Good morning, and welcome to this Q&A session following Techstep's fourth quarter results, which were released this morning. CEO, Børge Astrup and CFO, Marius Drefvelin will be answering your questions as per usual. My name is Erik Haugen, and I'll be moderating this session. This Q&A session will be recorded and will be published on our website later today. If you'd like to submit questions during the Q&A, please feel free to do so using the Teams chat function. Now, before we commence with your questions, Børge Astrup, would like to do a short recap of the highlights from the fourth quarter. Over to you, Børge.
Thank you very much, Erik. Good morning to all of you. The transformation journey to recurring revenue continues for Techstep, so let me give you some of the highlights from Q4. Our recurring commitment is important both for the customers and us, meaning that we strive to deliver high customer value every single day through our services and products. This will also result in stronger gross profit going forward for Techstep. We see an increased momentum and traction with 11 new managed mobility services contracts in Q4. These contracts has an estimated value of NOK 48 million and approximately 12,600 managed devices. We are obviously very happy with the vote of confidence shown by Norway's largest financial services group. We are also pleased to see that the pipeline of opportunities are growing and look forward to converting further opportunities into new business and added commercial momentum.
Our annualized recurring revenue in the fourth quarter grew to NOK 266 million. This includes our own software, advisory services, and hardware as a service. Growth in recurring revenue will be our key focus moving forward. For the full year 2021, our gross profit increased by 21% to NOK 459 million, in line with the growth in our markets. There is also a lot of activities and initiatives ongoing in Techstep. We're looking forward to launch the new rebranding of Techstep during March. The rebranding will give us a clearer message, a clearer storyline, and a clearer position of how we support customers through smarter mobile technology for a brighter tomorrow. We are streamlining the organization and strengthening the management team, both in sales and marketing. With the restructuring, we're also shifting our investments towards the commercial division.
Where we will invest in supporting tools to increase our momentum and also to increase the accuracy and efficiency. In Q1, our new CFO, Anita Huun, and our CMO, Sheena Lim, will also join the team. We're also strengthening our product and development department as we move on to be able to deliver our product offering of SmartControl and SmartDevice and SmartWorks. SmartControl, is a platform for all businesses that will help you to manage and control your devices and software more easily and securely. While SmartWorks, will help you to increase the quality and efficiency through mobile technology, such as industry-specific software. SmartDevice, will enable you to buy hardware in a more sustainable and affordable way, with the freedom for the employees to choose their preferred device.
Our market is expected to grow annually 24% from 2022 to 2027. Important focus areas are data privacy, security, and sustainability, also with a careful lifecycle handling of devices. We're also glad to see that expectation for cloud migration is also increasing as well, and this fits perfectly for us with our SmartControl, SmartWorks, and SmartDevice offering, meaning that with our position and product offering, the future looks bright.
Thank you, Børge. There have been a number of questions submitted to us. I will open with questions that go to you, Marius. You have a pro forma growth of 18% from Q4 2020 from MMS-related owned software. Can you comment on this and preferably growth ambitions?
Certainly. This includes the three software components, Wirigo, True Mobile, and FAMOC, all of which will be included in the new SmartWorks and SmartControl offerings. First of all, we are very happy to see that this growth is evenly distributed between all of these three components in Norway, Sweden, and Poland. The growth in Norway also includes a conversion from our white label services to the MMS- related software, which is according to our strategy. When it comes to growth ambitions, we have not updated any of these in our outlook, but as we have mentioned several times, and as Børge just mentioned, the market is expected to grow by 20%+.
I think the most important thing for us now is to roll out the new software and our services, and start to invoice the full number of users from day one.
Thank you. We will continue with some financial questions, Marius. You say you will continue to invest in R&D, but the development CapEx came in above your guidance in 2021. Could you bridge these two statements?
Okay. The main reason for that is, the acquisition we made last summer of the software company, FAMOC, which obviously increased the software development costs. I would say it brings in another NOK 5 million-NOK 6 million of CapEx, compared to the guidance we made last year. In addition, we are seeing that we are spending more time on CapEx related projects rather than what we normally would classify as OpEx related hours, spending time on bug fixing and maintenance, et cetera, and that's a good shift for us, and we are speeding up the software development.
Thank you, Marius. Børge, over to you. Can you say something about the market development?
Definitely. As mentioned, it's the expectation is that our market will grow with a CAGR of 24% from 2022 to 2027. This will happen gradually, and the expectation for the European market is approximately 20% for next year. As mentioned, the focus areas that we see out in the market as well is data privacy, security, and sustainability. This fits what we are going out with in the market in a very good way. I'm very optimistic for the future going forward.
There's a question here relating to the effects of all these offerings. Can you say something about the pipeline, Børge?
Yes. I can. The pipeline looks stronger for Q1 than it did for Q1 one year ago, so that's good. We also, with the focus on recurring revenue, we also see that, with the pipeline, we are in a good state to deliver what our goals and plans are for the year. Because with the recurring revenue, it's very, very important to get a good start of the year, but also to be able to build up a strong momentum that will carry us and help us going into 2023. We are also, with the rebranding, building a new webpage that is optimized for generating leads. This will also support the commercial momentum and will help us to also strengthen the pipeline, both short-term and long-term.
Thank you. Now, we are having some new employees in the management team. There are questions here about an update on the new hires. Can you please give an update on the new hires for CFO and CMO?
