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Zalaris

Earnings Release Feb 19, 2021

3795_rns_2021-02-19_e681fd30-f5ac-4cb9-96be-62d2a6251d59.pdf

Earnings Release

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Q4 HIGHLIGHTS3
KEY FIGURES4
CEO INSIGHTS 5
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 10
ALTERNATIVE PERFORMANCE MEASURES (APMS) 23
KEY FIGURES25

About Zalaris

We simplify HR and payroll administration and empower organizations with useful information so that they can invest more in their people.

Our proven local and multi-country solutions for payroll and HR includes software and business process as a service (SaaS/BPaaS), and outsourcing (BPO). Our solutions integrate with customers global HR systems. Mobile apps enable people to work from anywhere. We can implement with both local on-site and remote project teams, addressing needs in times of Covid-19 pandemic. #teamZalaris has 800 competent team members across Europe and APAC serving customers from local language service centers. Our 300+ consultants have more than 20 years of experience across all industries and IT environments including on premise, cloud and integration services. Zalaris manage solutions serving over 1.5 million employees each month, across multiple industries and with many of Europe's most reputable employers.

Headquartered in Oslo, Norway, Zalaris is publicly traded on the Oslo Stock Exchange (ZAL).

Q4 Highlights

  • Revenue of NOK 203.5 million (NOK 206.2 million) -1.3% and NOK 792.3 million (NOK 776.8 million) +2% for the full-year
  • Adjusted EBIT of NOK 15.9 million (NOK 5.0 million) +218% and NOK 55.3 million (NOK 30.1 million) + 83% for the full-year
  • Adjusted EBIT margin of 7.8% (2.4%) +5.4pp and 7.0% (3.9%) +3.1pp for the full-year
  • Cost reduction initiatives carried out is having a positive effect on EBIT, and has strengthened cash generation during the year
  • Signed several new BPO agreements and extensions, including a 5-year multi-country BPO agreement with Metsä, a Finnish forest industry group, covering 28 countries, and strengthening the position as a provider of multi-country HMC and payroll outsourcing services
  • Cash and cash equivalents of NOK 124.8 million, +NOK 42.3 million from last year (+51.3%), with continued strong operating cash flow

• The board will propose a dividend of NOK 1.00 per share to be paid for 2020

*Defined in separate section: Alternative Performance Measure (APMs)

Key Figures

Q4 2020 financial summary

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Revenue 203 522 206 220 792 326 776 792
Growth (YoY) -1,3 % 6,2 % 2,0 % 4,2 %
EBITDA 31 346 20 594 121 816 103 381
Adjusted EBITDA1) 29 076 18 920 109 780 87 451
Adjusted EBITDA margin (as % of revenue) 14,3 % 9,2 % 13,9 % 11,3 %
EBIT 11 311 (1 580) 37 302 14 091
Adjusted EBIT1) 15 909 4 958 55 292 30 142
Adjusted EBIT margin (as % of revenue) 7,8 % 2,4 % 7,0 % 3,9 %
Profit/(loss) for the period 17 559 (3 307) (10 324) (7 011)
Earnings per share (EPS) 0,89 (0,17) (0,53) (0,36)
Total comprehensive income (5 606) (1 939) 6 219 (5 323)
Free cash flow1) 13 291 33 670 76 581 17 046
Net interest-bearing debt (NIBD)1) (252 234) (286 610) (252 234) (286 610)
Full time equivalents (FTEs) period end1) 712 753 712 753

Q4 2020 financial performance by business segment*

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Revenue
Managed services 137 514 153 191 544 322 553 691
Professional services 66 008 53 029 248 004 223 101
Total revenue 203 522 206 220 792 326 776 792
EBIT
Managed services 15 596 14 906 63 110 54 958
Professional services 8 234 (315) 25 414 20 961
Group overhead and other (12 519) (16 170) (51 222) (61 828)
EBIT 11 311 (1 579) 37 302 14 091
EBIT margin (%)
Managed services 11,3 % 9,7 % 11,6 % 9,9 %
Professional services 12,5 % -0,6 % 10,2 % 9,4 %
EBIT margin (%) 5,6 % -0,8 % 4,7 % 1,8 %

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

CEO Insights

#teamZalaris delivered improvements in all dimensions in 2020 - an extremely disruptive year

Despite the impacts from the Covid-19 pandemic, #teamZalaris delivered its 20th year of consecutive growth with a revenue of NOK 792.3 million (+2%) for the year, and NOK 203.5 million (NOK 206.2 million) for the quarter.

Our adj. EBIT rose to NOK 55.3 million (7%) for the full year, up 83% from NOK 30.1 million last year. In absolute terms, we reached an all-time high adj. EBIT for the quarter of NOK 15.9 million (7.8%), up from NOK 5.0 million (3.9%) last year.

We continued to weather the Covid-19 storm and delivered on all customer commitments in a mixedmode, working from both our offices and homes.

Our efforts in managing the pandemic are being recognised by our employees, resulting in high employee engagement scores across all countries.

Strong pipeline started to materialise in signed agreements

As a result of Covid-19, we have seen a slow-down in decision making for both new outsourcing and Cloud implementation projects as customers have focused on managing their way through stormy waters.

In previous quarters we have reported a growing pipeline of promising opportunities.

With pleasure, we now see results of our hard work resulting in signed landmark agreements, as with Finnish industrial company Metsä, where we will be delivering a global payroll, covering 28 countries based on our PeopleHub concept.

