Good morning. My name is Hans-Petter Mellerud. I am the CEO of Zalaris. Please excuse us for this somewhat small hitch on our start. Please do also welcome our CFO, Gunnar Manum, who is here with me today for this webcast presentation of Zalaris Q3 2022 results. We are using Teams for this purpose and hope that we will deliver on your expectations. There is a Q&A function that you can use to ask questions that we will respond to at the end of the presentation. Please observe that the presentation is being recorded. You will find a link to the recording on the investor part of our website. Without further ado, let us move on to the presentation. Let's first look at some of the highlights of the quarter.
The 150 million of annualized contract value of long-term agreements that we sold last year continued materializing as recognized revenue in Q3 as planned. This resulted in yet another all-time high quarter to date with a revenue of NOK 224 million, representing 17% growth from Q3 last year in constant currency and our recurring revenue machine managed services grew by more than 17%. Add to this almost NOK 13 million deferred revenue from implementation projects, up from NOK 9 million last year, and the signing of our five new good-sized customers in the quarter, adding another approximately 25 million annual recurring contract value to our portfolio and contributing to continuing our growth streak in 2023 and 2024.
Our rapid growth has affected our EBIT negatively through the buildup, say, frontloading of needed capacity and taking some management focus, including mine as CEO, away from being on the ball, delivering on our EBIT expectations. We are addressing this now and have launched an EBIT improvement program in August, already well underway, targeting minimum EBIT improvements by end of 2023 of NOK 40-NOK 50 million. Our outlook is great. Pipeline in all regions is strong, and we expect to close new interesting deals now in Q4 to deliver on our sales target of NOK 100 million annual contract value. This is supported by positive developments where some of our leading partners increasingly bring us along into large accounts in both Germany and U.K. Within Managed Services, we continued our growth journey by signing new long-term agreements.
Zalaris shall deliver PeopleHub-based payroll solutions, serving pharmaceutical company CSL Behring with a total of more than 7,800 employees in Germany and Switzerland. Hearing aid retailer Amplifon with 2,500 employees in Germany and a SaaS payroll solution based on Zalaris PeopleHub for 3,000 employees to international payroll company iiPay end customer in Germany. Add to this, a new PeopleHub payroll solution to serve Czech-headquartered ČEZ 800 employees in Germany and a cloud-based HR solution based on PeopleHub powered by SuccessFactors for New Zealand-based Sealord's 1,200 employees in APAC. During the quarter, we see first signs of business normality post-COVID with volume increase relating to travel expenses and associated services. Our professional services units operate at full utilization and have signed many new customer agreements.
As previously mentioned, all our regions left the quarter with a strong pipeline, and a number of new potential agreements are targeted to be closed. PeopleHub-based solutions and services to secure continuing our 10% growth target through 2023 and 2024. We clearly see that we benefit from leveraging our combined Professional Services and Managed Services capabilities and our strengthened brand in Germany and U.K. in delivering on our 2023 sales targets. During the last quarter, we have also managed to renegotiate certain key contracts that will support our targets of 10% cash margin. Let's take a look at our segments. Managed Services revenue grew with 24% compared to last year when adjusted for currency movements. The inclusion of ba.se. added 3.3%, while 21% relates to new customers and volume increases. Net new signings with annual recurring revenue amounted to NOK 25 million during the quarter.
Churn was immaterial, and we have renegotiated agreements in Germany at improved rates. In the quarter, 89% of revenue is recurring based on long-term agreements, while the remaining about 11% relates to change orders. This is around 1% higher than normal, as we traditionally are trending with 90% recurring and a relatively fixed volume of 10% change orders and additional work. Leaving the quarter, our pipeline continued to stay strong in all markets. Let me repeat that we are well on the way to secure our target of additional NOK 100 million recurring annual contract value this year, supporting continued delivery of our 10% organic growth target and becoming a NOK 1 billion company in 2023. It's time for Professional Services, our consulting practice. Adjusted for currency movements, Professional Services revenue remained relatively constant but grew 1% to NOK 61.3 million in constant currency.
