Earnings call transcript: Solaris Q1 2025 sees strong growth and innovation

Investing.com

Published Apr 30, 2025 03:06AM ET

 Earnings call transcript: Solaris Q1 2025 sees strong growth and innovation

Solaris reported a robust financial performance for the first quarter of 2025, with revenue reaching NOK 370 million, marking a 16.2% increase year-over-year. According to InvestingPro data, the company's strong performance is part of a broader trend, with a trailing twelve-month revenue of $10.95 billion and an impressive gross profit margin of 40.7%. Based on InvestingPro's Fair Value analysis, the stock currently appears undervalued despite trading at a P/E ratio of 34.8x. The company's adjusted EBIT rose by 50% to NOK 51.1 million, with an EBIT margin improvement from 10.9% to 14.1%. Net profit surged to NOK 32.2 million from NOK 6.4 million in the previous year. Despite macroeconomic uncertainties, Solaris continues to focus on innovation and strategic growth, evidenced by its AI initiatives and regional expansion.

Key Takeaways

  • Q1 2025 revenue increased by 16.2% year-over-year.
  • Adjusted EBIT grew by 50%, with a significant margin improvement.
  • Net profit rose from NOK 6.4 million to NOK 32.2 million.
  • Strong growth in managed and consulting services revenue.
  • Continued focus on AI-driven innovation and European market expansion.

Company Performance

Solaris demonstrated strong financial performance in Q1 2025, driven by growth in its managed and consulting services. The company reported a 19.4% increase in managed services revenue and a 6.8% rise in consulting services revenue. Regional growth was particularly strong in the DACH region, which saw a 27% increase. Solaris's strategic focus on AI and its robust SAP ecosystem participation position it well against competitors in the payroll and HR services market.

Financial Highlights

  • Revenue: NOK 370 million (+16.2% YoY)
  • Adjusted EBIT: NOK 51.1 million (+50% YoY)
  • EBIT Margin: 14.1% (up from 10.9% last year)
  • Net Profit: NOK 32.2 million (vs. NOK 6.4 million last year)
  • Operating Cash Flow: NOK 22 million (up from NOK 7 million)

- Net Interest-Bearing Debt: NOK 226 million (reduced by NOK 22 million)

The company maintains strong financial health, as evidenced by InvestingPro 's Financial Health Score of 2.56 (GOOD). With a current ratio of 1.37 and moderate debt levels, Solaris demonstrates solid balance sheet management. InvestingPro analysis reveals 8 additional key insights about Solaris's financial position, available to subscribers.

Outlook & Guidance

Solaris aims for a revenue target of NOK 2 billion by 2028, with an EBIT margin goal of 13-15%. Analyst consensus from InvestingPro supports this ambitious outlook, with EPS forecast to reach $1.39 in FY2025. The company's stock has shown strong momentum, delivering a 38.2% return over the past year. For detailed analysis and comprehensive valuation metrics, investors can access the full Pro Research Report, part of InvestingPro's coverage of 1,400+ top stocks. The company is approaching an annualized revenue of NOK 1.5 billion and has secured NOK 81 million in net recurring revenue for the next 12 months. The focus remains on expanding its European service delivery while emphasizing data privacy and regulatory alignment.

Executive Commentary

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CEO Hans Peter Melrud highlighted the unstoppable momentum of Solaris, stating, "We are now on the verge of becoming a 1,500,000,000.0 company." He emphasized the central role AI will play in accelerating project delivery, reinforcing the company's commitment to innovation.

Risks and Challenges

  • Macroeconomic uncertainty could affect decision cycles and investment.
  • Potential challenges in maintaining growth momentum in a competitive market.
  • Regulatory changes in data privacy could impact operations.
  • Dependence on SAP's ecosystem may pose risks if changes occur.

Q&A

Analysts inquired about potential market slowdowns, to which Solaris reported no signs of deceleration, citing a strong pipeline. Questions regarding the strategic review were met with limited additional information. With analyst price targets suggesting further upside potential and a strong Piotroski Score of 8, the company's fundamental outlook remains positive. Discover more detailed metrics and analysis through InvestingPro 's comprehensive research tools and real-time financial data.

