Mcmillan Shakespeare Ltd

ASX:MMS

Good morning. I'm Hans-Petter Mellerud, the CEO and Founder of Zalaris. And joining me today for this webcast presentation of Zalaris Q4 2024 results is our CFO, Gunnar Manum. We are using Teams for this purpose. I hope that you will find it informative and engaging. You can use the Q&A function to ask questions, which we will answer at the end of the presentation. Please note that the presentation is being recorded. You can access the recording in the Investors section of our website.

First, we will look at some of the highlights of the quarter. As we close our 25th year in business and head towards our 25th anniversary in April, I am pleased to present our fourth quarter results, which mark another significant milestone in Zalaris' journey. In Q4 2024, Team Zalaris delivered its sixth consecutive quarter of all-time high revenues, reaching NOK 365 million. This is an impressive increase of 16.5% from the same quarter last year.

While last year, we spoke about soon being a NOK 1.4 billion company, we are now just short of becoming a NOK 1.5 billion company, 12 months ahead of our -- in our Capital Markets Day in September '23 communicated target.

EBIT stood at NOK 47.4 million or 13.1%, which is a 42% increase from NOK 33.4 million in the same period last year. In combination with an EBIT for the full year of 11%, we have delivered on our communicated target of delivering a consistent 10% plus EBIT. As I will discuss later, we are upping our long-term EBIT target from the range of 12% to 15% to a tighter range of 13% to 15%.

Our operating cash flow for the quarter was NOK 57 million, up from NOK 44 million last year. For '24, the Board will propose a dividend of NOK 0.90 per share. Following a planned period with a focus on solid preparatory work, the strategic review process announced in April is progressing well.

This slide highlights our positive sales developments in Q4, which correspondingly increased our estimated future revenue by NOK 44 million when combining both the Managed Services component of approximately NOK 28 million and the project component valued at around NOK 16 million.

Key contracts such as the Global Payroll Outsourcing combined with implementing a global HR solution based on SuccessFactors for IONOS and the private public cloud contract with the City of Osnabrück showcase our expanding footprint across the various regions. The record sales quarter in APAC with 37 deals closed further illustrated our growing market presence and the effectiveness of our sales strategies.

Managed Services have shown remarkable growth with a 20% year-on-year increase in revenue, now accounting for 75% of our total revenue and by itself being more than a NOK 1 billion business. 104% net revenue retention indicates that our clients are not only staying with us, but are also expanding their services, which is a positive sign for our future growth. This consistent performance across Northern Europe, DACH and U.K. and Ireland regions, reinforces our competitive position in the market. We saw solid growth in all regions with DACH leading the way with a very strong 25%.

In contrast, our Professional Services now renamed to Consulting. Revenue experienced a slight decline of 3% year-on-year, primarily due to a reduced consulting projects in the U.K. It is important to note that the key reason for us not growing in this segment is that we have redirected resources to support Managed Services implementation or transformation projects, ensuring we maintain our overall growth trajectory. This strategic shift is crucial for optimizing our service delivery and client satisfaction.

With this, I hand over to our CFO, Gunnar Manum, who will take you through the financial part of the presentation.

Thank you, Hans-Petter. This slide highlights a 17% revenue increase for quarter year-on-year, showing a strong performance also in constant currency. The revenue for the fourth quarter was NOK 365 million, an increase year-on-year of 14% when measured in constant currency.

Revenue in Managed Services grew by 20%, while Professional Services declined by 3%. The decrease in Professional Services primarily reflects the partial completion of a large consulting project in the U.K., as noted in the third quarter. Additionally, significant Professional Services resources, particularly in Germany, are being allocated to implementing new customers and managing change orders within Managed Services, reducing external revenue capacity in that division.

Net retention within Managed Services was 104%, and this shows the year-on-year revenue in constant currency from customers that were fully implemented in the fourth quarter last year, grew by 4%. New contracts signed during the fourth quarter have an annual recurring revenue of approximately NOK 28 million.

Looking ahead, we have a strong revenue visibility through 2025 and 2026, with a projected revenue increase of more than 12% compared to full year 2024. The charts illustrate our anticipated growth based on significant contracts, including those signed in Q4. The total net annual recurring revenue from these contracts is NOK 57 million.

The top graph illustrates the annual run rate for recurring revenue for Managed Services as of Q4 of NOK 992 million. Additionally, a NOK 57 million net new annual revenue from signed contracts and expansions is expected to have a full effect from Q1 2026. The bottom graph shows the estimated timing of this additional revenue.

In addition to the estimated recurring revenue for Managed Services, we have changed orders totaling approximately 12% of recurring revenue and 2024 revenue from Professional Services and APAC of NOK 339 million. This results in an estimated future annual revenue of minimum NOK 1.51 billion.

