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Edited Transcript of ALYA.TO earnings conference call or presentation 13-Feb-20 2:00pm GMT

Q3 2020 Alithya Group inc Earnings Call

Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Alithya Group Inc earnings conference call or presentation Thursday, February 13, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claude Thibault

Alithya Group Inc. - Senior VP & CFO

* Paul Raymond

Alithya Group Inc. - President, CEO & Director

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Conference Call Participants

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* Amr Ezzat

Echelon Wealth Partners Inc., Research Division - Analyst

* Deepak Kaushal

Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst

* Gavin Fairweather

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

* Maher Yaghi

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

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

* Suthan Sukumar

Eight Capital, Research Division - Principal

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Alithya's Third 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 Thursday, February 13, 2020.

I will now turn the conference over to Pierre [Bouchet], President at [Maison Resonne]. Please go ahead.

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Unidentified Participant, [2]

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Good morning, everyone. Thank you for joining us for the Alithya's Third Quarter Fiscal 2020 Results Conference Call. The press release and MD&A with complete financial statement and related notes were issued earlier today and are posted on our website. The related webcast presentation can also be found on our website in the Investors section.

Presenting this morning are Paul Raymond, Alithya's President and Chief Executive Officer; and Claude Thibault, Senior Vice President and CFO.

Following their comments, we will open the call for questions.

Before we begin, I'd like to specify that this call is intended for the financial community. So please be advised that this will contain statements that are forward looking and subject to a number of risks and uncertainties that can cause actual results 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 some indicators that are non-IFRS measures. Please refer to our MD&A for more details.

I will now turn over the call over to Paul.

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

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Thank you, Pierre. Good morning, everyone. (foreign language). I'm very happy to be with you today to discuss our latest results. And we will dive into numbers in just a minute, but I want to highlight what I feel are 3 key takeaways from the quarter and how it fits into Alithya's growth strategy more broadly.

First, the uptrend in the gross margin continued. Our gross margin remains one of the highest on record. Second, both the adjusted EBITDA and adjusted margin reached their highest level since going public. And lastly, as we scale, we continue to drive integration and operational synergies and savings. Since the acquisition of Edgewater, our SG&A has been declining in absolute dollars and percentage of total revenue.

During the third quarter, Alithya was very active on the acquisition front. The acquisition of Matricis in October 2019, of Travercent in December 2019 and the addition of Askida post quarter end, will clearly accelerate our growth going forward and reinforce our platforms on both sides of the border. In all, these acquisitions represent a total value of close to $50 million, which we financed with a combination of debt and shares.

During the quarter, we also divested our small U.K. operation. Revenues for the quarter were up 13.9% to $66 million. Third quarter revenue growth reflects the contribution from past acquisitions and partially offset by reduced spending at a few large Canadian customers, the Oracle legacy products and services, and to a lesser extent, the sale of our U.K. operation.

In Canada, we've been working hard to mitigate some of the decline through growth with new and existing clients, supported by the increase of higher value-added services and the commercial benefits from our larger scale. In Q3, we added 55 new clients spread across all our geographies. This is a combination of new contracts, new master service agreements and new clients from acquisitions.

Finally, we are proud to announce that during the third quarter, Alithya was recognized with a Customer Service Excellent Award (sic) [Customer Service Excellence Award] presented by the Organization of Canadian Nuclear Industries, or the OCNI. The award recognizes Alithya's ability to constantly live up to the customers' expectation, with consistent attention to their needs and an excellent record for on-time and on-budget project delivery.

Alithya has developed a distinguished reputation as a key contributor to the Canadian nuclear industry and the award is particularly meaningful as it is grounded on testimonials from Alithya's customers.

Claude will now review our third quarter results and our 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 drivers, I will focus on some profitability and balance sheet metrics.

Please turn to Page 6. Gross margin increased 22.6% in the third quarter, increasing to $20.2 million compared to $16.4 million in the corresponding quarter last year. As a percentage, gross margin increased to 30.4% from 28.3% for the same quarter last year, up 210 basis points year-over-year.

Gross margins benefited from the acquisitions of Edgewater, Matricis and Travercent as well as the larger contribution of higher value-added services. More specifically, our U.S. gross margin remained strong, while our gross margin in Canada showed improvement, both year-over-year and on a sequential basis, over the second quarter. As we indicated before and without factoring in acquisitions, the company's long-term strategy to move towards higher value-added services and increasing the use of permanent employees continues to drive gross margin higher over time.

In the third quarter, SG&A expenses amounted to $17.7 million, up 7.8% from $16.5 million last year. The increase can be mainly explained by the additional expenses from our acquisitions, which was offset by lower expenses from the divestiture of U.K. as well as certain nonrecurring items.

