Techstep ASA (TECH) Earnings Call Transcript & Summary

Good morning, and welcome to Techstep's Q4 and 2020 Presentation. My name is Jens Haviken and I am the CEO of Techstep. Together with me, I have Marius Drefvelin, our CFO, and together, we will walk you through our Q4 results as well as take a look at 2020 as a whole. This presentation is prerecorded. We will host a Q&A session later today at 10:00 a.m. We will provide you with information on how to participate in the Q&A session at the end of this presentation. Techstep had a strong year, and we delivered on our strategy through organic growth and acquisitions, which, in turn, grow our financial results this year. An improved product mix and successful acquisitions have lifted both group gross profit and EBITDA, which Marius will get back to in greater detail in the financial section. We also delivered on our operational plan. We continued the development of our own high-margin software and our service stack by combining market-leading IP, software and mobility expertise. With this, the total number of managed devices surpassed 200,000 at the end of the year. We report on a number of managed devices from 2021 and onwards as mentioned during the capital markets update in December last year. We have also made solid progress with our Managed Mobility Services packaging, Flow. We closed 17 new contracts in 2020, which were a mix of existing and new customers, proving the solutions the value to several major accounts. A definite highlight in 2020 was that we completed 2 acquisitions in Sweden. Optidev became a part of the Techstep family in October 2020, and eConnectivity joined us just before Christmas. This has doubled our capacity in Sweden as well as brought important capabilities to the group in general. These acquisitions have strengthened our Managed Mobility Services position, resulting in a strong momentum going into 2021. Optidev has delivered on plan with positive sentiment in Q4 and provides a strong foundation for the coming integration with Techstep Sweden. In short, to summarize 2020 Techstep has continued its transformation from a traditional telecom retailer to become a leader within the managed mobility services market, leading the customer transformation with unique competencies supported by our own IP. We have made a distinctive shift away from product sales to software sales and Advisory Services, as well as delivering hardware as a service. We have also taken a large step into digital communication and digital marketing and have established a completely new way of communicating with customers and stakeholders. We have increased gross profit by 35% year-over-year. This is a combination of organic growth and a result of our M&A strategy. About 1/3 of the growth relates to the Optidev acquisition, which we closed early in the fourth quarter. Moreover, we had an improvement in the product mix, driven by an increase in MMS deliveries. EBITDA adjusted for the year was NOK 96 million as a result of the gross profit increase and the cost mitigation actions we made in the second quarter. Annual recurring revenue was up 72% to NOK 63 million at the end of the year, including NOK 24 million from the Optidev consolidation. Our highlights in 2020 have been strengthened through a well-established strategy. We have since the inception of the company had a goal of becoming a leader in what today referred to as managed mobility services. Everything we have done in recent years has been a purposeful effort to take this position. Our addressable market basically consists of everyone who can take advantage of a smartphone to do a better job. The COVID-19 pandemic has shown us what a distributed workforce can achieve outside office and that most desk jobs are mobile. It has also shown us what is possible to achieve with mobile technology for the large part of the workforce that don't have an office, the deskless worker. Techstep is purpose-built to service the mobility needs of enterprises and their workforce, regardless of how and where employees operate. However, we have chosen to concentrate on sectors that are attractive to us. These are sectors with large companies with many employees and jobs that are mobile in nature or have high digital maturity. It is where we add most value. Managed mobility services is a market in its early stages. Currently, we serve about 550 enterprise customers in the private and public sectors in the Nordics with our solutions. And it is through this strategy that we have an ambition to manage more than 1 million devices by the end of 2025. As we close 2020 and look forward, Techstep's customer offering is both comprehensive, concise and more relevant than ever. We have today a clearly defined stack cost services that can be bundled together to best fit each customer's needs, and thus, increase value creation, both for customers and shareholders. The ability to package those services and customize service agreements is an important value driver that is expected to increase our recurring revenue streams and gross profit per unit. In the time ahead, it is important that we help existing MMS customers further on the mobility journey and cover the needs that arise and take the opportunities that come. We will therefore, continue to develop new services that will further increase the value for Techstep and more important, our customers. I will now hand over to Marius that will walk you through the financials.

