Techstep ASA (TECH) Earnings Call Transcript & Summary

Hi all, and welcome to the Q4 Q&A session. In Q4, 2 of our main focus areas were to finalize the capital raise and to implement the cost optimization program with a focus on turning Techstep profitable. For 2023, it's all about execution. We need to execute on the final phase of the transformation. We need to execute on the cost optimization and turning Techstep profitable. We need to execute on upgrading existing customers to the new product portfolio and to win new customers. Let me take you through some of the key highlights for Q4. Good signing on an external agreement with ISS, the commercial momentum continues. The extended agreement has an ARR of NOK 850,000 of our own SmartDevice software. This is in line with our growth strategy to move customers from transactional to recurring services, meaning providing full value of the portfolio. We have more exciting opportunities in the sales pipeline and look forward to 2023. The recurring revenue base is increasing. While the net gross profit in Q4 is trending on par with the full year with a stable and flat development in Q4 and 2022. Total recurring revenue is growing in Q4, driven by the increase in ARR from our Own Software to NOK 111 million. This is in line with our strategic objective to lead with software and scale with recurring revenue. The cost optimization plan that we communicated and implemented earlier this quarter is on track with a positive EBITA adjusted for the first time in 8 quarters. With the capital raise of NOK 103 million, the balance sheet has been strengthened and net interest-bearing debt is reduced with 50% creating flexibility through the final phase of the transformation. So let's move over to the inbox and see if I've gotten any questions. All right. So we have gotten more question and I'll give it to you Anita.

How are you trending on the cost optimization? And how should we think about this going forward?

Okay, Thanks. So on the cost optimization side, we're trending very well. We did a really good bottoms-up budget process where we have identified a lot of areas where we will cut cost. In Q4, 45 employees, unfortunately, were reduced, but we've carried the full cost of all employees in the quarter. Going forward, we will, therefore, see the full impact of the cost optimization. So expectations is that it will see -- be much more visible in the coming quarters.

Good. All right. Let's see. Do we have another question popping in here?

Yes, there's one for you here, Borge. Are you worried about the macroeconomic environment? And do you think that will have an impact on Techstep?

A very good question. The macroeconomics today is somewhat challenging. But with our solution, we are enabling our customers to reduce their cost, to help them to increase their efficiency and also to reduce the environmental impact. So this message is very compelling in today's challenging macro environment. But what we have seen is that customers are more cautious. It takes longer for them to make a decision, but we have not lost any opportunities, but the wheel is turning slower. We also have a big customer base, and this is a big benefit for us because that gives us repeatable income. And we also have long contracts with the customers 2 to 3 years, that gives a good stability for us. What we also see is during this challenging climate, people are focused on saving money. And when we can come out with the message that we can save NOK 4,000 to NOK 10,000 per employee. That's a very good story, okay? Let's see. How do you see the ARR side develop to reach ARR goal of NOK 140 million? Maybe you can take that one, Anita.

Sure. When we ended 2022, we had an ARR of NOK 111 million, and this was one of the highest sequential growth with [ appellant ] and almost 13% year-over-year. But we also have seen that the sales times can extend a bit from when we've sold the product until we implement the ISS case is a good example of that. It was sold and closed in December, but won't be implemented until this Q2. And this is what we also expect to see forward that we're going to have a lot of bookings and sales in Q1, and then you're going to see them deployed more into the second half of 2023.

Good. And just received another question for you as well here. When should we expect the additional NOK 50 million in cost reduction to take place? Can you elaborate on the areas this will come from?

Yes. So as I said, we did see the cost optimization efforts filtered through in Q4, but the majority of the effect will be in 2023. So we also have included the cost base where -- for 2022, and you can see the decline that we're aiming for going forward. It will be in different areas. It's across marketing and other general OpEx, approximately 50-50 between salaries and general OpEx. That's what it's going to be the split.