The PeopleHub concept gives multinationals one common payroll process across the countries they operate. Supported by advanced analytics, it is fully integrated with their global HR solutions through a centralised integration point, thereby targeting direct cost savings and improved operational efficiency and transparency.

In Professional Services, we continue to see a good inflow of work for our consultants and have signed numerous agreements for Cloud payroll, HR transformation projects and change orders. We have signed multiple expansions with customers for our Application Maintenance Services (AMS) – helping customers maintaining their in-house payroll and HR solutions mostly based on long term agreements of a recurring nature.

Aiming at delivering our 21st year of consecutive growth

We leave 2020 with a healthy pipeline and high ambitions. We fully intend to continue our streak and deliver our 21st year of continuous growth.

Our markets are growing as customers are looking for new solutions coming out of Covid-19. They prioritise access to unified people data, cost reduction, digitisation of processes and securing business continuity for their global operations.

In Managed Services, we target growth by increasing share of wallet with existing customers, supporting them with additional services and increasing geographic coverage. In parallel, we target new customers in the fast-growing market for multi-country payroll with our PeopleHub concept.

In Professional Services, we support our customers on their journey to the Cloud through implementing innovative SAP SuccessFactors, SAP S4/Hana, SAP Analytics and our own HR Tech portfolio of solutions. Our AMS offering continues to be important in securing customers' business-critical payroll and HR functions, keeping up with fastchanging needs.

Our cost structure has improved significantly over the last 18 months. The current organisation and infrastructure have a significant capacity to scale with limited additional cost.

Increased level of M&A in our market is driven by both industrial and financial ambitions. We are an active player in this market.

Thank you #teamZalaris for a job well done!

The Covid-19 pandemic has allowed #teamZalaris to showcase its real capabilities and true strength.

The year has made us stronger and better at working together and utilising our total capabilities in servicing our customers. 800 employees in 10+ countries across the globe are increasingly working together as one team.

We enter 2021 with the goal to continue building on these capabilities and delivering on our ambition to become the European leader in Payroll and HR solutions.

Financial Review

Revenue

Consolidated revenue for the fourth quarter 2020 amounted to NOK 203.5 million (Q4 2019: NOK 206.2 million), only marginally lower than last year despite some negative impact on revenue from Covid-19.

Revenue for the full-year 2020 amounted to NOK 792.3 million, up from NOK 776.8 million last year, a growth of 2.0%.

Nordics & Baltics

Revenue in the Nordic & Baltic region was NOK 115.4 million in the fourth quarter, which was a reduction from the figure last year of NOK 122.9 million. The revenue during the quarter has been negatively impacted by Covid-19 in terms of lower transaction volumes (e.g. travel controls) and less change orders and project revenue from existing customers.

Revenue for the full-year 2020 amounted to NOK 444.5 million, down from NOK 449.9 million last year.

Central Europe

Revenue in the Central Europe region for the fourth quarter was NOK 79.8 million, compared to NOK 75.5 million last year. Higher revenue from existing customers in Poland, and positive currency movements, was offset by some reduction in Germany, mainly within Professional Services. As reported in previous quarters, new business generation within Professional Services in Germany has been negatively impacted by Covid-19.

Revenue for the full-year 2020 amounted to NOK 308.8 million, up from NOK 294.1 million last year.

UK & Ireland

Revenue for the fourth quarter in the UK & Ireland region amounted to NOK 8.3 million, compared to NOK 7.8 million in the same quarter last year.

Revenue for the full-year 2020 amounted to NOK 39.1 million, up from NOK 32.8 million last year.

Group Profits

Consolidated EBIT for the quarter was NOK 11.3 million (negative NOK 1.6 million).

The adjusted EBIT was NOK 15.9 million for the fourth quarter (NOK 5.0 million) when adjusted for one-off costs (NOK 1.0 million) relating to redundancies, calculated costs of the Company's share-based payment plan (NOK 0.9 million), and amortisation of excess values on acquisitions (NOK 2.7 million).

Through the EBIT-improvement program initiated in 2019, employee costs and other operating expenses have been reduced by approximately NOK 8.8 million for the quarter and approximately NOK 50 million for the full-year compared to last year, when adjusted for currency effects and differences in costs capitalised. Thus, the Company's operational cost base has been significantly reduced, and has contributed to an increased operating cash flow.

EBIT for the full-year amounted to NOK 37.3 million, compared to NOK 14.1 million last year.

The Group had net financial income of NOK 13.7 million for the fourth quarter (net expenses NOK 2.4 million), including an unrealised currency gain of NOK 18.9 million (NOK 2.7 million) on the EUR 35 million bond loan and other foreign currency denominated balances. Excluding these unrealised gains, the net financial expenses for the fourth quarter was NOK 5.9 million (NOK 5.0 million).

Net financial expense for the full-year was NOK 50.8 million (expense NOK 24.1 million), including an unrealised currency loss of NOK 27.1 million (gain NOK 2.4 million).

The net profit for the quarter was NOK 17.6 million (loss NOK 3.3 million). The net loss for the full-year was NOK 10.3 million (NOK 7.0 million)

Total comprehensive income amounted to a loss of NOK 5.6 million (loss NOK 1.9 million), after currency translation differences of negative NOK 23.2 million (positive NOK 1.4 million). Total comprehensive income for the full-year was NOK 6.2 million (negative NOK 5.3 million).

Business segment performance

Managed Services

The Managed Services ("MS") segment had revenue of NOK 137.5 million for the fourth quarter 2020, compared to NOK 145.1 million in the same quarter last year, when the 2019 figure is adjusted for NOK 8.1 million in revenue from MS customers moved to Professional Services in 2020.

