Zalaris ASA

OSE:ZAL

Earnings Call Transcript 2021-Q1

[Hans-Petter Mellerud]

Good morning. My name is Hans-Petter Mellerud. I am the CEO of Zalaris. Please also welcome our CFO, Gunnar Manum, who is here with me today for this webcast presentation of Zalaris Q1 2021 results. We are using Teams for this purpose and hope that we will deliver on your expectations. There is a Q&A function that you can use to ask questions that we will respond to at the end of the presentation. Please observe that the presentation is being recorded. You will find a link to the recording on the investor part of our website.Without further ado, let's move on to the presentation. Despite short-term impacts from the COVID-19 pandemic, team Zalaris continued weathering the storm, delivering Q1 on all customer commitments, still with the majority of our employees working from home. Our revenue is slightly impacted by some temporary lower volumes and change orders that can be attributed to COVID-19, and it is still too early to see the effects of our new deals. Our continued EBIT focus is continuing to pay off. Our EBIT margin was 7.2%, up 5 points from 6.7% last year. We signed several new agreements, including a landmark deal with Finnish forest company, Metsä, to provide payroll for their 10,000 employees in 28 countries based on our PeopleHub solution. And as communicated yesterday, our first platform deal in Germany to serve Telefónica O2's 8,200 employees with our outsourced payroll services. In sum, our awarded agreements amounts to about NOK 40 million in recurring revenue when implemented. Our operating cash flow continued being strong, ending the quarter at NOK 118 million. And last but not least, subject to approval on the Annual General Meeting in May, a dividend of NOK 1 per share will be paid out on June 1.Taking a closer look at the figures quarter-by-quarter. Consolidated revenue for Q1 amounted to NOK 192.8 million, down from NOK 200.6 million in the same quarter last year. The lower revenue compared to last year is mainly due to COVID-related temporary reductions within Managed Services in the Northern European region. I will comment on this a couple of slides ahead when looking at Managed Services in more detail.EBIT continued to improve with NOK 300,000 in absolute terms to NOK 13.8 million and with 5 points to 7.2% compared to Q1 last year. We continue optimizing our cost base, as also exemplified through our FTE levels decreasing 5.4% to 714 FTEs. Another key element of further increasing our EBIT is growing revenue through selling platform-based services, as solved with our new agreements. As these use existing platform and infrastructure capacity, they will have a significant marginal contribution to our EBIT in excess of our target drive margins.Our business model with long-term agreements and recurring revenue is one of the favorites among investors. We have offered Software as a Service, Business Process as a Service and outsourcing delivery models since we were founded 21 years ago. More than 90% of our revenue in Managed Services and 55% of revenue in Professional Services is recurring. Delivering payroll and HR services on the basis of one common IT platform, the Zalaris PeopleHub, supported by local competent resources has been key to our success and 20 years of uninterrupted growth.Our approximately 800 employees delivered services from 12 countries. In addition, we can deliver to 150-plus countries through partners with our PeopleHub concept. Our short-term aim is to deliver services with own solutions and people for all EU and European Economic Area countries. From the outset, our goal was to help customers reduce their direct process cost by 20% to 30% by outsourcing their payroll and HR processes to us. At the same time, enabling them to operate seamlessly across borders. With COVID-19, large companies across the globe are reprioritizing their investments for our solutions that enable unified access to payroll and HR data for analytical purposes, digitization of workflows, reduction of cost and securing business continuity of business-critical payroll. Working from anywhere has to continue in normal, driving the need for fully digitized people processes. Even though we see many are delaying large new investments also in HR technology, needed projects to support working from anywhere and secure business continuity are being prioritized.Team Zalaris is extremely well positioned to support existing and new customers, navigate and position themselves in this situation. Our innovative products and services portfolio cover the whole payroll and HR value chain. Our customer base of medium and large-sized customers is diverse in all our market-facing countries. The number and value of customers impacted directly by COVID-19 in transportation and tourism is limited. Even though, as previously mentioned, we see some reduction in business volumes as posting of travel expenses and some reduction in employees. Our largest market unit is Germany, delivering 32% of our revenues. Germany and the U.K. are our markets with the largest potential. Poland and U.K. are our fastest-growing market units. Poland has doubled revenue since our acquisitions in 2017 and is now 100 employees strong. However, we shall not forget that our potential in the Nordic is still large. If we were to achieve the same penetration in Sweden, Denmark and Finland, as we have in Norway, we could double our total revenue. Now let's look at our segments. As previously mentioned, in Managed Services, we continue to see the impact of temporary lower volume of travel controls and other services resulting from COVID-19-related businesses activity and volumes amounted to about NOK 3 million to NOK 4 million. In addition, we still see that COVID-19 has been delaying projects and large change orders totaling around NOK 4 million for the quarter compared to Q1 last year. The capacity last year used for change orders has, in Q1, been used to implement new outsourcing projects with both revenue and costs capitalized, the revenue to be recognized from the go live event for these new contracts. Revenue from new signed agreements in Q1 and also Q4 last year will first start to materialize now in Q2. There was no material churn in revenue within Managed Services for the quarter year by year. In the previous quarters, we have reported the build of our strong pipeline. It was just a great pleasure that we can communicate a number of new signings, providing the potential of our platform-based solutions.In the quarter, we signed new long-term customer agreements with, as previously mentioned, approximately