Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Checkit plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company will review questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to split the following poll. I'd now like to hand you over to Kit Kyte, CEO. Good afternoon, sir.

Hey, good afternoon. Thank you very much, everyone for attending. Let's start the presentation of our annual results for the year, financial year '23. Okay. So there's a little bit of ground to cover here. I'll start off presenting some of the financial highlights, and then we'll briefly touch on the why Checkit and then focus a bit more on dependents of our strategy before considering FY '23 in review. And then I'll hand over to Greg to take a deep dive in the financials before we open up for questions for the remainder of the session. I guess we are pleased to announce our results for the year to 31st Jan '23. So ARR coming in at GBP 11.5 million represents 28% year-on-year growth and is ahead of market forecast. Recurring revenue at GBP 9.6 million and represents 41% year-on-year growth flowing nicely from the ARR that's being booked. Total group revenue of GBP 10.3 million, up 22% year-on-year. And pleasingly, and for the first time, we're mentioning our net retention rate, which is 116%, which represents the successful execution of our land and expand cross or upsell program, particularly relevant in today's conditions. So why Checkit? Again, I appreciate that most of us are now familiar with the story, but for those who may have joined for the first time, I'm going to give you a very quick overview. So there are 3 things about Checkit that makes us differentiated and stand out in the marketplace. So we have a realtime workflow management, task management software platform sits on the cloud. And this specifically targets the digitization of deskless workers in the work that they do for large blue-chip multisite, multinational organizations, guiding them, tasking them through their work, removing the need for pen, paper, Excel spreadsheet. Surrounding that platform, we have a sophisticated Internet of Things, IoT sensor solution that integrates directly into that platform, and that provides the automation and the removal of the need for human touch on all of the assets, be they fridges, freezers, vaccine storage units, buildings that deskless workers work in. Okay. So once you then fuse those 2 pieces together, what we're then doing really is we're generating vast amounts of data, taken from the analog into the digital world. And then we represent that data to management, senior leaders, operational managers and afford insights, analytics, and sophisticated dashboarding, which allow them to make further realtime decisions on the efficiency, the productivity and the optimization of their distributed operations. This is all set against the backdrop of real need and real demand. Now this is a fragmented and evolving open market. But let's not forget there's 2.7 billion deskless workers in the world. And they actually represent 80% of the global workforce, okay? Then the majority of the workers in the large blue chip organizations that we target and yet still 73% of them are still using pen and paper or Excel spreadsheets, which is redundant and do not provide realtime visibility into the work they do. This is 2023, and this is a very underserved market. When you then factor in the rising cost of labor, supply chain and efficiencies, supply chain challenges and disruptions, the impact of inflationary pressures, these will have a direct influence on these large organization's ability to deliver service to the standard required and improve customer satisfaction. And this creates a situation that we've often referred to as a dark operations environment effectively as a business leader, as an operational leader, as someone who's running a collection of sites and locations, you have very little visibility into what's happening underneath the hood. You cannot see, you cannot understand what your people and what your assets are doing in realtime and how they interact. You have very little visibility. And this is what the Checkit platform and ecosystem provides to business leaders and decision makers. Now let's review strategy and see how we're tracking. There's 3 pillars there: First pillar, convert Checkit into a pure subscription business. We consider this pillar now complete. With the wind down of the BEMS business unit achieved over the last year and recurring revenues now representing 93% of all revenues, we are now in a firm and clean position to scale as a business with all incremental business being recurring revenue based. Pillar 2, building scale and global growth. So what we mean here is scale in the way that we position and upsell, cross-sell our products across both the existing customer base and net new customers. And global growth being the target geographies that we're going after. As a reminder, we're predominantly centered around the U.K. and Western Europe and then also North America with the U.S. as our stated ambition to be one of the leading -- contrary to there after this business as a geography. We see massive opportunity there if we can accelerate that scale. And the third pillar here is how we think about transforming the operating model of the business and factoring in the right levels of culture. Transforming the operating model means making it fit for enterprise-level