Checkit plc (CKT) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Checkit plc investor presentation. [Operator Instructions] 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 thank you, everyone, for joining us. Today's results mark an important point in Checkit's development. We've moved from a period of substantial investment and restructuring into a profitable, more focused business. The formal sale process has concluded. It provided extensive external validation of our technology, customer base and recurring revenue model. And although it did not produce an offer at which the value the Board felt they could recommend, our focus has now moved firmly on to independent execution and demonstrating the greater value that we believe exists within Checkit. So today, we will cover the stronger financial foundations established in H1, the simplification of the business and our 2-year framework for profitable growth. I'm joined today also by Kris Shaw, who's our Chief Financial Officer. So I'll cover the business, product strategy and outlook, and Kris will take you through the commercial model and the financial results. The central result is our return to adjusted EBITDA profitability. So continuing operations delivered GBP 0.3 million of adjusted EBITDA, representing a GBP 1.2 million improvement on the prior year. We've achieved that alongside revenue growth, a higher recurring revenue mix and an improved gross margin. So recurring revenue now represents 97% of total revenue and ARR has increased by 5% to GBP 12.8 million. New bookings increased and churn reduced significantly, giving us positive net commercial momentum. We also generated cash from continuing operating activities, GBP 0.3 million this year compared to GBP 2.3 million outflow last year. The withdrawal of the legacy product has removed a completely separate legacy technology estate and approximately GBP 0.7 million of annualized cost. So today, Checkit now is a profitable, overwhelmingly recurring business, able to direct its resources towards one modern platform and a much narrower commercial strategy. So for those of you who are new to the business and for those who've been with us for a while, I'll briefly re-explain what it is that we do what makes us different and unique in this space. So Checkit connects the physical world of sensors with the people and the systems responsible for frontline operations. We monitor critical conditions continuously. When something changes, our software then guides the required action and preserves the evidence. We then use the combined sensor and the workflow data to give our customers operational insight. This matters most where a failure creates regulatory, financial and patient safety consequences. There are hardware-only providers that can record a condition. There are enterprise quality management systems that can manage documentation, but Checkit connects both the live sensor estate, the frontline response and the compliance record. So we sit in between the 2, and that's our point of differentiation. Once we're embedded in those daily operations, that combination becomes difficult to replace. So we now operate with 2 clear areas of focus. Medical represents approximately 71% of our continuing revenue, and it's our principal growth engine. Our strongest positions are in the NHS, private hospitals and U.S. plasma with further opportunity in diagnostics, biotech and cell and gene therapy. These customers value regulatory compliance, reliability and a complete audit trail. Those requirements also support high switching costs. Retail represents approximately 29% of revenue, and we're concentrating our activity only on what we would call premium multisite customers where sensing, workflow and regulatory requirements combine to support attractive economics. We're deliberately reducing our attention on fragmented lower-value opportunities where acquisition and service costs are too high. So our strategy is to deepen our medical positions and pursue only higher-quality retail opportunities. Platform unification is the most important product initiative in this business today. Medical customers currently use a proven monitoring proposition, but they do not yet have the full workflow and analytics capabilities available on our modern platform. So next-generation medical monitoring brings those capabilities together. Our customers will retain their existing hardware while gaining a significantly better software experience. The new platform has enhanced regulatory functionality, electronic signatures, calibration records, integrated workflows and a complete alert life cycle. Moving to one cloud platform removes duplicated development and infrastructure. It should allow us to innovate faster, lower our cost to serve and make a broader range of software available to the installed medical base. The opportunity extends beyond the new interface. It makes our complete monitor, act and understand proposition available across medical and across the entire installed base. Delivery of this is structured into 4 practical phases. By the end of October, we are targeting core regulated medical functionality, the end-to-end CAM+ data flow, CAM+ being our medical product and a completed customer migration design. Then calibration, operational qualification and remaining feature parity are targeted for January. From February onwards, customers will begin running the existing and unified platforms in parallel. Migration will then proceed in controlled phases over several quarters. That timetable reflects our operational capacity and the validation and process changes required by customers. We expect to begin commercial go-to-market activity in the new calendar year with commercial launch and complete customer migration as separate milestones. As the program progresses, the one code base should improve our development speed, reduce duplicate costs and create further cross-sell opportunities. AI is already changing how our engineering organization works. This is so much more than just vibe coding. We built a structured development framework in which specialist agents, Checkit agents, support our software design development, testing and documentation. Human control remains built into the process. Security, performance and quality reviews can block release and defined changes require explicit human approval. We're applying this capability directly within the platform unification and interface development program. Early projects indicate the potential for materially faster delivery at substantially lower cost. We will measure our success through delivery speed, product quality and development costs. This is an internal operating capability that can allow Checkit to achieve much more with a focused engineering organization. I'll hand over to Kris now to talk a bit more about our economic units and financial performance.

