Techstep ASA

OSE:TECH

Earnings Call Transcript

[Morten Meier, executive]

Good morning, everyone, and welcome to our Q4 presentation followed by a Q&A session. We're already well into the new year, and we've been looking forward to share the last quarter results with you and how we are positively developing and increasing our profitability across markets and revenue streams. At the end of the presentation, we will open up for questions and you can, at any time during the presentation, post questions in the chat.

My name is Morten Meier, and I have had the great opportunity and pleasure to lead Techstep in the last 12 months. I'm here with our CFO, Ellen Solum, who had her second anniversary this month and we are both very satisfied with the progress and improvements we see every day and the last quarters, and which we also will share with you today for Q4.

Let me first start with some reflections on my first year and some key achievements. Since I took on this role in February '24, we've been looking into 3 key aspects of our business: which areas are most profitable today; where do we see the potential for growth going forward; and how to increase productivity in every part of our business.

This has resulted in some changes and tuning to our strategic direction, our go-to-market model and our key priorities, which I shared with you last quarter. In addition, we defined 3 strategic pillars to use as our guiding principles to build and shape the organizational culture we're aiming for. These 3 are very simple, but still important pillars to align around and ensure we build our future on.

First, our people. We have the most certified and knowledgeable people in the industry, and we are very proud of the individual and collective competency we represent. This is our most valuable asset and a unique differentiator in the market, both to build the software and services we need, but also become more relevant to all our customers and partners.

Secondly, customer first is simpler said than done. We need to go to work every day with a mindset of how we can increase value for our customers and partners. We have great software, devices and services, but we need to understand our customers better and their pain points and to help them increase their productivity and profitability in their markets.

Thirdly, optimize and accelerate. We need to fine-tune our organization and offerings to prepare and rig for the exponential growth we are aiming for. Our ambition is to become more relevant for our customers and partners and be their preferred partner to deliver, manage and secure their mobile estate and accelerate their ESG initiatives.

We have done several changes to the organization in the last quarters, and we're operating more streamlined, integrated and optimized than before, both from a process, tools and culture perspective. This work continues as we always strive to improve and increase our speed and agility.

As I pointed out when joining Techstep, I strongly believe we're in a great position to create history and become the leading mobile and circular tech company in Europe, and I'm more confident than ever that we are on the right track.

As a mobile and circular tech enabler and accelerator, we are serving private enterprises and public sector across the Nordics with our direct sales model, and the European and global market through our indirect partner model. By combining our Own Software, world-class expertise and being one of the most certified mobile device players in Europe, we help our customers and partners create more value from their mobile estate and for all kinds of users.

With our direct business model, we combine our Own Software and unique expertise with the broad range of different hardware and software solutions we represent to better equip our customers with the best mobile tools to optimize their work.

In the indirect partner model, we are empowering partners to deliver and integrate our highly scalable solutions and services into their core business models or as value-added services and new capabilities to serve their customers in a better and more efficient way.

The turnaround of Techstep continues with increased focus on transitioning our business model from transactional and point solutions to recurring and end-to-end services and becoming a strategic partner helping customers transform and drive innovation with secure and sustainable mobile technology solutions.

Let me take you through some of the many highlights from the fourth quarter. The profitability keeps improving and accelerating. And again, we have growth in both revenue and net gross profit year-over-year. Recurring revenue annualized is up 6% year-over-year. And going into the new year, our recurring revenue contracts are all-time high, NOK 19 million higher than 12 months ago. And our Own Software is growing the fastest with double-digit growth, again, 11% in recurring revenue.

EBITA adjusted is doubled in 12 months and 10x the result going 2 years back. We also continued to generate positive cash flow from operations last quarter with NOK 26 million.

Another strong commercial quarter with great momentum across all business areas as well as our defined markets with several new signings and renewed contracts with key customers and partners. We have won and onboarded several new trade broker members, expanded service delivery to existing members and our large contract with ISS and SL in Sweden was delivered on time.

