Zalaris

Earnings Release • Aug 25, 2022

25 August 2022

Presentation of financial results Q2 2022

Disclaimer

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This presentation includes and is based, inter alia, on forward-looking information and contains statements regarding the future in connection with the Company's growth initiatives, profit figures, outlook, strategies and objectives. All forward-looking information and statements in this presentation are based on current expectations, estimates and projections about global economic conditions, the economic conditions of the regions and industries that are major markets for the Company. These expectations, estimates and projections are generally identifiable by statements containing words such as "expects", "believes", "estimates" or similar expressions.

Important factors may lead to actual profits, results and developments deviating substantially from what has been expressed or implied in such statements. Although the Company believes that its expectations and the presentation are based upon reasonable assumptions, it can give no assurance that those expectations will be achieved or that the actual results will be as set out in the presentation. The Company is making no representation or warranty, expressed or implied, as to the accuracy, reliability or completeness of the presentation, and neither the Company nor any of its directors, officers or employees will have any liability to you or any other persons resulting from your use.

Agenda

Today's presenters

• Highlights
• Company in brief
• Financial review
• Markets and outlook
• Q&A

Hans-Petter Mellerud CEO and Founder

Gunnar Manum CFO

Highlights

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Q2 2022 key takeaways

• Accelerated growth: Revenue growth of 15 percent (constant currency)
• Successful new-sales: Strong inflow of new contracts in Q2, including a 7 year contract with StoraEnso
• Good outlook: Solid pipeline of new business for second half 2022
• Investing in ramp-up and expansion: Stable margins on existing customers. EBIT temporarily negatively affected by ramp-up cost on new clients and the expansion to APAC
• APAC on track: APAC expansion on track with first major PeopleHub contract in place. Positive EBIT targeted from Q3 2022
• vyble® process: Engaged investment bank to sell vyble, allowing Zalaris to focus entirely on the continued growth of its PeopleHub based business

Continued development in new signings driving recurring revenue streams

• Several new landmark deals and extensions signed securing continued growth in 2023
• Pipeline of Multi-Country Peoplehub powered opportunities strong and potential of another year of record sales
• Peoplehub package powered by SuccessFactors v 2.0 completed and expected to create additional demand in cooperation with SAP

Time- based outsourcing services to Stora Enso's 6000+ employees in Finland. Approx. 20 FTEs business transfer to Zalaris. PeopleHub solution powered by SuccessFactors to Sealord's 1200 employees in APAC/New Zealand.

for Global Application Maintenance Services in Poland for the provision of Application Maintenance Services valued at approx. MEUR 2 per annum

targeting closing in Q3 in contracting stage with MEUR 2-6 annual contract value when fully implemented. Amplifon with 2'200+ employees signed yesterday.

Managed Services grew by 22% in the second quarter, in local currency

Revenue NOK 151.7m (+20.6%)

*Revenue in local currency converted to NOK using the avg. currency rate from the quarter last year. See Q2 interim report for definitions of APMs

• +22% higher revenue when adj. for currency effects
• The inclusion of ba.se added +9.5%, while +12.5% relates to new customers and volume increases
• Net new signings with annual recurring revenue (ARR) of NOK 14m during the quarter
• Continued good activity level, particularly within the European multi-country HR & Payroll segment, where Zalaris has a strong position. Several large new contracts expected to be signed in H2 2022
• >90% of revenue is recurring based on long-term BPO contracts, while the remaining <10% relates to change orders etc.

Professional Services had marginally lower revenue compared to last year, in local currency

Revenue NOK 58.0m (-2.7%)

^*) Revenue in local currency converted to NOK using the avg. currency rate from the quarter last year. See Q2 interim report for definitions of APMs

• Revenue in Professional Services was approx. in line with last year when adjusted for negative currency effects
• Significant PS capacity still being utilized on implementing new customers in MS (transformation projects)
• Pressure on PS consulting resources, particularly in Germany, and lack of available resources is the key growth inhibitor
• In local currency, revenue in Poland grew by ~38%, from additional volume from existing clients, while Germany had a reduction of ~10%

Majority of Professional Services revenue is recurring and supports a continuous presence with customers

Distribution of Projects vs long term AMS based revenue

• ~55 % of Professional Services revenue is recurring, or recurring like, and based on long term agreements and relationships
• ~84 % of Professional Services revenue is from customers that were customers 12 months prior

Revenue customer split

* Customers that were invoiced in the same quarter previous year

** New customers since the end of the same quarter previous year

First major contract signed in APAC – targeting positive EBIT in Q3

Clear strategic rational for APAC expansion

• Support European-based customers as 64% of deals with European origin include APAC coverage*
• APAC one of fastest growing markets for Multi Country Payroll
• Vendor consolidation opened opportunity to hire seasoned team of industry experts to build Australian and Singapore foothold, at a relatively low risk
• Potential for offshoring in the Philippines

