Zalaris ASA

OSE:ZAL

Earnings Call Transcript 2020-Q2

[Hans-Petter Mellerud]

Good morning. My name is Hans-Petter Mellerud. I am the CEO of Zalaris. Please do also welcome our CFO, Gunnar Manum, who is here with me today for this webcast presentation of Zalaris Q2 2020 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. In a macro environment heavily impacted by the COVID-19 pandemic, we are pleased to announce that we, with almost all of Team Zalaris working from home, delivered Q2 with a positive development in EBIT and cash flow. All our services have been delivered without disruption. A handful of our colleagues had been infected with COVID-19 whilst working from home. They are now safe and back at work. Our early offering of COVID-19-related services supporting our customers tackling the pandemic were well received. Our modern IT solutions and distributed service center infrastructure enabled us to move to home office within a few days. Our supportive team of colleagues did whatever needed to support customers in this difficult time. Feedback from customers and employees on how we have handled this situation has resulted in all-time high net promoter scores, and I'm really proud of Team Zalaris. Team Zalaris delivered Q2 with a year-on-year revenue growth of 5.8% to NOK 198.4 million and corresponding adjusted EBIT growth of 79% to NOK 12.7 million. At the same time, we saw our cash position increase with NOK 65 million compared to Q2 2019. Our EBIT Improvement Program launched in Q2 last year with a goal of reducing monthly costs with NOK 4.7 million starting from Q1 this year has been a key contributor to the improved results. Many of our customers are adjusting headcount and business volumes downward as a result of COVID-19. However, we have maintained overall revenue development through supporting customers with additional services resulting from the pandemic. This is particularly the case for our Professional Services. A functioning payroll and HR function is a license to play for all large companies. Our customer base is solid with typical 5-year agreements. We have had no churn or COVID-19-related write-offs. Our business model with long-term agreements and recurring revenue is increasingly in favor among investors. We have offered software as a service and business process as a service delivery models since we were founded 20 years ago. Working from anywhere has become the new normal, driving the need for fully digitized people processes. Delivering payroll and HR service on the basis of one common IT platform, supported by local competent resources, has been key to our success, our 19th year of uninterrupted growth. From the outset, our goal was to have customers reduce their direct process costs by 20% to 30% by outsourcing their payroll and HR processes to us. With COVID-19, everyone had been learning what's working from home or anywhere means. Reducing cost and focusing capital expenditures to projects with defined short-term payback is a natural consequence of every company bracing themselves for the unknown of the pandemic. Add to this, the overall megatrend of increased focus on human capital management and corresponding growth in cloud-based HR solutions. Team Zalaris is extremely well positioned to support existing and new customers navigate and position themselves in this situation. Our innovative product and services portfolio cover the whole payroll and HR value chain. We are very pleased to see that the investor market is also recognizing our strong position. This has resulted in that the number of Zalaris investors has increased by almost 30% since the beginning of the year. Welcome to all of you. Our customer base of medium- and large-sized customers is diverse and -- in all our market-facing countries. The number and value of customers impacted directly by COVID-19 in transportation and tourism is limited. Our largest market unit is Germany, delivering 64% of our revenue. Germany and the U.K. are our markets with the largest potential. However, it's also important to not forget our home market. If we were to achieve the same penetration in Sweden, Denmark and Finland, as we have in Norway, we would also double our total revenue. Professional Services has seen postponement of some projects as a result of COVID-19. These are expected to return when the situation settles. COVID-19-related business continuity services are in high demand. This resulted in expanding services with a number of existing customers in U.K., Poland and Germany. In Germany, we signed a landmark agreement together with SAP in the municipality sector. We shall deliver a new SuccessFactors cloud HR solution to the City of Krefeld's service organization. In Managed Services, we experienced increased interest resulting in a growing pipeline. During the quarter, we signed a number of new agreements, including a 5-year agreement for software as a service-based payroll with the Norwegian county municipality of Trøndelag with 5,000 employees, a 10-year master services agreement for payroll and HR services to a leading Nordic bank with 50,000-plus -- 15,000-plus employees, a 5-year agreement of software as a service-based payroll with a 3,000-plus employee strong leading global energy company operating in Norway, and expansion of our services with GlaxoSmithKline to also cover Austria. During the fall of 2019, we became an Oracle payroll partner. The relationship has proven productive through producing 2 of our reported needs. This is encouraging us to explore the potential for also further partnerships in the future. The Managed Services segment grew by 2.4% during Q2 compared to the same quarter last year and amounted to NOK 137.1 million for the quarter. Managed Services revenue contributed to 69% of total revenue for the group. Of this, more than 90% is recurring revenue. As previously mentioned, we had 0 churn in the quarter. EBIT for