We continue to deliver strong growth in the last months in Poland across our mobile device management solutions, and we're live and airborne with devicenow as a Device-as-a-Service partner globally. Additionally, the announced partnership with ICE went live with its first phase during December.

We finished strong with hardware and software growth in all markets and across all categories and with all-time high revenues in Sweden during Q4. I'll come back to some more updates at the end of the presentation.

But first, I'll 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 will take you through the financials for the fourth quarter and sum up the year.

Like Morten said, we have seen a significant uptick in our revenues and profits towards the end of the year with a record high EBITA adjusted in the fourth quarter, finishing off a year that began with the challenging market in Sweden and generally high competition with pressure on margins. At the same time, the company is undergoing a comprehensive restructuring, both in terms of strategy and commercial focus, as well as internally within the organization, involving processes, systems and people. Through constant cost focus with a long-term perspective, we have and will continue to optimize to ensure that we are rigged for extensive growth.

Morten mentioned that I celebrated 2 years anniversary recently, and I can honestly say that in these 2 years, I have seen an enormous change and progression in the company on many levels. I am confident that with the new agreements, the new market strategy, coupled with the efforts that we are putting into restructuring the organization, we are well positioned to successfully grow over the next coming years.

So, for Q4 this year, we have a 4% growth in total revenues, where almost half of the nominal growth is due to revenues from Own Software, equaling 24% year-over-year. The growth is in large driven by partner sales in Europe for our mobile device management software product.

The previously announced agreements with devicenow and ICE, which are in full operation at the end of the year are included with negligible revenue amounts as the onboarding of customers and devices started late in the year.

It is also positive to see a 3% growth in device revenues, the second quarter -- growth quarter in a row after several quarters with a declining trend.

Advisory & Services revenues encompass both transactional and recurring revenues, and it is the transactional revenues from consulting and aftermarket where we have seen a dip in activity in the last quarter, resulting in a reduction in revenues of 2% year-over-year. The recurring revenues, which is the managed services within Advisory & Services, grew year-over-year.

Net gross profit grew by 5% from last year to NOK 95 million, driven by the substantial growth in Own Software. The margin on transactional device sales was stable year-over-year, but a larger share of Device-as-a-Service and profits from end-of-lease contracts drove the total margin on device revenues to 15.4%, up 0.5 percentage point year-over-year.

With the effects from the declining transactional consulting revenues, total net gross profit margin ended up at 30% at the same level as last year. EBITA adjusted in the period was NOK 21.3 million, up NOK 11 million from the fourth quarter last year, both due to the growth in net gross profits, but also due to a 7% decrease in operating costs in the quarter compared to last year.

Net loss in the period was NOK 4.5 million, but consists entirely of noncash items as we have total amortization of intangible assets of NOK 19 million in the quarter. Included in this NOK 19 million is an impairment of NOK 3.7 million for retired intangible assets.

As for the market performance, both Norway, Sweden and Poland have shown an underlying growth. In Norway, the recognized revenue is stable compared to last year at NOK 180 million, where device revenues have decreased with 1%. But considering the total sales, including devices sold as-a-service in the period, where the revenues will be distributed over the leasing period, the total device sales in Norway increased with 2% compared to Q4 last year. The net gross profit increased with 8% year-over-year due to profits from Device-as-a-Service.

Sweden experienced a 5% growth in total revenues in Q4 to NOK 121 million, which primarily is driven by increased device sales, offset by a decline in consulting and aftermarket revenues. The increased device volumes are driven by larger bulk deliveries and frame agreements and margins will therefore decline in total with 3 percentage points year-over-year.

The Polish-European market is continuing the exceptional growth rate from Q3 and revenues increased with 57% from Q4 last year, primarily from upselling Own Software to existing customers with a profit margin just below 80%.

The net gross profit development over the last years has been steadily declining, as a result of both the overall decline in the global market for devices as well as increased competition and price pressure. Last quarter was the first time in years where we saw a positive year-over-year development, and this has continued into Q4.

