Techstep ASA (TECH) Earnings Call Transcript & Summary

Good morning, and welcome to Techstep's Q2 presentation. Today, we will focus on how we are sharpening our market position simplifying the business and building a more scalable platform for profitable growth. We will take you through the Q2 financial performance and a business update before we open up for questions at the end. You can always submit questions in the Q&A chat or send an e-mail to ir@tectept.io. We are presenting from our headquarter in Oslo, I'm happy to have our CFO, Havard Haukdal by my side. Havard is still quite new to Techstep, close to 4 months now as our CFO and he brings broad experience from corporate finance, strategic financial management and operational leadership. That experience is highly relevant as we strengthen execution discipline and the financial foundations for profitable growth.

Thank you, Morten. Since joining Techstep, I have been motivated by the pace of the organization and a clear focus and strive towards execution. My priority is to support disciplined delivery of the strategy, strengthen financial performance and help scale the business efficiently through both our Nordic markets and prioritize European partnerships. I'm more eager for us to take the next steps to further prioritize and create momentum. I will soon return to present the Q2 financial results. But first, back to you, Morten.

So before we begin, a brief introduction to Techstep. We are a European mobile and circular technology company, combining software, specialist services and hardware to help organizations operate more efficiently, securely and sustainably. We serve enterprise and public sector customers directly and we extend our reach through mobile operators and IT service providers across Europe. That combination of direct customer insight and partner-enabled scale is central to our strategy. Our differentiation comes from bringing software specialty services and hardware together in integrated mobile tech offerings, creating real business value for our customers and partners. Our software provides control security, automation and visibility across the mobile environment. Our experts translate that capability into secure, efficient operations and measurable customer outcomes. Hardware completes the solution while life cycle and circular services help customers manage devices and assets more effectively over time. The real value comes from how these capabilities work together as 1 integrated solution. We take this value proposition to market both directly and through a focused ecosystem of mobile operators and technology partners. By strengthening these alliances, we can extend our reach, make delivery more repeatable and scale with a more efficient go-to-market model. This supports growth in selected new markets while also creating opportunities to expand the software and services mix with existing customers and partners. The intended result is deeper customer relevance, a higher share of recurring revenue and a stronger foundation for scalable profitable growth. We will look closer at how we turn that positioning into concrete execution priorities in the business update section. But now let me hand it over to you, Havard, for our Q2 walk-through.

Thank you, Morten. I will now take us through the Q2 financials and the key messages for the investors. A general reminder in the beginning, we compare all our figures towards the historical pro forma figures for 2025. If you want to dial into the IFRS reported figures, I'll advise you to go into the Q2 financial report. We will start with the headline metrics, then look at the earning drivers, the improvement program, recurring revenue, cash flow and balance sheet. We will close the section with the planned rights issue and its indicative time line. At the high level, Q2 shows revenue growth, but the quality of the earnings remains below the level that we need to deliver. Revenues were NOK 228.8 million, up 12% year-on-year on a pro forma basis, excluding the divested business. Growth was primarily driven by devices deliveries, while the lower margins and a weaker mix limited the contribution to net gross profit. Net gross profit was NOK 52 million, corresponding to a 23% profit margin and the margin declined by 11 percentage points year-on-year. Adjusted annualized recurring revenues was NOK 244 million, up 1% year-on-year after adjusting for the terminated legacy telecom expense contract. Adjusted EBITDA was negative NOK 12.9 million, a year-on-year decline of NOK 13.3 million. The next slide explains the mix, rollout delays and cost actions behind these headline figures. Total revenues in Q2 was NOK 228.8 million compared with NOK 203.9 million in Q2 last year, an increase of 12%. The increase was driven by devices, where revenue grew 22% to NOK 176.4 million, including deliveries to Helse Midt-Norge. The revenue growth did not translate into higher gross profits. Net gross profit declined 25% to NOK 52 million and the margin fell to 22.7% from 33.8%. The main factors were the higher share of lower-margin device sales, lower device as a service