Earnings call transcript: Zalaris ASA Q4 2024 beats revenue expectations

Zalaris ASA reported a strong fourth quarter for 2024, with revenues reaching $365 million, surpassing the forecast of $351.75 million. This revenue beat of 3.78% underscores the company’s robust operational performance and market demand. Following the earnings announcement, Zalaris ASA’s stock surged by 6.95%. According to InvestingPro data, the company maintains a "GOOD" financial health score of 2.69, with particularly strong momentum and cash flow metrics. The stock is trading near its 52-week high of $87, signaling positive investor sentiment, and analysis suggests the shares may still be undervalued.

Key Takeaways

• Zalaris ASA’s Q4 2024 revenue exceeded expectations by 3.78%.
• Stock price rose by 6.95% post-earnings, reflecting strong market confidence.
• Managed services accounted for 75% of total revenue, highlighting strategic focus.

Company Performance

Zalaris ASA demonstrated solid performance in Q4 2024, achieving a revenue increase of 16.5% year-over-over. The company’s strategic emphasis on managed services and global payroll outsourcing has fueled growth, particularly in the Northern Europe and DACH regions. This aligns with the company’s consistent annual growth rate of 14-18%. InvestingPro data reveals impressive returns, with an 81.12% price return over the past year and a strong 46.37% gain in the last six months. Get access to 12 additional ProTips and comprehensive analysis with an InvestingPro subscription.

Financial Highlights

• Revenue: $365 million (+16.5% YoY)
• EBIT: $47.4 million (13.1% margin, +42% YoY)
• Net Profit: $13.4 million
• Operating Cash Flow: SEK 57 million (up from SEK 44 million)

Earnings vs. Forecast

Zalaris ASA’s Q4 2024 revenue of $365 million exceeded the forecast of $351.75 million, marking a 3.78% beat. This performance highlights the company’s effective execution and market position.

Market Reaction

Following the earnings release, Zalaris ASA’s stock price increased by 6.95%, reflecting investor confidence. The stock’s movement towards its 52-week high of $87 underscores the positive market sentiment driven by the revenue beat and strategic initiatives.

Outlook & Guidance

Looking ahead, Zalaris ASA targets a 10% annual growth rate, with a revenue goal of SEK 1.5 billion by 2026. The company revised its EBIT target to 13-15%, up from the previous range of 12-15%, indicating a focus on profitability. InvestingPro analysis shows the company operates with a moderate debt level and maintains strong liquidity, with current assets exceeding short-term obligations. Analyst consensus remains positive, with comprehensive insights available in the Pro Research Report, one of 1,400+ detailed company analyses available to subscribers.

Executive Commentary

CEO Hans Peter Melrood emphasized the company’s growth potential, stating, "We are now close to being a SEK 1,500,000,000 company." He also highlighted the scalability of Zalaris ASA’s operations, noting, "We could easily double the size of our business without increasing organizational overhead."

Risks and Challenges

• Macro-economic pressures may impact growth sustainability.
• Cautious headcount growth could limit scalability.
• Potential refinancing of debt in H2 introduces financial uncertainty.

Q&A

During the earnings call, analysts inquired about Zalaris ASA’s EBIT margin improvement strategies and potential debt refinancing plans. The company confirmed a cautious approach to headcount growth, emphasizing the scalability of its current infrastructure.

Full transcript - Zalaris ASA (ZAL) Q4 2024:

Hans Peter Melrood, CEO and Founder, Savaris: Good morning. I’m Hans Peter Melrood, the CEO and founder of Savaris. And joining me today for this webcast presentation of Savaris q four twenty twenty four results is our CFO, Gunnar Manen. We are using Teams for this purpose and hope that you will find it informative and engaging. You can use the Q and A function to ask questions, which we will answer at the end of the presentation.

Please note that the presentation is being recorded. You can access the recording in the Investors section of our website. First, we will look at some of the highlights of the quarter. As we close our twenty fifth year in business and head towards our twenty fifth anniversary in April, I am pleased to present our fourth quarter results, which mark another significant milestone in Solaris’ journey. In Q4 twenty twenty four, Team Solaris delivered its sixth consecutive quarter of all time high revenues reaching $365,000,000 This is an impressive increase of 16.5 from the same quarter last year.