On a sequential basis, when compared to the second quarter of the current year, SG&A expenses decreased by 4.5% from $18.6 million to $17.7 million, again. Management continues to target decreasing administrative expenses as a percentage of total revenues, as consolidation synergies materialize and larger scale allows for more leverage. As such, during the third quarter, we identified and realized additional consolidation synergies and savings, which accounted for $0.8 million of expenses recorded in the quarter.

On a full quarter basis, meaning, if these reductions had all been realized at the beginning of the quarter, the total SG&A savings realized amount to approximately $1.1 million on the recurring quarterly basis. The acquisitions, combined with the growing contribution of higher value-added services, resulted in our adjusted EBITDA rising more than 166% in the third quarter from $1.3 million last year to $3.5 million this year.

Growth in adjusted EBITDA also reflects a positive impact of $0.6 million from the adoption of IFRS 16 on leases, which was partially offset by a combination of recurring and nonrecurring expenses related to being a public company and expanding the business.

Of note, both in absolute dollars and as a percentage, our adjusted EBITDA has increased sequentially for the past 5 quarters, as illustrated on Slide 6, from $0.9 million in the second quarter of 2019 up to $3.5 million this past quarter. The net loss in the quarter was $1.8 million or $0.03 per share compared to a net loss of $5.4 million or $0.12 per share for the same period last year. This improvement was driven by increased EBITDA, partially offset by increased amortization of intangibles and depreciation and decreased income tax recovery when compared to the same quarter last year.

Now turning to our liquidity and financial position on Page 9. Operating activities generated $8.1 million in liquidity in the third quarter, a marked improvement versus a use of liquidity of $9.7 million last year. Despite completing 2 acquisitions, representing a total value of over $30 million, we ended the third quarter in a very healthy financial position.

At December 31, we had $10.2 million of net bank borrowing, which means bank debt minus $23.3 million in cash, short-term deposits and restricted cash. This compares with a net bank borrowing of $8.7 million at the end of fiscal 2019. We now have $45 million in total long-term debt on a gross basis. Now back to Paul. Thank you.

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

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Thank you, Claude. As discussed on Slide 11, the acquisition of Travercent in December 2019 is an excellent example of our strategy in action. We were able to complete this acquisition and integrate it successfully by leveraging our existing U.S. platform. In addition to meticulous pre-closing planning, the operational integration process went smoothly because of the highly complementary and self-contained nature of this Travercent business with our U.S. operations. Travercent brings us additional scale in the U.S. health care sector and market-leading expertise in Oracle cloud-based ERP technologies, which will help offset the decline we are seeing in our Oracle legacy products and services. At this time, we estimate our U.S. Oracle cloud-based business represents approximately 75% of our U.S. Oracle portfolio.

It's a similar story with the acquisition of Askida, which we discuss in more detail on Slide 12. Again, our established scale made this acquisition easier to integrate operationally, which was compounded by the highly complementary nature of the Askida business to our offering. Askida gives us additional expertise in software testing, quality assurance and advanced application development and modernization, which we can leverage throughout our network. We are pleased to welcome the 110 professionals from Askida into the Alithya family.

It's also important to note that both these acquisitions are highly profitable and will be immediately accretive to our results. As you know, turnaround situations require much more integration time and it's not the case here. I want to finish with a few key takeaways on the last slide. We are focused, more than ever, on our 3- to 5-year growth objectives. We continue to expect gross margin expansion supported by acquisition, higher-value services, more permanent employees and scale. We have faced challenges on the organic front in Canada in the past year. However, we are actively working to add new clients, new higher value-added services and growing scale through niche acquisitions to reduce our exposure to IT investment cycles of large customers. The recent success with our acquisition program in no way deters us from the objective of resuming organic growth in the near term. It remains an integral part of our business plan, as demonstrated by the addition of dozens of new clients in the quarter. The acquisition of Matricis, Travercent and Askida have brought in annualized revenues of approximately $35 million. We end the quarter with a strong balance sheet and are well positioned to continue to pursue our acquisition strategy and to deliver on our long-term vision to become a North American leader in strategy and digital transformation.

We will now be pleased to answer any questions you may have, and I'll turn it back to the operator.

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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 Stifel.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [2]

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Can you hear me?

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

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Yes. Yes.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [4]

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Paul, I just wanted to ask you a bit about the Canadian market. You talked about reducing reliance on some of the major Canadian customers you've had in the past and diversifying your customer base. Can you talk more specifically about what's going on with those big Canadian customers? Is this the reduction a part of your shedding of the lower margin business? Or as part of this reduction changes in how they're procuring services from service providers?