Efficient roll-out on track

• Use PS short-term to quickly build revenue base and name recognition, and reach break-even level
• First major contract for implementation of Peoplehub for New Zealand company Sealord signed in August
• Healthy pipeline of contract leads, with additional signings expected in H2 2022
• Currently 16 employees SAP consultants also utilised on European customers
• Targeting positive EBIT from Q3 2022

vyble® business reorganised and focused on SaaS – seeking partner to fund growth

Strategic rationale

• German market for HR and Payroll solutions for Medium market and below estimated at EUR 3'200 million pa
• Fragmented supplier market with no clear leader in payroll space
• vyble® with modern cloud native solution

Key activities and milestones since acquisition

• Refocused strategy to provide SaaS payroll and HR through two channels Direct and Indirect via tax advisors and accountancies to improve scalability
• Stabilized organization, technology and on track to receive all necessary certifications

Future plans

• Executing and strengthening sales with goal to deliver on sales targets aiming at break- even in Q4 2023 or approx. 0,08% market share
• Hired investment bank to sell vyble® that can accelerate growth through financing strengthened marketing and sales effort and realize market potential. Zalaris to focus on serving strong pipeline in Peoplehub based Mid- and Enterprise market.

Company in brief

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Payroll & HR solutions that enable digital organizations

One global IT platform with local presence

Our vision: Supporting multi-national companies manage HR and payroll across borders

Zalaris today: The leading European headquartered Global provider of payroll and human capital management solutions based on outsourcing and SaaS models

1,500,000 employees served monthly across all HR solutions	989 Zalaris employees	> 300,000 employees served monthly through payroll services
2021 Revenue: EUR 78 million	Own service centers in 16 countries with expertise in local laws and regulations	Together with partners 150+ countries with expertise in local laws and regulations

Zalaris offering is built around Peoplehub – covering the whole employee life cycle

Software as a Service (Saas)

Business Process as a Service (BPaas) and Outsourcing

Professional Service (Advisory, Analytics, Technology, Implementation)

Payroll and HR partner to mid- and large size organizations

MANAGED SERVICES (MS)

PROFESSIONAL SERVICES (PS)

*BPaaS – Business Process as a Service

Significant European player with Germany largest entity

Revenue per country Q2 2022 (%)

Diversified customer base across a wide range of industries

Financial Review

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Revenue increased by 15% for the quarter in local currency

Revenue NOK 211m (+13%)

Revenue growth +15% YoY in constant currency

• Revenue growth (as reported) for the quarter YoY: +13.4%
• From new entities (ba.se and vyble): +6.4%
• New contracts/volume changes: +7.0%
• MS +20.5% to NOK 152m
• PS -2.5% to NOK 58m
• New BPO contracts awarded yet to be implemented has annual recurring revenue of ~NOK 51m

*See Q2 financial report for definitions of APMs

New BPO contracts will result in significant revenue increase going forward

Revenue development over time based on signed MS contracts (NOKm)

Contracted ARR* evolution over time based on signed contracts (NOKm)

• Total annual revenue expected to increase by NOK 87m (+11%) by Q2 2023 vs. LTM Q2 2022, based on signed contracts (assuming no material churn)
• Any new contract signings after Q2 2022, with a revenue effect by Q2 2023, will come in addition
• Revenue from new contracts signed will materialise gradually through to Q2 2023
• Assumes MS change order levels at historical ~10% and PS revenue at LTM Q2 2022

*The ARR for the quarter is an estimate calculated by annualising the actual recurring revenue (according to contract revenue) for the quarter, for customers at the end of the quarter. Please refer to the APMs section of the interim financial report for further details.

Revenue deferred as part of transformation projects for new BPO contracts continues to show a high activity level

Deferred revenue and employee hours capitalised, LTM (NOKm)

• Significant potential revenue generating capacity utilised on implementing new BPO contracts, which will generate recurring revenue from go-live date
• Amount of revenue deferred increased by 55% to NOK 17.6m for the quarter YoY
• Value of employee hours capitalised increased by 52% to NOK 18.2m for the quarter YoY
• Deferred revenue and costs will be recognised over the contract period, from the go-live date

Adj. EBIT (ex. APAC) for Q2 impacted by onboarding of customers and recruitment and training of new resources to handle increased volumes

Adj. EBIT* excluding APAC (NOKm) and margin (%)

MS - EBIT (NOKm) and margin (%) PS - EBIT (NOKm) and margin (%)

