Techstep ASA

OSE:TECH

Earnings Call Transcript 2023-Q4

[Morten Meier, executive]

Good morning, everyone, and welcome to our quarterly presentation for Q4 2023 live from Oslo. My name is Morten Meier, and I will, together with our CFO, Ellen Solum, give you an update of our financial results as well as our direction and outlook going forward. As this is my first month as the new CEO of Techstep, let me first introduce you to myself, to all of you.

First, I have to say I'm super excited, humbled and proud to be the new CEO of Techstep. I spent my entire career in the software and technology industry, mainly with large global enterprises like Microsoft, IBM and HP, with all kinds of leadership roles from public sector and enterprise lead partner and alliances lead, COO and Deputy GM to mention some. I was given the opportunity to join Techstep back in November last year as an adviser and to engage closely with the management team, Board and all parts of the organization, especially the sales teams. I immediately felt a very strong connection to the company, and I was and still are highly impressed by the unique competency we have and the burning passion for our technology and customers across all parts of the organization.

I took on this role, as I strongly believe we are in a great position to create history and become the market-leading mobile tech company in Europe and to realize the huge potential we represent with the strong combination of our Own Software, world-class expertise and managed services as well as one of the most certified mobile device players in Europe. When my role was announced, I shared my first 8 weeks' plan with the organization consisting of 3 main pillars. First, meet and get to know as many as possible of our great employees, and we set the teams in our different locations. So far, most locations have been visited, and I have -- I had the opportunity to sit down with our amazing people to learn, discuss and share our ambition about the future.

Secondly, to better understand our profitability, productivity and potential across our different value streams and where our highest growth opportunities are. We've spent quite some time to land and onboard the teams on our updated go-to-market strategy and execution plan and where and how to accelerate. And last pillar, meet with our customers and partners to see how we can help them increase value, reduce cost and mitigate risk by collaborating closely with us and leveraging our competency and unique solutions. It has been some very exciting weeks and we have some even more exciting weeks ahead of us. Our value proposition resonates so well with customers' need and market demands.

So let's take a closer look at this company. Our mission is to help customers and partners to become more efficient, secure and sustainable by leveraging best-in-class mobile technology services and solutions. We combine Own Software with some key third-party vendors, our best practices, professional services and managed capabilities with a broad range of different hardware technologies we represent to better equip our customers and their office and frontline users.

We are one of very few providers with capabilities across all 5 categories of managed mobility services. And in addition, having strong capabilities within customized and industry-specific solutions, development and management of mission-critical applications as well as mobile tech strategy and transformation advisory. Our home market in Scandinavia with our dedicated sales, delivery, operations and support teams, serving both public and enterprise sector customers and within multiple industries. Rest of Europe, we serve through strong partners and alliances, and I'll get back to this highly scalable business opportunity later in the presentation.

We have a strong footprint in our home market with large reference customers and an increasing customer base with recurring revenue. Our ambition is to continue to grow our recurring revenue, delivering more as-a-service solutions and taking stronger responsibilities to operate and support our customers' mobile ecosystem.

Let me take you through some of the highlights for Q4. The profitability keeps moving in the right direction. And for the fifth consecutive quarter, we delivered a positive EBITA adjusted. For the year, EBITA adjusted landed at NOK 30 million, an improvement of NOK 54 million from 2022. Our net gross profit margin is up year-over-year from 28% to 30%, and we have successfully delivered on the cost optimization program introduced in 2022. On the commercial side, Q4 was slower than anticipated, but the momentum picked up towards the end of the year. A key win in the quarter was the frame agreement with Kammarkollegiet, which gives us the opportunity to engage with the public sector organizations in Sweden.

The conversion from transactional to recurring revenue continues and recurring revenue base grew by 5%, driven by 9% in ARR-own software. In addition, we have refocused our commercial strategy with increased focus on partner sales as channel for highly scalable products as own software and managed services. Yesterday, we announced the first strategic partnership with devicenow for Lifecycle Portal, which marks an exciting opportunity for advancing Techstep's goal becoming the leading mobile tech company in Europe.