Out of this deferred project revenue from supporting managed services implementation project of approximately NOK 13 million for the quarter versus NOK 9 million last year. Deferral of revenue on transformation projects was a predominant reason for Germany delivering 7% lower recognized revenue compared to last year. However, this compensated with higher revenue coming from our Team Zalaris Poland, delivering application maintenance services to some large global customers as ABB and Hitachi Energy. We strengthen our resource situation, adding several trainees and associate consultants contributing to healthier cost levels. In addition, we added significant resources into our Poland and Indian delivery centers. This has short term impact on our margins, but will allow us to increase change order revenue and contribute to reducing the use of expensive external consultants, resulting in improved margins in quarters to come.
Again, let me remind you, in Professional Services we see that application maintenance services, AMS, helping customers maintain their payroll and HR systems, mostly on a long-term or subscription basis, continue generating around 50% of total revenue. We are progressing well in developing AMS services as a group-wide offering out of our Polish Professional Services practice. As mentioned earlier, again, with new significant wins with Hitachi and ABB and services sold such as Ryanair last quarter. Our long-term relationship with customers continue being visualized through 80% of our Q3 revenue in this segment coming from customers that were also customers in Q3 last year. Let's take a look at the profitability of our business. It differs significantly across our countries.
This we share with you for the first time to help with transparency and hopefully better visualizing our roadmap of prioritizing priorities to increase margins. On a country level, our target EBIT margin is 15%-20% per entity depending on size before any allocation of group costs. Well-performing countries are characterized with a high degree of standardization and customer deliveries based on one common Zalaris PeopleHub platform, combined with meeting target level of near and offshore usage in the resource mix. In addition, scale and product mix are significant factors driving profitability. Analyzing EBIT margin year to date per country, we see UK and Ireland with a high degree of PeopleHub SaaS based services delivering on our target margin criteria despite having a modest scale.
Norway, on the other hand, continues its performance despite being slightly down this year, mainly attributable to the scale of the business. Denmark and Sweden are on a good way toward target margin through increased use of nearshoring and digitization of processes. Poland is temporarily hit by building up capacity to cater for nearshoring of SAP HCM and SuccessFactors application maintenance services from the Nordics and Germany. In our German units, service, despite being powered by SAP-based solutions, has traditionally been provided on the basis of individual and customer-specific SAP system configurations implemented before we acquired the business, including using various ticketing and service management solutions. We have more than 10+ productive SAP systems in Germany versus one in our traditional PeopleHub solution used throughout the rest of our organization.
Add to this minimal use of near and offshore resources and a tight labor market resulting in extensive use of external consultants to deliver on contracted commitments. As a part of our EBIT improvement program, we have taken actions to improve the situation, including implementing Zalaris standard service management concept and workflows. This enables increased use of robotic process automation and seamless transport of work to our delivery centers in Latvia, Poland and India. This will reduce our total resource costs and allow us to compensate critical customer facing resources better with the aim of increasing the attraction and retention of these, as well as optimizing our dependency on external consultants. Starting from 2022, all customer projects are implemented on our scalable multi-tenant PeopleHub solution. This allows driving scalability and margin improvement of new projects to matching those in U.K. and the Nordics.
Our improvement activities are organized as a formalized EBIT improvement program reporting to me targeting minimum NOK 40-50 million improvement in EBIT by the end of 2023. Key elements of the program include improved customer margins in Northern Europe through full implementation of Zalaris 4.0 operating model and nearshoring by end of 2023, resulting in NOK 8-10 million annualized cost savings. The Zalaris 4.0 model refers to a model where responsibility for delivery to a customer resides nearshore and using onshore and offshore resources where needed instead of our traditional model with ownership of customer delivery onshore. Next is implementing Zalaris 4.0 operating model and nearshoring for German operations by the end of 2023, resulting in another NOK 8-10 million annualized savings.
