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Edited Transcript of ZAL.OL earnings conference call or presentation 28-Feb-20 7:30am GMT

Q4 2019 Zalaris ASA Earnings Call

OSLO Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Zalaris ASA earnings conference call or presentation Friday, February 28, 2020 at 7:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Gunnar Manum

Zalaris ASA - CFO

* Hans-Petter Mellerud

Zalaris ASA - Founder & CEO




Hans-Petter Mellerud, Zalaris ASA - Founder & CEO [1]


Good morning. My name is Hans-Petter Mellerud. I am the CEO of Zalaris. Please do also welcome our new CFO, Gunnar Manum, who joined Zalaris in January and is here with me today for this webcast presentation of Zalaris Q4 and Fiscal Year 2019 results.

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. It is a pleasure to announce that we finished Q4 with an all-time high revenue of NOK 206 million, and that we continue our growth streak, finishing 2019 as our 19th year of uninterrupted growth with almost NOK 777 million in revenue for the year. This amounts to 6.2% growth for the quarter and 4.2% for the year. With this, we have, since our IPO in 2014, multiplied our revenue 2.4x, resulting in a compounded annual growth rate of approximately 19%.

Still reflecting inefficiencies from our restructuring activities, our adjusted EBIT was NOK 30.50 million for the year. This is an improvement of 9% since 2018. Needless to say, we are not satisfied with this EBIT margin as it is far from our communicated target of 10%. We expect to see significant improvements as our cost reduction initiative takes effect in Q1.

As communicated in previous reports, we have now downsized our employee base with a net of 52 full-time equivalents. The vast majority of this were in administrative and back-office functions.

Cash and cash equivalents showed a positive development with an increase of NOK 17.6 million in the quarter.

During the fourth quarter, our customers continued extending their relationships with us such as The State of North Rhine-Westphalia, Germany's largest employer with a staggering 700,000 employees and pension recipients, which selected Zalaris to continue providing SAP application maintenance services securing payroll accuracy and efficient digital processes to their 1,000 strong payroll and pension shared service center.

Leading natural gas transporter, Gassco, a Zalaris customer since 2003, renewed its agreement for payroll, time and attendance and travel expense management. Yara, among the largest fertilizer companies in the world, upped its commitment for transactional HR services across Norway, Sweden and Denmark, powered by Zalaris' proven cloud solution.

The renewals reflect Zalaris' successful long-term business model in securing recurring revenue streams and low historic churn.

New customers are just as relevant, of course, and we recently signed the PEKAO bank in Poland for implementation of a new global HR solution for their 16,000 strong workforce. The 5-year agreement covers performance and goals management, succession, learning, recruiting and onboarding services.

Winning industrial company Mahle in the U.K. as a payroll outsourcing customer for a 5-year term is another example that our organic growth efforts bear fruit.

With this, let's take a look at our operations. First, I would like to remind you what company Zalaris has become since our inception in the year 2000. We are one of the leading providers of payroll and HR outsourcing services delivered both as a Software as a Service and Business Process as a Service or outsourcing, if you like, models. In addition, our consultants support many leading organizations across Europe, choosing and implementing digital payroll and HR processes based on solutions from SAP on customers' own systems.

Our solutions cover all processes needed to manage an organization's human capital efficiently. These solutions cover the whole employee life cycle from recruiting, on-boarding, payroll and benefits, training and performance management. A key differentiator is that we offer 1 common solution covering 12 countries all in 1 system in local language, supported by local competent employees and consultants located in the countries where our customers' employees are working. We serve more than 300,000 employees each month with our solutions and manage systems on behalf of our customers that serve more than 1 million employees needed in good and bad times gives us a resilient and sustainable business model. We have much redundancy built into our operations, including the ability to distribute work between our service centers and plans such that we can handle issues such as the current coronavirus without major disruptions.

We are part of a very exciting market with healthy growth in the segments that we operate. Growth is driven by a number of factors, of which the most important is organization's realization that if their employees are their key asset, then they should have efficient systems supporting the recruiting, development and management of this key asset.