Full transcript - Zalaris ASA (ZAL) Q1 2025:

Hans Peter Melrud, CEO and Founder, Solaris: Good morning. I am Hans Peter Melrud, the CEO and founder of Joining me today for this webcast presentation of Solaris q one twenty twenty five 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'll look at some of the highlights of the quarter. As we mark our twenty fifth anniversary, I'm proud to be here wearing the Team Solaris jersey and share Solaris first quarter results for 2025, another remarkable milestone in our journey. In q one twenty five, Teams and Aires achieved its seventh consecutive quarter of record breaking revenues, reaching 370,000,000, a strong 16.2 increase compared to the same period last year. We are now on the verge of becoming a 1,500,000,000.0 company, achieving this milestone twelve months ahead of the target set during our Capital Markets Day in September 23.

I will outline our updated growth targets in the upcoming outlook section. Our EBIT reached 52,100,000.0, representing 14.1% of revenue and a 45% increase from 34,800,000.0 in q one of the previous year. Operating cash flow also saw a significant boost, reaching 22,000,000, up from 7,000,000 in the same period last year. For the twenty four fiscal year, the board has proposed a dividend of 0.90 kroner per share, subject to the approval of the annual general meeting scheduled for the May. While deal signings in managed services started slowly, a significant Nordic payroll agreement covering three and a half thousand employees was finalized shortly after quarter end, and we expect another one to land soon.

The sales pipeline remains strong with both expansions from existing clients and interest from new names. We remain optimistic about achieving our 25 sales targets. Consulting sales performance is on budget for the year. We'll secure contract extensions with both existing clients spanning public and private sectors and have also brought in new customers. As a general rule, we will no longer disclose customer names to reduce cybersecurity risks and protect confidential financial details.

However, we will continue issuing an anonymous press releases for significant deals to maintain transparency to you. Managed services revenue increased 19.4% year on over year or 16.2% when adjusted for currency effects, reflecting continued strength in our core offering. We achieved a net revenue retention of 101% year on year in constant currency even with some customer churn, underscoring how our existing clients continue to expand both geographically and functionally within our platform. Growth was broad based across all regions in local currency. DACH grew 27%, Northern Europe thirteen %, UK and Ireland Six Percent.

Then let's look at professional services, now renamed consulting. Revenue in Salares Consulting increased by 6.8% year over year or 3.9% when adjusted for currency effects. This growth was primarily driven by stronger sales in the APAC region and Poland, partially offset by the tapering of a large consulting engagement in The UK. A significant portion of Solaris Consulting's capacity is currently being leveraged to support our managed services business, particularly in implementation of new customers through transformation projects and execution of change orders with notable activity in Germany. With this, I hand over to our CFO, Gunnar, who will take you through the financial part of the presentation.

Gunnar Manen, CFO, Solaris: Thank you, Hans Bethel. This slide highlights a 16% revenue increase for the quarter year on year, showing a strong performance also in constant The revenue for the first quarter were NOK $370,000,000, an increase year on year of 13% when measured in constant currency. Revenue managed services grew by 19%, while Salaris Consulting grew by 7%. The increase in Salaris Consulting is primarily due to increased sales in APAC and Poland, partly offset by the partial completion of a large consultative project in The UK, as just mentioned by Hans Petter. The growth in APAC was approximately 70%.

Additionally, significant consulting resources, particularly in Germany, are still being allocated to implementing new customers and managing change orders within managed services, reducing the external revenue capacity in Solaris Consulting. Net retention in managed services was 101% for the quarter. Looking ahead, we continue to have strong revenue visibility through to twenty twenty five and twenty twenty six, with a projected revenue increase of more than 14% compared to full year 2024. The chart illustrates our anticipated growth based on signed contracts. The total net annual recurring revenue from these contracts is 81,000,000.

The top graph illustrates the annual run rate for recurring revenue from managed services as of Q1 of $984,000,000. Additionally, NOK81 million net new annual revenue from signed contracts and expansions is expected to have a full effect from end Q1 twenty twenty six. The bottom graph shows the estimated timing of this additional revenue. In addition to the estimated recurring revenue from managed services, we have changed orders totaling approximately 12% of recurring revenue and the revenue from Salares Consulting for the last twelve months of SEK345 million. This results in an estimated future annual revenue of minimum 1,540,000,000, based on the average currency rates in the first quarter.

Now, 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 initiative communicated in the second quarter last year are having a positive effect. The first quarter adjusted EBIT was NOK51.1 million, an increase of 50% year on year, with an adjusted EBIT margin of 14.1, 1%, up from 10.9% last year. The adjusted EBIT for managed services was 54,700,000.0, which was 22,300,000.0 more than last year, mainly due to the factors just mentioned. The adjusted EBIT for Salares Consulting was 8,600,000.0, 0 point 7 million lower than last year.