While Nordic operations are close to our target operating model of using 50% near and offshore, Germany is currently using close to zero. Our key focus is to change this and to implement this where possible, taking account of language challenges and limitations in our customer agreements. We'll utilize existing capacity to serve new customers and additional change order resulting in another NOK 5 million-NOK 10 million annualized savings. We have, as previously mentioned, built up significant capacity to cater for moving application maintenance services from the Nordics and Germany to Poland. This work is progressing and is increasingly bearing fruit. Freed up capacity from this and other near offshore activities will be used to serve new customers that are currently in the project implementation phase. Similarly, is the case with freed up resources in our German Leipzig and Hagen service center.
As a result, we can deliver significantly more revenue from new customers without adding headcount to our German operations. We'll add the contribution margin from customers to go live, net of non-renewals, with an EBIT effect of about NOK 20 million. As Gunnar will cover next, we have close to NOK 70 million of sole contract value yet not recognized as revenue. When this goes live throughout the rest of 2022 and 2023, we have estimated the positive margin impact to be NOK 20 million. Last, but not least, we'll reduce the use of external consultants, as also previously commented on, and replace with own employees with approximately 20%-25% lower cost, resulting in an approximately NOK 5 million annual savings. We are using an extreme level of external consultants at the moment, particularly in Germany.
This activity is led by our Group HR in cooperation with our Professional Services organization, supported by active strategic workforce planning, focused on building new capacity from inside through structured trainee programs and activities to retain critical talent. Also needless to say, we are reviewing our overhead costs and are targeting maintaining or slightly lower our existing levels, and thus maintain the positive scaling effect of increased contribution from our operating entities to our overall EBIT margin. For those with a calculator on standby, you will see that the sum of the above initiatives amounts to more than NOK 50 million. Thus we are confident that we, with active management, will achieve target levels. With that, let's again and let me remind you what company Zalaris has become.
Our business model with long-term agreements and recurring revenue is favored among many investors. We have offered software as a service, business process as a service, and outsourcing delivery models since we were founded 22 years ago. To reiterate, more than 90% of our revenue in managed services and around 50% of revenue in professional is recurring. Delivering payroll and HR services based on one common IT platform, the Zalaris PeopleHub, supported by local competent resources, has been key to our success and 22 years of growth. 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 cost by 20%-30% by outsourcing their payroll and HR processes to us, at the same time enabling them to operate seamlessly across borders.
Our approximately 990 employees deliver services from 16 countries. In addition, we can deliver to 150 countries through partners with our PeopleHub concept. Our short-term aim is to deliver services with 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, digitalization of workflows, reduction of cost, and securing business continuity of business critical payroll. Working from anywhere has become the new normal, driving the need for fully digitized people processes. Zalaris is extremely well positioned with our innovative product and services portfolio that cover the whole payroll and HR value chain.
Our services are built around our People Hub concept, enabling customers to manage their human capital across borders in one common cloud-based system solution, with functionality covering the whole employee life cycle. 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 global HR solutions. Our organization is structured in two business units. Managed Services deliver solutions and services based on People Hub. Professional Services is an SAP partner focused on advisory and implementation services of SAP Human Capital Management and S/4HANA product portfolio. Professional Services is also responsible for implementing new Managed Services customers. Managed Services currently accounts for about 2/3 of our revenue and is growing more than 15% per annum. Professional Services produces the remaining 1/3 and is growing single digits.
Our largest market unit is Germany, delivering 33% of our revenue. Germany and the U.K. are our markets with the largest potential. In addition to being 7x the size of the market to our Nordic home market, a higher number of sweet spot customers with more than 100 or more than 1,000 employees are located here. We see strong growth in the managed services from Germany as our brand is increasingly better known, as also reflected in the quarter with four of 5 reported new agreements in Germany. Poland has doubled revenue since our acquisition in 2017 and is now 100 employees strong. Poland is particularly excelling in the professional services and application maintenance segment. The U.K. is rapidly turning into a more managed services-oriented organization from experiencing strong interest in its cloud and outsourcing offering.
