Techstep ASA

OSE:TECH

Earnings Call Transcript 2022-Q2

[Borge Astrup, executive]

Good morning, all, and thank you for joining Techstep's Q2 presentation. My name is Borge Astrup. And together with our CFO, Anita Huun, we will take you through the operational highlights of the quarter and the financial results. Techstep is a purpose-led organization designed to help customers with smarter mobile technology. By making the world of work smarter and more sustainable through mobile technologies, we make positive changes to the world of work, freeing people to work more effectively, securely and sustainably. To have a clear vision and mission is critical, and it's our guiding star in everything we do in Techstep from developing software solutions, attracting talents, developing our organization, winning new customers and delivering high value to our existing customers.

It has now been 12 months since I joined Techstep, and I'm happy to see the progress made to build Techstep into a mobile technology company, enabling organizations to utilize software and hardware to strengthen their performance. My focus for the first period has been to simplify Techstep. Techstep consists of many acquired companies with a total of 8 different product portfolios. The company needed to be organized as one Techstep to gain the desired commercial momentum. We have now reorganized the company to support our new standardized product portfolio to be able to deliver great customer value.

The upcoming period is all about standardizing all parts of Techstep so that we are able to scale and deliver on our ambitions for now and the future. We are strengthening our position in the growing managed mobility market globally. We have been recognized as the only Nordic player and the only global challenger by Gartner in the market with double-digit growth. Our last 12 months revenue of NOK 1.3 billion and record recurring revenues highlights this position. The financial reflects the transformation phase but with recurring revenue at record level. In Q2, we had a total revenue of NOK 317.2 million versus NOK 324.7 million last year, a gross profit of NOK 111.9 million versus NOK 113.9 million last year and the EBITDA adjusted of NOK 12.2 million versus NOK 13.3 million last year. Our recurring revenue annualized grew to NOK 281 million, and our Own Software ARR crossing and a very important milestone of NOK 100 million, reaching an ARR of NOK 101 million with 90% gross margin in the quarter. In addition, we have NOK 10 million from recent software wins that are yet not included in our ARR. So record recurring revenue from Own Software, Advisory & Services and Hardware-as-a-Service is in line with our strategy to grow through software recurring revenue and M&A. We continue with a strong commercial momentum with 11 new Managed Mobility Service contracts in Q2, adding NOK 14 million in contract value and NOK 9 million in recurring revenue annualized, with both new and existing customers expected to be delivered over the next quarters. We are focusing on continued transformation to unlock the profitable growth at scale with simplification and standardization of our product portfolio. Aligning the organization around a simplified offering to accelerate growth and streamline the cost base to improve profitability. In line with our first quarter of 2022, the second quarter is also showing that the underlying factors are pointing in the right direction. With a strong focus on delivering high value to our service and products for our customers every day. Building recurring revenue takes time, and focusing on underlying factors is a key success criteria when building a recurring business. The underlying factors gives us clear indication on how our performance and financial results will be going forward. The gross profit last 12 months is steady on NOK 457 million as well as adjusted EBITDA of NOK 69 million. We are in ongoing restructuring and transformation where we are building a wave of recurring revenue in the coming years. But short term, this impacts our operating results. Historically, Q2 is a slower quarter than Q1 for Techstep, but we continue with important contract renewals and great wins with both existing and new customers, including demand for our Own Software and Managed Services, reaching sales bookings of NOK 9 million in recurring revenue annualized as we signed 11 Managed Mobility Service contracts with 3,300 managed devices in Q2 2022. When customers buy our software, we see a positive tag-along effect on the hardware. During the second quarter, we continued to see an increased volume of mobile devices sold to customers compared to last year, both in the traditional transactional way, but also in the asset service way. The implementation of signed contracts started slower than expected in Q1. We have seen improvements in Q2, but we are not at the desired speed aligned with our ambitions. Our current ARR include the customers that are onboarded and invoiced. And we have a good backlog of signed sales contracts that will be implemented in the coming quarters. And thus, a stronger development in ARR is expected. Since 2019, we have won 85 contracts with a total estimated potential of NOK 366 million in revenue to be delivered over the next years. As we transform our business model from transactional to recurring business, this will affect our gross profit short term while we build up a more foreseeable recurring revenue stream. With 11 new Managed Mobility Service contracts signed in Q2, 3,300 managed devices were added to our existing portfolio where we continue to build recurring revenue annualized from organizations, both in private and public sector. The majority of the contracts closed in Q2 are for our SmartDevice portfolio. And the estimated potential is a contract value of NOK 14 million. We are proud and thankful for the confidence shown to us by both new and existing customers and thank them for the continued business with us. We are very, very proud to be recognized as the only challenger, the only Nordic player and one of the very few European players in Gartner's global Magic Quadrant for Managed Mobility Services. This shows that we are one of the strongest players in our market in Europe and that our Managed Mobility Services portfolio of SmartWorks, SmartDevice and SmartControl fits well in the marketplace. And this will open up new opportunities for Techstep. Gartner highlights the following areas as our strength: our big focus on self-service. To be able to deliver high customer value and to build a scalable business model, this has been a key focus for us. Two, us targeting business outcomes. Our primary focus is to deliver continuous value to our customers. We always start with identification of the mobile technology potential and the maturity as well as a defined measurable outcome. One of the biggest challenges and key focus areas for businesses is sustainability where we help our customers to be responsible and take the steps towards a better future. Gartner has highlighted the following areas as cautions: no own nor contracted depots outside of Europe. As our focus market is Europe, this has not been the focus area for us. Innovative vertical offerings are purpose-built. This has given us a unique insight in industries with a focus on building easy-to-use solutions we get dedicated and direct feedback from our customers. With our SmartWorks portfolio for frontline workers, we are standardizing our capabilities to be able to bring the value towards more customers. Pricing is higher than average. We are delivering a bundled solution to our customers with a wider range of capabilities than our competitors. The majority of our customers are in the Nordics, and the prices are higher in the Nordic countries, and we often include a device in our offering. Techstep is all about mobile technology and delivering smarter mobile technology to our customers. We are in the transformation where we are streamlining the organization and standardizing our product offering to ensure that we can execute accordingly. Acquisitions has played an important part of building Techstep into what it is today. This has resulted in 8 different portfolios. We are close to 50 different product offerings. In order to simplify Techstep, a new clear product portfolio has been key. Our product offering now consists of 3 portfolios with 7 solutions in total that help to solve our customers' challenges. A key to be able to solve our customer challenges and to deliver consistent, great customer value is a simplified and standardized product offering.