Positive contribution from higher revenue was offset by marginally higher allocation of regional overhead costs. The condensed profit and loss slide provides a detailed overview of our financial performance, highlighting our key components. The increase in license cost is attributed to high revenue from our payroll and HR solution solutions and was marginally lower than last year as a percentage of revenue. Revenue per employee in constant currency grew by approximately 11% year on year. However, the significant revenue growth led to a year on year increase of 19 FTEs, contributing to higher personnel expenses.

A majority of the new FTEs has come from nearshore and offshore locations, and personnel expenses as a percentage of revenue decreased by two percentage points. The reduction was partly due to lower share based payments cost compared to previous year. Other operating expenses decreased by two 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, external hosting, and costs incurred on the strategic process. This was partly offset by a reduction in the use of external consultants.

The EBIT was 41,700,000.0 for the quarter compared to 32,500,000.0 last year. The EBIT last year included a gain on sale of assets of 10,500,000.0. An unrealized currency gain of 14,500,000.0 related to the euro denominated bond loan resulted in net financial income of 1,200,000.0, compared to a net financial expense of NOK23.9 million last year, which included an unrealized currency loss of NOK11.4 million. Net profit for the period was NOK32.2 million compared to NOK6.4 million last year. Our operating cash flow for the quarter was positive, showing a year on year increase of 14,000,000 to reach 22,000,000.

The chart illustrates the growth in our cash balance from the previous quarter, which increased by NOK6 million. While earnings rose, this was partially offset by an increase in net working capital, primarily due to timing effects expected to be reversed in the second quarter. The net interest bearing debt as of March 31 was reduced by NOK22 million during the quarter to NOK226 million, which converged to a leverage measured by the net interest bearing debt, divided by adjusted EBITDA of less than one. The reduction in net interest bearing debt was partly due to the appreciation of NOK against euro reducing the value of the bond loan. And that concludes the financial section, and Hans Petit will now present our outlook.

Hans Peter Melrud, CEO and Founder, Solaris: Thank you, Gunnar. Let's now turn to our positive outlook for Solaris even as we navigate a landscape shaped by macroeconomic uncertainty. The year '25 brings a complex global environment marked by increasing macroeconomic uncertainty and volatility. In this context, businesses are seeking stability, efficiency, and trusted partnerships more than ever. Our business model rooted in long term contracts and the delivery of essential services that is a foundation for staying in business like payroll offers exactly that.

This foundation ensures reliability and continuity even in unpredictable times. Our value proposition centered on cost efficiency and strategic flexibility is especially compelling during recessionary or uncertain economic periods as clients seek ways to optimize operations without compromising on quality or compliance. Experience from previous crisis and downturns has shown that such periods often prompt customers to initiate cost reduction and strategic transformation initiatives, leading to increased demand for outsourcing based business models. As a European provider, we deliver services that are hosted within Europe and underpinned by European values, including data privacy, regulatory alignment, and cultural proximity, an increasingly important differentiator for our clients across the region. In early twenty four, we launched a strategic initiative to define our road map for leveraging artificial intelligence with the twin goals of driving customer facing innovation and enhancing internal operational efficiency.

This has resulted in high internal engagement among our consultants and developers that already result in tangible improvements for our customers. To date, we have lowered system implementation costs, improved user experience in our travel expense solution through AI based processing of traveler seats, and improved responsiveness and usability of our help desk interface. Both existing and new customers like what they see. As an active participant in the SAP ecosystem, we are rapidly adopting AI driven capabilities delivered by SAP into our SuccessFactors based solutions, positioning ourselves at the forefront of next generation HR and payroll technology. Looking ahead, AI will play a central role in accelerating project delivery, streamlining operations, unlocking new time saving innovations, and in developing new products and services, delivering measurable benefits to both our customers and employees.

As outlined at our Capital Markets Day in the fall of twenty three, we see we set an annual growth target of 10% with a goal of reaching a total run rate revenue of 1,500,000,000.0 by '26. And, cautiously, based on our recent quarterly performance, we are well ahead of schedule and on track to achieve this milestone already now in '25. The majority of our growth continues to come from managed services, where the revenue composition evolving more favorably than anticipated. We're seeing a higher share of high quality recurring revenue from long term contracts typically range from five to seven years in duration. Over the past two years, our average annual growth rate has been approximately 18% or 14% when adjusted for currency effects.

