Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Checkit plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so, and these will be available via your Investor Meet Company dashboard. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Kit Kyte. Good afternoon, sir.

Hey. Good afternoon, everybody, and thank you for making the time to tune into our Half Year Results Webinar. We have a little bit of ground to cover today. So I'll start off with some highlights and financial highlights. And then for those that are new or those -- all the existing shareholders and they know us well, we'll recover the why Checkit story, and what makes us such an attractive market, particularly in light of current technology trends. Then we'll cover off some of the pillars of our strategy, before doing a bit more of a deep dive into H1 and some of our customer stories. Then I'll hand over to Greg for more focus on the financials, before we open the floor to questions. So yes, we're very happy with the results delivered so far. So ARR coming in at GBP 12.6 million at the half, up 24% year-on-year. And in the U.S., ARR GBP 3.2 million, up 41% year-on-year, evidencing continued traction in that market. Recurring revenue of GBP 5.4 million, 22% and total group revenue of GBP 5.7 million, 19% follow-on accordingly. Worth noting that recurring revenue is -- represents 95% of all revenues in this business. And the net retention rate at 113% continues to reinforce the land and expand strategy through really consistent upsell across all of the existing customers, as we bring on new customers and then scale. So we're very happy with this. So okay, so why Checkit? And what's the attractive opportunity here? So frontline workers, deskless workers are in large blue-chip multinational enterprises are our target audience here, okay? So to remind anyone who's new here, frontline workers, deskless workers, they still represent 80% of the global workforce. And yet, the frontline work is under increasing pressure. So these large blue-chip enterprises, for whom the majority of their employees or deskless workers, they suffer quite often attrition rates of greater than 70%. So this results in knowledge walking out the door, knowledge loss, a significant amount of staff turnover, a reliance on contingent labor, the gig economy, where you bringing in staff here are untrained, they don't know what they're supposed to be doing. These frontline workers are operating in an environment with increasing complexity, often having to interact with systems, which are digitally complex, and yet they themselves have no digital tooling with which to access, and from a leadership and a management and operational control perspective, given the vast number of workers and a vast number of sites in which they work, they are driven towards remote management. The Checkit platform and IoT ecosystem solves this by driving automation and digital into that environment. We help these organizations do more of less, strictly adhere to their compliance requirements, drive increased quality in the way that they run their operation and deliver on service expectations, not just through increased customer retention, but also from employee satisfaction as well. When we think about some of the big macro trends that have been building up over the last 12 to 18 months, particularly the rise of AI and large language models and the disruptive effect that's going to have, particularly for the knowledge worker industry, we look at our industry, the deskless industry, the frontline industry, frontline worker. And we realized actually that work is always going to need these workers, they're not going anywhere, anytime soon. But automation isn't going to do everything here. And yet, they do need to be equipped with digital tooling and the automation capability to help enhance the way they interact with the rest of the digital world. And so this is what Checkit does. Our mission here is to help businesses make the most of these works. So starting at the top, thinking about management, operational leadership. Our platform, add it essence, is gathering vast amounts of data, from both workers and the assets that they work with in the physical environment. They'd be the fridges, freezers, hot holds, et cetera. All that data gets translated into sophisticated insights, analytics, dashboarding capabilities that allow operational leaders and managers to make real-time decisions and drive operational effectiveness. In the hands of a worker, the deskless worker, the frontline worker, that looks like an iPhone or an Android device or an iPad device, with an intelligent workflow automation tool in the hands, guiding them, prompting them and helping them prioritize which task to do and when. Okay. We help them move from the routine to the rare, and from simple to complex tasks. And alongside this and surrounding all of this in the physical environment they work in, we have a sophisticated IoT ecosystem that has sensors and integrations to help create an extended nervous system inside the organization, prompting issues and alerts and driving real-time resolution of actions in a continuous feedback loop. So we cover off on our strategy, and there's 3 pillars of the strategy, really. The first pillar is to convert Checkit into pure subscription business. As I alluded to earlier, recurring revenue is now 95% of all revenue. So we consider this pillar now to be complete. We've done a lot of work over the last 18 months to transition Checkit into this place. Second pillar is how we think about building scale and global growth. So scale, in terms of the product suite and the product mix that we bring to bear, and indeed in which industries we do it, and then global growth in terms of where you look to serve customers and businesses. So as a reminder, this company has grown up in the U.K. and Western Europe, but as I mentioned before, the U.S. and North America is really priority growth market for us. And we also have presence now in Asia Pacific, particularly in Australia and New Zealand. So we've started to expand our reach. And the third pillar, which is absolutely vital, whilst we're doing first 2, is to continue to transform the operator more of this business. And Greg will give you some more detail on that, as we think about driving operational efficiency in side, oftentimes using our own tools to help us do so. All of which still needs to be done, whilst building a culture that can focus on outsized growth for the organization. So these growth ambitions, I just want to cover them off with you all. First one, continue to accelerate U.S. market growth. We've evidenced good consistent scale so far. It's a priority market for us, and we would like to do more, whilst also consistently scaling the rest of the world, particularly around Western Europe. Second pillar here. As you will see, we've driven some quite significant operating efficiencies. We need to continue that in order to accelerate our path to profitability, and we're confident of doing so. And the third one, is how we see the future and the evolution of Checkit platform and ecosystem for large multisite enterprises, and we seek to become the intelligent copilot for the frontline industry, augmenting the work that people do. We do this with our software, our sensors, and increasing our ML and AI contribution across our target sectors. So let's cover off H1 in review. Just focusing on the ARR bridge. As I mentioned earlier, we've been very successful with land and expand strategy. So the continuing ability to bring a new customer in, at whatever size is necessary, but oftentimes an initial entry point deal. And then cross-sell and upsell that existing customer. And there's a number of stories we'll talk about in a bit. But as you can see, the majority of ARR has come from that cross-sell and upsell activity, whilst bringing in net new customers at the top of that pipeline. Subscription revenues. There's been consistent growth over the last 3 years and backing up this point around recurring revenue mix, 95% of all revenues helped us to get a vast amount of predictability in future revenue stream for the business. With the focus on the U.S. then. So over the last 18 months, we've actually driven