Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Checkit plc half year 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 can review all questions submitted today and we'll publish those responses where it's appropriate to do so. Before we begin, as usual, we would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CEO, Kit Kyte. Kit, good afternoon, sir.

Good afternoon. Thank you very much, and thank you, everybody, for attending Checkit's half year results for the financial year '25. So the presentation team today is obviously myself, Kit Kyte, CEO, and Greg Price, CFO, COO. This will be Greg's last presentation with Checkit. We wish him all the best with the future and his endeavors, and we thank him for the time and effort he's invested with Checkit over the last few years. So by way of agenda, there's a fair bit of work and ground to cover today. I will bring us up to speed with the first half highlights for '25 and then for those who are new to the story and indeed, those who are existing holders, I will remind that Checkit story, the value proposition, the points of difference before covering off on the key pillars of our strategy and then we will do a double-click into our product, R&D and innovation efforts before handing over to Greg for financials, and then we'll finish with the outlook and open for questions. So we're very happy with some solid progress on all key company goals and criteria in the half. This is our first time that we've mentioned the group bookings and those group bookings, that's net new ARR sales have grown 38% year-on-year from the prior half of FY '24 to GBP 1.2 million of ARR, reflecting a number of strong contract wins that we did announce to the market during the first half. Just as a reminder, for those that are new, Checkit contracts on 3-year minimum terms. So actually, that GBP 1.2 million of ARR translates into GBP 3.6 million of total contract value. Talking of ARR, the flow-through to ARR growth was at 9% to GBP 13.8 million. That somewhat dampened from the strong sales performance as we saw a bit of managed churn on a couple of low-margin noncore contracts to the business, which we consider to be exceptional in the first half of the year. Total revenue grew consistently up to 16% at GBP 6.7 million, and our net revenue retention rate of 109% continues to be top quarter and evidence of a consistent land-and-expand strategy being executed. We also were pleased to announce the release of our Asset Intelligence ML/AI module in April with first contract secured in the last couple of months of the half. whilst on the bottom line, adjusted EBITDA has improved by a further 24% to GBP 1.4 million, and cash remains healthy at GBP 7 million at the half. So a quick reminder revise on the Checkit's strategy, indeed, what Checkit is and where -- what the value proposition looks like. So Checkit is in its simplest form an operational excellence platform serving the deskless industry, and that would be large blue-chip multinational organizations with tens of thousands of workers conducting similar types of task and activity across distributed operations. It is an operational excellence platform that is provided primarily by 2 distinct products. On the one hand, we have an automated monitoring solution that is Internet of Things, sensors, which are integrated across an organization's critical asset base, providing automated monitoring and real-time and data collation. And on the other hand, we have a task management workflow tool that provides a digital solution for the deskless workers that are working on the front line and helps guide them through their tasks and checks and this integrated end-to-end with that automated monitoring solution, thus providing a seamless end-to-end set of data back up to management. Increasingly, as the company evolves it's go-to-market and indeed it's product footprint, we're seeking to then build ML/AI modules that sit on that data in order to further enhance the ROI that customers get, and we'll talk more about that later. So for those that would be considering investing in Checkit and those that are new, it's worth double-clicking on what the investment case in store looks like. Checkit is targeting the operational efficiency agenda for large blue-chip multinational organizations. Typically, organizations are trying to solve for a revenue, a cost and a risk imperative. Increasingly in today's market, it's cost and risk that is a priority, and this is something that Checkit can bring using automation and using digital in what is a very underserved and fragmented market we're seeking to take a leadership position in that market. We consistently are demonstrating an execution capability around what we call a land and expand strategy. So we selectively target which net new customers we bring on board and then we seek to grow them over multiple years into very healthy 6-, 7-figure ARR customers into the business. This is backed up by our top quartile NRR rates that we keep and consistently report. We're very focused on where we want to play and where we want to sell. This is a company that's grown out of the U.K. is well developed within the U.K. market and indeed Western Europe. And more recently, we've entered the North American market, particularly the U.S. as another core geography that we want to do business in. And as I said, we keep investing very specifically in innovation that seeks to monetize and take advantage of the vast amounts of data that our products are providing to customers. It's the first step -- the first order of data that they would have received. And again, for a final point on this, this is a business that's built around a recurring revenue subscription model. And as we'll see, that's a vast majority of our revenues. And this, again, given the 3-year minimum terms of our contracts provides a lot of visibility around future earnings streams. So what's that market opportunity, if I break it down a bit further. So again, there's 2 key -- a confluence of 2 key trends on the macro side that are working in our favor. One, the workforce management market and how organizations bring digital to that is growing at a CAGR of about 12%, whilst at the same time, the global smart center market is growing at a CAGR of about 18%. Checkit solves both of these problems in an end-to-end fashion. We often come across endpoint competitors that might provide aspect of a task management solution or an aspect of an Internet of Things solution, Checkit actually seeks to bring those two together, because we see the end-to-end offering as the key to driving operational excellence. Let's not forget that 80% of the global workforce is categorized as deskless worker, okay? That's like 2.7 billion people and yet, 73% of those workers are still using pen and paper to do the work. So the automation and the digital opportunity is apparent, and it's now starting to be invested in quite significantly by large blue-chip organizations. In terms of where Checkit plays currently, we're primarily focused on the healthcare, the retail and hospitality industries. So when we say healthcare, that means hospitals, be the NHS, where we're heavily penetrated or private hospitals, it means care homes, it means blood plasma providers. That's about 50% of our ARR base. The retail vertical primarily means food retail. So think of food operations solutions. So think of the likes of Waitrose and John Lewis, think of someone like BP and all of their service stations, not just across the U.K., but in other locations as well. This is about 30% of our ARR base and is a consistent and sticky part of our land and expand strategy. And then hospitality, think of well-known customers such as [indiscernible], these types of customer here. We would also include in that the large global contract caterers such as Compass Group or Sodexo Group, which are also customers of ours. That's about 20% of our ARR base. And as we continue to scale, we're seeking to incorporate adjacent sub verticals such as food manufacturing and biotech, which we consider to be high-margin industries, where our use cases are already well proven that we can continue to sell and upsell. And as I mentioned, the U.S. market for us is highly attractive, and we'll talk about how we're performing there shortly given that it represents 5x more tax spend than you see in Europe. Okay. So the key pillars of our growth strategy, how are we performing and what are we doing? So accelerating the U.S. and the U.S. -- our U.S. footprint in the market is a key priority for the business. And there's a slide which we'll