Techstep ASA

OSE:TECH

Earnings Call Transcript

[Borge Astrup, executive]

Hi all, and welcome to our presentation of Techstep's Financial Results for the First Quarter of 2022. 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. In addition, we will update you on our product portfolio and show you how our customers benefit from using our platform as well as we'll provide more information on the latest acquisition of the cybersecurity firm, Crypho.

Techstep's transformation journey is progressing. And while the quarterly results is not where we want them to be, I'm happy to see that the underlying factors are pointing in the right direction. As we are transforming the company from one-off transactional sales to recurring revenues, we are focusing on delivering high customer value every day through our services and products which, in turn, results in a mutual recurring commitment between our customers and Techstep.

Focusing on the underlying factors is a key success criteria in building a recurring business. The underlying factors gives us clear indication of how our performance and financial results will be going forward. Delivering recurring revenue value for our customers will offer operational predictability for them as well as financial predictability for Techstep and our other stakeholders.

Two of the key underlying factors for us are sales bookings and hardware volume. These are clear indications from the market if our product portfolio has a good market rate or not. We see a continued increased commercial momentum with the closing contracts of total value of NOK 11 million in annualized recurring revenue and 17 new Managed Mobility Service contracts with 9,500 managed devices in Q1 2022 versus 8 contracts and 3,200 devices in Q1 2021.

When customers buy our software, we see a positive tag along effect on the hardware. During Q1 2022, we have increased the volume of mobile devices sold to our customers, both in the traditional transactional way and as a service, with 20% compared to last year. When the sale is closed, we start the implementation process for the services. However, the pace of implementation were not where we wanted to be in Q1. We have picked up the speed in Q2, but the slow pace in Q1 is affecting the results. The length of the implementation period varies due to the customer complexity and the different product portfolio. Our focus going forward is to improve the implementation process to deliver the promised value to our customers faster and to see the sales booking growth to be reflected in our gross profit.

Our annualized recurring revenue in the first quarter increased to NOK 270 million. This includes own software, advisory services and Hardware-as-a-Service. Growth in recurring revenue will continue to be our key focus moving forward. The gross profit last 12 months is steady at NOK 459 million as well as adjusted EBITDA of NOK 70 million. We are in ongoing restructuring and transformation where we are building a wave of recurring revenue in the coming years. But short term, it's impacting our operating results.

Techstep is all about mobile technology and to deliver smarter mobile technology to our customers. And since after the summer, we have streamlined our organization, started standardizing our product offering and divested the voice and contact center business, all to ensure that we can execute accordingly. To allow that to happen, we have 3 product portfolios: SmartWorks, SmartDevice and SmartControl, where we serve public organizations, enterprise businesses and service industries such as transport and logistics, health care and retail, to name a few.

With SmartWorks, we help transform customers' business with robust mobile solution. We empower frontline workers and increase their efficiency and quality. SmartDevice helps our customers manage the full life cycle of their mobile devices. And SmartControl helps our customers to ensure the security and management of their devices as well as they have a unified and effective distribution of the company's apps.

Our market is expected to grow annually 24% from 2022 to 2027, and the expected growth rate for 2022 is 20%. Important focus areas are data privacy, security and sustainability with careful life cycle handling of devices. We're also glad to see that the expectations for cloud migration from on-prem is increasing as well. This fits perfectly with our product portfolio of managed mobility services divided into SmartControl, SmartWorks and SmartDevice, meaning that with our position and product portfolio, the future looks bright.

Since 2019, we have 174 contracts with a total estimated potential value of NOK 352 million in revenue, this to be delivered over the next years. We continue to increase the momentum, signing 17 new contracts in Q1 2022. As we transform our business model from transactional to recurring business, this will affect our gross profit growth short term while we build up a more foreseeable recurring revenue stream. With the 17 new Managed Mobility Service contracts signed in Q1, 9,500 managed devices were added to our existing portfolio and building annual recurring revenue for organizations both in the private and the public sectors. The majority of these contracts are SmartDevice, and the estimated potential contract value is NOK 55 million. We are proud and thankful for the confidence shown to us by both new and existing customers and thank them for their continued business with us.

Today, I will focus on the SmartWorks solution, illustrating a customer case to show how we help them work not only more efficient but also with higher quality, and this results in a better experience for their customers. Last year, Techstep signed a SmartWorks agreement with Pågen, one of the biggest bakeries in Sweden, to develop and support a mobile solution for their field sales and deliveries. Now the SmartWorks solution is deployed with Pågen's 450 sales representative working out in the field. The solution will improve logistics, inventory management and order entries and it's integrated with their ERP system, resulting in streamlining the work of Pågen's sales representative and ultimately enhancing the customer experience.

