Hi all, and good morning. Welcome to the Q&A session for Techstep's third quarter. The third quarter has come to an end, and I would like to summarize the events of the quarter. A lot has happened for Techstep in this quarter. We proudly have raised NOK 103 million in the private placement in a tough financial market in Q3. The capital strengthens our balance sheet and gives us capital through the final phase of the transformation. The commercial momentum continues in Q3, and with the launch of the product solution, Techstep Lifecycle and Techstep Manage, increased traction is expected, and we can already see positive movement in the sales pipeline.
We have a large customer base with a solid upsell potential, with approximately 1,800 customers without a recurring agreement. The growth in software ARR and the Total Recurring Revenue Annualized continues with NOK 104 million in software ARR and NOK 295 million in Recurring Revenue Annualized. While the net gross profit effect is lagging. Building recurring revenue takes time, and we expect to see positive net gross profit development in 2023. Our focus is on turning Techstep into a profitable company. The cost optimization program has been initiated, and the execution has started to materialize. The profitability is improving, with EBITDA adjusted improvements of NOK 10 million compared to Q3 2021.
We have set new targets where we will have a net gross profit of NOK 420 million, a software ARR of NOK 140 million, and an EBITDA of NOK 50 million in 2023. While in 2025, we will deliver more than NOK 540 million in net gross profit, more than NOK 225 million in software ARR, and more than NOK 150 million in EBITDA. Let us move over to some questions that we have received. You can, of course, send in the questions at ir@techstep.io or in the chat. Anita, I will give the first question to you. How is your cost optimization going, and what kind of restructuring charges can we expect?
As we have announced, we are doing a NOK 90 million-NOK 100 million cost optimization program. This is going according to plan. We are definitely on track. As we also saw this quarter, profitability is increasing as our OpEx and cost base has declined year-over-year. We are approaching the end of the longer investment phase, meaning that it is possible to reduce the cost base but still keep the commercial momentum and not hurting the long-term potential and growth of Techstep. 50% of the cost reductions, unfortunately, will be impacting from a personnel and salaries side of the business. As we start the restructuring process in October, we are giving employees three months' salary. This, we will be booking the extended cost of these that moves into January and February.
We will be booking that at the end of the quarter. Many of these employees have left, so as such that is a bit, we're able to do that. They will be booked as a one-off restructuring cost. It's not talking about huge amounts. It's 30-40 people as of now. Since they're still moving parts, we won't be quantifying it, but it's not a huge number in total. We are also looking into exiting some non-profitable product areas. Some of these products have both small goodwill part and contracts on our balance sheet, which we will be looking to do a small write down off.
These are also very small product areas, so it will be in the range of NOK 10 million-NOK 20 million, is the assumption, and all the costs will be booked in Q4.
Good. Thank you.
Okay. There's a question here for Børge as well. Apple announced earlier this week that they have supply issues. Will this affect Techstep?
What Apple announced is that they will have supply challenges for the iPhone 14 Pro and the iPhone 14 Pro Max. These models are not the ones that drive the biggest volume at Techstep. We are a Apple Tier One partner, and we therefore is a prioritized partner for Apple. We have a very good partnership and good processes with Apple regarding forecasting and managing the volume that is expected. We also expect some mitigation due to that Apple has increased the price for several of their models, meaning that we will see some mitigation effects on our net gross profit. Hold on, Anita. Another question that we had just arrived. Can you explain what you mean with lead time on ARR extending?
Yes. From the day the customer signs until we start invoicing, there are lead times. These can extend depending on, for one, our capacity to deliver, and also a lot of it is dependent on the customer side because they need to have technical resources ready and their project teams to implement from their side. That's where we've seen some of the issues lately. Over the last few months, the lead times have extended. That means that the ARR has been a little bit slower than we hoped for, but not a big issue. It's still expecting to deliver on our ARR for Q4. We have some big deals coming in in the end of the quarter, so we're dependent on these being implemented before December.
Though we're optimistic and positive that that's gonna be able to do that.
Yes. We also got a similar question for a follow-up. You recently signed NOK 10 million ARR of backlog, which only NOK 2.6 million were realized from Q2 to Q3 due to what you have seen in the growth. Should we still expect the Q4 2022 ARR of NOK 115 million? You comment on this as well.
Yes. That is, of course, dependent on lead times, but the backlog is there to deliver over the coming quarters. We have among them the Nortel deal which we have announced, and that's gonna be helpful because it's quite a big deal for us. We also have some other deals which are of a larger content. Of course, the new product portfolio with the launch of Implement and Techstep Lifecycle has started to create a lot of traction, so we're hoping to get some of these deals also in on the Q4 side.
Good. Another follow-up question to the cost optimization here. Cost optimization already looks to materialize, but other OpEx still looks a little bit high. What are the targeted level here, and can you track this correctly?
Yeah. This can be a bit lumpy, and we also do some. It's some of the projects are ongoing that we have decided not to stop, and it's also about cleaning up on the accounting side that we have changes between personnel and OpEx in some of our accounts, which actually increased a little bit this quarter. As we have communicated, 50% of the cost reductions will be done on the personnel side. The remaining is gonna be done on OpEx and SG&A. We won't split this out going forward. Coming from a very high level with a lot of projects ongoing, the reduction of these is easier because we have a lot of external consultants that have been working on this side.