While last year, we spoke about Zune being a 1,400,000,000.0 company, we are now just short of becoming a 1,500,000,000.0 company, twelve months ahead of our in our Capital Market Day in September 2023 communicated target. EBIT stood at $47,400,000 or 13.1%, which is a 42% increase from $33,400,000 in the same period last year. In combination with an EBIT for the full year of 11%, we have delivered on our communicated target of delivering a consistent 10% plus EBIT. As I will discuss later, we are upping our long term EBIT target from the range of 12% to 15% to a tighter range of 13% to 15%. Our operating cash flow for the quarter was SEK 57,000,000, up from SEK 44,000,000 last year.

For SEK 24, the board will propose a dividend of SEK 0.9 per share. Following a planned period with a focus on solid preparatory work, the strategic review process announced in April is progressing well. This slide highlights our positive sales developments in Q4, which correspondingly increased our estimated future revenue by AUD 44,000,000 when combining both the managed services component of approximately AUD 28,000,000 and the project component valued at around AUD 16,000,000. Keyed contracts such as the Global Payroll Outsourcing combined with implementing a global HR solution based on SuccessFactors for EONOS and the private public cloud contract with the City of Osnabruck showcase our expanding footprint across the various regions. The record sales quarter in APAC with 37 deals closed further illustrates our growing market presence and the effectiveness of our sales strategies.

Managed services have shown remarkable growth with a 20% year on year increase in revenue, now accounting for 75% of our total revenue and by itself being more than a NOK1 billion business. 104 percent net revenue retention indicates that our clients are not only staying with us but are also expanding their services, which is a positive sign for our future growth. This consistent performance across Northern Europe, DACH and UK and Ireland regions reinforces our competitive position in the market. We saw solid growth in all regions with DACH leading the way with a very strong 25%. In contrast, our professional services now renamed to consulting.

Revenue experienced a slight decline of 3% year on year, primarily due to a reduced consulting projects in The UK. It is important to note that the key reason for us not growing in this segment is that we have redirected resources to support managed services implementation or transformation projects, ensuring we maintain our overall growth trajectory. This strategic shift is crucial for optimizing our service delivery and client satisfaction. With this, I hand over to our CFO, Gunnar Manon, who will take you through the financial part of the presentation.

Gunnar Manen, CFO, Savaris: Thank you, Hans Petter. This slide highlights a 17% revenue increase for the quarter year on year, showing a strong performance also in constant currency. The revenue for the fourth quarter was $365,000,000 an increase year on year of 14% when measured in constant currency. Revenue managed services grew by 20%, while professional services declined by 3%. The decrease in professional services primarily reflects the partial completion of a large consulting project in The UK as noted in the third quarter.

Additionally, significant professional services resources, particularly in Germany, are being allocated to implementing new customers and managing change orders within managed services, reducing external revenue capacity in that division. Net retention within managed services was 104% and this shows the year on year revenue caught in constant currency from customers that were fully implemented in the fourth quarter last year grew by 4%. New contracts signed during the fourth quarter have an annual recurring revenue of approximately $28,000,000 Looking ahead, we have a strong revenue visibility through 2025 and 2026 with a projected revenue increase of more than 12% compared to full year 2024. The charts illustrate our anticipated growth based on significant contracts, including those signed in Q4. The total net annual recurring revenue from these contracts is $57,000,000 The top graph illustrates the annual run rate for recurring revenue for managed services as of Q4 of $992,000,000 Additionally, a $57,000,000 net new annual revenue from signed contracts and expansions is expected to have a full effect from Q1 twenty twenty six.

The bottom graph shows the estimated timing of this additional revenue. In addition to the estimated recurring revenue for managed services, we have changed orders totaling approximately 12% of recurring revenue and 2024 revenue from professional services and APAC of three thirty nine million. This results in an estimated future annual revenue of minimum NOK 1,510,000,000.00. This slide shows a record high adjusted EBIT for the quarter, reflecting the increased revenue and operational improvements achieved, particularly in Germany. The German EBIT improvement initiatives communicated in the second quarter last year are having a positive effect.

The fourth quarter EBIT was $47,400,000 an increase of 42% year on year with an adjusted EBIT margin of 13.1%, up from 10.7% last year. The adjusted EBIT for managed services was $57,000,000 which was $29,000,000 more than last year mainly due to the factors just mentioned. Adjusted EBIT for professional services was 5,700,000.0, 10 point 7 million lower than last year. EBIT in professional services was negatively impacted by reduced revenue and higher bonus accruals, which showed a positive development from the previous quarter. The condensed profit and loss slide provides a detailed overview of our financial performance highlighting our key cost components.