a CAGR of 66% in U.S. growth, to the point where it's now GBP 3.2 million of ARR and about 25% of the total ARR of the business. So we consider the U.S. to still be very much on track to become the largest revenue contributor of the group. So think about our pipeline. So in terms of how we're going about driving that scale and global growth I mentioned earlier. You'll note that the pipeline here, 64% of that pipeline references is targeting towards large blue-chip multi-enterprise, multinational companies. So customers such as BP, who we already have, or John Lewis or the NHS or Grifols in the U.S. or Ortofarma represent the core target market for us. Now these sales cycles can often take up to 12 months, if you're looking to land at scale. And so we also focus on the enterprise and the midsize customer for the remainder, in order to continue to produce run rate business. Some of the logos you see on this slide represent customers in our pipeline and also customers that we've recently won and land and expanded with. So for example, Just Eat, we brought on in the first instance, about 10 months ago. And subsequent to that, we [indiscernible] again into Canada with the Compass Group, which we'll talk about. Earlier, has been a great success story for us, even Atria, which is the third largest senior living care and provider in the U.S. We have recently got our initial footprint and location under the belt. So we're very excited about the future prospects of this pipeline. We announced in our trading update, and again, reminder with the release this morning, that we recently secured the John Lewis Waitrose contract, largest ever contract renewal for the company, just over GBP 6 million of total contract value, which we're very pleased with. And it's just a really good example of a sticky and sustainable relationship. We're very well integrated. 22,000 endpoints are being monitored across the John Lewis and Waitrose estate. We're able to monitor and control and provide insights on everything from their fire door, lift usage, HVAC systems, a vast number of assets, including fridges and freezers and energy output, the data outputs that they're providing, then get visualized through our dashboard that I mentioned earlier. So it's a great relationship. We're driving about GBP 3.6 million in food wastage savings a year. So that's the cost and sustainability play. GBP 24 million of repurposed staff time, and that GBP 0.6 million of optimized energy usage. So it's a really good example of this ticket customer relationship. We're very pleased to have renewed for another 3 years. Separate customer example would be something like Compass Group here. So on the one hand, we've had Compass as a customer for a number of years. And yet, with the recent signing of the MSA with Compass Group back at the end of May, we've really unlocked the capability to drive scale in this customer. For those that don't know Compass Group is one of the world's largest catering providers, facilities management players, highly, highly decentralized organization. So thousands of thousands of locations around the world with power and autonomy decentralized. So the ability to land and expand there is quite contingent on getting a commercial framework that the one we put in place to unlock that ability. I [indiscernible] one centralized thing within Compass Group is their procurement organization, called Foodbuy. So we secured that. And as you'll see, the typical challenges with Compass Group, relate to that the way they run their food operations, which is the core of their business. So very time-intensive manual checks required, quality and efficiency challenges in what is a highly competitive market with relatively low margins, and a complete lack of visibility from the management team. We've eliminated that manual and paper-based check requirement. We've reduced by 14% minimum, the manual checks and recording requirements. We've helped mitigate stock loss, 33% reduction in management time. And since we signed that MSA, we just -- we've onboarded 3 new contracts with Compass Group and the pipeline has more than 15 opportunities with Compass Group just in the U.K. alone. So it's exciting, and we look forward to the next half and into next year with optimism. So I want to touch now on really the product, and how we see the product evolving over time. So again, just to make it clear, we have a workflow tool that I mentioned, that helps digitize the work and augment the power of the frontline workers and it does it in 3 areas, really. It's an integrate, assist and manage cycle. So we're integrating data and information they're receiving from the environment, either through the checks and the tasks they're doing, or through the alerts and the recordings they're coming in through sensors. We're then helping them to prioritize and assist the way they do their work to help and get their job done. And all of that data then being fed up to a single [indiscernible] that helps managers and operational leaders to better visualize and optimize the way the people are working, right? Concurrent activity, what do you do when workers don't turn up? Would you do? How do you onboard a vast amount of work as quickly you can do it through a system like this? Alongside this, our sensor networks, our IoT sensor networks are priority end-to-end managed monitoring of the assets and the physical environment, in which these frontline workers are operating. So it's a define, collect and inform cycle. Define, we're helping to model the assets and the rules that are required for monitoring. We're collecting a vast amount of data in near simultaneous, real-time, and storing that data on the cloud inside our own data lake. And then we're using that to then inform and alert management and frontline workers, around deviations or asset breaks or anything like this, to then be able to prompt a real-time resolution. Again, driving operational effectiveness. And when you put that together in an end-to-end platform, you get a single intelligent platform. And really the intelligence is the area we're going to start to capitalize on in the future, because it's a vast quantity of data that's being gathered all the time across hundreds and thousands of locations and tens of thousands of people and assets. So that points towards what we're going to be doing with the product in the future. And really, there's 3 areas. So first of all, I mentioned this vast amount of data. What we're going to be looking to do is find ways to harness the power of that data, and commercialize it with our target customers' organizations. So selling those data insights. For example, as we're monitoring assets continuously, can we help them with predictive maintenance challenges? Clearly, if assets go down in an unforeseen manner, then you can result in things like stock loss, stock wastage, energy loss and of course, an inability to serve customers. So anything that you can help customers to predict is valuable. Can we help them predict or manage energy optimization in a more effective way? Again, we have a number of customers in beta already, where we're looking to try this and roll it out. Secondly, how do we better use humans, and how do we complement the human worker in a more proactive and predictive way, okay? So again, how do we bring -- how do we think about bringing in generative AI and sort of things to help them become more effective in doing the work they're doing, and alleviate them out of the mundane towards more effective, higher value-adding work? And then we take the entire platform, and we think about how do we position that towards high-value processes in those industries and those subsectors of industries, which have higher margins to think, for example, manufacturing or chemical manufacturing plants, where the cost of pretty highly-skilled, highly-payable frontline workers and the cost of expensive stock becomes prohibitive if it's run inefficiently or there are losses and there are wastages. So how can we position the Checkit platform to better serve those industries? And that really points towards the evolution of the product. Okay. So I'll hand over now to Greg, the CFO, who will take you through more detail in the finance numbers.