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

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Yes. Thanks for the question, Deepak. I think my first comment I'd say on that is we're not losing any market share in those customers that we're talking about. It's really a variety of subjects. Some customers are changing. One has been very public in changing their approach, period. Others, to your point, some is a lower-margin business that we're shedding. And others is just the change in the buying cycle. Some of these projects with their large customers are very large, and of course, the decision cycle is longer and the start cycle is longer. We've been talking about this for a few quarters. So we haven't been waiting on the sideline for this to change. And instead, we've been very aggressive on the other customers and adding new customers. And as we mentioned last quarter in terms of new customers we added, and again this quarter, with 55 new customers we just added, we're pretty confident that we will catch up to that eventually.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [6]

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Okay. Is there any light at the end of the tunnel for some of these major Canadian accounts? Like, 6 months, 12 months?

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

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Like I said, we haven't lost any market share. Yes. we haven't lost any market share, so as the spending resumes at some of those, we're going to get our fair share. In the meantime, we're not waiting. So we're getting business in other places.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [8]

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Okay. Okay. Great. And just on the M&A front, between Matricis and Travercent, are you able to give us a sense of what percentage of your business is tied to the health care sector today, including those acquisitions that are outside Canada?

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

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Yes -- no, that's a great question, Deepak. In the U.S., I can tell you, pretty close. We had some health care business on the EPM side with the -- with our own existing Oracle pre-Travercent. So I don't have the exact number for that one because we didn't track it that way, we tracked it by practice. But Travercent was 100% health care. So it's -- they were very specialized in the health care sector. They're actually seen as the top provider of Oracle cloud solutions in health care. So kind of a counterpart to our Microsoft business that was top in process manufacturing. Travercent was very specialized. So we're very happy with that. And because of that mix now, 75% of our business, the Oracle business in the U.S., is now in the cloud space, which is the space that's growing the fastest. So we knew we had an issue with the legacy, as you've seen in past quarters as well in the U.S., and we knew this is going in when we acquired Edgewater. We've been very open about it. So we were looking for a way to fix the cloud issue and accelerate it, and Travercent was a perfect fit for that.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [10]

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Okay. And can you give us a sense of the natural growth rate of Travercent's business?

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

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It's been double-digit in the past.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [12]

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Okay. And then I had a follow-up for Claude. I'm just trying to understand the pro forma net debt position and leverage ratio, post Askida and given all the cash payouts for Travercent. I'm getting about $65 million. I think I might be a bit high. Can you give me a sense of what you're looking at in terms of pro forma, net debt, net debt to EBITDA?

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

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Well, we provided some details, you need to consider cash, obviously. So we tend to look at debt on a net basis. We had very high cash balances at the end of the year to pad for the holiday season. So our debt -- our gross debt level should be lower in absolute terms. So I'm getting to a lower number than you, actually. So we're more around the $40 million range.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [14]

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Okay. And can you remind -- sorry, go ahead.

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Claude Thibault, Alithya Group Inc. - Senior VP & CFO [15]

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No, go ahead.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division - Director and Technology & Communications Analyst [16]

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No, I just -- and so $40 million, and then can you remind me what kind of leverage ratio cap you're comfortable with? Is it 2.5x or 3x?

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Claude Thibault, Alithya Group Inc. - Senior VP & CFO [17]

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Yes. So total debt for us should be between 2 and 2.5x. We're not comfortable going much higher than that, unless we would have significant synergies and easy synergies, fast synergies, then we could stretch it for a temporary period. But otherwise, we're shooting for 2 to 2.5x, and we don't need to go much higher than that. That's times EBITDA. And as you know, we're going after profitable acquisitions. So every time we write a check, usually, it comes with additional incremental EBITDA. So our multiple doesn't move that much higher. Our recipe, as you know, is 50-50 shares versus stock. It will depend on the situation and the shareholder profile of the target. But if you go 50-50 and even the cash portion tends to be 50% on closing and 50% on the later dates. So the impact on cash on closing is very limited from that perspective. So the leverage of our available borrowing is significant on that structure.

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Operator [18]

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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 [19]

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So I think my question reflects some of the discussions I've had with some of your shareholders. I'm trying to assess how long it's going to take for the Canadian business to overcome some of the pressures you're talking about. You definitely have resumed your M&A strategy, and we've seen the result of that in recent transactions, which is positive, definitely. But your base business is continuing to feel the pressure. By our estimate, your organic growth rate in Canada is -- was probably mid-single digit in the quarter, if I'm not mistaken. Can you tell us when -- if there is a path to growth in Canada, how long you think it's going to take to get there?