During first half of 2023, we announced the significant contract with all 4 health regions in Norway under the Sykehusinnkjop agreement. The ambition is to equip the different roles at the hospitals across Norway with new devices, both for clinical and office use. In addition, we will start delivering a completely managed mobility service, taking care of the full Lifecycle managed services and security of the devices. This will be the new standard for clinical and office users making Techstep the trusted partner for the mobile environment in health region Southeast. This means we are taking a unique position in delivering an end-to-end complete mobile outsourcing service to the frontline workers in the specialist care, and we have called it managed health.

We have now signed a letter of intent with Sykehuspartner, which also covers the first pilot hospitals. And in the coming months, we aim to finalize the full scope of deliveries and sign the service agreement to roll out and fully manage mission-critical devices serving their 82,000 users in the region.

And with that, 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, Morten, and good morning, everyone. I'll take you through the highlights of our financials for the fourth quarter. But before diving into the quarter details, I think it is good to take a step back and look at the full 2023 year. Techstep has been through a considerable transformation journey, consolidating and developing new products and services, reorganizing and restructuring the entire group and in the last year, focusing intensely on building a far more lean and cost-efficient organization.

To turn a company completely around takes time, but we are slowly turning the corner. And although our total revenues in 2023 declined, we have managed to both steadily increase the share of recurring revenues and increase our EBITA adjusted with NOK 54 million from 2022. In the fourth quarter, our total revenues were NOK 300 million, which is a 16% decline versus fourth quarter of the previous year. And it is caused primarily by the decline in device revenues and Advisory and Services.

Total device sales for the whole year was down 16% from 2022, but we saw a positive turn towards the end of the year. And fourth quarter revenues were only 5% down year-over-year. As for Advisory and Services, fourth quarter last year included some major one-off transactions in third-party software and aftermarket with high revenues and low margins. In addition, we see that the consulting business has been slowing down during the year. Revenues from our Own Software has considerably increased for the year as a whole, with 17% in total. But fourth quarter revenues in 2023 was affected by some cleanups and credits from previous periods.

Please also note that we have restated the revenues for 2022 and previously reported revenues for 2023. This restatement is a reclassification of kickbacks and credits from our device partners, which has previously been reported as revenues and are now reported as a reduced cost of goods sold. So there are no effects on gross profits in the period.

Net gross profit in fourth quarter was NOK 90 million versus NOK 100 million last year. But the net gross margin has improved by 2 percentage points as the share of higher-margin products and services in our net gross profit increase. EBITA adjusted was NOK 10.6 million in fourth quarter, improved with over NOK 8 million year-over-year. This is entirely a result of the cost optimization implemented from fourth quarter in '22.

Total expenses, including personnel costs, declined with 19% in fourth quarter in 2023 year-over-year, while the headcount was reduced by 15%. Our net loss for the period was NOK 5 million, but the loss consists entirely of noncash items such as amortization of intangible assets.

By the close of 2023, our last 12 months net gross profit stood at NOK 354 million, reflecting a decrease from NOK 367 million or 4% compared to 2022. The downward trend primarily stems from reduced profits in the devices and other areas, particularly transactional device sales. However, we observed a consistent improvement in profits from Advisory and Services as well as our Own Software. Year-over-year Advisory and Services, inclusive of managed services, experienced a 4% increase, while profits from our Own Software surged by 12%. Techstep's primary focus remains on growing total net gross profit. However, transitioning the company from a transactional sales orientation to a comprehensive managed mobility partner entails time and has impacted our transactional sales.

We are actively expanding our recurring revenue base among customers, attracting new clients while also converting existing ones. As of the end of 2023, our total annualized recurring revenues reached NOK 312 million, marking a 5% increase from '22. Notably, our managed services contracts have seen a very good 12% year-over-year improvement. Transitioning the company from a business model centered around transactional device sales to a recurring revenue model, incorporating software, services and Device-as-a-Service delivery is groundbreaking work for both us and our customers and will naturally take time.

