Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Checkit plc Full Year Results Investor Presentation. [Operator Instructions]. Questions are encouraged and they can be submitted at any time using the Q&A tab. [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 is appropriate to do so. 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 to you.

Good afternoon, and actually also good morning because I'm speaking to you from the U.S. and it's a good morning to anybody who is joining us from U.S. as well. There's a bit of a presentation of the team, I'll give you at the start here. So also introducing David Davies, our Chief Product Officer, to the normal group of myself and Greg Price. That specifically so we can talk a bit more about the recent product module that we've launched, and you'll go into more details as we go into it. Okay. So there's a tight agenda that we want to get through today. We'll start off with the operational highlights. And then for those of the new to the story. I'll take you through who Checkit is and what makes it differentiated. Then I will cover off how we're progressing against our stated strategy and key goals. Before handing over David, we'll do that deep dive on Asset Intelligence. And then Greg will take us through the financials, and we'll open up for questions. Okay. So we're really pleased with the results that we've delivered for FY '24. Our stated goals of consistent growth and accelerated path to profitability coming through. So 16% growth in ARR to GBP 13.3 million, 17% growth in revenue, whilst at the same time, we've now delivered 30% CAGR in our recurring revenue growth since FY '20. And we've halved losses in the year to GBP 3.4 million, down from GBP 6.4 million. So we're really pleased with achieving those twin goals at the same time. Gross margin at the same time has continued to grow 4 percentage points to 67% and our land and expand strategy, the way that we grow our customers with initial entry point deals and then expand over time continues to be validated as we deliver a net retention rate of 111%. As I mentioned we recently announced the launch of Asset Intelligence, which is a very exciting data-led play that David will take you through shortly. And we delivered cash of GBP 9 million at the end of the year. So we're clearly on path to deliver profitability in FY '27 EBITDA positivity as the guidance now states. Okay. So let's have a look at who Checkit is for those that are new. So to keep it very simple, Checkit is a technology platform that delivers automation and digital for the deskless worker, the deskless worker is someone who works for large blue-chip enterprises at about 80% of the global workforce. These are large multi-site international organizations. Where Checkit delivers its value is roughly speaking, in 4 areas. So from a senior operational leadership and management perspective, we are giving them visibility into how better to run their operations using the deskless worker, which is the majority of their workforce. And indeed, the interaction they have with their fixed assets and their built environments as they go about the work. So that is the format -- takes the format of dashboards, insights, analytics, that they can then drive cost efficiencies and productivity gains across the organization. That information, that data is powered by the 2 aspects that make Checkit unique and differentiated. First of all, an IoT, Internet of Things ecosystem that acts rather like an extended nervous system across the organization, monitoring fixed assets in real time. This is providing immediate warning of issues and prompting and guiding actions that the humans, the deskless workers can then act upon in real time prevent things like stock loss or compliance failures. At the same time, the human and the deskless worker is equipped with the Checkit digital tool, our workflow management capability that is device-agnostic that takes them from an analog paper-based Excel spreadsheet-based world into a real-time digital world that translates all of their tasks into a very user-friendly format and allows them to get on with their work. All of this activity is generating billions and billions of data points. And so as David will take you through later on, what we're then building is machine learning and AI algorithms to capitalize on the data that's already being generated to further enhance operational management capabilities. So for those that are new to the story, I'll talk you through why you should consider investing in Checkit. One thing I want to point out and saying that's become really clear as I speak with U.S. investors is that people get very excited about the size and the scope of what's called the smart sensor market, so just Internet of Things alone. This is an industry that's growing at 18% CAGR at the moment, and Checkit is very well positioned as a leading integrator of Internet of Things capabilities into solution sets for customers. At the same time, we have around about 350 what we call sticky customers, large blue-chip enterprises, whom, as I demonstrated through the NRR of 111%. We continue to grow and land and expand over time. These customers typically come with a lifetime value of around about 8 years. So once we land them, they stick with us for quite a time as we look to scale them over the period. At the same time, we're very focused around where we want to play and where we want to grow. So for example, I'm in the U.S. because the U.S. is one of our stated growth markets and geographies. We see this as a great opportunity for the company given the commonality of blue chip customers as we have in Western Europe, where there's just more of them, we see a greater opportunity to expand. As I mentioned earlier, we continue to focus on recurring revenues. So whilst our ARR has grown at a cap of 30% recurring revenues overall and now 93% of the entire revenue base for the company. So this translates into a quite a significant market opportunity. Again, as a reminder, we're dealing with 80% of the global workforce spread across large blue-chip enterprises in a very specific set of industries that we want to target. So I'll take us through the aspects of our strategy that we're focusing on. On the top line, we're going to talk about growth. Growth being where we're looking to accelerate U.S. market presence, how we're looking to scale upsell and cross-sell existing customers and then where we're looking to focus in terms of our industry verticals and the adjacent verticals we are looking to bring onboard. On the bottom line, we're talking about the profitability metrics that help drive the business forward to breakeven. So for example, the recurring revenue, subscription focus, it's now 93% of all revenues. Continue our focus on driving operating efficiency into the business in order to expedite profitability and at the same time, sequencing investment towards innovation and R&D to release things such as asset intelligence to help the business continue to grow. So let's consider how we're faring against that strategy. We talked about the U.S. From a standing start, the U.S. is now GBP 3.4 million of ARR over the last 3 years. That's about 26% of the group's total ARR. So we're really happy with the footprint that we've established. U.S. is often a totally hard market and many U.K. companies struggle to get a decent footprint in this. So we're pleased with our potential so far. As I mentioned, it's a huge market opportunity for Checkit. We've invested in scaling up the U.S. leadership from a sales perspective and a marketing perspective. And it's fair to say that we expect the U.S. to be a leading contributor of ARR to the business on an annual basis within the next 2 to 3 years. When I consider the verticals that we play in, Checkit prominently plays in the healthcare, food, retail and hospitality verticals. So healthcare represents now about 50% of our ARR with retail being about 30% and hospitality about 20%. To give you an indication, what we're seeing at the moment, everyone is aware of the macroeconomic challenges that face the market generally, healthcare continues to be robust from a pipeline and a sales perspective. And I think this is linked to the fact that it's a higher-margin industry. We have a very well-developed set of use cases in the world of client base. So we continue to see robustness in the way that those deals in that pipeline manage. What's also interesting to note is that both retail and hospitality have started to show signs of life, certainly this year in terms of our pipeline, in terms of the new opportunities that are coming in, which is great given the last 2 years where they struggled a bit. We also are now bringing in adjacent markets and industry verticals, first to focus in. So for example, food manufacturing and biotech are natural fits given the products that we have and the use cases we have with the domain experience they bring to bear. As I mentioned, recurring revenue is now 93% of our total revenue base. So we consider this aspect in the strategy complete. That which is not recurring revenue, so the non-recurring revenue that is effectively professional services associated with integration and implementation of the Checkit platform into the system. We talk about the path to profitability. And as I said, we've halved losses in the year to GBP 3.4 million. I think what this is also demonstrating is the impact of operational gearing coming through as we keep our operating expenses relatively flat. From our cash position and as the guidance we now suggest, we will be very confident about hitting EBITDA positivity during FY '27, which is effectively at the end of calendar year '26, so just over 2 years' time. Now we've often talked about some of our core large customers, the likes of BP, Waitrose, John Lewis, NHS. So briefly mention a couple of our medium-sized customers to highlight again, the breadth of customers that Checkit has and indeed, the opportunity -- we run with them. So for example, if we consider Kedrion Biopharma in the U.S.. The biopharma blood plasma market in the U.S. for us is very interesting. We actually have 6 out of the top 10 blood plasma biopharma providers in the U.S. I think it's fair to say that we're actually the leading provider of blood plasma biopharma services to the U.S. market of any customer. So for example, Kedrion, we have 70 different centers in the U.S. where Checkit is providing automated monitoring solution. This is giving them not just instant information around the state of their asset base given that effectively, these are mission-critical operations for the business. But at the same time, what we're also doing is providing an audit and compliance trail for what is a very heavily regulated industry, and we're minimizing the likelihood of risk to the business and indeed waste of the product. A completely different example and completely different story would be P&O Ferries for example. Where we recently sold the Checkit platform a different product sets is the workflow management platform in a different form of IoT into their 2 new leading flagship vessels. This is to provide them with a digital-first automation-first effective food operation solution because this is hospitality on water. And again, this takes them from an analog paper-based world into a digital world. It gives them an audit visibility in an immediate effect. It also helps them reduce the manual effort and indeed the labor cost effort that's required across these ships and contributes directly to sustainability goals. With that, I'm actually going to hand over to David to take us in more detail through the new Asset Intelligence product that we just released.

