Techstep ASA (B1T0.F) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Q2 presentation followed by a Q&A session. I'm here with our CFO, Ellen, and we are ready to share our Q2 results today and talk about the progress, improvements, priorities and achievements from last quarter and the strong commercial momentum we see across markets. It's now more than 18 months since I joined Techstep as the CEO, and we continue to accelerate our profitability and transition into a more scalable and relevant business enabler for our customers and partners across Nordics and globally. We continue to develop and optimize our organization, as well as tuning our strategic direction with a clear focus on creating more value for our customers and partners by having the best mobile tech expertise and building the solutions and services the market needs. Our consistent positive performance underscores the strength of our offerings and the value they deliver to our clients. We remain dedicated to our mission of becoming Europe's leading mobile circular tech provider. Our team's dedication and competence, combined with the customer and partner-first mindset, positions us well to achieve our goal. As a mobile & circular tech provider, we are enabling organizations to increase their efficiency with more flexible, innovative and productive ways of working. We are highlighted by Gartner in their latest market guide as a recognized managed mobility provider, managing more than 3 million devices across Europe. We have 2 distinct business models, with a direct model serving our customers across the Nordics with the best mobile tech solutions to all kinds of mobile users and the indirect model, empowering partners to deliver and integrate our highly scalable solutions and services into their core business models. We are very proud of our existing customer base across the Nordics with strong foothold across private and public sectors in both Sweden and Norway, and we continue to build a strong ecosystem of partners regionally and internationally. We focus on transitioning our business models from transactional and point solutions to recurring and end-to-end services becoming a strategic partner, helping clients transform and drive innovation with secure and sustainable mobile tech solutions. Let me take you through some of the key achievements from the second quarter. Profitability is increasing as we are tuning the commercial model. Net gross profit margin was 36% in the second quarter, driven by increased share of owned software and advisory and services revenues, as well as increasing margins on devices. For the 11th consecutive quarter, we delivered positive EBITDA adjusted with solid 64% growth year-over-year. Recurring revenue grew 4% year-over-year. And again, our Own Software is growing the fastest at 6%, slightly below the double-digit growth we have seen in the previous quarters. We continued to generate positive cash flow from operations last quarter, with a NOK 24 million strong improvement year-over-year. Another solid commercial quarter with great momentum across business areas and our different markets with several new signings with key partners and customers. We are live and in operations with management of clinical devices within health region Southeast, and we prolonged the agreement with Sykehusinnkjøp until July 27. We also signed a strategic partner agreement with Telia Norge in June, opening new opportunities for creating higher value to our joint customers. We're also finalizing of the -- for newer partnership in Ireland and U.K. with a planned onboarding later this year. Our Techstep Essentials, Mobile Device Management Software received security certification from the Spanish National Security Agency, CCN, as the only certified MDM solution for public sector in Spain. At the end of June, we signed a new agreement with the Municipality of Oslo, for the third consecutive time, and we went live with this agreement on July 1. We also won 2 new municipalities in Sweden this summer with Borås and Norrköping as new customers. Finally, we secured strategic agreements with both Securitas and LKAB last quarter, taking greater responsibility to manage, secure and support their entire mobile estates. We continue to see strong commercial momentum both directly and indirectly. I'll come back to more details at the end of the presentation. But let me first hand over to Ellen, who will take you through our financial results for the quarter.

