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 receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Kit Kyte, CEO. Good afternoon, [ sir ].

Hey. Good afternoon. Thanks. And thanks, everybody, for joining today. It's both good afternoon and good morning. I'm actually doing this from the United States, on the East Coast, and so for those who are joining from the U.S., good morning as well. Okay, good. So we'll get straight into this. Very pleased to present the highlights, trading update highlights, for the financial year 2024; and pleased with the 16% growth in ARR to GBP 13.3 million. Also, recurring revenues are now at 93% of our total revenue base, so this is really, really powerful from our perspective and in line with our strategy, helping us better predict future revenue streams and income streams that come through. And as Greg will take you into a little bit more detail: We've also halved losses for the year, in line with our strategic imperative to expedite path to profitability, so again very pleased with that result. Our land-and-expand strategy as it relates to customer growth continues to be validated. We signposted an MSA that we signed with Compass group at the half year point last year. Since that point, we've added 5 new contracts with that particular customer. And the pipeline of further opportunities continues to grow as we look at the year ahead, so again very exciting. And as it relates to our product, and we will spend a bit of time talking about this as we go through the presentation. We continue to invest in making a scalable single platform but, more importantly, investing in what we do with data, customer data, and how we harness the power of AI. All right, so we'll just cover off how we're going to spend the session. For those of you and as a refresh for those that have been with us for a bit, we'll cover off who we are and what we do, what makes Checkit differentiated in the market. I'll then cover off our strategy before doing a review of FY '24 and then hand over to Greg for financials before we open up for questions. Okay, so effectively, who is Checkit? What is Checkit? For those that are new to the story. We play and we target large blue chip multisite enterprises, though specifically focused around the deskless worker, okay? So large enterprises for whom the majority of their workers do not sit behind a desk. They're interacting on the shop floor, in the warehouse, with machines, with customers from food retail operations, health care companies, biotech companies; people working in labs, these types of workers, people who have to move around and interact with the built environment. And our target is to optimize and help businesses make the most of these workers and these assets in order to be far more operationally effective so they can sell more. They can run their businesses more effectively. So if we look at a cascading stack here. From the very top, what we're doing is we're helping senior executives, operational leaders, heads of compliance, heads of maintenance. We're helping them by making visible the state of their operation. These are large organizations who are typically operating in the dark. They don't have data. They're not able to track the work that their people are doing. They have no visibility on how their assets are working. We make that visible through the Checkit platform, okay? In the hands of a worker, what this looks like: It looks like an iOS app or an Android app or a tablet or [ a number of ] device in their hands that has the Checkit workflow tool. And that guides, [ prioritize ], assists the way they interact with the environment, the tasks they need to do, the daily checks they need to do, their ability to capture photos, their ability to signpost thoughts in real time to better improve the operational performance of the business. Surrounding the worker is typically a built environment, okay? They could be very complicated health care systems and assets like deep-freeze fridges and freezers, vaccine storage units. They could be hot-holds. They could be any number of physical assets. And our IoT, Internet of Things, sensor network allows them to be continuously monitored, automatically monitored, thus removing the need for humans to have to interact with their assets; and feeding those alerts and those data points back into the platform to create a continuous ecosystem. And then the final point here about what makes Checkit quite exciting is if you think about the environment in which we're operating. You're taking customers from an analog world, one where they rarely get any data at all, literally using pen and paper or Excel spreadsheets, to a digital world, so we're generating vast amounts of data. And as we go through the presentation, I'll explain how we're bringing that data to life in order to mine and provide intelligence for operational leaders to further drive cost savings, sustainability initiatives, et cetera. Okay, so let's have a quick look at the strategy then that we're pursuing. As I mentioned, for us, we operate on a pure SaaS, recurring revenue subscription model. It's now 93% of all of our revenues, so we've continued the transformation on that path: minimum 3-year terms that we sign with customers, very high net revenue retention rate, as Greg will take you through. The nonrecurring revenue that we do sell is effectively professional services, configuration, platform optimization and training that surrounds an implementation of the Checkit platform. The second key pillar, one of the reasons why I'm speaking to you from the U.S. at the moment, is that we want to continue to leverage our success but, more importantly, expedite it into the U.S. market. We need to make the U.S. a success; the U.S., we see as a significant growth opportunity for Checkit given the size of the customer base and the type of blue chip customers. And they're matched with our Checkit -- with our platform and our products. And the third piece is we're continually looking to refine both the markets and the industry verticals in which we play in order to find the right fit between our product and the margin that the customer has such that -- when they have product outages or stock wastages, it becomes a critical pain for them. We see a lot of opportunity, particularly in the U.S. So let's take a step back and just consider how the platform [indiscernible] actually works. So we have a workflow tool that -- at the core of our platform, okay? And effectively we're looking -- we're helping workers and customers do 3 things, okay? We're helping them manage the workforce, manage the operation through the use of dashboarding insights and analytics generated by the tools that are in workers' hands, so visibility and optimization. At the same time, we're able to integrate both data and information from