The Nordics is still generating more than 50% of our revenue, delivering continuous solid results and recurring revenue growth. Finland has particularly been excelling over the last 12 months, growing Q3 revenue with more than 80% compared to the same quarter last year, reflecting also the potential still in the Nordic. This is a slide that reminds me of what fantastic customer base we have. 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 Manum, who will take you through the financial part of the presentation.
Thank you, Hans-Petter. Revenue for the third quarter was an all-time high quarterly revenue, an increase by more than 70% year-on-year in constant currency and 14% as reported. The increase comes mainly from new customers within Managed Services, as well as increased volume from existing customers, including increased change orders of NOK 7.2 million. Managed Services revenue increased by 24%, while Professional Services had a marginal increase of 1% when adjusted for currency effects. Professional Services resources, particularly in Germany and the U.K., have been utilized on the implementation of new customers within Managed Services, which reduces the external revenue generating capacity. The work carried out by these resources result in deferred revenue, which will be recognized as revenue in later periods.
New contract signings for Managed Services during the quarter have annual revenue approximately NOK 25 million, and managed services contract signed but not yet implemented have total annual revenue of NOK 71 million, as shown on the next slide. This slide shows how the new customer contracts in Managed Services that are yet to be implemented will impact the revenue going forward. In the top graph, we show on the left the current annual recurring revenue for Managed Services of NOK 565 million based on revenue figures for the third quarter. On top of that, we have NOK 71 million in annual revenue from contracts that have not yet gone live. After deducting non-churn of NOK 3 million, the contracted annual recurring revenue going forward is NOK 633 million.
The timing of this additional NOK 68 million in annual revenue is shown in the bottom graph, with some of the large new signing expected to go live in the first quarter of 2023. On top of the estimated recurring revenue of NOK 633 million within Managed Services, we normally have change orders of approximately 10% of the recurring revenue, that is NOK 63 million, and revenue from Professional Services of NOK 241 million based on the figure for the last four months. This gives an estimated future annual revenue for Zalaris just around NOK 940 million based on signed long-term Managed Services contract. This is 10% higher than the total revenue last 12 months.
As we have shown in the previous quarters, we are spending considerable resources on implementing new customer contracts, and the activity level remains high, as can be seen from the graph on this slide, which shows the amount of revenue and cost deferred during the last 12 months. This shows that the volume of new customers being implemented has increased quarter by quarter on a rolling 4 months basis. The implementation projects are invoiced to our customers and generate cash through milestone payments, but the revenue with the costs are deferred and recognized in the P&L from the go live date and over the contract period. For the third quarter, the amount of revenue deferred was NOK 13 million, which is 51% above last year.
The adjusted EBIT for the third quarter was NOK 11.4 million, a decrease of 19% year-on-year. This is before the EBIT from the APAC region of -NOK 1.7 million. The adjusted EBIT margin ex-APAC was 5.2% compared to 7.2% last year. The EBIT for managed services was NOK 16.5 million, which was in line with last year and was impacted by the factors noted earlier, as well as additional costs for establishing our application maintenance service center in Poland. The EBIT for professional services was NOK 3.8 million compared to NOK 4.1 million last year. As noted in the previous quarter, the EBIT margins are negatively affected short-term by the rapid growth, including the onboarding of new customers and the recruitment and training of resources for new contracts.
In addition, the EBIT margin in Germany is still at a significantly lower level than the rest of the group. As presented by Hans-Petter, our EBIT improvement program being implemented will address this and should increase the annual EBIT by a minimum of 40-50 million NOK by the end of 2023. The key contributors will be a reduction in personnel cost per FTE by moving more work to nearshore and offshore locations, improving customer margin in Germany by bringing the German operation up to the same level of Zalaris standardization as in the Nordic region, reducing the use of external consultants, and contribution from signed customer contract to go live during the next 6-12 months. 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 have increased by around 169 year-over-year, including ba.se. A majority of the new FTEs have come from nearshore and offshore locations. This explains the increase in personnel expenses. Personnel expenses per FTE were down 1.6% year-over-year. The increase in other operating expenses was mainly due to high use of external SAP consultants utilized on revenue generating projects and travel costs. The adjusted EBIT was NOK 9.7 million for the quarter. The bridge between the adjusted EBIT and the EBIT of NOK 4.4 million are share-based payments of NOK 2.5 million and the amortization of excess value on acquisitions of NOK 2.9 million.
