Techstep ASA

OSE:TECH

Earnings Call Transcript 2023-Q2

[Borge Astrup, executive]

Good morning, all, and thank you, all, for joining Techstep's Q2 presentation. My name is Borge Astrup, and together with our CFO, Ellen Solum, 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. Through Techstep, customers can buy their mobile devices, and with our software, they can manage their mobile device fleet. With our solutions, we help customers to manage and secure their mobile ecosystem in a sustainable manner and at the same time, help them to reduce their cost with 20% to 25%. In Q2, we have continued on the journey towards turning Techstep profitable. We will turn Techstep profitable by selling the new and simplified product portfolio to existing and new customers and to deliver on the cost optimization program.

So let me take you through some of the highlights for Q2. Techstep's financial results are moving in the right direction with 7% growth in net gross profit, 15% growth in ARR from Own Software and 15% growth in recurring revenue and a positive EBITA adjusted for the third quarter in a row. The net gross profit grew to NOK 95 million, improving the margin from 28% last year to 33% this quarter. The share of high-margin revenue from Own Software and Advisory & Services increased from 24% last year to 31% of total revenues in Q2 this year.

The global smartphone market faced a continued decline in the first half of 2023 as challenging economic conditions drove lower consumer demand and extended purchasing cycle. However, the steep decline seen at the end of 2023 and into the first quarter of 2023 slowed down in the second quarter, and the expectation is that the market will start to recover during second half of the year.

We now see positive effects of the transformation of Techstep the latest years. It has been about making Techstep less vulnerable and dependent on the fluctuating hardware sale through focusing and investing in our own software and services. With our solutions, customers can reduce their cost with 20% to 25%, so the value proposition is very relevant in a challenging macro environment.

The recurring revenue base continued to grow both year-over-year and quarter-over-quarter. The ARR from Own Software grew to NOK 110 million, in line with the strategic objective to lead with software and scale with recurring revenue. In the second quarter, Ellen initiated a review of the classification and the product definition of Own Software ARR as our product portfolio and building of products has changed over last few years. The reclassification is not affecting the growth or the financial statement, and Ellen will come back with more detail later in the presentation.

For the third consecutive quarter, we delivered a positive EBITA adjusted of NOK 2.3 million for the quarter and NOK 8 million for the last 12 months. With winning the frame agreement with Oslo Kommune, the commercial momentum continues. The contract has a potential of NOK 480 million in revenue with NOK 240 million in hardware and NOK 240 million in software and Advisory & Services over the next 4 years. With the signing of both Oslo Kommune and Sykehusinnkjøp, Techstep has signed frame agreements to a record of NOK 1.1 billion the first half year of 2023, the strongest in Techstep's history. After a quarter, refinancing has been secured with more financial flexibility. More information will come later in the presentation.

Techstep has been through an extensive transformation process, and we are now executing on the final phase. Techstep has gone from being a hardware company with 47 different products with a lot of manual processes and low margin to now leading with value-based software and services where we help customers to be able to utilize the mobile technology ecosystem with a simplified product offering. The company had a limited organic growth before the transformation. Well, now we are growing and winning market momentum. The cost base was too high and after restructuring, we have optimized the organization and continued trimming the cost base.

With growth and reduced costs, we can now show significant EBITA improvement of NOK 31.8 million from H1 2022 to H1 2023. We see increased traction in the marketplace for our solutions with signing customers such as Pekao Bank in Poland, [indiscernible] in Norway and [indiscernible] in Sweden, to mention a few. Techstep is now in a completely different state where we can see the results of the transformation has started to capitalize.

It is with pride I can say that Techstep is, again, recognized as the only challenger, the only Nordic player and one of the very few players in Gartner's global Magic Quadrant for Managed Mobility Services. This shows that we are one of the strongest player in our market in Europe and that our product portfolio of SmartWorks, SmartDevice and SmartControl fits well in the marketplace. Gartner highlights the focus on continued innovation, our streamlined product portfolio with a strong focus on customer needs and customer journey as our strengths. In addition to being recognized in the Magic Quadrant, we have also been rated by Gartner as one of the top players in the report Critical Capabilities for managed mobility services global. This recognition reflects our ongoing process of changing the world of work, and it is a continued validation towards the marketplace.