Thanks, Kit. At our year-end, we're hooking up with themes of growth and efficiency. Today, as we announced our FY '24 interim results, I'll update you on our progress in both these areas. First, some highlights. I'm pleased to report that our top line continues to show strong growth, with annual recurring revenues of GBP 12.6 million, up 24% year-on-year. On top of this, we've also seen progress in our profitability, with gross profit of GBP 3.9 million, up 30% year-on-year and LBITDA, a loss of GBP 1.9 million and an improvement of 47% year-on-year. I'll talk in more detail on our profitability shortly. But first, some more on revenue. As I said, ARR grew about 24% year-on-year, and this is reflected in recurring revenue of GBP 5.4 million, up 22%. As we mentioned at year-end, ARR provides strong visibility of future revenues, so ARR now of GBP 12.6 million supports the analyst forecast of GBP 12 million of revenue for the full year. As Kit has explained, recurring revenue growth is a result of our land and expand strategy as well as strong performance in the U.S., and in a challenging sales environment, this represents positive headway. Nonrecurring revenue is now a very small part of our business. So total revenue of GBP 5.7 million, up 19%, mirrors our recurring revenue performance. On top of our top line, we've also delivered improving gross margins in the half. Gross margins have grown from 54% in January 2022, to 63% in January '23, up 9 points, and now up a further 6 points to 69% in July 2023. There are 2 drivers to this improvement: efficiency and sales mix. And efficiency has come from 3 key areas: first, our hardware costs; second, procurement savings in our platform costs and finally, efficiency in our cost of delivery, which is the cost of sending engineers to customer sites to install our sensors. As we have grown revenue, we've been able to deliver for customers with our existing teams. And as Kit mentioned before, we're now using Checkit tools to guide through the retail installations, and that's a good example of how we're able to be more efficient. However, our cost efficiencies aren't only seen in our cost of sales. The efficiency we've been able to deliver in our operating costs, meant that our cost base reduced by GBP 700,000 in the period. This includes savings from bringing all product development in-house, ceasing the use of outsourced software teams, and this resulted in increased productivity. The combination of top line growth and cost efficiencies has resulted in strong progress on the path to profitability. As you can see here, LBITDA, as a loss of GBP 1.9 million compared to the previous year, which was GBP 3.5 million, is an improvement of 47%. And as we look at our cash position, we can see plenty of runway to reach profitability. Cash in July 2023 was GBP 12.8 million. This represents an outflow of GBP 2.8 million from January '23, and that outflow is 40% lower than the previous year, even as we increased for inventory by GBP 1 million to ensure that our supply chain remains resilient in the face of competition for components. We manage our cash very carefully, so we can maintain the balance between achieving further ARR growth and working towards profitability. And this comes together in the analyst forecast for EBITDA breakeven during FY '26. And now I'll hand back to Kit for some closing messages.

