Zalaris ASA

OSE:ZAL

Earnings Call Transcript 2021-Q4

[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 Q4 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.And what a year we have behind us. We have been operating at full capacity, and we have seen all-time high interest in our products and services. This resulted in Q4 signings of new long-term agreements for SaaS and Business Process as a Service that will increase annual recurring revenue, ARR, with NOK 37 million and secure additional recurring revenue for many years to come. For '21 as a whole, this brings us to an all-time high sold annual contract value of NOK 115 million. This will contribute to 11.5% net revenue growth when fully implemented towards the end of the year. We continue seeing stronger interest in our PeopleHub based multi-country solutions. Our recognized revenue for the quarter ended at NOK 201.8 million. This is at 4.1% when measured in constant currency compared to last year. Our high activity level is also visualized through the increase in deferred revenue. This is invoiced revenue from implementation projects that first will be recognized for the duration of the contract from the date when the contract is in production. Deferred revenue increased by NOK 26.5 million from last year to NOK 41.4 million this year. Our EBIT margin ended at 5%, still low and reflecting extra costs from capacity build that needed to serve new customers that are not generating revenue yet. COVID-19 is still making its mark, but our employees and customers are holding out in mixed mode, working from home and office. As the situation improves, we expect to see volumes with existing customers, again, moving in the right direction, driving an increase in revenue. This month, we made an exciting acquisition of a German company vyble, giving us access to own IP to serve small and mid-market companies with a fully digitalized solution for payroll and HR management. I'll cover the potential of vyble at the end of our presentation. So with Q4 revenue as a baseline being NOK [indiscernible] million contract value and base acquisition are estimated to bring Zalaris to NOK 900 million annualized revenue when fully implemented by Q1 '23. This is based on adding NOK 94 million, which is the net remaining value of the NOK [indiscernible] million signed agreements not recognized in Q4 to our reported Q4 figures. To this, we have the estimate value of change orders and variable revenue relating to the new contracts, which normally represents about 10% of the recurring revenue. Thus, with ARR in Q4 being around NOK 505 million, we estimate that the net effect of the new agreements with corresponding change orders to take Managed Services revenue to NOK 650 million when implemented. Add to this the assumption that we will maintain similar Professional Services revenue levels as in Q4, and we end up at an estimated future revenue of NOK 900 million. Additionally, you will see some effects of new sales in '22, growth in Professional Services and revenue growth coming from M&A. When looking at the figures quarter-by-quarter, one should not think that we [indiscernible] been working at all actually. However, as previously mentioned, we have never been working this hard winning and implementing new customers. But the results do not materialize neither in reported revenue nor in our EBIT for the quarter yet. As mentioned previously, our recognized revenue for the quarter ended at NOK 201.8 million at 4.1% measured in constant currency, but slightly down in actual currency compared to last year. Further, when adding in the effect of the NOK 41.4 million deferred revenue, we have delivered our 21st year of uninterrupted growth. Zalaris 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 revenue in Managed Services and around 50% of our revenue in Professional is recurring. Delivering payroll and HR Services based on one common IT platform, the Zalaris PeopleHub supported by local competent resources, has been a key differentiator, contributing to our success and 21 years of uninterrupted growth. From the outset, our goal has been to help customers reduce their direct process costs by 20% to 30% from outsourcing their people processes based on fully digitized workflows to us, at the same time, enabling them to operate seamlessly across borders. Currently, our approximate 880 employees deliver services from 13 countries, including France that we added in Q3. We are currently looking at expanding our own geographical coverage to include all EU and large G20 countries where our customers have significant employee populations. Together with partners, we can deliver to more than 150 countries with our PeopleHub concept, all in one customer-facing solution. Figured by COVID-19, large companies across the globe have reprioritized their investments towards 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. Demand for global payroll and HR solutions is increasing. Again, Zalaris is extremely well positioned to support existing and new midsized and large customers navigate and position themselves in this situation. Our innovative products and services portfolio based on PeopleHub powered by SAP cover the whole payroll and value chain. With the addition of vyble, we will strengthen our position to also serve the SME segments with solutions that are tailored to smaller companies with less complex needs and much lower setup costs. Our largest market unit is Germany, delivering 35% of revenue. Germany and the U.K. are our markets with the largest potential. In addition to being a 7x sized market to our Nordic home market, a higher number of sweet spot customers with more than 1,000 employees are located here. Poland and U.K. are our fastest-growing market units. Poland has doubled revenue since our acquisition in 2017 and is now more than 100 employees strong. Poland is particularly excelling in Professional Services and Application Maintenance Services. U.K. is rapidly turning into a more Managed Services oriented organization from experiencing strong interest in its cloud and outsourcing offerings. The Nordics is still generating more than 50% of our revenue, delivering continued solid results and recurring revenue growth. This is a slide that reminds me of what the fantastic company that we have built. We have a diverse portfolio of customers in most industry segments, some of the leading brands in the region where we operate. Many of these with a fantastic upside in