MS revenue contributed to 67.6% (70.4%) of total revenue for the Group. Revenue within MS has been negatively impacted by lower volumes of travel controls and change orders and other projects for existing BPO customers, mainly as a result of Covid-19.

Revenue Managed Services (NOKm):

The EBIT for MS for the fourth quarter was NOK 15.6 million (NOK 14.9 million). The increased EBIT is mainly a result of the EBIT improvement program.

Professional Services

Revenue in the Professional Services ("PS") segment amounted to NOK 66.0 million for the fourth quarter 2020, 8% higher than last year's figure of NOK 61.1 million, when the 2019 figure is adjusted by NOK 8.1 million for revenue from MS customers moved to PS in 2020.

A significant increase in revenue in Poland, and a stronger EUR, was partly offset by a reduction in license sales in Germany.

Revenue Professional Services (NOKm):

The EBIT for PS for the fourth quarter was NOK 8.2 million (negative NOK 0.3 million). The significant increase in EBIT compared to last year is due to higher revenue, operational improvements within PS in Germany, and a particularly low EBIT in 2019. The low EBIT in the fourth quarter last year was due to the timing of expenses, including restructuring costs, in combination with lower utilization and higher use of temporary external consultants in Germany.

Financial position and cash flow

Zalaris had total assets of NOK 720.7 million as of 31 December 2020, compared to NOK 723.7 million at 30 September 2020.

Cash and cash equivalents were NOK 124.8 million as of 31 December 2020, an increase of NOK 8.5 million from the end of the previous quarter. Cash and cash equivalents have increased by NOK 42.4 million, after the repayment of interest-bearing debt of NOK 17.5 million, compared to the balance at 31 December 2019.

Total equity as of 31 December 2020 was NOK 109.8 million, compared to NOK 108.1 million as of 30 September 2020. This corresponds to an equity ratio of 15.2% (14.9%).

The Company holds 503,521 own shares at 31 December 2020.

Net interest-bearing debt (interest-bearing debt less cash and cash equivalents) decreased from NOK 280.7 million at 30 September 2020 to NOK 252.2 million at 31 December 2020. The decrease is mainly due a reduction in the NOK value of the EUR

35 million bond loan, as a result of the appreciation of NOK during the period. The net interest-bearing debt at 31 December 2019 was NOK 286.6 million.

Operating cash flow during the fourth quarter 2020 was NOK 14.1 million (NOK 50.7 million). The high operating cash flow in the fourth quarter last year was due a large net reduction in working capital (increase in trade payables), and some reclassifications.

Net cash flow from investing activities for the fourth quarter was negative NOK 0.8 million (negative NOK 17.0 million). Investments mainly relate to

EBIT improvement program

As communicated in previous reports, Zalaris launched an EBIT improvement program in 2019, Vision2020, targeting NOK 4.7 million monthly cost reductions by the first quarter 2020. This included streamlining of the organization, ramp-up of digitizing efforts, automating services and increasing Robotic Process Automation (RPA) projects, all aimed at increasing quality in deliveries and reducing costs. As part of the program the total number of FTEs has been reduced by 91 (-11%) in the period from 30 June 2019 to 31 December 2020.

In the second quarter 2020, a follow up of Vision2020 was executed, realizing additional NOK 1 million in monthly cost reductions by the fourth quarter 2020, through a reorganizing of the Nordic Professional Services organization to align with the Professional Services organizations in our other regions. Key actions taken were:

• Moving consultants primarily working with Managed Services customers to the Managed Services Organization

internal product and system development projects. Net cash flow from financing activities for the fourth quarter was negative NOK 5.2 million (negative NOK 15.4 million).

Cash and cash equivalents balance at 31 December 2020 was NOK 124.8 million (NOK 82.4 million).

The board will propose a dividend of NOK 1.00 per share for 2020.

  • Realigning the Nordic Professional Services organization to focus on advisory and implementation of SAP Cloud based HR solutions.
  • Adjusting capacity to demand resulting in the downsizing of approximately ten employees.

Other ongoing cost based EBIT initiatives focus on:

  • Increased utilization of our near- and offshore capabilities
  • Automation of standardized processes through digitization and Robotic Process Automation.

The EBIT improvement program has resulted in a reduction in total operating expenses of approximately NOK 50 million (-8%) for the full-year 2020, when adjusted for differences in costs capitalized and currency rates compared to last year. The key focus going forward will be to grow revenue, while maintaining capital discipline.

Outlook

The market fundamentals remain strong and Zalaris' key markets within multi-country payroll and HR outsourcing are expected to grow in the foreseeable future. The Company 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 a short-term negative impact on revenue, as larger implementation projects within Professional Services are being postponed and

less travel and lower employee numbers are impacting Managed Services. This situation is also expected going forward, depending on the duration of Covid-19.

In the longer term, we expect to see an increase in HCM outsourcing post Covid-19, which should benefit Zalaris. The Company's pipeline of potential multi-0country payroll outsourcing projects is strong.

The Company's financial results have improved significantly compared to 2019, as a result of the cost

reduction initiatives implemented in 2019 through the EBIT improvement program, in combination with increased revenue and further optimization initiatives in 2020. These initiatives include streamlining of the organization, ramp-up of digitizing efforts, automating

services and increasing Robotic Process Automation (RPA) projects, all aimed at increasing quality in deliveries and reducing costs. Further improvements in the financial results are expected going forward.