Thanks, Greg. Yes. Look, I mean, we're pleased with the ARR growth, and of course, we'd always like it to be more. But as Greg mentioned, we've got a strong cash position here to see to the profitability. And the Board is confident that it's delivering an operating performance ahead of market expectations for this year. And with that, I'll hand over to the team here for questions.

Kit, Greg, that's great, and thank you very much indeed for your presentation this afternoon. If I may, I will just bring back up your cameras now. [Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Greg, Kit, as you can see in the Q&A tab, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Alex, if I could please just hand back to you to chair the Q&A session with the team, and then I'll pick up from you at the end.

Thank you very much. So yes, let's start this Q&A session with the first question on AI. What impact is AI having on the business? How are you applying it? And what planned investment is required here?

Yes. Very topical question. Thank you, Alex. From a competitive perspective, we're quite excited about AI. We actually have -- we already had AI at work inside the business, I can elaborate on that in a bit. But we very much see the disruptive component of AI is affecting knowledge worker businesses, far more than it will as we see this as a complement to our business because, of course, the frontline work at the type of work they're going to -- the frontline workers do is not something that's going to be automated by AI anytime soon. So actually, the real question for us and something that the team is already working very hard against is how to incorporate the best lowest-hanging use case of generative AI into our platform and systems, to better enhance the value proposition we have with our customers. And so we see this actually as a point of difference for us, given the vast amounts of data that we're actually gathering, and this is data that was analog data in the first instance that we make digital in the first place. We have on our data lake, we have in the cloud and we can then bring the latest advances of AI onto that data to drive really meaningful additional impact for customers. And the other point I'd say is, it's also a great opportunity internally. So we actually have a project underway now. We have teams across the company, looking at how we can best utilize the latest AI tools in a way that can help us become more efficient as a business, and also more engage with customers. And again, this is contingent on having the right data in place, but we do. And if we think, again, that will be a point of difference as an organization.

Thank you. The next question is sort of linked to that actually. It says, what does the road map look like for future products and also new geographies?