scale on a global basis. It also means introducing the necessary efficiencies to allow us at scale with reduced cost. In order to do all of this, you've got to build a culture that's built around high performance. So let's consider what our growth ambitions look like. Firstly, continue to expand our U.S. market presence and then double down on the rest of the world ARR growth. Pleasingly, we've had a successful year in the U.S., growing their ARR by 91% year-on-year and reflects now a solid base from which to continue to expand into that market for what is a really significant opportunity. Equal to that is how we want to continue to execute and scale the business we have in U.K. and the rest of the world. Second pillar of equal importance now as we pivot towards profitability is how we will continue to drive and maintain operating efficiencies to accelerate that path to profitability. And Greg will be able to expand on that later when we get into the presentation. And by doing Pillars 1 and 2, we will be on course to become the market leader in this very open nascent space in what we refer to as augmented workflow, sensors plus software plus analytics in our target verticals. So let's look at the year review. Then we'll detail on the annual recurring revenue bridge. So as I mentioned earlier, going from left to right, we did about GBP 0.6 million of net new business, and this reflects, I think, accurately our land-and-expand strategy, where what we see in the market now, given the macro conditions that are affecting most organizations, we see that the willingness to commit budget at scale has been somewhat reduced and the number of stakeholders required to make a big purchase decision elongate the sales cycle. Therefore, what one wants to do is get targeted entry points into large budget customers from which you can then expand through cross-sell and upsell, which we've then done very successfully, as you can see, delivering GBP 1.6 million of ARR in the year. And then the final piece has been the final conversion of U.S. contracts into pure recurring revenue basis. So this focus on -- this relentless focus on subscription revenues is what makes this business now very scalable. So we've delivered over 30% year-on-year growth in recurring revenues for each of the last 3 consecutive years. You can see last year, that was 41%. As I mentioned earlier, recurring revenues now represent 93% of the entire revenue base of the company. And then double-clicking on the U.S. We said it's been a successful year. You can see that we grew those ARR between last year and this by 91%. As you can see also, the U.S. now represents nearly 25% of ARR in the business. So it's on track to become the leading contributor of ARR to the business over the next couple of years. A quick mention on the pipeline and customer base, existing customers and net new customers. You can see on the right-hand side here, our pipeline just shy of, as I reported, 6, 7 weeks ago, the trading update, just shy of GBP 14 million at the start of the year. That's the annual value. So the total contract value is more like GBP 41 million, GBP 42 million because we did 3-year minimum terms in our contracts. The vast majority of that pipeline represents what we call large enterprises. So these are the very large BP equivalent customers, NHS equivalent customers, multibillion pound organizations. The remainder of the pipeline is split up to what we would call enterprise and mid-sized customers. So enterprise being about GBP 1 billion in revenue-type customers, mid-sized being somewhere between GBP 500 million to GBP 1 billion. And these are the kind of customers that we would constitute as contributing to what we call run rate revenue, and we differentiate between bringing in run rate land-and-expand entry point deals and then the larger, more difficult to predict large customers that we bring in off the top. Some of the customers you see on the left-hand side here represent the successful execution of that land-and-expand policy. For example, Just Eat, who were brought in last year and have since been expanded or [ Compass Group ] who traditionally had a very small footprint with and who we're starting to now expand at scale. All other customers are live in-flight opportunities in the pipe as we speak. So let's focus on a couple of those customers and just see how it comes to life. So we've had a well-established relationship with the John Lewis partnership for a number of years. But to bring it to life, we delivered GBP 28 million of annual savings to the John Lewis partnership, split in the following ways. So that's about GBP 3.6 million in food wastage savings a year, GBP 24 million of repurposed staff time and a GBP 0.6 million minimum -- GBP 0.6 million of optimized energy usage. As you can see, Checkit is very well integrated into the John Lewis partnership. We control everything from fire doors to lift, to HVAC systems, freezers, fridges. We collect vast amounts of data, which helps them predict not just energy forecasting but also asset optimization. And this is a really good example of a large customer that we've built over time for whom we're now very sticky inside the organization. On the other hand, we might look at, say, the biopharma sector, where we have a number of well-known biopharma clients in the U.S. In this instance, if we think about Octapharma in the U.S., the key challenges they face, high cost and inefficiencies