Techstep ASA

OSE:TECH

Earnings Call Transcript 2021-Q4

[Borge Astrup, executive]

Hi all. Thank you for watching Techstep's Q4 presentation. We are transforming our business model from one-off transactional sales to having full focus on selling our product offering as a recurring revenue bundle. This gives a recurring commitment and value towards our customers, meaning that we strive to deliver high customer value every day through our services and products. This will also result in a stronger gross profit going forward for Techstep.

We see increased momentum and traction with 11 new managed mobility services contracts signed in Q4. These contracts has an estimated value of NOK 48 million and approximately 12,600 managed devices. And we are obviously very happy with the vote of confidence shown by Norway's largest financial services group. We're also pleased to see that our pipeline of opportunities are growing and look forward to converting further opportunities into new business and added commercial momentum.

Our annualized recurring revenue in the fourth quarter grew to NOK 266 million. This includes our Own Software, Advisory & Services and Hardware-as-a-Service. Growth in recurring revenue will be our key focus moving forward.

For the full year 2021, our gross profit increased by 21%, and to NOK 459 million. The EBITDA adjusted was NOK 69 million and reflects the ongoing restructuring and transformation where the result is a lower revenue short term but is stickier and higher quality recurring revenue moving forward.

We will start to see improvements with increased traction in both sales and that our business model with recurring revenue is adopted by our customers. The recurring business model consists of higher-margin software and other value-adding services for our customers. And at the end of last year, we announced the sale of the voice and contact center business for NOK 65 million as we are streamlining our operations.

There is a lot of activities and initiatives ongoing in Techstep. We are very much looking forward to launch the rebranding of Techstep during March. The rebranding will give us a clearer message, a clearer story line and a clearer position of how we support customers through smarter mobile technology for a brighter tomorrow. We are streamlining the organization and strengthening the management team with both with specialist roles in marketing and sales. With the restructuring, we are also shifting our investments towards the commercial division and optimizing the supporting systems like website, CRM, ERP to improve accuracy and our efficiency.

In Q1, our new CFO, Anita Huun; and our CMO, Sheena Lim, will also be joining the team. We are also strengthening our development and product department to be able to deliver the improved and refined product offering of SmartControl, a platform for all businesses that will help you to manage and control your devices and software more easily and securely. SmartWorks will help you to increase quality and efficiency through mobile technology such as industry-specific software. SmartDevice enables you to buy a hardware in a more sustainable and affordable way with the freedom of the employees to choose their preferred device.

So let me explain the smart product offering more in depth. Vy bus use SmartControl to manage and control their devices for their 7,000 Nordic employees. Let us start with asset and device management. Through our solution, they have full control over who has the different devices. If the device is updated to the latest operating system and if the device is lost or stolen, it can remotely be wiped.

At management, with our solution, they control, manage, update and distribute apps for the different user groups and their mobile devices. Security in today's zero trust society, securing your business and your employees are more critical than ever. And with our solution, Vy bus and their employees can manage and control both corporate and personal data in a more secure and user-friendly manner. And if customers do not want to operate this themselves, we can manage these services for them at a fixed cost per user per month.

SmartWorks is a solution that helps deskless workers to increase quality and efficiency through industry-specific software. With our software solution, we support PostNord and their more than 10,000 drivers to make deliveries with higher quality and less errors. PostNord subscribes to our complete product offering, both SmartWorks, SmartControl and SmartDevice. This enables them to manage and control more than 54,000 devices, finger scanners, printers and so on. And by locking down and limiting the functionality on the device, they also get a more simplified and user-friendly solution.

If you travel with public transportation in Stockholm, you most likely travel with Storstockholms Lokaltrafik, SL. SL has 300 employees that daily are out controlling tickets and helping passengers. With our software for public transportation, SL has been able to increase the accuracy, efficiency and quality in their work. We also support them to manage and control their devices with Smart Control and buying their devices in a more sustainable and affordable way through SmartDevice.

If you walk into a Meny supermarket in Norway, you see employees with a handheld device, helping customers. This is also delivered by Techstep. Through our solution, they can easily handle multiple of tasks, such as alarm for the bottle deposit system, check list for the fresh food counter, category management and warehouse status for the different groceries and so on. This enables them to spend more time out on the shopping floor and helping customers.

SmartDevice enables you to buy your hardware in the more sustainable and affordable way with the freedom for the employees to choose their preferred device. We are proud to be a Tier 1 partner with Apple. Apple supports us with know-how from their industry experts and gives us access to the best-suited technology for our customers. To be able to succeed with life cycle management, it needs to be set into an automated system.

Aker BioMarine started to buy their devices in the traditional transactional way, but it was hard for them to manage the full life cycle management. They now work smarter, while they, at the same time, deliver on their ESG commitment through our automated Hardware-as-a-Service model. With SmartDevice, they get the full life cycle automated from purchase through to service and repair. And after 2 years, they return the device responsibly and securely for reuse or recycling. They also get the flexible purchase model for their employees, where their organization can set the purchase policy and the employees get the freedom to choose their preferred device.

And the best of it all is that they save NOK 1,500 to NOK 2,000 per device while they save time and the environment. So this most surely we call a no-brainer.