Thank you, and good morning. I will take you through financials, starting with the second quarter results. The total revenues in the second quarter was NOK 247 million, which was a decline of 7% year-over-year but with a 5% increase in net gross profit compared to second quarter last year. The decline in overall revenues is driven by a 12% reduction in revenues from devices, which is entirely due to the expiration of a low-margin public sector frame agreement in Norway. As device sales have been stable year-over-year if we exclude the effects from this one agreement. The revenues from our Own Software continue to grow, up 13% year-over-year in the second quarter, following 11% growth in the first quarter this year. The revenues from our Essentials MDM products sold from our Poland office drive the growth, but we also have positive effects on the life cycle revenues from the Sykehuspartner agreement, which went fully operational in the second quarter. Advisory and Services revenues are stable year-over-year, but there are changes in the product mix where transactional revenues from consulting have somewhat declined but were compensated with higher revenues from third-party software. The total net gross profit in the quarter was NOK 88 million, resulting in a margin of 36% of total revenues versus 32% last year. This change is driven by the continuously growing share of revenues from high-margin Own Software as well as increasing margins on device revenues, including revenues from Device-as-a-Service, in line with our strategy of moving towards value-adding higher-margin services and software. EBITDA adjusted in the quarter was NOK 4.3 million, constituting 64% growth from second quarter last year. In the second quarter, we had a modest increase in total operating costs compared to last year. This was despite a lower number of FTEs as salary adjustments, inflation and investments in business support systems offset the benefits of our ongoing cost optimization initiatives. These efficiency-driven investments are expected to generate significant savings in the years ahead, with tangible effects anticipated already in 2026. Net loss in the quarter was NOK 15 million, after amortization of intangible assets of NOK 17 million. Out of the total amortization, NOK 7.4 million is amortization of purchased technology and customer contracts from previous M&As. These assets will be nearly fully amortized this year, leaving only a few million for the early quarters of 2026, which will reduce quarterly amortization to about NOK 10 million to NOK 12 million next year. The net gross profit in the second quarter increased by 5% year-over-year to NOK 88 million, driven by 20% growth in profits from our Own Software which is primarily driven by the growth in the Essentials MDM software as well as the increasing contribution from the Sykehuspartner agreements in the quarter. Net gross profits from Advisory & Services declined with 9% year-over-year, but this is driven by the variability in transactional type of revenues, such as third-party software and consulting fees and not by recurring revenue contracts, as you will see later in the slide showing the development of recurring revenues. Third-party software sales usually generate lower margins and are largely transactional with volumes that can be expected to fluctuate over time. In this last quarter, the share of these revenues were higher than last year, while consulting revenues with high margins were respectively lower. As our focus is shifting towards contracts that strengthen customer relationships and support recurring revenue growth, this may temporarily affect our transactional sales but positions us for stronger long-term performance. Net gross profits from Devices increased by 10% in the quarter, driven both by improved margins on transactional sales and by higher gains from end-of-life Device-as-a-Service contracts. Looking at the market development in the second quarter. The Norwegian market showed a decline of 14% in revenues. This is again due to the expiration of the large public frame agreement with low margins in Q4 last year. At the same time, the revenue growth deriving from the agreement with Sykehuspartner is contributing positively, resulting in only NOK 1 million or 3% decline in net gross profit. In Sweden, Denmark, there was an 8% revenue growth in the second quarter year-over-year, driven by 12% growth in Device revenues. Although there was also an increase in the margins on Devices, driven by high gains from Device-as-a-Service in the quarter, the net gross profit grew with 4%. And as a product mix within Advisory & Services changed in the quarter versus last year to a higher share of lower-margin products, as I mentioned in the previous slide. The Polish European market consists primarily of the Essentials Mobile Device Management software, [indiscernible] and is continuing the momentum from last year, with 20% growth in revenues and 36% growth in net gross profit. At the end of second quarter this year, we had a total of NOK 324 million in recurring revenues annualized. This is an increase of 4% year-over-year and with growth in all our revenue streams, in particular, on software contracts, where we see a growth of 6%. However, compared to the first quarter this year, we see a decline of 2%, this is caused by customer churn on some of our legacy IT systems and all the contracts for maintenance and services, a development not entirely unforeseen. There will naturally be changes in the customer base with some