Thank you, Kit. A couple of things I would like to highlight about the business and also about the results which we're presenting today. So first of all is the quality of our revenues. You see here that 97% of our revenue is recurring in nature. Also, the way that we contract with our customers. So we typically sign a 36-month contract with our customers. At the end of that 36 months, it would move on to a 12-month rolling contract. What that means is we have very good visibility of our revenues, of our cash flows and of our future profitability. I think it's also important to understand how we account for those contracts with our customers. So from a revenue perspective, we obviously recognize the revenue over time equally as the contract progresses. From a cost perspective, typically, when we include the installation at the beginning of the contract, we take the full cost of the hardware and the full cost of the installation at the very beginning of the contract. What that means is that the first year of our contracts are typically breakeven and subsequently become increasingly more profitable. And you'll see that feeding through into the gross margin as you see that gross margin gradually increasing over time. The other thing about this business is that what we're selling is very much a mission-critical product. We're looking after blood products. We're looking after vaccines. We're ultimately looking after patient safety at the end of the day and also food safety. This means that our customers are not necessarily looking for the cheapest solution, but they're looking for a solution which allows them to comply with the strict regulatory requirements that they're in and also provide an auditable solution as well. So this again translates into the high gross margin, which we're able to deliver from this product as well and also translates into the strong retention rates. You see that we have 94% GRR. That means that on average, our customers are staying with us for around about 20 years. Our NRR of 102% is a little bit below where we'd like it to be. So we have said today that we're targeting 105% to 110%. As Kit has highlighted, we have a way to get there, which is through the next-generation medical monitoring and through the platform unification, delivering us upsell opportunities to existing customers. Just looking in terms of the results, you can see that the bookings number has improved in the current period. So we went from a GBP 600,000 of bookings in the last period to GBP 700,000 in the current period. If you look a little bit deeper into that number, you'll see that we have a greater proportion of bookings from new customers, a greater proportion of bookings from expansion from existing customers and a smaller proportion from price increases. So that is really a strengthening of the quality of those bookings as well. On the other side of the ARR equation, we have reduced the churn from GBP 800,000 to GBP 500,000. So overall, we're making significant improvements on both sides of that ARR equation. We certainly recognize that there's more to do, but we are making progress. From this slide, I think I would really like to highlight the improvement in the adjusted EBITDA. You see that we went from a GBP 900,000 EBITDA loss in the prior period to GBP 300,000 EBITDA profit in the current period. It's a GBP 1.2 million swing. That has come from ultimately a change in the cost base of the business. It is a structural change. It is very much embedded into the way that we operate, and it won't be changing back. And therefore, we have significant operational leverage as we move forward. We will continue to be investing in the business, and we will be making investments in the products. As Kit has highlighted, we're finishing the next-generation medical monitoring. We're finishing the platform unification. We have investments in go-to-market. Our objective, therefore, over the short term to ensure that we continue to be cash flow breakeven, ensure that we continue to be EBITDA profitable, but not necessarily in the very short term over the next year to drive EBITDA to the highest number possible that will come in the future as those investments deliver results. Today, we announced the discontinued operation. That was a product which was provided to a single customer. It added significant complexity to the business and it held back development of the platform. Ultimately, it had a significant opportunity cost associated with it. And therefore, whilst it did deliver an accounting profit in the period, the overall contribution to the business was negligible. Overall, the business is very much simpler. It is very much lower cost and growth will convert into EBITDA and cash generation in the future. You see from this slide that our cash flow has been broadly flat over the last 12 months. This contrasts with earlier periods where we were significantly cash consumptive. This is obviously a result of the structural change in the cost base. We have sufficient cash to continue moving forward and making the investments we plan to. We have no external debt on the balance sheet. The only significant liability on our balance sheet is the deferred revenue, which is from customers who pay us annually in advance and therefore, act as a working capital funding function for the business. From a capital allocation perspective, our objective, as I said, is very much to preserve cash. We have a focused road map. We'll be funding the platform unification. We'll be funding the go-to-market, but we'll be disciplined in these investments, and these investments will support future growth. And I'll hand it back to Kit.