NOK 40 million of annual contract value, when fully implemented, including our landmark agreement with Finnish forest company, Metsä, to deliver payroll for their 10,000 employees in 28 countries based on our PeopleHub solution. With multi-country payroll being a marked experience in strong growth, this was an important win to prove our position in the market, already resulting in increased interest from similar customers. Adding to this, Zalaris has been awarded a groundbreaking agreement with German mobile phone operator, Telefónica Deutschland O2, to provide fully outsourced payroll for their 8,200 German employees. I will cover this deal in some more detail on my next slide. So it was with great pleasure that we yesterday could announce our latest win of Telefónica in Germany. This is our first platform-based sale in Germany since our acquisitions. It's a fantastic example of how increased focus on sales and cooperation across the group create tangible results. The excitement expressed from both customers and their advisers after seeing the digitization and automation capabilities of the Zalaris platform is a promising sign with respect to growth opportunities in the German market, and we already see the interest materializing in new inquiries. As part of the agreement, Zalaris will consolidate Telefónica's 2 SAP payroll solutions to the Zalaris PeopleHub concept with the goal of maximizing quality and efficiency through automation and digital workflows. The solution will be integrated with Telefónica SuccessFactors-based global HR solution with a production start date in January 2022. We will deliver a comprehensive suite of mobile apps to partner payroll outsourcing services from our Leipzig-based service center to their 8,200 employees.As exemplified with this project, Zalaris' cloud-based transformational payroll and HR approach supports customers consolidating multiple solutions into one cloud-based system in a timely and cost-effective manner. The services are perfect for companies that want to future-proof their investments in SAP payroll on time through moving these to the Zalaris cloud platform located here in Europe. There are approximately 10,000 SAP payroll implementation globally and 3,200 in Germany, a huge market. Add to this that we take responsibility for the maintenance and perform future upgrades, add mobile app functionality for our processes, include advanced analytics and use extensive automation, including robotics process automation to deliver it all as a Business Process as a Service priced on a consumption basis on a monthly basis.As integration is a foundation for efficient processes, we provide integrations to whatever global HR solution that a customer has, including leading solutions, as SuccessFactors used by Telefónica, Workday, Oracle, CatalystOne and a wide range of others. This combined with our full-service payroll offering allows customers as Telefónica to rapidly reap the benefits while leaving all the complexity of implementation and maintenance with us.Then let's take a close look at Professional Services or our consulting practice. Professional Services continued developing positively, in particular, supported by positive developments in the U.K. and Poland. Despite COVID, revenue was slightly up to NOK 64.3 million, driven by both high focus on project work as well as positive development in application maintenance services.EBIT levels were somewhat down to NOK 55 million (sic) [ NOK 5.5 million ] for the quarter, mainly due to increased usage of subcontractors to secure proper staffing levels as we are aiming to adjust our demographic mix, targeting reduced average cost to match the expectations of market rates. There is strong focus on optimizing resource utilization across the group and to build new capacity with competitive costs.The market for skilled resources is particularly fierce in Germany and increasingly in Poland. The long termism of Professional Services customer relationships was again confirmed with 84% of revenue coming from customers that were also customers in Q4 last year. In Q1, we organized Professional Services as a group-wide business unit to improve resource utilization across the group and strengthen our profile as a player of delivering global HCM and payroll projects. That means human capital management projects. As access to competent resources, as previously mentioned, in many markets is a key limiter to growth, running group-wide initiatives as trainee and training programs is a key element to future success. This is also where we see huge benefits working closely with Managed Services to provide a very attractive career model.Professional Services continued its positive development, including selling a number of new agreements, including a new contract with thyssenkrupp Elevator for the implementation of a new payroll solution in Germany and a frame agreement to deliver up to 6,000 man days of consulting support over the next 3 years to one of our large German customers in the public sector, together with partner T-Systems International. All in all, more than EUR 5 million worth of contract value. In Poland, we continued expanding our relationship with ABB, being responsible for application maintenance, serving 150,000 employees in 97 countries. Our Polish team also continued their wind stream, closing a number of smaller deals. In the U.K., we continued our positive trend of expanding our relationships with existing customers. In Professional Services, we see that the application maintenance services, helping customers maintain their payroll and HR system mostly on long-term or a subscription basis, continuing at around 55% of the total revenue in Q1. As the absolute value of these services are relatively stable, the percent of share is mainly affected by overall positive revenue development.The AMS revenue stream proves particularly important in times like these when customers are looking to work with proven unknown suppliers for small projects with defined outcomes. Developing AMS services as a group-wide offering is a key focus area for Professional Services. This is also a super farming ground for cloud and outsourcing projects. So important to acknowledge when evaluating our Professional Services business is that contrary to many consulting businesses, around 55% to 60% of revenue is recurring. And as mentioned on the previous slide, this is a key contributor to that 84% of our Q1 revenue in this segment came from customers that were also customers in Q1 last year. I hand over to our CFO, Gunnar, who will take you through the financial part of the presentation.