The Board of Directors of Zalaris ASA Oslo, 18 February 2021

Interim Consolidated Financial Statements

Consolidated Statement of Profit and Loss

2020 2019 2020 2019
(NOK 1 000) Notes Oct-Dec
unaudited
Oct-Dec
unaudited
Jan-Dec
unaudited
Jan-Dec
Revenue 2 203 522 206 220 792 326 776 792
Operating expenses
License costs 20 944 23 911 72 517 67 981
Personnel expenses 4 106 851 117 298 431 000 438 543
Other operating expenses 44 380 44 418 166 993 166 887
Depreciation and impairments 769 971 3 311 4 048
Depreciation right-of-use assets 7 4 149 5 620 19 101 21 932
Amortisation intangible assets 6 6 765 6 733 27 436 26 704
Amortisation implementation costs customer projects 3 8 352 8 848 34 666 36 606
Total operating expenses 192 210 207 800 755 024 762 701
Operating profit (EBIT) 11 311 (1 580) 37 302 14 091
Financial items
Financial income 5 1 009 1 564 5 763 2 632
Financial expense 5 (6 241) (6 603) (29 507) (29 057)
Unrealized foreign exchange gain/(loss) 5 18 918 2 660 (27 069) 2 375
Net financial items 13 685 (2 378) (50 813) (24 051)
Profit before tax 24 997 (3 958) (13 511) (9 960)
Tax expense (7 437) 651 3 187 2 950
Profit for the period 17 559 (3 307) (10 324) (7 011)
Earnings per share:
Basic earnings per share (NOK) 0,89 (0,17) (0,53) (0,36)
Diluted earnings per share (NOK) 0,86 (0,17) (0,53) (0,36)

Consolidated Statement of Comprehensive Income

2020 2019 2020 2019
(NOK 1 000) Notes Oct-Dec Oct-Dec Jan-Dec Jan-Dec
unaudited unaudited unaudited
Profit for the period 17 559 (3 307) (10 324) (7 011)
Other comprehensive income
Items that will be reclassified to profit and loss in subsequent periods
Currency translation differences (23 166) 1 368 16 543 1 688
Total other comprehensive income (23 166) 1 368 16 543 1 688
Total comprehensive income (5 606) (1 939) 6 219 (5 322)

Consolidated Statement of Financial Position

2020 2019
(NOK 1 000) Notes 31. Dec 31. Dec
unaudited
ASSETS
Non-current assets
Intangible assets 119 896 132 950
Goodwill 160 418 153 248
Total intangible assets 6 280 313 286 198
Deferred tax asset 18 397 11 710
Fixed assets
Right-of-use assets 7 21 777 34 849
Property, plant and equipment 32 518 33 137
Total fixed assets 54 295 67 986
Total non-current assets 353 005 365 894
Current assets
Trade accounts receivable 148 651 148 614
Customer projects 3 78 246 88 808
Other short-term receivables 15 989 27 275
Cash and cash equivalents 8 124 843 82 448
Total current assets 367 729 347 145
TOTAL ASSETS 720 735 713 038

Consolidated Statement of Financial Position

2020 2019
(NOK 1 000) Notes 31. Dec 31. Dec
EQUITY AND LIABILITIES
Equity
Paid-in capital
unaudited
Share capital 1 962 1 957
Other paid in equity 6 523 3 804
Share premium 35 580 34 252
Total paid-in capital 44 065 40 014
Other equity 14 266 (374)
Retained earnings 51 443 52 526
Total equity 109 774 92 166
Liabilities
Non-current liabilities
Deferred tax
Interest-bearing loans
Lease liabilities
9
7
12 084
375 832
11 104
25 313
362 487
16 536
Total long-term liabilities 399 020 404 337
Current liabilities
Trade accounts payable 21 190 29 845
Customer projects liabilities 3 50 256 55 740
Interest-bearing loans 9 1 244 6 571
Lease liabilities 7 11 792 19 099
Income tax payable 5 612 5 408
Public duties payable 49 486 37 314
Other short-term liabilities 71 480 61 464
Derivatives 880 1 095
Total short-term liabilities 211 940 216 535
Total liabilities 610 960 620 873
TOTAL EQUITY AND LIABILITIES 720 735 713 038

Consolidated Statement of Cash Flow

2020 2019 2020 2019
(NOK 1 000) Notes Oct-Dec Oct-Dec Jan-Dec Jan-Dec
unaudited unaudited unaudited
Cash Flow from operating activities
Profit (Loss) before tax 24 997 (3 958) (13 511) (9 960)
Net financial items 5 (13 685) 2 380 50 813 24 051
Share-based payments 932 628 2 718 1 743
Depreciation and impairments 769 973 3 312 4 049
Depreciation right-of-use assets 7 4 149 5 620 19 101 21 932
Amortisation intangible assets 6 6 765 6 733 27 437 26 705
Depreciation implementation costs customer projects 3 8 352 8 848 34 666 36 606
Recognized customer projects assets 3 (5 935) (1 393) (18 026) (29 505)
Recognized customer projects liabilities 1 488 (1 740) (6 723) (8 545)
Taxes paid (1 146) (6 356) (2 427) (6 356)
Changes in accounts receivable (16 426) 2 764 (37) 9 504
Changes in accounts payable 7 777 24 535 (8 655) 5 487
Changes in other items 1 068 19 879 25 714 (8 313)
Interest received 37 37 195 162
Interest paid (5 029) (8 226) (24 864) (25 052)
Net cash flow from operating activities 14 113 50 724 89 713 42 508
Cash flows to investing activities
Investment in fixed and intangible assets (822) (17 054) (13 132) (25 462)
Net cash flow from investing activities (822) (17 054) (13 132) (25 462)
Cash flows from financing activities
Sale/(Buyback) of own shares (0) (6 515) 1 332 (10 934)
Payment of lease liabilities (5 595) (4 277) (21 491) (22 807)
Repayment of loan 378 (4 638) (17 510) (6 320)
Net cash flow from financing activities (5 217) (15 430) (37 669) (40 062)
Net changes in cash and cash equivalents 8 073 18 240 38 912 (23 016)
Net foreign exchange difference 519 (604) 3 483 (2 379)
Cash and cash equivalents at the beginning of the period 116 251 64 812 82 449 107 844
Cash and cash equivalents at the end of the period 124 844 82 448 124 844 82 448