Yes. And again, I alluded to it a bit during the presentation. I think there's roughly 3 areas for the future road map of the product. One, based upon all the data that we're gathering, how do we better utilize that data and apply machine learning and AI capabilities to that data set to drive additional value for customers? And so for example, we have 5 customers currently in beta right now where we're rolling out some of these ML AI programs for them. And we're helping customers, for example, those that have thousands of assets, let's say, fridges and freezers with lots of stock inside of them. We're helping them predict or better optimize the energy usage of those assets. There, for example, what we've discovered is for every one degree centigrade that they ask that is too hot or to cold? It's costing a business up to GBP 500 a month in waste and energy wastage cost. And so those are just kind of insights. When you put them at scale become really powerful. I think the other thing is around how we're helping them predict which assets are going to fail and when. And this is literally done on the basis of continuous temperature monitor. You can't just give these assets about to burn and blow. And this is very powerful. If you can get ahead of that curve versus just reacting and having stock loss and abilities to customers. So these predictive insights as a service to customers, is an area that we're going to be looking to focus as a business, absolutely. The second area is how we better equip humans. So the frontline workers, people who make up the vast majority, people workers inside these large businesses. How do we complement even further the work they're doing in a digital way, that makes them more effective and allows them to do higher value-adding work? Because ultimately, a lot of these workers, the only point of contact with customers on the ground, so it's better that they should be spending more time with customers on the ground than doing a bunch of routine task injects that could be automated or could be enhanced using AI capability. And then the third area for the product that we're looking to really build focus in is how we can then apply and develop and evolve our current product set towards new industry sectors, which we consider to be of higher margin, and I used the example perhaps of, say, chemical manufacturing or food manufacturing, where the deskless work and the frontline worker is actually quite highly-skilled and quite costly, as is the product that they're working with, and -- but they still suffer from these inefficiencies and they still suffer from an abundance of pen and paper and spreadsheets, and how do we bring our product set in there to target those customers and help them drive much better operational efficiency.

Okay. Thank you. You referenced your ambitions to accelerate U.S. market growth. Can you comment on your sales and marketing strategy in the U.S. And what are your expectations for the U.S. in the near to medium term?

Okay. So the expectations for the U.S. in the near to medium term is quite clear that we expect them to become the largest revenue contributor to the business. Market size is 4 to 5x that of the U.K., Western Europe. The -- we have a common business language and the buying propensity once we get established is quicker. So sales cycles, we expect to maybe start to become shorter. So that is the expectation for the U.S. We are investing behind bringing sales, marketing, customer success capability further into the U.S. We have a footprint. We have about 18 people though at the moment, of which 4 or 5 are sales, marketing folks, the remainder are of delivery folks. We'll be looking to augment that through the second half of the year and into next year to really seize this opportunity. I think the other aspect that's going to really help boost, not just the U.S., but particularly the U.S. as well as [indiscernible] is how we start to harness our partner and channel strategy. So we have a few partners that we do work with and I would say we haven't got close to optimizing how we can go to market with them. As we look to harness that second half of this year and into next year, I think we can see a really meaningful uptick in pipeline and revenue growth, and that's particularly true for the U.S.

Okay. Question here is, who are your competitors?

Yes. Okay. So there's a number of competitors, not all are, what I would say, pure play competitors to Checkit. So just a statement I would start with is we're the only organization that we know of that has a true end-to-end capability here. So the workflow platform being the core of what we have, the IT center ecosystem fully integrated into that, driving data back and forward in a continuous loop and this kind of insight dashboarding management there. So that is our kind of point of difference here. But in the U.S., we'd see the likes of, I guess, the Zenput or Jolt or GoSpotCheck as a competitor. And over here in the U.K., we might see a sort of reflects perhaps on the SaaS management side of things, although they won't -- they don't have the IoT UK system. So it's a relatively fragmented base. And then there's some quite niche players that might play in the food safety space, that we come up against from time to time or the medical monitoring space. But again, none that will do the breadth that Checkit does. So that's how we see the space at the moment.

Brilliant. Next question, how open are you to growing the business through bolt-on acquisitions?

I mean, the short answer would be open. I'm not sure what we mean by bolt-on. But yes, ultimately, we're open to this. I think the lens through which we make assessments would be is there a product complementarity component to it? Is it something that helps us enhance our overall value proposition to customers? Is it customer or ARR acquisitive? And as we got that [indiscernible] mix, if it does, then we're very much open to this.

Thank you. Next question, looking at the customer base. How diverse is the customer base, and does any one customer represent more than 10% of your revenues?