Our product portfolio has evolved, reaching a stage where we are exceptionally well positioned to meet the evolving demands of the market with the totality of our offering and competence. Historically, our customers, spanning both public and enterprise sectors may not have been fully ready to adopt new solutions and technologies. However, we observed a gradual shift in this mindset. And the market is increasingly receptive to our products and services, coinciding with our own advancements that allow us to better address emerging needs. The recent development we see in the health sector and the recently secured contract with devicenow serve as a testament to this trend.

In 2023, we have seen a 9% year-over-year growth in ARR on Own Software. Our expectations for 2023 were higher than what we have realized. However, it has taken a longer time to fully complete our products, particularly in fully completing lifecycle and ensure partner readiness. Similarly, there has been an extended timeline to materialize agreements that were entered into in the first half of 2023, which is largely due to customer readiness and long decision processes. There's a strong indication of high interest in the European market for our products primarily through the intensified partner engagement. And as a lifecycle product now is partner ready, we see substantial potential for exponential growth, particularly through major partner agreements.

As previously mentioned, last year marked a significant turning point for Techstep. Throughout the year, we consistently demonstrated improved EBITA conversion, which can be attributed to our diligent cost optimization initiatives. Upon launching the cost optimization program, our aim was to trim NOK 90 million to NOK 100 million from our annual cost base compared to 2021 levels. Despite the challenges posed by rising inflation in 2023, we successfully achieved this target. The variance observed between Q3 and Q4 of 2023 can be attributed to the seasonality inherent in our cost structure with personnel expenses comprising over 2/3 of our total operating costs.

Our EBITA conversion rate has seen steady improvements over the last 12 months, reaching 8% for the year as a whole. We remain committed to maintaining a strong focus on cost management throughout 2024 while also strategically balancing necessary investments to support potential larger contracts in our pipeline. There remains untapped potential for further cost reductions, particularly through the optimization of processes and systems across our organization. However, it's important to note that investing in our IT infrastructure in the coming year will be essential for achieving long-term cost efficiencies.

As we navigate the complexities of cost optimization and investment planning, our overarching goal remains to ensure sustainable growth and profitability while effectively managing our resources and supporting our future business objectives. As we have demonstrated improvement in profitability throughout the year, our cash position by year-end stood notably strong at NOK 77 million. The operating cash flow for Q4 inclusive of investments in Device-as-a-Service increased by NOK 19 million year-over-year, reaching NOK 50 million. For the entirety of 2023, cash flow from operations amounted to NOK 60 million, marking a substantial improvement of NOK 65 million compared to 2022. This enhancement is primarily attributed to improved profitability and improvements in trade working capital.

Investments in own developed products and IT infrastructure leveled out in Q4 compared to the previous year, amounting to NOK 8 million following the reductions in research and development implemented in Q4 '22. Nonetheless, for the entire year, we witnessed a total reduction of NOK 18 million in investments compared to the previous year. It is worth noting that for entire 2023, the net cash flow from operations less investments was positive at NOK 27 million last year. Compared to 2022, which was a negative cash flow of NOK 57 million, this is a substantial improvement of NOK 84 million.

In Q4 '23, cash outflows to interest, loan repayments and lease down payments amounted to NOK 33 million, which included the repayment of short-term credit lines totaling NOK 24 million. In contrast, during the same period in '22, the net cash flow from financing was NOK 7 million, which includes an NOK 18 million net increase from the capital raise and debt repayment. In summary, the net increase in cash for the quarter totaled NOK 9 million. We are confident that our robust financial position as we enter 2024 is sufficient to execute our strategic objectives.

At the end of 2023, we have an equity ratio of 45%, up 2% since 2022, primarily due to reduced trade working capital balances at the end of the year. The reduction in current assets, excluding cash, is primarily related to larger third-party software transaction at the end of 2022 with the same effect on trade liabilities. Our balance sheet includes items related to Device-as-a-Service of NOK 160 million in assets and NOK 187 million in liabilities with a net effect of NOK 27 million, which represents future profits on the current portfolio of Device-as-a-Service.

The total borrowings increased with NOK 5 million from 2022 to the end of 2023, NOK 279 million as a result of the refinancing in the third quarter. The refinancing increased the share of long-term debt with an improved repayment schedule. And leaving 2023, we have only bank loans as all the previous sellers' credit has been repaid or converted in 2023. The net interest-bearing debt improved to NOK 101 million from NOK 113 million in 2022 as our cash position has improved.

