Good morning and welcome to Techstep's Q3 presentation, and thank you for joining us. We are building a more focused mobile and circular technology business with software and services at the center. Today, we will explain the financial results, the progress we are making, and where we still need to improve. For us, the next step is clear. We need to turn stronger commercial activity into recurring gross profit and cash while continuing to bring our costs down. I am Morten Meier. Joining me today is our CFO, Håvard Haukdal. I will talk about how we are developing the business, our strategy, and our priorities. Håvard will walk you through the Q3 financial results. Our aim is to give a clear picture of where we are today, what we need to do next, and how we will measure progress.
For those who are new to Techstep, we help organizations make mobile technology work in their daily operations. We bring together software, devices, and specialist services and support customers throughout the lifecycle of their equipment. We manage more than 3 million devices and work with over 80 partners. Our customers include large businesses and public sector organizations where reliable and secure mobile tools matter. Our ambition is to become a leading mobile and circular technology partner in Europe. To achieve this, we are building on our customer base and technical expertise with more software and recurring services at the center of each relationship. Håvard, over to you for the Q3 financial results.
Thank you, Morten. I will now take you through our Q3 2026 financial results. The main financial development this quarter is the return to positive adjusted EBITA as cost reductions begin to contribute. Revenue and net gross profit remain below last year, and cash generation still needs to improve. I will start with the headline figures, explain the earnings drivers and cost program, then cover recurring revenue, cash flow, and the balance sheet. I will finish with the pro forma effect of the rights issue. Let me start out by underlining that all historical comparisons use pro forma figures, excluding the divested business. Q3 revenues was NOK 169 million, down 7% year-on-year. Net gross profit was NOK 53.4 million, down 13%, with a profit margin of 32% as shown here. Adjusted EBITA returned to positive territory at NOK 2.1 million.
That is an improvement of NOK 15 million from second quarter, although it remains NOK 3.3 million below the same quarter last year. Adjusted annualized recurring revenue was NOK 251 million. It increased 3% from the previous quarter and declined 5% year-on-year. The ARR comparison adjusts for the terminated legacy Telecom Expense contract. Overall, the quarter shows progress in operating profitability, while the lower gross profit and recurring revenue compared to the last year underline the work still ahead of us. Let me explain the drivers in detail. Revenues was NOK 169 million compared with NOK 182.6 million in third quarter last year on a pro forma basis. Devices revenues increased 1% to NOK 129.3 million. Our software revenue declined 31% to NOK 15.7 million, and advisory and services declined 24% to NOK 24 million. Net gross profit was NOK 53.4 million, NOK 8.2 million below last year.
The profit margin was 31.6% compared with 33.7%, a reduction of 2.1 percentage points. Devices net gross profit increased 26%, mainly through higher transactional margins. This improvement could not offset the weaker contribution from our own software and advisory and services. Own software net gross profit declined 33%, largely due to the terminated Telecom Expense solution. Core own software declined 15% because of select churns. Advisory and services net gross profit declined 25%, mainly reflecting delayed managed health rollouts and lower consulting activity. Operating costs declined NOK 4.9 million year- on- year, partly offsetting the lower gross profit. Adjusted EBITA was +NOK 2.1 million compared with NOK 5.4 million last year. The improvement from Q2 reflects cost reductions beginning to materialize. The net loss was NOK 151.4 million and includes NOK 137 million of goodwill impairment, somewhat lower compared to what we estimated in the prospectus for the rights issue.
Amortization was NOK 8.0 million compared with NOK 17.5 million last year. I will now put the gross profit development into a longer-term perspective. Net gross profit for the last 12 months was approximately NOK 227 million at the end of Q3, down 14% year- on- year on a pro forma basis shown on the graph. The decline reflects a weaker gross profit contribution through the first three quarters of 2026. The terminated Telecom Expense solution has reduced the software contribution, while delayed managed health rollouts have held back consulting and services activity. The growth we anticipated has taken longer time to materialize. Our priorities are to convert those rollouts into recurring gross profit and to improve margins through the Techstep Improvement Programme. The next slide explains the cost base target and the progress towards it.
Techstep Improvement Programme aims to align our cost base with the business while protecting the expertise we need to serve customers and deliver projects. Our starting point is the May 2026 baseline, and the target is an annualized cost base of NOK 218 million for personnel and other operating expenses. The program reflects a reduction of 25 FTEs and changes to the organization following the repositioning in Sweden. September's monthly cost was already at the target run rate. However, holiday effects and temporarily unfilled positions helped the month's result, so we should be cautious about treating it as a sustained cost level. Still, some potentials remains to be realized. However, we are progressing well in line with our internal projections for the improvement program. We expect the benefits to build over the coming quarters, with close to full program effect by April 2027.