This slide shows a record high adjusted EBIT for the quarter, reflecting the increased revenue and operational improvements achieved, particularly in Germany. The German EBIT improvement initiatives communicated in the second quarter last year are having a positive effect. The fourth quarter EBIT was NOK 47.4 million, an increase of 42% year-on-year, with an adjusted EBIT margin of 13.1%, up from 10.7% last year. The adjusted EBIT for Managed Services was NOK 57 million, which was NOK 29 million more than last year, mainly due to the factors I just mentioned. The adjusted EBIT for Professional Services was NOK 5.7 million, NOK 10.7 million lower than last year. EBIT in Professional Services was negatively impacted by reduced revenue and higher bonus accruals, which showed a positive development from the previous quarter.

The condensed profit and loss slide provides a detailed overview of our financial performance, highlighting our key cost components. The increase in license cost is attributed to higher revenue from our payroll and HR solutions. Revenue per employee in constant currency grew by approximately 9% year-on-year. However, the significant revenue growth and ongoing transformation projects for new customers led to a year-on-year increase of 44 FTEs contributing to higher personnel expenses.

A majority of the new FTEs has come from the nearshore and offshore locations and personnel expenses as a percentage of revenue decreased by 1.3 percentage points. Other operating expenses decreased by 0.7 percentage points as a share of revenue year-on-year. However, total cost rose due to increased use of external payroll partners for global payroll deliveries in non-local markets and external hosting.

The EBIT was NOK 37.7 million for the quarter compared to NOK 26.2 million last year. Net financial expenses were NOK 13 million compared to NOK 15.7 million last year. Net profit for the period was NOK 13.4 million compared to NOK 20.9 million last year. Last year's net profit included NOK 10 million in positive income tax due to the balance sheet recognition of a carryforward tax loss.

We had a strong cash flow during the quarter, which rose by NOK 30 million year-on-year to NOK 57 million. The chart illustrates the development in the cash balance from the previous quarter, which rose by NOK 42 million. The increase is mainly due to higher earnings and reduced -- and a reduction in the net working capital. The net interest-bearing debt of 31 December was reduced by NOK 39 million during the quarter to NOK 247 million, which converts to a leverage measured by the net interest-bearing debt divided by adjusted EBITDA of a low 1.2.

And that concludes the financial section, and Hans-Petter will now present our outlook.

Thank you, Gunnar. Then we're back to the outlook, where I will use the opportunity to reiterate some of our revised financial targets before summing up.

Looking ahead, as communicated on our Capital Markets Day last year, we have set an annual growth target of 10%, aiming for a total run rate revenue of NOK 1.5 billion by '26. The growth targets for Managed Services and Professional Services are 15% and 5%, respectively.

As demonstrated over the last quarters, we are well ahead in reaching this target. With most of the growth coming from Managed Services, the revenue composition is developing more positively than envisioned, resulting in a higher mix of high-quality revenue from longer-term agreements with recurring revenue.

Over the last 2 years, our annual growth rate has been approximately 18%. When removing the impact of currency changes, the annual growth rate has been approximately 14%. This growth primarily stems from increased revenue from existing customers within Managed Services and recurring revenue from long-term contracts with new customers. These contracts typically have an initial duration of 5 to 7 years.

Our growth will be driven by a continued focus on acquiring new customers and upselling more value to existing customers through expanded geographic coverage and enhanced functionality. We always prioritize growth that supports the utilization of our existing capacity and infrastructure, thus achieving larger incremental margin.

On an annualized basis, our Q4 revenues almost NOK 1.5 billion. In addition, as just described by Gunnar, we have NOK 126 million net of churn in annual recurring revenue already contract for delivery over the next 12 months. As it currently looks, we are close to our NOK 1.5 billion and its revenue target measured in constant currency. With churn expected to be within our historic thresholds, we are confident in staying on track with respect to growth in the foreseeable future.

A key foundation for reaching our margin target is involved improving the EBIT margin of our German operations according to our EBIT improvement program communicated in Q2 last year. As we started to see already in Q3 and now further in Q4, we have been able to implement these improvements faster than envisioned and see the corresponding effect on our overall profitability.

With huge credit to our respective teams, we expect to see further improvements over time as EBIT for Germany will approach that of our more mature Nordic business. Continuing improvements in combination with additional benefits stemming from the use of AI, along with scaling will further enhance our performance. As a result, we have reframed our Capital Markets Day communicated target of delivering 12% to 15% EBIT in '26 to a tighter range of 13% to 15% EBIT.

In summary, Q4 and 2024 have been remarkable for Zalaris with all-time high revenue and EBIT. We are now close to being a NOK 1.5 billion company, and we delivered 11% EBIT. We have adjusted our sights and are closing in on our target EBIT range from 12% to 15% to 13% to 15%, as the margins in Germany start to approach also our more mature Nordic business, and our confidence in delivering margins have been strengthened.