Managed Services was NOK 16 million, about unchanged from the same quarter last year. Securing business continuity for our customers has been the key focus area for management during the quarter. Moving all employees to home office within days and continue operating, delivering on agreements, ensuring correct payroll is a considerable challenge. Customers recognize the additional value of having a professional supplier with respect to ensuring business continuity. Zalaris' distributed model of service centers, combining local, nearshore and offshore on the basis of one common IT solution allows for flexibility and needed compartmentalization of risk to tackle the pandemic. In parallel to handling the pandemic, Managed Services realized a further almost NOK 1 million monthly cost saving to be seen from Q4, coming from additional reduction in staff, increased near-shoring, automation and organizational alignment. Revenue in the Professional Services segment amounted to NOK 61.3 million for the quarter, an increase of 14.1% from last year. The positive development was led by our Polish organization, expanding services with existing customers and winning new ones. In Germany, we reduced 1 management layer, increasing significantly the agility of the Professional Services organization. In parallel, we launched an 18-month program to optimize our location strategy with a goal to consolidate most of our German administrative functions into our life-stage service center. This is expected to continue to -- contribute to approximately NOK 8 million annual cost savings when fully implemented from the end of 2021. Our long-term relationship show up in our revenue composition. Almost 80% of our Q2 Professional Services revenue came from customers that were also customers in the same quarter last year. EBIT for Professional Services for Q2 was NOK 4.1 million, including a one-off redundancy cost of NOK 2 million. In Professional Services, we see that the application maintenance services helping customers maintain their payroll and HR systems, mostly on a long-term or subscription basis, has developed very positively, amounting to 62% of revenue in Q2. This revenue stream proves particularly important in times as these, when customers are looking to work with proven known suppliers for smaller projects with defined outcomes. So important to acknowledge when evaluating our Professional Services business is that contrary to many consulting businesses, more than 60% of revenue is recurring. And as mentioned on the previous slide, this is a key contributor to -- that 80% of our Q2 revenue in this segment came from customers that were also customers in Q2 last year. So with this, I hand over to our CFO, Gunnar Manum, 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. As Hans-Petter noted, revenue for the quarter was NOK 198.4 million, an increase of 6% from last year. Managed Services generated stable recurring revenue from predominantly the same client base as we had last year, but Professional Services saw a good increase, mainly from Poland. Adjusted EBIT was NOK 12.7 million compared to NOK 7.4 million last year, an increase of 72%. And the margin increased by 2.5 percentage points to 6.4%. We have seen a gradual improvement in margin following the implementation of the EBIT Improvement Program as seen from the quarter development in the EBIT margin for the last 12 months. And further cost reductions will materialize going forward with NOK 1 million monthly cost reduction expected by Q4 2020 through the reorganization of the Nordic Professional Service organization. Organizational optimization initiatives in Germany are also expected to improve margins. The positive EBIT effect of the cost reduction and efficiency initiatives will increasingly become more visible in the P&L. We continue to target 10% EBIT margin. As noted, there was a good improvement in adjusted EBIT and adjusted EBIT margin during the second quarter. Through the EBIT Improvement Program initiated in 2019, employee costs and other operating expenses have been reduced by approximately NOK 15 million for the quarter and NOK 27 million year-to-date compared to last year, when adjusted for currency effect. Thus, the company's operational cost base has been significantly reduced and has contributed to an increased operating cash flow. Net financial income was NOK 19.8 million compared to a loss of NOK 8.7 million last year. This includes an unrealized currency gain of NOK 25.6 million on the EUR 35 million bond loan, compared to a loss of NOK 0.5 million last year. Net profit for the period was NOK 22.4 million compared to a loss of NOK 3.3 million last year. Moving on to the cash flow for the quarter. The cash balance increased by NOK 41.5 million during the quarter, an increase of 47%, and NOK 69.4 million from the second quarter last year. The operating cash flow was NOK 45.4 million compared to NOK 5 million last year. The increased operating cash flow is due to a large reduction in working capital during the quarter of NOK 34 million as well as a lower cost base as a result of the EBIT Improvement Program. The reduction in working capital is a result of lower trade receivables of NOK 24 million and some deferred VAT payments of NOK 8 million to NOK 10 million allowed under COVID-19 relief schemes. There's been no delays in the collection of trade receivables during the quarter. Moving on to the balance sheet. As a result of the increased cash and the slight reduction in the NOK value of the euro-denominated interest-bearing debt, net interest-bearing debt was reduced by NOK 66.6 million to NOK 277.9 million during the quarter. Based on the current financial performance and position of Zalaris, the Board will propose a dividend of minimum NOK 0.5 per share for 2020. And that concludes the financial section, and I hand it over to Hans-Petter to present the outlook for Zalaris.