quarter-to-quarter volatility and churn in recurring revenue contracts as we shift our commercial strategy by refocusing our product offering and expanding the number of product partners. The strategic foundation for broadening our partner base is not only to increase overall revenue, but also to broaden the revenue base and reduce dependency on a few larger customers. Throughout this transition, we can expect some volatility as the changes take effect. Going forward, we have strong faith in the partner channel growth and the new opportunities Martin will present later, as well as the expansion of the Essentials Mobile Device Management software in Europe, expecting these to make a substantial contribution to accelerate growth in the coming years. The slight change in the Device-as-a-Service contract is caused by what we believe is a current trend, where we see customers extending the life of the Devices for up to 1 additional year. So when the Device-as-a-Service contracts expire, many now choose to extend the contract at lower prices or buy out the devices for extended use. This is a trend we have seen for a while, but we anticipate that this effect will level out over a few periods. At the end of the second quarter, the LTM net gross profit was NOK 350 million with LTM EBITA adjusted of NOK 42 million, a growth of 52% since last year. This also represents a conversion of 12% from net gross profit to EBITDA adjusted. At the end of the second quarter last year, this KPI was 8%, proving we are growing profitably despite the ongoing transition towards a business model focused on recurring revenues and at the same time, spending considerable efforts in organizational changes, streamlining operations and optimizing the cost base. Since the end of 2022, Techstep has continuously been driving cost-cutting programs, efforts that are continuing into 2025. But this year is also about investing to be able to gain further efficiencies and lower the future cost base. We are both investing in our business support systems as well as investigating the use of AI in development and operations. And in the current quarter, our total cost increased with 3% despite the effects of reduced personnel costs. The expectation is that year-over-year costs will increase slightly in the coming quarters until we start to see the benefits of these investments in 2026. Cash flow in the second quarter was very strong, with cash flow from operations improving by NOK 24 million year-over-year to NOK 54 million before Device-as-a-Service investments. After Devices-as-a-Services investments, cash flow from operations amounted to NOK 39 million compared to NOK 15 million in the same quarter last year. The improvement was largely driven by positive working capital effects, supported by a few significant contracts during the quarter as well as our continued strategic focus on liquidity and cash management, which is enhancing cash generation across the business. Cash spent on investments was NOK 8 million in the second quarter, up from NOK 7 million year-over-year and consists primarily of development costs for adjusting our portfolio to the partner agreements. We expect this level to continue as long as we add on additional partner agreements, although there are a large extent of reuse of developed functionality for each added agreement. Additionally, to be relevant, meet and be ahead of competition, we will naturally need to continuously invest to improve our offerings. Net cash flow spent on financing activities in the quarter was NOK 22 million and includes net repayment of long-term loans and short-term credit facilities of NOK 15 million. In addition to payment of interest and leasing of NOK 7 million. In the second quarter last year, net repayment of debt was NOK 4 million. Net cash flow in the quarter was NOK 10 million, resulting in a cash position at the end of the quarter of NOK 22 million. In addition, we had undrawn credit facilities available in the amount of NOK 35 million. Then over to our financial position at the end of the second quarter this year. We had total assets of NOK 1.1 billion, whereof NOK 959 million was noncurrent assets. Within noncurrent assets, goodwill was NOK 639 million. Internally generated assets was NOK 93 million and purchased assets through M&As were NOK 14 million. These purchase assets will be fully amortized in the beginning of next year. We had a total equity of NOK 548 million, equaling an equity ratio of 48%. Our total interest-bearing borrowings was NOK 142 million, consisting of NOK 122 million in long-term loans were up NOK 15 million will be repaid in the next 12 months and are classified as short term. The remaining short-term debt of NOK 20 million is draw down on the group RCF. The net interest-bearing debt was NOK 120 million, which is an improvement of NOK 31 million year-over-year, but slightly up with about NOK 12 million since the end of last year, as seasonality in our business drives higher cash generation in the second half of the year than in the first half. Items in our balance sheet related to Device-as-a-Service was NOK 162 million in assets, which are capitalized values of the devices leased out. And liabilities of NOK 156 million, representing prepaid revenues and buyback obligations. The trade and other liabilities of NOK 258 million consists of ordinary trade payables of NOK 145 million in addition to public duties payable, accrued expenses and prepaid revenues. Then Morten will take over the presentation for the business update and the outlook.