Great. Thank you, Kit. So as has been mentioned, I'd like to take you through a first sight of what we've done with artificial intelligence and machine learning on top of all the data that we're collecting. And to put that into context, just to remind people and perhaps explain where this all comes from but the platform has these 3 elements that Kit's described, the Internet of Things, sensors that help people keep their stock safe, remove manual checks from people's lives, freeing up to do other things and also ensures complete compliance monitoring. That's based on both our own sensors and increasingly third-party sensors as well. Working in tandem with a workflow product that puts very easy to use tools in the hands of workers to make sure that they're able to do the right thing at the right place and the right time. And crucially, those 2 are working completely together from one service provider, which is us so that if something happens in the real world, people at the front line can respond to it in the right way with the workflow. And of course, this is used by companies with potentially many hundreds of locations. We're seeing what's going on across your business is just not possible without this level of digitization. So our analytics products provide that oversight that they have for some time, allow people to compare locations and trends. But what we've done now is bring on this new capability, we call Asset Intelligence, which is taking -- we've taken another look at what we can do with that data and applied new techniques to it. And really, this comes also from not just what can we do with the technology, but what problems are our customers facing. And the people we're talking to are owning potentially many thousands of assets, fridges, freezers, et cetera, containing very valuable stocks. The sort of questions that they ask beyond the basic monitoring is, how can I tell where I should focus my maintenance efforts? Which of my assets are really healthy? Or which of my -- am I -- have I got things set up right, so I'm not wasting energy? Obviously, we all know that that's increasingly important to people. How much of my capacity is available? As in -- I've built my operation, whether it's a retail operation or a supply chain to use the assets I've invested in or how many of them are actually available at any one time? So that's what -- those are the problems the product solves by basically taking this information we were gathering and treating it in a new way. So new value for customers, we think it sets us apart from the competition and also demonstrates our technological leadership and it's a great opportunity to expand our footprint in line with the strategy Kit's been talking about. So what does that look like? Well, behind the scenes, the machine learning is essentially categorizing things for want of a better word into different buckets. So this is an example of how we start to look at the health of an asset, in this case, something monitoring refrigeration. And in this case, you can -- I think you can probably see on the screen, this is categorized as a good, healthy asset. And the plot at the bottom shows essentially that the temperature is being controlled in a way that falls well within the expected tolerance that the machine learning has figured out is correct. And if you can trust that with a poorly behaving asset, you can -- I think you can see the difference for yourselves. Now of course, if you have 2 fridges or freezers like this, it would be easy to go and look at what's going on. But you have to remember that these are businesses and operations teams who are managing many, many assets. And being able to sort them this way and figure out where to go and look and pay attention is hugely valuable. And we can apply similar techniques to looking at how much energy is being used or wasted. So it's a trade-off. If you set things up too close to the limits, then you risk not keeping the contents of your fridge or freezer at the right temperature. But if you set it too low, you're essentially just burning money. So the tool is able to look at that balance and identify where energy is being wasted, and then again, recommend to the operational teams, what they can do about that to start actually reducing emissions while keeping stock safe. And finally, a similar approach can be taken with no configuration at all to work out which appliances are essentially in use or not in use across a large area. And as I mentioned before, this is particularly important in areas where these appliances are important to operations. As somebody said to us, you can't sell ice creams without an ice cream freezer, and that's just one example. So huge amount of works gone into this building on the models we've -- on the data we've already collected. I think the key takeaway is that we've taken the value of our IoT from the very important tasks of looking after compliance, stock loss and safety and extrapolated that into a whole new area where we're helping people figure out where to target their maintenance. They can figure out which of their fleet of appliances they should be replacing and where the capital investment should be going with a more scientific approach. They can also address the sort of emissions problem. And in cases like my ice cream fridge, they can also target improved retail revenue, all from the data we're already collecting.