Thank you, Jens. In the fourth quarter, revenue increased from NOK 335 million to NOK 399 million. More importantly, however, gross profit increased by 97% from NOK 75 million to NOK 149 million. This includes the contribution from the Optidev acquisition of NOK 36 million, with also growth in our leasing portfolio and higher demand within Advisory Services. Consequently, EBITDA adjusted increased from NOK 7.5 million to NOK 50.6 million as a result of the increase in gross profit as well as cost mitigating actions. The depreciation related to the leasing portfolio was NOK 37 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. The net interest-bearing debt increased to NOK 167 million. This is due to the acquisitions of Optidev and eConnectivity before year-end. Finally, we had CapEx of NOK 44 million, of which NOK 36 million relates to leased out hardware to customers and NOK 8 million relates to investments in own software and IT development. If we look at the development in gross profit over the last 5 years, the compound annual growth rate has been 22%. This reflects the transition from hardware focus towards software, IP and mobility expertise-driven MMS. Much is driven by acquisitions, but the composition of products and services is also important in understanding the development. The leasing portfolio and Optidev's enterprise customers within software mobility have been key in our strategy of building a leading MMS provider in the Nordic region. Part of the increase is also due to an increase in price per unit as well as an increase in volume in the number of units delivered. At the same time, there has been a reduction in the hardware margin and an unexpected decline in operator commissions. This has led to a decrease in gross margin from 2016 to 2019. We have mitigated the margin reduction through our product mix. We have an increase in advisory services, own software and leasing. Our leasing portfolio started growing in 2020 through our Flow deliveries. This improvement in product mix have yielded results, and we are in line with meeting our ambition of EBITDA over gross profit above 30% by 2025. The gross profit for the last 12 months increased from NOK 305 million in the third quarter this year to NOK 378 million in the fourth quarter. Much of this relates to the acquisition of Optidev, which is included in the fourth quarter. The leasing portfolio is increasing, and we continue to see this as a driver of gross profit. Moreover, we saw an increase in our own software from NOK 38 million to NOK 43 million and Advisory Services increased from NOK 92 million to NOK 105 million. Going forward, all of these segments are expected to increase as we continue to focus on rolling out our Managed Mobility Services offering. This offering is a solution including finance, mobile devices, connectivity, service and support, and most importantly, our own software. This will boost the value for our customers by reducing administration costs and increasing the flexibility and security related to having a mobile workforce. We are building our business model to be able to increase recurring revenue on MMS deliveries. We have NOK 63 million in annual recurring revenue from our own software. The gross margin on our ARR is approximately 95%. NOK 24 million is a result of the acquisition of Optidev and their cloud-based mobile software platform, TrueMobile. Furthermore, we experienced a 64% growth in Origo users from the end of 2019 to the end of 2020. It is key for Techstep to focus on user growth as this is a strong driver for ARR. Due to existing framework agreements, in particular, within the public sector, some of the users are currently unbillable. Therefore, the development in the ARR is lagging behind the user growth. Due to the stickiness of our solution, we are, however, confident that the upcoming renegotiations of these agreements will materialize in increased ARR. Here, we see the development in pro forma gross profit and EBITDA adjusted on a 12 months rolling basis. This includes our most recent acquisitions for the full period. The profitability has increased during the year due to the following key drivers: One, a positive contribution from Advisory Services and growth in the leasing portfolio, both impacting gross profit and EBITDA; two, the Optidev acquisition with underlying improvements; and three, a lower cost base driven by our mitigating actions during COVID-19. On the next page, we have the balance sheet. As already mentioned, we closed 2 acquisitions in the fourth quarter, explaining the majority of the increase in total assets. We maintain our solid balance sheet with 47% equity ratio. Tangible assets of NOK 174 million include leased out hardware of NOK 133 million and other leasing obligations such as premises and IT licenses of NOK 40 million. Net interest-bearing debt of NOK 167 million includes an acquisition loan of NOK 63 million and sales credit of NOK 75 million for the acquisitions of Optidev and eConnectivity. On the next page, we have the aggregated cash flow statement. The cash flow from operations was NOK 49 million. This includes an increase in net working capital of NOK 8 million, mainly due to increased inventory in Optidev. Net investment activities include acquisition expenditure of NOK 61 million, leased out equipment and some fixed assets of NOK 36 million, and CapEx related to investment in software and IT development of NOK 8 million. Net financing of negative NOK 13 million includes repayment of loan for Optidev of NOK 5 million, and lease repayments for premises and licenses of NOK 8 million. With this, I will hand it back to Jens.

