Good morning, ladies and gentlemen. Welcome to Alithya's second quarter and fiscal 2023 results conference call. I would now like to turn the meeting over to Alithya's management. Please go ahead.
Good morning, and thank you once again for joining us for Alithya's second quarter fiscal 2024 results conference call. The press release and MD&A with complete financial statements and related notes were issued this morning and are now posted on our website. The webcast presentation can also be found on our website in the Investors section. Please be advised that this call will contain statements that are forward-looking and which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. These statements include, without limitation, our estimates, plans, expectations, and other statements regarding the future growth, results of operation, performance, and business prospects of Alithya that do not exclusively relate to historical facts.
Or which refer to future events, including statements regarding our expectation of our clients' demand for our services, and our ability to take advantage of business opportunities and meet our goals set in our three-year strategic plan. For more information, please refer to the cautionary note in our presentation and to the forward-looking statements and Risk and Uncertainties section of the MD&A available on our website. All figures discussed on today's call are in Canadian dollars, unless otherwise stated, and we may refer to certain indicators that are non-IFRS measures. Please refer to the cautionary note in our presentation and to the Non-IFRS and other financial measures section of our MD&A for more details. Presenting this morning are Paul Raymond, Alithya's President and Chief Executive Officer, and Claude Thibault, Chief Financial Officer. I will now turn the call over to Paul Raymond. Paul?
Thank you, Benjamin. Good morning, everyone, and thank you for joining us for the review of our second quarter fiscal 2024 financial results. Despite our lower revenues this past quarter, we are particularly optimistic in respect to progress in key areas that I would like to discuss. I would first like to highlight three notable areas of achievement from our second quarter, and then we can dig deeper into how they impact our results and influence our confidence for the future. First off, we are pleased with our continued progress in terms of gross margin as a percentage of revenues. We continued our favorable progression, both sequentially and YoY, largely due to greater project efficiencies, improved utilization, a reduction of subcontractors, and continued focus on growing our higher-margin segments.
Second, during a historically slow summer quarter and despite lower YoY revenues, we continued to make progress in reducing our SG&A spending. Along with other ongoing initiatives, that trajectory better positions us to increase our profitability faster once the world returns to a healthier economic context. Thirdly, we continued to feed our strong pipeline of bookings for the future, both in terms of newly proposed projects with existing clients and through the addition of 36 new clients in the quarter, which is a good achievement for a company our size. I would note that this latest accomplishment reflects Alithya's growing reputation for not only offering robust solutions from leading technology partners, but also for our ability to provide professionals with the end-to-end expertise required to ensure successful outcomes for our clients. So now let's dig a little deeper into those highlights, including the factors driving them.
Gross margins are a source of pride in our Q2 results, both as a percentage of revenues and in terms of making progress in our offering of higher-margin products and services to our clients. Excuse me. Despite persistent industry factors beyond our control that our CFO, Claude, will further explain later, we are back above our minimum gross margin threshold of 30%, again, in a declining top-line quarter. This is the result of ongoing initiatives in several areas. One of those areas is our reduction of subcontractors. In Q2, saw our ratio decrease by five percentage points, while simultaneously augmenting our utilization rates. Additionally, we're able to maintain sequential stability in terms of the number of professionals we employ in our higher-margin Smart Shoring jurisdictions, and we remain focused on increasing our size and reach in that realm.
In terms of SG&A spending, despite the inflationary pressure that we have been feeling for a couple of years now, we were able to exercise strong control over our spending and to flatten our expenses. In fact, sequentially, we experienced a decrease in spending of CAD 2.6 million and a YoY reduction of 1.6%. At times, that process requires some difficult decision that's part of a push for greater efficiency, and you will see this in the restructuring costs taken in Q2. As a result, considering the slower conditions that we're seeing in certain areas of the information technology services sector, we are doing well, and we have taken great strides to operate with greater efficiency as things start to improve. Those cost reduction and efficiency efforts are not completed, as we will discuss further in the presentation.