Thanks, David. Our financial results this year are based on 3 drivers. Sustainable growth, efficient delivery and careful cost management. And on this highlights slide, you can see all of these drivers in play. So sustainable growth in that revenue was up 17% year-on-year. Efficient delivery as gross margins have increased by 4 percentage points to 57% and careful cost management as we've reduced losses by almost half with LBITDA now being GBP 3.4 million as we continue to progress towards profitability. Sustainable growth while driving cost efficiencies is a delicate balance, and we'll take you through this as to how we're achieving shortly. But first, let me talk about revenue in a bit more detail. So total group revenue for the year was GBP 12 million, which is up 17% versus last year. And recurring revenue is also up 17% and that recurring revenue continues to be over 90% of the total, which demonstrates the quality of our revenues. Our growth reflects our land and expand strategy where we start with a small sales for customer and then progressively develop our footprint with them, which is seen in our retention rates at the bottom and gross retention of 99%, net retention of 111% are certainly something that we're very pleased to see. And those strong retention rates give us confidence in future revenues, which you can see on this slide. So our annual recurring revenues are a clear indicator of future recurring revenue. So if you look at FY '22 in our second block, ARR of GBP 9 million in FY '22, converted in FY '23 to recurring revenue of GBP 9.6 million and then ARR in FY '23 of GBP 11.5 million converted into recurring revenue to FY '24 of GBP 11.2 million. So we have good signs of our future revenues, and that gives us confidence in the guidance that's been issued today. But our top line growth is only one driver of our performance. So let's now talk about our margins. Gross margins have continued to increase from 54% in FY '22 to 63% last year and 67% this year. The improvement this year has come from utilizing third-party providers in our delivery model as well as the full year effect of procurement savings for our platform costs. And on top of our margins, we've been able to halve our losses, as I was saying, and LBITDA has improved by 46%. And as you can see here, this is partly due to the increase in gross profit, which is up 23%. It's also driven by the reduction in operating costs by GBP 1.5 million, 11% as we carefully managed our cost base in the year. So our investments in sales and marketing reduced by 12% in the year. As we focused on maximizing our ROI and identified opportunities in adjacent markets and geographies, as Kit has mentioned. Product cost expensed also reduced by 7% as a result of efficiencies achieved, although the amount capitalized increased to GBP 2 million as we invested behind the capabilities that David has talked us through. Elsewhere, we've driven cost efficiencies in our operations, introducing automated call handling and offshoring as part of our customer support team in H2. So all that means that when we look at our cash position, we can see sufficient scope to reach profitability. Cash at the end of the year at January 2024 was GBP 9 million. And even though we saw a one-off adverse working capital movement of GBP 1.2 million as we increased inventory levels to protect our supply chain, FY '24 saw a 23% reduction versus the previous year in cash burn, and we expect this to continue to reduce in FY '25. We manage our cash very carefully so we can maintain the balance between achieving further top line growth and profitability. And you can see that balance on this next slide. The combination of top line growth at the top and then the reduction of losses as we expand margins and continue to drive cost efficiency means we can be confident that we can achieve the analyst guidance issued today to show a positive EBITDA in FY '27, which just to remind you, is the year to January 2027 so effectively calendar year 2026. That is enough said today, when we reach breakeven, operational leverage support rapid margin expansion. So there's a lot more to come. And on that note, I'll hand you back to Kit for more on our outlook.