Thank you, Kris. I mean the key point is that Checkit now has a stronger financial foundation from which to invest selectively in growth. I'll finish by explaining how we intend to do that. So the Board has adopted a 2-year framework for the next phase of value creation. As Kris mentioned, we intend to sustain adjusted EBITDA profitability and cash generation while building progressively stronger ARR growth. We will pursue that through disciplined investment in the unified platform and medical commercial activity. We've established clear retention objectives. Kris mentioned net revenue retention between 105% and 110% and gross revenue retention above 95%. Improved retention will help us reduce the amount of new business required simply to replace churn and allow bookings to compound more effectively. The platform unification supports that objective by giving our medical customers more software to adopt while reducing our own cost to serve. As Kris mentioned, delivery will not necessarily be linear, particularly during customer migration, but the direction and measures are clear. We see substantial white space within medical. So I want to double-click on that. However, we will remain selective about where we invest. The immediate opportunities are those closest to our existing customers' references and regulatory capabilities. So the NHS still contains a meaningful white space, particularly outside of England, and we have a strong reference base there. So for those that are new, we're present in about 186 different NHS hospitals and about 86 NHS trusts. For reference, there are almost 2,000 hospitals across the U.K. for which we have the same use case to be able to deploy time and time again. In the U.S., blood plasma remains our most established route to growth with related opportunities in blood, tissue and organ procurement. Again, for those that are new, we have 6 of the top 10 blood plasma providers in the U.S. on the books already, but there's clearly more to go after. We also see potential in biotech, cell and gene therapy and diagnostics, including expansion through existing OEM relationships. Selected international markets may offer further opportunity where compliance requirements resemble those we already serve. As always, we will assess each opportunity against conversion evidence, delivery requirements and capital efficiency. The priority is to increase our share of the available market without spreading resources across too many new areas. Our plan, therefore, rests on 5 connected areas of execution. First and foremost, we must complete the platform unification. This is the foundation for lower development cost and a better medical proposition and more cross-sell on the installed base. Secondly, we must deepen our medical positions through the NHS, U.S. plasma, biotech and existing global accounts. Third, we must keep our retail focused only on larger, higher-quality premium customers and we must exit activity that cannot support attractive economics. Fourth, we must continue to develop the U.S. opportunity through sustained executive attention and targeted periods on the ground. Finally, we must continue to apply AI to measurable productivity gains across product development. The balance matters here, improve growth without creating an undisciplined cost base and protect cash while completing the product investment required for the next phase. So in closing, Checkit entered this phase as a materially stronger business. We have differentiated technology in markets where monitoring, workflow and compliance are mission-critical. We have 97% recurring revenue, improving retention and a cost base that has returned this business to profitability. We have a clear product program, a focused commercial strategy and meaningful operating leverage if we execute successfully. Our priorities are straightforward to protect profitability and cash, completely unify medical platform and build progressively stronger recurring revenue growth. We believe that delivering against those priorities can create materially greater value for shareholders. And so with that, I'd like to thank you all, and Kris and I will certainly be pleased to take questions.

[Operator Instructions] I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And Kris, could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

First question here. In the past, you've said 2027 will be profitable. Do you maintain that outlook?

Yes. We've achieved that milestone now. And as we've mentioned throughout this presentation, we expect to continue to improve that over the coming periods. Anything you'd add to that, Kris?

No, I think that's right. I think that the results which we've had in the latest period from the continuing, discontinuing operations in the remainder of the year show that we'll be able to deliver the EBITDA profitability number, which we originally set out to achieve. Next question. Given that 71% of Checkit's business is now concentrated in the medical sector, your organic growth relies entirely on NHS trusts. However, individual hospitals heavily mandate purchasing through official framework agreements and approved vendor list. What is the plan, if any, to circumvent this barrier?

The short answer is that we're already on all of those frameworks and preferred supplier list. So we're inside the tent. That's a sort of moat of its own. So that's already achieved. And as I mentioned earlier, it's a pretty proven use case for us now given the 186 hospitals we're currently in. So we'd expect to continue to expand those over time in the way that we have done. The hope is that, again, with a unified medical platform and a lower cost to serve that we can actually be even more competitive on certain NHS tenders where price is one of the leading indicators. So that becomes an attractive upside for us.

Did you try to move the lost customer on the legacy product to your main technology platform? If so, are you able to say why it wasn't possible?

Well, short answer is no because the product itself being legacy was focused on a noncore part of this business and that's what that customer was particularly interested in. We took the view given that it was negligible in terms of its contribution to the business, and it was a blocker indeed for us completing the platform unification program that the right thing to do is to retire the product or sunset the product alongside the one customer that was on that.

Is the development work needed to complete the [indiscernible] platform technically difficult to do? I'm just thinking about any risks to the achievement of this.

It is technically difficult to do, but we have a technically competent team. And as I mentioned earlier in the session, that team is now being augmented with Checkit-specific agents that we've built up to get the work done. So, so far, progress is in line or ahead of management expectations on that program. So I don't see a huge amount of risk of that work getting completed in the time lines we suggested.

Could you please talk a little about your current position in the NHS and what opportunities you see for growth there?