Our Q2 revenue amounted to CAD 118.5 million, down year-over-year, primarily due to a cyclical decrease in IT spending in the Canadian financial services sector. Additionally, cautious spending decisions by some of our clients also had adverse effects on our US training and digital adoption services.... However, to counter some of those headwinds, we continue to shore up our offering of AI-enabled solutions targeting greater efficiency. Another client-centric trend is causing a slower start to some projects as well. Investments that typically required a CIO sign-off, are now being circulated more broadly within organizations with increased scrutiny to ensure sustainable ROI. In response, Alithya is diligently working to present clients with the facts that they need to order to move forward. However, Q2 saw some projects start delays in line with that trend.
Additionally, as Alithya's reputation grows, we continue to close on bigger contracts, particularly in our leading U.S. verticals of healthcare and manufacturing. And as we sign larger deals more frequently, they often require final approvals at the board levels, which takes more time. In the U.S., our Microsoft business delivered growth on a YoY basis, while our Oracle business also experienced a strong quarter. Both lines of business generate higher margins, and we are excited about the future, given the forecasts for growth in some of the key sectors that we service, and especially the U.S. healthcare sector. In Canada, the financial services market remains tight but steady. Despite an important reduction in volume experienced from a few of our big financial services sector clients, our market share are not decreasing, and the projects and spending remain on track for the long term.
We also continue to make progress in the public sector, which accounts for a significant portion of our business in Canada. That progress is largely due to our ability to adapt to emerging trends in that segment. For instance, government agencies are increasingly breaking up their large-scale projects into smaller segments, dividing phases between multiple suppliers in order to manage risk. Looking ahead, we're inspired by strong bookings of CAD 110 million and a book-to-bill ratio of 1.08, when excluding the impacts of the two long-term contracts signed in April 2021. Additionally, our cross-selling strategy continues to bear fruit, and we are looking forward to engaging in new projects with existing clients as they explore the benefits of Alithya's broader offering of products and services.
Simultaneously, we have 36 new clients to explore those same possibilities, including a growing portfolio of proprietary products outside of our traditional Microsoft and Oracle offerings. So once again, thank you for joining us this morning, and I will now turn the floor over to Claude Thibault, our Chief Financial Officer. Claude?
Merci, Paul. Good morning. As Paul mentioned, revenues for the quarter amounted to CAD 118.5 million, a decrease of 8.1% compared to revenues of CAD 128.9 million for the second quarter of last year. Of note, Alithya had one less billable day in Q2 than in the same quarter last year, which in itself accounts for a reduction of just under 2%. In Canada, revenues decreased by 9.5% to CAD 68 million, due mainly to a reduction in IT investments in the banking services sector. However, we are seeing good progress in revenue increases in other areas of our Canadian business. Looking at our U.S. business, revenues decreased by 6% to CAD 45.7 million.
This decrease was primarily due to weaker demand for our digital, digital skilling and change enablement services, and some slower project starts, as mentioned earlier by Paul. Decreased U.S. revenues were partially offset by a favorable US dollar exchange rate impact of CAD 1.3 million between Q2 of this year and last year. As for our international operations, they also reported a softer revenue quarter, decreasing 8.3%, mainly due to reduced activities in Australia, but partially offset by a favorable foreign exchange rate impact of CAD 500,000 YoY. Now let's look at our Q2 gross margin dollars, which overall decreased by CAD 3 million or 8% to CAD 34.8 million.
However, as a percentage of revenues, our second quarter consolidated gross margin increased to 29.4%, up from 29.3% for the same period last year. On a sequential basis, gross margin as a percentage of revenues also increased, despite a sequential decrease in revenues that naturally puts pressure on gross margin performance. The increase in gross margin percentage is derived from better individual project and general utilization management, increased revenues from higher-margin offerings, and finally, fewer subcontractors. Let me take a moment to further comment on our Q2 gross margin percentage. In the second quarter, Alithya recorded a CAD 1.1 million provision adjustment on tax credits receivable from previous periods, reflecting certain changes in estimates and assumptions, with a notable portion relating to the activities of a previously acquired business.
While this provision impacts our Q2 numbers, it is not related to the second quarter performance per se. And as such, if we exclude it, gross margin as a percentage of revenues would have increased by 1%- 30.3% compared to the same quarter last year. It is not only a notable increase in itself, but it also brings us back above our minimum threshold of 30%, and this during a quarter with declining revenues. Again, it is very challenging to be increasing gross margin performance during a soft quarter, soft revenue quarter... including as it relates to utilization rates. And as such, all the factors and initiatives leading to this overall improvement in Q2 bode very well for when our revenues resume a more typical organic growth pattern. Now let's look at SG&As, which also represent a notable second quarter improvement.