Thanks, Greg. Yes, so we will continue with our land and expand strategy. We're going to capitalize on how we can monetize the vast amount of data that's being generated by a platform with new and exciting product innovations. As I mentioned, the U.S. market remains a key priority for our growth strategy for the coming years. And with our operational -- our prudent operational cost management, we will maintain our momentum on margin improvements. Again, we look forward to being cash flow breakeven during FY '27 and posting positive EBITDA in FY '27. And therefore, we look forward to this year with confidence.

[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 on our investor dashboard. Greg, David, as you can see, we have received a number of questions throughout today's presentation. And Alex, if I may now hand back to you and kindly ask you to read out the questions, and I'll pick up from you at the end.

Thank you very much. Let's kick off then with the first question. Revenue growth is currently slower than historically. Can you share with us any metrics on the number of success in conversion sales presentations over time, which may indicate where the sales cycles are still lengthening or contracting?

Thanks, Alex. Let me take that. Look, so the way we structure this business is we have what we call run rate forecasting, run rate sales and large deal opportunities. That's the way we said this. We build our business around the run rate deals only. These can be short or small initial deal sizes, but oftentimes with large blue chip customers, okay? So whilst it may appear that revenue is slowing. It's not entirely true given that the base overall is growing, but also the -- when we consider things like the NRR of 111%, what it really means is that we're bringing in, let's say, an initial deal size with average deal, so to say, GBP 20,000 which for a customer, it feels like BP or similar is one that we can grow to more than GBP 1 million of ARR over the coming 2 to 3 years. So actually, we think about are we getting the right type of customers into the pipe then flows through the following years. You see the NRR being top quarter compared to our peers. What I can also say is that when we look at comparable organizations and companies, it's -- the common sales conversion in the pipeline is around about 10%, 11% and that's actually best-in-class. And that's what we see inside Checkit. So our conversion rate is where we need -- where we'd expect to have it, which means sales execution is where it needs to be. The lumpiness in the pipeline is dictated by large deals. So given the current macro environment, they can sometimes move by a quarter or even 6 months, they can indeed fall out of year, hence the reason we don't forecast around it. But we're pretty confident, especially given the start to this year and the types of organization that have entered the pipeline and the potential size and materiality of those deals.