Now let me take you through how this is structured and the value that it brings to our customers. SmartDevice is the complete and sustainable solution to help organizations integrate and manage all mobile devices from procurement to end of life. Users are empowered to choose, repair and replace mobile devices, while the organization has visibility and cost control over all their devices. The solutions that address the needs in the market are Techstep life cycle. Techstep life cycle is a solution that digitize the life cycle of mobile devices from end to end. Based on organization policies, mobile device categories, providing cost control and device visibility from enrollment to recycling. Users get direct control of life cycle tasks through an event-driven self-service portal, simplifying purchase, repair and replacement needs. Techstep expense is a solution to manage mobile subscription cost, providing visibility, control and certainty for the organization. Through the mobile policy, the cost split between the organization and the employee, providing freedom of mobile usage. With SmartControl, we have experts deliver best practice implementation, support and proactive services. We manage and secure the entire mobile ecosystem of your organization by combining Apple and Google Android knowledge together with the best-in-class software. This ensures that your devices and apps are always compliant, secure and up-to-date. The solutions that address the needs in the market is Techstep Managed, a best practice Managed Mobility Service, which ensures that devices are actively managed and performing at their optimal best at all times. Our experts identify, anticipate and resolve problems before they develop into significant issues. We are committed to challenge and inspire as part of our proactive services. Techstep Secured provides organization with the peace of mind that their Apple and Google Android devices are protected. We respect privacy, but we actively monitor and secure your mobile devices to regular updates by our experts. Techstep Secured combines proactive services with security software. Techstep Evolve provides organizations with experts and services to assist them to the next step in their digital journey, whether it's streamlining app releases, building a mobile technology strategy or creating a team to explore breakthrough technology. And finally, SmartWorks transforms everyday deskless working practices. By combining the right software, hardware and services, we bring the power to the fingertips of the frontline workers, enhancing usability, productivity and performance while reducing environmental impact. The solution that address the needs in the market are: Techstep Enable, provides frontline workers with turnkey mobile solutions to become more digital and collaborative. We solve everyday working challenges to best practice mobile solutions and increasing productivity, enabling your mobile technology initiatives. Techstep Amplify transform deskless work into user-focused mobile technology software and solutions to boost the frontline productivity and efficiency. We challenge your processes and ways of working with the ambition to optimize your frontline work. Let us look at 2 customer cases how the SmartDevice portfolio is used to provide value to our customers. An important part of Techstep's growth ambitions is our partner sales. It's therefore great to see the inclusion of Nortel as a Techstep partner. Nortel has, in Q2, signed a partner agreement to include Techstep Expense, a solution in our SmartDevice portfolio, to all their subscribers commencing from Q4 this year. The inclusion of Techstep Expense will enhance Nortel's offering and add new benefits to its customers as they will have a better overview and control of their mobile costs. We proudly welcome Nortel and its customers to Techstep. DNB is a long-standing customer of Techstep. And in Q2, they have completed their tender process, which aim to add further benefits to DNB in terms of easier mobile device life cycle handling, self-service and reduce the total cost of ownership. One of the goals were also to give DNB better visibility and cost control of all their mobile devices. We are very proud to have won this tender process. We thank DNB for their continued confidence, are looking forward to working closely with DNB to enhance their financial and environmental benefits further. Anita will now take you through the Q2 financials.