around compliance in general, but specifically very, very specific temperature compliance for their blood plasma storage units. Heavily error prone and suffering from manual paper-based process, okay, so time wasted and introducing a lack of regulatory compliance into our system. Maintenance and calibration issues across multiple vendors. By bringing in Checkit and having Checkit scale with them, we're now driving hundreds of hours' worth of repurposed staff time, a significant reduction in management audit time and also an increase in management visibility, reduced costs from systems consolidation and indeed, in really important year, minimizing the potential for spoilage inside the system. And this is a common use case across all of our biopharma customers and again, points to the stickiness of the product the Checkit has to play here. And another one within the healthcare sector, but back over here in the U.K. and outside of the NHS, I think which is well known that we serve so well here is private care homes. These are high-margin businesses, but they suffer from a lot of the same problems. So very time-intensive manual checks across multiple different teams, heavy reliance on paper-based processes, field managers and leaders having to drive all over the country side all of the time to be able to turn up a check and understand what's actually happening, it's completely inefficient, a complete lack of visibility on what's happening in the organization. By implementing Checkit, which we did last year and that's since up sold again this year, they're driving 10x faster maintenance issue resolution, 40% reduction in audits, completion rate to 100% of all checks. Management now has visibility across the sector. When I spoke to the head of innovation at Hallmark. Anand, he said, "you give us a real headache." I was like, why do we give you a headache? And he's like because we thought we had it organized. We thought we knew it was happening, but you've shown us where the improvement has really at. But this is now important because we can properly drive a digital transformation in this organization with clarity. So it's a good example of a customer benefiting and reciprocating value back to us. I'll touch finally now on some of the areas we're investing in the product and a platform for handing over to Greg. Really, there's a few areas. We talked about the IT ecosystem. And for me -- for us here, the key is integrating best-in-class third-party IT providers into our platform. This will enable us to sell additional complementary use cases to both existing and net new customers that are fully integrated to our platform, benefit from the data collection and the insights and analytics that come off the top. Moving customers towards predictive insights. So how we fuse that sensor data and the data that we gather from the workloads to move people from just being organized and tasks into guided in the way they do their work, enabling customers to do more rapid self-service on lighter-weight versions of the platform of the product in order to adopt its scale and also investing in the cloud platform as we seek to scale on a global basis. This becomes fundamental. And where do we see the future here? So really, there's 3 different areas that we're starting to think about. It's not exclusive. But firstly, given the data that we gather, which is vast amounts, how do we monetize that data? How do we sell Insights-as-a-Service, Data-as-a-Service? For example, we monitor thousands of thousands of different assets in certain client locations. Could we provide a service to those customers that helps them to predict whether or not those assets are going to break when they're going to break or indeed, whether those assets are burning through energy, which has been pressing at the moment in a way they don't need to be. So are your freezers 5 degrees colder than they should be on average? And what does that look like across 1,000, 2,000 assets across an organization. These are the kind of incremental adjustments that we see employees wanting to make. Attrition and retention amongst employees is the single biggest cost factor in the [ data ] industry because you're looking at 75%, 80% of attrition rates. So can we help organizations recognize when employees need targeted training and indeed whether or not they may become a flight risk, a churn risk? How do we implement humans more into the process in that a human in this instance is much like a very sophisticated sensor? So how do we also use their own observations outside of workflows with sensor data to generate new workflow tasks in real time. And how do we also, as an organization as a product move towards higher-value processes. What we mean by this is certain industries, for example, manufacturing or chemical manufacturing have high-value product and again, high-value employees, even though they are deskless doing the work. So you can imagine the inefficiency which they suffer from is even more painful from a margin and P&L perspective. And this is an area that we see Checkit starting to want expand towards? And how do we provide additional asset-based guidance for the deskless workers, like how do we integrate augmented reality? How do we bring machine vision into play? So these are something exciting areas that we see the product developing over the next few years. So I'll hand over to Greg now and we'll do a double click on the finances.