It's great to see that Gartner address the same customer challenges as we hear when we talk to customers and other organizations. The following 3 challenges are highlighted within the mobile technology area: one, life cycle management of devices; two, managing the mobile ecosystem and security; and three, increasing the efficiency, quality and safety for the frontline workers, where our portfolio solves these challenges in the market with a strong growth.

SmartDevice solves the life cycle management challenges for organizations from purchase to service and end-of-life handling of mobile devices. The solution gives employees the freedom to choose their preferred device while the organization keep control over the cost. Best of all is that the organizations can reduce their cost for their mobile device fleet with 20% to 25%. SmartControl helps customers to have control over security, apps, handling of data and the interaction between IT system and the mobile ecosystem. SmartWorks is our solution for employees that do not sit behind the desk, where they can increase the quality of their work significantly, be more effective, which also result in happier employees and better results.

Our portfolio consists of both recurring and transactional revenue. Recurring revenue is recurring contracts with a minimum of 12 months commitment for Own Software and Advisory & Services, while Hardware-as-a-Service includes contracts committed for 24 months or more. Recurring revenue related to Own Software is also referred to as ARR. Transactional revenue is onetime revenue from Advisory & Services projects and hardware sales. Recurring revenue creates stickiness, and stickiness creates better scalability.

One of our recent wins is Aider. Aider is the biggest challenger in the accounting industry in Norway. They have a strong belief that the accounting industry needs to be redefined where they will use user-friendly technology combined with challenging the customers through the knowledge of their highly-skilled workforce. The Techstep [ Corporation ] serves well with Aider's technology-focused strategy. The contract with Aider covers the full SmartDevice software, including life cycle and mobile expense management, as well as Hardware-as-a-Service for all their employees.

With a complete SmartDevice solution, Techstep enables Aider to get better control and reduce their cost per employee, get full control over a device for their 700 employees, get the freedom for their employees to choose their preferred device with a lower cost for Aider. They get a fully automated life solution -- life cycle solution for their employees. And they get the solution that's built on the circular economy principles, helping them to achieve their sustainability goals.

The first half year was tender-heavy with several large tenders delivered. And it's great to see that this materialized again with winning and signing the agreement with Oslo Kommune. Oslo Kommune is one of Norway's largest employers, and Techstep will deliver smart device to some 30,000 of Oslo Kommune's employees. The contract includes the opportunity for adding software and Advisory & Services from our full portfolio. The potential value for this contract is up to NOK 480 million over 4 years. This includes software, Advisory & Services and hardware. This is estimated to approximate NOK 240 million in hardware and NOK 240 million in software and Advisory & Services, with the potential of doubling the current contract value. The agreement is deployed in Q3 2023 and onwards.

The public sector has some key focus areas: sustainability, optimizing the digital work for their employees and optimize their costs. With this, we can see a significant growth in tenders from the public sector, both in Norway and in Sweden. And Techstep is very well positioned as we have shown with winning both Sykehusinnkjøp and Oslo Kommune. We thank Oslo Kommune for their renewed trust and look forward to the cooperation. I will now hand over to Ellen who will take you through more details of our financial results for the quarter.

[Ellen Solum, executive]

Thank you, Borge. As Borge mentioned, second quarter results is a milestone in Techstep's history. For the third consecutive quarter, we have a positive EBITA adjusted. Although our total revenues year-over-year declined with 8%, this decline is entirely caused by the downturn in hardware. However, we did see a positive development towards the end of the quarter, which is in line with the market sentiment expecting an upturn during the second half of the year.

Our Advisory & Services as well as Own Software revenues increased substantially year-over-year, causing a total net gross profit growth for the quarter of 7% despite the decline in revenues. Net gross profit margin increased from 28% last year to 33% in the second quarter due to an increased share of high-margin offerings and higher margins from hardware revenues. Increasingly, during the year, we managed to secure higher margins on both the transactional hardware sales and the Hardware-as-a-Service offering, and the share of Hardware-as-a-Service has increased over time and contribute further to the total net gross profit increase.