[Anita Huun, executive]

Thank you, Borge. In the second quarter of 2022, revenue was NOK 317 million compared to NOK 325 million in the same quarter previous year. This corresponds to a revenue decline of 2% year-over-year also organically. For the first half of 2022, the overall growth has been 5%. We see a relatively steep decline in our revenue from Advisory & Services, but this is due to the sale of our Voice & Contact Centre, which is partly compensated by the growth in revenue from our Own Software. Overall, recognized revenue from our Own Software portfolio grew 56% year-over-year in Q2. This also including the acquisition of Famoc. ARR from our Own Software passed the NOK 100 million milestone for the first time this quarter and is up 58% year-over-year versus the same level last year. We have strategically invested in acquisitions and added new users to the portfolio. So part of the growth is inorganic and relates to the inclusion of Famoc included from Q3 2021. The sequential increase in ARR is only 3%. And as we also saw in Q1, we have a backlog of customer wins on the software side, waiting to be implemented and onboarded. We do not include contracts in our ARR base where we have not started to invoice the customers. Gross profit in Q2 was slightly down year-over-year, while the overall gross margin was flat. Our gross margin fluctuates quite a bit with customer and product mix but will over time increase as our software portion of revenue increases as gross margin in this area is north 90%. Corresponding to the slight negative gross profit development, we also see a drop of NOK 1.1 million in adjusted EBITDA year-over-year despite both OpEx and personnel costs is down year-over-year by approximately NOK 1 million in Q2. Net interest-bearing debt increased from NOK 189 million in Q1 to NOK 237 million in Q2. This is a reflection of the ongoing investments in transforming and transitioning the company towards a software-led recurring revenue-driven model. But H1 has also been more capital-intensive than H2 will be. Techstep continues to ramp and grow the recurring commitment between the company and our customers, which leads to more predictable revenues and cash flow generation longer term. We are, therefore, very happy to see the record high recurring revenue base this quarter with revenues of NOK 281 million. We are growing the base 4% sequentially. And of the NOK 281 million, NOK 101 million of them is ARR from our own software, which yields very strong gross margins north of 90%. However, this transition towards a stickier and higher-quality recurring revenue model does impact revenue and profit short term as our software revenue is built on a monthly basis, and we are moving customers more from upfront payments towards spreading more of the earnings out in time.

The graph here shows Techstep's different recurring revenue streams. And as of Q3, we also included our Hardware-as-a-Service revenue and managed services revenue as these are important areas in our transition. And as mentioned, our backlog on Own Software is growing, and we are seeing increased demand from our customers. So we expect to see a strong ramp going forward in our total recurring revenue base and commitment with our customers. The gross profit for the last 12 months was NOK 457 million, corresponding to a relatively flat development in Q2 year-over-year. In Q2, we saw an increase in Hardware-as-a-Service, while revenue from our Advisory & Services business was down due to the divestment of the Voice & Contact Centre business but offset by improvements in gross profit from our Own Software portfolio. Our hardware transactional business continues to be quite stable and cash-generative with gross profits above NOK 100 million.