The net loss for vyble included in discontinued operations was NOK 4.4 million for the quarter. Net loss for the period was NOK 6.7 million compared to a profit of NOK 0.7 million last year, after unrealized currency loss on the bottom line of NOK 8.3 million compared to a gain of NOK 0.5 million last year. We continue to have a strong cash position with a cash balance at 30 September of NOK 96 million. The operating cash flow was negative NOK 10.6 million as a result of a large increase in trade receivables of NOK 20 million from increased sales and some timing effects. We made investments mainly in system developments of NOK 8 million, which is higher than the quarterly average due to some investments mainly in APAC. The net interest-bearing debt at 30 September was NOK 284 million.
Now that concludes the financial section, and I transfer over to Hans-Petter to give you some perspective on our market and outlook.
Thank you again, Gunnar. Let's round off looking at the market and sum up. As mentioned earlier, also in my previous presentation, we see a strong interest in our payroll and HR business process outsourcing services. This has resulted in a significantly strengthened pipeline and record-high number of signed agreements over the last 12 months. This sentiment is also confirmed by industry analyst Everest Group, who in their 2020 key issues survey reported that 57% of senior European stakeholders and key buyers in large European companies expected the use of HR business process outsourcing to increase in the time to come. Triangulating this with the results of a recent NelsonHall industry analyst report expecting the market for multi-country payroll to grow with 10.7% to 2023 at a market size of around $6 billion.
NelsonHall also states that growth is driven by international expansion requiring a global footprint for payroll, wish to reduce the number of payroll suppliers, need of increased visibility of the global workforce supported by advanced analytics, and ability to seamlessly integrate payroll with new global HR solutions. Our experience operating in the market aligns with NelsonHall. In addition, we experience good interest from large industrial players with global shared services that are looking to be more flexible in terms of spinning out parts of their business, like Siemens with Unify. These carved-out businesses need a complete human capital management infrastructure that we can deliver plug and play. Zalaris has operated with a vision supporting international businesses delivering multi-country payroll and HR solutions since our inception 22 years ago. With our PeopleHub concept, we can deliver a comprehensive global solution and support customers transform their people processes.
As such, we are well positioned to continue our success in the current market. With inflation increasing and stories about the great resignation and inflated salary expectations, I would like again to comment on how this is impacting us. We see some cost inflation and wage pressure, but are well protected through contracted price indexation clauses in the majority of our agreements. In addition, we still have sufficient room for margin improvement through increased automation and use of lower cost near and offshore. This will help us maintain margins in the event salary increases surpasses indexational prices. In macro environments with recession and crisis-like tendencies in the past, we have seen increased demand for outsourcing solutions as customers are focusing on their core business, looking to reduce variable costs. The fact is that we are providing a service that all customers in a business need payroll.
There is no business without paying your employees is a license to play. We have a diverse customer base of very solid companies representing various geographies and a broad spectrum of industries, including some large public organizations in markets such as Germany. We are continuously monitoring the position with the aim of maintaining and further improve our competitive cost situation. Again, arriving at my last slide, let's sum up. With all-time high revenue reported again, we are well on our way to implement our NOK 115 million annual contract value sold in 2021. New contract wins in 2022 year to date supports our aim of over-delivering on our 10% growth target and becoming a NOK 1 billion company in 2023.