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

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Maher, thank you for the question. I think you need to break it down. The -- our job is to identify where the issues are and fix them, right? So we had an issue in the U.S. that we've been very vocal about and very open about, which was around growth in our Oracle legacy products. We knew that was there. We were looking for a way to accelerate the cloud component. We've done that with the Travercent acquisition, which was a great fit, both culturally and business-wise. And given that we had a strong platform in the U.S. to accommodate that. So we're confident that we turned the corner in the U.S. And the Microsoft business in the U.S. is stable and growing, so there's no concerns there. In Canada, the same thing. In most of our regions, we have growth, and we had sequential growth in Canada in the last quarter as well. So if you go back historically, our large customers in -- more specifically in the province of Québec, were a big chunk of the revenue. So when one of those slow down, obviously, it impacts the rest. So we've been very active in adding new customers in other areas. And that's why we started seeing sequential growth in the last quarter in Canada because of that -- those new customers. You also have the cross-selling that's kicking in, and that's why you're seeing our margins improving in Canada as well. Because now we're cross-selling higher value-added services and staying away from the lower margin stuff. So we could grow revenue very rapidly in Canada. You wouldn't like the margins and we wouldn't either. If you look at the biggest challenge this industry is facing today, it's finding qualified people. The qualified people want to work on the interesting and exciting projects. They don't want to work on the low-margin body-shopping-type stuff. So we've really transformed the business in the past 5 years to get to focus on high-margin business and high-value to attract people. And that's why our permanent employee base is growing year-over-year. And today, over 70% of our people are full-time employees. So we need those types of projects to attract and retain the best people. So we're very focused on the higher-value services. So does that mean that we let go or we -- some projects that we don't bid on, absolutely. But the ones that we do bid on are much more interesting and much more profitable, and those are the ones that are going to generate strong long-term growth. So that's where we're going in there. And I wish I could give you a more specific answer on when customers make their decisions, but we have no control on that. What we have control on is the quality of our services, making sure that our people, we have the right people that are ready. And that's why we're managing to that. So if the project is late, we make sure they are late to start. We make sure that the rest of our business is very healthy. And that when those projects take off, we're ready to take them on. I don't know if that answers your question, but that's really the focus is running a healthy business. The rest, we know, will follow.

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Maher Yaghi, Desjardins Securities Inc., Research Division - VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [21]

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Maybe I'll follow up. When you look at your top 3 accounts, which I think 2 of them are causing quite a bit of pressure on your top line, how much of your Canadian revenue is now coming from these previously 2 best clients trying to assess how much more further maybe pressure you could get from these 2 clients?

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

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A great question, Maher, and I can't answer. The reason for that is, we have no customers today that represent more than 10% of our revenues. So we haven't -- we don't disclose by customer the revenue. Of course, as you read the papers like we do, you know some of the large customers are having all kinds of different difficulties and different issues to fix. So we try to help them fix those issues.

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Operator [23]

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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 [24]

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Can you give us like more color on the Oracle EPM business? Paul, you mentioned that it's now 75% cloud, 25% on-premise. I'm just wondering what prompted the large decline specifically during the quarter because it seems, at least from the outside looking in, that the overall Edgewater performance over the last 3 quarters was sort of stable-ish, then you have like that big drop during fiscal Q3. Then do you expect that legacy part of the business to go to 0? Or how do we think about that?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [25]

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Great question, Amr. There's a few different factors in there that you need to consider. In the U.S., Q3 is always lower than Q2 because of the Thanksgiving holidays. So that's kind of a difference between Canada and the U.S. Canada is usually more towards the summer and more Q2 and the U.S. is more Q3. So that's one point. But on the Oracle business, the 75%, you just have to be careful with that number, it includes the new revenues coming in from Travercent. So when I say that the total business in the U.S., our Oracle is 75% cloud. Now you have to factor in the new business from Travercent coming in then going forward. So that's on the 75% piece. On the on-prem business, on the EPM, so even with the EPM business, we have cloud and we have on-prem or the legacy stuff. That's an overall Oracle industry issue that the legacy work is going down significantly, and you might have seen, there was actually an announcement in Oracle -- at Oracle in the last few weeks, where they actually shut down their public sector service division in Canada. So they're having their own restructuring issues on the Oracle side. So that's why we saw the addition of Travercent as key to us and the forward growth because even our Oracle cloud business has been growing double digits in the U.S., but it was offset by the faster decline of the on-prem business.

Now as far as the on-prem business goes, the legacy stuff, you have to be careful with that, too, because now we have customers we're helping. They keep the legacy application, but they're moving the legacy application to the cloud. So we're now more active in helping the customers. Instead of getting off the legacy application, we're helping them move the legacy applications to the cloud. So we're seeing that business growing as well, which was not expected when we were making the transition to the cloud.

I don't know if that answers your question or gives it more color, Amr?

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [26]

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Yes -- no, that's very helpful in terms of understanding the dynamics. Then I'm still going through your financials. Are you guys disclosing how much revenues and EBITDA both the acquisitions are contributing to the quarter?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [27]

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No, we're not.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [28]

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At least, you could give some color at a higher level, at least?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [29]

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We disclosed the top line -- historical top line of these targets around the time we made those acquisitions, and that was picked up by certain analysts. So that we disclosed on a looking-back basis. We will not provide these details going forward. And the reason is, we are building very much of an integration approach. So we start cross-selling the targets, products and services into our existing operations and vice versa. So at some point, we can decide, "Okay, this new contract, do we put it left or do we put it right." And that would obviously impact these numbers. So there's no real use to keep track of that going forward.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [30]

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Understood. Then I guess...

