Good morning. I am Hans-Petter Mellerud, the CEO and founder of Zalaris, and joining me today for this webcast presentation of Zalaris Q1 2024 results is our CFO, Gunnar Manum. We are using Teams for this purpose and hope that you will find it informative and engaging. You can use the Q&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 recordings in the investor section of our website. This is, in fact, my 40th presentation of Zalaris quarterly results since we were listed on the Oslo Stock Exchange in 2014, underpinning a key value of long-termism and endurance that I seek to instill in everything that we do. Welcome to this 40th quarterly presentation, which we will celebrate with the cake later today.
First, we will look at some of the highlights of the quarter. Again, having an anniversary with the 40th presentation, it is super cool to announce that Q4 2024, Team Zalaris delivered its ninth consecutive quarter of all-time high revenues, reaching NOK 318 million, an increase from NOK 261 million in Q1 of the previous year. This signifies a 22% year-on-year growth in actual terms and 18% in constant currency. We are now nearing a NOK 1.3 billion annualized revenue, surpassing our aspirations from just a year ago. EBIT also stood at all-time high of 10.9%, amounting to NOK 34.8 million, which is an 88% increase from NOK 18.5 million in the same period last year. Zalaris' market success persisted, with the signing of contracts worth 200 million NOK in total contract value for long-term projects in professional services during Q1.
Our free cash flow for the quarter was robust, with NOK 43 million following the sale of our Leipzig office building. Following the quarter's end, we initiated a strategic review process to assess options for sustaining our strong growth and leveraging market opportunities in the forthcoming years. The year 2024 started with strong momentum, marked by both an increase in signings and a strengthened pipeline of opportunities. In Germany, our professional services organization partnered with one of the country's largest system integrators to sign a landmark agreement. This agreement involves implementing a new human capital management solution that covers employee data management and payroll for the State of Berlin, or the city of Berlin, so to speak.
The Zalaris portion of the contract is valued at approximately NOK 170 million over the next four years, positioning Zalaris as a leading provider of SAP-based people services to the public sector in Germany. Similar projects are expected to enter the market soon as the sector continues to digitize and modernize its people processes. In the Nordics, we welcomed the energy company Vår Energi ASA as a new customer, initially covering their 1,000 employees with significant potential for expansion. APAC continued its positive trajectory by signing a total of 25 deals, marking their second-highest quarter to date. This includes new agreements with Accolade Wines for multicultural payroll and the implementation of a new payroll solution for Telstra Broadcast Services. Our pipeline of new prospects, as well as the opportunity to expand with existing customers into new geographies, has continued to develop positively.
Our strengthened brand and leadership position have enabled us to capture a significantly larger share of the relevant large enterprise multicultural opportunities originating out of Europe. Then let's look at our segments. Managed services revenue increased by 25% as reported and 20.9% in constant currency to NOK 233 million. Our net revenue retention in constant currency remains strong at 109% year-over-year as existing customers expanded their geographic footprint and functionalities. All our regions showed good growth, with DACH leading the way with 28% year-over-year. Managed services represented 73% of our total revenue, slightly higher than last year. Then let's look at professional services, our consulting practice. Professional services revenue grew 9% in reported and 2.8% in constant currency to NOK 76.8 million.
Our professional services capability has been key to win our recent contracts and is increasingly also being used in Germany and U.K. to implement managed services contracts based on PeopleHub and our standardized template-based solutions. Most of the growth in this segment came from the U.K., which grew by a massive 60% compared to last year, a big contributor being a large agreement with a leading European airline to implement a global SAP-based payroll solution. Germany had revenue in line with last year, growing 2.5% year-on-year as consulting resources were increasingly used to implement managed services projects. However, with our new public services wins, we also expect significant growth with stable revenue streams over the next four years in our German professional services unit. APAC also continued its positive development with several new wins.
Again, let me remind you, in professional services, we see the application maintenance services, or AMS, helping customers maintain their payroll and HR systems, mostly on a long-term or subscription basis, continue generating around 53% of total revenue. Our long-term relationship with customers continues being visualized through 85% of our Q1 revenue in this segment, coming from customers that were also customers in Q1 last year. Our right-shoring metric continued developing positively during the quarter, increasing the percentage of near offshore as a percentage of total headcount with 1.2% since last quarter and around 3.3% during the last 12 months. This lowers our resource costs and is a significant step towards Zalaris 4.0 target of 50%, and we expect this trend to continue. Let me again remind you what a company Zalaris has become.