supporting them in continuing digitizing their people processes, simplify work life and achieve more. Many of you asked about our relationship with SAP, particularly now after the acquisition of vyble. When I founded Zalaris with the vision to deliver seamless people services to companies working across borders, we decided to use the proven solutions from SAP to power our offerings. This allowed us to get access to market-leading solutions covering almost all relevant countries with minimal technology risk and at a fair variable pricing. With SAP providing the building blocks [indiscernible] as you might envision it, we have built our own layer PeopleHub around these solutions to simplify deployment of new customers, enhance the user experience and better blending with non-SAP solutions that we frequently integrate with. With SAP guaranteeing their road map, supporting the maintenance of our current solutions to 2014, we have unparalleled security for our business and can almost remove technology risk when we expand into new countries. Particularly for large complex enterprises as the ones that we have won last year as Metsa, Siemens, Yunex, Marstons’ and Gjensidige. Our secure hosting arrangements powered with renewable hydropower-based energy are regularly securing 100% uptime month after month. Working with SAP that allows us to easier expand with proven solutions to new markets and support the trend shift in demand that we are seeing in Germany and the U.K. Let's look at our segments. As mentioned, we experienced a trend shift generating strong sales in Germany and the U.K. as the Zalaris brand is increasingly being recognized. In the quarter, Managed Services revenue increased to NOK 143.1 million, up from NOK 137.5 million in the same quarter last year. This is 8% growth year-by-year when adjusting for currency movements. With more than 90% revenue being recurring and the additional NOK 115 million annual contract value equaling more than 20% segment growth, generating more than NOK 600 million additional contract reserve during '21. This is a rock-solid business. Combined with a pipeline that continues being strong, you can expect this segment to continue showing good growth going forward. As I said in Q3, we reported that we had a strong pipeline. It was thus not unexpected for us that we could continue our signings trick in Q4 for our PeopleHub based platform solutions. In the Nordics, we yet again proved our position in the financial services sector, adding leading insurer Gjensidige with 3,700 people to our customer list. This is another project where our consultants in Professional Services and our Managed Services teams shall implement payroll and HR as a combination of Business Process as a Service for the transactional functions as payroll and travel expenses based on PeopleHub and a SaaS solution covering master data and health management based on SAP SuccessFactors. In Germany, we signed Siemens spin-out Yunex Traffic with 3,100 people in 21 countries as a new PeopleHub customer. Our consultants in Professional Services and our Managed Services teams work in concert to deliver a comprehensive fully digital solution, including master data and [ talent ] management. Again, the solution is based on SAP SuccessFactors [indiscernible] and PeopleHub for time and attendance, travel expenses and payroll as Business Process as a Service. In the U.K., Marstons’, with around 14,000 people in more than 1,000 pubs, chose us to deliver a complete SaaS solution for time and attendance and payroll based on PeopleHub. We have supported Marstons’ for years with Professional Services, and it is a real proof of customer satisfaction when our relationship is expanded to include a long-term agreement to deliver a mission-critical payroll solution. And on this, I'll also remind you that this was also one of the rationales when we acquired ROC and sumarum in 2017 that we wanted to work with their Professional Services customers to convert them into long-term Managed Services customers. And with Marstons’, we see that this is starting working. Having myself actively sold both in Swedish and Norwegian agreements with Siemens in the early 2000s, I just love seeing us expanding and extending our long-term relationship with Siemens with another 6-year contract period. No doubt, this is a positive relationship, also position -- that also position us well to also win the Siemens spin-out Yunex. And with Siemens now in the -- we are expanding from Norway and Sweden to cover the full Nordic with an option to also include the Baltics. So now being in '22, our pipeline continues to stay strong, and our target is to deliver similar growth in the next year. Then let's take a closer look at Professional Services, our consulting practice. Adjusted for currency movements, Professional Services revenue were in line with the leverage last year with revenue of NOK 62.9 million. And to this deferred project revenue from supporting Managed Services implementation projects of approximately NOK 8 million for the quarter, and you find an organization that is currently running at full capacity. We have a short-term negative EBIT impact of higher-than-normal use of external consultants in combination with cost for a trainee program building new consulting capacity in Germany. We are almost back to a normalized resource situation now in Q4 with full normalization expected from Q1. Do also keep in mind that the deferred project revenue comes with no margin shown in Professional Services. That is also a contributor to the lower margin. Gunnar will talk more about this in his section. In Germany, our Professional Services unit successfully completed projects for Stadtwerke Krefeld and BITZER. We have been selected to support Doctors Without Borders with the new SuccessFactors based HR solution. Our team continued its positive development, winning additional [ Workforce ] Application Maintenance Services and a number of new projects. The team also is increasingly supporting the Nordics and -- with both implementation and development capacity. That is our Polish team. In Professional Services, we see that Application Maintenance Services or AMS helping customers maintain their payroll and HR systems, mostly on long-term or subscription basis, continue generating more than 50% of total revenue. We are progressing well in developing AMS services as a group-wide offering as part of the Professional Services business unit out of our Polish