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.

Good afternoon, and good afternoon, everybody, and thank you for attending the annual results webinar for the full year '25. There's a fair bit to get through, so we'll move very quickly into this. Just to introduce the presentation team. Myself, Kit Kyte, CEO; and also introducing for the first time, Kris Shaw as CFO for its annual results debut. So thank you, and welcome, Kris. So we've got a few bits to get through in today's agenda. I will start off with the highlights of the year that was FY '25 before covering off strategy update, particularly important for those that are new to the company and potentially new investors before handing over to Kris, who will take us through the financials in more detail, and then we'll cover off the outlook for the year that we're currently in and open up to questions and Q&A, which will be moderated by Alex Schlich. Okay. So we're very pleased with what we consider to be a strong performance for FY '25. Just going from the top. So sales performance, recurring revenue bookings, ARR, up 33% year-on-year to GBP 2.1 million of ARR booked in the year, which we're very happy with, which flowed through to ARR growth of 8% to GBP 14.4 million, up from GBP 13.3 million. That was dampened slightly by some exceptional churn, which Kris will take us through, where otherwise it would have been nearer sort of 15%, 16%. Revenue, of course, flowed through very strongly to 17% in the year to GBP 14.1 million. And in line with our sustainable growth and accelerated profitability, we continued with [ LBITDA ] improvement by a further 33% down to GBP 2.3 million. Net cash at the start of this year was strong at GBP 5.1 million. A couple of points I'll make here now. Our net revenue retention of 107%, again, we're very happy with. And just as a reminder, our 3-year average around net revenue retention is about 111%. We aim to try and get as close to 110% on an ongoing basis, as we can. So again, very pleased with that as a very solid example of land and expand at work. And I'll touch on some of the product innovation features that we released in the second half of last year, namely asset intelligence, the ML and AI module, and we'll go into that in a minute. Okay. So in terms of strategy, for those that are new to the company, I'm going to briefly summarize and make as clear as I can, who indeed we are and what we do. So starting from the top, Checkit is an organization that serves particularly large multinational companies or organizations, companies that have hundreds, if not thousands of different locations, each of which are the same. And particularly, we are selling into the operations area, so the Chief Operations Officer. And what they receive, what they get at their level is what I call a single pane of glass view as to the operational performance, the operational excellence that exists within their frontline operational footprint, okay? So think KPIs, think dashboards, think graphs, think predictive analytics, ways of managing cost out of the system. Now that's facilitated by our 2 core products. The first being a sophisticated Internet of Things sensor ecosystem. So in each of these locations, there are built assets, think fridges, freezers, plasma storage, blood storage, vaccine storage assets, which need automated monitoring and they need automated telemetry reporting. That is facilitated by our Internet of Things ecosystem that provides a wealth of data for the first time for an organization because this data would have previously manually recorded and manually checked. So that is an automation opportunity for these organizations. And alongside that, we have a task management platform that sits in the hands of the worker in an iOS device or an Android device or a tablet, and that guides and prioritize them through their daily tasks, checks and processes. The 2 products are symbiotically linked, meaning that data is shared between them. So for example, if you're a worker working in a food retail location and an asset fails, an asset goes down, that triggers an automatic alert to the worker who can then respond in real time to resolve the issue. Thus, preventing things like stock loss or any further damage to brand reputation that would typically occur in these large disparate organizations. As I mentioned, in both instances, these tools are generating a vast quantity of data, data that was analog in the first place for these large businesses that has become digital, okay? So Checkit is that first digital step towards a more cohesive solution. On that data, we can then build sophisticated ML and AI modules such as asset intelligence, which then adds even further ROI to an operational leader by way of cost out or cost efficiency or indeed operational excellence. And we'll talk on that in a bit. Okay. So if you're new to Checkit investment story, I want to call out a few key points here for why Checkit is a very investable company in the current market. And so the first thing to note is the market that we operate. So I've alluded to the fact that we specifically sell to large multinational enterprises with hundreds of thousands, tens of thousands sometimes, of the same type of footprint serving their customers. Now the operational workers that form part of that footprint are typically very underserved from a technology perspective. So whilst there's a lot of noise and hype around the ability for something like generative artificial intelligence to disrupt knowledge worker SaaS-based industries, ours actually is very underdisrupted and underutilized. And so that is something