a live environment, asset performance, environmental data back into the platform to further assist the performance of the operation but also the visibility of what else is going on in the environment. And in the hands of the worker, we're helping not just to assist them to get the job done, but we're transforming the way they interact in their workplace. And we should remember that in these industries we're typically dealing with 75% to 80% attrition rates amongst the workforce. And this leads typically to a situation of knowledge walking out of the door, so anything that we can do to retain knowledge, onboard workers much more efficiently and indeed retain workers because they're equipped the kind of tools that they expect in their daily lives becomes a real benefit to an organization. As I mentioned before, what we've got here is an IoT and sensor network that then sits around that platform. It's like an ecosystem, okay? And it is used to monitor the assets that exist in networks environments, [ so which we said ], fridges, freezers, [ maximum ] storage units, HVAC controls, energy management systems. These sensors are reporting and alerting in real time the monitoring of those assets back into the platform so that leaders and people on the ground get immediate visibility as to when there's an issue, in which they can then take a remediation action. This is very, very powerful. I mean, only last week, there was an article in the Guardian newspaper that talked about a Swedish research laboratory who had last -- over Christmas, it had a freezer failure. That failure cost them decades of research samples to the tune of GBP 37 million. That's just one asset going down, so you can see the value of being able to [ monitor those automatically ]; and then immediately act upon it if there's an issue, using a human. Taken together, you get a single end-to-end platform that drives intelligence. And this really is the core of the Checkit value proposition. I think it's what makes us stand out amongst peers and competitors. We not only monitor the assets, but we also [indiscernible] the people. We bring them together seamlessly so you get this playoff effect between assets, people, actions, remediation actions, inspections, et cetera, but more importantly, as we'll see, we generate a lot of data. And that data becomes very, very action oriented; and becomes intelligence for the senior customer, so what are we actually doing then with the data? What's really exciting about this? Over the last 6 to 9 months, we came to a realization that we were sitting on vast quantities of data, billions of data points being generated across our customer base. And with the advent of large language models and the usability of AI inside the awareness [ and consciousness ] of senior customers, we decided to get ahead of the market -- or ahead of the curve on this. And we decided to turn the data sets that we're using into actionable and usable information for customers, so not just turning into information but into action. So we've built machine learning and AI algorithm tools to help drive, in particular, sustainability initiatives for customers. What does that really mean? What it means is, by monitoring their assets in real time and generating the data from them, we're able to give customers predictive maintenance benefits. We can tell them when an asset is likely to fail before it fails, thus preventing the kind of incident I described earlier from the Swedish research laboratory. That in itself is highly valuable, but not only that, we're also able to predict the asset health as a whole for customers. So for example, when and how do you do swap-out routines of your assets? At the moment, when you're flying blind, maintenance leaders are just replacing assets en masse, again a huge cost and inefficiency. On top of that and especially given the energy fluctuations we've seen over the last year or 2 since the Ukraine crisis, our ability to also help customers manage the optimal performance of their assets within the correct temperature ranges, again, yields a per-unit energy saving that, when you put that at the scale of thousands and tens of thousands of assets, becomes significant for an organization. These, we have these algorithms built. We have them in beta with one of our largest customers in the U.K. And what's really exciting is the opportunity to then roll that out over the course of this year across our existing customer base and indeed as a point of difference for new customers. Okay, so let's take a look at the year in review. Again, I've mentioned our focus on recurring revenues. I think that point has landed. To say here that we've been growing our recurring revenues [indiscernible] on the growth rate of 30% -- and really what we see now is a really tight linkage between the ARR that we bring in and then the recurring revenue that flows from the following year, as you can see in FY '24 following on from FY '23's ARR growth. U.S. is a critical global market for us. We've been in the U.S. for about 3 years. It is now worth about 26% of total group ARR. And this is a really positive first step, but as we know, the U.S. market is not just significant. It's highly competitive, so for us it continues to be a focus for growth. Some of the aspirations I've put on the U.S. team and the U.S. organization is for it to be the leading contributor of ARR to the business within 2 years and the leading overall contributor of ARR within 2 to 4 years, okay? So a big goal for the U.S., but we see this is really where we can make this business grow the most. And then before I move on to financials with Greg, just I just want to elaborate on the markets we play in and the future markets we expect to be in. So again for those who are new: Our ARR is roughly split 30% from health care customers -- so think NHS. We're in 86 different trusts, private hospitals, blood plasma providers, even a few pharmaceutical providers. Retail, which would encompass food retail operations, the likes of BP or John Lewis Waitrose that we've spoken to before; and indeed hospitality. So hospitality would also include what we call soft FM, so the likes of Compass group and Sodexo, [ who are ] customers, but also very large a well-known hotel [indiscernible]. It is roughly 30% in each category. What we see in that next, alongside the product innovations, is where we will target future markets, so for us, adjacent industries such as food manufacturing becomes the next best low-hanging fruit for us to target. Why? Because we have the domain knowledge, but also they have the product quantity and the margin risk that comes with stock loss, inefficiency and [ pulling your own ] operations. And same again with biotech and R&D laboratories, as I signposted earlier. So this is a very exciting opportunity for us to expand.