Then I'll leave the word to Morten who will give you a short business update and go through the outlook.

[Morten Meier, executive]

Thanks, Ellen. Let's have a closer look at our journey ahead. The world is experiencing rapid technological advancements and digitalization is at the forefront of this transformation, reshaping industries and work processes. AI, no-code, low-code development and reliable high-speed connections are driving this change. AI is revolutionizing how we work by automating tasks, improving decision-making and enhancing productivity. No-code, low-code platforms empower nontechnical users to create applications and contribute to digital initiatives. Mobile technologies are central to these digitalization initiatives.

Billions of connected devices will generate vast amounts of data. Mobile-first strategies are essential for success. At the same time, this will require better control and proper management, ensure security and optimize the mobile experiences and, of course, comply with regulations and support ESG initiatives. The uniqueness of mobility is still connectivity, trust and ease of use for both work and private. In fact, the most powerful digital tool in the day-to-day life. This creation and creativity are the engine for further development and innovation.

We strongly believe Techstep is well equipped and uniquely positioned to help customers and partners in this new era. Techstep only works with mobile technology. We are not an IT generalist but a mobile technology specialist. Our portfolio contains the ingredients needed to scale mobility, technology usage in cost efficient, secure and sustainable way. Partnerships with leading mobile technology, hardware and software manufacturers lay the foundation. On top of that, we delivered managed services, taking full responsibility for the device lifecycle, including proactive device management and security services.

Our own software, together with our managed services and expert advisory makes for the best practice outsourced mobile technology. We can bundle the whole stack together or deliver brick-by-brick depending on customer needs and maturity, everything as a service. With purchasing ready-to-go devices, lifecycle management, device management and security, our customer can scale mobile tech usage in an outsourced model.

Let's have a look at our key markets and different sales channels. We have 2 distinct routes to the market. Our direct route in our defined home market, serving both public and enterprise customers and leveraging our broad portfolio of solutions and services and the indirect channel, historically, mainly through distributors and partners, but now with increased focus on mobile network operators and complementary partners, finding new strategic partners in selected geographical markets constitutes our revised partner strategy. The key components of our offering in the indirect channel and through strategic partnerships are our own highly scalable software and our managed services. This can both be delivered as standardized solutions or embedded into our partners' offerings and business models.

In 2023, Techstep won several public tenders and frame agreements. And in fourth quarter, we got renewed confidence by the public sector purchasing agency, Kammarkollegiet in Sweden. Agreements such as this gives Techstep a right to sell products and solutions at predefined conditions normally with options for adding additional value-added services on top. Some agreements are exclusive, some are frame agreements with a license to sell. Conversions to revenues is taking time, but maturity and momentum are progressing positively, and we need to make sure we can both realize value for our end customers as well as our shareholders. These type of agreements are usually long-term contracts, and we work ongoing with the public sector to increase digital maturity and how to procure and deploy solutions to harvest the benefits from their digital initiatives.

In 2024, we will continue to focus and prioritize public sector from health to central and local government and transportation. As a strong proof point to our indirect focus, I'm happy to share that yesterday we signed our first strategic partnership agreement with devicenow, a global provider of subscription-based IT devices to introduce Lifecycle Portal to a wider customer base worldwide. Devicenow is a German-based company and part of the CHG-MERIDIAN Group. They have a global reach across 190 countries and serves several major global customers. Devicenow's vision is to become the leading player in the global Device-as-a-Service market with sustainable, conscious IT device subscription, a market that is expected to grow from about USD 30 billion at the beginning of the decade to almost USD 500 billion in 5 years' time.

This partnership allows us to increase our global reach whilst devicenow can further great -- can add further great value to their offering through our Lifecycle Portal, which will be integrated into Devicenow's standard offering. We will do joint go-to-market efforts to acquire and onboard new customers and existing customers will have the opportunity to migrate over time. Techstep will deliver Lifecycle Portal with an integrated e-commerce solution at a fixed price per device per month. In addition, the agreement includes opportunities to incorporate our managed services into the devicenow's portfolio. In addition to this agreement, we are actively pursuing other significant partnerships and opportunities with expectations to finalize agreements in the upcoming months.