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

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Maybe -- sorry, Amr, maybe just to add to that, that if you look at the dates of the acquisition, Travercent was December, just mid-December. So there's not a big pickup in Q3 from those. It was even the middle of the month.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [32]

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Yes. Then Matricis, I guess, like it's contributing a full quarter, and at the time of the acquisition, I think you guys gave high-level thoughtful color that it's $6 million in top line. Anything like change there in terms of the dynamics? Or that's sort of performed with the expectation post the acquisition?

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

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Yes, no change.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [34]

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Okay. One last one. At the time of the -- I guess, like, more than a year now -- the Edgewater acquisition, you guys were aiming sort of an exits run rate of $22 million to $24 million in analyzed EBITDA, 12-month post the acquisition. Like, as we sit here today, I guess, a few moving parts, 3 additional acquisitions completed recently, but maybe like lower organic growth rates. Maybe you could give us an update, I guess, as to where you guys currently stand vis-à-vis that targets?

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Claude Thibault, Alithya Group Inc. - Senior VP & CFO [35]

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Amr, thank you for the question. Basically, well, you know what our run rate is for the third quarter. We've just reported that. We see additional savings on the SG&A going forward. We see the impact of the acquisitions going forward. The short answer is, we remain -- we keep these targets. We remain with that objective going forward. Obviously, it comes back to the top line miss, if you will. And we've talked about that a lot on this call. So if you would just take revenues we were expecting at the time of those when we pronounce these objectives. Basically, that's the difference. So as Paul mentioned, we are obviously looking to buck the cycle in future quarters and at the levels we were talking about. And your question, we are still very confident, and we're still comfortable with those levels going forward.

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Operator [36]

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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 [37]

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I wanted to just touch base on the Microsoft practice in the U.S. I think, historically, we'd talked about that business kind of growing high single digit, kind of low double-digit, correct me if I'm wrong. Just wanted to check in on that practice and see if those kind of growth rates are unchanged? Or just a bit of an update on that piece of the business?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [38]

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Yes, sure. Thank you for the question. Yes, the Microsoft business is actually pretty stable. It's growing both in U.S. and in Canada. We're very focused on a key sector in Microsoft. So if we look for growth opportunities outside of the existing business, we're going to look for other sectors, like Travercent, for example, where we did something in health care. So if we wanted to add to that and grow faster, Microsoft--outside of our existing business--we'd probably look at an acquisition and something in another sector. But the -- we're very happy with how the existing business is growing. It's up since -- in 2 years, the Microsoft business is up around 30%. So it's a business -- a lot of these businesses where we're dependent on IT, so Microsoft, Oracle and so on, you really have to look at it on an annual basis because a lot of the projects the revenue, there's usually a big revenue when the project starts from licensing, from all kinds of -- especially in the cloud area. So sometimes you'll have big variations because the project starts in quarters. But over a year, we're on plan.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [39]

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Okay. And then just as a follow-up, I wanted to touch base on the Askida acquisition that you recently announced. Obviously, a piece of that business is automated QA. Curious to what extent you can leverage that IP and those processes to create efficiencies within your current QA processes with other clients?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [40]

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Thank you. Very good question. I can give you a simple example. We implemented Oracle Cloud ERP internally for ourselves. Every customer that's implemented an ERP platform has the same challenges that the advantage of being on a cloud platform is you're always up-to-date. The disadvantage of being on a cloud platform is you have to be up-to-date. So basically, every quarter, any customer that uses those platforms gets pushed updates from the providers, so whether it's Oracle, Microsoft, SAP and so on. Every time you have updates, you have to retest your whole systems to make sure that you didn't break anything and things still work the same way. Most organizations, and we know because we've talked to our existing customers and ourselves have to do that manually. So our business people have to go in, reenter test cases and make sure and go through the process of using the system to make sure nothing is broken. With the Askida tool, we can automate all that, which we're in the process of doing as we speak. We've actually created a user group with other customers that use the Oracle Cloud platform that have the same issue, who are waiting on us to come back and show them how we do it. So basically, there's a huge potential customer set out there with that situation alone. With digital transformation, every time there's a large modernization project or a large conversion project, a big portion of the project is the testing and QA of that conversion. We did not do that in the past. In the past, whenever we had those types of projects, we would partner with companies like Askida or other partners to look after the testing. A lot of this is done manually with offshore companies and so on and so forth. So having an automation tool, you can basically address a market that's underserved today, which Askida was a very nice company. It was growing rapidly. Their challenge was getting out and addressing a wider market and having access to more scale. So it was really a good fit. Travercent was in the same situation, by the way. They were seen as the top provider in health care, but whenever it became to a larger health care group, their size was a stopper in terms of decision-making. So they wanted to be part of a bigger organization as well to go after bigger projects. So it was really a good win-win for both sides.