The increase in license cost is attributed to higher revenue from our payroll and HR solutions. Revenue per employee in constant currency grew by approximately 9% year on year. However, the significant revenue growth and ongoing transformation projects for new customers led to a year on year increase of 44 FTEs contributing to higher personnel expenses. A majority of the new FTEs has come from the offshore and offshore locations and personnel expenses as a percentage of revenue decreased by 1.3 percentage points. Other operating expenses decreased by 0.7 percentage points as a share of revenue year on year.

However, total cost rose due to increased use of external payroll partners for global payroll deliveries in non local markets and external hosting. The EBIT was $37,700,000 for the quarter compared to $26,200,000 last year. Net financial expenses were $13,000,000 compared to $15,700,000 last year. Net profit for the period was 13,400,000.0 compared to 20,900,000.0 last year. Last year’s net profit included 10,000,000 in positive income tax due to the balance sheet recognition of a carry forward tax loss.

We had a strong cash flow during the quarter, which rose by $30,000,000 year on year to $57,000,000 The chart illustrates the development in the cash balance from the previous quarter, which rose by $42,000,000 The increase is mainly due to higher earnings and reduced and a reduction in the net working capital. The net interest bearing debt of thirty one December was reduced by $39,000,000 during the quarter to $247,000,000 which converts to a leverage measured by the net interest bearing debt divided by adjusted EBITDA of a low 1.2. And that concludes the financial section and Hans Pette will now present our outlook.

Hans Peter Melrood, CEO and Founder, Savaris: Thank you, Gunnar. Then we’re back to the outlook where I will use the opportunity to reiterate some of our revised financial targets before summing up. Looking ahead, as communicated on our Capital Markets Day last year, we have set an annual growth target of 10% aiming for a total run rate revenue of SEK 1,500,000,000.0 by 2026. The growth targets for managed services and professional services are 155%, respectively. As demonstrated over the last quarters, we are well ahead in reaching this target.

With most of the growth coming from managed services, the revenue composition is developing more positively than envisioned, resulting in a higher mix of high quality revenue from longer term agreements with recurring revenue. Over the last two years, our annual growth rate has been approximately 18%. When removing the impact of currency changes, the annual growth rate has been approximately 14%. This growth primarily stems from increased revenue from existing customers within managed services and recurring revenue from long term contracts with new customers. These contracts typically have an initial duration of five to seven years.

Our growth will be driven by a continued focus on acquiring new customers and upselling more value to existing customers through expanded geographic coverage and enhanced functionality. We always prioritize growth that supports the utilization of our existing capacity and infrastructure, thus achieving larger incremental churn in annual recurring revenue already contract for delivery of churn in annual recurring revenue already contract for delivery over the next twelve months. As it currently looks, we are close to our SEK1.5 billion annual revenue target measured in constant currency, With churn expected to be within our historic thresholds, we’re confident in staying on track with respect to growth in the foreseeable future. A key foundation for reaching our margin target is involved improving the EBIT margin of our German operations according to our EBIT improvement program communicated in Q2 last year. As we started to see already in Q3 and now further in Q4, we have been able to implement these improvements faster than envisioned and see the corresponding effect on our overall profitability.

With huge credit to our respective teams, we expect to see further improvements over time as EBIT for Germany will approach that of our more mature Nordic business. Continuing improvements in combination with additional benefits stemming from the use of AI along with scaling, will further enhance our performance. As a result, we have reframed our Capital Market Day communicated target of delivering 12% to 15% EBIT in twenty six percent to a tighter range of 13% to 15% EBIT. In summary, Q4 and twenty twenty four have been remarkable for Solaris with all time high revenue and EBIT. We are now close to being a SEK 1,500,000,000.0 company and we delivered 11% EBIT.

We have adjusted our sights and are closing in on our target EBIT range from SEK 12 to SEK 15 to SEK 13 to SEK 13 to SEK 15 as the margins in Germany start to approach those of our more mature Nordic business and our confidence in delivering margins have been strengthened. Cash is continuing to accumulate correspondingly and our Board of Directors will propose a dividend of SEK 0.9 per share. As announced on April 2, the Board of Directors has initiated a strategic review process. This decision reflects Zalari’s successful expansion of its portfolio of large agreements for global payroll and HR services to leading international enterprises in recent years. The process that we announced is progressing well.

With the company’s strong operational improvements and corresponding positive share price development since the announcement, the Board of Directors is taking a measured approach in concluding the process. We continue to carefully expand our strategic opportunities and expect to conclude the process towards the end of Q2 this year. Shareholders will be informed as when and if relevant updates become available. We could not have landed our twenty fifth year and be ready for our twenty fifth anniversary in a better way. Thank you to our hardworking teams and our customers and partners for all the support on this journey.

