Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Checkit plc Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions]. Before we begin, I would like to submit the following poll, and if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Kit Kyte. Good afternoon, sir.

Hey, thanks very much, and good afternoon, everybody. I'm very pleased to be able to present the trading update for the full year '23, and we'll get straight into it. The obligatory disclaimer we need to get through. Okay. So there's a little bit of ground together. I will start with a set of highlights on the financials, and then we'll explore, for those who are new to Checkit, the why Checkit, the who we are, what we do, why our industry and why now. And then I'll cover off the pillars of our strategy and how we're looking to continue to grow to seize this opportunity. And then I'll hand over to Greg for a bit more detail on the financials before we open up for Q&A. So we're very pleased with what was a successful and consistent year of growth, organic growth in the company. ARR came in at GBP 11.5 million, so that's 28% year-on-year and ahead of market expectations. Recurring revenue at GBP 9.6 million represents 41% year-on-year growth. And I'll add that is the third consecutive year of plus 30% growth in recurring revenues. And it is also now greater than 90% of all of our revenues, so we're very happy with that result. Total group revenue from continuing operations at GBP 10.3 million, representing 22% year-on-year growth; and cash of GBP 15.6 million, ahead of market expectations lead us in a very healthy and a balanced position as we move into FY '24. And then with a view towards our path to profitability, we're very confident that our cash position will remain strong throughout that. So for those who are new to the Checkit story and indeed for those who are existing shareholders, it's time to revisit what we're about and what's so exciting about the opportunity. So who are we? What is it that we do? Really, there's three things for you to bear in mind here. Checkit, first and foremost, is a cloud-based platform that drives, enables and guides workflow for deskless workers, and that workflow is using part of their hands through an Apple device or an Android device or an iPad tablet. That platform is also augmented and surrounded by an Internet of Things sensor ecosystem, okay? So the assets, be they fridges, freezers, hot-holds, vaccine storage units, buildings that these deskless workers operate with are monitored automatically by our Internet of Things sensors. A second point, the key point about what makes Checkit so differentiated is that we link and we integrate the data that comes from the Internet of Things sensor devices with the data that comes from the people doing the work into the one platform, so we can end-to-end view an automation and digitization of the environment in which deskless workers operate in. We provide them with the technology they need to be more effective, more efficient, reduce waste, et cetera. The third piece that really makes Checkit stand out is when we think about the business leaders in the large multisite international businesses that we tend to work with. These are predominantly COOs and CXM minus one leaders. Sophisticated dashboarding, insights and analytics takes over the data that is gathered from the shop floor as it were and turns that into real-time visibility and actionable insight. So we're in the business of driving operational improvements across the board for large multisite operations. There is a real and fundamental need. So despite all of this, deskless workers, that's about 2.7 billion people or 80% of the global workforce, 73% of these workers in large blue-chip multisite, multi-geographical organizations are still using pen and paper or Excel spreadsheet to do their work, right? So even though we're in 2023, it's a 21st century world, they're still operating like it's the 1980s. It's clearly not fit for purpose. Then you factor in rising cost of labor, supply chain challenges, supply chain disruption events, the impact of inflation, fundamental in our target audience, the impact of labor attrition, and you get a direct impact on service delivery. This leads to a situation or an environment in which our customers are operating in a dark operations environment. What does that mean? It means that the interaction, the activity between people, places and things remains hidden from view. They can't see beneath the bonnet, which means you're inefficient, you're wasteful, you're wasting time, resource, energy, food, medical product, et cetera. Checkit platform brings this into the light and allows business leaders to make continuous improvement on their operations. The market size is compelling. So what we know is knowledge worker market is about 600 to 1 billion people, has about GBP 210 billion of business technology spend annually going through it. Deskless worker market is 3 to 4x the size. Even if we make a few prudent assumptions that deskless workers might be less highly valued than knowledge workers is debatable. Even if we accept that the market itself is still fragmented and evolving, over the coming years, it's quite possible to see a market opportunity GBP 500 million to GBP 600 million annual business technology spend. In order for Checkit to see the opportunity, we need to be very focused. So I'll just explain the industries that we currently play in and why we do so. Okay. So predominantly, we focus on health care, retail, restaurant hospitality. It's about 600 million deskless workers. Healthcare includes within it biopharma companies in the U.S., for example. It includes within it hospitals, both private and public. So for example, the NHS is one of our largest customers. It also includes within it life sciences organizations and care homes, increasing care homes, or senior living as they say in the U.S., which is becoming quite an interesting space for us. Retail, for us, quite predominantly means food retail, but within that, of course, you've also got franchise operations from the large food retail players. And you've got facilities management, particularly soft FM for, which food to go is a core business requirement. And