All right, I'll now take over and talk about the financials. When it comes to the financials, I talked about 2 key themes this year. So those themes are growth and efficiency, and I'll update you now on the progress we're making on both these fronts. So first of all, growth. And today, we report annual recurring revenue growth of 16% year-on-year, recurring revenue growth of 17% and group -- [ where our ] total group revenue of GBP 12 million is also growing by 17%. When it comes to efficiency, we've been able to deliver a 46% improvement year-on-year in our LBITDA from GBP 6.4 million to GBP 3.4 million. And with cash of GBP 9 million at the year-end, we're very confident in our runway to breakeven. So if I go into the top line growth in a bit more detail. So as I said before, ARR grew by 16% from GBP 11.5 million to GBP 13.3 million. And revenue grew by 17% from GBP 10.3 million to GBP 12 million. And both of these are in line with analyst guidance from Singer's and Edison despite the challenging economic conditions everyone has faced. Our land-and-expand strategy to bringing customers on a smaller initial sale, show them the value we can offer and then upsell and cross-sell has generated growth from our existing customer base, which is evidenced by continuing high net revenue retention rate of 111%. And our gross revenue retention rate of 99% further evidences the stickiness of our customer base. With 93% of our revenues being recurring, this provides good visibility for future periods. So just to explain that a bit more. On this slide, you can see ARR of GBP 11.5 million in FY '23; and that provides visibility for FY '24 recurring revenue of GBP 11.2 million. And we expect that trend to continue. So our strong recurring revenues give us a solid base, which allows us to pursue our path to profitability. And on this slide, we can see how we've been able to grow revenue while reducing our [ LBITDA losses ]. LBITDA of GBP 3.4 million is an improvement of 46% from the GBP 6.4 million we reported last year. So nearly half the amount. We've achieved this in 3 ways: first of all, by improving our gross margins by carefully managing our operating costs and also by delivering operational efficiencies. And to give a specific example, we moved our first-line customer support offshore in September, as well as delivering some cost savings that's leading to an improvement in the quality of service that we provide to our customers. And I'll talk more about our cost management program when we present our full year results in April, but for now I'll hand back to Kit.

Yes. Thanks, Greg. So that concludes our presentation for now. I would like to hand over to Alex, who will field some questions that have been posted in.

Thank you, Kit. Yes, we've had quite a few questions that have come in. Some are quite similar to each other, so I'll try and group those together.