Thank you for joining us today. We will now open the floor for questions. Gunnar.

Gunnar Manen, CFO, Savaris: Yes. First question, can you help us bridging the EBIT margin from 2024 to your target in 2026 with regards to 2025? And what are the key elements that will determine whether the EBIT margin will be 13% or 15% in 2026?

Hans Peter Melrood, CEO and Founder, Savaris: Well, that’s a it’s a long question, but I think in terms of bridging it, we as we are delivering 13% EBIT already now in Q4, we are showcasing the potential that we have for our business. So clearly being able to deliver 13.1% in the Q4 means that 13% to 15% is a range that we will also continue deliver think that we’ll continue delivering in subject to that we are maintaining cost controls that we do today and we continue growing as we have continued as we have done and that we recognize the value of the contracts that we already have signed up for. So I think the key drivers for the EBIT improvements, as you will see also in our report, is that we have been able to maintain the headcount at around plusminus 1,100 more or less stable over the last twelve months. In addition, we have changed the mix towards more use of favorably, say, costed resources in the nearshore and offshore, and thus the percentage of cost now spent for personnel expenses has been going down month by month basically. So I think that’s the key driver.

But add to that the scalability of our infrastructure and our organization. As also mentioned in the past, we think that we could easily double the size of our business, subject to that we grow in the regions that we are currently located, without having to increase our organizational overhead significantly. So I think the scale of our existing business and then the productivity enhancements that we see through utilizing our organization, more automation, more the use of AI, but then also the better use of resource mix with more near and offshore that’s what’s going to give us the 13% to 15%.

Gunnar Manen, CFO, Savaris: Thank you, Answert. So and then next one, do you expect to refinance your debt in H2? And how much of your cash position can and will you use to reduce the gross debt? I think maybe I should answer that. Yes.

So the first opportunity to actually refinance the bond loan that we currently have that is in September year. And we will definitely do evaluate and consider a refinancing at that stage but it’s too early to say the outcome of that. And the outcome of that will also then decide what you know the cash position that we need to maintain. But definitely if we were for instance to refinance with a normal bank loan that will create a lot more flexibility in terms of our current cash position. So we could use overdraft facilities etcetera to handle the fluctuations in working capital etcetera.

So this is something that we need to come back to in in in in hedge two.

Hans Peter Melrood, CEO and Founder, Savaris: Yeah. Amit, as we have mentioned, we’re in the midst of the strategic review process. And as part of the process, we are, of course, evaluating strategic options. And clearly, the way we are financed and so on will is a part of that discussion as well. But as Gunnar said, the first opportunity for early redemption of the current bond is in September.

Gunnar Manen, CFO, Savaris: Next (LON:NXT) question. Could you talk about your headcount plans for 2025? And was there anything in the cost base for Q4 twenty twenty two that helped the strong EBIT margin and that we should expect to increase from Q1 twenty twenty five?

Hans Peter Melrood, CEO and Founder, Savaris: Yeah. I think in terms of plans for headcount, we are continuing growing. We still have quite some work to do in replacing external consultants with internal consultants. We’re constantly on the outlook for really good new colleagues in that area. And it’s definitely a limiter for growth in the professional services area is to have available consultants.

So we are working to add more on that side. However, on the administrative side, we see constantly improving the way we operate, utilizing our global shared service infrastructure, so we don’t envision seeing much more overhead being added, but are naturally also looking to see can we should we add some more sales capabilities and capacity to serve customers. So that’s something we’ll continue evaluate. But all in all, we are focused on maintaining a low cost base because that is a key to drive margins in our business. So I don’t expect to see any significant changes in headcount moving forward unless that comes with also significant added revenue.

Gunnar Manen, CFO, Savaris: And in terms of the cost base there were no particularly items of things that, you know, cost wise were particularly low in Q4 versus then Q1 this year. To the contrary, I mean, we usually have higher for instance bonus accruals in Q4 than in Q1.

Hans Peter Melrood, CEO and Founder, Savaris: Yeah.

Gunnar Manen, CFO, Savaris: Okay. And I think that concludes the Q and A.

Hans Peter Melrood, CEO and Founder, Savaris: Okay. Perfect. So thank you for some good questions. So, yeah, as you can see, we are ready soon to celebrate our twenty fifth anniversary in April, and we will actually celebrate good results today with some cake. So maybe you should go and have some too.

So thank you for listening and have a great day.

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