Good. And we got a question here as well. And I think I will answer this myself. During 2022, you have talked a lot about the new product portfolio. Is it now ready in the market? The answer is yes, more or less. There will come some additional exciting launches. I can't tell all about it yet, but we will -- we're really looking forward to show you that later on. During the year, we have successfully commercialized and standardize our offering out in the market. We have moved from 47 to 7 different product solutions. So that's a significant reduction, and that -- this makes it much, much simpler for both our internal employees and the external the ones to understand what Techstep is all about. The feedback that we have gotten from the market when we have launched the new solution is very positive. They like the user interface. They like how it's developed, how it works and all of it. So that's very, very positive. The key for us in '23, as I mentioned in the intro and in the presentation, is execution because we now have the [indiscernible] that we need to succeed in the market. So it all comes down to what we are able to deliver and drive forward in the market. And another question popping in here. I address this for you, Anita. You say that you missed your ARR guidance of NOK [ 115 million ], as some customers on the old platform are switching back to transactional. Why this -- why these customers switch back?

Yes. So what we have said is that we have had some churn. We have the old product platform on our Hardware-as-a-Service area. Some of the customers that were early starters in 2019 had -- they had some of the baby errors, I would call it. And some of these customers decided that they wanted to move back to transactional buying. And for us, that is unproblematic as the key focus is getting customers into the portfolio and upselling towards higher-value areas. So they do that because having a platform for device life cycle management is the most important area and where they buy -- in which way they buy their hardware is more indifferent to them. So churn on Hardware-as-a-Service, just moving back to the transactional side.

Good. And we have another question. How should we think about the ARR bridge for 2023 going from NOK 111 million to NOK 140 million, front or back-end loaded? I can start and then you can fill in, Anita. So during the year, we have had a good development in our ARR for the beginning of the year, since we also see a slower ramp and longer lead processes, the ARR is back-end loaded. So we expect due to implementation time and such and getting customers ready, we expect the majority to come closer to summer after summer and so. Anything to add to that, Anita?

No. I think we addressed it also in the prior questions, that's good.

Good. And then another question popping in, should we expect similar net working capital development in 2023 as in 2022?

Yes, you should, Techstep's working capital can be quite lumpy depending on timing of large hardware sales, et cetera, but we do see a quite similar pattern where the working capital builds up to the end of the year, [indiscernible] have a tougher H1 start. So that's the similar pattern we expect to see going forward. Other than that, Techstep isn't that working capital intensive given that we have quite stable inventory levels and that we have a good funding mechanism between accounts receivable and payables, but expect similar trends in the coming year.

Good. And you previously said that you now want to return value for your shareholders. What does this mean to you? Shareholder value has decreased dramatically during 2022. Yes, it has. 2022 was a challenging year, both for Techstep and also for the market. What we have seen is that we have been doing a turnout. We have done a lot of good internal work. And I've got some follow-up questions for this as well. What was your biggest mistake in 2022? And what is it that you're most proud of? We have a focus on driving value towards our customers. And then we drive value, we are able to bring up the ARR. We are able to bring up the revenue. Techstep have -- also has a lot of legacy revenue that needs to also be managed throughout the year. As we're not, of course, happy with the share price development in 2022, and we will do whatever we can to get that up during 2023. So the biggest mistake in 2022 was, I would say, we try to push a lot of things through very quickly. And that gave us some pain and growing pains in the business. But what I'm most proud of is the effort from the employees, all the effort that they actually put in and really helped us to move forward, getting the new product portfolio through and taking care of our customers to give us a much better foundation going into 2023 than going into 2022. Yes.

There's one question here. Under Q3, you said you were talking with several clients regarding potential contracts. However, the ISS deal was the only one reported in Q4. Why is it so difficult in finding new clients?

So what we have been communicated is deals over a certain size. That is what we have said in our reporting structure that we should do. So we have one more deals than the ISS. We have upgraded existing customers as well. We have 1 new clients coming in. We have a focus of having a land and expand strategy coming in with 1 part of the solution for the customers and then expanding that as we and the customer grows and get more mature and prove the growing. So we can expect to see more deals coming up, and we will do a review of what we communicate and present to the market going forward.