The key focus for Techstep is growing our overall gross profit, and particularly our recent wins on the software side is important to be able to do this. Every new contract we win on the software side drives revenue on the hardware and advisory side as well. We clearly see momentum building here, and our current backlog in this area gives us visibility going forward. Techstep divested the Voice & Contact Centre business at the beginning of the fiscal year, while Famoc was acquired in Q2 2021, and as such we provide visibility on our pro forma figures, excluding these 2 changes. The Voice & Contact Centre business was seen as a non-core asset, but it did include NOK 22 million in gross profit in 2021. On a pro forma basis, Techstep's Q2 gross profit decreased from NOK 118 million to NOK 112 million, while the conversion from gross profit to EBITDA increased from 10% in Q2 '21 to 11% driven by lower OpEx and payroll versus Q1 last year. On a pro forma basis, our OpEx and payroll is actually down NOK 7 million year-over-year. If we look at this over a 12-month period, we saw a declining trend throughout 2021 in our profit conversion as our gross profit in H2 last year was impacted by both hardware delivery issues and lower hardware margins while we, at the same time, continue to invest in our transformation towards a recurring revenue model. We remain firm on our focus to increase profitability in the long term through increase in software and IP-led revenues and operational leverage. As Borge will touch upon later, we are also initiating a cost optimization program with the goal of optimizing our cost base by NOK 40 million to NOK 50 million annually, which will help lift our profit conversion back on track. Our equity ratio after Q2 stands at 42%, slightly down from 44% in Q1. Intangible assets are mainly goodwill of NOK 604 million and customer relations and technology of NOK 190 million. And goodwill increased by NOK 7 million after the inclusion of Crypho this quarter. Tangible assets of NOK 187 million mainly include devices delivered to customers through our Hardware-as-a-Service portfolio, NOK 156 million. The devices are owned by external funders, not by Techstep, but they are capitalized in our balance sheet. Long-term interest-bearing debt includes acquisition loans of NOK 67 million and seller's credit of NOK 30 million. H1 has been capital-intensive as the transformation is driving a high investment phase currently. This impacts our cash flow from operations negatively with an increase in working capital. And on top of that, our CapEx program has been H1 heavy, and we continue to invest in our Hardware-as-a-Service portfolio, which drives cash outflows from investments. Compared to 2021, where cash flows were positively skewed in the first half, H1 this year has been negatively skewed. So comparisons year-over-year is challenging. We expect improvements in cash flow in H2 2022, and measures and cost optimization programs are being put into effect to help drive this. Our cash and cash equivalents were NOK 30 million at the end of this quarter. Borge will now take you through the outlook and summary section.

[Borge Astrup, executive]

Thank you, Anita. As mentioned earlier in the presentation, acquisitions has made an important part in building Techstep what it is today. In total, 12 companies have been acquired over the years. We have optimized the product portfolio structure and the business models, and we have reorganized into one Techstep. It's now time to harvest the synergies, streamlining and optimize the OpEx and CapEx base and reduce the costs with NOK 40 million to NOK 50 million over the next 6 to 18 months. We will continue to transform to fuel the growth and increase the scalability while we, at the same time, optimize our cost base. Medium-term goals for the coming 12 to 18 months can be summarized into transforming Techstep into securing profitable growth. The market where we are in is expected to grow 24% annually from 2022 to 2027 and expect the growth rate for 2022 is 20%. Important focus areas are data privacy, security, sustainability with careful life cycle handling of devices. We're also glad to see that the expectations for migration from on-prem to cloud is increasing as well. This fits perfectly with our product portfolio of Managed Mobility Services of SmartControl, SmartWorks and SmartDevice, meaning that with our position and our product portfolio, the future looks bright.

So let me summarize Q2. We are recognized as the only Nordic player and the only global challenger by Gartner in the market with double-digit growth. With this, we are strengthening our position in the growing managed mobility market, reinforcing our position as a leading European enabler of smarter mobile technology. Techstep's transformation journey is progressing, with the underlying factors pointing in the right direction. The financials reflect the transformation phase, but with recurring revenue at record level. Our commercial momentum has continued in the second quarter with 11 Managed Mobility Service contracts signed and NOK 9 million in recurring revenue annualized. We have a determined focus on continuing our transformation to unlock profitable growth through the simplification and standardization of our product offering and optimizing the cost base. And that concludes today's presentation. Thank you for your attention. Now please join Anita and myself in the Q&A session today at 8:00. You can always submit your questions to us by using the Investor Relation e-mail or during the session in the chat function. Hope to see you there soon.