In 2021, the growth of the European managed mobility service market was 21%, equal to Techstep's gross profit growth in the same period. Our market is expected to grow annually 24% from 2022 to 2027. Important focus areas are data privacy, security and sustainability with careful life cycle handling of devices. We're also glad to see that the expectation for migration from on-prem to cloud is increasing as well. This fits perfectly with our product offering of SmartControl, SmartWorks and SmartDevice, meaning that with our position and product offering, the future looks bright.

In Techstep, we are evolving our managed mobility services product offering to a more simplified set of products and services. In the time ahead, we will continue to focus on making our value proposition even clearer, both for existing and for new customers to ensure that they can capitalize on the advantages of the market's most complete mobile technology offering.

Since 2019, we have won 57 contracts with a total estimated value of NOK 297 million in revenue, this to be delivered over the next coming years with an increased momentum of signing 11 new contracts in Q4 2021. As we transform our business model from transactional to recurring business, this will affect our gross profit growth. Short term, we will see a decrease, and then we will build it up to a more foreseeable recurring revenue stream.

Since the inception, we have recognized approximately 25% of the total estimated contract value, meaning there is a significant value left in the already signed contracts. Previously, the customers has been invoiced for the software solution when the device was purchased and enrolled. This has now been changed so that all users now will be invoiced advance.

So let us look at how a typical customer enrollment journey will be moving forward for a customer and their employees that has both SmartControl and SmartDevice. When we have implemented the SmartControl solution, the customer can utilize the value of the platform and will be invoiced for all users from day one. Rolling out SmartDevice is typically done in a linear manner over 2 years as employees usually change their device every second year. The SmartDevice agreement is a 24-month agreement running from when the employee receives the new device.

The renewal of SmartControl is automated and will be running for as long as the customer has a SmartDevice agreement active. In the quarter, we signed 11 new managed mobility services contracts with new and existing customers across the Nordics. The majority of the agreements are SmartControl contracts, and the contracts are signed with both public institutions and private enterprises. And they represent 12,600 new managed devices with an estimated value of NOK 48 million over the next years.

This proves that the Nordic companies understand the increased value of our proposition as a number of both products and devices per contracts are increasing and thus, the value for Techstep. It's always exciting to talk about customers and their stories. And here are a couple of examples of the newly signed contracts.

In the quarter, Techstep signed a software agreement with DNB for 9,000 users. This proves DNB's increased trust in us. DNB is Norway's largest financial services group and offers a wide range of financial products and services. We will deliver our cloud-based mobility software solution to 9,000 DNB employees equipped with mobile phones that is already supplied by Techstep.

Our software solution will provide them with the administrative control of mobile hardware and the employees get a self-service solution for support and cost control. The value to DNB and its employees is simplifying and streamlining the management of mobiles through the life cycle as well as reducing the cost and improving the sustainability. The contract is over 2 years and has a significant share of recurring revenue.

Magyar Posta is one of the largest companies in Hungary, and a long-standing customer of Techstep's subsidiary, Famoc, which was acquired by Techstep in July 2021. Magyar Posta has renewed its confidence with Techstep by entering into a new contract period of our SmartControl SaaS solution. Techstep will provide enterprise mobility management software to Magyar Posta's field-based postal workers, securing that all mobile devices at all time has the right apps and functionality as well as ensuring information security and GDPR. We are grateful for the new agreement and thank Magyar Posta for their renewed confidence.

So moving over to the financials. There is one important aspect of our current business that I would like to highlight in order to understand where we're heading. We are working on transforming our business model from transactional one-offs to stickier and higher-quality recurring revenue model. This gives our customers predictability in their costs and better cash flow and a higher value. However, this transformation also results in lower revenue short term for Techstep but a stickier and higher quality recurring revenue moving forward.

The graph to the right shows all our reported recurring revenue streams, including our own software previously reported as ARR and the full-service contracts. Of total NOK 266 million in recurring revenue, NOK 98 million comes from our own software. If we include the wins from the fourth quarter, we would be above NOK 100 million.

So in 2021, we had a 54% growth on our own IP, including the Famoc acquisition that we closed the third quarter last year. On a pro forma basis, we had an 18% organic growth. The share of recurring revenue of total revenue in the quarters will vary, depending on the size of the transactional sales and the one-off deliveries.

But in absolute figures, recurring revenue is expected to grow over time. Going forward, our focus will be on recurring revenue and selling our new smart product portfolio offering with recurring revenues.

Now Marius will take you through the rest of the financial section.

[Marius Drefvelin, executive]

Thank you, Borge. Here, we see the development in pro forma gross profit and EBITDA adjusted, including acquisitions as well as the divestment, which we announced in the fourth quarter.

As we can see from the top figure, we had a positive development during the year with growth in gross profit and EBITDA. The gross profit conversion increased from 7% in the first quarter to 20% in the fourth quarter. This is due to an increase in Own Software, efficiency improvements and reduction in variable operating costs.