talk you through how that's performing. Continuing to drive industry-leading or top quartile net revenue retention rates through upsell, cross-sell across the existing customer as whilst bringing in targeted net new customers is the organic growth model that we're looking to apply. I mentioned the sub verticals that we're now looking to expand into. Where we see high-margin fit across existing use cases, that's certainly what the target as well as becoming a business that's built around a recurring revenue subscription-based model that becomes sticky to the future. And as Greg will show you in a bit, we're doing all of these whilst continuing to drive operational efficiency and accelerate and bring forward that path to profitability and beyond at the same time. So how are we performing against that strategy? Well, in terms of the U.S., ARR has grown a further 13% in H1 and actual revenues were up 20% year-on-year in the half. From a subscription revenue, sort of recurring revenue base that I keep mentioning, that's now 94% of the total revenue base. So one could consider that almost complete from a pure recurring revenue perspective. Product innovation. We've mentioned Asset Intelligence. We have a section on this where I'll talk to you about how that use case is being used. We're very pleased with the stickiness of that product. Net revenue retention remains at 109%. And as I said, there are a number of mid- to large-sized contracts that we announced in the half that have supported what was a 38% growth in sales bookings. And so overall, in H1, we continue to execute against our expectations. So the U.S., this is a market we entered just over 3 years ago, maybe 3.5 years ago now. And as you can see, we've now scaled it to being 27% of total group ARR. A lot of U.K. companies will struggle to establish a bridgehead in the U.S. It's a very competitive market. So we're pleased with the performance given how lean the team is over there to now have a well-established bridge head. We are actually in all but 2 states in the U.S. in terms of our customer profile. So we spread our customers across the U.S. The majority sit within the healthcare space, which is a high-margin industry, and certainly, we have a very proven use case for. Clearly, the non-healthcare space and non-healthcare opportunity represents something significant for Checkit. And as a result of this, we've been expanding in the go-to-market team on an organic basis. And I myself have actually spent a number of months at the start of the year in the U.S. and I'll go and spend some more months at the back end of this year in a bid to continue to spearhead the growth effort there. The expectation around the U.S. is quite significant, and we think, in the midterm, more than 50% of revenues should come from the U.S. to Checkit. So again, just double-clicking on the subscription revenue base. As I mentioned, ARR is now up at GBP 13.8 million. Recurring revenue grew 14% to GBP 6.3 million. And then total revenues have grown 16% to GBP 6.7 million. And that really is reflected in the 2 core metrics that we track, that being net revenue retention of 109% and gross revenue retention of 95%. As I mentioned, the managed churn of a couple of low-margin noncore contracts that we took advantage of in the first half is the reason why GRR is at 95% as opposed to sort of more traditional 98% to 99%, but that's well within management's expectations. So a couple of customer stories to bring this to life for you. We announced a significant new contract with Octapharma in the first half, Octapharma is a U.S. company. It's our second largest customer. We're in over 170 different plasma locations across the U.S. with this customer. This is a customer that we've tripled ARR with over the last 3 years. And it's just -- it's representing somewhere around GBP 800,000 of ARR to the business. And there's a good example of land and expand at work. Checkit provides a fully fledged end-to-end automated monitoring solution for Octapharma and the new deal we signed, which was for a new product range called TTMU, Tactical Temperature Monitoring Units enables Octapharma to get a mobility solution, but more importantly, a redundancy solution that sits alongside our core automated monitoring platform. It won't escape. People noticed that the NHS suffered a ransomware or cyber attack or the number of NHS customers suffered one of those attacks a few months ago. The similar attacks have been going on in the U.S. around healthcare customers, obviously, the threat is around patient data. The automated monitoring that Checkit provides acts as a mission-critical sort of final line of defense for these organizations and has been proven in action over the course of this year. Equally, BP is one of our largest customers and is for good reason, one, we continue to invest and expand with. This is an organization where we've currently scaled our full product suite task management, automated monitoring, ML/AI algorithmic data reporting to over 850 company-owned locations over the last 4, 5 years. So that's the whole of the U.K., Netherlands, Luxembourg and pleasingly, Australia and New Zealand, where we've actually recently just completed the full rollout of another 430 locations there. What's been very exciting about the BP story, is that in the first half of this year, we made 2 different contracts for another 200 franchise locations with BP. Now what's exciting about the franchise opportunity is that it represents 3x the size of the company-owned footprint on a global basis? So being able to prove the commercial structure and the use case on the franchise side of the house is very exciting for us, and we continue to look forward to the future with confidence with this key customer of ours. And then I'm just going to finish off here before I hand over to Greg by spending a little bit of time double-clicking on the product and indeed what's the point of difference here and where are we seeking to invest by way of innovation going forward. So as I mentioned, the key point of difference for Checkit is that we provide an automated monitoring, Internet of Things driven solution and our task management solution, integrated together end-to-end. This is the basis of an operational excellence platform in the services and the use cases that we currently play in. That data feeds seamlessly between assets and people, people back to assets, and that is the operating environment. The majority of large blue-chip organizations actually work in. Of course, what's been happening is we're generating a vast amount of data. The data never existed, it was analog in the first place. By having digitized it, we can then do -- manipulate it in order to provide a much stronger ROI opportunities for our customers. And this is where Asset Intelligence as our first module in this space came to bear. Effect of the Asset Intelligence is taking all of the data that was already being driven by our Internet of Things automation solution, running it through our algorithm and providing 3 core ROI-led benefits for an organization. Firstly, predictive maintenance. This is a high probability ratings on which assets are going to fail and when before they fail. That way you can minimize the loss -- the potential stock loss or inventory loss or revenue loss associated with such failures. The second one, and this is a really interesting one when we consider the Morrison's most recent announcement around the project minus 15 degree C, this is around energy consumption. So organizations are realizing that if they've got thousands of assets running colder than they need to be or running hotter than they need to be, they're burning through energy at a rate that when you sum it up, becomes a meaningful P&L effect. This is something that Asset Intelligence specifically helps organizations to predict and then manage and then control around. And the final one is around capital allocation. So on an annual basis, which assets do I actually need to replace versus taking a gas and having a blanket approach to this kind of investment. Asset Intelligence will help you predict specifically which asset will go down and therefore, be much more granular around what you need to do about replacement. So this has been a very sticky bit of product R&D. And indeed, we had a couple of contracts won in the first half. The majority of the pipeline going forward has some form of asset intelligence baked in, either as an upsell, cross-sell or as a point of difference net proceedings. And with that, I'm going to hand over to Greg to talk us through the financials.