Total gross SG&A expenses in the second quarter totaled $29.9 million, a decrease of $500 thousand or 1.6% compared to $30.4 million in the same quarter last year, and despite a negative U.S. currency impact of $0.4 billion. Therefore, this represents a YoY quarterly reduction of almost $1 million. This decrease comes mainly from remuneration and recruiting expenses, partially offset by increased business development and travel expenses, and higher internal improvement project costs. On a sequential basis, SG&As also decreased by $2.6 million, from $32.5 million in the first quarter. This $2.6 million dollar reduction reflects a non-recurring impairment charge of $1.4 million in Q1.
Even when excluding that amount, there is a sequential quarterly reduction of CAD 1.2 million, coming mainly from remuneration elements. We are pleased to see our efforts on that front starting to show actual net reductions in dollars. We look to maintaining the same continued discipline on SG&A spend going forward, and we are actually working towards achieving additional savings in the current context. Overall, as a result of decreased revenues and gross margin dollars, including the CAD 1.1 million provision I mentioned, partially offset by decreased SG&A expenses, our second quarter adjusted EBITDA amounted to six point nine—sorry, CAD 6.5 million, representing a decrease of CAD 2.9 million, compared to an adjusted EBITDA of CAD 9.4 million during the same quarter last year. Now, looking at our adjusted net loss.
Our Q2 adjusted net loss amounted to CAD 0.2 million, representing a reduction of CAD 3.6 million from a positive CAD 3.4 million of adjusted net earnings for the same period last year. This marginally negative number is a result of the reduction in adjusted EBITDA and the notional effect of income tax - income taxes relating to adjustments, as can be seen on page 22 of our Q2 MD&A, without which adjusted net earnings would be positive. Of note, as adjusted EBITDA is lower, and as the amounts deducted to calculate the adjusted net earnings do not materially change from quarter to quarter, it is to be expected that the adjusted net earnings amount decreases proportionately more than the adjusted EBITDA amount.
This is also true in the opposite direction, and any future improvement in Adjusted EBITDA will translate into a proportionately higher adjusted net earnings amount, everything else being equal. Moreover, despite our reduced Adjusted EBITDA and adjusted net earnings, it should be noted that Alithya is still generating positive operational cash flow during the quarter, even after considering CapEx, lease liabilities payments, and interest, and even after considering our non-recurring business acquisition, integration, and reorganization disbursements. Despite our decline in revenues and gross margin dollars, we see well on page seven, our rebounding gross margin percentage, which again, would be even higher than 29% when ignoring the previous period impacts. As for our long-term Adjusted EBITDA trend, because of our disciplined SG&A performance and the scale which we have now reached, the decrease in Adjusted EBITDA is relatively smaller.
Indeed, while our gross margin dollars are CAD 6 million lower than our high watermark in Q4 of last year, our Adjusted EBITDA is only CAD 4 million lower. The difference indeed coming from overall SG&A reductions. Again, this points to potentially enhanced EBITDA performance going forward, just as soon as revenues return to a sequential growth pattern. Now, turning to liquidity and financial position on page 9. Net cash used in operating activities was CAD 17.3 million, representing an increase of CAD 16.7 million. This amount resulted primarily from CAD 20.9 million in unfavorable changes in non-cash working capital items.
Those changes in non-cash working capital items consisted primarily of a CAD 12.2 million decrease in accounts payable and accrued liabilities, a CAD 6.2 million increase in accounts receivable, and a CAD 3.1 million increase in unbilled revenues. The accounts payable and accrued liabilities reduction comes from both a reduced number of employees and subcontractors, and a reduced number of accrued days at the end of the quarter. The increase in accounts receivable mainly comes from delays on certain large customer balances, most of which do not pose any credit risk and have notably receded as of today. Finally, the increase in unbilled revenue mainly comes from our project type mix, as well as a few specific billing particularities at the end of the second quarter....
As such, while this CAD 20.9 million dollar working capital usage is a high amount, it is largely a timing and mix issue, and among others, we already know that the reduction in number of days of accrued salaries will be reversing at the end of Q3. Now, back to you, Paul.