Adj. EBIT (ex APAC) NOK 10.2m (NOK 11.4m) -10.5%

• Adj. EBIT (ex APAC) margin 4.9% (6.2%)
• Adj. EBIT margin impacted by:
• build-up of delivery capacity for new contracts +35 FTEs (57% near/offshore) since Q1'22 to 884 FTEs ex. APAC having negative effect on utilisation
• Higher travel and related costs + NOK 3m
• New contracts that go live in 2022 and 2023 will support improved EBIT margins
• Initiatives for margin improvements
• Further transfer of work to nearshore and offshore locations with lower cost structure
• Operational improvement program to bring customer margins in Germany to Nordic level
• Increased utilisation (will partly come through volume increases)
• EBIT APAC NOK -3.5m targeted break-even from Q3'22

* See definition of adj. EBIT under APMs in Q2 2022 Interim Report)

Condensed Profit and Loss

	2022	2021	2022	2021	2021
(NOK 1 000)	Apr-Jun	Apr-Jun	Jan-Jun	Jan-Jun	Jan-Dec
Revenue	210 187	185 415	418 627	378 193	775 265
License costs	20 647	16 188	40 416	31 763	67 481
Personnel expenses	118 864	98 961	223 614	205 023	405 949
Other operating expenses	49 819	48 497	105 049	90 723	199 886
Amortization implementation costs customer projects	7 469	6 922	15 491	13 678	29 874
Depreciation, amortization and impairments	12 194	11 748	24 416	23 641	49 488
EBIT	1 194	3 100	9 642	13 365	22 585
Adjustment items	5 626	8 320	11 560	11 843	26 989
Adjusted EBIT*	6 820	11 419	21 201	25 208	49 574
Adjusted EBIT margin %	3,2%	6,2%	5,1%	6,7%	6,4%
Net financial income/(expense)	(27 396)	(12 138)	(21 107)	(918)	(7 571)
Profit/(loss) before tax	(26 203)	(9 039)	(11 466)	12 447	15 014
Income tax expense	5 182	2 623	3 664	(1 387)	(2 203)
Profit/loss from discontinued operations	(3 959)	-	(7 720)	-	-
Profit/(loss) for the period	(21 021)	(6 416)	(7 802)	11 060	12 812
Basic earnings per share (NOK)	(0,72)	(0,31)	(0,75)	0,52	0,60

License costs: Increase from inclusion of ba.se and volume/revenue increases

• Personnel expenses: Increased number of FTEs YoY (+188), higher option costs (+NOK 1.2m), and reclassification from Other op. exp. (+NOK5.2m), partly offset by more costs being deferred through customer projects (-NOK 6.0m) and positive currency movements
• Other op. exp.: Higher use of external consultants and travel costs, and inclusion of ba.se, offset by NOK 5.2m reclassified to personnel exp. Figure last year included NOK 5.2m in one-off m&a expenses

Continued strong cash position

Development in cash balance (NOKm)

• Cash balance at 30 June of NOK 117m
• Dividend payment of NOK 7.6m (NOK 0.35 per share)
• Investments relates mainly to internal system development including projects partly financed through SkatteFunn
• Net interest-bearing debt of NOK 254.4m vs. NOK 212.9m at the end of previous quarter.

Markets and Outlook

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57% of European senior stakeholders from global enterprises expect the use of HR Outsourcing to grow

Well positioned in most attractive market segment

Above 10% 2018-2023 growth (CAGR) for the multi-country segment

CAGR 2018-2023 Source: Nelson-Hall, "Next Generation Payroll Services"

Well protected to changes in global macro picture

• Higher inflation
• Most long-term contracts have a provision for annual indexation based on salary and CPI increases
• Experiencing some pressure on salary levels in a competitive market for resources
• Fear of recession
• High share of recurring revenue and long-term contracts
• Historically seen an increased interest for outsourcing in challenging times, when companies need to focus on operational efficiencies and cost reductions
• Geographical diversified
• Higher interest rates
• Would increase cost of capital, but current solid cash position and positive cash-flow.

Leaving Q2 continuing growth with aim of delivering on margin expectations

• Communicated growth of 10%+ within sight and annualized revenue of NOK 900+ million by Q1 2023
• Maintain target EBIT of 10% as revenue from projects under implementation are recognized and cost reductions from Zalaris 4.0 in place
• Resilient vs macro picture. Majority of contracts with indexation clauses protect against inflation and pressure on personnel costs. Historically increased demand for outsourcing in recession/crisis situations.
• APAC investment with first significant projects wins and expected to deliver positive EBIT from Q3 2022
• Refocused vyble to focus on HR and Payroll SaaS. Seeking new owner/co-owner that can finance strengthened marketing and sales to capture significant share of EUR 3,2 billion German market.

Q&A

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We simplify HR and payroll administration, and empower you with useful information so that you can invest more in people.

Thank you!

Zalaris ASA | +47 4000 3300 | www.zalaris.com

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