Techstep's delivery to Pågen has included the development of a front-end mobile app. This app is deployed on handheld devices that Pågen sales representatives bring with them when visiting stores. Once in store, the sales representative checks the stock situation for Pågen products and refill the shelves as necessary. Then the app is used to communicate back to H2 on how much is sold and how much new product that has been added. The app also allows the representative to reallocate stock from one store to the next, should there be more or less need to refill the stock.

All is instantly communicated back to Pågen's ERP, which then allows for consolidation of all incoming data, meaning that the production and next delivery can be planned accurately. The sales representative has completed important sales administration task already in store and can swiftly move on to the next, comfortably knowing that the paperwork is taken care of, the goods are on the shelves and the customer is happy. Pågen relies on Techstep for managing the handheld devices, its operating system and the app remotely.

Techstep is also handling the device life cycle management for the handheld devices, ensuring swift repairs and returns if it should break as well as providing secure environmental-friendly returns of the devices, all part of Techstep's complete as-a-service model. We are proud to be working with Pågen and its team of dedicated sales representative helping to bring good experiences to their customers.

Last week, we closed the acquisition of Crypho, adding additional software capabilities to our platform. Crypho is an award-winning, end-to-end encrypted mobile messaging and information-sharing software for businesses, just like WhatsApp is for consumers. Crypho makes it GDPR-compliant, and the data is stored in data centers in Norway. The software is easy to use and administer, and it's highly scalable for any size organization.

Verizon yearly published a mobile security index report, where 60% of the respondents say that mobile devices are the company's biggest security risk. Existing customers of Techstep have requested product functionalities similar to what Crypho offers, and the functionality will drive demand towards our SmartControl and SmartWorks portfolio. The acquisition also supports the sustainability focus in Techstep, where the Crypho solution can help customers reducing their carbon footprint from data storage through file-sharing through Crypho instead of distributing via e-mails.

We will also be able to strengthen awareness of the Techstep brand when we launch this in the marketplace as this service will be used by customers daily. We will further enhance the Crypho platform and utilize our commercial organization to bring the software out to customers in all markets. We believe that we have an opportunity to increase the software ARR on existing Techstep software users with the potential as much as 30% by adding Crypho to the existing software solution.

In Q1, we launched a new Techstep brand. With the rebranding, our goal is to simplify and capture our brand story in a clear, purposeful and meaningful way. It express who we are and why we do what we do. This new identity will set us apart from our competitors and present memorable impression, enabling us to increase the company value, set high expectations and secure new customers easier. The rebranding of Techstep would not deliver a full impact without a new website. Our new website is built to amplify the Techstep story, create a seamless user experience, maximize lead generation and has a solid foundation that makes it scalable for our continuous growth. Please visit techstep.io to experience this yourself.

Our straightforward focus is to simplify in order to standardize to be able to scale Techstep. Mobile technology can make employees happier and more productive by freeing them up to work in smarter ways. Supporting our customers to make their world a little bit smarter, happier and sustainable is how we will know we're getting things right. Traditional boundaries of space, place and legacy technologies are still holding businesses back. Our mobile technology and software expertise enables customers to utilize the potential of mobile technology moving forward. We are building the leading mobile technology powerhouse in Europe, because the future of work is mobile and we can help you get there.

I will now hand over to our CFO, Anita, who will take you through more details on our financial results for the quarter.

[Anita Huun, executive]

Thank you, Borge. In the first quarter of 2022, revenue was NOK 346 million compared to NOK 305 million in the same quarter previous year. This corresponds to a revenue growth of 13% year-over-year or 15% organically adjusted for the divestment of the voice and contact center business. The strong growth was driven mainly by our hardware portfolio with solid contribution from hardware transactional and hardware-as-a-service. Growth from our software portfolio continues to increase and was up 25% year-over-year in the quarter.

Our ARR on own software is now close to NOK 100 million or 50% above the level at Q1 2021, as we have strategically invested in acquisitions and added new users to the portfolio. The sequential increase in ARR is only 2%. And as Borge touched upon earlier, this is due to delays in onboarding of recent wins, both from Q4 and Q1. We base our ARR on contracts where we have started to build the customers. And as such, our NOK 11 million in wins this quarter are not included in this number.

Gross profit in Q1 was relatively flat year-over-year, but slightly up on a pro forma basis, 2%. The gross margin was down 4 percentage points to 33%, which is due to both customer and product mix this quarter with a higher mix of sales coming from hardware this quarter versus last year. Corresponding to an overall flat gross profit, the adjusted EBITDA was also in line with last year as we continue to make investments to support the transformation and transition towards a recurring revenue-driven model.

