Techstep ASA (TECH) Earnings Call Transcript & Summary

Good morning, and welcome to this Q&A session following the publications of Techstep's Financial Results for the Second Quarter 2022. Answering your questions today will be CEO, Borge Astrup; and CFO, Anita Huun. My name is Erik Haugen, and I will be moderating this session. Before we begin, a couple of practical information. This session will be recorded and will be made available on our website later this afternoon techstep.io/investor. You may post questions using the Q&A function in Teams or send us an e-mail on ir@techstep.io. Before we go ahead with the actual session, CEO, Borge Astrup will make some short comments highlights and the financial results for the second quarter for Techstep. Borge?

Thank you very much, Erik. So we are strengthening our position in a growing Managed Mobility market globally. We're very, very proud to be recognized as the only challenger, as the only of the Nordic player and one of the very few European players by Gartner, in the market growing with double digits. Our last 12 months revenue of NOK 1.3 billion and record recurring revenue highlights this position. The financial results reflect our transformation phase, but with recurring revenues at record levels. We continue our strong momentum with commercial sales of 11 new Managed Mobility Service contracts in Q2, adding NOK 14 million in contracted value and NOK 9 million in recurring revenue annualized. This is both from new and existing customers, and we expect this to be delivered over the coming quarters. Our recurring revenue annualize grew to NOK 281 million, where our Own Software ARR crossed a very, very important milestone for us, NOK 100 million, where we reached an ARR of NOK 101 million. On our ARR, we have 90% gross margin for this quarter. Our gross profit for the last 12 months is steady on NOK 457 million, likewise is our EBITDA of NOK 69 million. We are in an ongoing restructuring and transformation, where we are building a wave of recurring revenue that will help us in the coming years, but short term, this will impact our operating results. Building recurring revenue takes time. And it's very important then to focus on the underlying factors. These are success criterias in building our recurring business. In line with our first quarter 2022, the second quarter is also showing positive development in the underlying factors. We have a very strong focus on delivering high value through our services and products to our customers every day. We are focusing on the continued transformation to unlock the profitability to grow at scale. We do this through simplification and standardization of our product portfolio and solution.

Thank you, Borge, Anita Huun will join us as well. We will now kick off the Q&A session. Borge, I will start addressing the questions to you. You report new MMS sales every quarter but we fail to see the financial growth. Please explain.

So building recurring revenue takes time, as mentioned. When we move from transactional sales to recurring revenue, that also affects our numbers. So when we do transactional sale, we get all the revenue the first month. But when we have reporting ARR or annualized recurring revenue, we only get the revenue for 1 month, so 1/12 of the total revenue. So that's one of the reasons. Our closed contracts of NOK 11 million in Q1 and NOK 9 million in Q2 shows that we are growing as we go along. This includes our Advisory & Services, Hardware-as-a-Service and ARR on own service -- Own Software. In Q2, we also have reported a backlog of NOK 10 million in ARR. So we expect a strong growth in ARR going forward. One other important element is also that when we sign contracts, we need to implement the solution for the customers. So first, we sell the contracts, then we implement. We're setting up the services, doing integrations for the customers, ensure that we are communicating with their internal systems. And when that's done, the customer is onboarded and then we can recognize the revenue. For our SmartWorks portfolio, then we also need to do some development as we go along. That also makes the period of implementation to take a little bit longer time, but also makes the solution way more stickier. So our financials is reflecting a transformation phase, where we also are phasing out noncore elements, and this will -- and has affected our financials, but we see that we have a positive development of our recurring revenue analyzed. So in Q1 this year, we had NOK 270 million, and we grew this to NOK 281 million. So we are very positive regarding that, and we have a strong belief that, that will continue to grow even more rapidly. And the last point is that we also, when we sell our software, we see a very positive tail effect of hardware and consulting as well as we go along.

Moving on to financials. Key part of the Q2 reporting, of course, Anita. You say financial -- it reflects the transition that Techstep is in to a recurring revenue model. Where is the effect visible? Hardware sales are not down and leasing sales are not up. How large is the effect then on Advisory for instance? Can you elaborate, please?

Yes, I think we have to revert back to Borge's answer on this because there is a lag in the model where we bill revenue monthly. So by definition, moving towards a recurring model moves cash flow and profits out in time. We see this on our Hardware-as-a-Service portfolio where we have a certain part upfront. But then after 2 years, we also have good profits coming from the end of life on the lease period. And this is also the same on the software side and consulting areas with a 1-month billing. So the leading indicator for our profits is our ARR growth and also our total recurring revenue annualized. So that is the best indicator of when profits will come going forward.

Now the other side of this is cost question here. How would you cut NOK 40 million to NOK 50 million? And how quickly will we see this in the P&L?

Yes. So as we announced today, we will be cutting our cost base with around NOK 40 million to NOK 50 million. And this is due to us being able to have an optimized portfolio and business model. And we have, over a long time now, invested in integration and in our IT platform. Now that we're moving more into streamlined operations, we will be harvesting the synergies. For us, it is quite a few low-hanging fruits on the cost side. We have spent quite a lot of money o external consultants on the IT platform and on the general OpEx side. So we assume that we have around at least NOK 30 million to cut just in this area. On top of this, we are looking into head count fees and lower utilization of contractors. So we will see this both on CapEx, OpEx and on the payroll side going forward. And just one more thing. We have already initiated quite a few initiatives. So we expect to see some short-term effect already in Q4 on this area, and then the remaining part, of course, in 2023.

And this is a natural step for us where we are now because we have done 12 acquisitions over time. So now we need to harvest and then increase our profitability.

That touches nicely on the next questions that I have here on my list. Borge, what are your growth ambitions going forward?

So we are not growing at our expected speed but we see that we are picking up the speed as we go along. And we strongly believe that the growth will come, and we are working every day super hard to make this come true. As mentioned in the presentation, our market is growing 24% over from 2022 to 2027. So what we expect is, of course, to grow faster than the market. That's our clear ambition because then we are winning market share and taking the position that we serve in the market. And with the recognition from Gartner, we know that we have the right product fit for it. So it's down to execution and making it happen.

In the presentation today, you have explained a little bit about the new product offerings and the portfolio. Question here, why will the new -- so why will the new product offerings lead to increased sales?