And by the way, on the testing tool, we own that IP.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [41]

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Great. And then just before I pass the line, on the M&A side, obviously, you've been active since the fall of last year. So maybe you could just give us an update on kind of your M&A funnel, your M&A pipeline, whether it's kind of how it's been picked through or whether it's still quite strong?

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

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No. We still have a very healthy pipeline, Gavin, and one of the things that we look at. People are always concerned with how well the integrations go, how well this -- how long it will take, when do you get the upside and the synergies. And if you look at the last 3 acquisitions we've done, they were very profitable companies. So our focus -- the operational integration is almost instant because there are no very little, if none at all, cost synergies. They're all growth synergies. As opposed to an Edgewater, where it was really -- there was a lot of fixing to do, and there were a lot of cost synergies as you can see from the year-over-year SG&A and gross margins and so on. So we're still realizing some of those. But these -- we really like the profile of the companies that we acquired in the last 3 months -- last 4 months, sorry, because of the profitable nature and the upside nature of those businesses. So we have some very motivated teams that came over and came across that are still with us, and they are going to be with us for quite some time

Now the funnel is still very strong. So we still have a lot of those types of companies that we're in discussion with. And we're also looking at larger acquisitions, more transformative ones as well.

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Operator [43]

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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 [44]

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First question for me is on the client wins in the quarter. So it looks like you guys had a fairly robust quarter for new supplying ads. Can you provide some color around the types of engagements and the end markets where you guys saw strength? And also, how much of that was kind of organic, driven by the correlative business versus some of your recent acquisitions?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [45]

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Yes. Thanks, Suthan, for the question. Actually, it's a good mix in just about every geography. Mix from acquisitions and organic, about half came from the Q3 acquisition, so from Matricis and Travercent. And the other half came from organic, from the operations. And also a good mix between ERP and the non-ERP customers.

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Suthan Sukumar, Eight Capital, Research Division - Principal [46]

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Okay. So it sounds pretty balanced then. Okay.

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [47]

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Yes, yes. It's pretty balanced across the board.

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Suthan Sukumar, Eight Capital, Research Division - Principal [48]

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Good. Good. And then with the Matricis acquisition, are you seeing a step-up in the size of the engagements with them now under your umbrella? Or is it still too early to kind of see those trends kick in?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [49]

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No. With Matricis and same thing with Travercent, when we go through our due diligence process, which has accelerated because these companies are pretty simple in terms of structure, we also plan for the integration in parallel. So during that process, we actually go through each customer that they have and each customer that we have and have an action plan for the day after to look at cross-selling opportunities, where we want to meet. We talk to every customer that prior to closing, to validate their interest in the transaction and their support of the transaction. Every call we've had in the past 4 months have been positive, and actually, more than positive. Some of those calls, pre-closing calls, have resulted in opportunities that we're going after together, for the reason I said earlier with Gavin in that. A lot of these companies have very large customers. So for example, Askida will be brought in for a large conversion project as a subcontractor or as a partner to do the testing portion only. They did not do the whole project. So given our presence and our scale, we can now go after the whole project. So customers that they have, that we did not have, that are very happy with the Askida services are now saying, "Well, we'd like you to come back now on this bigger opportunity together." So it's very positive. We're very happy with those acquisitions.

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Suthan Sukumar, Eight Capital, Research Division - Principal [50]

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Good, good. Okay. Great. And that's helpful. And on cross-sell, you guys touched on this a little bit over the course of the call, but could you speak to some of the progress you're having here from a cross-sell perspective? And where you're seeing some of the biggest traction today?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [51]

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Well, I think the -- we have traction everywhere, but in some places, it's simpler. And I'll give you an example. So with Travercent, whenever you sell an ERP project, there's always a data analytics or an EPM component, right? You need management reports, you need these types of things. So in the past, whenever Travercent sold an ERP project, they would find a partner or subcontracted EPM portion. So now all of their active customers we've gone back to, plus every bid that they were working on or are working on today, they did our EPM practice. Vice versa, the opposite is also true. We're going back to all of our EPM customers now and pitching the ERP practice. So those are very simple because they are 100% complementary. In other situations, it's not always black and white. But -- sorry, Askida is a good example because not every project that we do we have responsive for testing today. So those projects are already underway. But new projects, we can now add that going forward. So some is more immediate and some is more over time. Does that answer your question?

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

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Yes. No, that's helpful. And maybe just one last one for me on the IP side of things. So you've obviously gained some IP with your recent transactions. Curious kind of can I better understand your plan and strategy around this? Is there a plan to start to integrate some of these IP into a more consolidated road map? Or is the plan kind of just to kind of leave these things on a stand-alone basis within the acquired entities and kind of leverage growth from that perspective?

