Zalaris ASA
OSE:ZAL
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Mastercard Inc
NYSE:MA
|
Technology
|
|
US |
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Walmart Inc
NYSE:WMT
|
Retail
|
|
US |
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
46.5
79.2
|
Price Target |
|
We'll email you a reminder when the closing price reaches NOK.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Berkshire Hathaway Inc
NYSE:BRK.A
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Mastercard Inc
NYSE:MA
|
US | |
UnitedHealth Group Inc
NYSE:UNH
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Walmart Inc
NYSE:WMT
|
US | |
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Good morning. I am Hans-Petter Mellerud, the CEO and Founder of Zalaris. Joining me today for this webcast presentation of Zalaris Q2 '23 results is our CFO, Gunnar Manum. We are using teams for this purpose and hope that you will find it informative and engaging. [Operator Instructions]
Please note that the presentation is being recorded. You can access the recording on the Investors section of our website. Let's begin with the presentation.
First, we'll look at some of the highlights of the quarter. In Q2 2023, Zalaris delivered the sixth consecutive quarter with all-time high revenues of NOK 280.5 million, up from NOK 210 million in Q2 last year. This represents 33.5% year-on-year growth in actual and 20% in constant currency. Adjusted EBIT ex Asia Pacific was NOK 22.3 million for Q2, up 118.6% from NOK 10.2 million in the same period last year.
We are surpassing our growth aspirations for the year and will deliver '23 well above our initial NOK 1 billion revenue target. In fact, we have now delivered a major milestone of becoming a EUR 100 million run rate company. Our EBIT improvement program is on track, and we continue to target 10% adjusted EBIT by the end of '23.
Winning two of the main prizes at the Global Payroll Associations annual awards, Payroll Software Supplier of the Year and Transformation Project of the Year was a great recognition of our enhanced position in the international payroll market. We left the quarter with solid sales for H1 as a whole and a pipeline that has grown 53% compared to the same quarter of last year.
History tends to repeat itself with recessionary cycles that boost the demand for our kind of services. Reducing costs and improving the ratio between variable and fixed costs are appealing value propositions. Moreover, we offer enhanced compliance and the ability to deliver end-to-end integrated digital processes. In the quarter, we signed new agreements with a total Annual Contract Value of about NOK 6 million. There is a significant potential to increase the geographic scope for the global retailer, where the initial call-off covers around 5% of their global workforce.
We also renewed our long-term relationship with Finnair, expanded our payroll rollout for another large airline customer in the U.K. and closed our first payroll deal albeit small in Australia. With these new signings, we have secured approximately 90% of our '23 sales budget needed to sustain 15% growth in Managed Services in the coming years by the end of this quarter. This is considerably ahead of closed sales in the same period last year.
In addition, we have increased our pipeline of multi-country PeopleHub new name and upsell opportunities to approximately NOK 800 million annual contract value. This is 53% higher than at the end of Q2 last year. NOK 24 million of this pipeline is in the final contracting stage and expected to close soon.
Then let's take a look at our segments. Managed Services revenue increased by 34.5% as reported and 22.5% in constant currency, reaching NOK 204 million. This growth was driven by new contracts, upsell and volume increases, which accounted for 56% of the increase as well as new customers which contributed 44%.
As a result, our Net Revenue Retention in constant currency was 109% year-on-year as existing customers expanded their geographic footprint and functionalities. All our regions achieved well above our target of 15% growth. Managed services represented 73% of our total revenue, slightly higher than last year.
Then it's time for Professional Services, our consulting practice. Professional services revenue grew 25% and 7.3% in constant currency to NOK 72.3 million. Our professional services capability has been key to win our recent contracts and is increasingly also being used in Germany and U.K. to implement managed services contracts based on Peoplehub and our standardized template-based solutions.
Most of the growth in this segment came from the U.K., which grew by a massive 88% compared to last year. Germany had revenue in line with last year as consulting resources were increasingly used to implement managed services projects. And again, let me remind you, in professional services, we see that the Application Maintenance Services, AMS, helping customers maintain their payroll and HR systems, mostly on long-term or subscription basis, continue generating around 57% of the total revenue.
We are progressing well in developing global AMS services as a group-wide offering out of our Polish professional services practice under the branding Zalaris Care. Our long-term relationships with customers continue being visualized through 78% of our Q2 revenue in this segment, coming from customers that were also customers in Q2 last year.
Two of our three key people metrics are developing in the right direction. Our first metric, the percentage of near and offshore resources in our total headcount is a key factor for a cost-effective resource mix. It increased by 7 percentage points year-on-year to 39.2%. This lowers our resource cost and is a significant step towards our Zalaris 4.0 target of 50%. We expect this trend to continue.
Our second metric, the percentage of external consultants in our total headcount is relatively stable year-on-year. This metric remains our target for a substantial cost reduction, but it is challenging due to the limited availability of resources in the market. We will put more effort into driving this metric in the right direction.
Our third and final metric focuses on improving productivity, as measured by revenue per employee. It increased by 20% in reported and 8% in constant currency year-on-year. We expect this trend to continue through our continued focus on automation, standardization and scale.