and end of lease contribution. The terminated legacy telecom expense contract also contributed negatively with close to NOK 6 million and we had the delays in the health care rollouts. Our own software revenues declined 35% year-on-year to NOK 15.7 million with a decreased NGP of NOK 7.5 million. This is largely reflects a terminated legacy solution with a reduction in NGP of NOK 5.7 million. Our core owned software declined by 6%, advisory and services revenues increased by 6%, but net gross profit decreased because of the delayed health product rollout, resulting in lower consulting and services than expected. Adjusted EBITDA was negative NOK 12.9 million compared with positive NOK 0.4 million in Q2 last year. The NOK 17 million reduction in net gross profit was partly offset by lower operating costs and realized savings absorbed inflation and temporary product cost. The net loss was NOK 30.5 million. Amortization was NOK 10.4 million compared to NOK 17.4 million last year, and net financial items, we are NOK 6 million compared with NOK 3.8 million last year. Okay. Let's move on to last 12-month entity. On our last 12-month basis, net gross profit was approximately NOK 235 million at the end of Q2. This is around 11% below the Q1 2025 last 12-month level of NOK 248 million. The decline reflects a weaker net gross profit delivered in both Q1 and Q2 2026. The main shortfalls related to the terminated telecom expense solution and delayed rollouts in the health sector. As a result, the anticipated growth has taken longer to materialize than expected. The Techstep improvement program is expected to support margin recovery as well as lowering the cost base. And the commercial priority remains to convert delayed projects and pipeline into recurring higher-quality gross profit. And the Techstep improvement program is intended to align the organization and the cost base with the current setup business. And we will strengthen the path to profitability. Let me also start out by emphasizing that there has been a key priority to protect and keep key competence in text as we move forward with the Techstep improvement program. Compared with the May 2026 baseline, the new target is an annualized cost base of NOK 218 million for personnel and other operating costs. The program also gives focus to reducing consultancy costs. The program includes a reduction of 25 FTEs and are reshaping of the organization following the repositioning in Sweden. These actions are designed to simplify execution and create a more scalable operating structure. The savings will phase in over the coming quarters with close to the full run rate effect expected by April 2027. This means the financial benefit will build progressively rather than appear in 1 single quarter. Let us also look at annualized recurring revenue. Just to emphasize, again, the figures are on a pro forma base for 2025 and the figures are also adjusted for the terminated legacy telecom expense solution. Adjusted annualized recurring revenue was NOK 244 million at the end of Q2, representing growth of 1% year-on-year. The year-on-year comparison is positive, but annualized recurring revenue has declined from the levels recorded in the second half of 2025 and from the restated Q1 level. Annualized recurring revenue from devices remain broadly flat. Owned software declined by 8% quarter-on-quarter due to a small number of terms while delayed managed health rollouts continue to restrain the growth expected in the quarter. The focus is therefore on converting the existing customers and partner pipeline into recurring deployments and improving retention across the software portfolio. Moving on to cash flow. Cash flow in Q2 was pressured by weaker earnings and working capital movements. Adjusted EBITDA was NOK 9.8 million, while working capital represented an outflow of NOK 12.7 million. Net cash flow from operations was negative NOK 6 million, including net investments in Device as a Service. Operating cash flow was negative NOK 16.1 million. Investment activities, excluding Device as a Service used NOK 6.1 million, primarily reflecting continued development of own software for the partner channel and the Spain rollout together with ongoing efficiency products. Financing activities contributed to NOK 19.2 million after the new bank financing was implemented back in May. The facilities were total NOK 75 million following the divestment. Cash decreased by NOK 3.1 million during the quarter to NOK 4.6 million. Subsequent to Q2, Techstep announced a NOK 40 million bridge facility and a planned rights issue of at least NOK 83.3 million. And then also quickly look into the balance sheet. At the end of Q2, total assets were NOK 910 million and total equity was NOK 412 million. This established an equity ratio of 45%. Total noncurrent assets were NOK 731 million. This includes goodwill at NOK 485 million and customer relationships and technology of NOK 88 million. The decline in the share price following the announcement triggers a goodwill impairment assessment in Q3. Net interest-bearing debt was NOK 82.6 million, Interest-bearing borrowings consisted