Thank you, Claude. So before we go to questions, let's recap on the three notable areas of achievement of our second quarter. So one, it's very challenging to be increasing gross margin performance during a soft revenue quarter, and as such, all the factors and initiatives leading to this overall improvement bode well for when our revenues will resume a more typical organic growth pattern. Two, we continue to make progress in reducing our SG&A spending, and we look to continue to improve this measure going forward. And finally, our continued strong bookings and our growing sales funnels are also very encouraging. So we will now take questions. Joelle?
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jerome Dubreuil with Desjardins. Please go ahead.
Hey, bonjour tout le monde [Foreign language]. Thanks for taking my questions. First one is on the utilization rate and margins. Is it fair to say that, you know, in the past, you would always keep a relatively high level of headcount to be ready for a bounce back, and now you might be a bit more nimble on that front and maybe more adjusting to the situation you're seeing? Is it fair to say that, and what major changes were done to achieve this?
Yeah, thanks for the question, Jerome. Yes, yes. So, you know, we in the services industry and our model, I mean, most of our costs are tied to headcount, right? So we have the ability to adjust up or down based on demand and market, the market conditions. During COVID, as you all know, we had incredible growth, and to be able to keep up with that growth, we couldn't hire fast enough. So we actually used a lot of subcontractors where we couldn't find people, and we grew extremely fast. So of course, when things slow down or when clients start reducing less strategic stuff, the first place that we cut is the subcontractors. So we've reduced our subcontractors significantly in the quarter. Those usually have a much lower margin, right?
Which is why we like having full-time employees that we can invest in. And the other one is utilization. So of course, we take a much closer look at that, and in tighter markets, when there's the work is delayed or people are working on less projects, we want to make sure that utilization is at its maximum. So instead of keeping a very large pool of available people, you have more flexibility in terms of how you use those. So yes, utilization and margins are two things that we can tweak in our type of business.
Okay, thanks. Second question for me, maybe not easy to answer because maybe budgeting period isn't fully over with your clients, but what would you consider is a normal state of spending for your financial services vertical? Is it maybe a year ago when you know there was higher spending or is now the normal spending? Are we kind of a bit of an air pocket because of the what was done in the past or during COVID, maybe?
Yeah. So spending increased significantly during COVID, everywhere, every industry, as you can imagine and as we've seen, and it put a lot of pressure on salaries and hiring, and, you know, people moving all over the place, and turnover was high everywhere, and everybody was scrambling for people. I think the banking industry was the first of our industries to be hit by the current situation, and it's simple, right? It's simple math. The rapid change in interest rates have pushed a lot of banks to cut costs, and we see this everywhere, not just in Canada, but everywhere.
You're seeing the layoffs that the banks are doing, which we haven't seen in a few years, significant layoffs, while they're trying to adjust to the position they're in of having mortgages with lower rates than what they're paying for. So as that cycle fixes itself, so within the next year or so, we think it's gonna level out. And based on the conversations we're having with our clients in the financial services sector, they all expect to be resuming higher spending in about a year. So they're really going with the bare bones right now. If it's strategic, if it's important, if it cut costs, and everything else has kind of been put on hold.
So we've seen some significant and radical reductions in our financial services clients in Canada, where we have more exposure to that. The other thing, though, that we're seeing in talking to them is they all want to do more with AI in the coming year. So we do have a lot of conversations with these clients about getting ready for projects in the new calendar year to do with data and AI and automation. So that's very encouraging as that's where we're investing the most right now in terms of new offerings, so.... Does that answer your question though, Hal?
Yep. That's great. Yeah.
Okay. All right, thanks. We'll see.
Your next question comes from Vincent Colicchio with Barrington Research. Please go ahead.
Yes. Good morning, Paul.
Hey, Vincent.
Follow up on the last comment. Are you currently working with a number of AI pilots with clients?
We actually have projects, not just pilots, but we actually have pilots. If you'll remember, we did an acquisition just over a year ago, called Datum Consulting Group, which is all, 100% of what Datum did was data and AI-driven solutions. So we actually have IT that we roll out at some of our clients to automate some of their back-office processes, modernizing legacy systems. So that part of the business is doing extremely well. And we have other areas we're also doing pilots, not in terms of piloting what we do, but sometimes it's the first time a client actually does a significant AI initiative. And of course, the biggest challenge there is the data.
So we actually have data services where we can help the clients, you know, clean up the data or figure out what it is that they want to do before they launch into these, these automation projects. So yes, we very active in that area.
Thanks for that. Are you seeing increased demand for offshore services? And if so, are you looking to accelerate that side of your business?
Yes, that's an area, Vince, good catch, where I don't feel we're moving fast enough on that one. We are making changes there to accelerate that. It's a big upside for us. I mean, you folks know the numbers and you know the difference in costs. We have the business, we have the large contracts. It's our job to move faster on that. As you see pressure in the industry today, with companies trying to get more competitive, that's a, to me, that's an easy, easy area where we can improve our margins and become more competitive at the same time. So yes, that's definitely an area we're gonna be, you're gonna be hearing more about in the coming quarters.
Okay, one last question. Where is your subcontractor ratio at today, and where do you expect to be by year-end?
We haven't disclosed the number. It's at the lowest that it's been in two years, in over two years, events, and their plan is to keep reducing it, so.
Thank you for answering my questions.
All right.
Your next question comes from Gavin Fairweather with Cormark Securities. Please go ahead.
Hi, this is Graham Smith on for Gavin Fairweather. Just my first question-
Hey, Graham
... is back on the financials. I was just hoping that if you guys can maybe quantify the impact on this quarter, and then maybe sort of, as well, you talked about some of the Canadian revenue streams that verticals are kind of picking up as well as core. If you could call out which ones maybe those are, that'd be great. Thanks.
Mostly, mostly banking, Graham. We have a handful of clients that represent most of the decrease in Canada.
Okay, that's helpful. Thanks. And just on the ones that you said maybe are picking up as well?
Well, it's interesting because when we exclude those large clients, you know, we're seeing some really positive stuff throughout the business. You know, the Microsoft business is growing, the Oracle business is growing. We have 36 new clients. The size of the projects that we're bidding on keep increasing because of the reputation that we're building and the scale of the company now. And of course, the larger the projects, the longer it takes to close them because of the approval levels within the organizations. But, you know, we have $20 million projects that we're bidding on now that, you know, two years ago, we weren't even invited to those projects. So there's a lot of positive stuff that we're seeing.
So that's why we're kind of confident for the future and why it's so important for us to keep focusing on getting our costs down and our margins improved, because as the revenue starts picking up, it's gonna have a greater impact on the bottom line. So our focus is really on that right now.
That's great. Thanks. And then just maybe one more from me. So you talked-
Yeah
... about sort of the increased utilization. Do you see sort of any further efficiency benefits you can get in that utilization department, and also just on fixed price projects?
Yeah. So on the fixed price projects, we're doing extremely well. I think the improvement that we can do on the fixed price projects is really the mix of people. So for example, having a bigger portion of those projects being delivered by one of our Smart Shoring centers is gonna have a greater impact on the margins for the fixed price projects. But from a delivery perspective, we're doing extremely well. That was the first part. What was the second part of your question there, Graham?
No, that, that was mostly it. It was just on utilization and the fixed price project.
Oh, yeah, and utilization. Yeah, there's always, there's always room on utilization. The question there is balancing demand with having people ready to meet the startup. So you know, when we have some delays and project starts, you just wanna make sure you're not adjusting to regret it a week later. So,
Yeah
... that's an art as much as a science in terms of figuring out the mix there, but there's always room for improvement there.
I would repeat that our improvements that we're seeing occurred in a down revenue quarter. So in the service business model, it's very difficult to be adjusting utilization on the way down. It's very challenging, and the other way around is also very encouraging. So when revenues are going up, then you're scrambling to find resources. You put everybody to work on projects, and in a sense, it's much easier. So the fact that we were able to deliver such good performance on this specific point in Q2 bodes pretty well for the future.
That's very helpful. Thanks, guys, and I'll pass the line.
Thanks, Graham.
Your next question comes from Brian Kinstlinger, with Alliance Global Partners. Please go ahead.
Hi, good morning, guys. Great. When we first spoke, you laid out your primary goal for improving gross margin, so congrats on above 30% in achieving what you said you'd do. What would you say is a reasonable long-term goal, contemplating fixed price execution, utilization, subs, pricing? What should investors think about, the goal as long term for gross margin?
