Techstep ASA (TECH) Earnings Call Transcript & Summary

Hello, and welcome to the Techstep Q1 Presentation. [Operator Instructions] Speakers, please begin.

Welcome to Techstep's First Quarter Presentation 2020, and thank you for joining us today. My name is Jens Haviken. I am the CEO of Techstep. And together with me is our CFO, Marius Drefvelin. Like most organizations out there, we are going online and communicating with our stakeholders via digital channels. So far, we have done our quarterly presentations in Norwegian. But today, we will do the presentation in English as we have Nordic operations and international stakeholders to address. Today, we will go through our Q1 presentation and prepared remarks. Then, like the operator said, open up for questions afterwards. [Operator Instructions] Okay. So, let's begin. Next slide, please. 2020 has turned out quite differently than most of us had foreseen upon entering this new decade. We are all affected in some way by the pandemic and COVID-19 crisis. At the same time, the wheels of society needs to keep rolling and work needs to continue. We will spend the first time of this presentation going through Techstep's response to the new reality; recap how we have developed going into this very important year; take a look at our new mobility-as-a-service offering as well; and of course, the first quarter results. After that, we will look at our operations and recent sales activity with customers before Marius takes us through the numbers. We will round off with our near-term outlook as well as priorities and plans for 2020. Next slide, please. The first part of 2020 has turned into a very challenging period for society, people and organizations. At the same time, it's also a very fascinating period in time for a tech company like Techstep. The already 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. I think Microsoft made it quite well the other day when they said that we have seen 2 years' worth of digital transformation in 2 months. Techstep's mission is to make work mobile, to be an enabler of the digital workplace. The current environment is obviously very supportive for a strategy execution over time. Long term, we believe that digital transformation and adoption we now see is very positive for society, people, our customers and ourselves. We are very well positioned to harvest the benefits presented by mobile technologies. I will revert to the immediate and near-term business effects for Techstep later. As the COVID-19 pandemic broke out, our top priority was the health and safety of our employees, customers and partners. We are better equipped than many to handle today's operating environment, and the teams have handled the situation well so far. As you have seen from our stock exchange release and the report this morning, we delivered stable financial results in Q1. That said, we have much higher ambitions for growth and profitability over time. But the results this quarter are as expected by consequence of the strategic choices we have taken. Next slide, please. As previously mentioned, the ongoing transformation and increased adoption of digital solutions makes our long-term strategy more relevant than ever. Mobile solutions enable all of us to continue to perform and deliver on our work duties through the present situation. Without them, the world probably would have suffered even more. With our mega trends improved, overall adoptions are positive, Techstep needs to capitalize on the position we have taken in Norway and Sweden. And more enterprises and end-users need to employ the tools and solutions that enable them to do a better job, covered by mobile technology, delivered by Techstep. Next slide, please. Techstep has been purpose-built to service the mobility needs of enterprises since the beginning in 2016. We have spent the last 3 years building skills and scale to deliver on our vision of making work mobile and to become a leading enabler for the digital replace in the Nordics. With a series of acquisitions, integrations and business development efforts, we have aligned behind one strategy, one brand and one mission. We are now at this stage where we have completed most of our product and technical developments. Our main focus now is to roll out solutions as fast as we can to both existing and new customers. Next slide, please. As a part of our transformation from a traditional wholesaler towards a full-service provider of mobility solutions, the development of our customer offering and solution has been at the core of our efforts. We started out with selling mobile phones and telecom subscriptions over-the-counter. It was a good business model back in the days. The markup and bonuses from the telecom operators paid off well. Since then, structural developments within our industry have reduced margins on hardware to the benefit of customers. And this is a good thing. We should all be focused on the relevance and value creation for the end-users. That's why we initially put together a mobility-as-a-service solution. We wanted to create more value for our customers through customer-friendly, easier-to-adopt solution, which made it possible to harvest the benefits of mobile technology in a simple, secure and cost-efficient manner. And like all the new