Net interest-bearing debt increased in Q1 to NOK 189 million as we continue to invest in the transformation. This is mainly attributed to the acquisition of the remaining 20% shares of Techstep Finance, an increase in working capital, and Q1 was a CapEx-intensive quarter as large IT projects were finalized this quarter. Normalized CapEx per quarter will be lower and, as such, the level will come down as we move forward into the year.

Techstep's focus is to build a recurring revenue base with better predictabilities for future financial results and increased value and visibility for our customers as they adopt more of our services and products. However, this transition towards a stickier and higher quality recurring revenue model does impact revenues and profit short term. 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 towards a recurring revenue company.

In Q1, we saw a 2% sequential growth in our ARR portfolio, bringing the total value of our recurring revenue portfolio to NOK 270 million. NOK 98 million (sic) [ NOK 99 million ] of these come from our own IP, which have a gross margin close to 90%. We had some negative FX impact on software related to Famoc in Poland and Optidev in Sweden, while we saw a very strong sequential growth in Norway, close to 10%, from our SmartDevice software platform. As Borge also mentioned, momentum is picking up. And if we include our wins from Q1, our ARR from own software would be well above NOK 110 million. Implementation is lagging a bit behind and is our key focus, together with adding new customers to our services, which will grow our ARR numbers nicely over time.

The gross profit for the last 12 months was NOK 459 million, corresponding to a flat development in Q1 year-over-year. In Q1, we saw an increase in both Hardware-as-a-Service and from our own software, but we were negatively impacted from a decline in hardware one-off where our margins were down year-over-year as the customer mix was skewed towards larger customers where the margin is a bit lower. Focus is to deliver and implement our recent MMS wins to grow our gross profits going forward. With our current visibility on backlog with the recent wins and with momentum building on our software side, the visibility is improving day by day.

Techstep divested the voice and contact center business in Q4 '21. It was closed this quarter and acquired Famoc in Q2 '21. And as such, we would like to give visibility on our pro forma figures, including these 2 changes. The voice and contact center business was seen as a noncore asset, but it did include NOK 22 million in gross profit in 2021. On a pro forma basis, Techstep's Q1 gross profit increased slightly, 2%, while the conversion from gross profit to EBITDA increased from 7% in Q1 '21 to 12% this quarter, driven by lower OpEx and payroll versus Q1 last 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. In the quarter, we maintained a solid balance sheet and our equity ratio stood at 44%. Intangible assets are mainly goodwill of NOK 591 million and customer relations and technology of NOK 184 million. Tangible assets of NOK 180 million mainly include devices delivered to customers through our Hardware-as-a-Service portfolio, NOK 152 million. The devices are owned by external funders, not Techstep, but we capitalize them in our own balance sheet. Long-term interest-bearing debt includes acquisition loans of NOK 65 million and seller's credit of NOK 33 million.

The cash flow from operations was minus NOK 6 million this quarter, and it includes a negative working capital effect of NOK 18 million for the quarter. This is partly driven by a slight inventory build. But Q1 is also a quarter where we have quite a few prepayments, typically on licenses and other IT-related OpEx. Q1 was, as expected, a CapEx-intensive quarter as we finalize a few large IT projects, among them are a rollout of the new ERP. NOK 19 million of CapEx in Q1 was related to software development and IT investments, but only NOK 4 million of this was related to our own software developers. This is, as such, not the level we will be at going forward, and we would expect lower CapEx levels in the coming quarters. As announced, we acquired the remaining 20% of Techstep Finance in Q1, which also resulted in a net outflow of NOK 9 million this quarter. At the end of the quarter, our cash balance and cash equivalents stood at NOK 39 million.

Borge will now take you through our outlook and summary section.

[Borge Astrup, executive]

Thank you, Anita. We have a continued focus on increasing the commercial momentum and won 17 new managed mobility service contracts in the first quarter. And with this, we have decided to increase the medium-term 12- to 18-month ambitions. As mentioned, we have restructured and streamlined the organization, and we can already see positive effects and with increased growth in underlying factors and good progress in the transformation of Techstep. This makes us confident that we will be able to see this in the financial results moving forward.

So let me summarize Q1. Techstep's transformation journey is progressing with the underlying factors pointing in the right direction, where implementation will be a key focus for us moving forward. The increased commercial momentum continues with closing contracts of a total of NOK 11 million in annualized recurring revenue and 17 new Managed Mobility Service contracts with 9,500 managed devices in Q1 versus 8 contracts and 3,200 devices in Q1 2021. In addition, the focus on increased commercial momentum we will continue with our buy-and-build strategy to increase our recurring revenue and software offering to be able to deliver increased value to our customers and other stakeholders. The rebranding will reinforce our position as a leading European enabler for smarter mobile technology.

And with that, we conclude today's presentation. Please join Anita and myself at a Q&A session today at 10:00. You can always submit your questions to us to the Investor Relations e-mail address. We hope you will join us at 10:00.