Yes. Our CFO will, Anita Huun, she will join us on Monday, so that's fantastic. This will be the last quarterly presentation from Marius. We also have Sheena Lim joining us as our new CMO from March first.
We have a submitted question, just came in. This is for Marius. Looking at the seasonality, can we expect this, as in gross profit EBITDA, to be lowest in Q1 and increase throughout the year?
I think the answer to that question is yes. Q4 will still continue to be, on a general basis, the strongest quarter of the four quarters, even though the effect is now smaller than it used to be a few years ago because of our transition towards recurring revenue. Obviously there is still a plan, and our ambitions is to grow quarter-over-quarter throughout the year, both going into this year and into next year.
All right. Thank you. Just checking to see if we have any more questions in the chat here. How do you think about the operational cost development going forward? How many new hires do you expect in 2022, or will we see some scalability throughout this year? Marius, you're putting your hand up.
I think in general, well, in 2021, we had a turnover of 13%. I think we should be expecting a turnover going forward considering the transformation we are currently doing. From an OpEx and personnel expenses perspective, I think it's a mixed picture. We are doing some ERP projects and efficiency projects which will reduce the OpEx going forward. And as such, we should be able to see some scalability and increased efficiency. As far as personnel, as we have been talking about, we are increasing the staff in the way that we are strengthening the team, replacing with other kind of competencies. We have been doing that, and we will continue to do so.
I think it's an overall mix with some reductions due to some of these projects, maybe offset by some of the increases with the recent strengthening of the team that we have been doing.
Thank you. Yeah, I think this one is for you, relating to the business here. Do you view the DNB contract, as mentioned in the report, as a one-off to your strong MMS results in Q4, or should we expect the current MMS growth to continue at the current pace going forward?
Very good question. First of all, we're very happy with the DNB win. This shows that we are able to win large deals moving forward, and this will help us also to be relevant for other big corporates to when they also will choose their providers. The pipeline, as said, is going the right direction. We are strengthening the pipeline every month moving forward. We will of course have some larger deals also coming in in the future. Yes, the deal is somewhat a one-off since it's a big deal. What we are focusing and will be focusing moving forward is how much we're able to sell for each of the months, and that we see that are strengthening in the time to come.
It will be a trend going forward that we will be able to win more deals. We will be able to sell more when we also have the refined product offering and increased momentum in total.
Thank you, Børge. There are more questions coming in on the email here, the ir@techstep.no. Marius, this is for you. Could you please explain the overall decline in pro forma gross profit to EBITDA conversion from 2020 to 2021?
I think this has two aspects. For the full year, we're still seeing a decline in the operator commissions, as we have been talking about for some time. This year it was about NOK 10 million-NOK 12 million of the decrease as such. Secondly, we are definitely seeing the effect of moving towards recurring revenue, meaning that we are periodizing these revenues over a 24-month span rather than aiming for the transactional sales. However, we did spend some time in the presentation on the quarterly development for the 2021 year, where we saw an increase in the gross profit conversion from 7% in the first quarter in 2021 to 20% in the fourth quarter. In each of these four quarters last year, we were seeing an improvement.
Børge, I guess, should we expect the gross margin in non-MMS, transactional, in brackets it says here, to revert back to 25%, or do you expect continued headwinds on reselling margins? Side note, Atea recently highlighted very low profitability for its mobile phone reselling business.
This, the margin game, and that's why we are focusing the business on the recurring revenue moving forward, because then we combine our offering with the transactional sale, with our software, giving the customers a way stronger product offering. That means that we can give them a stronger offering with both SmartDevice and SmartControl as one example, or SmartWorks and SmartDevice. When we do that, then we will be able to have a stronger margin moving forward.
There will continue to be margin challenges on just selling transactional hardware, but there are smarter ways of doing it, and businesses can save way more money to do it in a smarter way than pushing for the transactional price, because they have to have a stronger focus on their ESG commitments and to put that into an automated system moving forward. That is one of our core offerings that we can help them with so that they actually can deliver according to their commitments on the ESG.
Thank you. I have another question for you, Marius. When should we expect financial effect from the lifecycle management business in terms of reselling customers' devices into a second-hand market?
For some time now, we have been saying that the Hardware-as-a-Service portfolio will start to mature towards the end of this year, 2022. Meaning that the portfolio and the devices we started to deliver at the end of 2019 will now either be delivered back to Techstep, or the customer will continue to keep the devices if they are still well-functioning above the typical contract period of 24 months. The answer is we should see that effect of these end of lease contracts. Techstep has the obligation to buy back these devices. We have a well-functioning secondary market, and we have said that this normally will give us the same margin selling it the second time as for the first time.
It should be seen as a kicker in the portfolio, and booked as a one-off transaction as such when this starts to happen. Probably at the earliest, Q3, Q4 this year and going into 2023.
Thank you, Marius. I will hand it back to you, Børge.
Thank you very much, Erik, and thank you all for joining. I also would like to thank Marius for his service as our CFO for many years now. He's done a great job and helped to bring Techstep to where we are today. He's done a fantastic job over the previous years, so we wish him all the best moving forward on his next journey.
Thank you very much, Børge.
Thank you all, and that concludes the Q&A session for Techstep's Q4 results. This recording will be available on our website later today. If you have further questions, you can always ask this using ir@techstep.no. With that, we conclude the session and wish you all a great day.