Furthermore, we sold off the voice and contact center business for NOK 65 million at the end of the year. This business area generated NOK 22 million in gross profit in 2021 and was a profitable business. However, because of our focus on Own Software and mobile technologies, this was considered noncore for us. In addition, continuous reductions in operator commission led to a decrease in gross profit and profitability over the last years for this business.

We see the effect of the transition towards a recurring revenue business model. We are pursuing longer and larger full-service contracts rather than smaller one-off contracts. This will impact our profitability during our transformation, but we remain firm in our focus to increase profitability in the long term through increase in software and IP-led revenues as well as operational leverage.

In the fourth quarter of 2021, revenue was NOK 384 million as compared to NOK 399 million in the same quarter the previous year. For the full year, revenues increased by 14% to NOK 1.3 billion. Gross profit for the fourth quarter was NOK 123 million as compared to NOK 148 million the same quarter the previous year.

In the fourth quarter of 2021, we delivered a material backlog of transactional hardware devices caused by shortage from our suppliers, leading to a reduction in gross margin. Moreover, the fourth quarter of 2020 included a periodization effect of the Hardware-as-a-Service portfolio of NOK 15 million relating to previous quarters in 2020.

More importantly, gross profit increased by 21% to NOK 459 million for the full year of 2021. This is mainly due to the acquisitions of Optidev and Famoc in the fourth quarter 2020 and the third quarter 2021. These acquisitions led to an increase in Own Software and the Hardware-as-a-Services portfolio, both important recurring revenue streams.

EBITDA adjusted was NOK 25 million in the fourth quarter and NOK 69 million for the full year 2021. The profitability level is affected by the transition of building our recurring revenue business model as we continue to make the required investments to support this transition.

For the full year 2021, depreciation increased from NOK 87 million to NOK 108 million as a result of growth in Hardware-as-a-Service. We have a prudent approach on the residual value of the assets. The Hardware-as-a-Service portfolio will start to mature towards the end of this year.

Amortization of intangible assets relates to acquisitions and development costs. Amortization is noncash and completed by 2026.

At the end of the year, we had net interest-bearing debt of NOK 121 million reduced from NOK 182 million the previous quarter due to the divestment of the noncore business. The gross profit for the last 12 months was NOK 459 million. There was a mixed development in the fourth quarter with an increase in own software and flat development in advisory and services. There was a small underlying decline in the Hardware-as-a-Service portfolio due to some contract expirations. However, we are not concerned about this as we saw an increase in wins in the fourth quarter.

Going forward, as Borge has already mentioned, we will focus even harder on rolling out our own software and the related recurring revenue streams. In the quarter, we maintained a solid balance sheet with 42% equity ratio. Intangible assets are mainly goodwill from acquisitions and customer relations and technology development.

Tangible assets mainly include devices delivered to customers as Hardware as a Service. The majority of these devices are owned by external funders, not Techstep, but capitalized in our balance sheet. Long-term interest-bearing debt includes acquisition loans of NOK 61 million and seller's credit of NOK 32 million. The proceeds from the sale of the voice and contact center business of NOK 65 million reduced our net interest-bearing debt accordingly. In the balance sheet, NOK 40 million is booked as deferred revenue and NOK 25 million is booked as other current liabilities. In the first quarter of 2022, the net gain of NOK 40 million will be booked as other revenue.

The cash flow from operations was NOK 10 million. This includes a negative working capital effect of NOK 14 million for the quarter, partly driven by the delivery of the hardware backlog. Net investments were positive NOK 30 million and includes proceeds from the sale of the voice and contact center business offset by CapEx on software development and IT investments of NOK 24 million.

For the full year of 2021, we had CapEx on software development and IT investments of NOK 48 million. Towards the end of the year, we were speeding up our software development programs as part of the acquisition of Famoc. At the end of the year, we had NOK 50 million in cash and cash equivalents.

Borge will now take you through the outlook and the summary.

[Borge Astrup, executive]

We have previously talked about what we need to do in order to achieve our ambitious goal of becoming a leader in the managed mobility service market. We will speed up the conversion of existing customers to manage service contracts. We will win new contracts as we improve our competitive edge. We will conduct acquisitions to obtain IP and software, new customer bases and a stronger market position. Last but not least, we will also focus on geographical expansion.

Going forward, we are targeting strong growth in our managed mobility service offering. As mentioned, we are restructuring to streamline the organization and expect the effect to materialize over time. We have already started to see the effect as we have closed 11 managed mobility service contracts in Q4 and reached 33% for the full year. This is almost twice as many as last year's 17 contracts.

Origo user growth was below our ambition. Following the acquisition of Famoc, Origo will be integrated into our SmartControl offering together with Famoc's software solutions. The change of invoicing of SmartControl will also have a positive effect on the number of users on our platform moving forward.

EBITDA adjusted to gross profit conversion was 15% for the full year, but as Marius has shown, the trend has been positive throughout the year and reached 21% for the fourth quarter. Development CapEx is mainly affected by the acquisition of Famoc and the repackaging of our product offering that was not included in the medium-term ambition. But this shows a positive shift towards software focus in Techstep.

And that concludes today's presentation. Please join us for the Q&A session at 10:00 on Teams. You will find the link on our web page. So thank you all for watching, and have a great day.