The sum of other OpEx is NOK 114 million, I think, for the full year next year, and that's a target we are very comfortable with, that we're coming from a very ramp in investments in both 2021 and 2022.
Good. Thank you. Another question that came in was, do you see a risk on your financials due to the challenging macro environment? I will start answering that one, and then you can just fill in if there are additional comments. What we are offering to the organizations is to actually help them to save cost. What we see from customers is that they get a positive return on investment from six to nine months based on what kind of combination of products they buy from us. They also will be able to then win on the residual value for the existing hardware they already got, so they have a significant saving on that one. With our solution also, customers are reducing their indirect cost with clear policies and automate their processes.
Not just on the saving side, but they are also able to then reduce their environmental footprint. With our solution, they will get increased efficiency, they will be able to save money, they will be able to increase the quality. In a potential recession, I strongly believe that we have a strong offering towards customers. Then, Anita, another question. We have done some changes on the wordings. Can you explain why you have changed to net gross profit and what is the difference from gross profit?
Yeah, of course. We announced some new targets now during the quarter, and it's based on net gross profit, EBITDA adjusted, and our software ARR. These are key metrics for us and are gonna be very important to track the growth going forward. This is a bit technical, but net gross profit for us, there we take the reported gross profit, and we adjust it for the depreciations on the Hardware-as-a-Service side. This is because we have a leasing model, meaning that due to IFRS 16, our depreciations on the Hardware-as-a-Service are not picked up in COGS, but as depreciations. Extracting these gives a cleaner picture of the real profitability, and is aligned with the business model for us.
That's why we've adjusted these, and that shows a better picture and is better aligned with the cash flow from operations as well going forward.
Good. Thank you.
I think we have a question. Two seconds, let me check here. Yeah. Cash flow this quarter, positive to see the working capital release in this quarter. LTM cash flow impact from working capital is now about NOK -5 million-NOK -10 million. Is this the normalized working capital investment level with the current growth? Yes, that is correct. As we also communicated during the first half, we had a very cash intensive first half, both Q1 and Q2. Now we saw a relief in the working capital, and it was a reversal of NOK 30 million positive for us. In general, Techstep shouldn't be a very working capital heavy business.
We have low inventory levels, and we have very good. Our accounts receivable and payables are very optimized with our hardware model, and they shouldn't be creating a lot of working capital in general. We did have a backlog in the first half. Going forward, we will see a lower working capital in the business in general.
Good. Another cash question that came in. Sweden is burning a substantial amount of cash, representing a major part of Techstep losses. What are you doing about this?
Yes. Yeah, you can. We have changed a bit around on where employees are working and shipping from, due to the functional change in the model and building one Techstep. This means that we have people in Sweden who are also working with the product development or within Techstep Lifecycle across. We don't look in general, we look at revenue and gross profit from a company perspective, while cost can be in different places country-wise. Sweden in general isn't burning cash to that extent. We have a very cash generative business also with the purchase of Optidev.
Good. Thank you. I got a question here. Can you say something about the pipeline going forward? Do you see any slowdown or uncertainty among the customers due to the situation we are in today? Can we expect some large new deals going forward? We can't comment on large deals, but we are working on multiple deals as we speak. Lately we have seen increased traction from our marketing activities. We have also done some good participation on different trade shows. We are, as we speak, in Gothenburg and doing a trade show there regarding transport and logistics. The news coming in from that yesterday was that we have good inflow, a good interest in deals, and we can also see that the pipeline is materializing. We got good inflow during the last couple of months on new leads.
I'm very optimistic for deals coming in for the end of the year. Q4 traditionally is a strong quarter for Techstep, so I'm optimistic for the results and we will work very hard to get all the deals in as quickly as possible.
Okay. There's a question here on Q4. Anita, Q4 with the present cost saving program, how will this look like? We don't guide specifically on Q4, but when we did our investor pre-presentation with the capital raise, we did give a guidance on the full year of a net gross profit of NOK 374 million and OpEx savings going into that. We will see the same trend. We will see a flattish development on net gross profit and expect to see underlying profitability increase as costs are going down, but we will also book the one-time charge for the next quarter. I think that's where we will keep the guidance for Q4 as of now.
Thank you. We also got a question. What is the difference between your Recurring Revenue Annualized and your ARR, and can you comment on the development? I will start off. Our Recurring Revenue Annualized covers all the recurring contracts that we have in Techstep, meaning that we have all the three revenue pillars, meaning Managed Services, Hardware-as-a-Service and software. Our ARR is solely our own software. With our new product portfolio, we are delivering recurring services in all three portfolios. Since our focus going forward is to convert customers towards the new portfolio, a good development is expected both in the Recurring Revenue Annualized , so the totality, and also on our own software ARR. As Anita Huun mentioned earlier, we are reporting the recurring revenue and the ARR when the customers are live and invoiced.
Let's see if we have any final questions. We got a question here on the private share issue. What is the status and well, when will this take place?
Yes. We have sent the prospectus for the Norwegian financial authorities. We're waiting for that to be approved. When that is approved, we will start the rights issue. The plan is the start of December, I think. Yeah, that's depending on the approval from the financial authorities.
Perfect. That is the last question that I can see have come in. Thank you all for attending. Thank you for engagement, and please follow us on LinkedIn so that you can get all the updates of what's happening in Techstep. Thank you.