Thanks, Kit. I'm pleased to be able to take you through my last set of results as Checkit CFO. These results continue to show that Checkit is well placed to achieve its strategic goals. And I'll start with some financial highlights before I go through some detail. And as a reminder, if anyone has any questions, please put them on the site and we'll answer them at the end. So in terms of financial highlights, let's start there. And what we're aiming for is a balance of top line growth achieving profitability and maintaining sufficient cash. And our results this half year meet that aim. So with growth of 16% year-on-year in revenue, improving gross margins and then adjusted EBITDA improving by 24% with cash of GBP 7 million. That certainly feels like it achieves those aims that I was talking about just then. And if I start with revenue of the total group revenue of GBP 6.7 million, GBP 6.3 million or 94% is recurring revenue. And this shows the quality of our revenue. Our revenue has been increasing by around GBP 1 million per half year for each first half across the last 3 years, as you can see on this slide, and that shows the sustainability of our growth. It reflects our land and expand strategy, as Kit has said, where we start with a small sale to a customer and develop our footprint over time. And our top line growth is only one driver of our performance. So let's talk about our margins. Gross margins have continued to increase from 54% in FY '22 to now stand at 68%. And that's, of course, an increase -- that's in spite of an increase in our cost of sales as we set up the infrastructure in Australia and New Zealand to support our biggest contract to date. And I expect our margins to continue to increase in future periods. So our top line growth with revenue of 16% and gross margin performance that I've just talked about result in gross profit growing by 12% with operating costs held flat during the period. That means our EBITDA has improved by 24% to a loss of GBP 1.4 million in the half. And that's on top of the 46% improvement that we had last year. So when we talk about the path to profitability, which is on this next slide, we are confident that we're heading on the right track. The growth in revenue, margin expansion and careful cost management show that we will achieve profitability, and we're confident in the guidance that's been released today -- that's been reiterated today that we will see further improvements in EBITDA in the second half, and that will result in EBITDA being positive in the year ending 31st of January 2027. So that's effectively the calendar year 2026. And this is supported by our cash position. So cash at the end of July was GBP 7 million, and that's compared to GBP 9 million at the start of the year. That represents an improvement in our cash burn of nearly 30%, and we expect this to continue in H2. We manage our cash very carefully so we can maintain the balance between growth and profitability with sufficient cash to reach breakeven. And with that, I'll hand you back to Kit for some closing messages.