We've got a couple more questions on the sales area. The difference between the net retention rate and the total revenue growth is quite small, suggesting modest success finding new customers. What are you doing to address this?

Yes, let me pick on that again. Well, I think actually, this is related to the same answer I just gave. So again, remember, an average deal size for Checkit is around about GBP 20,000. However, when you're bringing in large blue chip customers, the expectation, given that we have an average customer lifetime value of about 8 years, the expectation is that over the next 2, 3 years, you take that GBP 20,000 and you take it to GBP 100,000, GBP 200,000, GBP 300,000, et cetera, total ARR enterprise value for the customer. So actually, the focus is very much on land and expand. We wouldn't want to have a primary focus that is contingent on landing large [ wells ] in the year, otherwise, which talk about our forecasting.

If a customer doesn't renew a contract, can you remove the installed sensor? What's the stock the customer carrying on the tasks without your service?

Great question, a very simple answer. The customers don't own the sensors, we do. So if a customer doesn't renew the contract, we remove all of our equipment and hardware so they can't use our system without paying us money. But -- there's another interesting point to this, which is that I think when we looked at our GRR so gross revenue retention of 99%. So it's -- that's best-in-class, very low churn rates. And I think part of that is because once you have got the IoT and you have got the system in place, you are providing mission-critical operations. So it becomes quite a barrier to wanting to remove Checkit because you're reintroducing a lot of risk into your system. And so we see this and we see -- we often see even where a customer may indicate that they want to not renew a contract when actually comes down to we've often seen extensions to that, and that gives us an opportunity to revitalize a particular relationship if it needs doing.

Thank you, Kit. Moving on to a slightly different topic about product innovation. What is the market competitor to Asset Intelligence? Does an Internet of Things for fridges exist? Or is the data collection platform novel?

Yes. If I might ask David Davies to comment on that, if I can.

I thought -- yes, sorry, I nearly jumped it anyway. I mean, I think, first of all, yes, IoT offered [indiscernible], and that's why it's important for us to continue to innovate. I mean the way we do the IoT piece is itself various differentiating things about it, including the way we sell it as a service, the service to be around it, things like calibration. But -- and of course second differentiator is that it comes as we were out of the box with the workflow, as I tried to explain earlier. So rather than just collecting data, we're also enabling you to do something about it. And -- but we're not seeing our competitors doing what I described earlier, which is actually taking that data and using techniques like machine learning to actually turn it into even more high-value information. So that is a differentiator on top of what is a rapidly expanding IoT sort of landscape.

I'd add to that as well. And I'll just say that, again, if we focus on the deskless space, which is the opportunity here. We don't see another competitor that's monetizing the data in the way that we are and those twin pillars of IoT workflow that keep pushing data in give us a competitive advantage at the moment. Now when I speak to our customers, and I've been speaking to a lot of our existing customers and new customers in the U.S. This particular product innovation is something that they are actually asking me about before we even have a chance to advertise it to them. So this is top of mind for almost all of our customers at the moment, not just from an ESG perspective, from a cost management perspective, it's significant. -- and they're expecting the impact of AI to give them these types of benefits. So it's really reassuring having now released this module that we're kind of ahead of the curve in this respect.

Staying on the topic of product innovation. How do you stay ahead of technological advancements and ensure that your solutions remain innovative and competitive?

Yes. Let me take this thing, and then I'll pass on to David. I mean I think the -- first of all, what we're constantly doing, and David's function, which is a well-funded function, is constantly scanning the environment for not just the competitive landscape, but trying to bake in the latest innovations that are happening on a global basis and ask the question, what is it that we actually need to build versus what is it we need to copy and integrate it to something that is relevant for our customer base and our product set? And increasing as we go forward, I think that's the opportunity for us. The idea is not for us to try and become the market leader in large language models or some version of ChatGPT, but it's instead to take all of the benefits of that and apply it to an area where we have domain knowledge and demand expertise. And that area is the deskless worker in an environment that has built assets, people and fixed assets and heavily compliant goods. So Davies anything else you want to add to that?

I mean that's spot on. It's very important that we -- the way the modern world is, there's a lot of fantastic technology coming out that we can leverage, and it's important we do not try to recreate that. It's all about having very smart team who can take that and shape it. And coupling that to, I think, yes, building on our strengths, we've already got things that make us different. We've got vast reservoirs of data, which means that we can apply that in a very distinct way, and then listening to our customers and making sure that what we're doing isn't for the sake of it. It's because it serves really practical solutions. And the example you just gave with people asking about, well, what else can I do with this data? How do I predict what's going to go wrong with my appliances is a great example, and there will be more.