ALYA - Alithya: Stable Earnings And Strategic Diversification

2023-10-31 15:27:06 ET

Summary

• Alithya Group released its FQ1 FY2024 results some weeks ago, showing improved margins and a share buyback program to support its stock value.
• The IT consulting industry is experiencing a slowdown after a surge in demand during the pandemic, with companies cutting down on discretionary IT budgets.
• Alithya's strategic acquisition of Datum has diversified its offerings and revenue streams, contributing to a relatively stable financial outlook.

Introduction

Alithya Group Inc. (ALYA), the Canada-based IT consulting (or technology consulting) and IT Services firm, released its FQ1 FY2024 results some weeks ago. The company's business and financial results seem influenced by global economic headwinds; however, margins have shown improvement, thanks to strategies like the acquisition of Datum, which Alithya closed last year. Also, to support the value of its stock, Alithya recently renewed its normal course issuer bid (NCIB) or share buyback program with the Toronto Stock Exchange.

Tech Consulting Industry Outlook

This year, the pandemic boom that IT consultancy firms enjoyed since late 2019 (during the Covid era) seems to have mostly waned and these firms are experiencing some sort of slowdown. During the pandemic, businesses were actively researching, adopting, and implementing new business strategies, resulting in a surge in demand for tech consultancy. Lately, elevated interest rates and inflation have made most companies cut down on their discretionary IT budget. The IT services sector analysis and ratings have not been exactly bullish since late last year. Even big players in the consulting industry like Accenture ( ACN ) have been cutting jobs, as they seek to trim OpEx. In terms of earnings, the revenue for most firms in the IT consulting or services sector (especially mid and small-cap firms) has been either flat or has seen very modest growth in the past four to five quarters.

Alithya's Tech Services Strategy and Market Positioning

Alithya implements IT solutions using business applications and technologies provided by major companies such as Microsoft ( MSFT ), Oracle ( ORCL ), Amazon ( AMZN ), and others. These solutions are tailored for clients across various sectors, including energy, healthcare, telecommunications, logistics, and more. The strategic acquisition of Datum (now called Data Solutions) last year means a lot for Alithya in terms of earnings generation. Instead of solely relying on third-party or partner software solutions, it now has the opportunity to access both consultancy services and direct recurring Software as a Service ((SaaS)) revenue. This acquisition diversifies Alithya's offerings and revenue streams. Some of Alithya's other proprietary technologies include RapidSUITE - an intelligent document processing solution that leverages AI, and CASSI™ - a work management reporting software, to help businesses improve preparation, execution, backlog, and reliability-centered activities, among others. Alithya has also earned the Microsoft Business Applications 2023/2024 Inner Circle award for the 18th consecutive year, an award reserved for Microsoft's top partners who excel in both sales accomplishments and delivering exceptional value to customers. In FQ1 2024, Alithya achieved record bookings in its Oracle and Microsoft Enterprise cloud-based practices, with global bookings totaling CAD$111 million.

On the latest earnings call , Alithya's management acknowledged an 11.2% increase in its revenue generated in the US, mainly driven by revenues generated from Data Solutions (formerly Datum); while revenue generated in Canada fell slightly due to reduced activity from its clients in the Canadian banking sector. And rightly so, the Canadian banking sector has been experiencing financial challenges as a result of higher global interest rates which are increasing the funding cost of Canadian banks, as highlighted by the Bank of Canada in its Financial System Review released in May this year. The impacted funding costs for these businesses must have affected their discretionary IT spending.

Earnings and Margin Analysis

Similar to the earnings of most firms in the IT consulting and services sector, Alithya's quarterly earnings have seen marginal growth for the past few quarters. ALYA recorded earnings of $93.35 million in FQ2 2023, $96.59 million in FQ3, $100.79 million in FQ4, and $99.34 million in the latest earnings for FQ1 2024. The earnings estimates for FQ2 and FQ3 2024 are expected to remain consistent with the marginal increase and decrease trend recorded in the last five quarters. Looking at the income statement , both gross profit and total operating expenses have shown a similar marginal increase and decrease trend for the last five quarters. The consistency in earnings and financial metrics indicates a level of stability in Alithya's financial performance, suggesting the company's ability to maintain a relatively steady level of business activity. This can be reassuring to investors and stakeholders who prefer stability. Also, as I mentioned earlier, this trend has been similar to several firms in the IT consultancy and services sector and can be largely attributed to the post-pandemic changes in market conditions and macroeconomics.

Analyzing Alithya's bottom line, the company hasn't been profitable. Net income has been negative for several fiscal quarters, but cash from operations has been positive since FQ3 2023. Alithya recorded $25.8 million cash from operations in FQ3 2023, $3.3 million in FQ4 2023, and $5.7 million in FQ1 2024. Analyzing the cash flow statement, the company's cash from operations is largely influenced by its accounts payable and accounts receivable, suggesting that the timing of cash receipts from customers and cash payments to suppliers plays a substantial role in the gaps seen in the company's operating cash flow.

The net losses have been "mainly created by amortization of intangibles by acquisition and integration costs and by share-based compensation, most of which are noncash and nonrecurring expenses directly attributable to past individual acquisitions," Alithya management stated in the last earnings call.

ALYA Stock

ALYA's current price is near its price level at the year's open. The stock reached a high of $2.83 in mid-April and has since retraced 31%. The stock is currently down ~8% YTD. In comparison to the S&P/TSX SmallCap Index which is down -3.87% YTD, ALYA's price performance has been slightly poor. Institutions hold 36.58 million ALYA common stock, which represents 38.21% of the shares outstanding. High institutional holding could suggest price stability as institutions are most likely not going to engage in short-term trading or panic selling during market volatility

Risks

Alithya, like any company in the IT consulting and services sector, faces risks that can impact its financial performance and market position. Investors should consider these potential risks; especially the risk of economic downturns. Macroeconomics severely affects companies in the IT consulting and services sector. A further downturn in the global economy could lead to reduced demand for IT consulting services, adversely affecting Alithya's revenue and profitability.

Takeaway

Alithya appears to have a relatively stable outlook, especially in terms of its financial performance. While growth in earnings has not been significant, the marginal increases or decreases indicate a level of stability in the company's financial performance. The acquisition of Datum has diversified Alithya's offerings and revenue streams. This diversification and recurring SaaS earnings can contribute to a more stable financial outlook. This stock is worth a hold in the portfolio of investors who prioritize stability and long-term potential. Additionally, those seeking exposure to the evolving IT consulting and services sector.

For further details see: