Calian Group Ltd. (OTCPK:CLNFF) Q4 2022 Earnings Conference Call November 25, 2022 8:30 AM ET
Company Participants
Jennifer McCoy – Director, Investor Relations
Kevin Ford – Chief Executive Officer
Patrick Houston – Chief Financial Officer
Conference Call Participants
Amr Ezzat – Echelon
Doug Taylor – Canaccord Genuity
Benoit Poirier – Desjardins Capital Markets
Maxim Matushansky – RBC Capital Markets
Deepak Kaushal – BMO Capital Markets
Nick Agostino – Laurentian Bank Securities
Operator
Good morning, ladies and gentlemen and welcome to Calian’s Fourth Quarter 2022 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Ms. Jennifer McCoy, Director of Investor Relations. Jennifer, the floor is yours.
Jennifer McCoy
Thank you, Jenny and good morning everyone. Thank you for joining us for Calian’s Q4 and fiscal year 2022 earnings call. Presenting this morning are Kevin Ford, Chief Executive Officer and Patrick Houston, Chief Financial Officer.
As noted on Slide 2, please be advised that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements maybe materially different from actual results. As a reminder, all amounts are expressed in Canadian dollars except as otherwise specified.
With that, let me turn the call over to Kevin.
Kevin Ford
Thank you. And before I begin, I think it’s important that I introduce to you Jennifer McCoy, our Director of Investor Relations. We are looking forward to having on board and Jennifer has over 25 years of experience in Investor Relations and will help us to drive our IR program. So, welcome, Jennifer and good morning everyone.
The fourth quarter capped off another record-breaking year for Calian on several fronts. Q4 revenues reached $161 million, up 26% compared to the same period last year. This growth was primarily driven by our expansion in the United States and Europe. Gross margin set a new record reaching over 31%. Similarly, adjusted EBITDA increased over 50% to reach $19 million significantly outpacing revenue growth. When I spoke with you last August, I spoke at supply chain slowdowns affecting near-term revenue. Our teams work diligently this quarter and we were able to make significant gains in our ITCS segment in the final months to deliver orders for our customers and recognize revenue earlier than we had previously forecasted. This, coupled with the dedication of our staff, the power of our 4-piston engine and the successful execution of our strategic plans, delivered an outstanding quarter.
I would also like to highlight our continued push to win new customers and extend our relationship with existing clients. This quarter, we recorded $161 million in new contract signings, with approximately $100 million from existing customers and the balance from new customer wins. I’d like to turn now to fiscal year ‘22 results. I am pleased to report that FY ‘22 represents another record year across several key performance metrics as we continued our growth through acquisitions and our journey to bring differentiated solutions that truly add value to our customers. Revenues increased 12% in line with our objective to deliver consistent double-digit growth.
In fact, I am proud to say that this year represents the fifth consecutive year of double-digit growth for Calian. Acquisitive growth this year was very strong, coming in at 19%. Both acquisitions we completed in FY ‘22 have exceeded our expectations and helped us diversify both our ITCS and learning segments. Organic growth took a pause this year coming in at a negative 6%, primarily impacted by two factors: the first being the unwinding of the peak COVID response business in our health segment and the second being our completion of a large ground system project for North American customer. While organic growth revenue took a pause this year, our 5-year trend over driving organic growth has been strong and Patrick will discuss our guidance for next year when we expect organic growth to return in fiscal ‘23.
You have heard me frequently say that we are looking to grow properly across all of our segments. This year, we successfully expanded gross margins and EBITDA margins coupled with our growth. This is our fifth consecutive year we have grown margins at a pace ahead of revenue. And I would sum up the year in this way. Our team continued to live our strategy despite COVID or the uncertainty of recent economic impacts. We continue to deliver for customers, grow into new geographies, diversify our offerings and reinvest in our business to position Calian to continue the momentum of the last 5 record years.
However, our success in FY ‘22 can’t be told through numbers alone. During the year, we had some leadership announced their retirement as we welcome new talent. Sacha Gera took over as President of the ITCS segment and Michael Muldner started as our CIO and I would be remiss in not thanking Jerry Johnson, our previous CIO for his 30 years of service and wish him well in his retirement. We completed two acquisitions, which have exceeded all expectations and has again shown our ability to complete successful M&A transactions. We also expanded our service offerings through several initiatives. We launched Nexi, re-launched Corolar Virtual Care, added market leading technologies in the synthetic training, virtual reality and immersive training, as well as expanded in the space market, designing, developing, manufacturing and delivering ground-based solutions to name just a few.
As we celebrate the company’s 40-year history this year, let me take a few minutes to demonstrate how far we have come in the last 5 years. Revenues have almost doubled from $305 million to $582 million, representing a CAGR of 18%. Profitability has paced top line growth. Gross profit more than doubled to $169 million, representing a CAGR of 27% and gross margins increased from 21% to 29%. EBITDA performance was the strongest ever over the last 5 years, growing by 164%, representing a CAGR of 27% and EBITDA margins have grown from 11% or so – from 8% to 11%. This performance has been the product of multiple initiatives. But above all, it has come from our entire team bringing their commitment and talent to the work everyday to transform our business.
Over the same time period, we were able to successfully diversify our revenue streams by geography, customer and offering. In FY ‘22, our revenues outside Canada represented 29% of total revenues, up from 20% in 2018. Revenues from commercial customers surpassed the 50% mark for the first time in our history from 32% just a few years ago. We are able to do this while continuing to grow our legacy Canadian government business. And today, 27% of our revenues are generated from technology products, demonstrating our progressive pivot to a technology company. Each of these milestones is some significant indication of our strategy and action and further motivates us to continue to execute our plan. As we complete the last year of our Imagine 2023 strategic plan, we are focusing on developing a clear path on our journey to become a $1 billion company, which we are looking forward to share with you. So stay tuned.
For now, let me provide an update on the results by business segments. If you have been on one of these calls before, you’ve heard me mention our corpus and engine and how growth in one segment balances the potential decline in another in any specific order. This diversification allows us to capitalize on opportunities across multiple diverse markets. The broader trend of continued investment in IT and cyber across North America has helped propel our ITCS group to a record year and the quickly evolving landscape and the global military training market has meant a robust pipeline in our learning group. These have offset temporary pauses in our health and areas of our advanced tech segments. Both of these segments have promising opportunity starting in fiscal ‘23.
So, let’s begin with IT and cyber. This segment posted impressive revenue growth for both the quarter and the year. Revenues tripled to $69 million in the quarter and more than doubled to $173 million in the year. This growth was driven by expansion in the U.S. market with the acquisition of Computex in March of ‘22. Their performance has greatly surpassed our expectations. To provide some color on this, we expected to generate about $75 million in annual revenues when we first acquired Computex and in fact, we generated $71 million in 7 months since the acquisition.
Our top line growth was also the result of our continued expansion of our Canadian based cybersecurity offerings and increased demand for managed security platforms. In addition, the easing of supply chain shortages allowed us to deliver a backlog of orders to customers in the quarter, in effect recording record revenues we expected to deliver in fiscal half of ‘23. In Q4, gross margin increased to 36% and EBITDA tripled to $12 million. In FY ‘23, we expect this momentum in our cyber market to continue as we exceed the robust demand in the market and our offerings are well positioned to deliver value for the customers.
Turning to our health segment, the pace of new business in health has not yet picked up to the level where it offsets the last remnants of the impact of COVID-19 resulting in a decline of revenue quarter-over-quarter. We have continued to focus on service delivery and building up a network of healthcare practitioners across Canada in what has been a very challenging backdrop coming off 2 years of COVID fatigue. While revenues for Q4 declined 11% to $39 million from $44 million from the same period last year, gross margins and EBITDA margins held steady at 25% and 16% respectively, a testament to our proactive management of costs.
In fiscal ‘23, we expect a return to organic growth. Despite the reduction in revenue this year, we remain optimistic about our market position and the three-pronged approach to drive future growth, including digital health technologies, pharmaceutical solutions and health solutions and services. In fact, after quarter end, we won a contract with the Provincial Health Services Authority of British Columbia to provide hospital nursing service and support across all five health authorities.
Turning to our advanced technology segment, as we neared the completion of our largest ground system project, which has impacted revenue growth, our diversity into adjacent markets has begun to yield results. These lower volume but higher margin divisions has resulted in gross margin and EBITDA margins increasing significantly to 33% and 15%, respectively. Currently, we are seeing strong demand in our software engineering for satellite and communication customers as well as demand for our precision location services through our GNSS products.
Looking to FY ‘23, we expect a return to organic growth. The diversification I mentioned in our space and terrestrial division over the past several years is going to help us offset what was the slower second half for awards of new large ground system projects. And we have already seen some breakthroughs with the announcements of a new $12 million project for the three new earth observation antennas.
Turning to our learning segments, in Q4, revenues increased 24% from the previous year coming in at $22 million. Similarly for the year revenues increased 23% to $92 million, up from $75 million from last year. This growth was driven by the acquisition of SimFront at the start of the year, which allowed us to expand our Canadian military training presence as well as expanded into the United Kingdom. They have also brought technologies that are relevant commercial customers and we have continued to develop a pipeline of opportunities.
In Q4, gross margins were down slightly from previous quarters to the timing of software and projects. For the year, gross margins and EBITDA margins increased to 25% and 18% respectively versus 23% and 17% from the prior year. In fiscal ‘23, we see continued demand for our services and technology in the military training space in Canada and Europe and this should put us on track to break the $100 million revenue mark for the first time in our learning segment.
Now, I will turn the call over to Patrick to discuss cash flow balance sheets and our guidance outlook for fiscal ‘23. Over to you, Patrick.
Patrick Houston
Thank you, Kevin. Driven by significantly higher EBITDA, profitability increased. Net profit in FY ‘22 increased to $14 million or $1.19 per share, up from $11 million or $1.07 per share for the same period last year. The significant increase in profitability was offset by increased charges as our acquisitions have outperformed and achieved their earn-out targets. The amortization of intangibles for current acquisitions is tapering off and will result in further net earnings in coming periods. Adjusted net profit, which isolates the one-time impact of acquisition-related charges, grew 19% to $44 million, or $3.87 per share, up from $37 million or $3.50 per share last year.
Through execution and accretive M&A transactions, we have been able to grow this by 150% in the last 5 years. This continued strong profitability translate into robust cash flow generation and has become a staple of our operating efficiency. While posting record EBITDA margins and growing this at a pace significantly above our top line growth, our conversion to cash flow has consistently improved as we have gained greater scale and have been able to implement further operating efficiencies.
We generated operating free cash flows of $47 million this year. This is up 38% from last year and up 213% in the last 5 years. During those 5 years, we have increased our cash flow conversion from 50% to above 70% in this most recent year. This strong conversion and focus on managing working capital in the longer term means their already strong liquidity position will strengthen in the coming periods, allowing us to continue to invest in our M&A agenda.
We continue to have a disciplined approach to capital deployment in FY ‘22. When we say discipline, we mean consistent deployment of capital with the view of getting maximum return for the amount invested. As Kevin mentioned earlier, the early returns from our last two acquisitions have been strong. Their performance has been above expectations and both will be key contributors in fiscal ‘23. We have continued to pay earn-outs as they are earned and again showing that the acquisitions we have made are growing and consistently hitting or exceeding their targets.
We have maintained our dividend rate at $1.12 per share. We continue to see the dividend as an important part of our balanced capital deployment strategy and we will reevaluate the size of the dividend in future quarters. Our CapEx levels have remained stable despite significant increase in the size of our business over the last 5 years. This again speaks to our improved operating cash flow efficiency. We continue to invest in capital that will help us scale and not inhibit our growth aspirations.
After making all these investments, we ended the year with a solid balance sheet. As of September 30, we are in a net cash position once again. Our cash on hand of $43 million, combined with our unused credit facility, provides us with $150 million of net liquidity. And we are able to further expand this liquidity with our current lending syndicate if need be. This strong balance sheet position coupled with strong profitability and cash flow conversion positions us well in a more uncertain market and will help us continue to execute our strategic plans.
In addition, we are starting the new year in a position of strength. We signed an additional $699 million in new contracts in FY ‘22, of which over $400 million were contract renewals and extensions. We also exited the year with a robust backlog of $1.3 billion, of which over $400 million is planned to be realized in fiscal ‘23. As we seek out new customers and new geographies, this strong backlog of business will serve as our anchor as we look forward to another year of record growth.
Let’s take a look at our guidance for FY ‘23. For the fiscal year ended September 30, 2023, we expect revenues in the range of $630 million to $680 million. At the midpoint, this reflects revenue growth of 13%. And this would represent our sixth consecutive year of double-digit growth and record levels once again. It also assumes a return to positive organic growth with an even split between organic and acquisitive growth for the full year impact of acquisitions completed midway through last year. We expect adjusted EBITDA in the range of $70 million to $75 million. At that midpoint, it reflects adjusted by the growth of 10%. This growth takes into account the current economic conditions, cost increases and continued impact on supply chains. And finally, we expect adjusted net income in the range of $46 million to $50 million for the upcoming year.
Our strong Q4 performance and ability to accelerate revenue will mean that our first half of fiscal ‘23 will be slightly lower weighted than the second half of the year as new business comes online fully. Finally, I must caution that revenues and profitability realized are ultimately dependent on the extent and timing of future contract awards, customer realization of the existing contract vehicles and any impacts due to COVID-19. Our guidance does not incorporate any additional M&A activity and should we close any new opportunities, their contributions would be incremental. Please see our press release and MD&A for detailed reconciliation of our guidance.
Now, I will turn the call back over to Kevin to conclude our prepared remarks.
Kevin Ford
Thank you, Patrick. So in conclusion, we had a record year yet again as our 4-piston engine continues to deliver on a consolidated level. What’s more coming off a record year, we are on track to sustain this pace and deliver another record year while continuing to search for strategic acquisitions. I want to thank our staff for their commitment and dedication as they make all the difference in our results. I’d also like to thank our customers for their loyalty, our suppliers for their collaboration, and our shareholders for the continued support. We are also proud to announce the publication of our inaugural ESG report that describes our journey as we work towards embedding ESG best practices into our business. We developed a strategic framework to build, set priorities and drive value for our shareholders and stakeholders. You can find the report on our website.
And without Jenny, I’d like to now open the call to questions.
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] Thank you. Your first question is coming from Amr Ezzat of Echelon. Amr, your line is live.
Amr Ezzat
Kevin, Patrick, good morning and congrats. Can you speak to the quarter-on-quarter growth in IT and cyber? There is an incremental $20 million in revenues, which is pleasantly surprising. Is that concentrated to one specific project or customer or how do we think about that?
Patrick Houston
Yes. Good morning, Amr. Yes, it was tremendous quarter for the ITCS group. And part of it was dealing with some of the backlog that we had built up over the last couple of quarters and we are obviously working with our supply chain to get that product and a lot of it started to come into focus here in the last quarter. So, we are able to deliver it. It wasn’t one specific product, but just clearing out some of the backlog across multiple customers in several different industries. And so it’s strong performance from our team to make that happen given the current challenges on the supply chain.
Amr Ezzat
Okay. And what do you feel is a normalized like revenue levels like for IT, is it I assume it’s not like the $68 million or $69 million you guys reported?
Patrick Houston
Now, certainly we did see a significant bump from that. So I think we get back to a more – somewhere between the Q3 and Q4 performance going into next year. We are still seeing a lot of momentum on our IT business and certainly, they are white hot right now. So I think they are going to continue that momentum into next year.
Amr Ezzat
Fantastic. Can you give us a little color on the pace of new projects starting in advanced tech? I mean, you guys recently announced the Natural Resources Canada contract. You have got the European project as well. I am trying to get a sense if you feel that Q4 was a trough quarter for advance tech essentially?
Kevin Ford
Yes, thanks Amr. It’s Kelvin. So for the advanced tech, it’s important to look at all the moving parts between our space, terrestrial and defense business. From our legacy space business right now, with the announcement of the three antennas, we had had announced earlier a NASA antenna with regard to our InterTronic team in Montreal and our GNSS products, our global positioning of precision location antenna business is actually growing significantly year-over-year. So right now, I am expecting advanced tech to actually to make a turn on this year from a growth posture. We see good backlog. We see good opportunities. And then when you look at our aerospace and defense elements as well as our terrestrial element with our IntraGrain, we are seeing good push across each of the divisions within that business unit. So right now, I am expecting a good year from advanced tech. And right now we are coming out strong with a few key wins to kind of propel that growth for next year. So, definitely advanced tech is going to comeback this year. And across a bunch of setting of projects that we will talk about our Investor Day later, but we are definitely going to give us more exposure to our shareholders with regard to all the exciting things happening in advanced tech right now.
Amr Ezzat
Fantastic. Then Kevin, like your stock price has held up well in the face of very weakest markets and you guys remain pretty under-levered. Can you maybe give us an update on your appetite for M&A and how would you characterize like the current markets? Are you guys seeing a lot of attractive opportunities or what’s happening?
Patrick Houston
Yes, we have continued to see good momentum on M&A side. We are still quite busy looking at a lot of targets and working with some key opportunities. So the pace that we set here in the last couple years of doing one or two strong deals that have really performed, I think is our objective here going into next year. So that’s what I continued. And we certainly have the balance sheet to execute those deals. So I think we are well positioned as long as things come into focus to have another good year from an M&A perspective.
Amr Ezzat
Then maybe one last one, Patrick on the working capital side, anything to read – and the jump in accounts receivable for describing that?
Patrick Houston
Yes, I mean, we really push hard to finish the year strong. We did deploy some extra cash towards the working capital to make sure some of the material came in so that we could realize the revenue. But I think a lot of that is very, very short-term and should kind of reverse back out in the next couple quarters. So I wouldn’t be overly concerned. And I think it was the right thing to do to make sure we are well positioned to have the equipment and parts we need to deliver revenue in Q4 and into next year.
Amr Ezzat
Great. Thanks. Congrats on a strong quarter. I’ll pass the line.
Kevin Ford
Thanks, Amr.
Operator
Thank you very much. Your next question is coming from Doug Taylor of Canaccord Genuity. Doug, your line is live.
Doug Taylor
Yes. Thank you. Good morning, Kevin, Patrick, and congrats on a very robust finish to the year.
Kevin Ford
Thank you.
Doug Taylor
I wanted to ask a couple of questions about the health unit and what’s implied in your guidance. I mean, obviously, last year, there was some volatility related to COVID work. Can you speak to what degree you factored? I guess I’d call it any temporary or short-term work into your guidance for the health unit in the year ahead?
Kevin Ford
Yes, thanks, Doug. It’s Kevin. So we have really not factored in any additional COVID-19 or immunization work that really dominated the last frankly couple years in the health business unit. So we have in fact and a lot of our work right now is getting back to what I call business as usual with regard to healthcare services. As I mentioned, the product launch we are doing now focusing in that our pharma business contract research, patient support programs, we are kind of getting back to what I consider to be a normal, a normal healthcare business. And so right now nothing has factored in that would be aligned to COVID-19.
Doug Taylor
Okay. And I see from your disclosure, you talked about some temporary slowdown due to some contract transitions. Can you shed a little bit more light on this and when you might expect those to be resolved?
Patrick Houston
Yes, our pharma business certainly runs kind of on a cycle where we get projects. We work on them for a couple years to deliver. And then usually the customer comes on with an additional project, we did see some gap there in Q4, where some of the projects were winding down and we hadn’t started the new ones. But we have a strong pipeline on the pharma side for FY ‘23. And we think it was just more of a timing issue than a slowdown in the business.
Doug Taylor
Okay, So nothing related to your kind of foundational contracts supporting military and things like that in the health unit and is there – are there any of those upcoming that we should be aware of?
Patrick Houston
No, they have continued strong demand from that strong base of customers we have built over the last 5 years, like 50 contracts across Canada, those have continued. Our biggest struggle has been finding the resources healthcare workers, in general has been very tired after COVID-19 and it’s been that’s probably our biggest challenge right now. But the demand from the customer sites continue to be strong.
Doug Taylor
Okay. Maybe last question for me, I mean, in the year, IT and cyber, you are talking about relief from supply chain, previous supply chain issues, you also speak on the other hand to some parts shortages in your advanced tech unit. Is there visibility to relief on those? If it is supply chain impacted as well as we have started to hear from other hardware vendors that most of that is loosening up?
Patrick Houston
Yes, we have got some promising feedback here in the last couple of months. We have seen kind of lead times actually reduce from what we were getting lead times or more than a year on certain parts come down. So that would point to things getting better here in the next 3 to 6 months. But again, it’s a bit of a waiting game to see if that actually comes through. But some of the information we have gotten seems to indicate better ‘23 than ‘22.
Kevin Ford
It’s Kevin. Just – it also, what I did mention before, because the question, I remember, on the advanced tech group, we do have a backlog of products that are sold again waiting for parts. So we think that will relieve, first quarter second quarter for sure. So I am hoping by this time next year, we are not talking about this anymore, Doug, but in the same spirit, a lot of opportunity. And I think again with backlog and parts we are going to see that to unwind in Q1, Q2 and advanced tech, so still very optimistic on that, based on my discussion with Pat that it runs out. So hopefully we see that to actually happen over the next quarter here.
Doug Taylor
I hope we are not talking about it anymore as well. Thanks. I will pass along.
Kevin Ford
Yes, I am sure you are tired of asking the question.
Operator
Thank you very much. Your next question is coming from Benoit Poirier of Desjardins Capital Markets. Benoit, your line is live.
Benoit Poirier
Yes, thank you very much. Good morning, Patrick. Good morning, Kevin.
Kevin Ford
Good morning, Benoit.
Benoit Poirier
Yes, just to come back on advanced tech, you made great comment about the expectation of positive organic growth going into fiscal ‘23. Just in terms of margin profile, could you maybe provide some color given the completion of the large ground system contract and positive organic growth assumption whether we could see further upside in terms of EBITDA margin specifically for advanced tech?
Patrick Houston
Yes, thanks, Benoit. Yes, I think you start to see some of that this quarter as the mix kind of went away from the large ground system business to some of the adjacent markets Kevin spoke to that we have been working hard to expand into and you saw the margins kind of tick up this quarter. So I think right now it’s in the near-term, maintain those margins and hopefully, by the end of the year, we are improving it back to kind of historical levels for IT just as the mix gets better. So I think there is some room to grow there.
Benoit Poirier
Okay, perfect. And on the learning side, there was a good mix of organic growth contribution from the latest acquisition, although margins came down sequentially. So if you could provide more color about what could explain the drop from the 18%? What could be the reason behind the drop and also kind of a reasonable assumption we should be looking for fiscal year ‘23?
Patrick Houston
Yes, I think as we pivoted what was historically a very service oriented business to more technology, we have seen the better margins, but that also brings a bit of variability depending on software sales and deliveries, which are generally much higher margin. So I think that was the reason for the Q4 change. I would look at the level for this entire year, Benoit, as kind of a guidance on what we can deliver next year in learning.
Benoit Poirier
Okay, okay. That’s great. And for ITCS, obviously, you talk about the strong contribution in the quarter and kind of some expectation going into next year. It seems that you have been very good at leveraging the Computex acquisition, just wondering about the opportunities to leverage Dapasoft in the U.S., any new opportunities there or any, yes?
Kevin Ford
Yes, thanks, Benoit. I think for from our viewpoint, the acquisition and Sacha and the team have been doing a great job in both not only integrating Computex into the Calian family, but really remaining focused on our customers. And having actually visited their sales kickoff this year, it’s probably the one of the most mature sales engines we have had in Calian, it’s pretty incredible. So now with presence in Houston, Florida, Minnesota area, we see great customer demand as organizations look to pivot. With regard to their cyber infrastructure managed services, the team is now driving more recurring revenue as well through that segment. So we are seeing those opportunities as between our security operation centers that we now have now in Houston and Toronto. So from my viewpoint, we continue to see great demand in network services, cyber services, our product relationships with organizations like Cisco. And we do believe that frankly that momentum is going to continue. So for going forward, we want to combine that the organic growth engine that we acquired through Computex and iSecurity as you remember, Benoit, about a year ago, 2 years ago, and also look for other M&A opportunities to continue to expand our footprint in the U.S. So we expect ITCS has remained white hot into the year and it’s definitely got our focus as we see that segment is definitely a high margin, high growth opportunity.
Benoit Poirier
Okay. And in terms of working cap, Patrick, you mentioned color about Q4, what should we be looking at for fiscal ‘23 given you are still growing, but you mentioned that there could be some release in the shorter term should we expect still some consumption of working cap given the growth posture ahead of Calian, ahead of you?
Patrick Houston
I think our targets would be neutral to slightly positive. We have got some things coming back to us this year between the investments we made in Q4 and some of the ground system project unwinding. But I will be offset by some of the growth that we are forecasting obviously plus 10% growth again next year. So our target is to be neutral to slightly positive and hopefully some positive inflow here in the first half of the year.
Benoit Poirier
That’s great color. And just in terms of tax rate, was there something unusual in the quarter that could explain maybe a higher income tax. And when we look at the income taxation and change in fair value related to contingent earn-out, total about $10 million in fiscal ‘22. So from the modeling standpoint, I am just wondering how should we be looking at those two items going into fiscal year ‘23 and if you could provide some color about the tax rate that would be great?
Patrick Houston
Sure. On the deemed content and the earn-outs like we have continued to see over achievement from several of our transactions Talisam, iSecurity and Dapasoft and SimFront, so we have booked pretty much all of the earn-outs now, so I am not expecting any large changes on that going into next year. And on the tax rate, yes, I mean, the net income was significantly impacted by that. So it made the tax rate look unusually higher, but on a cash basis and against EBITDA, I think it’s stable to last periods. We are still kind of on a cash tax in that 23% to 25%. So, that’s what I expect for next year.
Benoit Poirier
Great color. Thank you very much for the time.
Kevin Ford
Thanks, Benoit.
Patrick Houston
Thank you.
Operator
Thank you. Your next question is coming from Maxim Matushansky from RBC Capital Markets. Maxim, your line is live.
Maxim Matushansky
Thank you and good morning. I just wanted to circle back on advanced technologies. And I guess how much of what you have been talking about is for next year is waiting for parts and how much of it is kind of the slowdown in the contract award timing. I am just trying to wonder how much risk there is for some of those awards to slip later in the fiscal year or if it’s primarily the supply chain issues that you have more visibility on?
Kevin Ford
I would say right now from a supply chain perspective, it’s affecting certain elements of our products. We have been able to maneuver through that on our GNSS antennas. So, we are not expecting a slowdown. We expect to see continued growth in our precision antennas. It’s specifically some of our products are decimated products, where we are waiting, we have a backlog of orders. And we are just waiting for specific parts to remove that. So, it’s not significant in the context of revenue, I would say, but definitely a margin, it’s going to help with the advanced tech performance. As far as the pace of business, again, with some wins on our belt here now, and some good opportunities that we are in the middle of the bid process, and these aren’t bids we are waiting for. We are right in the middle of the going through the evaluations and we expect the next quarter we will be hearing wins or losses, but we still have quite a few opportunities in the funnel. So, we are feeling pretty good about the organic growth, as I mentioned earlier in advanced tech, Nexi and because of the backlog and parts or the backlog of products, as well as just the bidding pipeline right now. And our ground system business, our GNSS antenna business, our integrating business, our nuclear business is going well. And we are having some good opportunities also in defense manufacturing. So, again, I expect this to be a turnaround year for advanced tech and the growth posture across many, many factors that are going to give us some tailwinds this year.
Maxim Matushansky
Got it. And switching to the Learning segment, I mean there has been continued rhetoric about military spending in light of the conflict in Ukraine. I am just wondering if you are seeing any immediate impact from that on demand for Calian’s business, or we should think about that as more of a longer term tailwind?
Kevin Ford
Yes. Great question. It’s really going to be both short and long-term, I believe. So, what we are seeing in the short-term, with our customers in both Canada and now NATO in Europe is an increased demand for training across multiple disciplines, so extra highs, rehearsal, cyber, so you are starting to see more cyber requests. So, in the short-term, it’s definitely going to give us some opportunity. And I think we have built that into our guidance for next year. From our Learning segment, as I mentioned, we are pretty excited by, we see the potential of our learning business being over $100 million next year. On longer term, the defense spending way this works is that that money sometimes takes time to get from budget into program. And so we expect longer term as well, that this will be a positive tailwind for Calian across all of our businesses, whether it’s on recapitalizing equipment, increasing the training capacity and pace, the IT cyber spends. So, we see both short and long-term, this as an opportunity, Maxim and definitely for learning business, increased demand and training pace, I would say both in Canada and Europe.
Maxim Matushansky
Okay. And finally, just on M&A, I know you mentioned, looking at kind of the bigger deals, are there any segments that looks more attractive in the near-term given kind of the changes in the macroeconomic conditions and movements of valuations? Are you seeing any particular segment that looks attractive either from a valuation perspective or from Calian strategy perspective?
Patrick Houston
Yes. ITCS, still is the focus for us just because of we have purchased a couple of good assets there. They have really been performing. So, we are looking and we have got a strong team there sort of saying how can we supplement that with additional assets that would give us either geographical reach, or more net new talent, which is an issue in this space right now. It helps come back to us where I think the valuations were too high for us the last couple of years that’s come back. So, I think that’s helped and continue to see some good targets in both AT and learning. So, I would say right now all four of them are pretty active from a pipeline perspective, with ITCS, and being one of our main focuses here for FY ‘23.
Kevin Ford
Yes. Maxim, it’s Kevin. I think for me, as you know, the opportunity we have is the diversity, again. So, as Patrick mentioned, that we have discussions going on in each of our segments, I can confirm that. So, each of our segments right now is out with active discussions around M&A. And – but aligned to our strategy, we want to make sure that when we are doing acquisitions, it’s supporting our strategy, as well as our goals to increase margin and differentiation as well as diversification. So, all of our segments have opportunities, but we do take time or we make sure we are very rigid on our due diligence. So, the pace of these will be really at the pace that we are comfortable that we found the right targets, and the right ones that are going to support our strategy. So, I would expect this year across each of our segments, hopefully some activity, but we are not pushing it until we make sure we have the right type of company that will fit into Calian long-term.
Maxim Matushansky
Okay. Thanks. I will pass the line.
Kevin Ford
Thanks Maxim.
Operator
Thank you very much. Your next question is coming from Deepak Kaushal from Stifel Capital Markets. Deepak, your line is live.
Deepak Kaushal
Hi. Yes. Just quick correction it’s BMO Capital Markets now. Good to talk again, Kevin, Patrick and nice having called Jennifer. I have a couple of folks here I think I can fit some in. Just on the advanced technology, you mentioned a couple of orders that came through one for NASA and one for International Resources Canada, ground systems and antennas. Can you talk about what’s particularly moving those forward, given the delays recently? Is that certainty on interest rates and they are project specific factors here? And what can we read through across the broader segment of that space side and the advanced technology [ph]?
Kevin Ford
Yes. Hi. Good morning Deepak. Definitely, to your point, we have seen some delays in new satellite launches, some of the new LEO constellations are working through that either looking at their debt posture. So, we are seeing that definitely create some delays. The ones that we have signed were basically on the books and moving forward with regards to customers that hav their funding and have requirements short-term too, to get new observation data or deep space exploration. So, what we are seeing right now is still a good pipeline, frankly, of ground based antenna opportunities. And with our acquisition of SatService and InterTronic, we also have the ability now to expand our antenna line with regard to the size and complexity of the antennas we build. So, in the past we were larger aperture attendants, now we can do things and we have done a bunch of research and development with the carbon fiber 4 meter antenna, full-motion, 4 meter antenna, which is relevant for LEO constellations. So, in some ways, these delays have been good for us, because it’s allowed us to pick up our R&D and our product lines to be responsive to these as they come to market. So, we have some good short-term opportunities, I am actually really excited about long-term because our product – if you walked into the Italian restaurant of antennas, our menu is much more with regard to both capacity, size, right from GNSS, now, 15 meter antennas, whether metal or carbon fiber. So, we expect this to continue to be a strong push for us, Deepak, in the next little – next few years, for sure.
Deepak Kaushal
Okay. Great. And just a couple of clarification questions first on the M&A and then on the cash flow. On the M&A side, initially it kind of sounded like you guys were focusing on two segments, or two big acquisitions and two big good acquisitions, one, particularly being an ITCS. And then more recently, you said you are looking for activity in all four. I mean how do you decide which segment to feed, can you feed all four segments in the next 12 months? And just maybe just in general, like your capital allocation process, and how you think about capital allocation across your portfolio businesses, if that makes sense question?
Kevin Ford
Yes. No, it’s a great question I think and frankly, as you look at the four segments, I want to reiterate a few things. Number one is that we have our strategic plans and business plans in place. And we look to identify in those plans where we want to grow something either organically through R&D or new innovation. That’s one of the reasons that created a CTO position here, or it’s going to be an M&A opportunity. So, across our strategy, M&A as a reminder, supports either diversification, innovation, or both. And from a capital allocation perspective, working with the business unit president’s, working with Patrick, who I have asked to run our M&A office, some of these things, the timing of them can be offset. We never really see something, just to align where we have four acquisitions in one quarter or just the way these things play out. So, we are actually proactively monitoring, it’s almost a daily discussion with Patrick. Our M&A team, our business unit presence on the status of these discussions. And from a capital allocation perspective right now, we are really looking to prioritize high margin, high growth, high scale opportunities across each of our segments, Deepak. So, we will definitely – we will keep that M&A engine running. And Patrick, any comments you would like to make on capital allocation or M&A pipeline?
Patrick Houston
Yes. I think you are bang on. We keep looking out for the timing on needs that I was uncertain. So, it gives us some optionality. And on the size again, as we have gotten bigger, I think we are focusing on those acquisitions that can really have an impact both strategically and financially across each of the four segments. And so, I think that’s what you are going to see from us in the short to medium-term.
Deepak Kaushal
Okay. That’s fantastic. And then just lastly on working capital, Patrick, you mentioned earlier on the operating cash flow. You are converting now 50%, sorry 70%, up from 50%.
Patrick Houston
Yes.
Deepak Kaushal
And then given the growth expectations for this year, you are expecting to be working capital neutral. How should we think of that going forward, because as you grow the businesses working capital requirements, certainly in some of the large projects, there is a big working capital requirements. Can you continue to grow the business at double digits and maintain working capital neutral here, or is there some kind of cash investment required there that we are missing here?
Kevin Ford
I think it depends as the business goes. I think for next year, certainly we were looking for double-digit growth. We have got some working capital we are trying to pull back in. It’s going to kind of offset that growth. So, that’s why I am thinking we can be neutral to net up next year. And going forward, we are just being, from a conversion perspective, as we scaled and gotten much bigger, we have gotten more efficient, both from a CapEx and tax perspective, which has really allowed us to convert that EBITDA into cash flow. So, I think that’s a maybe a misunderstood thing about Calian. But I think it’s certainly a highlight in this market today in our ability to convert that kind of operating performance into real cash flow for the business.
Deepak Kaushal
Okay and that’s helpful. Thanks. Well, look, I will leave it at that, and appreciate taking my questions.
Kevin Ford
Thanks Deepak. I appreciate it. Thanks, everyone, for the questions. They are excellent.
Operator
Thank you. Your next question is coming from Nick Agostino of Laurentian Bank Securities. Nick, your line is live.
Nick Agostino
Hi. Yes. Thank you and good morning everybody. I just want to understand Kevin on the M&A front, now that you have put – you have got the CTO position in place and all that. How do you guys approach M&A? Do you just look at targets that are out there and take more of a business economics view and look at targets that give you good growth potential, maybe open up some market segments and give you some good economics, or you take – is part of that decision, product base. In other words, you are looking at your current offerings may be identify some product gaps based on customer feedback, and look at – make that internal decision to either acquire or build. So, I was just trying to understand how you guys are approaching M&A. Is there a product gap approach to it? And if there is, what are the product gaps that you have identified within the four segments?
Kevin Ford
Yes, great. Thanks Nick. So, from an M&A perspective, it really does supports, as I mentioned that our customer diversification and innovation, and I will take Computex as a great example of that. So, with one acquisition, we were able to diversify our customer base to no government, it was all private industry, SMB, or sorry, mid-market, customers over 1,100 new logos, so massive tick mark on our customer diversification objectives. Then you look at the innovation that that acquisition brought. With regard to the relationships with organizations like Cisco and CrowdStrike and then as well our managed security services, our now of iSecurity. So, when I look at the acquisitions going forward, we want to do the same type of thing. We want to find those acquisitions that bring us more diversification that customize, whether it’s in certain sectors, whether domestically, whether globally. And also as you said, in product gap, look at more innovation. So, buying organizations that are bringing some element of technology, some elements of differentiation through their products, to help augment our current product/services mix. So, it’s a bit of all of it, to be honest with you, Nick, with regard to our approach here. We match that strategy alignment with the financial metrics that we look for both in past performance and future performance. And then we spend quite a bit of time with the organizations to assess culture fit, because we do believe that’s a key element of these as well. So, it’s a bunch of moving parts and M&A accounting, but – and we learn from everyone, there is nobody perfect in M&A, but – and we are learning from everyone. And from my viewpoint, though, that innovation, customer diversification across all that we do is going to be the main focus for M&A engine across each of our segments. So, hopefully I answered your question there. I rambled on there. But hopefully I answered your question.
Nick Agostino
Yes. No, but that was helpful. I guess just as a heartbeat that you mentioned product innovations. When you look at your current offerings, are there any product innovations or ideas that maybe you think you need to add? And you may be contemplating building or at the same time you are out there looking to acquire if the opportunity is there. So, is there anything that you have identified from a product gap, or is it just you look at the M&A targets that are in front of you and you evaluate what innovation they might have as opposed to having something in mind?
Kevin Ford
Well, I think for us, just sort of high level if you kind of walk through our segments and our health business clearly as you look at our Nexi and Corolar Virtual Care platforms. This year, we ran through L-SPARK here in Canada with Gordon and Sasha. We ran an opportunity to look at products that could build into our current product base. We are referring to as ecosystem development. So, I would say, at our healthcare platforms, we would be looking for pieces that could help augment that platform, and basically continue to differentiate and provide more value to customers. In our learning space, our SimFront and SimWave acquisition has been very an eye opener for us, and just on the amount of innovation and learning across virtual reality, war gaming, of the things that are now being asked for by customers. So, again, more opportunities to expand our learning portfolio to make that training environment as real as possible. And an immersive learning/virtual reality capability would be one. If you look at our Advanced Technologies Group, continued expansion of our space business is going to be an important element of this because we still believe long-term that this is going to continue to be a massive growth opportunity for us to support our growth objectives. And we are looking at diversification of our antenna, our capability in recurring revenue opportunities. And then on our IoT segments, again, we have got now quite a bit of – Sasha, who told me quite a bit of technology on the truck, and we are looking to amalgamate, integrate those technology components. But in the same context, look to invest in new capability to strengthen our cyber resilience offerings, as well as building more ecosystems out there, regarding products that could plug into our cyber services. So, it’s a really a lot of discussions here that we have across each of those segments, that just to highlight a few. And I could probably spend 15 minutes, 20 minutes on this alone just on each of our segments as to all the different moving parts, but those are the kind of the highlights and priority of it for the time.
Nick Agostino
Okay. I appreciate that. I guess there is just one last one. I think you kind of highlighted pretty strong demand or interest on the augmented reality, can you just talk to how, I guess the cross-sell that you are getting when it comes to your digital assets on the healthcare side? What the reception has been in the marketplace, the cross-sell, and more importantly, maybe specifically, what the growth rate is for those particular products? And I will leave it there.
Kevin Ford
Yes. I think for me, as we launch digital products, and I expect – my expectation here in the company is everything is a double-digit growth number, I want to see that. And – but as you look at those product launches in Corolar Virtual Care or the Nexi platforms, they are definitely getting. There is a lot of presentations right now. It’s as you integrate new products and introduce new products to the market, it takes time. So, we are expecting this year not to see massive growth there. We expect to be investing on getting products, understanding product awareness, and working with customers. And we are doing lots of work. Now, we are having extra sales capacity and we invest here to actually get these products to market. And the point you made I don’t talk about enough frankly. When you think about the convergence opportunities across our business units, we are definitely seeing more of those. We are looking at remote healthcare. And we just recently got an opportunity, where we combined our healthcare business with our satellite business to basically provide remote healthcare units, that then has a remote learning capability and a cybersecurity element to it. So, we are starting to see those opportunities that come across our business units and what we call a convergence opportunity. So, standby for those but so each and other segments right now, we are going to have more innovation, more product gaps, as we said, things that we are fixing, but as importantly, we are looking for those opportunities to move across the business for collaboration with our business units for customers biggest challenges.
Nick Agostino
Okay. Thank you for that.
Operator
Thank you so much.
Kevin Ford
Thanks Nick.
Operator
Okay. We don’t appear to have any further questions in the queue. I am now going to hand it back over to Kevin for any closing remarks.
Kevin Ford
Okay. Thank you, Jenny and for facilitating today’s call. Before we close, I would like to mention that we will be hosting an Investor Day in Toronto on February 15th. So, please save that date and more details will follow in the next couple of weeks. So, on that note, I want to thank you for each for – everyone for attending. I want to thank everyone for the great questions, and we look forward to providing an update on our next quarterly call. So, with that, Jenny, we can close the call.
Operator
Thank you very much and thank you ladies and gentleman. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation. Have a great weekend.
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