that Checkit can bring to bear from an automation and digital standpoint. So we get in there first on the ground, create an automation and digital footprint from which you can then add more value-adding AI tooling to make it more effective. As I mentioned, ours is a company that is successful when we have net revenue retention, so that's our ability to upsell and cross-sell customers at about 110% and above. So effectively, we land a customer at any size within our target footprint and then we build and scale them over time. So think of someone like BP, who's one of our largest customers, we're in over 1,000 locations now. That's the U.K. it's Netherlands, it's Luxembourg, it's Australia, it's New Zealand and with many thousands more for us to keep going into. And then we couple that with typically pretty low industry-leading low attrition rates. So our gross revenue retention number is typically around 95%, 96%, and that's where we aim to do. So we could hit those 2 metrics, then the question becomes a very targeted approach to net new logo acquisition, and we'll talk on how that's been benefiting the business in a bit. By way of geographical expansion, North American market, particularly the U.S., where I'm actually speaking to you from today, is our key international market for expansion, for reasons that are quite obvious in terms of the size of the market and the homogeneity of the customers. And I'm pleased to take you through how successful we've been with the U.S. so far in a little bit. Again, this is a business that is a predominantly subscription-based recurring revenue business. And what do I mean by that? I mean that 94% of our total revenue base is recurring revenue now. And that's on a 3-year -- typical 3-year minimum term. That's very attractive because it provides stickiness of the revenue profile, a lot of future visibility of future earnings and indeed, acts as a risk mitigant, especially in today's quite volatile macroeconomic environment. And as we mentioned a few weeks back, we delivered an update to the market that we've always been pursuing the accelerated path to profitability. We have chosen to prioritize that as the main effort this year by way of a GBP 3 million annual cost-out exercise, which Kris will talk to you of in some detail. So that provides us with a significant degree of assurance around profitability by the very start of next year. So that, again, is encouraging. So the market opportunity, I've touched upon some of the macro factors that we are working in. But effectively, Checkit sits at the confluence of 2 key industries. So the first being the global workforce management market, which is valued at about $11 billion and growing at a CAGR of 12%. And the second is the way that the global smart sensor market, so Internet of Things devices valued at $65 billion, growing at a CAGR of 19%. And Checkit is a leader in both of these, but in particular, the confluence of both of those into a single platform. And the hardware-enabled SaaS component of that makes this a very sticky product for customers, hence, the low churn that we typically produce. Now the workers we go after, so-called deskless workers, frontline operational workers are still unbelievably, given what's happening is still very underserved from a technology perspective. So 73% of them are still using pen and paper to do their work, which is just mind-boggling really. And when they're not, they're either using Excel spreadsheets or they're using very ineffective tools that don' t really speak to each other. And this is the automation and digital opportunity for Checkit because we come in and we put that first layer on the ground from which you can then build up. This pickup provides a lot of meaningful insight for operational is to then drive cost out of the system or drive operational excellence. In terms of the markets in which we focus, I'll just take you through the ARR split so you can see why do we do what we do. Health care as a space, so think the NHS, think private hospitals, think private care homes, think blood plasma providers. That's 50%, 5-0 of our ARR now and particularly sticky industry for us given that it's a high-margin space and it's heavily compliant and regulatory led, and our products provide that first layer of data aggregation into that space. Alongside that, we have about 35% of our ARR coming from food retail. So I think, again, the BP use case or someone like Dishoom or waitress John Lewis. And then the remainder sort of 20%, 25% comes from hospitality customers, which were our traditional customer when we first built the product, brought the company and scaled up from there. As I said, the U.S. market is our primary and priority international expansion market, just is 5x the size of Europe in terms of spend, even now with a slightly more volatile macro environment, those companies still require automation. They still need to drive cost out. They still need to become digital, and they are very similar use cases to what we have in Europe. So that's very exciting for us. Now I want to talk to you very briefly about what the growth strategy looks like then. I'll point you towards the top line first. I mentioned the U.S. market and U.S. market growth, and we'll see how that's developing. Again, I'll labor the point around our ability. This is an organization that grows by landing a customer at whatever size of footprint and then expanding that customer over a number of years through upsell, cross-sell and minimizing the amount of churn that comes through the system. So NRR and GRR is so important to this business. Again, ours is a business