The focus is to make the lower cost base sustainable without weakening delivery. Let us now return to recurring revenue. Adjusted Annual Recurring Revenue was NOK 251 million at the end of Q3. That represents a growth of 3% from Q2 and a decline of 5% year-on-year. The figures adjust for the terminated legacy Telecom Expense contract, and the historical comparison uses a pro forma basis. ARR annualizes recognized recurring revenue in the last reporting month using the contract duration criteria described in the footnote. Device-as-a-Service contributed positively to the quarter-on-quarter development. Declines in own software and advisory and services, including a few large customer churns, partly offset the contribution. We entered into several new recurring revenue contracts in Poland. A stronger Norwegian krone also limited their positive contribution in our reporting currency.
Delayed managed health rollouts also held back the ARR growth we had expected for the quarter. The priority is to retain customers and turn new contracts and delayed rollouts into recurring revenue. I will now move on to the cash flow. Cash flow generation remained under pressure in Q3. Adjusted EBITA was NOK 2.1 million, while working capital absorbed NOK 26.2 million. Changes in trade and payable balances contributed to that outflow. Together with other cash flow items, this left operating cash flow before Device-as-a-Service investments at -NOK 10.7 million. Net investment in Device-as-a-Service was NOK 9.3 million. Including that investment, operating cash flow was -NOK 20 million. For this presentation, we include Device-as-a-Service investment in operating cash flow to show its relationship to the customer revenue. The IFRS financial statements classify it within investing activity.
The 2025 cash flow comparatives are reported figures rather than pro forma figures. Other investing activities used NOK 6.1 million, including continued software development for the partner channel and Spain rollout. Financing activities contributed NOK 28.1 million, while the NOK 40 million bridge loan was established in July. Cash increased NOK 2 million during the quarter, closing at NOK 7.7 million. After quarter end, we completed the NOK 100 million rights issue. I will cover the balance sheet and the financing effect next. At the end of Q3, total assets were NOK 700 million. Goodwill was NOK 341 million after the NOK 137 million impairment, while customer relations and technology amounted to NOK 78 million. Interest-bearing borrowings totaled NOK 117 million.
This comprised approximately of the NOK 42 million under the revolving credit facility, the NOK 40 million bridge loan, and the NOK 35 million shareholder loan. After deducting cash of NOK 7.7 million, net interest-bearing debt was NOK 109.3 million. Equity was NOK 251.3 million, corresponding to an equity ratio of approximately 36%. After quarter end, we completed the NOK 100 million rights issue and repaid the bridge loan. The shareholder loans remain to be settled as indicated there. The following slide illustrates a pro forma debt position, assuming the full NOK 75 million reduction from the bridge and shareholder loans, together with the stated increase in cash.
This bridge illustrates then how the rights issue and the assumed loan settlements reduced net interest-bearing debt from the Q3 closing position. We start with a net interest-bearing debt of NOK 109.3 million. The pro forma calculation assumes NOK 75 million of gross debt reduction, comprising the NOK 40 million bridge loan and the NOK 35 million of shareholder loans. It assumes a NOK 16.7 million increase in cash coming from the rights issue of NOK 100 million compared to the initial minimum NOK 83.3 million capital raise.
Together, those changes reduce pro forma net interest-bearing debt to NOK 17.6 million. Gross interest-bearing debt would be approximately NOK 42 million, with cash of approximately NOK 24.4 million. This is an illustrative pro forma position using those assumptions. It includes the settlement of the shareholder loans, which the preceding slide identifies as still to be completed. It therefore goes beyond the reported balance sheet at 30th of September. The financing strengthens the debt position. Our operating priority remains to improve cash generation through recurring gross profit, working capital management, and lower cost base. Okay, let's move to the concluding and final slide. This slide brings the main financial developments together. Adjusted EBITA improved from -NOK 12.9 million in Q2 to +NOK 2.1 million in Q3, followed by the cost reductions. The pro forma financing bridge reduces net interest-bearing debt from NOK 109.3 million to NOK 17.6 million.
It assumes a NOK 75 million reduction from the bridge and shareholder loans, together with NOK 16.7 million higher cash. The shareholder loan settlement forms part of that illustration. That concludes the financial section. I will now hand it back to you, Morten, for the business update.
Thank you, Håvard. I will now take you through our Q3 business update and priorities. Our direction is unchanged. We focus on secure, managed, and circular mobile technology. What matters now is how we deliver on that strategy. I will cover the development in our business, some key customer opportunities, and the work we need to complete to improve profitability and cash. We have made our priorities clearer. Software and services come first, particularly for large customers and industries where secure mobile and operations are critical. We are also making the organization leaner. We moved from 190 full-time positions at Q2 to 180 at Q3. Our target is around 160 during 2027, and we are on track to reach it. We need to reduce costs while keeping the expertise required to serve our customers well.