My vision when founding Zalaris 24 years ago was to set up a company that would help customers with IT solutions and services to operate their people processes seamlessly across borders. Zalaris' business model is based on long-term agreements that generate recurring revenue. We have offered Software as a Service, Business Process as a Service, and outsourcing delivery models since inception. More than 90% of our revenue in Managed Services and around 55% of our revenue in Professional Services is recurring based on long-term agreements. Our historic churn is low in the 2%-3% range. Delivering payroll and HR services based on one common global IT platform, the Zalaris PeopleHub, supported by local competent resources, has been key to our success and 24 years of growth. Now, an almost NOK 1.3 billion run rate company, we are being seen as one of the leading global players in our industry.
From the outset, our goal was to help customers reduce their direct process costs by 20%-30% by outsourcing their payroll and HR processes to us. Our approximately 1,100 employees deliver services from 17 countries. In addition, we can deliver to 150+ countries through partners with our PeopleHub concept. Our short-term aim is to deliver services with our own solutions and service centers for all European Economic Area and G20 countries. We see large companies across the globe prioritize investments towards solutions that enable unified access to payroll and HR data for analytical purposes, digitization of workflows, reduction of cost, and securing business continuity as business-critical payroll. Working from anywhere has become the new normal, driving the need for fully digitized people processes. Team Zalaris is extremely well-positioned with our innovative product portfolio and services that cover the whole payroll and HR value chain.
Our services are built around PeopleHub, enabling customers to manage their human capital across borders in one common cloud-based system solution with functionality covering the full employee lifecycle. The solution is offered as software as a service with various additional layers of business process as a service and outsourcing and can be integrated to all major HR platforms. Our organization is structured in two business units. Managed Services deliver solutions and services based on PeopleHub, ranging from software as a service to a comprehensive outsourcing solution. We can integrate to whatever global HR solution a customer has, including SAP SuccessFactors, Workday, Oracle, Cornerstone, CatalystOne, and others. Professional Services is an SAP partner focused on advisory and implementing services of the SAP Human Capital Management solutions as SAP SuccessFactors and S/4HANA product portfolio. Professional Services is also responsible for implementing new Managed Services customers.
As mentioned previously, managed services accounted for 73% of our revenue in Q1, with more than 90% recurring. Professional Services produces the corresponding 27%, with more than 50% being recurring-like. This is a slide that reminds me what a fantastic customer base we have, typically midsize and larger companies with more than 1,000 employees and operating in two or more countries. We have a diverse portfolio of customers in most industry segments, some of the leading brands in the regions where we operate. Many of these, with a significant upside in supporting them in continuing digitizing their people processes, simplify work life and achieve more. With this, I hand over to our CFO, Gunnar, who will take you through the financial part of the presentation.
Thank you, Hans-Petter. The revenue for the first quarter of NOK 380 million was an increase of 22% year-on-year and an increase of 18% when measured in constant currency. In the first quarter, approximately 80% of total revenue was invoiced in currencies other than NOK. Revenue in managed services increased by 21%, while professional services had an increase of 3% in constant currency. As noted in previous quarters, significant professional service resources, particularly in Germany, are being utilized on implementation of new customers and change orders within managed services, thus reducing the external revenue capacity within that division. Net retention within managed services was 109%. This shows the year-on-year revenue growth in constant currency, that is, 9% from customers that were fully implemented in the first quarter last year. In professional services, approximately 85% of the revenue for the quarter came from customers that were customers also in the first quarter last year.
New contracts signed in managed services during the quarter have annual recurring revenue of approximately NOK 4 million. Now, this excludes any upsell to existing customers during the quarter. In addition to the revenue that will come from the new signings in the first quarter, we have the revenue that will come from new contracts signed in early periods but not yet implemented as of Q1. This slide shows the total future revenue impact of all these new contracts. The total net annual recurring revenue from these contracts is NOK 90 million, which represents a further increase in annual revenue for managed services of 11% when compared to the revenue for the full year 2023. There are no known material churn going forward.
In the top graph, we show on the left the current annual recurring revenue for managed services of NOK 819 million based on the annualized revenue figure for the first quarter. On top of that, we have NOK 90 million in additional net annual revenue from signed contracts that will go live mostly in 2024. Thus, the contracted annual recurring revenue going forward is NOK 909 million. The timing for the additional net amount of NOK 90 million in annual revenue is shown in the bottom graph. On top of the estimated recurring revenue of NOK 909 million within managed services, we currently have change orders of more than 12% of the recurring revenue. This is NOK 109 million, and revenue from professional services and APAC of NOK 312 million based on the full year figure for 2023.