of NOK 43 million classified as noncurrent and NOK 43.7 million classified as current, less cash of NOK 4.6 million. The new financing platform was put in place on 5th of May with our NOK 45 million revolving credit facility and a NOK 25 million overdraft facility. Shareholder loans are subordinated to the revolving credit facility and amounts to NOK 35 million. Subsequent to the quarter, the company secured a NOK 40 million bridge facility and announced the planned rights issue. During Q2, delays and additional integration costs led to deterioration in near-term fundamentals even though the Board continues to see long-term potential in the business. To secure liquidity until the equity raise, Techstep established a NOK 40 million bridge facility. The contemplated rights issue is guaranteed by 5 shareholders for up to NOK 83.3 million at a subscription price of NOK 1 per share. The Board remains open to alternative proposals that could support a higher subscription price. The transaction was announced on 17th for July. And the final terms, risk factors and completion conditions will be set out in the prospectus and remain subject to the required corporate and regulatory approvals. Let's also move on to the next slide and the indicated steps and timing towards completion. This is the indicative time line for the rights issue from August through October 2026. Following the publication of the Q2 results today, the prospectus draft and the -- also stock exchange application are planned for submission in late August. The EGM notice is expected in early September, followed by the EGM and prospectus approval around late September. The subscription period and rights trading are expected to run from late September to mid-October. Results and allocation are then planned for mid-October with settlement and release of proceeds expected by late October. Investor sounding, pricing assessment, prospectus, preparation and board readiness activities continue in parallel through August and September. Settlement includes guarantor share issuance, VPS processes and registration. Once the proceeds are released, the bridge facility will be repaid. All milestones remain indicative and depend on approvals and execution of the contemplated transaction. With this in hand, I hand it over to Morten to give a business update and to summarize the presentation.

Thank you, Havard. As I said earlier, our business update is centered on 1 clear objective. Translating Techstep's market position into more consistent execution and improved profitability. During Q2, we sharpened our focus around the areas where we can differentiate on our own software, unique specialist services and an integrated hardware and life cycle offering. At the same time, we continue to simplify the organization, lower the cost base and build a more scalable operating backbone. The following slides show how this positioning our partner and ecosystem model and the Techstep improvement program Connect from customer value to operational execution and financial outcomes. So this slide summarizes our execution agenda in 3 moves. First, we are sharpening the market position. Sweden is being repositioned around a more differentiated enterprise mobility offering while we scale software and services led growth across Europe. Second, we are resetting the structural cost base. FTEs declined from 260 at the end of 2025 to 190 at Q1 as a result of the carve-out in February as well as the rightsizing the organization with a target of approximately 160 FTEs by Q4 this year. The annualized cost base target is now NOK 218 million, as Havard stated by the end of 2026 compared with NOK 312 million in 2025 and and a further down from NOK 238 million as annualized cost base last quarter. And third, we are standardizing and automating the operating platform. 1 ERP is live in Norway, Poland and Sweden, while digital commerce, AI and automation rollout continues. The combined objective is clear focus, a lower run rate and a platform that can scale. The key takeaway from the Techstep improvement program is straightforward. Aligning margin expansions, profitable growth at a lower cost base to strengthen profitability and cash. First, we are targeting higher recurring gross profit from the existing customer base. The main levers are a higher software and services mix and a disciplined upsell and cross-sell. Second, we are prioritizing profitable new business, not growth at any cost. We will focus on customers, partners and markets where we can win repeatably and increase recurring revenue. And third, we are reducing the cost base through centralization, organizational simplification and ERP and digital commerce efficiencies. The new annualized cost target is 15% below the original May baseline. The program should be assessed through 3 outcomes. Recurring gross profit, the cost run rate and cash generation. Benefits will phase in over time and remain subject to our execution, restructuring costs and commercial performance. And building on the improvement program, our growth strategy is to develop both go-to-market channels but with different roles. The