Consolidated Statement of Changes in Equity

Share Other paid in Total paid-in Retained
(NOK 1000) Share capital premium equity equity Other equity earnings Total equity
Equity at 01.01.2019 2 003 45 140 2 061 49 204 (33) 59 733 108 905
Profit of the year (7 011) (7 011)
Other comprehensive income - 1 688 1 688
Buyback of own shares (46) (10 888) (10 934) (10 934)
Share based payments 1 743 1 743 1 743
Other changes (2 030) (196) (2 226)
Equity at 31.12.2019 1 957 34 252 3 804 40 013 (374) 52 526 92 166
Profit of the year (10 324) (10 324)
Other comprehensive income 16 543 16 543
Sale of own shares 5 1 327 1 332 1 332
Share based payments 2 718 2 718 2 718
Other changes (1 903) 9 241 7 338
Equity at 31.012.2020 1 962 35 580 6 522 44 064 14 266 51 443 109 774
Unaudited

Notes to the condensed interim consolidated condensed financial statements

Note 1 – General Information and basis for preparation

General information

Zalaris ASA (the Group) is a public limited company incorporated in Norway. The Group's main office is in Hovfaret 4, Oslo, Norway. The Group delivers full-service outsourced personnel and payroll services.

Basis for preparation

These interim consolidated condensed financial statements are prepared in accordance with International Accounting Standard 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU). The condensed consolidated interim financial statements do not include all the information and disclosures required by International Financial Reporting Standards (IFRS) for a complete set of financial statements, and these condensed interim financial statements should be read in conjunction with the annual financial statements. The interim condensed consolidated financial statements for the three months ended 31 December 2020, have not been audited or reviewed by the auditors.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended December 31, 2019.

Going concern

With reference to the Norwegian Accounting Act § 3-3, the Board confirms its belief that conditions exist for continuing operations and that these interim consolidated condensed financial statements have been prepared in accordance with the going concern principle.

Note 2 – Segment Information

The Company's operations are split into two main business segments; Managed Services and Professional Services.

Managed Services includes a full range of payroll and HR outsourcing services, such as payroll processing, time and attendance, travel expenses as well as related cloud system solutions and services. This includes additional cloud-based HR functionality to existing outsourcing customers as talent management, digital personnel archive, HR analytics, mobile solutions, etc.

Professional Services includes deliveries of change projects based on Zalaris templates or implementation of customer-specific functionality. This business segment also assists with cost-effective maintenance and support of customers' own on-premise solutions. A large portion of these services are of recurring nature and much of the services are based on long-term customer relationships.

Information is organized by business area and geography. The reporting format is based on the Group's management and internal reporting structure. Items that are not allocated are mainly intercompany sales, interestbearing loans and other associated expenses and assets related to administration of the Group. The Group's executive management is the chief decision maker in the Group. The investing activities comprise total expenses in the period for the acquisition of assets that have an expected useful life of more than one year. The operating assets and liabilities of the Group are not allocated between segments.

2020 Oct-Dec

Managed Professional Gr.Ovhd &
(NOK 1 000) Services Services Unallocated Total
Revenue, external 137 514 66 008 - 203 522
Operating expenses (111 248) (55 275) (5 653) (172 176)
EBITDA 26 266 10 733 (5 653) 31 346
Depreciation and amortisation (10 670) (2 498) (6 867) (20 035)
EBIT 15 596 8 234 (12 519) 11 311
Net financial income/(expenses) 13 685 13 685
Income tax (7 437) (7 437)
Profit for the period 15 596 8 234 (6 271) 17 559
Cash flow from investing activities (822)

2019 Oct-Dec*

Managed Professional Gr.Ovhd &
(NOK 1 000) Services Services Unallocated Total
Revenue, external 153 191 53 029 - 206 220
Operating expenses (125 010) (50 707) (9 910) (185 627)
EBITDA 28 181 2 322 (9 910) 20 593
Depreciation and amortisation (13 275) (2 637) (6 260) (22 172)
EBIT 14 906 (315) (16 170) (1 579)
Net financial income/(expenses) (2 378) (2 378)
Income tax 651 651
Profit for the period 14 906 (315) (17 898) (3 307)
Cash flow from investing activities (11 785)

2020 Jan-Dec

Managed Professional Gr.Ovhd &
(NOK 1 000) Services Services Unallocated Total
Revenue, external 544 321 248 004 - 792 326
Operating expenses (435 925) (212 633) (21 952) (670 509)
EBITDA 108 397 35 371 (21 952) 121 816
Depreciation and amortisation (45 286) (9 958) (29 271) (84 515)
EBIT 63 110 25 414 (51 222) 37 302
Net financial income/(expenses) (50 813) (50 813)
Income tax 3 187 3 187
Profit for the period 63 110 25 414 (98 848) (10 324)
Cash flow from investing activities (13 132)