with very high levels of recurring revenue, so stickiness and future visibility of earnings, this is important for us. And as we're prioritizing this year, the main effort for this business is to bring forward profitability as quickly as we can, and we have a lot of confidence, and we'll take you through what that now means as per the cost-out exercise that we're currently driving as well. In terms of R&D and innovation, product is still the most invested part of our business. We will continue despite the cost access to focus on very specific value-adding innovation opportunities. And where necessary, if there's a customer-led customer paid for opportunity, we'll get behind that. So again, we remain focused on driving that in the business. So the U.S., for those who are new, we entered the U.S. market about 4 years ago, standing start, and we're very pleased with the progress, right? So it's now 26% of group ARR in the business. The bridgehead has been established. We're in all but 2 states within the U.S. And from a sales perspective, we've grown ARR in the U.S. 12% year-on-year. So it's the fastest-growing market, which is exactly what we want it to be. There's a huge amount of potential here, untapped. We've still got plenty to go after. But what I will say from an investment perspective, we have now built an established a go-to-market leadership structure with go-to-market organic sales and marketing based in the U.S. and I'm pleased with the progress that we're making. Indeed, we've got a sort of midterm objective for the U.S. to contribute more than 50% of sales in a given year to the business and indeed, in time, 50% of revenues. So that's the expectation and the pressure we're putting on the U.S., but we remain confident with the way we're delivering. I won't labor the point on subscription revenues. But what I will say, of course, is that there's a direct correlation between sales, bookings from a recurring revenue perspective and the ARR that, that generates and then the ARR that then flows through to recurring revenue and then total revenue as a whole. And again, as you can see, really positive numbers there from sort of 8% ARR through to 17% on recurring revenue and indeed total revenue at 17%. And then just to touch on GRR and NRR for the year. We reported NRR of 107% and GRR slightly lower than we'd normally expect, but still very good at 92%. So I'll take you through a couple of customer use cases to try and bring this to life. And those who are watching from the U.K. and London who like a bit of spice and like a bit of a boutique feel will be familiar with a company called Dishoom. Dishoom is one of our favorite customers for a number of reasons. Whilst we're in only 13 locations with them, it's a great example of the full stack of our product at work. So what's going on inside Dishoom? And not forget this is a company that's now expanding to the U.S. as well. Behind the scenes, you've got all of the assets, the cookers, the hot holes, anything that requires Bluetooth probing and ability to check inventory and better manage your production planning. That's being facilitated by Checkit sensor ecosystem, the telemetry reporting. At the same time, the workers where -- whose main effort should be serving as much product to customers and indeed driving an improved customer experience. They're able to do that because they're using the Checkit task management system to guide them through their tasks, but also to minimize the likelihood of duplication of effort and frankly, to be able to respond in real time to any outages in their assets so that what they're not doing is constantly going back and checking things rather than serving customers. All of this then provides a wealth of data that allows Dishoom to make very specific operational excellence decisions, where best to have people working in a restaurant, what types of food and product, how best to minimize the likelihood of wasted stock and wasted produce. And this then drives, frankly, a better customer experience. So they're very happy with us, and we're very happy with the relationship. On the other hand, you might look at someone like the Royal Devon University Healthcare Trust or even use this as an example for the NHS as a whole. This is an organization where we're in 178 different hospitals, 86 different trusts. Actually, if I was to aggregate the ARR from all of the different NHS locations, it would be our single largest customer north of GBP 2.3 million of ARR. But what's really exciting about what we do with the NHS, it is a heavily -- obviously heavily compliant, heavy regulatory-led environment with very precious stock and assets. And so Checkit provides what we call an automated monitoring solution for health care. So all of the fixed assets that look after critical products such as bloods or vaccines or in pharmacy locations are fully automated and monitored by the Checkit system. This then frees up nurses and other workers to spend more time with patients, which, of course, in the NHS' case is highly valuable given the exceptionally stretched nature of the organization. Now when someone like the CQC will do a snap inspection on an NHS location for any failed audit, that's typically a GBP 50,000 fine. And so Checkit's ability to provide data and then data that goes back years as an assurance of the validity of the regulator exercise becomes highly sought after. It's a very proven solution and one from which we can then add some of the AI/ML modules that I mentioned earlier. So I'm going to hand over to Kris now, and he'll take you through the financials in a bit more detail.