[Gunnar Manum, Chief Financial Officer]

Thank you, Hans-Petter, and thank you all for listening in to this webcast. Revenue for the quarter was NOK 193 million, which was somewhat lower than last year's figure of NOK 201 million. As mentioned by Hans-Petter, we had some COVID-19-related reductions, which we have also pointed out from the last few quarters. In Managed Services, in the first quarter this year versus last year, we had a NOK 3 million reduction in volume-based revenue, that is revenue from travel expense processing and number of employees, et cetera, and a NOK 4 million reduction in change orders. This explains most of the reduction in total revenue for the quarter, and for most parts, we see this as an effect of COVID-19. There was no material churn in revenue for Managed Services year-on-year. Revenue from Professional Services was approximately in line with last year when we adjust for some customer reclassifications between Managed Services and Professional Services. Marginal lower revenue in Germany was offset by increased revenue in Poland, which is still experiencing very good growth. Adjusted EBIT was NOK 13.8 million compared to NOK 13.4 million last year, an increase of 3%. And there was a slight improvement in adjusted EBIT margin of 7.2%. As mentioned, the EBIT margin was slightly higher than the same quarter last year, as seen in the figure on the left. And we saw a small increase in the margin for the last 12 months, as seen in the figure on the right. We continue to target an EBIT margin of 10%. Looking at the P&L. We are now implementing more new BPO contracts compared to the same time last year. As a result, more resources are being utilized on these new contracts, resulting in increased deferred revenue and costs, which will materialize in increased revenue as the projects go live. This is reflected in the reduced personnel costs as more costs are being deferred, as shown in the P&L, with a 5% reduction in personnel expenses year-on-year.Net financial income for the quarter was NOK 11.2 million compared to negative NOK 72 million last year. This includes an annualized currency gain of NOK 17.4 million on the EUR 35 million bond loan and other foreign currency denominated items. Last year, the unrealized loss on these items was NOK 66.3 million. This resulted in a net profit for the quarter of NOK 17.5 million compared to a loss of NOK 48.6 million last year.Moving on to the cash flow. There were some significant movements in other receivables and payables during the quarter, including an increase in prepayments as a result of annual licenses paid and other working capital changes, including a reduction in VAT payable, which resulted in a negligible cash flow from operations for the first quarter. However, the cash balance of NOK 117.6 million at March 31 is NOK 30.1 million higher than the same time last year after the repayment of interest-bearing debt of NOK 17 million.Quickly looking at the balance sheet. The net interest-bearing debt decreased from NOK 252.2 million at 31 December to NOK 242.4 million at 31 March. The reduction is primarily due to a stronger NOK -- Norwegian kroner versus euro, which impacts the NOK value of the EUR 35 million bond loan. The company will pay a dividend of NOK 1 per share for 2020 on 1 June, subject to approval by the Annual General Meeting to be held on the 20th of May.That concludes the financial section, and I hand it over to Hans-Petter to present the outlook for Zalaris.