then the final industry for us is restaurant and hospitality. This is a core part of the Checkit business. The point to note here is there are adjacent industries, education, manufacturing, construction, that we expect to scale into as we harden up our go-to-market offering. So I'm going to cover off with a few of the key pillars of our strategy. There are three pillars. One, we will continue to convert Checkit into pure subscription business. I consider this now complete. As I said, more than 90% of our revenue is now recurring. Two, we will look to continue to build scale and global growth, scale in how we go to market, global growth in where we seek to play. So U.K., Europe has been our traditional base. As you'll see, the U.S. and North America has become a very exciting growth story for us, and we'll continue to focus our efforts in these two regions. We have a foothold in Asia Pacific, and over time, I expect that to also play an increasing role in our growth story. And the third piece, which is really fundamental to this, is we will continue to evolve and transform the operating model of the company, one that seeks to be able to scale and grow without adding in incremental cost. A key factor of this really is the culture of the organization that we're looking to build it. High performance must be core if we're going to seize the opportunity the way we want to. And so those growth ambitions, let me unpack them for you. There's 3 pillars to it. Again, one, we will continue to expand and prioritize growth in the U.S. market. Alongside that, we'll seek to double down growth in what we call the rest of the world. So that's kind of U.K., Europe and beyond. It's worth remembering we've got more than 500 customers, and the majority of those are based in and around the U.K. and Europe. There's a great opportunity, particularly in economic conditions such as these, to drive increased upsell and cross-sell opportunity amongst those customers. Alongside this and of equal importance is how we continue to accelerate our path to profitability. We've mentioned this a lot in the last 6 to 12 months, operating efficiency in how we sell, in the way the product goes to market becomes absolutely fundamental. And Greg will be able to articulate more on that in a few moments. If we get pillars 1 and 2 correct, then pillar 3 should start to follow through. We have a stated ambition to become the market leader in what we call the augmented workflow. So that's a sophisticated use of Internet of Things sensors, software and analytics in our target sectors. I'm going to touch on a few things that have been highlights from the year FY '23. So as it relates to customers and pipeline. Pipelines sitting currently at just shy of GBP 14 million, annual value that is, so it's nearer GBP 45 million, GBP 46 million of total contract value because of the 3-year minimum terms. The really important thing to know about the pipeline is that nearly 70% of that is comprised of what we call large enterprises. That's big multinational blue-chip organizations, billion plus in revenues. That's the fundamental basis for how we will seek to grow this company, large enterprise customers, and we pursue what was called a land and expand model. So initial deal sizes might be relatively small. But if you're a company like Compass Group, for example, or Sodexo, customers we all brought on board in the last year, the ramp, the opportunity to scale as the product gets sticky and as the snowball takes place is significant. Other logos that we typically would work with would be the likes of Stop & Shop, Greggs Just Eat, et cetera, a number of whom we brought on board in the last 12 months and over the next 12 and beyond, we seek to expand. Alongside this upside larger deal opportunities, it's fundamental to maintain a consistent run rate in the business. I think we've done a good job in the last -- in H2 of demonstrating that. That is consistent sales coming through the door. And that's why we also focus on what we would call enterprise and midsized customers, sits at GBP 500 million to GBP 1 billion in revenues. They may have a limit to the total amount of lifetime value they can have. However, the consistency in the shortened sales cycles keeps the business well balanced. A word on the U.S. Again, I'm really pleased with the performance of the U.S., okay? So we've grown at about 91% in terms of ARR in the last 12 months, and that's a really fantastic result. It's still a maturing market opportunity for us. We are still figuring out the best and most optimal go-to-market strategy, but I think the indicators are that we've got a model that works there, okay? Predominantly, our customers have come from net new customers in the biopharma space, upsell and cross-sell within the biopharma space. Also, more recently, we started bringing on new food retail sort of franchise customers. And an interesting vertical here as well is senior living, so care homes in the U.S. that's had a lower traction. So we're quite excited, and we want to continue to maintain that growth as we move into FY '24. And finally, before handing over to Greg, just to touch on a few aspects of how we're investing into the platform to make it and maintain it as a point of difference amongst the competitor base. So we will continue to onboard third-party IoT use cases. So additional Internet of Things sensor products into our ecosystem. This allows us and this will complement the use cases and the go-to-market that we currently have, both our existing and new customers. Within the platform itself, I mentioned already that we fuse sensor data with the data gathered from people and workflows. We will move and we'll enhance that what we do from being a task master and from organizing operations to guiding operations using predictive insights. This will have to be enabled through a much more flexible use of self-service, customers enabling trials, easier adoption of the platform, very easy self-service workflow development. And all of that needs to be underpinned by a robust, scalable and resilient cloud platform, which is core to this business. Okay. So I'm now going to hand over to Greg, and he can take you through some of the numbers in more detail.