The annual recurring revenues from our Own Software grew by 15% year-over-year and with NOK 4 million in the first half year. We saw momentum in sales picking up towards the end of the quarter, and a large majority of contracts signed was in the latter part of the first half year. As we are not reporting ARR before the contract is implemented and invoiced, these contracts are not included in our numbers presented at the end of second quarter but will be added as we move into the second half of the year. We have had to restate our ARR for previous periods, and I will get back to that later in this presentation.

EBITA adjusted for the quarter was NOK 2.3 million in second quarter this year, which is a substantial improvement from last year. Year-to-date, the improvement from last year is NOK 31 million driven both by increased gross profit and the cost savings we have implemented since fourth quarter last year. We are still showing a net loss for the period, in total, NOK 17.6 million in the second quarter, but the majority is due to noncash items, such as amortization of intangible assets and currency effects in net financials.

After a relatively stable and flat development in our last 12 months rolling net gross profit, the development in the second quarter this year is finally showing a positive turn. Both year-over-year and second quarter consecutive growth was 2%. Despite the revenue decline we have seen in the last quarters, we're still growing our net gross profit. This is a result of Techstep's refocused strategy to transform the software and service-led recurring revenue models. The revenue mix is changing to higher-margin services and products, but we are also securing higher margin on the hardware offering. The share of gross profit from Advisory & Services and Own Software has grown from 59% to 63% in 1 year. And we have had a 16% decline in hardware revenues year-over-year in second quarter, while the net gross profit from hardware declined with only 4%. So we see that as we convert customers to recurring contracts, we also have positive tailwind on Advisory & Services as well as hardware margins.

Annual recurring revenues from our Own Software is an important KPI for Techstep. We are showing you all the quarters since first quarter of 2022 as we have restated the previously reported amounts in order to show comparable figures. In second quarter, I initiated a review of the classifications and product definitions, in particular, in reports from subsidiaries and [ purchased ] entities as our product portfolio and bundling of products has changed over the last few years. Based on this review, we needed to adjust the reported numbers to ensure that we apply the same definitions in all periods. Each quarter since first quarter of '22 has been restated with the effect of reducing reported ARR with approximately NOK 5 million from previously reported amounts each quarter in '22 and into first quarter of '23. There are no effects on the financial statements in the period as this is merely a classification of revenue contracts within the separate revenue categories.

As you can see from this slide, we have had a steady growth in ARR in the last 1.5 years. In 2022, we had 15% growth, and we are aiming at about 22% this year. The growth will be driven by the new product portfolio as it matures, the positive sales momentum we are currently experiencing and the new agreements signed during the first half of the year, which will materialize financially in the coming months. In line with the restatements, we have adjusted our ARR ambition for this year to NOK 125 million to NOK 135 million and to above NOK 200 million in 2025.

The total recurring revenue has been restated in line with the changes in ARR. We've had a very positive development in the recurring revenues the last quarters, which continued into the second quarter. Again, we see the results of our refocused strategy to move to a recurring revenue base. Leaving the quarter, we had a total of NOK 318 million in recurring revenue base, corresponding to a 15% growth year-over-year and an increase of NOK 10 million or 3% since last quarter.

In order to turn Techstep profitable, we focus on the net gross profit to EBITA adjusted conversion. As a result of the cost optimization results where we have managed to substantially reduce our cost base, the EBITA conversion has been positive the last 3 quarters. But with high inflation rates we are currently experiencing as well as some one-off expenses in the second quarter, this year conversion rate declined to 2% from 4% last quarter. However, it is an improvement of 20 percentage points since the same quarter last year. And as the last 12 months adjusted EBITA is finally positive at NOK 8 million, conversion rate is positive for the first time. With the results we are showing from the cost optimization efforts and streamlining the organization and the fact that we have turned our operations to support a highly scalable product offering, we are moving Techstep towards profitability.

The cost optimization plan that was initiated in fourth quarter of '22 targeted annual savings of NOK 90 million to NOK 100 million compared to the '21 cost base through reducing headcount, operating expenses and investment spending. As of second quarter, we are on target with our goals. At the end of June, the total headcount has been reduced by almost 20% year-over-year. Operating costs are down 7%, and the platform investments are down almost 50% since first half of '22. And we are continually working with further optimization and streamlining of the organization. However, uncertainty related to the price inflation as well as the weakening of Norwegian krone in the last half year is affecting our cost base and creates some uncertainty around the actual run rate at the end of the year.