In Q3, we had a 4% growth year-over-year, while we, in the fourth quarter, see 5% growth. Our revenue streams vary significantly in terms of recurring and transactional income. Device revenues predominantly consist of transactional income and recurring revenues from Device-as-a-Service is about 20% to 30% of the total device revenues. As such, the net gross profit will vary significantly from quarter-to-quarter, strongly influenced by seasonal fluctuations.

The Advisory & Services revenues consist both of transactional and recurring revenues, where the recurring revenues are the managed services we offer on contracts over 12 months minimum. Transactional revenues are mostly consulting fees as well as third-party software revenues, both of which will vary with seasons, timing of contract implementations and market factors. Recurring revenues accounts for about 40% to 60% of the net gross profits.

Our Own Software is mainly sold on recurring revenue contracts and the net gross profit over time is more stable. In Q4, the very positive growth in Poland contributed to a substantial 23% growth in the net gross profit, record high in Techstep's history.

When we report recurring revenues, we look forward as opposed to the previous slide where we show the historical growth, including transactional profits. Recurring revenue is measured as the last month's contractually invoiced revenues times 12. So entering 2025, we have in total NOK 331 million in contractual annual recurring revenues, which is 6% or NOK 19 million higher than when we entered 2024. And again, it is the Own Software revenues that are increasing the most with 11% growth.

As we mentioned, we believe that the partnership agreements we have entered into with ICE, devicenow and now recently, the European IT vendor will generate exponential growth in the recurring revenues in the next years. But as we only include these revenues as they are invoiced, the reported recurring revenue at the end of '24 includes insignificant amounts generated from these agreements as we have just recently started onboarding of customers. How long a time this ramp-up will take is highly uncertain and difficult to predict as we do not ourselves have control over the end customers.

To show the scalability of our current business model, we measure the conversion from net gross profit to EBITA adjusted. Throughout 2023, the cost optimization efforts increased LTM conversion rate from minus 6% entering '23 to 8% leaving '23. In '24, we have stabilized the cost base, optimizing systems and processes to rig for growth. And during the year, we have increased the EBITA adjusted conversion to 11%.

In the fourth quarter isolated, the conversion rate was 23%, generating the highest EBITA adjusted in Techstep history. Further growth in the business will largely convert directly to EBITA, but we should expect slight additional increase in the cost base going forward due to inflation and investments.

In the fourth quarter, we had a positive cash flow from operations of NOK 26 million after investments in Device-as-a-Service, reduced from NOK 50 million in Q4 last year, and the difference is driven primarily by the change in working capital.

In 2024, we had an exceptionally positive working capital development driven by high sales in the last months of the year. In addition, we have experienced more challenging payment terms with our large frame agreements the last year, weakening the working capital.

CapEx in the quarter was NOK 9.5 million, about NOK 2 million more than usual quarterly run rate as we have had project costs and investments for both implementing the new partner agreements as well as developing our own back-office IT landscape. Normally, the CapEx should be around NOK 5 million to NOK 7 million per quarter, but as we move into several new partnership agreements, we might see some quarters with higher investments in the coming years.

Net cash flow from financing activities was minus NOK 1.9 million in Q4. We had a capital increase in October, raising net NOK 29 million in funds, and we have repaid long-term loans and short-term credit in the amount of NOK 24 million as well as lease and interest payments.

Net cash flow in the quarter was NOK 15 million, and cash at the end of the quarter was NOK 31 million. In addition, we have undrawn credit facilities available in the amount of NOK 45 million.

At the end of the third quarter, our equity ratio was 49%, up from 45% at the end of '23 and a total balance of about NOK 1.2 billion. At year-end, we had noncurrent assets not related to Device-as-a-Service of NOK 805 million, whereof NOK 632 million in goodwill, NOK 16 million in deferred tax assets and NOK 125 million in customer relations and technology.