Thanks, Kit, and good afternoon, everyone. We're very pleased today to present a trading update ahead of market expectations. ARR at GBP 11.5 million increased by 28% versus last year and was ahead of analyst forecast of GBP 10.8 million. So an increase of GBP 700,000 versus those analyst forecast. Cash was also ahead at GBP 15.6 million versus consensus expectations of GBP 15.2 million. Group revenue from continuing operations was GBP 10.3 million, up 22% versus last year, with recurring revenue 41% up, partly offset by nonrecurring revenue, which we expected to decline as we converted more U.S. customers from maintenance contracts to subscriptions. As Kit said, recurring revenue is now 93% of the total, demonstrating our transformation into a subscription business. So let's go into some more detail on our recurring revenue performance. As you can see here and as Kit mentioned before, this is the third consecutive year where we've grown by 30% or more. This consistent growth reflects new business wins as well as expansion with existing customers. We've been successful in renewing one of our largest enterprise contracts, and as we invest in our growth and in our platform, we remain confident in our growth strategy and our expansion in the U.S., which Kit just spoke about, evidence of this further. As well as growth, we've applied increased focus on our plan to drive further operating efficiencies and accelerate our path to profitability. Over the last year, we have reduced costs in our operations with some targeted headcount reduction of 10%. We have also delivered on initiatives to reduce our hardware and platform costs, which will improve our margins. Today, we are focusing on revenue and cash, so we'll take you through this more when we announce our preliminary results in late April. And now I'll hand you back to Kit.

Thanks very much, Greg. Look, we look forward to be able to unpack more of this actually as we hit the prelims in mid-end of April, but it beholds me to say that the Board remains confident in our ability to drive -- continue to drive consistent and strong organic growth in FY '24 despite the economic conditions that we all are familiar with. So with that, I would like to hand over for Q&A and look forward to answering questions.

[Operator Instructions]. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with the copy of the slides and the published Q&A, can be accessed via your investor dashboard. Alex, perhaps now, if I may, just hand over to you to chair the Q&A session with the team, and I'll pick up from you at the end. Thank you.

Thank you, Jake. So I'll kick off with the first question from [ Ryan ]. Great to see that the new contract wins in January. What is the typical sales cycle in securing new customers?

Yes, okay, good. Let me take that one. Thanks, Ryan, for your question. There's a few factors I'd make people aware of. One, the sales cycle depends on the region, and it depends on the size of the customer. So if it's the enterprise big blue-chip customer, typically, you would have expected to see 12 to 15 months to land a significant foothold from which you can then expand. Over the last 12 months, because of the economic conditions that we're all familiar with, that -- we have seen some extension of that kind of a sales cycle. If you're looking at sort of midsize and sort of smaller enterprise customers, those sales cycles can be 6 to 9 months, let's say. We did have a win in the U.S. at the back end, very end of last year, which had a 60-day sales cycle, and that's actually a midsized customer. So there is variation within that. We're constantly striving to reduce that sales cycle, but there are certain aspects we don't have full control of. So that will be the way I'd guide people towards it.