This gives an estimated future annual revenue for Zalaris of approximately NOK 1.33 billion based on signed long-term managed services contracts and calculated using the average exchange rates for the first quarter. This is 18% higher than the total revenue for 2023. The adjusted EBIT for the first quarter was NOK 33.4 million, an increase of 88% year-on-year. The adjusted EBIT margin was 10.9%, up from 7.1% last year. The improvements in EBIT and EBIT margin are the result of increased revenue and operational improvements, particularly in the Nordic region, such as delivering a larger share of the service from nearshore and offshore locations. The adjusted EBIT for managed services was NOK 32.7 million, which was NOK 8 million higher than last year, and the EBIT margin increased by 0.9 percentage points to 14.1%. The adjusted EBIT for professional services was NOK 9.9 million, marginally lower than last year.
Moving on to some of the other key P&L items. With the increased revenue and ongoing transformation projects for new customers, the number of FTEs has increased by 69 year-on-year. This, together with the negative currency impact from having more than 80% of our personnel costs denominated in currencies other than NOK and the higher option costs from the large increase in the Zalaris share price during the quarter, largely explains the increase in personnel expenses. The revenue per employee in constant currency increased by approximately 9% year-on-year. A majority of the new FTEs have come from nearshore and offshore locations, and personnel expenses as a percentage of revenue decreased by approximately 1.4 percentage points when adjusted for the increased option costs in the quarter. Other operating expenses were 1.1 percentage points higher as a percentage of revenue compared to last year.
We saw higher operating expenses in general due to increased volumes, but particularly within IT hosting, use of external payroll providers and external consultants, and one-off provisions for doubtful debts. The EBIT was NOK 33 million for the quarter compared to NOK 12.8 million last year, after a gain on the sale of the office building in Leipzig of NOK 10.5 million. Net financial expenses were NOK 23.8 million compared to NOK 38.9 million last year. The expenses for the quarter included an annualized loss of NOK 11.4 million, mainly related to our euro-denominated bond loan. The financial expenses were particularly high last year due to a significant currency loss and other financial expenses in connection with the refinancing of the bond loan. Net profit for the period was NOK 6.4 million compared to a loss of NOK 25.9 million last year.
We continue to have a strong cash position with a cash balance at 31 March of NOK 161 million, an increase of NOK 25 million from the previous quarter. This graph shows the bridge between the EBITDA and the cash increase in the quarter. The operating cash flow was NOK 7.2 million in the first quarter. The operating cash flow for the quarter was negatively impacted from Easter holidays at quarter end, and the cash balance was NOK 24 million higher on the 2nd of April. This also explains the increase in the net working capital shown on the graph. We received net proceeds after repayment of debt of NOK 31 million from the sale of our office building in Leipzig, which has been vacated. The net interest bearing debt at 31 March was NOK 298 million, down from NOK 350 million at the end of the previous quarter.
Our leverage, measured by net interest bearing debt divided by adjusted EBITDA, decreased to 1.7 at the end of the first quarter, down from 2.1 at the end of the previous quarter. Now, that concludes the financial section, and I will now leave the word to Hans-Petter to present the outlook for Zalaris.
Thank you, Gunnar. So, to sum up, let's look at Zalaris outlook for the next 36 months, and I will use the opportunity to reiterate some of the financial targets from our Capital Markets Day that we had also last September. We can maintain our target growth rate and margin improvements going forward. 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%.
The growth primarily stems from increased revenue from existing customers within managed services and recurring revenue from long-term agreements with new customers. These contracts typically have an initial duration of five to 10 years - sorry, from five to seven years. Looking ahead, we have set an annual growth target of 10%, aiming for a total revenue of NOK 1.5 billion by 2026. The growth targets for managed services and professional services are 15% and 5%, respectively. Consequently, recurring revenue from long-term contracts with customers in managed services is expected to represent an increasing share of total revenue, rising from 68% in 2021 to a projected 77% in 2026. Our growth will be driven by a continued focus on acquiring new customers and upselling to existing customers with expanded geographic coverage and enhanced functionality. On an annualized basis, our Q1 revenue is close to NOK 1.3 billion.
In addition, we have approximately NOK 90 million net of churn in annual recurring revenue already contracted for future periods. Therefore, we are confident that this revenue target is well within reach within the specified time frame. Continued emphasis on standardized solutions and process improvements, spurred by increased automation and the use of AI, will, along with scaling, propel us towards our Capital Markets Day's communicated target EBIT of 12%-15% in 2026. Combined with a target cash conversion of 70%, this should yield an operating cash flow before interest of approximately NOK 190 million-NOK 250 million per annum. To sum up, this quarter, we are pleased to report that our focus on EBIT improvements and long-term value creation has resulted in us delivering a quarter with both all-time high revenue and all-time high EBIT.