Professional Services practice. Our long-term relationship with customers is yet another time visualized through 84% of our Q4 revenue in this segment coming from customers that were also customers in Q4 last year. Over the course of many years, we have looked for good alternatives to serve the market for small- and medium-sized businesses with fully digital payroll and HR processes. Our PeopleHub based solutions are super for the mid and large market and complex employee agreement needs but require significant upfront project investments to establish fully automated processes. Where the vyble opportunity came up a couple of days before New Year's Eve, offering us a way into a solution designed and built for the SME market with a comprehensive set of solutions and -- very innovative feature to simplify onboarding and managing of smaller customers. We acted swiftly in [indiscernible] and showed interest. Vyble, as it turned out, was -- had approximately 600 customers with a total of around 14,000 people serve that generated around EUR 1.1 million in annual recurring revenue. It has an innovative sales and marketing approach and sell both directly to end customers and to indirect channels as [indiscernible] and Professional Services organization. It was still cash negative but growing at a very healthy rate. At the end of the day, we were able to acquire vyble in form of an asset deal, including taking over around 20-plus employees at the price [ sales ] of around 1%. Our intent is to leave vyble as a separate entity, however, utilize our scale, competence and market presence to the [ MAX ] with the goal of supporting rapid growth and bringing the company into an EBITDA positive situation as possible. We are still early days and working on focusing the company and setting plans for the future. We intend to report on vyble separately to secure transparency with the business that we are coming from. I am talking more about vyble in our marketing and outlook section towards the end of the presentation. So with this, 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. We will now take a closer look at the financial figures for quarter-by-quarter. As Petter has already covered the revenue part, but just to repeat the total figure. Revenue for the quarter ended at NOK 202 million, marginally down from last year. However, when adjusted for movements in currency rates from last year, approximately NOK 10 million, revenue increased by 4%. EBIT ended somewhat lower in the quarter compared to last year with an adjusted EBIT of NOK 10.2 million compared to NOK 15.8 million last year. And I will come back to some of the details shortly. As covered by Hans-Petter, we signed a large number of new contracts in Managed Services during 2021, which will result in a significant increase in revenue going forward. What I would like to show you here is when the new contracts signed, I expected to generate recurring revenue in the P&L. As you can see from the bottom graph, which shows the expected development in the annual recurring revenue for Managed Services. These contracts will gradually go live during 2022 and the first quarter of 2023. The large increase in ARR in Q1 2023 includes the newly signed contracts with Yunex Traffic in Germany, Gjensidige and Marstons' in the U.K. The large number of new customer contracts being implemented has a negative impact on the revenue short term, a significant revenue-generating capacity, i.e., consultants, is being utilized on these projects. If we do invoice and generate cash through milestone payments, but the revenue is deferred and recognized in the P&L from the go live date and over the contract period. For 2021, we have deferred revenue of NOK 41 million compared to NOK 15 million last year, as shown in the graph, an increase of NOK 26 million. This also has a negative impact on the EBIT and EBIT margin short term as the [ resources ] spent on these projects do not generate an immediate margin as they did last year. Coming back to the EBIT. The adjusted EBIT of NOK 10.2 million for the quarter was NOK 3.9 million lower than last year, which also had an impact on the EBIT margin. The reduction is mainly explained by payroll tax adjustment of NOK 1.7 million relating to employee share options, more Managed Services and Professional Services resources being utilized on implementing contracts as noted in the previous slide, and some higher cost in preparation for increased volumes, i.e., investments in personnel that are not immediately fully utilized. The EBIT for Managed Services was NOK 14.1 million compared to NOK 15.6 million last year, and the difference is explained by a one-off settlement of VAT dispute from 2019 of NOK 1.8 million. EBIT and EBIT margin in Managed Services are expected to increase as new contracts go live. The EBIT for Professional Services was NOK 4.8 million, and that's also been impacted by more resources being utilized on transformation projects as well as some capacity issues as noted in previous quarters, resulted in -- resulting in a decrease from the high EBIT of NOK 8.2 million last year. The EBIT in Professional Services has gradually improved during the last 2 quarters. Looking at some of the other P&L items. Personnel costs were NOK 4.4 million lower for the quarter due to more costs being deferred, a positive currency movement, which was partly offset by higher calculated option costs and the inclusion of a ba.se of approximately NOK 7 million for the quarter. The increase in other operating expenses of NOK 13.5 million comes from the use of external SAP consultants, approximately NOK 10 million in Poland and Germany, in particular, external M&A costs relating to the acquisition of ba.se and the one-off settlement of the VAT dispute from 2019 mentioned earlier and the inclusion of ba.se. This was partly offset by positive currency movements. Net profit for the period was NOK 1.4 million compared to NOK 18.9 million last year, which included a large unrealized currency gain. Moving on to the cash flow. During the quarter, the company had a positive cash flow from operations of NOK 19.9 million, which was 19% higher than last year. The cash balance at the end of the quarter was NOK 176 million. The net interest-bearing debt at 31 December was NOK 183 million, which corresponds to a ratio of net interest-bearing debt or adjusted EBITDA of NOK 1.8 million. And that concludes the financial section, and I'll leave it up to Hans-Petter to conclude.