Thanks, Greg. Look, we're going to continue to drive growth for a pure subscription-based model that provides good visibility to future revenue streams. At the same time, we're going to continue to invest in the development of Checkit platform to create an industry-leading product that is differentiated around innovation and the use of the data. And as I mentioned and as Greg has also mentioned, the Board remains confident that Checkit will make further progress to achieving its goal of profitability in calendar year 2026, and we remain on track to beat market revenue and EBITDA expectations for the current year. And with that, I will pause, and I will open up the floor for questions.

Perfect, Kit, Greg, if I may just jump back in there. And thank you very much indeed for your presentation this afternoon. [Operator Instructions] I would just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can all be by your investor dashboard. Guys, as you can see there, we have received a number of questions throughout your presentation this afternoon. I thank you to all of those on the call for taking the time to submit their questions. Alex, at this point, so if I may hand over to you just to chair the Q&A with the team. And if I pick up from you at the end, that would be great.

Thanks, Jake. So let's go to the first question, and it's on group bookings. So a couple of questions here. Group bookings is a first time reported KPI, will this be continually reported going forward? And then connected to this, group bookings look very healthy at plus 38% year-on-year to GBP 1.2 million over the last 6 months. Do bookings equal customer contracts signed, but billing has not yet started? Is my understanding correct? And how long does Checkit think the bookings can be billed and become ARR? Will it convert to ARR in the second half of the calendar year?