Moving into 2024. Our key focus remains to turn Techstep profitable. We did not deliver according to the ambition we had for 2023, but we choose to maintain our ambition for 2025, even though it is ambitious. This means that we need an even faster acceleration in 2024 to reach the 2025 goal than originally planned. We see great potential through our indirect business model and increasing growth in our direct sales channel, but we also realize that the value realization will take somewhat longer than anticipated. We expect an increased acceleration especially through the second half of this year.

Moving forward, we will continue to further optimize the organization and the customer journey for faster execution and value realization on existing and upcoming contracts. Growth will be driven by leveraging the broad portfolio and refocused commercial strategy through upselling more value-adding products and services across the product portfolio as well as increasing sales of scalable products through new and existing partner channels.

For 2024, Techstep aims at growing recurring revenues annualized year-over-year by 30% and net gross profit 10% to 15% and increasing EBITA conversion to 12% to 16%.

That concludes today's presentation. Thank you for your attention. We will now move directly over to a Q&A session. So please stand by if you have any questions. We will be back in about 1 minute to see if there are any questions posted so far.

[Morten Meier, executive]

Welcome back to our Q&A session. We have got some questions and Ellen and I will try to answer as best we can. So Ellen, maybe you will take the first question posted.

[Ellen Solum, executive]

Yes. Let me see 2025. It looks like you're guiding a 10% lower EBITA adjusted now versus what you guided at the Q3 2024 presentation. Is that correct interpretation of your updated guiding?

The guiding for 2025 is approximately the same. It's a little bit lower, but considering it's 2 years in the future. I think that it's more or less what we have guided on before. So we are upholding our previous guiding and outlook, but it's quite a stretch, like Morten said, those 2 years. And we are dependent on having a substantial growth this year in order to be able to reach those very hairy targets for 2025.

So the next one as well, when will Techstep have its first quarter with profitability?

We're not guiding separately on each quarter as they come along. But as we said, we expect quite a substantial growth in the second half of 2024. So we see that first half year, our expectations are not as high, although we do believe that the year 2024 as a whole will be more profitable than 2023. So not particularly I want to comment on each quarter going into the future, but we see that the second half, we are looking at a higher profitability.

[Morten Meier, executive]

Thank you, Ellen. We have also got several questions related to the devicenow agreement that we announced yesterday. We cannot unveil all of the details related to that contract, but there are questions related to a number of units Techstep software will be installed, turnover margin, et cetera. Let me just say we have very high ambitions about the strategic partnership agreement we signed yesterday with devicenow. They are a global player serving global customers represented in 190 countries around the globe, and their existing customers have an average user base of tens of thousand users. Now we are in a very strong position to enter the market together with devicenow and acquire new customers together. Our Lifecycle Portal will be devicenow's front end to these new customers globally, including end-to-end lifecycle management and event handling of the devices throughout the whole lifecycle and the e-commerce solution to actually procure those devices. So it's embedded into the business model of devicenow. And when devicenow will be successful in the global market, Techstep will also be a part of that.

There are questions related to the revenue per user per month on a contract like this. That's confidential information in the agreement. But again, this is also a result of kind of as Ellen said, remaining the same 2025 ambition as we announced a year back. So the reason why we can continue with that hairy ambition for 2025 is that we see great momentum in the market. And with strategic partnerships like devicenow. And as also said, we are working on similar partnerships with other both MNOs and complementary partners as well.

We also got a question, can we expect revenues from lifecycle sales to devicenow already in 2024?

And the short answer to that is, yes, we have strong expectations that we will start capitalizing on these customers together with devicenow already in 2024. Contract signed yesterday, and we are already working on large global customers together with devicenow and also some of their existing customers with demands within better asset control and lifecycle handling of their devices. So it's both to acquire new customers but also to see how to migrate over time their existing customers.

I think we tried to cover most of the questions posted. If there are no new questions as we can see in the chat, we will then conclude today's session. And again, thank you for your attention. Looking forward to see you presenting our Q1 numbers in a few months. Thank you.