Techstep ASA

OSE:TECH

Earnings Call Transcript

[Jens Haviken, Chief Executive Officer]

Good morning, and welcome to Techstep's Q2 Presentation 2020. Together with me, I have our CFO, Marius Drefvelin. My name is Jens Haviken, and we will walk you through the Q2 presentation. After we've done with the presentation, we will open up for questions and answers.Okay. So let's begin. The agenda for today is that we will go through the highlights for the quarter, take the operations, the financials and then do a short outlook. I would say that -- the first -- second quarter of 2020 has turned out quite differently than most of us have foreseen. And in mid-March, we experienced that -- a situation where no one has experienced before. So when you go through our highlights for the quarter, we are proud of what we have delivered. We had a significant operational progress in the period and delivered on several of the running projects according to plan. And we delivered a solid financial performance, with increase in gross profit and profitability. Onboarding customers on our managed mobility offering, Flow, is our high priority. And in the quarter, we signed 3 new Flow contracts valued at NOK 27 million.An important milestone was that we launched a new version of the Origo Business Cloud platform, which will enable partners to utilize the capabilities in the platform. Simultaneously, this allows for the rollout of Origo Business Cloud in Sweden. And as a consequence of the launch, we had a soft launch of Flow in Sweden at the end of the quarter and are now ready to start rolling out on a larger scale. This progress and the strengthened results come after several years of building Techstep organically and through M&A and after developing our customer offering based on our own IP and software. Looking ahead, we continue to focus on delivering on our growth strategy and ensure that we have our balance sheet and the financial flexibility to both pursue growth and maintain resilience in more uncertain times.So let's dig deeper into the second quarter with focus on operations. First and foremost, there is still an ongoing pandemic and, at Techstep, we put our people's wellbeing first. Our main priority has been to protect our employees and their families while delivering to our customers and partners. Since the beginning of the outbreak, we have taken several actions to handle the situation as best as we can. We comply with local recommendation across all our locations, and we have so far had no COVID-19 cases registered among our employees. Our vision is making work mobile, and the ongoing digitalization of society has been amplified and accelerated by governmental measures to ensure physical distancing. Remote work is the new norm for many workers, students and even children. People have by and large been introduced to new digital and mobile ways of working in a matter of months. We at Techstep believe these ways of working are here to stay and expect to grow further also after the crisis abates.Mobile solutions enable all of us to continue to perform and deliver on our work duties through the present situation. This ongoing transformation makes our vision and long-term strategy more relevant than ever. The telecom and IT services industry converged in what is defined by the industry analysts as the Managed Mobility Services. Managed Mobility Services, MMS in short, is the IT processes and management services required to buy, provision and support the devices in which are connected to a cellular or/and wireless connectivity. Example of such devices are smartphones, tablets and ruggedized field work units. In the Nordics, there are about 14 million employees and about 80% of them are in jobs that are deskless. It is a group of workers that the tech industry, to a great extent, have not addressed. The mobile technology makes it easier for organizations and enterprises to address these workers with digital solutions, ultimately helping them to do a better job. According to a report issued by Emergent, a Silicon Valley-based VC fund, there will be an increase in spend on technology for deskless workers of 31% across all industries. Something is about to happen. More than 50% of employees in Norway have their mobile subscriptions financed by their employer, which is 200,000 raise more than 10 years ago. We believe this will increase even more when IoT and 5G matures, and we believe this will contribute to drive growth in the MMS segment as well. It's an exciting segment to be in, even though MMS, as a concept, has been known for some years, it's still early days. The industry analysts predict strong growth for MMS in the coming years and forecasting a compound annual growth rate of more than 30%. We believe they're right. Techstep has been purpose-built to service the mobility needs of enterprises since our beginning in 2016. And our ambition is to become the leading Managed Mobility Services provider in the Nordics. We have spent the last 2 years building skills and scale by consolidating the market so we can deliver on our vision of making work mobile. Through a series of acquisitions, integrations and business development efforts, we have aligned behind one strategy, one brand and one mission. We