We are on track with our EBIT improvement program as communicated in Q3 last year. The program targeted NOK 40 million to NOK 50 million improvement in EBIT by the end of '23. During the quarter, we made significant progress in our EBIT improvement project. We have implemented most of the improvements we identified in the Nordic region, and we expect to see this impact on our margins in the coming quarters.
We are now focusing our efforts on completing EBIT improvement activities in our German operations. We completed the first wave of data center consolidation in early August, and we expect to finish this by September. We still have some double resource costs from adopting the Zalaris 4.0 operating model, which includes automation and moving work near and offshore.
We will gradually reduce these costs by Q4 as we reassign or release the excess capacity. We will increase our attention to reduce the use of external consultants with stronger growth resulting in increased demand in combination with limited good resources available in the market. This is, however, challenging. To address this, we have established a separate strategic project to set up Zalaris Academy with a goal of developing our own talent through training programs and other means.
So let me remind you again of what our company Zalaris has become. Our business model based on long-term agreements and recurring revenue is favored by many investors. We have offered software as a service, business process as a service and outsourcing delivery models since we were founded 23 years ago. And to reiterate, more than 90% of our revenue in Managed Services and around 50% of our revenue in Professional is recurring based on long-term agreements.
Our historic churn is low in the 2% to 3% range. Delivering payroll and HR services based on one common global IT platform, the Zalaris Peoplehub, supported by local competent resources, has been key to our success and 23 years of growth. Now we're EUR 100 million run rate company, we are being seen as one of the leading global players in the industry.
From the outset, our goal was to help customers reduce their direct process costs by 20% to 30% by outsourcing their payroll and HR processes to us. At the same time, we enable them to operate seamlessly across borders. Our approximately 1,100 employees deliver services from 17 countries. In addition, we can deliver to 150 countries plus, through partners with our Peoplehub concept.
Our short-term aim is to deliver services with our own solutions and service centers for all European economic area and G20 countries. We see large companies across the globe prioritize investments in our solutions that enable unified access to payroll and HR data for analytical purposes, digitization of workflows, reduction of costs and securing business continuity of business-critical payroll.
Working from anywhere has become the new normal, driving the need for fully digitized people processes. Team Zalaris is extremely well positioned with our innovative products and services portfolio that cover the whole payroll and HR value chain. Our services are built around our people of concept, enabling customers to manage their human capital across borders in one common cloud-based system solution with functionality covering the full employee life cycle.
The solution is offered as software as a service with various layers of business processes as a service and outsourcing, and can be integrated to all major HR solutions. Our organization is structured in two business units, Managed services deliver solutions and services based on PeopleHub, ranging from software as a service to a comprehensive outsourcing. We can integrate to whatever global HR solution a customer has.
Professional Services is an SAP partner focused on advisory and implementation services of SAP Human Capital Management solutions as SuccessFactors and as for [indiscernible] product portfolio. Professional Services is also responsible for implementing new managed services customers. Managed services accounted for about 73% of revenue in Q2. Professional Service, they're corresponding 27%.
And this is a slide that reminds me of what fantastic customer base we have, typically midsized and larger companies with more than 1,000 employees and operating in 2 or more countries. We have a diverse portfolio of customers in most industry segments, some of the leading brands in the regions where we operate. Many of these with a significant upside in supporting them in continuing digitizing their people processes, simplify work life and achieve more.
So 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. The second quarter was the sixth consecutive quarter with all-time high revenue. The revenue for the quarter was NOK 208 million with an increase of 33% year-on-year, and an increase of 20% when measured in constant currency.
In the second quarter, approximately 80% of total revenue was invoiced in currencies other than NOK. Revenue in Managed Services increased by 22%, while professional services had an increase of 7% in constant currency. As noted in previous quarters, significant professional services resources, particularly in Germany, are still being utilized on the implementation of new customers and change orders within Managed Services. Thus reducing the external revenue-generating capacity within that division.
As mentioned by Hans-Petter, approximately 56% of the reported revenue increase in Managed Services come from customers that were customers in Q2 last year and 44% of the growth came from new names. New contracts signed in Managed Services during the quarter as annual recurring revenue of approximately NOK 6 million, while a further NOK 24 million are under contracting.
This slide shows the revenue impact of signed contracts that have not yet gone live at the end of the second quarter. The net annual recurring revenue from these new contracts is NOK 84 million, which represents a further increase in annual revenue from Managed Services of 10% when compared to the annualized revenue in the second quarter.
In the top graph, we show on the left, the current annual recurring revenue for Managed Services of NOK 713 million, based on the annualized revenue figures for the second quarter. On top of that, we have NOK 84 million in additional net annual revenue from signed contracts that will be implemented. Thus, the contracted annual recurring revenue going forward is NOK 797 million. The timing of this additional net amount of NOK 84 million in annual revenue is shown in the bottom graph. With a new EUR 5 million contract with Innomotics won last quarter, planned to be fully implemented by the end of next year.