We have now a common ERP platform, and the new dCom platform is live with migrations ongoing. The work now is to use these systems to simplify daily operations and increase our scalability. Our annualized cost base target is NOK 218 million. This remains a target with close to full program effect expected by April 2027, as Håvard pointed out. We still have work to do to realize those benefits, but we are making good progress towards our goal. For Q4, we have three practical priorities. First, let's do more business with the customers we already have. We want to help them get more value from our software and services by making better use of our solutions and expertise. Second, let's be selective and win profitable new business that scales.
We'll focus on opportunities that fit our strategy and expertise, and we need to be able to deliver on them with clear margins and cash terms. Third, lower our operating cost. The NOK 218 million annualized cost base target remains in place. We need simpler processes and less duplication, supported by improved ERP, dCom, AI, and automation. At the same time, we must protect the people and skills needed for delivery and continuous innovation and development. We will measure progress through recurring gross profit and cash alongside the cost base. We have two routes to growth, and both matter. We expect both to grow, but the partner route to grow significantly faster. In the Nordics, we work directly with customers. We want to build deeper relationship and become more relevant to them.
By combining more software with managed services and the broad range of devices we represent, we can create more value for our customers, especially for larger, complex, and regulated organizations. Across Europe, we will grow selectively through partners, including operators and IT providers. This gives us a route to customers in selected segments and geographical markets without building and scaling the organization everywhere. Our ambition is for partners to contribute around 40% of gross profit by 2029, compared with 15% in 2025. This is a directional ambition, not financial guidance. It describes the mix of gross profit, not revenue, or a forecast of total profit. Progress depends on partner adoption and our ability to deliver and scale. Sweden shows why we are focusing on secure mobile operations. We have signed our largest Swedish contract to date with an initial term of three years.
It combines endpoint management software with ongoing managed services for a major public sector employer. In Germany, we have agreed terms and an initial commitment. The project started last week while we complete the remaining details of the final agreement. We are clear that the definitive agreement is still being finalized. The strategic link is secure mobile technology for customers whose work depends on reliable operations. These cases support our focus on software and specialist expertise. We now need to deliver well and turn the work into recurring revenue and cash. We are positioning ourselves to take on more complex projects with similar requirements, including in new markets. Let's take a closer look at these type of projects and what they typically involve.
These are the kinds of projects we refer to as mission-critical services, supporting customers where mobile technology needs to work reliably and meet very high security requirements, including emergency services and critical infrastructure. Our starting point is our own software and managed services. We help customers secure and manage their devices, supported by specialist expertise. We work with selected partners where the solution requires additional capabilities. Over time, this can open more of our portfolio to each customer, from specialist devices and deployment to repair, reuse, and recycling. Some customers also need resilient connectivity and round-the-clock support. The business opportunity is to earn recurring software and service revenue, then grow the customer relationship where we can add value and deliver profitably. Let me close with the main message.
Our focus this autumn on doing more business with existing customers, choosing new customers and partners selectively, and repositioning in Sweden has improved our win rate. It strengthens margins and builds a better pipeline for coming quarters. Our largest Swedish contract to date is a clear example of the software and managed services business we want to grow. In Germany, we have agreed terms and an initial commitment, and the project has just been launched. We are completing the final agreement as we speak. The priority now is delivery. We need to turn wins, including healthcare and partner rollouts, into recurring gross profit and cash. We also need to realize the cost and ERP benefits while protecting our delivery expertise. Our European ambition remains. We will measure our progress through the results we deliver, particularly recurring gross profit, a lower cost base, and stronger cash generation. That closes today's call.
Thank you for your time and interest. Håvard and I are now ready to take your questions. Let's see if any questions have come through the chat or our investment relation email. First question here, let me just get back. Employees, when the improvement program is finished, how many employees are let to go in Norway, Sweden, and Poland, and how many employees are left in each of the countries? As we just showed, the ambition is to get to around 160 FTEs by the end of this year, which means a reduction across the three countries mentioned of 25 FTEs this fall. That comes on top of the reduction we did following the carve-out in Q1 this year with approximately 10 FTEs. So, what's remaining? Top of head, in Norway, we are close to 80 people after the reduction has taken place.
Poland around 40 FTEs - 45 FTEs, and Sweden the same. So, Poland and Sweden are 40 + FTEs, and Norway 80 FTEs. Then we had a question related to the other income and expense. That specific question maybe you can answer, Håvard, the expense in Q2 related to the restructuring costs, NOK 4.3 million.
Yeah. These are the restructuring costs that has been we have been taking on as part of the de-manning and the other processes.
Then there is a question related to the stock exchange release we updated recently regarding the DFØ contract. I would say we are in a standstill period. We know that this standstill period is now being extended. We are looking into our options related to the new recommendation, the three different vendors, we being ranked as number two. So, I think we'll get back to more details related to DFØ when this is completed. I think that's all questions for now. Thank you for asking questions. You can always use our investment relation mailbox, ir@techstep.io. Again, thank you for joining. I wish you all a great Wednesday.