And I think we will elaborate and say that it's not difficult finding new clients. We have more than 2,000 existing customers where we upsell and upgrade. And also, we see a very growing demand for our product portfolio, particularly now with all the focus on cost efficiency and sustainability. So we see it coming in with large tenders and bids that customers are in much more degree [indiscernible] asking for our products as a part of the solution. So in that sense, it's a very strong momentum growing.

Good. let's see. Have we gotten any more questions popping in. We have one final one that we can take, Anita. Let's see. Yes. So finally, what industries are -- interest the most in your service? So this varies due to what we are going out within the market. So when we look at the SmartDevice portfolio, it doesn't matter what kind of industry you're in. Because it's built for being industry by [ agnostic ], meaning that we can bring this out to an industry. We have a lot of traction within health care, public sector and also in transport and logistics. It's often a lot of big companies where they have a lot of employees and also where they need to digitalize their work. And with our SmartWorks offering, we are able to digitize them quite a lot. And with that and the purchase done earlier in the Techstep history, the transport and logistics industry is one of the biggest we have. But all in all, our solutions can fit any industry, so it's not dependent on what kind of industry.

Okay. There's a question here. You said during the whole 2022, the momentum was good. But in Q4, we see decline in revenues. Under Q3 2022, you said that Q4 is the strongest quarter for Techstep. What happened? So first of all -- and take inflation into account to the picture, how does that impact revenue? Inflation-wise, price adjustments took place in Q1. So we typically do the price increases at the beginning of the year. So that impact hasn't been seen. Techstep has a lot of hardware revenue. So growing that part of revenue is -- it's a very stable and cash-generative business for Techstep, but it's much more important, growing the software business and moving margins up. So the decline in revenues can typically be explained by decline in the hardware side, where we see the growth coming from the more high -- higher GP areas. So sequentially, our gross profit grew year-over-year in Q4, while the revenues declined slightly or very flat. So that's moving in the direction that we have pointed out, higher margins. So we focus on GP growth, net gross profit growth, more than the revenue in itself. So yes, I think that ...

It's a lot of questions coming in today, that's very good. So I will address one for myself. In the increase in MEM white label software ARR related to the Nortel portfolio. Do you expect these customers to go over to MMS related ARR? Yes, we do. We have a very good partnership with Nortel, and we're proud to see how that is developing. What we offer out in the market together with Nortel and also together with Telenor and other partners, is that we offer a complete solution, where they -- where customers can both buy devices and the subscription, so they get one point of contact to solve their mobile connectivity and devices in total. We expect both the MEM to grow throughout the year and also to get good new deals, and we have a lot of potential deals also in the pipeline, both from Nortel. So many of the customers we already have today is also active on MEM, Mobile Expense Management and also on the life cycle part. I will do one more for you here, Anita. Should we expect similar net working capital development in 2023 as in 2022?

Yes, you can. So there's also a release similar as 2022 with net capital release in H2. Yes, we can expect the same trend. We typically go out with a high hardware sales in Q4, and you have the reversal of this in Q1. So we expect to see a net working capital release in H2 2023 as well.

Good. Then I do the final question for myself. Then Sweden has a negative EBIT for 2022. What you do to turn this to a profitable territory? So when we look at Techstep in total, the new product offering and what we have been able to deliver to the market has been mainly focused on Norway because Norway has been more mature. We have now adjusted the offering and made it ready to also fit into Sweden and the Swedish requirements for the customers. We also have some strong partnerships. We have a very good partnership with Apple in Sweden, where we together go out and digitalize and help customers to utilize mobile technology in a much better way. And we also see a shift in Sweden, where they now focus more on the sustainability, the life cycle being able to actually get the residual value out of the devices as well and also for employees there to be -- have the freedom to choose their selected device as well. So this was the longest session we had on Q&A. That's fun, fun to see the engagement from all of you on the other side. So I think we will conduct today's Q&A session. Thank you all for listening in, and wish you all a nice Friday and a fantastic weekend. Thank you all.

Thanks.