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

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Yes. Great. Thanks. Great question. Thank you. So currently, the IP is very specific to a given practice. Over time, as we get scale, and it's still a very small portion of our revenue. As it scales, when we feel the moment is appropriate, we will look at putting that together in a more consolidated way. However, currently, the best place to put the IP is with the practice that's selling it today. So no change in the near future, but it's something that we are looking at continuously as to how do we leverage that more and get more efficient. There are ways to make the IP more efficient. So for example, the IP that we have is developed locally where it's being used today, what we're looking at. Okay? As we grow the IP, where does it make the most sense to have some of the back-office operations for that IP to reside. So those are things that we look at on an ongoing basis from an operational perspective. But from a selling perspective, we're leading it with the practice for now.

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Operator [54]

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Your next question comes from the line of Richard Tse with National Bank Financial.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [55]

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You said one of your biggest challenges today is finding qualified people. I'm kind of curious, what is your current utilization rate today?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [56]

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Richard, we don't publish the utilization rate, and I'll explain why, even though it's very high. Given we've transitioned away from what I would call the staffing business, our utilization rate varies tremendously based on the type of projects that we do. So for example, in an ERP project, utilization rate might be lower, but the billable rates are very high because the projects have a beginning and a start date, people work on multiple projects at the same time. So because of the roles on an ERP project, somebody might be doing the analysis piece on one project then goes on to do the analysis piece on the next project and so on and so forth. So we don't really report our utilization rate as a whole because it varies tremendously based on the business line.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [57]

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Okay. That's fair. So...

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [58]

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But it's in very good shape. I mean, a good way to look at it is, just look at our gross margins. It's usually a good way to judge how we're doing on the utilization rates.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [59]

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Right. Yes, I guess, in a related question, if you're kind of having to go out and find these qualified people and we hear that, obviously, from a lot of companies with a fairly tight labor market, do you have to kind of really move up on compensation? And are there any implications to kind of margins -- at the margin here...?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [60]

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We have very competitive benefits. We do market surveys and comps on a regular basis. We don't have a choice. We want to stay competitive. We've put in place a lot of different things to attract and retain people, like our share purchase plan that all the employees participate in or can participate in, where we give them stock when they buy it. We also launched 2 years ago, the Alithya Leadership Academy. All of our managers go through this, and this is on how to better coach, better communicate, better manage performance of your people. And if you look at any survey out there -- and we do the same thing. We do exit surveys with our people when they leave. 80% of people who leave companies, leave because of their bosses. So we decided 2 years ago to invest in the bosses. And so when we launched the academy with a partnership with McGill University, every leader at Alithya have been through the academy. So as new leaders come onboard from acquisitions or from promotions or when we recruit, we put them through this academy. We actually measure the result of that. So we've rolled out the tool called Officevibe, that -- the free advertising for GSoft here, a Montreal company, that we used throughout the whole company. So when we do an acquisition, we roll out that tool right away to measure how people are doing. And since we've launched the academy, the highest score that we have of all the criterias we measure is now the relationship with the manager. And we're seeing the results of that in our retention rates. So we know it's a great investment, and we're going to keep doing it, and we believe that we're building different leaders here in Alithya.

The other big point and I mentioned it earlier, is the type of projects that we do. I'm a geek. I'm a computer engineer, so I confess, the IT people want to work on cool projects. So we've made the decision a long time ago in our strategic plan to focus on the high-value services. We're seeing it reflected in our margins. We see it reflected in our -- the number of permanent employees we have as a whole compared to our business, compared to the industry. And then we've really seen the impact of that on our retention. So we think we have -- we believe we have the right strategy on that front. And when we know why people leave, you can adjust, and we have that data. So that's why we're investing in those places.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [61]

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Okay. Just one last one for me. You mentioned earlier that some of your customers are changing their approach, which is causing a delay in the buying cycle. Just wondering if you can maybe unpack that a little bit with some color, like, why are they changing their approach? Is it they need time to evaluate things or maybe just a bit of a detail on that would be helpful?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [62]

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Sure. Thanks for the question. You have to go back historically here. In our situation, I can't talk for everybody in the whole market. But in our situation, 5 years ago, we had the 3 customers that represented over 50% of our revenue. Today, we have no customer that represents more than 10%. So we've diversified the company both from a customer perspective and geographically. 40% of our business comes from the U.S. today, another 1% comes from Europe. And even in Canada, we've distributed geographically as well. So the larger customers are having lesser and lesser impact when they change their practices. In our case, we're talking about very few customers that changed their approach for all kinds of reasons, and actually 3 very different reasons for the customers in question. So we adjust to that. We're not seeing an underlying change in the economy, if that was the question, Richard. We are hearing that some people are seeing slowdowns, and I guess, large, long-term outsourcing contract, but that's currently not our target market. We're really into the system integration, digital transformation, and we're seeing it in the pickup of new customers. There's still a lot of activity out there. So we're confident that we're going to be offsetting these larger customers with new customers.