Thank you, Kit. Just a little bit of background on myself, given this is my first IMC presentation with Checkit. I've worked in finance for the past 25 years in a variety of different industries, but my most recent role was CFO at SmartSpace Software plc, which is another AIM listed SaaS business. SmartSpace has actually taken private [ which is people who ] are left in a transaction, which valued that business at 4x ARR. I'd like to start off by taking you through the financial highlights. I think that these demonstrate delivery on our core objectives for FY '25. First of all, you can see that we had 17% year-on-year revenue growth, taking us to GBP 14.1 million. And secondly, delivery of efficient operations. You can see our gross margin increased by 3 percentage points to 70%, and our EBITDA losses continue to reduce by 33% to GBP 2.3 million. I would say that the single largest contributor to these improvements was the expansion of our contract with BP. We delivered our services to an additional 400 sites in Australia and New Zealand during the year. For me, the value proposition at Checkit really boils down to the quality of our earnings. And you can see this from these 4 core pillars at the bottom of this page here. So first of all, our revenue is 94% recurring in nature, giving us a high degree of financial predictability and consistent cash flows, and it reduces our reliance upon new sales to maintain momentum. Secondly, our contracts are typically 3 years in length at the outset, and they then move on to a 12-month rolling contract. Again, this gives us a stable revenue base and reduces the risk of churn. And where we do get indications of churn, we have 12 months to prevent the loss. As Kit mentioned, we have a strong net revenue retention of 107%, demonstrating our ability to execute, land and expand and our gross revenue retention of 92%. In fact, if you look back over the past 3 years, the average rate has been 97%. Again, a strong metric for the business. So obviously slightly down in the current period compared to the average over the past 3 years, and I'll go into a bit more detail on what that churn is made up of in the next slide. You can see here the movement in ARR during FY '25. It's made up of 3 main constituent parts. First of all, expansion ARR from our existing customer base. We had GBP 2 million of expansion ARR, which represents 15% of our opening ARR position. Secondly, we had GBP 200,000 of new customer ARR during the year. Again, this is a great source of future expansion revenue, and it's also an area which we're focusing on maximizing for FY '26. The churn and contraction ARR of GBP 1 million, you can see what that's made up of the -- from the pie chart on the right-hand side. First of all, we had GBP 400,000 of churn and contraction for what I would describe as our core customers. This is obviously an area which we try to minimize, but at GBP 400,000, that represents just 3% of our opening ARR. The other 2 items I would say were unusual in nature. So firstly, we had GBP 300,000 of churn and contraction from low value and lower-margin customers. The low-value customers, what we describe as a customer which typically operates from a single site and with an ARR of less than GBP 10,000. A lower-margin customer would be a customer where we have direct costs associated with providing services to that customer, which are also lost as part of the churn process. And finally, we have GBP 400,000 of churn and contraction from what I've described as a prior period tidy up. There's a few different things in there. But as an example, what might happen is the customer will place an order and the final delivered services may be either greater or more than that original -- greater or less than the original order. And therefore, it will come through either as expansion revenue or churn or contraction revenue. As we said in the announcement today, we expect our churn to stabilize for FY '26 at the levels that we've seen in FY '25. And again, we expect a similar breakdown between exceptional and core as we've seen in FY '25. This slide shows you the improving operational efficiency within the business. You can see that our gross margin has increased from 54% in FY '22 to 70% in FY '25. What this means is that whilst we have a 68% increase in revenues over this 3-year period, we have a 113% increase in gross profit. This obviously is what's driving us towards profitability. And just going a little bit more into operational gearing, you can see here that we have a 23% year-on-year increase in gross profit, taking us to GBP 9.8 million in FY '25. And at the same time, our operating costs increased by just 5%. This 5% increase is largely a result of inflationary pressure. We have just announced that we're putting through an annualized GBP 3 million of cost savings through the business. That program has already started. We expect it to be largely complete by the end of May. It's focused on a couple of areas in particular. It is spread out throughout the entire business, but focused on a couple of areas, and those will be both the capitalized and non-capitalized product spend and also go-to-market spend. The impact from this cost reduction exercise will be seen from Q2 of the current financial year onwards, but obviously, the full impact will only come through in the next year. And we expect restructuring costs somewhere in the region of GBP 400,000 relating to this program. This slide demonstrates the progress that we've made in reducing our EBITDA losses. You can see that they've reduced from GBP 6.4 million in FY '23 to GBP 2.3 million in FY '25. We expect this trend to continue in the future years. So for the current financial year FY '26, we expect to be approaching breakeven on an EBITDA level. And for next financial year, FY '27, we expect to be EBITDA profitable. We are being conservative in our revenue growth assumptions given the uncertain market conditions. We're not factoring in winning any of the large opportunities that we have in our pipeline, and we're just assuming run rate growth. Revenue growth is also going to be impacted by the reduced go-to-market spend as we focus on profitability. This slide shows you the movement in cash during FY '25. You can see that we consumed GBP 3.9 million during the year, which is down 40% in comparison to the prior year where we consumed GBP 6.6 million. We had GBP 5.1 million at the beginning of FY '26. The cost reduction program, which we're putting through, together with some modest revenue growth assumptions will deliver us to cash flow breakeven in calendar year 2026. That's it for me, and I'll hand you back to Kit.