Remember, growth is coming mainly from Managed Services, our long-term recurring revenue machine, providing payroll services that everyone needs to stay in business, currently growing at more than 17%. We have seen a temporary margin setback in Q2 and Q3 as we have front-loaded cost to cater for our strong growth and expanded into new geographic areas. Our growth focus has taken our aim somewhat away from our EBIT target. With our EBIT improvement program to deliver minimum of 40-50 million of annual improvements by the end of 2023, our EBIT focus is back, and we maintain our target of delivering 10% EBIT and becoming a NOK 100 million EBIT company. Despite the mixed macro picture, it is key to remember that we are operating a resilient business.
In macro environments with recession and crisis-like tendencies, we have seen in the past that demand for outsourcing solutions has increased as customers are focusing on their core business, looking to reduce and variabilize costs. We see some cost inflation and wage pressure, but are well protected through contracted price indexation clauses in the majority of our agreements. In addition, we still have sufficient room for margin improvement in our customer agreements through increased automation and the use of lower cost near and offshore. This will help us to maintain margins in the event salary increases surpasses indexation of prices. We in Team Zalaris are very proud of our achievements and optimistic about the future. We are endurance fighters constantly working on besting ourselves. If you wonder what resilient means, take 11 minutes to watch Resilient, the 2022 Zalaris Norseman film launched last weekend.
You'll find a link at the end of the presentation, an encapsulation of the spirit of Team Zalaris. Thank you, and with this, we open up for questions. Do we have any questions, Gunnar?
Yeah, Hans-Petter . The first one, can you please elaborate around how you will work to move transactional activities to near offshore, particularly for customers in Germany? How many customers in Germany are currently served by nearshore, near offshore employees?
Yeah. Let's start with the last part of the question. Currently, we have one customer in Germany that have a partial service provision also delivered out of our nearshore centers. We are in terms of how we are working with the process, we are actively documenting and going through processes in cooperation with our German delivery teams, mapping this to our standard processes and moving and identifying work that it requires the German specific language competence and work that is non-specific to more transactional work that requires little or minimal language competence, and this is the type of work that we prioritize moving first.
Next question: Why were you not able to deliver neutral to positive EBIT in APAC in Q3, which was guided last quarter?
We were delivering neutral APAC margins towards the end of Q3, and we'll continue with this into Q4.
Next question, which I will answer: Could you please elaborate on the timing of the EBIT, NOK 40 million-NOK 50 million in incremental EBIT? This will gradually come in from Q1 next year and onwards. I think we have already started the program, but I think that the actual effects will come into play from Q1.
Good. Do we have one question?
We have another one.
Yeah.
Back in 2014, Zalaris went public at a share price very close to where the stock is trading today. Dividends have not in any way been impressive. As stock follow earnings, why is management more or less only focused on revenue growth instead of constantly optimizing earnings?
Yeah, that is a very good question. I think as we have communicated in the presentation, we are now truly honing in on delivering on our EBIT expectations. We have a target of delivering and developing Zalaris into NOK 100 million EBIT company by the end of 2023 through the implementation of our communicated EBIT improvement program, delivering a minimum NOK 40 million-NOK 50 million of annual improvements. Having said that, why have we focused on growth?
We think that the growth initiatives that we have made have been are a foundation of becoming a real company and to be a real player in the market and to protect the large customers that we already have, is to such that we can deliver payroll and HR solutions that these customers are looking to procure in the future.
Next question. With your increased focus on automation, do you intend to lay off people in the long term, or is the strategy for automation to free up human resources to move on to new projects, et cetera?
Yes, I think it's always gonna be a combination. As we currently speak, with the strong growth that we are seeing, automation allow us to focus on upscaling our employees to take on higher competency jobs. For those that would like to join us on that journey, the future looks excellent as we know, as we need more competent people to actually deliver on the growth that we are already experiencing.
Thank you, Hans-Petter. I think that concludes the Q&A session.
Okay. With that, thank you all for joining. Again, if you have any other comments or questions, do not hesitate to contact us via ir@zalaris.com. Thank you for watching. See you soon. Bye-bye.