[Hans-Petter Mellerud]

So yes, as you know nonorganic growth has been an important element in developing Zalaris into the company and capabilities that we currently represent. Our acquisitions of German sumarum and U.K.-based ROC in 2017 has transformed us from being a Nordic about NOK 100 million per quarter revenue company to a leading European player with approximately twice the revenue and a significant presence in the key German and U.K. markets.We are now operating under one common brand, common IT infrastructure and solutions. We have many of the leading global and regional organizations as customers. Reaching our communicated 10% EBIT target is well within reach as we continue scaling our solutions, as reflected in our new signings and landmark teams. Integrating the acquisitions has taken time with -- and with our recent improvements and wins, we have started also harvesting the results of our hard work, now seeing also through increased revenue.We are constantly being asked about our M&A strategy, what dates and time lines are we looking at, et cetera. And as also explained in previous presentations, we are actively pursuing nonorganic growth options. Our prioritized focus is on companies that can either help us utilize our scale in existing markets or that can help us expand into the rest of the EU countries.In terms of utilizing scale, this can either come from cost synergies or utilizing our platform infrastructure capacity to the fullest potential. As I have mentioned previously, the incremental cost of adding new customers on our platform is limited to additional license costs with less additional hardware and operational costs. As a second dimension, we are looking at additions to our portfolio HR technology, preferably solutions that are natural add-ons to expand our relationship in the payroll and transactional HR space. In terms of size, we do prefer small and easier digestible bids. However, we are open for more transformative options.We are currently participating in processes. Succeeding with a long-term M&A-based strategy also require capital discipline and a clear path on value realization. There are other smaller processes that we are part of and hope to communicate some news soon.With our balance sheet and cash at hand, we have experienced that we have the capacity to make some smaller acquisitions. This, we believe, will contribute nicely to our financials if executed right. Signals from the capital market are very positive in terms of our ability to raise additional financing, including equity bonds and debt, if that becomes necessary, for any potential larger transactions.So arriving at my last slide, let us sum up. We continue our daily work on being a better version of ourselves compared to what we were yesterday, represented by our #BestingOurselves. We will continue our focus on creating satisfied customers at every investor touchpoint in Germany. We also believe that happy employees is key to have happy customers.We will continue driving margin improvement through improving operational efficiency, including maximizing the use of our near offshore and automation and to signing the right deals, leveraging the scalability of our existing platform. Our goal is to continue our growth streak and deliver our 21st year of continuous growth. And as just mentioned on my previous slide, we are actively exploring acquisition opportunities. This is a key to meet our growth aspirations. We have learned a lot from our previous acquisitions and are ready for new projects. And with this, we are open for questions.

[Hans-Petter Mellerud]

So Gunnar, do we have questions?

[Gunnar Manum, Chief Financial Officer]

We do have some questions. You state a higher pipeline compared to the same period last year. But what is the level compared to previous quarter?

[Hans-Petter Mellerud]

Yes. The current pipeline is higher than the -- compared to the previous quarter. So we have a very promising pipeline and are well advanced into many of the discussions with customers. Very quiet today.

[Gunnar Manum, Chief Financial Officer]

No further questions.

[Hans-Petter Mellerud]

Okay. So with that, thank you. If you should come up with further questions, please do not hesitate to send them to us at [e-mail], and we'll do the best we can to respond to you as soon as possible. Thank you, again, for watching this webcast. Have a nice day.