If you look at the kind of best-in-class in our industry, they're in the high 30s-40% range. I think that's where we need to evolve to. To be able to do that, Brian, we need to move a significant portion of our delivery as we grow to our smart shoring model. And if you think of the long-term target on that mix, we should be at around 40%. I mean, 40% of all of our projects should be delivered through our global network of smart shoring locations. So that's one area. The other area is, and we're seeing it now, I think over the coming years, the significant improvement we're gonna be seeing in terms of how we deliver our services, leveraging AI, is gonna have a big impact on that.
So that one, I'm still not sure what to tell you in terms of impact it's gonna have. All I know is that as we do more and more projects right now, the efficiency gains we're seeing on some of these projects are pretty impressive. So I think the old adage of looking at our businesses based on headcount and revenue per headcount is gonna change dramatically over the next few years. And maybe, if I may, I would add that right now, you know, 31% and change is an average. So as we speak, we already have certain business segments, certain business units, and certain projects that have gross margins significantly higher than that. You know, sometimes in the 40% range, even higher. And those segments happen to be our fastest-growing segments.
That's where we can make a difference, that's where we have, fairly, unique expertise, and that's where, we see the most, the strongest demand. So just by, and by difference, we have segments which have a much lower gross margin historically. So just by the changing revenue mix going forward that we're expecting, that alone should be improving gross margin, everything else being equal.
Yep, that was helpful. And then I reviewed the MD&A, the company generated CAD 15 million or so in adjusted EBITDA during the first half. Yet operating cash flow was, you know, significant due to CAD 21 million of working capital outflow. You highlighted the factors. Can you share your expectations for cash flow and/or working capital for the remainder of the year?
So we, we don't provide the guidance. As you know, we don't provide outlook. Hopefully, the qualitative comments we made on our Q2 performance will give you a directional, some directional ideas where we, we think we're going on every metric. In terms of the cash flow, it's really... As I said, it's mainly timing and, and specific occurrences that can, that can drive the amount. It so happened at the end of September that the planets aligned against us, to, to get to such a high amount of about CAD 21 million. The good news is that's, that's very much of a worst case. I mean, it will not go further down than that, that's for sure.
Just like last year, if you remember last year, we reversed all of these negatives that we also had in Q2, and we had several quarters of positive cash flow. We're kind of expecting similar trends. As I said, the big one of the big chunk is accrued salaries, where, again, we're a service model company. Our largest expense by very far is salaries, and just depending on the number of days of accrued salaries, based on the date of the last payroll of the quarter, makes a huge difference. We know, we know when our last payroll will be in December, and we know the number of days will be increasing back. That, without revealing any state secret, we know that big chunk of that will be reversing just naturally. On the other factors, as I explained also...
Go ahead.
No, I just said thank you so much. I, I thought you were done with your answer. I apologize.
No. And, you know, on the other factors, too, we're expecting improvements, but certainly not a deterioration. So-
... you know, worst case for the upcoming quarters would be flat, but we're actually expecting, as I explained, to recover most of that amount.
Okay, thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the 1. Your next question comes from Divya Goyal with Scotiabank. Please go, go ahead.
Good morning, everyone. So,
Good morning, Divya.
Paul and Claude, hello there. If you could provide a little bit more color on some of the high-margin offerings that you discussed in the gross margin, kind of percentage growth. I understand the subcontractor ratio decline is something you talked about, but what were the specific high-margin offerings that you sort of highlighted in the call here?
Sure. Well, there's several, Divya. Thanks for the question. Our highest margin business today is everything that has to do with AI and data. So we have a lot of projects around AI and data-driven offerings. Some of that includes IP. The gross margins in that business are in the 50% range, 50, so it's a very profitable business, and of course, it's something that we're working very hard at cross-selling in all of our accounts. And that comes back to my comment earlier, that it's not as much headcount driven. So the margins are. It's tough to compare with the traditional consulting business just because of the usage of these tools that make everybody more efficient and are focused on automation.
So that business is growing very well, and we want to invest more in it. The other two higher margin businesses are the ERP business. So our Microsoft and Oracle businesses are also in the 40% range, high 30s, low 40s, depending on the projects. So those businesses, to Claude's point, you put them all together, they represent a good chunk of our business and probably the fastest-growing part of our business. So as we look forward with the why we feel, although, you know, the revenue decline in the quarter, we're not happy with it, but by the same token, the higher margin stuff is doing extremely well.