Thank you, Ellen. As mentioned before, we see an increased need and interest from both customers and partners to simplify and streamline operations to drive efficiency and increase value for all kind of mobile work scenarios. We offer an end-to-end device life cycle management solution, taking care of every step from flexible and policy-based procurement with automated deployment and enrollment through asset control, input management and security to repair, reuse, return and recycle services. These unique capabilities help reduce costs enhanced security and accelerate sustainability. And we can deliver everything as a service from the device itself, the software needed as well as the services and competency we represent. The product partner market channel is an important growth initiative for our highly scalable solutions such as Own Software and Managed Services. We experienced a growing interest in our device life cycle management platform, including endpoint management and security services, as IT service providers and operators are looking for more sustainable and cost-efficient ways to manage their customers' mobile estate. In April, we entered a new LOI with Telia Norge with the intention of adding our services and capabilities into their customer offerings. And in June, the strategic cooperation agreement was signed. This partnership represents access to new customer segments and expansion of existing customers to deliver and operate some of our highly scalable solutions and services, this partnership also strengthens and adds customer value to joint trade broker customers as both Telia Norge and TechStep are selected vendors within respective areas. In Q1, Techstep announced that it has entered a letter of intent with Fonua, a leading IT vendor with strong presence in Ireland and now entering the U.K. market. The current agreed time line indicates initial onboarding and rollout of services within Q4 2025 and an accelerated growth into 2026 and beyond. With this new partnership, Fonua will adopt TechStep's life cycle platform as their standup solution for device life cycle management, enhancing operational efficiency and customer experiences. The previously announced partner agreements with devicenow and ice are progressing well, and momentum is picking up. But in first half, we have seen slower pace than anticipated. The technical development of the partnership continues and the growth expectations are unchanged, although the time line is slightly shifted. Our fastest growing software category is the Techstep Essentials Mobile Device Management solution. This software enables organizations to monitor, manage and secure their employees' devices in an efficient way. Demand for MDM is driven by multiple factors, like the current geopolitical climate, the rising need to access and process company data on the move, the growing inclusion of field and front line workers equipped with mobile devices and tightening regulatory requirements. We are actively recruiting new partners in several new and strategically interesting market across Europe to strengthen the reach and local presence. Currently, the largest opportunities lie in Spain, Hungary and Poland with increased momentum in other countries as well. The current pipeline represents more devices than is currently operated. In Spain alone, the addressable market represents close to 1 million devices and Techstep has recently as the only MDM provider received security certification by CCM, the Spanish National Security Agency, a certification required to deliver to the Spanish public sector. In April, we announced that we have entered into an extensive agreement with LKAB, one of Sweden's most historically industrial companies. Under the agreement currently covering about 6,000 devices, we will deliver comprehensive managed mobility services consisting of software consultancy, proactive services and support, and with the majority delivered through our asset service model. In June, we signed an agreement with Securitas for another delivery of managed mobility. The contract entails that Techstep delivers software management and support services to operate their entire mobile estate. The foothold in the public sector in Sweden has further been strengthening through newly awarded agreements with Borås and Norrköping Municipalities. These 2 agreements cover the delivery of mobile devices, accessories and services with an estimated value of up to SEK 40 million a year and with respective 4 and 3 years agreements. We have also seen strong commercial momentum in Norway with key customers and strategic agreements taking a larger responsibility to deliver, manage and operate complex mobile environments. Equinor is a great example, a strong reference for managed mobility, covering their global mobile estate consisting of almost 40,000 devices where we delivered software management consulting at 24/7 support. This agreement went live on July 1. We have continued to see good traction with the Tradebroker agreement we entered last fall and among their 87 member organizations. We continue to acquire new customers, and we are expanding and growing existing customers. We have added new customers every quarter since the exclusive agreement was signed. During Q2, we prolonged the exclusive umbrella agreement