2019 Jan-Dec*

Managed Professional Gr.Ovhd &
(NOK 1 000) Services Services Unallocated Total
Revenue, external 553 691 223 101 - 776 792
Operating expenses (446 454) (192 606) (34 351) (673 411)
EBITDA 107 237 30 495 (34 351) 103 381
Depreciation and amortisation (52 279) (9 534) (27 477) (89 290)
EBIT 54 958 20 961 (61 828) 14 091
Net financial income/(expenses) (24 050) (24 050)
Income tax 2 950 2 950
Profit for the period 54 958 20 961 (82 928) (7 009)
Cash flow from investing activities (25 462)

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

Geographic Information

The Group's operations are carried in several countries, and information regarding revenue based on geography is provided below. Information is based on location of the entity generating the revenue, which to a large extent, corresponds to the geographical location of the customers.

Revenue from external customers attributable to:

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Norway 57 911 63 994 215 979 228 438
Northern Europe ex Norway 57 533 58 932 228 486 221 455
Central Europe 79 822 75 498 308 776 294 135
UK & Ireland 8 256 7 796 39 085 32 764
Total 203 522 206 220 792 326 776 792

Note 3 – Revenue from contracts with customers

Disaggregated revenue information

The Group's revenue from contracts with customers has been disaggregated and presented in note 2.

Contract balances:

2020 2019
(NOK 1 000) 31. Dec 31. Dec
Trade receivables 148 651 148 614
Customer project assets 78 246 88 808
Customer project liabilities (50 256) (55 740)
Prepayments from customers (11 633) (9 608)

Customer project assets are costs specific to a given contract, generate or enhance the Group's resources that will be used in satisfying performance obligations in the future, and are recoverable. These costs are deferred and amortized evenly over the period the outsourcing services are provided.

Customer project liabilities are prepayments from customer specific to a given contract and are recognized as revenue evenly as the Group fulfills the related performance obligations over the contract period.

Prepayments from customers comprises a combination of short- and long-term advances from customers. The short-term advances are typically deferred revenues related to smaller projects or change orders related to the system solution. The long-term liabilities relate to initial advances paid upon signing the contract. These advances are contracted to be utilized by the customer to either transformation-, change- or other projects. These advances are open for application until specified, or when the contract is terminated, where the eventual remainder of the amount become the property of Zalaris and is hence rendered as income by the Group.

Movements in customer project assets through the period:

(NOK 1 000) 2020 2019 2020 2019
Oct-Dec Oct-Dec Jan-Dec 31. Dec
Opening balance in the period 82 441 95 970 88 808 97 272
Cost capitalized 5 935 1 393 18 026 29 505
Amortization (8 352) (8 848) (34 666) (36 606)
Disposals & currency (1 778) 293 6 077 (1 363)
Customer projects assets end of period 78 246 88 807 78 246 88 808

Movements in customer project liabilities through the period:

(NOK 1 000) 2020 2019 2020 2019
Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Opening balance in the period (49 702) (57 480) (55 740) (64 284)
Revenue deferred (6 952) (3 656) (14 961) (17 188)
Revenue recognized 5 464 10 015 21 684 28 505
Disposals & currency 935 (4 619) (1 239) (2 773)
Customer project liabilities end of period (50 257) (55 741) (50 256) (55 740)

Note 4 – Personnel expenses

(NOK 1 000) 2020
Oct-Dec
2019
Oct-Dec
2020
Jan-Dec
2019
Jan-Dec
Salary 89 539 88 267 358 593 366 516
Tantieme and variable compensation 5 126 5 196 19 204 19 437
Social security tax 15 561 13 709 54 548 54 099
Pension costs 3 082 3 983 17 450 19 333
Other expenses 3 290 11 832 12 828 24 953
Capitalised development expenses (3 812) (4 296) (13 598) (16 290)
Capitalised implementation costs customer projects (5 935) (1 393) (18 026) (29 505)
Total personnel expenses 106 851 117 298 431 000 438 543

Note 5 – Finance income and finance expense

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Interest income on bank accounts and receivables 33 37 191 160
Currency gain 607 517 4 679 1 916
Other financial income 369 1 009 893 556
Finance income 1 009 1 564 5 763 2 632
Interest exp. on financial liab. measured at amortised cost 4 561 4 408 23 145 19 253
Currency loss -24 386 987 3 377
Unrealised foreign currency loss/(gain) -18 918 -2 660 27 069 -2 375
Interest expense on leasing 265 462 1 503 2 126
Other financial expenses 1 439 1 346 3 871 4 302
Finance expenses -12 676 3 942 56 576 26 683
Net financial items 13 685 -2 378 -50 813 -24 051

Note 6 – Intangible assets

(NOK 1 000) Licenses Intern. Internally Customer Goodwill Total
and developed developed Relation &
Book value 01.01.2020 4 505 34 652 17 889 75 905 153 248 286 198
Additions of the period - 1 858 10 527 - - 12 385
Reclassifications - 15 371 (15 371) - - -
Disposals and currency effects 153 271 (1 978) 3 550 7 170 9 166
This period ordinary amortisation (1 746) (14 709) - (10 982) - (27 437)
Book value 31.12.2020 2 912 37 443 11 068 68 473 160 417 280 313
Book value 01.01.2019 9 057 28 768 19 937 85 302 151 996 295 059
Additions of the period 135 1 579 21 389 - - 23 103
Reclassifications - 18 055 (18 055) - - -
Disposals and currency effects (1 744) (39) (5 381) 652 1 253 (5 259)
This period ordinary amortisation (2 944) (13 711) - (10 049) - (26 704)
Book value 31.12.2019 4 505 34 652 17 889 75 905 153 248 286 198
Useful life 3-10 years 5 years N/A 10 years N/A
Depreciation method linear linear linear