products and solutions, you improve them over time. At the end of 2019, we launched an improved version of our mobility-as-a-service solution under brand name Flow. Flow has so far been made available for customers in Norway, and we plan to roll it out to selected customers in Sweden during the second half of 2020. Next slide, please. We strongly believe that Flow will enable our customers to provide their employees with the right mobility solutions in a simple, cost-efficient and secure way. Flow is powered by the Origo Business Cloud. It's the heart of the solution. Origo Business Cloud is a proprietary solution that has been developed over the last several years, an asset which has make -- sorry, an asset which makes Techstep unique in the marketplace. Flow provides several clear benefits to our customers; for instance, reduced administration and lower overall costs. So going forward, all our efforts are aligned behind bringing out our Flow solutions to a solid existing customer base as well as to new customers. Next slide, please. With limited impact from COVID-19 in Q1, we delivered on plan. We saw a stable revenue and EBITDA development, reflecting the transformation of our business and conversion of customers to the new solution. But make no mistake, the business definitely will have growth ambitions, and we'll continue to pursue growth. And the transition from a pure hardware supplier to a provider of software and solutions is materializing steadily. Techstep is experiencing lower gross profit contribution from operator commissions, in addition to the absence of revenue from the Norwegian SME segment that we discontinued in the second quarter of 2019. The Techstep's new software and solution offerings are introduced gradually to customers and the market. It is expected to take some time before the lower gross profit contribution will be compensated fully. Customer onboarding continued in Q1 with 6 new Flow contracts signed. I will come back to that later in the presentation. And in the beginning of April, we sold out our IT operations and support business, reflecting our strategic focus on software and IP-led growth. Next slide, please. So let's dig deeper into operations in Q1 in particular. Next slide. Techstep's main priority these days is the health of employees and their families. Immediately after the authorities took measures to limit the spread of COVID-19, Techstep activated business continuity plans and a dedicated task force. Since the 12th of March, Techstep has run its core operations and served our customers in Sweden and Norway utilizing our mobile office solutions that enable employees to work remotely. Furthermore, Techstep has restricted physical meetings and all travel between borders or within countries unless strictly necessary. I am proud of how the Techstep team has handled the situation so far. Next slide please. While Flow is a bold version of Techstep's mobile-as-a-service solution, consisting of both hardware, software, device lifecycle management and financing. Other new contracts in the quarter are a mix of both hardware only and a combination of hardware and solutions. The largest contracts signed in the quarter was with a multinational building material enterprise with Norwegian operations. It's also solutions and hardware contract with an estimated value of about NOK 10 million. The agreement also includes options to implement Flow at a later stage. We also closed a couple of larger deals in Sweden, in which one was with lower costs. Next slide, please. Flow allows Techstep to bundle value-adding services together with hardware and software into one complete solution offered to enterprises. The Flow offering consists of a smartphone, Techstep's software solution, the Origo Business Cloud, device lifecycle management and financing. The financing include Techstep Finance as the benefit of a residual value at the end of the leasing period, contributing to a lower cost of ownership for the customer. The Flow offering, which is paid per user per month with no upfront payments, help companies to take advantage of mobility solutions right away without impacting their shorter-term liquidity needs. We believe this is a very attractive value proposition to many companies these days. In addition, the customer can choose among several add-ons and several services tailored to their needs. During the first quarter, Techstep signed a total of 6 Flow agreements with a potential value of NOK 12 million. All 6 are signed in Norway. In total, we have 13 contracts and 4,500 users on Flow as of today. It's a small share of our total user base, but we are very happy with the start. That said, our ambitions are much higher as we're starting to get traction of the Flow concept in Norway, and we'll start to roll out in Sweden later this year. As Flow was launched into the wider market, Origo Business Cloud, a key component of the Flow offering, was also introduced independently to selected Techstep customers. And being a software solution, Origo Business Cloud will also be sold independently through partners. As of today, we have approximately 30,000 users on the Origo platform. Next slide, please. With that, I will hand over to our CFO, Marius, who will take us through the financials. Next slide, please.