Second question here from [ Steve ]. Further investment is planned into sales and marketing and development to support growth. How much of the business moving forward does this represent?

So yes, I'll take the first part of this, and I'll let Greg comment on what proportion of our spend is on sales and marketing. I think it is absolutely true that where we see green shoots and where we see scale, for example, in the U.S., we've had a very really good year, we look to get behind that, and that's why we're glad to have that healthy cash position, so we can invest accordingly. But it's also the case that we need to do it on an ROI-led basis. It isn't actually the case that there's a straight line between pound spent on, say, new sales heads and pounds delivered within a period of time. So we have to be very balanced in the way we do that. But absolutely, where we see growth, we get behind it, a very targeted, focused way. Greg, perhaps you might want to just speak a little bit more on how we balance that.

Yes, sure. So what I would say is that we have increased investment this year into sales and marketing and into our product. We'll take you through more of that detail when we get to the preliminary results. But as a broad assumption out of our operating costs, I would say that sales and marketing and product represent about 2/3 to 3/4 of the operating costs.

And then one specific question is how many sales people do you have in the U.S.? And given the success there, are you planning to increase the size of that team?

Yes. Okay. So surprisingly, we have three salespeople in the U.S. So they're quite effective. it's -- are we planning to increase the size of that sales team? As I said just before, absolutely. The way to do this fundamentally is you get -- you build up a significant amount of pipeline and demand such that the existing team is completely saturated. And where you have seen those green shoots, you then invest behind it with new heads. I think one of the learnings over the last couple of years is not to bring new heads in ahead of demand. So ahead of getting that pipeline where it needs to be. The pipeline is now where it needs to be in the U.S. So I think as we move into next year, we'll be looking to bring on more heads and drive more organic growth.

Got our next question here from [ David ]. Previously, Checkit has been excited about the rollout possibility with BP with targets of 1,500 sites in '22; 2023, 4,924. Can you sort of talk about how that client is progressing?

Yes, I can. I mean it's fair to say that the renewal, the enterprise renewal that we announced towards the back end of last year, one might assume it's quite related to the BP opportunity. And what I'd say there is they're a very large customer. They're top 3 largest customer for Checkit in terms of ARR contribution. But like any very large blue-chip organization, they can be quite slow in their decision-making process. And it could be the case, you might say, that until such contract renewals have taken place, they may not be willing to look at new markets. If we assume that, that contract renewal is now closed off, the new markets come back on the table. And those are just the kind of factors we're doing. The pace that Checkit wants and then there's the pace that a very large enterprise like BP wants, and they are always aligned. So we have to take what we can get where we can get it.

Okay. Another question here from [ David ]. What are your cash burn expectations for the next 12, 24 months?

I think I'll let Greg take that.

Yes, sure. So if you look at the analyst reports that came out this morning, you'll see that they're suggesting that cash at the end of this current financial year that we've just entered will be GBP 9.5 million. That represents a good improvement in terms of the cash burn that we're seeing. So cash burn will reduce over the next year by about 30%. We'll release and we'll expect the analyst to release guidance for FY '25 when we issue our preliminary results in April.

Thank you, Greg. Question here from [ Steve ]. Do you see consolidation in the sector? And do you have any plans for acquisitions?

It's a good question. So consolidation, I have seen actually in the U.S. most particularly. So there was a company called GoSpotCheck and another company called Zenput, both of whom would be acquired by kind of large vertical stack data analytics providers in the last 12 to 18 months. They are some of our primary competitors in the U.S. We haven't seen as much in the U.K., Europe yet, but that's not unsurprising. So there is consolidation. I think it's an opportunity that, I think, speaks to the growing awareness of the size of this space and the opportunity. In terms of plans for acquisitions, yes, we remain absolutely open for the opportunity and now is potentially an interesting time to make such an opportunity. I think what I'd say is that it would need to be a complement to what Checkit provides rather than an addition to the product set because our product set is differentiated already. It would need to be something that brings in a new component of what we do, and that might be quite interesting. So we remain open to it, we have the cash. But for me, it's about organic growth than it's inorganic growth through partners, channels, alliances, and then you can also think about acquisitions at the same time.