Note 7 – Right-of-use assets and lease liabilities

Zalaris leases several assets such as buildings, equipment, and vehicles. The Group's right-of-use assets are categorized and presented in the table below:

Right-of-use assets
(NOK 1000) Buildings Equipment Vehicles Total
Acquisition cost
At 1 January 2019 42 218 3 428 6 680 52 326
Additions 3 402 747 305 4 455
At 1 January 2020 45 620 4 175 6 985 56 781
Additions 5 870 154 5 6 029
At 31 December 2020 51 490 4 329 6 991 62 810
Depreciation
At1 January 2019 0 0 0 -
Depreciation 16 653 1 629 3 650 21 932
At 31 December 2019 16 653 1 629 3 650 21 932
Depreciation 15 708 1 426 1 967 19 101
At 31 December 2020 32 361 3 055 5 617 41 033
Carrying amount at 31 December 2020 19 128 1 274 1 374 21 777

Lease liabilities

(NOK 1000) 2020 2019
Current 11 792 19 099
Non-current 11 104 16 536
Lease liabilities at 31 December 2020 22 896 35 635
Interest expense included (in finance cost) 1 503 2 126
Variable lease payments expensed in the period 0 0
Operating expenses related to short-term leases 275 155
Operating expenses period related to low value assets 288 453
Total cash outflows for leases 22 994 24 933

Note 8 - Cash and cash equivalents and short term deposits

2020 2019
(NOK 1 000) 31. Dec 31. Dec
Cash in hand and at bank - unrestricted funds 118 145 56 132
Deposit accounts - guarantee rent obligations - restricted funds 2 247 21 529
Employee withheld taxes - restricted funds 4 451 4 787
Cash and cash equivalents 124 843 82 448

Note 9 – Interest-bearing loans and borrowings

2020 2019
(NOK 1 000) Annual interest Maturity 31. Dec 31. Dec
Bond loan 3 m Euribor + 4.75% 28.09.2023 366 980 345 188
Loan fees bond 28.09.2023 (4 957) (6 760)
Commerzbank - DE 1.3% 31.12.2031 12 256 13 834
Landesbank Baden-Würtenberg 4.0% 31.12.2022 1 554 2 200
Landesbank Baden-Würtenberg 1.95 % 31.12.2031 1 244 9 270
MBG From 5.0% to 6.5% 2020-2026 - 5 326
SG Finance loans From 4.0% to 6.7% 2019-2023 - -
Total interest-bearing loans 377 077 369 058
Total long-term interest-bearing loans 375 832 362 487
Total short-term interest-bearing loans 1 244 6 571
Total interest-bearing loans 377 077 369 058
Total unrealized foreign exchange profit/(loss) on bond loan (21 792) 2 531

The Company's bond loan of EUR 35 million is listed on the Oslo Stock Exchange. The loan in Commerzbank DE relates to the office building in Leipzig, which is owned by the Company.

Note 10 – Transactions with Related Parties

Purchase from related parties:

(NOK 1 000) 2020 2019 2020 2019
Related party Transaction Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Rayon Design AS 1) Management Services 854 684 2 371 1 556
Haug Advisory AS 2) Management Services - - - 200
Total 854 684 2 371 1 756

1 ) Hans-Petter Mellerud, CEO, owns 40% of Rayon Design AS though his company Norwegian Retail AS

2 ) Jon Erik Haug, Board Member of Zalaris ASA, owns 100% of Haug Advisory AS

Note 11 – Events after Balance Sheet Date

There have been no events after the balance sheet date significantly affecting the Group's financial position.

Alternative Performance Measures (APMs)

Zalaris' financial information is prepared in accordance with IFRS. In addition, financial performance measures (APMs) are used by Zalaris to provide supplemental information to enhance the understanding of the Group's underlying financial performance. These APMs take into consideration income and expenses defined as items regarded as special due to their nature and include among others restructuring provisions and write-offs. Financial APMs should not be considered as a substitute for measures of performance in accordance with IFRS. Disclosures of APMs are subject to established internal control procedures.

Adjusted EBITDA and EBIT

EBIT, earnings before interest and tax is defined as the earnings excluding the effects of how the operations where financed, taxed and excluding foreign exchange gains & losses. EBIT is used as a measure of operational profitability. EBITDA is before depreciation, amortization and impairment of tangible assets and in-house development projects. To abstract non-recurring or income not reflective of the underlying operational performance, the Group also lists the adjusted EBIT and EBITDA. Adjusted EBIT is defined as EBIT excluding non-recurring costs, costs relating to share based payments to employees, and amortization of excess values on acquisition. Adjusted EBITDA is EBITDA excluding non-recurring costs and costs relating to share based payments to employees, but after depreciation of right-of-use assets.