Thanks, Kit. There are 2 key themes I'll talk to you today: growth and efficiency, growth to become the market leader in augmented workflow and efficiency to accelerate our path to profitability. Today, I'll explain our top line growth and how the transformation of our business into a subscription model gives us a high degree of confidence in our future revenues. I'll then cover how we're finding the balance between investing in the business and driving operating efficiencies to enable us to reach breakeven. So in terms of our highlights, all that I've said just now is reflected in our full year results, which we've announced today and which were all 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. Our EBITDA and cash performance were also ahead of market expectations, with EBITDA at a loss of GBP 6.4 million, up GBP 200,000 and cash of GBP 15.6 million, up GBP 400,000. And all of these numbers exclude BEMS as we closed that division to BEMS as reported as a discontinued operation this year. I'll talk more about our cash and P&L performance shortly. But first, I'll go into a bit more depth on revenue. Group revenue from continuing operations was GBP 10.3 million, up 22% versus last year, with recurring revenue up 41%, partly offset by nonrecurring revenue which we expected to decline as we converted more U.S. customers from maintenance contracts to subscriptions. This means recurring revenue was 93% of the total for the year, demonstrating our transformation into subscription business. This transformation provides us with strong visibility of future revenue. ARR doubled over the last few years from GBP 5.7 million to GBP 11.5 million. As you can see, ARR provides visibility of the following year's recurring revenue. So ARR in FY '21 of GBP 5.7 million converted into recurring revenue in FY '22 of GBP 6.8 million, and then in FY '22, ARR of GBP 9 million converted into recurring revenue in FY '23 of GBP 9.6 million. This is also a reflection of our high retention rates, with a gross retention rate of 99% and a net retention rate of 116% as Kit said before, demonstrating the stickiness of our customers and ability to upsell. So I've talked before about the 2 key themes underpinning our strategy, growth and efficiency. And in our P&L summary here, you can see how we're balancing these strategic pillars. Strong top line growth and careful management of our cost of sale equals 41% year-on-year growth in our gross profits. This is then offset by increased operating costs. We're investing in the business both in our sales team and our platform. We're very careful on how we invest in the business, and I'll talk more about our gross margins and the operating efficiencies we've achieved this year, in a second. First, a quick note on nonrecurring items of GBP 4.8 million shown here. This relates to the impairment of goodwill on the closure of our BEMS business. It's a noncash item, and as such, has no bearing on our trading performance. Moving on to our cash performance. And with a year-end balance of GBP 15.6 million, cash remains strong. And we agree with the market analysts when they said this morning that they estimate that Checkit currently has sufficient funding to reach cash breakeven. Our strong top line performance has allowed us to invest in the business both in terms of operating activities, which you can see here was GBP 6.3 million, an increase of GBP 1.4 million versus last year and CapEx, which at GBP 2.3 million is the same as last year as capitalized development cost increased was offset by lower CapEx spend elsewhere. We are very focused on balancing the investments we make in the business, we're achieving cost efficiencies. This year, we've been able to improve our gross profit margins from the 47% reported last year to 63% this year. The closure of our BEMS business contributed 7 percentage points to this, but 9 points came from our cost efficiencies. We've been able to reduce the cost of delivery, which is how we install sensors as our customer sites as well as achieving general savings in our platform costs. As well as this, we've seen efficiencies in our operating costs as we brought software development in-house and through targeted headcount reductions of 10% in our operations. The combination of strong growth in our top line and operating efficiencies in our cost base gives us a lot of confidence that we can accelerate our path to profitability. I'll break this down to you here. So in H1, our revenue of GBP 4.8 million increased by 15% to GBP 5.5 million in H2. At the same time, our LBITDA in H1 of GBP 3.7 million reduced by 27%, so our losses reduced by 27% to GBP 2.7 million. The combination of growing top line and reducing losses is what we see will allow us to improve the path to profitability, and we expect EBITDA to break even in FY '26. And now I'll hand you back to Kit for more on our outlook.

