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 Børge Astrup and CFO Anita Huun. My name is Erik Haugen, and I'll 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 pose questions using the Q&A function in Teams, or send us an email on ir@techstep.io. Before we commence with the actual session, CEO Børge Astrup will make some short comments, the highlights, and the financial results for the second quarter for Techstep. Børge?
Thank you very much, Erik. We are strengthening our position in the growing managed mobility market globally. We're very, very proud to be recognized as the only challenger, as the only 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 level. 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 annualized grew to NOK 281 million, where our own software ARR crossed a very, very important milestone for us, NOK 100 million, where we reach 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. 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 criteria in building a 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 a 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, Børge. Anita Huun will join us as well. We will now kick off the Q&A session. Børge, I will start addressing a question to you.
Go for it.
You report new MMS sales every quarter, but we fail to see the financial growth. Please explain.
Yes. Building recurring revenue takes time, as mentioned. When we move from transactional sales to recurring revenue, that also affects our numbers. When we do transactional sale, we get all the revenue the first month. When we have reporting ARR, or annualized recurring revenue, we only get the revenue for one month, so 1/12 of the total revenue. That's one of the reason. 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 and services, Hardware as a Service, and ARR on own software. In Q2, we also have reported a backlog of NOK 10 million in ARR, so we expect a stronger growth in our ARR going forward.
One other important element is also that when we sign contracts, we need to implement the solution for the customers. First, we sell the contracts, then we implement with setting up the services, doing integrations for the customers, ensure that we are communicating with their internal systems. When that's done, the customer is onboarded, and then we can recognize the revenue. For our Smartwork 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. Our financials is reflecting a transformation phase, where we also are phasing out non-core elements, and this will and has affected our financials. We see that we have a positive development of our recurring revenue annualized.
in Q1 this year, we had NOK 270 million, and we grew this to NOK 281 million. We are very positive regarding that, and we have a strong belief that that will continue to grow even more rapidly. 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 now.
Thank you. Moving on to financials, key part of the Q2 reporting, of course, Anita. You say 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 go back to Børge's answer on this, because there is a lag in the model, where we bill revenue monthly. By definition, moving towards a recurring model moves cash flows and profits out in time. We see this on our Hardware as a Service portfolio where we have a certain part up front, but then after two years, we also have good profits coming from the end of life on the lease period. This is also the same on the software side and consulting areas with a one-month billing. The leading indicator for our profits is our ARR growth and also our total recurring revenue annualized. That is the best indicator of when profits will come going forward.
Now, the other side of this is costs. Question here, how would you cut NOK 40 million-NOK 50 million, and how quickly will we see this in the P&L?
Yeah. As we announced today, we will be cutting our cost base with around NOK 40 million-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 on external consultants on the IT platform and on the general OpEx side. 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 freeze and lower utilization of contractors.
We will see this both on CapEx, OpEx, and on the payroll side going forward.
Thank you, Anita.
Just to touch upon one more thing.
Of course.
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.
This is a natural step for us where we are now, because we have done 12 acquisitions over time. Now we need to harvest, and then increase our profitability.
That touches nicely upon the next questions that I have, here on my list. Børge, what are your growth ambitions going forward?
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. 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 deserve in the market. 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 product offerings lead to increased sales?
As I just mentioned as well, we have 12 companies that has been acquired. We have a total of 50 different products. That's quite hard to go to the market with. What we focus on now is that we have a more streamlined product offering. We have three portfolios with seven solutions where we can deliver the same great quality to all customers, so we can take the benefits of streamlining, standardization of that. It's easier for all parts of our organization, starting from marketing, to go to the needs with the customers. When we also have developed these new offerings, we have done that together with our customers, close collaboration, understanding what the needs are, also looking at the needs and the trends in the market. We strongly believe that we have a better market fit with the new offering.
We feel that we have a way better value proposition, clear, and we also have a significant growth opportunity with our existing customers. Because today we have many customers that has just bought parts of our offering, then adding the additional value of the software for those customers will give them so much more value, and that will strengthen our offering. With the clear focus that we have now, we will be able to streamline the business, and with streamlining, then we can increase the speed.
Increase speed.
Increase speed.
Increase speed. Anita, can you please give some more color on your cash flow this quarter?
Yes. As you see, we have had quite a capital-intensive both Q2 and H1. This also is related to Techstep's transformation and, being in an investment phase. A lot of these costs have been related to integration and, streamlining of the system portfolio. This also hits the CapEx side, and in H1 we had NOK 36 million of CapEx. Our CapEx program has been very H1 heavy because we've communicated that our CapEx on an annual basis is now gonna be around NOK 45 million-NOK 55 million. We'll see quite a reduction in this in the second half. On top of this, we have quite a skewed working capital versus H1 last year and this year, so we have started the year with quite a negative net working capital.
This is related to non-operational costs from 2021 where we get hit, so it's booked as a cost into 2021. Working capital can be quite lumpy. Our core with accounts payable, receivables and inventory is okay, but it's more of the other impacts on the working capital that with our Hardware as a Service portfolio can hit quite a bit. On top of this we had only NOK 2 million cash inflow related to sale of assets from our end of life portfolio which is lower than earlier. We expect this to revert back in the second half, both on working capital and on our Hardware as a Service portfolio, so that will help the cash flow in the second half of 2022.
Okay, thank you. Follow-up question on the financials. How has the OpEx then and personnel costs developed on a pro forma basis?
Yes. As you can see from our numbers, we look at our conversions from gross profit to EBITDA. Despite gross profit being down a little bit on NOK 6 million on a pro forma basis, it's down less on the EBITDA conversion as we have actually on a pro forma basis a NOK 10 million lower OpEx and personnel cost in our basis. We have actually versus on the pro forma basis, a lower cost base now than we had a year ago.
Thank you. Børge?
Yes.
What do you believe is the most important, or are the most important areas for Techstep short to medium term?
I think they are extremely important for us to continue to increase our momentum, commercialize, and continue to commercialize the business going forward, continue to grow. We also need to harvest from the acquisition, building one Techstep, and having one aligned organization and product offering. Of course, we have a very strong focus on simplify, standardize, and scale. Where we have had a very strong focus on simplifying, we are now doing whatever we can to standardize everything that we go to the market with so that we will be able to do a solid scaling phase going forward. With that is our focus going forward.
Clear and concise. I have no further questions in the inbox. Checking with the people behind the scenes to make sure that we have no other things waiting. I think then with that we will conclude today's Q&A session. Thank you for watching. Again, this recording will be made available on techstep.io/investor. Remember, you can always reach us by our investor email, ir@techstep.io. Enjoy your Friday. Thank you for watching.
Bye-bye.
Peace out.