Does that answer your question?

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [63]

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Yes, it does. Yes.

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Operator [64]

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(Operator Instructions)

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 [65]

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My line got cut off after I asked my last question. So I might call you back for some answers on that, sorry. So I didn't catch what you said. But I wanted to follow up on the Oracle business in the U.S. So how long is Travercent? You discussed the thinking about that acquisition and the work that you're doing to bring it and learn from the good performance or good productivity that you have from that business to supplement your Oracle business in the U.S. How long is that learning and transpositioning of those know-hows is going to take, in your view, to begin to see some improved performance from your existing Oracle business in the U.S.?

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

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Okay. I'm not sure I understand the question, Maher, but I'll rephrase it and tell me if I got it. So how long before we see an impact from Travercent on our U.S. Oracle business?

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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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Yes.

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

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Okay. So we closed Travercent mid-month in December. So you didn't see much in Q3, but it was there. So you will start seeing an impact from the Travercent acquisition in Q4. That's just a fact. The impact, however, on our business, on the operational side, is immediate because we now have new customers immediately on the health care ERP side. Those are new targets for our health care EPM practice, which we had previously. So we have new customers we can go to immediately from the EPM side. And by the same token, we have customers on the EPM side that we can go out immediately with the Oracle practice. And we had new proposals and bids in process, both on the Alithya side and the Travercent side prior to the acquisition, that we're now combining in our proposals. So the impact of that is immediate. So we inherited a sales force that came with Travercent, which, again, that's an immediate impact. And the Travercent acquisition was very profitable. So again, that has an immediate accretive impact on the company as well. So I don't know if that answers your question, but...

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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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Well, so apart from the M&A contribution, which you're going to get by acquiring Travercent, I'm trying to figure out if there's added benefit that we'll see in our actual reported results in the next couple of quarters when it comes to your existing Oracle business? And if it will be a sizable enough to offset the pressures that you have seen in the previous few quarters or historically in the legacy business and the Oracle business there?

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

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Okay. I understand maybe a bit better. So going forward, if this helps, 75% of our Oracle business in the U.S. is going to be cloud focused, which is growing faster than, obviously, the rest of the business...

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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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Is going? Or is it right now -- sorry, is it now 75%?

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

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Yes, yes, yes. Yes, as of now, with the addition of Travercent, it's now 75% on a run rate basis, obviously, yes.

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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. Okay. So that's helpful. And your legacy business is -- what's the objective? How to turn around or reposition the legacy part of your Oracle practice there? Is it a point where it's better to move on and focus only on cloud? Or is it still something that you want to pursue?

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [74]

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So from an acquisition perspective, we're not pursuing that. However, like I mentioned earlier, we are pursuing the migration of the legacy to the cloud. So a lot of customers that have legacy Oracle today aren't ready to make the switch to the cloud application. But they are ready to move their legacy applications to the cloud. So it's a subtle difference. I just want to make sure people understand. So they're not changing the application set they have, they are just moving it to a cloud environment instead of a mainframe on-premise-type environment. So we're very involved in that. And we see that growing, that piece we see growing.

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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. And one last question I had on M&A, maybe it was asked before, so you let me know. When it comes to M&A, you've done multiple smaller deals. What should we look for? And when it comes to larger deals, what is your main priority in terms of geographic location or metropolitan location, be it U.S. or Canada?

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

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Great question. So if you look at the past 3 acquisitions, we've been trying to do Canada-U. S., Canada-U. S., going back and forth, and this is to give the team a chance to integrate properly. So for the niche acquisitions, we have more flexibility because the integrations on the niche acquisition are very local. So it doesn't impact the whole corporate team. At the corporate level, we are looking for transformative acquisitions on both sides of the border. We are also looking for practices that we don't have today that we want to add or a geography that we don't have today that we want to add. We're always looking for healthy companies. We're looking for companies that also bring in new customers, right? So again, to be able to leverage the cross-selling nature of our scale. And we're looking for companies where the management wants to stick around because we are looking to leverage the management teams from healthy companies that joined. And you saw, we still -- when we do that -- every time we do that, we add skill, we add talent and we also add consolidation opportunities. So most of the time, the companies that we acquire, the people coming in, end up taking a larger role in the organization. So they have a larger impact. So we're always looking for those types of companies. But yes, I'd say the company is ready for a larger one right now.

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Operator [77]

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

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Paul Raymond, Alithya Group Inc. - President, CEO & Director [78]

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Well, thank you, everybody, for participating on the call today. We look forward to speaking with you on our next quarterly call. And have a nice day. (foreign language)

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Operator [79]

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This concludes today's conference call, you may now disconnect.