Cash is continuing to accumulate correspondingly, and our Board of Directors will propose a dividend of NOK 0.90 per share. As announced on April 2, the Board of Directors has initiated a strategic review process. This decision reflects Zalaris' successful expansion of its portfolio of large agreements for global payroll and HR services to leading international enterprises in recent years. The process that we announced is progressing well.

With the company's strong operational improvements and corresponding positive share price development since the announcement, the Board of Directors is taking a measured approach in concluding the process. We continue to carefully expand our strategic opportunities and expect to conclude the process towards the end of Q2 this year. Shareholders will be informed as when and if relevant updates become available.

We could not have landed our 25th year and be ready for our 25th anniversary in a better way. Thank you to our hard-working teams and our customers and partners for all the support on this journey. Thank you for joining us today. We will now open the floor for questions. Gunnar?

Yes. First question, can you help us bridging the EBIT margin from 2024 to your target in 2026 with regards to 2025? And what are the key elements that will determine whether the EBIT margin will be 13% or 15% in 2026?

Well, that's -- it's a long question. But I think in terms of bridging it, we -- as we are delivering 13% EBIT already now in Q4, we are showcasing the potential that we have for our business. So clearly, being able to deliver 13.1% in the Q4 means that 13% to 15% is a range that we will also continue to deliver -- think that we'll continue delivering in, subject to that we are maintaining cost control that we do today, and we continue growing as we have continue -- as we have done and that we recognize the value of the contracts that we already have signed up for.

So I think the key drivers for the EBIT improvement, as you will see also in our report, is that we have been able to maintain the headcount at around plus/minus 1,100 more or less stable over the last 12 months. In addition, we have changed the mix towards more use of favorably, say, costed resources in nearshore and offshore. And thus, the percentage of cost now spent for personnel expenses has been going down month by month, basically. So I think that's the key driver.

But add to that, the scalability of our infrastructure and our organization. As also mentioned in the past, we think that we could easily double the size of our business subject to that we grow in the regions that we are currently located without having to increase our organizational overhead significantly. So I think the scale of our existing business and then the productivity enhancements that we see through utilizing our organization of more automation, more the use of AI, but then also the better use of resource mix with more near and offshore. That's what's going to give us the 13% to 15%.

Thank you, Hans-Petter. So the next one, do you expect to refinance your debt in H2? And how much of your cash position can and will be used to reduce the gross debt? I think I'll be able to answer that.

Yes.

So the first opportunity to actually refinance the bond loan that we currently have, that is in September this year. And we will definitely do evaluate and consider a refinancing at that stage, but it's too early to say the outcome of that. And the outcome of that will also then decide what the cash position that we need to maintain. But definitely, if we were, for instance, to refinance with a normal bank loan that will create a lot more flexibility in terms of our current cash position. So we could use overdraft facilities, et cetera, to handle the fluctuations in working capital, et cetera, so -- but this is something that we need to come back to in H2.

Yes. And as we have mentioned, we're in the midst of the strategic review process. And as part of the process, we are, of course, evaluating strategic options. And clearly, the way we are financed and so on will -- is a part of that discussion as well. But as Gunnar said, the first opportunity for early redemption of the current bond is in September this year.

Next question. Could you talk about your headcount plans for 2025? And was there anything in the cost base for Q4 '22, that helped the strong EBIT margin and that we should expect to increase from Q1 '25?

Yes, I think in terms of plans for headcount, we are continuing growing. We still have quite some work to do in replacing external consultants with internal consultants. So we are constantly on the outlook for really good new colleagues in that area. And it's definitely a limiter for growth in the Professional Services area is to have available consultants, so we are working to add more on that side. However, on the administrative side, we see constantly improving the way we operate, utilizing our global shared service infrastructure. So we don't envision seeing much more overhead being added, but are naturally also looking to see can we -- should we add some more sales capabilities and capacity to serve customers. So that's something we'll continue to evaluate. But all in all, we are focused on maintaining a low-cost base because that is a key to drive margins in our business. So I don't expect to see any significant changes in headcount moving forward unless that comes with also significant added revenue.

And in terms of the cost base, there were no particularly items of things that cost-wise were particularly low in Q4 versus then Q1 this year? To the contrary, I mean, we usually have higher, for instance, bonus accruals in Q4 than in Q1.

Okay. And I think that concludes the Q&A.

Okay. Perfect. So thank you for some good questions. So yes, as you can see, we are ready soon to celebrate our 25th anniversary in April, and we will actually celebrate good results today with some cake. So maybe you should go and have some too. So thank you for listening, and have a great day.