Delivering Q1 with a 22% growth and an annualized revenue of nearly NOK 1.3 billion provides a solid foundation for further growth and achieving our communicated three-year target. We anticipate continued growth with more than NOK 90 million worth of annual contract value currently under implementation, which will be recognized as revenue over the next 12 months. Additionally, the impact of our significant public sector wins in Germany will gradually become apparent. This, combined with a positive pipeline that has already resulted in wins being reported in 2024, bodes well for the future. Our commitment to implementing the Zalaris 4.0 operating model remains strong, with the goal of elevating our DACH business to the levels enjoyed by the mature Nordic people-powered segment of our organization.
This will be supported by scale effects from our centralized cloud solution infrastructure, organizational capabilities, ongoing focus on automation, and the incremental implementation of AI functionality to boost productivity. As announced on April 2nd, the board of directors has initiated a strategic review process. This decision reflects Zalaris' successful expansion of its portfolio of large agreements for global payroll and HR services to leading international enterprises in recent years. The strategic review is designed to assess structures and opportunities that could further propel Zalaris' growth and create additional value for our customers and shareholders. Thanks for joining us today. We will now open the floor for questions.
Yes, Hans-Petter, I do have a few questions. We will start with some questions around the pipeline. Now, could you provide an update on the competitive environment when pitching for new contracts, and how is the sales pipeline now compared to what you saw in Q4 2023?
Yeah, I think if we look to the market, there have not been significant changes in terms of competition. We see that we are very competitive, both in terms of solutions, in terms of our capabilities in delivering multi-country payroll, and with the quality of services that we provide.
What we have seen is that, and which is also partially one of the reasons for initiating the strategic review, that the deal flow that we have access to has increased significantly, while we in the past had to basically sell and charge every deal ourselves, sourcing them in the market, we, to a much larger extent, have incoming deal flows both through our website and through direct incoming calls from very significant global organizations, also with hundreds of thousands of employees to potentially serve. So that's the big change that we have seen. We have access to much larger deal flows than what we've had in the past.
And the next question: Now, how is Germany developing, and particularly in relation to the EBIT margin improvements in that region?
Yeah, so I think, one, it takes more time than what we expected, but we are developing positively. As I said also initially, Zalaris stands for long-termism and endurance. We have initiated lots of changes, moved work to near and offshore locations. We are working on streamlining processes, simplifying organizational structures, now also including integrating baSE into our German operating organization. So all in all, we have a very positive development in the way that we operate our business, but we still have too many, say, double costs from the effort and project-related costs from the effort that has a significant impact on the results. But what we have also, since we last time spoke, we have also renegotiated some of the more of the agreements that we had with also existing legacy customers that also significantly improve our commercial position.
Last but not least, we are in the process of signing new agreements with existing, also legacy customers to convert them to PeopleHub-based services that will both help us deliver better and more functional services to customers, but also reduce the costs for delivering them through increased automation.
Yeah, and then there is a question here relating to new projects and project implementation. Now, elaborate on the high implementation costs capitalized during the quarter, and how is the current FTE capacity versus what you need to execute on the projects yet to go live?
Yeah, so I think the capitalized cost reflects also large efforts and the large projects that we have. There are some also timing effects also from the corresponding invoicing of those costs in terms of capacity.
I think we shall admit we are constantly on the borderline, so to speak, on capacity, but are greatly helped through then having access to professional services resources in our global organization and also working extensively to both recruit new resources, experienced resources, where we've also seen actually quite a good uptick, including having some senior resources also boomeranging back to us from Germany. And we are also running internal training and trainee-like programs to add new resources to the total resource pool because that's what we see at the end of the day, that all players in this industry need to take responsibility and build new capacity and not just steal capacity from each other. And that's what we are doing and have been doing for quite some time.
And a final question: Could you provide an update on the strategic review, maybe a bit more detail on why you've decided to undertake one and how far through the process of concluding it you are?
I think it's very limited what we can comment other than we have started the process, and we expect to know more, I guess, within Q2 we would know more on what direction that takes in terms of why did we start the review. I've tried to allude to that in our presentation, but what we see, we have developed extremely positively over the years. We have 24 years behind us with growth. We've developed from scratch to a leading global player or definitely a leading regional player with global reach.
We see that we increasingly have access to some very large global deals that are potentially magnitudes larger than the ones that we currently look at. We think that to utilize this opportunity, we should also look into what's the right structures that we operate in the future, and that's why we do the strategic review.
Thank you, Hans-Petter. That concludes Q&A.
Okay, thank you. If you have any further questions, as normal, please feel free to send us an email at ir@zalaris.com or also join us at some of the banks that we're also doing our presentations with today. Then you'll have more information. We'll do our utmost to serve you. Thank you.