are now at the stage with sharp focus on rollout our solutions to both new and existing customers. In the quarter, the next step was -- in the journey was the introduction of Origo and Flow to Sweden, an important milestone for us as mentioned before. In addition, we continue to pursue M&A opportunities to further strengthen and expand our offering and Nordic position. Techstep has evolved from a traditional wholesaler and distributor of basic telecommunication products to a fully Managed Mobility Services provider with a sharp focus on customer needs and value. Back in the day, the mobile phone was primarily used as a simple communication tool. Today, they are used to support sophisticated business processes and for many businesses are critical components in their operations. Some businesses have even moved to a mobile-first business model. These companies require more than a box mover, and this was the idea behind the initial offering put together which we call Mobility as a Service. A couple of years later, our solution has evolved to the next level. And in late 2019, we launched Flow. With Flow, we have packaged almost everything a company needs to do for managing their mobile devices and deliveries delivered as a managed service. In this landscape compared to where we came from, we put ourselves at the customer side of the table as we work independently of both operators and lenders. We take pride in bringing the best solution to the customer to ensure that they can harvest the benefits mobile technology provides, simple, secure and cost efficient. In this landscape, we realize our profits based on the value we deliver to the end customer.Flow, our packaging is powered by our Origo Business Cloud, which is the heart of the solution. Origo Business Cloud is a proprietary software-as-a-service solution that we have developed over the last several years, an asset which makes Techstep unique in the marketplace. Flow provides several clear benefits to our customers, including reduced administration, lower overall cost, data protection and sustainability benefits. Since launching at the end of 2019, we have signed contracts in Norwegian customers valued at NOK 48 million. And going forward, all our efforts are aligned behind bringing out our Flow solution to our solid customer base as well as new customer in both Norway and Sweden. In the second quarter, we signed 3 new Flow contracts, giving us a total of 16 since we started the last year. So far, we have primarily targeted and sold the solution in Norway. However, with the launch of the new version of the Origo Business Cloud in late June, we are ready to take the solution into Sweden. And in early Q3, we signed our first Flow contract in Sweden with Sveriges Radio. Sveriges Radio is our first Flow contract in Sweden and thus a very important agreement for us and a significant milestone. We strongly believe Flow can help Sveriges Radio and their employees to be more mobile in their work. With managed mobility solutions from Techstep, Sveriges Radio obtains a platform for faster, easier and secure mobile management, which can scale and deploy more apps and personalities.For the enterprise, this helps on saving time and improve control together with improved cost efficiency. For the users, then we get flexibility to choose the digital tools and a more convenient way to monitor and manage it. Techstep is also very happy to announce that Mesta has chosen our Flow solution. It includes Techstep Origo Business Cloud. With its predominantly mobile workforce, Mesta is a natural candidate for digital transformation to manage mobility services. The company employs more than 1,400 people spread all over Norway, majority of which work in the field or from small local facilities without local IT support.Mesta has started its mobility journey on its own by employing apps such as Handyman, Workplace, Elrapp and Office 365 to its field workers. They initiated discussion with Techstep to take this initiative to the next level by employing a secured platform on which to build the Managed Mobility Services required. This solutions -- solution allows Mesta to gain better overview and control over both its mobile hardware, its infrastructure and its cost and management of mobile subscriptions using the life -- including life cycle management and mobile expense management modules. Mesta's IT department help desk will be able to pass responsibilities and self-service to the employees by still retaining control. The employees will also benefit from being able to choose their preferred mobile device and to top up the cost of a more expensive model automatically through their monthly paycheck should they wish to do so with no added extra cost to Mesta.In short, Mesta has set itself ready for the future by employing the Flow solution from Techstep as a secure GDPR-compliant asset service platform, allowing them to transform its businesses digitally using Managed Mobility Services and applying more apps and functionalities in the near future. The 24-month agreement will commence from August this year and is expected to be worth approximately NOK 10.5 million in total. With that, I will hand over to our CFO, Marius, who will take us through the financials.