direct business will remain the larger contributor and our Nordic innovation and margin engine. Through close enterprise relationships, we gain customer insights deepen recurring revenue and increase the mix of our own software and specialist services, supported by hardware and life cycle delivery. The indirect channel is our European scale engine. By embedding our software and unique services in the propositions of mobile operators and IT service providers, we can reach larger installed customer bases, enter selected markets with a lower footprint and make delivery more repeatable. The ambition shown here is directional. We target the indirect channel at around 40% of gross profit by 2029 up from 15% in 2025. This is not a shift away from direct sales. We expect both channels to grow in profitability while indirect grows faster and therefore, increases its share of the mix. The illustration should be read as a strategic ambition, not financial guidance. This model supports the same financial outcomes highlighted on the previous slide, more recurring gross profit, better scalability and stronger operating leverage. The next slide provides commercial proof points, while the key measure will be our ability to convert partner reach and customer demand into profitable growth and cash. This message on this slide is deliberately balanced. We are not satisfied with the results delivered in the first half of 2026. Performance was below our expectations, particularly because the broader health care rollout took longer than planned and the revenue mix shifted toward lower-margin hardware. The shortfall in net gross profit shows that commercial activity has not yet converted into the profitability and cash generation we need. At the same time, there are credible commercial proof points. Device deliveries to Helse Midt-Norge contributed substantially to June revenue. Although other health care service trucks remained delayed. In Spain, first deliveries are underway through Vodafone and other operators following the Generalitat de Catalunya engagement, representing potential of up to 80,000 devices within 2027. Equinor and Bane NOR renewed their contracts and we continue to develop and strengthen the partner ecosystem across our markets. These wins do not offset the weak H1 outcome. They do, however, reinforce that the underlying customer need remains relevant, secure mobile operations, life cycle management, regulatory compliance and more sustainable device states. Our position has strengthened through reference customers, partner reach, differentiated software and services and our strong Nordic managed mobility footprint. The next proof point is conversion. We must translate these demands and pipeline into higher share of recurring gross profit, improved margins and cash. The opportunity is real, but confidence must be earned through execution and visible financial outcomes over the coming quarters. To close, we have completed important foundational work, but the financial performance shows that execution and conversion must improve. During first half, we completed the divestment finalize the group IDRP rollout, continued organizational rightsizing, repositioned Sweden and launched the Techstep improvement program. Together, these actions create a simpler operating platform and a clear focus on our software services and life cycle capabilities. At the same time, Q2 profitability was below expectations. Revenue increased, but net gross profit and the margin declined. The priority now is to execute consistently. We must convert our broader commercial pipeline, increase the contribution from recurring software and services improve margin management and realize the cost and efficiency benefits. In the Nordics, the direct channel remains central to customer insight, innovation and margin development. Across Europe, the direct indirect channel should scale Essentials and life cycle more effectively through our strengthened ecosystem of operators and IT service providers. Financial discipline is equally important. The announced bridge facility and fully underwritten rights issue are intended to strengthen financial flexibility and support execution. Progress should be measured through recurring net gross profit, the cost run rate, cash generation and evidence that commercial momentum is converting into improved financial outcomes. In summary, the strategic direction is clear and the foundations are stronger. Credibility will be built through disciplined execution and measurable improvements over the coming quarters. Thank you for your attention. We will now open for questions.

We will move directly over to Q&A session. So please stand by if you have any questions. And let's see if we have any posted so far. No questions posted in the chat nor the e-mail -- and not to forget, as I said earlier, in the beginning, you can always submit your questions by using the Investor Relations e-mail address. Ir@techstep.io or by using the chat function available in this presentation. If no questions, we will close the call. Again, thank you for attending and your attention. Have a nice Thursday.