Of these NOK 125 million, about NOK 28 million is related to acquired intangible assets from M&As, which will be completely amortized during first half year of '26. In '24, total amortization of customer relations and technology was NOK 68 million, whereof NOK 28 million was amortization of acquired assets.

Total borrowings was NOK 139 million and has been repaid with NOK 39 million during the year, where the short-term share has decreased with NOK 24 million. Our net interest-bearing debt at the end of '24 was NOK 109 million.

Liabilities related to Device-as-a-Service was NOK 189 million at the end of the year. This consists of deferred revenues with future noncash revenue effects and NOK 36 million in buyback obligations, whereof NOK 13 million is long-term. These future cash effects of the buyback obligation will, of course, be more than offset by future cash inflows when the assets are sold in the secondhand market.

Now, Marten will take you through business update and the outlook.

[Morten Meier, executive]

Thank you, Ellen. What a great financial update with a lot of positive development. First, let's have a quick look at the market we operate. Managing large amount of devices across multiple locations while ensuring security and user experience is no easy task. It requires expertise, processes and significant resource investments.

As organizations increasingly seek to streamline operations, reduce cost and enhance sustainability, many are turning to end-to-end device lifecycle management solutions. These solutions allow IT to shift their focus from device administration to actively driving business innovation and digital transformation. And that's where our unique and holistic value proposition fits perfectly to serve those needs and challenges.

We focus on automation, lowering TCO, improving security and circular tech for enterprise customers, IT vendors and operators. Thanks to our own developed device lifecycle management and mobile device management solutions, in combination with best-of-breed third-party vendors. We offer a comprehensive and streamlined lifecycle management of your devices as an end-to-end solution from procurement to recycling.

Procure allows for flexible device acquisitions through as-a-service or direct purchase integrated with our Lifecycle Management portal.

Deploy ensures zero-touch enrollment for fast and seamless onboarding, delivering devices directly to users with minimal involvement.

Control gives asset control and visibility to track and manage devices with real-time insights.

Proactive endpoint management ensures 24/7 workforce productivity, reducing downtime and security vulnerabilities.

Automated user-driven workflows simplifies device returns and replacements and increases efficiency.

Sustainable practices maximize residual value, extend device lifecycles and support responsible recycling. This streamlines IT operations, reduces costs and enhances security and sustainability.

And we do this for all type of users and work scenarios. The modern workforce is increasingly mobile, spanning both office-based knowledge workers and frontline workers in industries like retail, logistics, manufacturing, healthcare and others. Managing mobility for these user groups requires different approaches, tools and levels of support. Hybrid and office-based professionals need seamless, automated and self-service mobility solutions. Our approach ensures cost efficiency, sustainability and user satisfaction, keeping employees productive while on the move.

Field and frontline employees need reliable, rugged and always available mobile technology to perform tasks efficiently. Our fully managed mobility solutions are tailored to meet organizational needs and optimize workforce productivity at the edge of the business. Our goal is to simplify mobility management, reduce cost and enhance employee experience across all work scenarios.

Before we round off, let me share a positive milestone we announced this week. We are pleased to share that we have entered a letter of intent with a leading IT vendor, marking a strategic entry into Ireland and UK markets for Techstep. With this partnership, the vendor will adopt our Lifecycle platform as their standard solution for Device-as-a-Service offerings, enhancing operational efficiency and customer experiences. Both companies are committed to going live with the Lifecycle platform this year with customers onboarded in the fourth quarter. The commercial model includes a license fee per device per month.

To sum up, the fourth quarter showed strong development with improving profitability. And as we also achieved in Q3, we are growing both revenue and net gross profit.

Moving into the new year, recurring revenues is record high and market momentum is strong. We have several new signings and the strategic agreements are progressing well, but we also experienced that the time and workforce are scarce resources, so realizing and capitalizing will take some more time. These kinds of delays are both a result of our resource situation after several rounds with cost optimization, but also the complexity, integrations and dependencies at our customers and partners, as well as project creeps, which in the end are positive with higher potential and more stickiness when delivered.