Technological advances with cloud computing is also a key driver with customers looking for simpler and more agile approaches to implement new solutions using cloud-based HR solutions. This, in terms, drive the market for multi-country payroll solutions as it simplifies rollouts, ensures compliance, improves quality and eases the standardization of processes. As a result, we see the market on multi-process HR Outsourcing grow with 7% to 8% annually. The market for multi-country payroll outsourcing grow with around 20%. And the market for providing services on the basis of global HR solutions such as the one offered by us, SAP SuccessFactors, grow with more than 70% annually. So in other words, very exciting markets.

Then let's move back to our operational performance in our 2 segments: Managed Services and Professional Services. Managed services are delivering payroll and HR solutions and outsourcing services. Professional Services consist of consultants, implementing and maintaining our own solutions as well as supporting our customers with advisory, implementation and application maintenance services on customers' own SAP systems.

Looking at both segments separately, we can see year-over-year increase in revenues in both. We see a particularly healthy development in the second half of 2019. Managed Service revenue for the quarter ended at record high NOK 156 million. This is roughly a 9% increase compared to the same quarter last year. Much of the growth came from increased activity in the Nordics and license sales in Germany and Poland.

Professional Services ended at more or less the same level as Q4 in last year on close to NOK 50 million and was negatively impacted by a quite employee-friendly Christmas season with many holidays and the building down of occasion quotas.

As mentioned before, with Q4, we concluded our downsizing effort communicated as part of our EBIT improvement program, reducing a net of 52 full-time equivalents across our operations. Of this, 24 came from our payroll and outsourcing operations mainly resulting from consolidating service locations. 25 came from back-office and administrative functions and 3 from our professional services organization.

As part of our program, more than 100 employees were impacted, resulting in significant additional recruiting, training costs and operational efficiencies taken in there.

Looking at the segment profitability of Managed Services, the segment EBIT was up NOK 16.1 million -- up to NOK 16.1 million in the quarter, which translates into an EBIT margin of 10.4%. Comparing H2 2018 with this year's performance shows a significant improvement as well.

An increased share of new customers within HR cloud as well as more efficient delivery on large, well-established customers contribute positively to margin development in Northern Europe.

EBIT in the Professional Services segment amounted to plus/minus 0 compared to the NOK 10.8 million last year. Despite being better, the half year result for Professional Services also performed lower in H2 '19 than H2 '18. Some of the negative effects in the quarter relates to timing of certain expenses. However, the key impact is lower revenue, as previously mentioned, combined with lower efficiency of new consultants and temporarily higher use of external consultants needed to deliver on customer commitments.

With this, I hand over to Gunnar, who will take you through the financial review.


Gunnar Manum, Zalaris ASA - CFO [2]


Thank you. I will present the key financial figures, some of which have also been presented by Hans-Petter in his operational view. All figures are in Norwegian krones.

Hans-Petter mentioned that Zalaris recorded all-time high revenue for the fourth quarter and full year. The revenue for Q4 was NOK 206 million compared to NOK 194 million last year, a growth of 6.2%. The revenue for the full year was NOK 777 million and -- compared to NOK 745 million last year.

Sorry for that. No, I think we're in tune with the slides. Personnel costs for the fourth quarter increased by approximately NOK 30 million compared to last year, which is mainly due to less cost being capitalized to projects, both internal and external, a bonus reversal of NOK 4 million in the first -- in the fourth quarter last year and severance pay as part of the restructuring process that just -- that Hans-Petter mentioned. And as he also mentioned, the number of FTEs at year-end have been reduced by 52, of which 48 FTEs were employed in support and admin functions. This should significantly reduce the cost base going forward into '20.

The adjusted EBIT for the fourth quarter was NOK 5.1 million compared to NOK 12.5 million last year, while the adjusted EBIT for the full year was NOK 13.3 million -- NOK 30.3 million (sic) [NOK 30.4 million], an increase of NOK 2.5 million or approximately 9% compared to last year.

The EBIT for the quarter and full year was minus NOK 1.4 million compared to NOK 14.2 million positive for the full year. Yes. The adjustments between EBIT and adjusted EBIT are restructuring costs, amortization of excess value on acquisitions and the calculated cost of employee share options and stock units.

Net results for the fourth quarter was minus NOK 1.3 million, up from minus NOK 4.2 million last year.