Thanks, Alex. I'll take the majority of that, and I'll let Greg talk about the -- how bookings and ARR convert through to billings at the end of it. So yes, short answer. Yes, we will continue to report bookings going forward. Yes, we're very pleased with the bookings performance in the half. And I think this really is one of the most important measures for our future prospects. And as I mentioned before, we shouldn't look excited of the fact that these are 3-year minimum terms that we're booking on. So not only we get sticky visibility down the line, but obviously, it gives us a lot of confidence around the future years planning as well. Yes. So Greg, do you want to just articulate any more on how we relate to our ARR bookings to billings?

Yes. Sure, Kit. So just to cover off the definition, bookings are essentially the sales wins that we've had in the period. So to get the full definition, they're defined as the ARR of new sales wins that we contract during the period. So in terms of the question around billings, billings aren't as relevant at this point with bookings. Bookings are the contracts that we've signed rather than having a customer live or billing. Typically, we look to build a customer our standard terms or to bill a customer at the start of the contract. So there shouldn't be a delay. We do have some larger customers where we do have a slight lag. I would say it's typically 3 months. So we would expect to convert any bookings into ARR on most of our contracts in the year.

Thank you, Greg. And Kit, related question on bookings in terms of, I think, definition as you say, in today's announcement, you talked about total group bookings grew by 38% to GBP 1.2 million versus H1 FY '24 GBP 0.8 million, isn't that 50%? Or how do you get to the 38% figure?

I think I'll let Greg handle that. I mean, I think the short answer is it's a rounding answer.

Yes, that's absolutely right, Kit. So GBP 1.2 million, GBP 800,000 last year. That's obviously 50%, but we calculate all of the percentages in our announcement based on exact numbers. That's how you get to 38%.

Thank you. Question on Asset Intelligence. Regarding the launch of the new Asset Intelligence module, can you comment on the expected impact of this product on future revenue growth? Are there early indications of customer adoption or interest?

Yes. So as I mentioned in the presentation, we're very pleased with what asset intelligence represents. There were also a number of -- there were a couple of contracts that were signed off the back of that launch. So we only launched at the end of April. We got, I think, 2 contracts signed over June and July, which was very encouraging given sometimes there's a lag between an innovation release and then contracts signed off the back of it. In terms of future revenue impact and future revenue growth, I mean, this is a very high-margin product for us, exceptionally high margin. The way we see it going, and it's obviously early days, and we have to experiment between how it's sold to existing customers in net new. But I think it's considered as an upsell, cross-sell across the existing customer base. So effectively, does a customer want to pay a certain amount, and we're estimating somewhere between 10% to 20% of their total ARR base for the module to be solved, switched on effectively and give them those insights. So that can give you an indication of the upsell capability and it may be more or less depending on the type of customer. On the net new side, I think it's offered either as an additional module as part of the product stack. But in some instances, as well, it's also acting just as a point of difference because we don't see any competition with anything like this capability. So when you're speaking to decision makers and buyers who are looking to drive operational excellence in their stack, when you then show them this capability. it becomes very interesting for them. We've seen a very positive response amongst healthcare customers where, obviously, the cost of the inventory and the cost of their critical assets themselves are very high. And indeed on the food operations side of the house, where again, the cost of missed revenue to the business, because assets go down becomes quite punitive. So this is proving very sticky. And as I said, when we were talking about the presentation, the vast majority of our opportunities, net new opportunities coming into the pipeline have Asset Intelligence involved. So it's -- it continues to be quite -- it's quite sticky for us.

Next question here, which sector was the lost lower-margin client in? Why did you lose it? And what contract value was it?

Yes. So I mentioned what we called the managed churn or the nonrenewal of a low-margin noncore business. I mean that -- loosely speaking, we would consider that non-regrettable churn to our business. It was in the food retail sector, and it was ostensibly a legacy piece of business sort of managed service as it were that involved humans doing energy insights and it was a very low margin top business. We consider it to be noncore to our product set. The customer agreed and we agreed not to renew that. That was about 50% of the churn actually that we experienced in the half related to that contract. And then 30% of the churn in the half or the slightly outsized churn was then associated with a number of very small, very low-margin hospitality customers who, frankly, given the cost of living prices and the market conditions are unable to afford any price rises or even any investment in technology solutions, some of them, in fact, go under. And so for us, that's just not our core customer target. They're not large blue-chip organizations. They're not even midsize enterprise. So we don't put any additional effort cost into trying to retain those customers. If they stay with us, that's great. But if they can't make it, we unfortunately have to let them go.