentially and year-over-year, second quarter, for the old Alithya segments, we see a nice improvement in gross margin, which we see as a fundamental directional that we’re following. And in the U.S., that’s providing specific small changes that might have occurred, we remain with very good margins in the U.S. acquisition.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [63]

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Okay. In terms of the revenue growth, when I look at or — well, let’s say, kind of organic, but geographical revenue growth. If I look at the Canadian business, Canadian-generated revenue year-on-year, it’s running at close to minus 2% to minus 3%. When do you feel or do you see that growth rate turning positive? You alluded to — that some of the old lower-margin contracts that you are running there in Canada is coming — is close to what you’d like to see it in terms of percentages overall. So when should we expect the revenue growth to turn positive in Canada geographically generated revenue?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [64]

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Thanks for the question there. So if you look at the different businesses in Canada, so we have many different businesses. We’ve got the government business in Québec City. We’ve got business in Ontario. We’ve got different businesses in Montréal. Some of those are growing organically. So again, we’re talking averages and numbers, but some of those business are growing organically, which is a good thing. And we’re also adding new customers that are offsetting the reduction in the lower-margin business.

So again, we see growth in some areas of the business that are offsetting the reduction in the larger contracts that were lower-margin. So we see that as a positive. We — our objective is to grow high single digits in the business, and that’s what we target. That’s what we go after. So as soon as these things finish off the lower-margin business, we expect to see growth coming back to our objectives.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [65]

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And how far are we from that happening? Because you probably have a plan and…

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [66]

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I can’t give you a date, Maher.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [67]

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No, no, I’m not asking for a date. I’m trying to figure out — that runoff that you’re talking about is — has been going on for a few quarters. I’m trying to figure out when should we see stabilization in that runoff so that we can see the growth that you’re talking about.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [68]

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So again, I’ll come back to what I said last quarter. So we’re running this business for the long term. Our plan is to double the business in the next 3 to 5 years. It’s going to be a combination of organic and acquisitions. The quarterly changes in the mix of business is going to have a short-term impact. Over the long term, we’re not going to see that impact. So we’re really focused on the long-term plan. And the last thing we want to do is to have to worry about, is it going to be next month or this month or whatever. We have a very good plan. We’re tracking to it, and we’re going to stick with that long-term approach.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [69]

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Okay. And in terms of the U.S. business, again, I’m talking U.S. generated geographically revenue run rate year-on-year. It’s — a couple of quarters ago, you had the growth turning positive nicely. And you mentioned earlier on the call that the Microsoft business continuing — is continuing to grow double-digit. So can you talk about what happened to the Oracle business, let’s say, from 2 quarters ago that now we’re seeing a negative number year-on-year? So what’s happened in the Oracle business? And what are you doing to fix it?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [70]

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Sure. So let me give you a bit of color on that. So again, we closed the transaction a year ago. Our expectation at the time was flat revenue in the U.S. year-over-year. And when we said that, we explained because we were expecting the Microsoft business to grow and then the Oracle business needed some restructuring. I think we were pleasantly surprised in the beginning of the year to see the Oracle business doing better than we expected. However, based on what we’ve seen in the last quarter, it’s been pretty lumpy. And I hate that word, but reality is that some of the projects were started late or later than expected, whatever.

So we looked at that business. It’s being restructured. We didn’t wait for the end of the quarter to make changes. So those are already — have already happened or happening. So going forward, we expect that to be different. But again, we did make the inner circle again in terms of the top providers on the Microsoft side. So you’re not seeing that because you see a number, a consolidated number, but we’re seeing significant growth on the Microsoft side, and we’re confident the Oracle business is going to catch up eventually.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [71]

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So when you say you did some restructuring on the Oracle side, are you talking headcount reduction or change of strategy in terms of attacking new channels, getting new channel partners coming in? What have you done exactly?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [72]

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Well, we shut down some businesses. So at the time of the acquisition, there were different businesses within the Oracle practice. We shut down some lower-margin businesses or some underperforming practices. We did a lot of things on that, restructured the sales, the sales team and sales approach. So we’ve done a lot of things around the Oracle business. And that’s why I think we’re confident going forward, but we were expecting the first year to be rocky as we make those changes.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [73]

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Okay. So the restructuring you talked about here that you did recently, is that going to affect your Q3 results negatively? Or it should not have an impact on top line generation?

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Claude Thibault, Alithya Group Inc. – Senior VP & CFO [74]

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No, it should not.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [75]

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Okay. My final question, on your M&A strategy. You talked about what you’re looking for. Can you talk about maybe the valuations of the companies you’re looking at? Has it changed recently? You — you’re looking to pay in cash and stock or cash only? And maybe just what you’re hoping to see in the next year in terms of M&A — in terms of capital deployed?

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [76]

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So first thing is hope is not a strategy. So we have a very disciplined list of the criteria we look at. Valuation is one of them. We haven’t seen any change in what we’re going after. So we’re still in the 5 to 7x EBIT the range is what we’re paying. We’re looking for high-quality companies where the management wants to stick around. And that basically narrows the field to some very — to what I call the select few. There’s a lot of companies out there just trying to cash out and sell off. That’s not what we’re looking for. We’re not — it’s not for a lack of targets. There are many targets out there, some very nice potential acquisition that would fit very well into our platform, and it’s still a mix of cash and stock.

Now given where our stock is trading at and given our balance sheet, our incentive is to do more cash than stock so that they’d be less dilutive right now. But we haven’t changed the approach. We’re still keeping the same principles.

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Operator [77]

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(Operator Instructions) Your next question comes from the line of Deepak Kaushal with GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division – Director and Technology & Communications Analyst [78]

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Just, Paul, I wanted to ask you about your European strategy. I know it’s a small part of your business and now you’re exiting the U.K. Just some thoughts on what you think of Europe and what your plans are for that side of the business. And that’s it.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [79]

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Again, thanks for the follow-up, Deepak. And again, just to be clear, the U.K. was 9 employees. So it was not a large business, and we wanted to make sure that those people had a good place to land, that the employee — the customers would be looked after. So we actually sold it to a partner of ours that we had locally over there. So everybody is happy. It was more of a distraction.

Our European operation in France is doing very well. It grew double-digit in the past year and is online to grow double digits again this year. We’re very happy with the team that we have there. We said we’d look at Europe eventually, but short term, our target is North America.

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Operator [80]

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And there are no further questions at this time. Ms. Caron, I turn the call back over to you.

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Gladys Caron, Alithya Group Inc. – VP of Communications & IR [81]

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Thank you. So thank you for being on this call today, and we look forward to speaking with you at the next third quarter call. Have a nice day. Thank you.

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Paul Raymond, Alithya Group Inc. – President, CEO & Director [82]

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Thank you, everyone.

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Operator [83]

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Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.



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