Thanks very much, Kris. Yes, look, so we're very excited. We're happy with the performance that we've been delivering so far, and we're actually very, very enthusiastic about our ability to drive through profitability ahead of schedule whilst maintaining the core infrastructure of our go-to-market and our ability to keep growing, both locally and internationally. That continues to be demonstrated by our land expand NRR, GRR model as referred to already. The real focus of this business becomes a very targeted acquisition of net new customers, which is something we expect to see more of in the U.S. but indeed also in the U.K. And as Kris mentioned, that is not something we factored into our modeling. So actually, it's a conservative model, which we'd expect or hope to achieve on the upside. Indeed, the drive to profitability is the main effort of this year whilst maintaining sanctity of our go-to-market and GBP 3 million of annualized cost savings will be delivered and we're executing as we speak. And therefore, from the Board's perspective, we are confident of achieving, if not beating our EBITDA and cash flow projections both this year and next. And with that, I would like to, I suppose, hand over to Alex, and we can open up the floor and the panel for questions.

Kit, Kris, thank you very much for your presentation this afternoon. And if I may just bring back all your cameras. [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. Alex, as you can see, we received a number of questions throughout today's presentation. And if I could just hand back to you to read out the questions and give responses where appropriate to do so. I'll pick up from you at the end.

Thank you. Here's the first question that we've received in today. In your financial modeling of your base case and cautious case scenarios, at what level does cash or debt -- net cash debt bottom out?

Thanks, Alex. I mean, I will actually just hand this straight over to Kris, so he could give guidance on that.

Yes. I mean, as you probably see from the analyst notes, which we put out today, we're expecting our cash to bottom out at around about the GBP 2 million level, which will be where we are at the end of the current financial year. And we, therefore, expect to be approaching to be cash flow positive in the next financial year. So it will go up from that for FY '27, which is calendar year 2026.

Okay. Next question is also on the financials. Have you approached lending institutions to assess their attitude to lending against your recurring revenue streams, should borrowings be desirable or indeed necessary? If so, what has been the response?

Again, I'll hand this over to Kris. But I think the argument there is borrowings will not be necessary, but they may become a useful backstop to generate should we want to pursue other activities. And that's our thinking on this. But I'll hand over to Kris to be a bit more explicit.

Yes, that's right. I mean we have approached borrowing institutions, and we have had indicative offers that if we wanted to go ahead with some borrowing, we could do that. I think as Kit mentioned, I guess we don't need it in our cash flow projections. We're confident that we won't need to take any borrowings, but I guess there's scenarios there where potentially we may get a large new contract where we need working capital to finance that or some other kind of acquisition, which we may need to use borrowing for that kind of scenario. But in our normal day-to-day activities in terms of our forecasting, we're not planning to use any borrowing in those scenarios.

Okay. Thank you. Question here going across the pond to the U.S. Given the opinions of RFK Jr., is there not some concern that opportunities in either the medical monitoring or hospitality industry could dry up overnight?