And that's why you're seeing the impacts on the gross margin, and it's enabling us to reduce the subcontractors and invest more in these higher margin offerings, which, again, is where we're focused on. And we know that, you know, there's these lower margin things. We had to do them for our clients. It was. You know, as a trusted advisor, the client is asking you for help, you have to, you have to be there and you have to answer. But if we had our choice, we'd be focusing a lot more time on the higher margin stuff. So I think we look at this quarter as an opportunity to do more of that. So for us, you know, there's some positives in there. Does that answer your question, Divya?
It did. So I just wanted to confirm. So is it fair to assume that these higher 50%+ margin contracts that you're talking about, they are more consulting engagements on the AI and other technology-forward offerings, is what it is? But could they potentially be shorter term, and how should we thinking about you converting them into longer-term sustained high-margin contracts?
Yeah. So if you look at our numbers, about 10% of our business today is the long-term, recurring, IP-driven type revenue, and most of that is tied to the higher margin offerings and services that we have. So that's where we build IP. That includes, you know, the latest AI, like the ChatGPT modules in there that their clients are using and that they pay a fee to use, or we charge by the click or by the document or... So it's not headcount related, it's usage related, which, again, is we want to do a lot more of that. It usually starts a consulting engagement, right?
Where we come in and help them figure out how to leverage the technology, and then it usually turns into one of these projects where we can convert that into longer term revenue.
That makes sense. So just one more question on this, sector. So, so obviously, you've seen some slowdown in the financial services sector, and you can talk briefly about some of the other sectors across U.S. What are some of the sectors where you are truly seeing the growth? Because broadly, the macro, across IT services has been weaker. Where do you see some green shoots, as you move towards the end of Q3 year itself?
Yeah.
and like in 2024?
Yeah, we're seeing a lot of growth in healthcare right now. The size of the projects that we're seeing and the move to-- And again, it's projects that drive efficiencies, right? So we're seeing a lot of growth in healthcare right now. That's actually one of our fastest growing sectors right now. The AI piece, I'll come back on that again. It's not a sector thing. It's really a technology enablement thing. We're seeing across the board in all of our industries, we're seeing a lot of demand for those services today, and manufacturing. So not in the retail sense, but our process manufacturing business, we're also seeing a very high demand right now in that area.
I think banking, financial services is gonna be kind of slow for the next year or so, and then it's gonna come back, based on what we're being told by our clients and the time it takes for the mortgage renewals to catch up to the new interest rates.
... Yeah, no, that's that totally makes sense. But just one last one on the SG&A savings. So you did mention there is still room for SG&A sort of improvement, if I may put it that way. Could you provide some more color as to you know, could we expect 50 basis point improvement, 100 basis points, or what's your internal targets, if you may be able to share those on a go-forward basis?
So we're not going to disclose specifics, and obviously we keep a close eye on our ongoing revenue performance. But we're ready to go, you know, as far as we need to go to deliver good performance. We've said before that our sort of general target was 20% of revenues. Now, revenues is a moving number, so by reference, our target is also somewhat movable based on that. But we have a number of actions that we are ready to take and which will, you know, bring us more in the right direction on that front, without going into specifics.
That's helpful. Thank you so much.
Thank you, .
Your next question, your next question comes from Vincent Colicchio with Barrington Research . Please go ahead.
Yeah, Paul, any change in your capital allocation focus in the current environment? 'Cause I'm curious, will you be proactive on acquisitions in some of these higher margin areas currently?
Yeah, we're always looking, Vince. Again, we're seeing a lot of activity and targets. The three key things I always say, we want the right target at the right price that's actually for sale. So, we're staying very disciplined on that, and our eyes are wide open, and we're looking. So when the right one comes by, we'll be ready.
Has there been any improvement in the multiples?
For the quality assets, we haven't seen any decrease. Quality assets, if anything, I think are drawing more attention. And of course, there's a lot of stuff out there that's for sale that we don't necessarily want to touch. But for quality assets, there's still a very high demand.
Thank you.
All right.
There are no further questions at this time. Please proceed.
Thank you, Joelle. Thank you, everybody, for joining us today, and I know the holiday season is almost upon us, so enjoy the holidays, and despite everything that's going on, hope you have a lot of peace and joy in the next few months. Thanks for joining us today. Bye-bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.