Thanks, Greg. Look, so the Board expects to be market expectations for FY '24. As Greg mentioned, we've got strong visibility in our future revenue streams, and we continue to execute against our growth strategy, whilst some more gains to progressing, operating efficiencies and accelerating our path to profitability. We're excited for the year to come. And with that, I'd like to hand over to Alex and the team to open up to questions.

Kit, Greg, Thanks very much. for your presentation, what I do is I'll just bring your cameras back up. [Operator Instructions] I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. At this time, Alex, perhaps, maybe I can hand over to you just to chair the Q&A and others I'll pick up for you at the end.

Brilliant. Thanks, Alessandro. [Operator Instructions] Let me start here. One, it's a question about cash burn. Should I worry about cash burn? Are there still legacy costs that will drop out as you transition to a fully recurring revenue business model, and can you quantify any of those costs?

Yes, good. Okay. Let me talk this off and then I think Greg could go back and restate what you just stated. Yes. So look, the transition to recurring revenue business is complete, as we've been mentioning, with the wind down of the BEMS business, with recurring revenues now representing 93% plus of overall revenues. We've made that transition. We've taken the decisions of the costs that were necessary to achieve that already and they've been baked in. And as far as cash burn goes, I can only reiterate what Greg just mentioned, which if you look at the analyst consensus, they are confident that we hit breakeven in FY '26 with plenty of cash to spare. But Greg, perhaps you might want to elaborate a bit further.

Yes. Sure, Kit. So I think what I would add to that is that we see further opportunities for cost efficiency. So whether that be improving our gross margins first. So if you look at the analyst guidance from this morning, you can see that our gross margin will improve from the 53% we reported now to the mid-60s and then in FY '25, up to the high 60s. And then we see further opportunities in our operating costs as well, and those actually decrease next year. So important to bear that in mind when you're thinking about cash burn.

Okay. Second question here. Are you getting any R&D tax credits? And if so, can you give some idea of the amounts for last year and the year ahead?

Yes. So I'll take that one. So in terms of R&D tax credits, we do absolutely see some R&D tax credits each year. It's about GBP 100,000 to GBP 120,000 a year typically. We expect that to continue in the next year, roughly at that sort of level.

Okay. Thank you. Moving on here, looking at your customers, how easily and quickly can you onboard new clients? And are you resource constrained in your efforts to add scale?

Okay. Two parts to that question. How quickly and easily can we onboard new clients? I mean the answer is, it's pretty efficient. And there's a couple of reasons for that. Our platform is a -- it basically a no-code platform. So it doesn't require -- it does not get customized on a per client basis. Now where we do, do any configuration work because other customers that have the time or the bandwidth or it's just something that we've sold in as an added service, we call that professional service fees. But again, it's not time intensive. Probably the more intensive component of what we do is when we're implementing our IoT sensor network across clients. But again, these are designed to be self-installed. And again, with our further third-party IoT sensors that we've already incorporated in the system, are very, very, very simple at like a scrubber ship and can literally be taken out of a box and just stuck on the relevant assets. So these things are designed for scale by customers where needed. So short answer, it's not a rate determining step for us, not a blocker. Are we resource constrained in our efforts to add scale? I suppose every organization is resource constrained in some respects in their efforts to add scale, but not -- from my perspective, it's not the rate-determining step. So for us, it's all about the quality of the customers, the quality of the pipeline that we create and then how well we convert that pipeline that will have a much stronger bearing on where we add scale rather than, for example, whether we choose to continue to throw more bodies at the problem, it's much more about focused cloud and execution.

Thank you. You talked about becoming profitable in FY '26, it's a question related to that, what ARR equates to the breakeven result? And broadly, when do you see that occurring?

Yes. I think we've highlighted in the past, and I'll let Greg speak more, but we see somewhere between GBP 18 million to GBP 20 million of ARR being the breakeven trajectory for us. That's all I can really say. Greg, is there anything you want to add to that?

No, that's right, Kit. So the only thing I would add is that, obviously, as we see how our growth progresses over the coming years, we will dial up or down the amounts that we invested in the business to make the most of that growth. So there's no hard and fast rule on it. But yes, at the moment, we would say GBP 18 million to GBP 20 million.

Okay. Coming back to some of your customers again. Could you give us an idea of what percentage of customers take workforce management combined with sensors as opposed to just the workforce management?