The large managed health project with Sykehuspartner and Health Region Southeast is now into extra time. The project and different pilots are running at full steam ahead, and we have a joint ambition with Sykehuspartner to get across the finish line during this quarter. The backlog is building up and the solution and service descriptions are being finalized as soon as possible.

We are better rigged and ready for scaling than ever before. And we have been working on 3-year growth ambitions across our business areas and sales channels, and both the pipeline and potential are very promising. The expectation is a continued acceleration throughout 2025, but also a further acceleration and continuation into 2026 and beyond. These type of partnership and long-term managed services contracts will grow and drive exponential profitability in years to come.

Looking at our updated guidance for 2025, we expect strong growth in both recurring revenue and net gross profit, both growing double digit and with an acceleration through the year. As we're still in a transition moving from transactional to as-a-service and with large transformational deals like product partnerships and complete mobile outsourcing, the impact to our guiding could be quite significant, as you can read in the ranges we have provided.

We stand by our ambition to become the leading mobile and circular tech company in Europe with steady strategy and execution going forward and continue to accelerate our profitability. We aim to provide you with further guidance and an outlook into 2026 in our Q2 presentation in August. That concludes today's presentation. Thank you for listening.

[Morten Meier, executive]

We will now move directly over to a Q&A session. So please stand by if you have any questions. We will see if there are any questions posted so far. [Operator Instructions]

[Ellen Solum, executive]

Okay. We've received a question here. It's in Norwegian, so I need to have a little bit of time translating while I do this.

Question is Techstep has down adjusted the ambitions for the next years. In Q4, you do further adjustments. So the question is, what is the cost of the company coming in such a situation? Can we expect that you will continue with adjusting down the outlook in '25 as well?

[Morten Meier, executive]

Okay. Thank you for the question. I think we tried to answer this during the final outlook slide. But we are fully aware of the kind of history of Techstep, and that's why we are kind of also resetting the expectations to the market. We do see great potential, and we do see that we are turning the company around, and we are increasing our profitability quarter-over-quarter. But as pointed out, we also know that many of these projects are very complex with a lot of dependencies and integrations.

And when we are talking about this kind of product partnerships like devicenow, ICE and now with the new IT vendor in the UK and Irish market, these are kind of ERP systems for these kind of IT vendors to support their Device-as-a-Service offerings. We know that those kind of projects are very complex. But at the same time, you are building the backbone of those kind of companies. So when you are in there, it's really sticky and you're in there for many, many years.

So it's important for us to deliver with quality and deliver on the expectations with these kind of partnerships to make sure we can grow with the partners into the future. But we have an updated outlook, which is strong and that we strongly believe in and that we are confident with. So we have absolutely no ambitions to adjust the guiding given for 2025, at least not in a negative direction.

[Ellen Solum, executive]

And there's one more question here. [ I ] mentioned that peak sales in Q4 was in the beginning, mid-quarter. How has the market developed in '25?

[Morten Meier, executive]

Yes, we will not say too much about Q1 or January. But for sure, we have a very strong pipeline. I also mentioned that the backlog is building up due to the partnership with Sykehuspartner and the needs for new clinical devices in many new hospitals in Norway. So we see a strong pipeline for Q1, but there are tough competition every day. We are fighting for every deal, every customer. We are having a lot of different activities going with our direct salesforce in Norway, Sweden, Denmark around device sales together with our main partners, Apple, Samsung, Zebra, Honeywell, et cetera.

So as said, I cannot tell you more about the January and Q1 development as of now. But pipeline is building, and we are positive about the -- and continued growth in Q1 and the next quarters. We are back on track with a growth as we also presented for both Q3 and Q4, and that's, of course, the ambition to continue growing also in the coming quarters.

[Ellen Solum, executive]

Okay. I think that was it with questions.

[Morten Meier, executive]

Then we will round off. Thank you again for listening and wish you all a great Friday.