with Sykehusinnkjøp, until July '27, and we signed a new agreement with Sykehuspartner covering the delivery and management of devices to hospitals in the Southeast region from second quarter. This new agreement is now operational and covers several thousand devices and the financial implications for Techstep will be increased software and services revenues in the coming quarters. The final service contract covering deliveries from '26 and onward is expected to be signed at the end of '25. With this agreement, Techstep will deliver services to Sykehuspartner at all the hospitals in the region as a complete outsourcing service with an ambition to operate around 50,000 clinical devices within the region. Techstep has, for several years, had a strong presence in the public sector in Norway. And last day of June, we further anchored and strengthened this position. as we were awarded the new and exclusive frame agreement with the Municipality of Oslo. Techstep will deliver mobile devices, accessories and services, along with services for repair, collection, reuse and recycle to support the municipalities sustainability ambitions. The new agreement also includes the municipalities of Asker and Lørenskog as well as Sporveien and some other entities. The total contract value has a potential of up to NOK 500 million over a 4-year period with a current turnover at about NOK 300 million per 4-year period. With the great foundation we have in place with our market-leading solutions and services we're focusing on the ability to scale our business into new segments and new geographical markets through strong partnerships and our indirect business model. In addition, our focus is to help customers create more value and efficiency from their mobile workforce by taking stronger responsibility to deliver, operate and support their mobile estate in a secure and sustainable way. This will continue to increase our relevancy, stickiness and margins going forward, building stone by stone on our recurring revenue. To sum up, the second quarter showed strong development with improving profitability, and we have built a solid pipeline and foundation for coming quarters. Market momentum is strong. We have signed new agreements, upsell to existing customers and the strategic agreements are progressing well. So we see solid potential across both indirect and direct market channels going forward. Our partner agreements are built to scale, and we are already observing this with our first partnerships. These partnerships aren't just individual wins. They set the foundation for long-term growth and expansion. We are very pleased that the contract with Sykehuspartner is live and in production. This is a major milestone, opening substantial growth prospects in software, services and devices and strengthening our position in a critical sector. Further, we also see strong traction across Europe with our Techstep Essentials MDM. Our pipeline with key partners is stronger than ever, giving us improved visibility and confidence in future growth. These type of partnerships and long-term software and services contracts will grow and drive exponential profitability in years to come. Our '25 guiding indicates the uncertainty for when some of these agreements will be monetized and the expected ramp up. And with the slightly shifted time line mentioned for some key projects, we're most likely in the lower part of the ranges provided. Looking ahead, we expect continued profitability growth at the end of the year and further acceleration into 2026 and beyond. Our ambition is to continue to see solid double-digit growth in our EBITDA adjusted results throughout 2026, with the majority coming from our recurring software and services. We stand by our ambition to become the leading mobile and circular tech provider in Europe with steady execution and continued focus on our strategy. That concludes today's presentation. Thank you for listening.

We have at least 1 question here. You mentioned several new partner signings. When do you expect to see financial effects from these -- very good, and a bit tricky question to answer. But we have, as I said, a strong focus on building a strong partner ecosystem and making sure we can expand into new geographical markets and to partners with existing customer bases like IT service providers and operators. We are working hard to reduce the time from signings to onboarding, to make sure we can build more flexible API and tighter integration with those kind of partners. We have a broad range of different partners from the fully embedded product partner offerings that takes our capabilities and deeply embedded into their core offerings, and we have more traditional partners where we deliver more value-added services on top of their existing services. So, that's a clear focus for us to see how we can reduce the time from signings to monetizing and accelerate the ramp-up of these agreements. But we are planning for some exciting launches with some of these partners in the coming weeks, so look up. We will share some more news and launch services in the fall with some of these new partners mentioned. If there are any other questions coming -- if not, we will close the call for now. Thank you again for listening. Hope to see you back in 3 months from now.