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
EBITDA 31 346 20 594 121 816 103 381
Restructuring costs* 967 3 221 4 346 4 259
Share-based payments 912 726 2 718 1 743
Depreciation right-of-use assets (IFRS 16 effect) (4 149) (5 620) (19 101) (21 932)
Adjusted EBITDA 29 076 18 920 109 780 87 451
2020 2019
2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
EBIT 11 311 (1 580) 37 302 14 091
Restructuring costs* 967 3 221 4 346 4 259
Share-based payments 912 726 2 718
Amortization of excess values on acquisition 2 719 2 591 10 926 1 743
10 049

*Relates mainly to redundancy costs/severance pay for employees

Free cash flow

Free cash flow represents the cash flow that Zalaris generates after capital investments in the Group's business operations have been made. Free cash flow is defined as operational cash flow.

2020 2019 2020 2019
(NOK 1 000) Oct-Dec Oct-Dec Jan-Dec Jan-Dec
Net cash flow from operating activities 14 113 50 724 89 713 42 508
Investment in fixed and intangible assets (822) (17 054) (13 132) (25 462)
Free cash flow 13 291 33 670 76 581 17 046

Net interest-bearing debt (NIBD)

Net interest-bearing debt (NIBD), consists of interest-bearing liabilities, less cash and cash equivalents.

The Group risk of default and financial strength is measured by the net interest-bearing debt.

2020 2019
(NOK 1 000) 31.Dec 31.Dec
Cash and cash equivalents 124 843 82 448
Interest-bearing loans and borrowings - long-term (375 832) (362 487)
Interest bearing loans and borrowings - short-term (1 244) (6 571)
Net interest-bearing debt (NIBD) (252 234) (286 610)

Full time equivalents (FTEs)

The ratio of the total number of normal agreed working hours for all employees (part-time or full-time) by the number of normal full-time working hours in that period (i.e. one FTE is equivalent to one employee working fulltime).

Key Figures

(NOKm unless otherwise stated) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020
Revenues 192,4 187,5 190,7 206,2 200,6 198,4 189,7 203,5
Revenue growth (YoY) 3,3 % -0,7 % 8,2 % 6,2 % 4,3 % 5,8 % -0,5 % -1,3 %
EBITDA adjusted 22,9 21,1 24,7 18,9 26,8 26,8 27,0 29,2
EBITDA margin 11,9 % 11,2 % 12,9 % 9,2 % 13,4 % 13,5 % 14,2 % 14,3 %
EBIT adjusted 9,3 7,2 8,9 5,0 13,4 12,7 13,3 15,9
EBIT margin 4,9 % 3,8 % 4,6 % 2,4 % 6,7 % 6,4 % 7,0 % 7,8 %
Profit Before Tax 7,6 (4,3) (9,3) (4,0) (62,5) 27,2 (3,1) 25,0
Income Tax Expense (1,4) 1,0 2,7 0,7 14,0 (4,7) 1,4 (7,4)
Net income 6,3 (3,3) (6,6) (3,3) (48,6) 22,4 (1,8) 17,6
Profit margin 3,3 % -1,8 % -3,5 % -1,6 % -24,2 % 11,3 % -0,9 % 8,6 %
Weighted # of shares outstanding (m) 19,9 19,9 19,8 19,7 19,6 19,6 19,6 19,7
Basic EPS (NOK) 0,31 (0,17) (0,34) (0,17) (2,48) 1,14 (0,09) 0,89
Diluted EPS (NOK) 0,28 (0,17) (0,34) (0,17) (2,48) 1,11 (0,09) 0,86
Cash flow items
Cash from operating activities (22,0) 5,0 8,8 50,7 16,9 45,4 13,3 14,1
Investments (4,2) (7,1) 2,9 (17,1) (3,7) (3,6) (5,0) (0,8)
Net changes in cash and cash equi. (37,2) (9,4) (5,4) 18,2 3,9 41,0 (14,0) 8,1
Cash and cash equivalents end of period 69,3 59,6 64,8 82,4 87,5 129,0 116,3 124,8
Net interest-bearing debt 299,0 308,7 311,0 286,6 344,5 277,9 280,7 252,2
Equity 105,3 100,1 101,6 92,2 95,9 101,5 108,1 109,8
Equity ratio 13,9 % 13,8 % 14,3 % 12,9 % 12,4 % 13,5 % 14,9 % 15,2 %
Number of FTE (Period End) 822 825 803 753 728 723 713 712
Segment overview* Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020
Revenues 192,4 187,5 190,7 206,2 200,6 198,4 189,7 203,5
Managed Services 136,2 133,9 130,4 153,2 142,3 137,1 127,4 137,5
Professional Services 56,1 53,7 60,3 53,0 58,3 61,3 62,4 66,0
EBIT 6,5 4,4 4,8 (1,6) 9,5 7,4 9,2 11,3
Managed Services 13,6 15,8 10,6 14,9 16,7 16,0 14,8 15,6
as % of revenue 10,0 % 11,8 % 8,2 % 9,7 % 11,8 % 11,7 % 11,6 % 11,3 %
Professional Services 8,7 3,5 9,1 (0,3) 6,3 4,1 6,8 8,2
as % of revenue 15,5 % 6,5 % 15,1 % -0,6 % 10,8 % 6,7 % 11,0 % 12,5 %
Gr.ovhd & Unallocated (15,8) (14,9) (15,0) (16,2) (13,6) (12,7) (12,4) (12,5)

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

IR contacts:

Hans-Petter Mellerud CEO [email protected] +47 928 97 276

Gunnar Manum CFO [email protected] +47 951 79 190

Financial information

Interim report Q1 2021 to be published on 29 April.

All financial information is published on the Zalaris' website: http://www.zalaris.com/Investor-Relations/

Financial reports can also be ordered at [email protected].

Zalaris ASA PO Box1053 Hoff 0218 Oslo Norway

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