Then on to the cash flow. The cash balance increased by NOK 17.6 million in the fourth quarter to NOK 82.4 million at year-end. The increase is contributed by an EBITDA of NOK 21.7 million and a large decrease in working capital of NOK 39.7 million. This decrease is mainly due to an increase in trade payable, which were at a year low at the end of Q3 and a reduction in receivables during the fourth quarter. This was partly offset by investment into internal development projects of NOK 11.8 million and loan and lease payments.

For the full year, the investments in internal projects were approximately NOK 20 million, which is approximately in line with last year. The company also purchased own shares of NOK 6.5 million for the quarter.

Briefly on to the balance sheet. The company had assets of NOK 705 million at year-end compared to NOK 727 million at the end of last year. The net interest-bearing debt was NOK 287 million at year-end and a deduction of NOK 24 million from the third quarter. And that concludes the financial review, and then I'll leave it up to Hans-Petter to conclude. Hans-Petter, it's all yours.


Hans-Petter Mellerud, Zalaris ASA - Founder & CEO [3]


Thank you, Gunnar. So moving into 2020, we will focus our growth efforts building on the advantages of our sustainable business model. We will continue seeking a diversified customer base with a focus on medium and large customers with complex needs. Customers looking for multi-country solutions are a key focus group. We will continue exploring the potential of the attractive market for multi-country payroll and services delivered on the basis of global HR solutions. Vertical solutions addressing particular industry and market niches are being developed. We will seek to build on our position as an European leader and grow to cover more geography and targeting European leadership. Our platform supports the requirements of more than 50 countries, including all countries in Europe.

We love working with customers in long term and enduring relationships. This is where we are excited. We will focus on increasing net promoters, with a goal of growing faster with the help of our existing customers. Thus, supporting existing customers with new services and geographical coverage is a natural next step to drive customer value and growth. We have previously identified up to 50% upsell potential through providing such additional services. And having completed our 19th year of uninterrupted growth, we are aiming high, and we'd love to crown turning '20 with another year of uninterrupted growth.

So in summary, we are preparing 2020 on a strengthened trajectory with renewed capacity and more optimized cost structure and sharper overall focus on customer value, service and business growth. Our focus is delivering on the expectations of continuing our 19 years of uninterrupted growth. Key to growth in Managed Services is utilizing the scalability of our own Zalaris payroll Software as a Service and HR Outsourcing models successfully into Central Europe as well as U.K. and Ireland.

Growth in Professional Services will focus around developing Professional Services as a global business unit and to explore further the potential of our solid partnership with SAP. We have spent much of our -- of '19 focusing on reducing costs. We have reached our communicated target and look at this as a Phase 1 of operational efficiency. We are encouraged by our achievements, and we'll continue to simplify our operations, improve productivity and maximize the usage of our consulting capacity.

The market for HR solutions and technology is more buoyant than ever. We are making good progress in our sales efforts and are perfectly positioned to capitalize on our position as a leader in this space.

So thank you for listening. And with this, we open up for questions.


Questions and Answers


Gunnar Manum, Zalaris ASA - CFO [1]


We have a question from the web that I'll read out to you Hans-Petter.

In your action plan for 2019 and 2020, you target a consistent 10% adjusted EBIT margin for the last quarter of 2019. Should we read this as adjusted EBIT margin is estimated to end at around NOK 80 million in 2020?


Hans-Petter Mellerud, Zalaris ASA - Founder & CEO [2]


Yes, I think it's -- that is the target. But clearly, it is very -- we understand, it's also a quite challenging target. What we have delivered on is our communicated NOK 4.7 million cost reduction target compared to Q1 2019. And a key element in delivering on this -- on the -- also the EBIT target for 2020 is then, of course, also matching -- having matching revenue and driving revenue growth as we -- as according to target. Do we have another question?


Gunnar Manum, Zalaris ASA - CFO [3]


And I think that concludes the Q&A.


Hans-Petter Mellerud, Zalaris ASA - Founder & CEO [4]


Okay. Thank you for listening. Again, I would like to remind you if you have further questions, feel free to forward them to ir@zalaris.com, and we will do our utmost to respond to them. Thanks a lot. Bye-bye.