On top of the estimated recurring revenue of NOK 797 million within Managed Services, we normally have change orders of approximately 10%, that is NOK 80 million and revenue from Professional Services and APAC of NOK 248 million based on the figure for the full year last year. This gives an estimated future annual revenue for Zalaris of approximately NOK 1.1 billion based on signed long-term managed services contracts and calculated using the average exchange rates for the second quarter. This is 26% higher than the total revenue last year, not including any revenue increase in professional services or APAC.
The adjusted EBIT, including APAC, for the second quarter was NOK 22.3 million, an increase of 119% year-on-year. The APAC region had a negative EBIT of NOK 2.1 million. The adjusted EBIT margin, excluding APAC, was 8.1%, up from 4.9% last year. The EBIT of Managed Services were NOK 27.7 million, which was NOK 17 million higher than last year, and the EBIT margin increased by 6.5 percentage points to 13.6%.
Margins have increased mainly through lower marginal costs and the positive impact of operational improvements, particularly in the Northern European region. The EBIT for Professional Services was NOK 2.9 million, a decrease of NOK 2 million compared to last year. The EBIT in professional services have been negatively impacted by the investment in business development activities and a high use of external consultants.
The large drop shown in the graph between Q1 and Q2 this year is mainly due to seasonality with Q1 normally being the best quarter in professional services and the high business development costs just mentioned.
Moving on to some of the other key P&L items. With the increased revenue and ongoing transformation projects for new customers, the number of FTEs have increased by 103 year-on-year. This, together with the negative currency impact from having more than 80% of our personnel costs denominated in currencies other than NOK largely explains the increase in personnel expenses. A majority of the new FTEs have come from nearshore and offshore locations.
Other operating expenses were also negatively impacted by currency movements as well as an increased number of externals, the use of payroll partners such as BDO on new global payroll contracts and increased travel. The EBIT was NOK 13 million for the quarter versus NOK 1.2 million last year. Net financial expenses were NOK 21.9 million, which includes a currency loss of approximately NOK 9 million relating to the euro-denominated bond loan.
Profit for the period was negative NOK 9.3 million for the quarter compared to negative NOK 21 million last year. And total comprehensive income was positive NOK 4 million compared to negative NOK 3.5 million last year.
We continue to have a strong cash position with a cash balance of -- at 30 June of NOK 114 million. The operating cash flow before interest was NOK 13 million, which included an increase in net working capital of NOK 21 million, of which NOK 16 million related to the annual payment of accrued bonuses and sales commission for 2022.
We made investments mainly in system development of NOK 4.7 million and the net interest-bearing debt at 30 June was NOK 356 million. Now that concludes the financial section, and I will now leave to the word to Hans-Petter to give you some perspective on our markets and outlook.
So thank you, Gunnar. To sum up, let's look at our outlook for the future. We have had a superb start of the first half of '23. We reported another all-time high quarterly revenue, and we are well on our way to becoming a NOK 1 billion company in '23.
Moreover, we have delivered on a major milestone of becoming a EUR 100 million run rate company. Our next milestone is to deliver 10% adjusted EBIT in Q4 as EBIT improvements and increased scale gradually takes place. Our signings in H1 and our reported growth far surpassed our communicated 10% growth target. And remember, growth is coming mainly from Managed Services, our long-term recurring revenue machine that provides payroll services that everyone needs to stay in business.
We had targeted 15% annual growth, but are currently growing at more than 20% year-on-year. As we have shown previously, you see that almost exponential growth coming from outside the Nordic home market as our serviceable available market is increasing with our geographic expansion and our global delivery model.
In addition, we have a healthy professional services business that is also growing faster than its 5% target. Over the past 2 years, we have invested in standardizing and improving our PeopleHub solution to support customers with global footprints. We have also used AI technology to automate and improve customer service and innovative solutions to track employees' CO2 footprint.
We apply our standardized and improved solution to all new projects across our global operations. This allows us to implement projects faster and scale our business more efficiently by using one multi-tenant IT solution and improving our BPO operations with more cost-effective near and offshore resources.
We are confident that our strategy of providing global PeopleHub platform-based solutions to mid-market customers with multi-country needs will support both our tagline "simplify work life. Achieve more" and help us sustain our current growth rate and achieve our margin expansion goals.
Thank you, Team Zalaris, for the great work you put in making satisfied customers and delivering results. I'm very proud of our achievements to date and optimistic about our future.
To bring further insight into our business and the potential that we see for the future, we invite you all for our Capital Markets Day on the 19th of September. The event will be organized as a physical event in Oslo, and you will also be able to join via webcast. Please see our IR pages for more information. And then we are open for questions. Gunnar?
Yes, Hans-Petter. We have one question. Could you provide some more information on the status of the APAC region?
Yes. The APAC region is growing rapidly according to plan. And we expect APAC and target APAC to be EBIT positive now in Q4. And I think since over the last 2, 3 quarters. We have more than 15 new customers in APAC and are really establishing APAC as a good presence.
And that concludes the Q and A.
Okay. So not many questions today with our good results. That's good. If you should have some, please feel free to contact us on ir@zalaris.com, and we'll be happy to respond to them.
And again, we are welcoming you to our Capital Markets Day on the 19th of September, where you will also have a super chance to interact with the Zalaris management team. Thank you so much for joining, and have a great day.