Moving on to the balance sheet at the end of the quarter. We have an equity ratio of 46%, up from 43% at the end of last year. Our total noncurrent assets have increased with NOK 10 million this half year due to currency effects on goodwill, and investments in our platform -- Hardware-as-a-Service assets reduced by depreciations and amortizations in the period. Current assets have decreased with over NOK 100 million since 2022, which is both due to reduction in cash and reduction in trade receivables since last year ending balance consisted of one larger transaction that was settled in '23. The same effect is on the accounts payable items in total current liabilities.

In July, we announced that we had signed a term sheet for refinancing of the group's total bank debt. And as such, long-term loans have been classified as current. The refinancing will give Techstep improved financial flexibility by increasing long-term debt by NOK 50 million and increasing available credit facilities with NOK 25 million. We have substantial seasonal effects on our cash flow. And by restructuring our debt now, we are both securing a well-suited down payment profile on our long-term debt in addition to access to credit facilities in cash-intensive quarters. The interest levels on the new loans are approximately in line with the current financing, and we will complete the refinancing in the third quarter.

In July, we also converted the last remaining seller's credit of NOK 15 million to shares. So as from the third quarter, Techstep has no further seller credit in our balance sheet. Net interest-bearing debt was NOK 179 million at the end of the quarter as first half year has been very cash intensive and the second quarter is seasonally a low cash-generating quarter.

Second quarter cash flow from operations was NOK 29 million compared to NOK 7 million last year. We had a positive change in working capital of NOK 5 million. However, a large part of this is change in prepayments from our financing partners related to investments in the Hardware-as-a-Service portfolio, which is presented under investment activities. So the underlying actual change in trade working capital is negative, which is due to both seasonal effects in the second quarter as well as larger transaction towards the end of June with negative effects on the trade working capital.

Cash flow used in investment activities was NOK 48 million, includes the investments in the Hardware-as-a-Service portfolio with NOK 43 million. CapEx for our own platform development and other IT investments was NOK 8 million in the quarter and NOK 19 million year-to-date. This is compared to NOK 36 million spent in the first half year of '22. Cash used for financing activities was NOK 5 million in the quarter and equals the interest and lease payments in the period, while down payment on long-term loans of NOK 7 million in second quarter and NOK 27 million year-to-date balance out with drawdowns on short-term facilities.

Cash at the end of the period was NOK 11.6 million, which is a decrease of NOK 50 million in the first half year. As mentioned earlier, the negative cash development this year relates both to cash effects from the downsizing in the first part of the year as well as seasonal fluctuations, and cash is expected to improve in the second half of '23. In addition to the cash reported, we have additional credit facilities available, which are not shown in our financial statements. Then I'll leave the word to Borge, who will summarize and go through our outlook.

[Borge Astrup, executive]

Thank you, Ellen. So let me summarize. Our key focus is to turn Techstep profitable, and all in all, we are on track. There is still some uncertainty in the macroeconomic environment that has resulted in somewhat longer lead times and more prudence on the customer side. We can now see the results materialize with growth and optimize costs from the extensive transformation process that Techstep has been through the latest years, and we are now executing on the final phase of the transformation. With growth and cost optimization, we delivered a positive EBITA adjusted for the third consecutive quarter. In line with the restatement of ARR on Own Software in Q2 and uncertainties relating to timing and ramp-up of the deliveries under the new major contract awarded this year, we have revised the company's outlook for 2023.

The updated outlook for 2023 are an ARR of NOK 125 million to NOK 135 million, a net gross profit of NOK 380 million to NOK 390 million and an EBITA adjusted of NOK 40 million to NOK 50 million. By 2025, we aim for an ARR on Own Software above NOK 200 million, a net gross profit above NOK 540 million and an EBITA adjusted above NOK 150 million.

And that concludes today's presentation. Thank you for your attention. Please join Ellen and myself in the Q&A session today at 8:00. You can always submit your questions to us by using the Investor Relation email address or during the session using the chat function. So we hope to see you all there soon.