[Hans-Petter Mellerud]

Thank you, Gunnar. So let's take a closer look at vyble, which you can find at the web address vyble.io. Vyble is offering a comprehensive suite of payroll and HR functionality, delivered as software as a service and powered by Amazon Web Services that cover employee master data with employee files in recruiting, onboarding, time and attendance, night shift planning, travel and expense claims and payroll and much more. In addition, they have a super cool AI-based payroll simulation tool that is also part of the package, naturally supportive with both web and mobile-based apps. The total addressable market for vyble has been estimated to about EUR 2.6 billion in -- that is for Germany, and it's primarily focused on small and medium enterprises. Many of these enterprises are typically served by local [ accountancies ] or tax advisers. Unlike many competitors, vyble offer all the elements of modern digital HR solutions to small and midsized businesses with an integrated payroll-centric platform. The company currently supports both direct and indirect distribution. Direct distribution is perfect to get close to customers and understand their needs. However, it's the indirect distribution through Professional Services companies and tax advisers or [indiscernible] in Germany that turns us on. In 2019, there were alone more than 97,000 such tax advisers that with vyble asset solution can offer a white label solution to their customers, allowing them to convert typically hourly based billing methods to unit-based price models and keep some of the efficiency gains from digitization in their own business. In the Nordic, we have great companies, as, for example, [indiscernible] office using this as a growth strategy, serving accountancies with accounting and payroll solutions. With Germany being almost 20 size the size of Norway and in the process of catching on to digitization, this for us is a fantastic opportunity. The interest in the space is signified by numerous unicorns and deals as also that we have seen large USP companies making acquisitions in the space. So again, arriving at my last slide, let's sum up. TeamZalaris left '21 with record speed and all-time high sales of NOK 115 million annual recurring revenue, generating 11.5% growth when fully implemented. Our pipeline and opportunity space from being increasingly known for our ability to deliver multi-country payroll in the enormous markets for companies headquarter in Europe supports targeting similar results in '22. We are not forgetting our EBIT targets of 10% and continue focusing on improving margins through honing our delivery models and reducing overhead, while we [ in parallel ] add new business with healthy margins. Zalaris is well capitalized to continue growing via M&A, increased geographic coverage to fit the needs of our customers and add new IP to cover white space in our own solution footprint. The [ whole, our ] teamZalaris is energized and geared up to deliver on our promises and continuing the journey in '22. Thank you, and we open up for questions.

[Unknown Executive]

Yes. First question. How do you think the pipeline will develop going forward compared to what you have seen in 2021?

[Hans-Petter Mellerud]

As we speak, we see very positive developments of the pipeline and expect similar and target similar sales for '22.

[Unknown Executive]

You have not mentioned anything about dividend for 2021. Could you comment on that?

[Hans-Petter Mellerud]

Yes. We will come back later with that, but naturally also as large shareholders being also hit by the Norwegian wealth tax, I am a large proponent of a dividend myself.

[Unknown Executive]

With the acquisition of vyble, does this mean that Zalaris would consider acquiring other companies within more sort of the hedge our tax base.

[Hans-Petter Mellerud]

I think definitely, like I said, we have a healthy balance, like a healthy capital structure. We are actively looking for ways to expand both our geographic footprint as well as closing white space in our solution portfolio and acquiring more technology-related companies is definitely one of the options that we are continuously exploring, finding, of course, then the right candidates.

[Unknown Executive]

And that concludes the Q&A.

[Hans-Petter Mellerud]

Okay. Thanks a lot. Thanks for watching. And please feel free to contact us on [e-mail] if you have any further questions. Thanks a lot. Bye-bye.