Thank you, Jens. In terms of the key figures for the first quarter this year, revenue increased by 3% from NOK 284 million to NOK 293 million. Gross profit increased by 7% from NOK 75 million to NOK 80 million. And EBITDA adjusted was NOK 11.9 million, up from NOK 9.2 million in the first quarter last year. The net loss for the period was NOK 3.4 million as compared to a net loss of NOK 1.5 million in the first quarter last year. The financial statements this year include the full consolidation effect of our financing company Techstep Finance, in which we increased our holding from 50% to 80% at the end of last year. I will revert to that later on. Moreover, we invested NOK 4.9 million in software development and internal IT. The net interest-bearing debt increased during the period to NOK 27 million, mainly because we increased our inventory during Q1 to ensure supply for Q2 deliveries. Some of this inventory has already been delivered so far in the second quarter. If we turn to the next page, this figure shows the gross profit development and the different components included in gross profit based on rolling last 12 months. There was an increase in the share of hardware in black from 35% to 37%. This is due to an increase in volume, in particular from our public customers. Moreover, the leasing volume is now included in our reporting and comprises 3% of total gross profit. And as we have already talked about with the Flow concept, this is an important part of our offering, and we expect this volume to increase going forward. There was a decrease in the share of advisory and services from 51% to 46% because of continued reductions in operator commissions. In addition, the first quarter last year included a large one-off third-party software delivery. The reduction in operator commissions we have seen for some years already is expected to continue going forward. Most of these revenue streams were related to the SME segment in Norway. This is why we announced last year that we will focus on our own software and large enterprises. And while we recognize that this strategic decision may lower our gross profit short-term, we are confident that this will increase our recurring revenue from own software, and consequently, the gross profit in the long run. On the next page, we see the development in EBITDA in conjunction to gross profit, which increased from 10% last quarter to 11% this quarter. Overall, we see that the financial results and the profitability level reflect the transformation that we are currently in. Further investments are needed to become a software and IP-driven company with higher margins and increased recurring revenue. This includes the need to reinvest our cost-reducing initiatives; for example, increasing our headcount in strategically important divisions such as software development and advisory and services, increasing our IT spend and development, supporting our Flow offering and increasing our marketing spend. On the next page, we have the annual recurring revenue, which only includes our own software. We have 2 offerings; one, mobile expense management sold through operators as white label; and two, Origo Business Cloud, which consists of mobile expense management and asset management. Origo is sold by our own sales channels in Norway and Sweden as well as through partners. We had a 3% growth in end-users during the first quarter, and now we have 207,000 users. Our main focus during the first quarter was to fully onboard pilot customers on the Origo platform. Furthermore, we spent the first quarter improving the supply chain in order to reduce the cost of support and to reduce the time from contract signing to invoicing. And now we are better prepared to onboard new customers. If we turn to the next page, we have the income statement. We mentioned earlier, we have now started to consolidate the financials from our leasing company for the first time this quarter. This mainly increases revenue, gross profit and depreciation. Revenue is recognized over the contract period, typically 24 months. The lead-out assets are depreciated over the same contract period. The effect in the first quarter this year is an increase in gross profit of NOK 9 million and the corresponding increase in depreciation of NOK 9 million. We have taken a prudent approach on the residual value. It is still early days for our leasing portfolio, and we will adjust our assumptions, if necessary, when the contracts expire starting next year. Furthermore, personnel costs were reduced by 3% year-on-year, mainly due to a net reduction in headcount of 11 employees to 212. Operational costs have increased from NOK 14.7 million to NOK 19 million due to increased marketing and IT spend as well as investments in competence, training and certifications. Amortization of NOK 5 million relates to previous acquisitions. This is noncash and will be completed by 2023. On the next page, we have the balance sheet. We have a solid balance sheet with 56% equity ratio. Tangible assets of NOK 117 million consists of leased out hardware of NOK 80 million and other IFRS 16 leasing obligations, such as premises and IT licenses of NOK 34 million. We purchased hardware in Sweden and increased inventory by NOK 19 million to ensure supply for delivery in Q2, increasing our net interest-bearing debt. The long-term interest-bearing debt, however, is close to 0. The current interest-bearing debt of NOK 47 million includes factoring debt of NOK 39 million and an asset-backed loan in Sweden of NOK 8 million, which will be repaid in September when we have sold our office building in Karlstad in Sweden. Other current liabilities include NOK 71 million deferred revenue on leased-out hardware. On the next page, we have the aggregated cash flow statement. The cash flow from operations was negative NOK 1.3 million and includes the inventory buildup in Sweden that we have already mentioned. Net investment activities were negative NOK 23 million, of which NOK 5 million was software and IT development and NOK 18 million was payment of leased-out hardware. The cash flow effect of these payments is offset by an increase in deferred revenue included above in operating cash flow. Net cash flow from financing activities was negative NOK 3.2 million and relates to IFRS 16 lease payments for premises and IT licenses. Next slide, please. I will now hand it back to Jens to go through our outlook and summarize.