[Marius Drefvelin, Chief Financial Officer]

Thank you, Jens. Let's look at the figures in more detail. In terms of the key figures for the second quarter this year, revenue decreased from NOK 270 million to NOK 238 million, reflecting lower hardware volumes after COVID-19 broke out. More importantly, however, gross profit increased by 12% from NOK 69 million to NOK 78 million, mainly due to increased margins but also due to the inclusion of our leasing portfolio, which started this year. Consequently, EBITDA adjusted increased from NOK 6.4 million to NOK 17.2 million. This also includes lower costs compared to the same quarter last year. At the start of the second quarter, we announced the sale of our IT services division. The net proceeds of NOK 7.3 million is excluded from EBITDA adjusted. The net interest-bearing debt has been reduced from NOK 27 million in the first quarter to NOK 6.5 million in the second quarter, mainly due to improvement in working capital. Finally, we had CapEx of NOK 14 million, of which NOK 5 million was software and IT development costs, and the remaining NOK 9 million was leasing purchases. If you turn to the next page, we see that the gross profit for the last 12 months increased from NOK 285 million in the first quarter this year to NOK 293 million in the second quarter. If we look at the different parts of the gross profit, we see that despite reduced volumes of mobile devices, we were still able to improve margins and the gross profit contribution from hardware. Since we acquired the financing company providing the leasing part of the Flow offering, we have started to see leasing as a driver of gross profit from the first quarter this year and further increasing in the second quarter.Moreover, we saw an increased demand for our services, particularly within public health care. As expected, we continue to see reductions in operator commission, explaining the majority of the decrease within advisory and services. And as we have said before, this is expected to continue. Going forward, the gross profit split and development will increasingly reflect our focus on rolling out the Managed Mobility Services offering. This offering is a solution consisting of financed mobile devices, connectivity services and support, and most importantly, around software. This will boost the value for the customers by reducing administration costs and increasing the flexibility and security related to having the mobile workforce. Today, software drives a smaller part of the gross profit. However, we expect this to change as we expand our software-driven offering in the Nordics. Here, we see the development in EBITDA adjusted relative to gross profit on a 12-month rolling basis, increasing to 14% this quarter as profitability has improved. The increase in profitability was due to the following key drivers: one, an underlying increase in gross profit as we have already discussed; two, inclusion of the leasing portfolio; and three, a lower cost base.Here, we have the annual recurring revenue, which only includes our own software. One of our key focus areas and the core value driver is the Origo Business Cloud, and this is where we expect the growth going forward. Of the total ARR, Origo comprises approximately 25%, whereas the remaining 75% is the white label mobile expense management service. We had 9% growth in users from the first quarter to the second quarter this year, and we had 11% growth year-to-date.Late in the quarter, the platform for Origo Business Cloud was launched in Sweden. This enables us to roll out Flow to Swedish customers as Origo is the core offering of Flow. Also during the quarter, we continued to improve the supply chain in order to reduce the time from contract signing to customer sign-off. This will make us better prepared to onboard new customers faster.If we turn to the next page, we have the income statement. The effect of the leasing portfolio in the second quarter this year is an increase in gross profit of NOK 9.6 million and the corresponding increase in depreciation of NOK 8.9 million. We have taken a prudent approach on the residual value. It is still early days for the leasing portfolio, and we will adjust our assumptions, if necessary, when the contracts expire, starting next year. Other operational costs have been reduced from NOK 17.1 million to NOK 15.9 million, mainly due to reduced IT and marketing spend. Amortization of NOK 6.4 million mainly relates to previous acquisitions. This is noncash and will be completed by 2023. Here, we have the balance sheet. And we maintained the solid balance sheet with 59% equity ratio, up from 56% the previous quarter. Tangible assets of NOK 110 million consists of leased-out hardware of NOK 78 million and other leasing obligations such as premises and IT licenses of NOK 32 million. The current interest-bearing debt of NOK 43 million includes factoring debt of NOK 35 million and an asset-backed loan in Sweden of NOK 8 million. And this will be repaid in September when we have sold the office building in Karlstad in Sweden. Consequently, the net interest-bearing debt was NOK 6.5 million.On the next page, we have the aggregated cash flow statement. The cash flow from operations was NOK 25.8 million and is positively affected by working capital improvements, including a reduction in inventory in Sweden.Net investment activities were negative NOK 6.3 million, of which NOK 5 million was software and IT development costs and NOK 9 million was payment of leased-out hardware. The cash flow effect of these payments was partially offset by proceeds from the sale of the IT services division. Net cash flow from financing activities was negative NOK 3.4 million and relate to payments for premises and IT licenses. In summary, the net change in cash was an increase of NOK 16 million for the period. And with that, I will hand it back to Jens to conclude the presentation.

[Jens Haviken, Chief Executive Officer]

Thank you, Marius. So let's wrap up with an outlook for the rest of the year. So Techstep is positioning itself as the leading managing -- Managed Mobility Service provider in the Nordics. The company's strategy is to help enterprises harness the possibility of mobile technology across the workforce and to manage the complexity that naturally comes with providing hundreds of thousands of employees with new mobility solutions in a secure and cost-efficient manner. Going into the second half of 2020, Techstep continues its transformation towards becoming an IP- and software-led provider, delivering Managed Mobility Services. In line with this strategy, the evolved mobile-as-a-service concept named Flow was launched at the end of 2019 to existing and new customers in Norway and at the end of this quarter in Sweden. Going forward, Techstep will continue focusing on growing the sales of the company's value-creating higher-margin software and services. In addition to investments in the software platform and organizational capabilities like marketing and IT, Techstep will also continue to pursue M&A opportunities, which is an important component of our growth strategy. Looking further ahead, the relevance for mobility solutions within the workplace is higher than ever. The outbreak of COVID-19 has created attention towards workplace mobility and Techstep is confident that our solutions will be even more relevant once the crisis abates. Our priority remains. In order to ensure that our platform will handle the growth ahead, we will continue to improve the quality in our offerings and deliverables. We have launched a new version of Origo Business Cloud, which is a key component of Flow. And as stated earlier, from here it's all about onboarding new and existing customers to the platform. When it comes to financial priorities, our main focus is to ensure solidity and flexibility. We will continue to clarify and enhance our strategy with the intention of presenting our financial ambitions and targets as well as corresponding KPIs to make it easier for external stakeholders to understand Techstep as a company. We will present this work to our investors and stakeholders on our capital markets update December 1, 2020. So as a summary of today's presentation, we are currently in the midst of a pandemic which affects the way we live, work and move. Near term, the effects shows a mixed picture. The initial fall in demand is showing signs of recovery and the pipeline is improving. With the current outlook, all temporary reduced staff is set to return fully to work within September. We continue to keep our hands on the wheel to ensure that we have the necessary operational and financial flexibility to best adapt to any changes in the outlook.We are excited to have announced Flow in Sweden, and we will continue to develop our software offering and are continuously looking for M&A opportunities that strengthen our presence in the Nordics. We believe our value proposition is stronger than ever, and we are confident that we are at the right place at the right time.Okay. So thank you for listening in. Our next presentation will be November 6, and we will have the Capital Markets update first of December. And if you want to have more information, please take a look at our website. Thank you for listening in.