[Hans-Petter Mellerud]

Thank you, Gunnar. And then to some closing remarks to our view of the market and the opportunities that we have. Zalaris is a complete payroll and HR partner to mid- and large-size organizations. We deliver a range of solutions covering the whole employee life cycle with fully digitized processes that are integrated with local authorities, banks and other stakeholders. We have live integrations between our solutions and all major global HR systems. Our Professional Services unit supports customers implementing solutions from leading providers, SAP, and support our Managed Services unit, implementing new customer projects. The market fundamentals remain strong, and Zalaris' key markets are expected to grow in the foreseeable future. Zalaris is well positioned to capture part of this growth through new customers and by expanding the service offering to existing customers. The COVID-19 pandemic has had limited financial impact on the company so far, but revenue could be impacted negatively in the time to come depending on the scope and duration of COVID-19. However, the underlying market fundamentals remain strong, and the long-term outlook is very positive. In summary, we continue our daily work on being a better version of ourselves, represented by our #bestingmyself, or for Team Zalaris, #bestingourselves. We are still aiming high despite disruption introduced through COVID-19. We will continue driving margin improvement through our ongoing project for operational efficiency, including maximizing the use of near, offshore and automation capabilities; continue work in scaling on Zalaris payroll software as a service and outsourcing models successfully into Central Europe as well as U.K., Ireland and build on existing and new partnerships; develop Professional Services in the direction of a global business unit and explore further the potential of our solid partnership with SAP; deliver on an expected increased demand as a result of COVID-19 for solutions that support reducing operating costs and allowing flexibility to work from anywhere. This is back to the outsourcing basic value proposition on which we have built the majority of our Managed Service business. We expect acquisition opportunities to surface and intend to be an active player in the market. We have learned a lot from our previous acquisitions and are ready for a new project. And last but not least, build on our experience of handling COVID-19, being a more agile team-oriented demanding organization, setting clear targets and following up on the results. So with this, we open up for questions. So Gunnar, do we have questions?

[Gunnar Manum, Chief Financial Officer]

No.

[Hans-Petter Mellerud]

So it does not seem as we have any questions. No questions? Okay. So we have no questions. So then we are -- of course, if you come up with questions, you are naturally -- you should feel free to contact us through [e-mail], and we will do our utmost to respond to you as soon as possible. Thank you for listening, and welcome back for Q3 during the fall. Bye-bye.