Thank you, Marius. Let's turn to the next slide, please. Techstep is positioning itself as a leading Nordic enabler of the digital workplace. The company's strategy is to help enterprises harness the possibilities of mobile technology across their 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 2020, Techstep continued its transformation from a hardware wholesaler towards becoming an IP and software-led provider, offering highly scalable mobility solutions. In line with the strategy, the evolved mobile-as-a-service concept named Flow was launched in Q4 2019 to existing and new customers. Going forward, Techstep will continue focusing on growing sales of the company's value-creating, higher-margin software and services. In addition to investments in the software platform and organization capabilities like marketing and IT, Techstep will also continue to pursue M&A opportunities. Looking further ahead, the relevance for mobile 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. Next slide, please. As the current market situation is highly uncertain, it is too early to say whether the increased demand for solutions and services will continue or if reduced demand for hardware from private enterprises will remain. Business-to-business demand may suffer from reduced IT budgets, while we potentially could see an increased demand for mobility solutions. As initial observations and short-term outlooks signaled overall reduced demand, Techstep implemented a temporary reduction in workforce capacity by approximately 20% effective from April in Norway and May in Sweden. We further adjusted the operations and expenditures to the uncertain environment by reducing CapEx not related to software investments and increased inventory of hardware to secure supply. We have also established contingency plans to further adjust our operations and expenditures should the situation require the company to do so. Techstep has huge operational costs and capital expenditure flexibility and will adapt to the market conditions as they evolve. Next slide, please. Due to the current situation, our short-term priorities for 2020 have been somewhat revised. The well-being of our employees has, of course, always been important to us, but it has a different meaning today than 8 weeks ago. The other short-term priorities remains as they were before we headed into 2020. In order to ensure that our platform will handle the growth ahead, we'll continue to improve the quality in our offerings and deliveries. When it comes to financial priorities, our main focus is to ensure solidity and flexibility. We will 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 going forward. We plan to present this work to our investors and stakeholders in December 2020. Next slide, please. Short term is a mixed picture, but we are in a very good position to continue to roll out our products and services to new and existing customers. We will keep both hands on the wheel to ensure that we have the necessary operational and financial flexibility. I am particularly excited about our Flow offering, and it's crucial that we onboard new customers with the highest quality. We have performed on operational efficiencies, but we need to continue to improve to scale and handle the targeted growth. We will continue to develop our software offering and are continuously looking for M&A opportunities that will strengthen our presence in the Nordics. We believe our value proposition is stronger than ever, and we're confident that we are at the right place at the right time. 2020 is a defining year for Techstep and will be the foundation for our long-term success. Next slide, please. Thank you for listening in. We now open for questions and answers.

[Operator Instructions] Okay. And it looks like we currently have no audio questions registered. Speakers, do we have any questions on the web?

Not so far. No.

Okay. We still do not have any questions registered. [Operator Instructions] And as we don't have any questions registered, I hand back to our speakers.

Okay. Thank you for listening in. If you have any questions or anything you would like to discuss with us further, please pop us an e-mail or give us a call. And have a nice day. Stay safe.