The first one I'm going to kick off with is on the land-and-expand strategy. And the question is what is the split of ARR growth between this and simply [ putting up ] prices for existing customers, so I guess maybe you could give a breakdown between price and volume on that.

Yes. Thanks. I mean ultimately the split between new -- or existing customers and price growth is around about the 70% existing customer expansion, 30% price growth. We have been quite successful with price growth in the previous couple of years, but we feel we've hit a saturation point with existing customers there. Therefore, it's about upsell and cross-sell of new sites and new locations.

We've had a couple of questions in on this. One came in ahead of time and one came in during the call, which is on new customer numbers. "Management have talked about a significant opportunity pipeline. Could you comment on that and talk about how many new customers have been acquired over the last year?"

Yes. We'll be able to provide new customer numbers when we present the prelims in April, but it's I think, again, in line with the land-and-expand strategy. What we do see is that the cost of acquisition for new customers in the current environment is quite expensive and protracted, so where we do get them, for example, Macy's in the U.S. recently, we then expect to expand from there. So typically new customer acquisitions are lower in contract size, hence the land, and then larger as we expand them over time.

Next question is on gross margins. With the recurring revenue percentage of total revenue at 93% for both FY '23 and FY '24, are further gross profit margin expansion possible from the high 60% level at July [indiscernible]?

Yes. So let me answer that one, Alex. So we had -- just as a reminder for everybody. At the last year-end, we had gross margins of 63%. Those increased to the high 60s at the half year. I'd expect this year-end that would continue to be at the high 60s, that same sort of level. And then next year, I do expect there to be further gross margin expansion [ to be starting with a 7 ], so yes is the short answer.

Okay. And then a specific question on contracts. How big is the average contract size? And what is the largest individual customer?

Yes. So -- and as I mentioned earlier, our land and expand. The average contract size is in the region of about GBP 20,000 to GBP 25,000 of ARR. This is quite typical for industry peers such as ourselves. In terms of the largest overall customer, that would be Waitrose John Lewis, which is just over GBP 2 million of ARR.

Okay...

I might add further. I mean there's a sort of follow-up question to this in terms of the ARR profile. We've got 500 customers, but the top 10 customers represent about 35%, 40% of our ARR book. Top 20 is about 55% to 60%, and then there's a longer tail beneath that. Again, thinking about the focus of where we're growing the business is increasing the size and the number of those [ larger-budget ] customers, which do come with longer sales cycles, but that's where we see the bigger value over time.

Next question. How should we view selling and distribution costs in a high inflation business environment? For example, how much ARR or lifetime revenue can be expected to be generated per GBP 1 of sales and marketing costs?

Yes, I'll let Greg just handle that conversation.

Yes, sure. So it will vary by area. So certainly we look at the CAC that we have to incur. And that will be higher for enterprise customers. And it will vary between the food retail side and the medical monitoring that we offer to customers, so I think there's no real straightforward way to answer that directly, but I would say that, in terms of sales and marketing, we certainly are seeing progress in terms of how we're developing our -- what -- the way that we sell them to customers.

Okay. I'm going to group another 2 questions together. What do you forecast as the minimum cash balance before you break even? And then is there any risk that you'd need more capital to grow in the next 2 years? If the U.S. strategy is successful, would you need to invest faster?

Yes, let me initially handle this. And then I'll let Greg say what we can say. So yes, according to our forecasts, we're expecting breakeven at some point over the next 24 months. And we don't see our cash balance being a problem getting us to that point, as long as we maintain [ between the ] focus on profitability and consistent growth rates. So we do have the option to accelerate spend to seize a growth opportunity, particularly if something reveals itself in, for example, the U.S. If that is compelling enough, then we can still make that decision. And we're still confident that our overall cash position will see us through to breakeven and therefore cash generation, but Greg, is there anything else you wanted to add to that?

I think you've largely covered it, Kit. And what I would say is the guidance that's out for FY '25 shows an LBITDA of 2.3 million, so that's a further improvement from the LBITDA we're reporting today. We'd expect that sort of trend to continue, so as you say, we expect to break even in the next 2 years. And yes, absolutely, we are confident that the cash position will be sufficient to that point.