This sustained growth has largely been driven by both increased revenue from existing customers and new contracts within managed services. Given our current trajectory, we have set new targets. We now aim to reach 2,000,000,000 in revenue by '28 with an EBIT margin of 13% to 15%, While some competitors already achieved margins beyond this level, our priority is to first ensure consistent delivery within this target range before setting more ambitious profitability goals. Our strategy for continued growth remains anchored in our core service offerings, including multi country or global payroll for the mid market, our evolving HR services and global capability center product lines, a comprehensive suite of SAP consulting services now functioning increasingly as a global business unit. To support this, we are refining our go to market approach with a more clearly defined land and expand strategy aimed at scaling both within existing accounts and across new geographic geographies.

We believe growth will be fueled by a combination of upselling new services to existing clients, expanding geographic reach with the goal of establishing operations in all g 20 countries and full market coverage in Western Europe as the first step, and maximizing maximizing utilization of our existing capacity and infrastructure to unlock greater incremental margins. Currently, our Q1 annualized revenue is nearing 1,500,000,000.0 and we have over $80,000,000 in contract recurring revenue net of churn already secured for delivery over the next twelve months. Based on current trends and assuming churn stays within historical bounds, we remain confident in sustaining our growth trajectory. Looking forward, we expect to drive further improvements through AI adoption and in application automation with the goal of fully automating payroll to significantly improve gross margins, continued ex shoring initiatives to further enhance cost efficiency, and benefits from scale and productivity gains. If we deliver on our 2,000,000,000 revenue target, our EBIT ambitions of 13% to 15% would translate to an EBIT in the range of 60,000,000 to 300,000,000.

With ongoing transformation and technology driven enhancements, we see the potential to surpass this EBIT margin range over time. So let me sum up. Q1 has marked the beginning of another remarkable year for Salaris. With $370,000,000 revenue for the quarter, we are now almost 1,500,000,000.0 in annualized revenue and delivered a solid 14% EBIT for the quarter. With this strong momentum, we continue our growth ambitions, setting a new target of reaching NOK 2,000,000,000 in revenue by 2028, with an EBIT margin of 13% to 15 equivalent to an EBIT of between NOK $260,000,000 and NOK 300,000,000.

Cash generation remains strong, and the Board of Directors will propose a dividend of NOK 0.9 per share at the upcoming annual general meeting. Our strategic review process is continuing, backed by significant operational improvements and a strong share price performance since the announcement. The Board is taking a measured and thoughtful approach to evaluating strategic initiatives. We expect, as we said also in our last presentation, to conclude the process by the end of Q2, that is this quarter that we are currently in, And shareholders will be updated as soon as further information becomes available. As we celebrate our twenty fifth anniversary, we couldn't have asked for a better way to mark the occasion than again deliver the best results ever.

A heartfelt thank to all my colleagues in team Salares, all our valued customers, and partners for your continued trust and support on this journey. And again, as the title of the latest Salaris Norsemen film so rightly states, team Salaris are unstoppable. Thank you for joining us today. Stay active, and we now welcome your questions.

Gunnar Manen, CFO, Solaris: Okay, Hans. But there one question here. Since new signings have been low in managed services services in q one, do you see any slowdown in the market?

Hans Peter Melrud, CEO and Founder, Solaris: No. We do not see a slowdown in the market. We with the type of deals that we are selling, it is quite normal that signings and conclusions of those are delayed from time to time. So our pipeline looks great, and we are confident that we will continue our growth journey, reaching our target growth of 10% annually. Yeah.

Now, has customer behavior changed since the tariffs tariffs were announced early this month? And, or do

Gunnar Manen, CFO, Solaris: you see expect any any longer sales cycles?

Hans Peter Melrud, CEO and Founder, Solaris: We can't say that we have seen a change. But, in general, we see and that includes ourselves as well, that we are always somewhat more careful on adding more costs to our p and l. So that I think we might see some longer decision making cycles, particularly on new projects that is consulting projects, but still also there, the pipeline looks strong. And as also mentioned in our my outlook section, we think and see in general that when the customers are in, for more, say, troubled times, the likelihood that they go to outsourcing based models to reduce costs and have more operational flexibility is good. So we think it's, in general, good for business.

Gunnar Manen, CFO, Solaris: Now can you add any more flavor to the, to the strategic review other than what you, mentioned?

Hans Peter Melrud, CEO and Founder, Solaris: No. At this point, I cannot, unfortunately.

Gunnar Manen, CFO, Solaris: And that that's it, really.

Hans Peter Melrud, CEO and Founder, Solaris: Okay. Good. So, again, thank you so much for joining. If you have any questions, feel free to contact us on ir@salaris.com, and we'll be there and do our utmost to respond to those as soon as we can. And in the meantime, we'll do our utmost to continue the journey for our next quarter.

So thanks again, and, again, stay active.

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