Thank you, Marius. Our main area of focus is the deskless worker, a long overlooked group of people when it comes to technology and digitalization in general. About 80% of the total workforce don't sit at a desk, and we believe mobile technologies provides a great opportunity for these users, their organizations and for Techstep. We have several strong examples on how our customers and their deskless workers embrace mobile technology to improve their work life. Those drivers that use tablets for tasks such as damage reports, time tables and learning in the field, electricians who document their work and invoice customers between assignments, and employees in the retail sector were able to spend more time with their customers on the shop floor than they do in the office. It's always exciting to talk about new customers and their stories. And here's a couple of newly signed contracts. To provide a more productive and efficient workday for the deskless worker is Techstep's mission, and in Q4, we signed several important agreements for Managed Mobility Services, one of which was with Eltel Networks, a leading Nordic field service provider for power and communication networks. By adopting Techstep's Asset Management and Platform Management services for its 1,000 employees, Eltel is able to continue its sustainable digital transformation journey. Eltel has already started to roll out time-saving apps such as ATC apps and working planning apps that make their workforce more effective, spending less time on admin and more on their important core tasks. The Techstep services just can now be accelerated and achieved with greater scalability through better device management, data security and control, which, in turn, reduces risk and cost. Health care is another key vertical for Techstep, and through our agreement with the National Health Authorities, we constantly strive, together with local hospitals and IT departments, to improve patient care through the adoption of mobile digital tools for clinical personnel. In December, we reached an important milestone when Sykehuset i Vestfold not only chose to purchase and manage its mobile equipment as a service, but also decided to accelerate the adoption of apps and mobile devices for a greater share of their workforce. Having chosen its Managed Mobility Services platform from Techstep, the hospital is now able to deliver its digital transformation in a more secure, cost-efficient and sustainable way. We are very excited to join Sykehuset i Vestfold and their staff on their journey towards a more efficient workday, which most importantly, will result in more time for the patient. Flow is important because it is a solution that creates value for our customers, such as Sykehuset i Vestfold and Eltel. The number of Flow contract is also an important indicator on how successful we are in onboarding new and existing customers into this new world of Managed Mobility Services. In the fourth quarter, we signed 3 new Flow contracts, giving us a total of 24 since we started in the fall of 2019. Flow has been very well received by both new a existing customers, and we have a promising opportunity pipeline of Flow and Origo going into 2021. Techstep's market and focus is very exciting and provides great potential. There are primarily 4 aspects to this: One, we have a fantastic customer base for additional sales, especially in Norway; two, our customers are in different stages when it comes to digital maturity, providing great opportunities for enhancing our share of wallet; three, more and more customers value our Nordic presence; and four, we see great opportunities for building new enterprise customers relationships in Sweden as well as Denmark and Finland. As mentioned earlier, we have an ambition to manage 1 million devices by the end of 2025. We are often asked why 1 million devices is important to us. The answer to that is that the device itself serves as a foundation to attach services, hence, the term managed device. As of today, we managed about 200,000 devices, so we can safely say that we have taken a long step already. To reach our goal, we need to convert more customers from transactional product purchases to our service-based management mode, and of course, with new customers. We will continue to acquire companies to strengthen us where we need it. For example, enhance our presence in Denmark and possibly expand to Finland. I want to emphasize that there is no given order or priority associated with these overall activities. This is something we work on continuously and in parallel. Taking a look ahead, we are targeting strong growth with our MMS offerings. We intend to double the number of users on our cloud solution, Origo, and sign more than 30 new MMS contracts. When it comes to financials, we believe our gross profit growth and our gross profit-to-EBITDA conversion will be in line with the current run rate. We expect development CapEx to be higher than the long-term ambition driven by the need to modernize our existing business systems to increase efficiency and scalability and improve profits long term. To sum up, we are rigging ourselves to serve the mobility needs of larger companies in a world that is constantly moving towards mobile-first. We are positioned to become a market leader in a rapidly growing market. We strengthened our position with enterprise Managed Mobility Services through investments in own IP, software and mobility expertise, as well as through the acquisitions of Optidev and eConnectivity in the last quarter. We will continue to grow through organic growth, acquisitions and geographical expansion. With that, we conclude today's presentation. As mentioned earlier, Arctic Securities will host a digital Q&A session at 10 a.m. You will find a link on techstep.no. If you have questions you want us to address in the Q&A session later today, please use the e-mail address ir@techstep.no. Thank you for listening in, and have a nice day.