Checkit — Making good progress towards profitability

Checkit (AIM: CKT)

Last close As at 26/04/2024

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−1.50 (−7.14%)

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Research: TMT

Checkit — Making good progress towards profitability

Checkit reported annual recurring revenue (ARR) growth of 24% y-o-y in H124, with more than half of the growth from upsells and cross-sells to its existing customer base. Revenue was 19% higher y-o-y and EBITDA losses nearly halved y-o-y. We have upgraded our FY24 EBITDA forecast on better gross margins and operating efficiencies. Recent contract wins provide upsell potential and the recent John Lewis contract renewal highlights the stickiness of the technology.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Making good progress towards profitability

H124 results

Software and comp services

14 September 2023

Price

27p

Market cap

£29m

$1.25:£1

Net cash (£m) at end H124

12.8

Shares in issue

108.0m

Free float

56%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.5

10.2

42.1

Rel (local)

12.7

11.6

40.7

52-week high/low

34p

14p

Business description

Checkit optimises the performance of people, processes and physical assets with its intelligent operations software. It is headquartered in Cambridge, UK, and has operations centres in Fleet, UK, and Tampa, US.

Next events

FY24 trading update

February 2024

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Checkit is a research client of Edison Investment Research Limited

Checkit reported annual recurring revenue (ARR) growth of 24% y-o-y in H124, with more than half of the growth from upsells and cross-sells to its existing customer base. Revenue was 19% higher y-o-y and EBITDA losses nearly halved y-o-y. We have upgraded our FY24 EBITDA forecast on better gross margins and operating efficiencies. Recent contract wins provide upsell potential and the recent John Lewis contract renewal highlights the stickiness of the technology.

Year
end

Revenue
(£m)

ARR
(£m)

PBT*
(p)

EPS*
(p)

DPS
(p)

EV/sales
(x)

01/22**

8.4

9.0

(6.1)

(9.0)

0.0

1.9

01/23**

10.3

11.5

(7.3)

(6.9)

0.0

1.6

01/24e

12.0

13.3

(4.7)

(4.3)

0.0

1.4

01/25e

14.2

15.9

(3.6)

(3.4)

0.0

1.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing operations only.

ARR growth and cost control reduces losses

For H124, Checkit reported revenue of £5.7m (+19% y-o-y), recurring revenue of £5.4m (+22% y-o-y) and LBITDA of £1.9m (-47% y-o-y). ARR was 10% higher half-on-half (h-o-h), with gross retention of 98% and net revenue retention of 113%, reflecting strong upsells and cross-sells. ARR in the US increased 41% y-o-y to £3.2m. The company is continuing to focus on growth via its land and expand strategy while reducing costs and improving operating efficiency and expects to deliver operating performance ahead of market expectations for FY24. We have improved our LBITDA forecast for FY24 by 4% to £3.6m.

Scaling the business; evolving the product offering

Checkit’s land and expand strategy is focused on winning enterprise customers, who currently make up 85% of current pipeline opportunities, and the company is looking for partnerships to accelerate its growth. The recent agreement signed with Compass is already starting to bear fruit and other small wins have upsell potential. Checkit continues to invest in its technology platform to help the business scale and to support development of the product offering. This includes considering a wider range of verticals and applying artificial intelligence (AI) tools to the vast quantities of data the platform produces to bring predictive insights to customers.

Valuation: Sustained ARR growth to reduce discount

On an EV/sales multiple of 1.4x for FY24e and 1.1x for FY25e, Checkit trades at a material discount to the UK software sector (2.6x current year sales, 2.3x next year sales) and US SaaS peers (6.6x current year, 5.6x next year). If Checkit were to trade on the UK average for FY24e, it would be worth 40p per share and moving to trade in line with US SaaS peers would imply a valuation of 85p. Sustained ARR growth will be the key trigger for Checkit to attract a multiple more in line with SaaS peers, evidenced by customers signing up to use its software and existing customers expanding their usage. Faster movement towards break-even should also support the share price.

Review of H124 results

Exhibit 1 summarises Checkit’s H124 performance.

Exhibit 1: Half-year results from continuing operations

£m

H124

H123

y-o-y

Revenue

5.7

4.8

19%

Recurring revenue

5.4

4.4

22%

Non-recurring revenue

0.3

0.4

-21%

Gross profit

3.9

3.0

31%

Gross margin

69%

63%

6%

Adjusted EBITDA

(1.9)

(3.5)

-47%

Normalised operating profit

(2.5)

(3.9)

-37%

Reported operating profit

(2.7)

(4.5)

-41%

Normalised PBT

(2.3)

(3.9)

-42%

Reported PBT

(2.5)

(4.5)

-45%

Normalised net income

(2.3)

(3.9)

-42%

Reported net income

(2.4)

(4.4)

-46%

Normalised basic EPS (p)

(2.1)

(3.6)

-42%

Reported basic EPS (p)

(2.3)

(4.3)

-47%

Net cash

12.8

19.5

-34%

Period-end ARR

12.6

10.2

24%

Recurring revenue/total revenue

95%

92%

Source: Checkit, Edison Investment Research

Revenue increased 19% y-o-y, with recurring revenue 22% higher and non-recurring revenue down 21%. Recurring revenue made up 95% of group revenue, up from 92% a year ago. Period-end ARR was 24% higher y-o-y. Gross margin improved over the year, increasing 6pp to 69% due to increased efficiency in hardware costs and lower platform procurement costs. Adjusted LBITDA reduced from £3.5m to £1.9m from a combination of higher gross profit and reduced operating costs. Depreciation and amortisation totalled £0.6m, share-based payments were £0.2m, the company earned net interest income of £0.2m and reported a £0.1m tax credit, resulting in a net loss of £2.4m.

Cash reduced from £15.6m at the end of FY23 to £12.8m at the end of H124. The company consumed £1.9m in cash from operations, received interest income of £0.2m, capitalised development costs totalling £0.9m, spent £0.1m on capex and made lease payments of £0.1m.

ARR growth reflects land and expand strategy

End-H124 ARR increased 10% h-o-h, with US ARR of £3.2m up 41% y-o-y and 16% h-o-h. The company had a gross retention rate of 98% and net revenue retention rate of 113%, reflecting a mix of upsells/cross-sells and price increases during the period. More than 50% of H124 ARR growth was from upsell and cross-sell within the existing customer base, with the balance from new customer wins and pricing.

The company benefited from several small wins that have potential for future upsell. Checkit also signed a master service agreement with Compass Contract Services (UK) Limited (Compass) for the provision of connected automated monitoring and connected workflow management to their end-users, primarily in the food services sector. Since signing, Checkit has entered into three new contracts with Compass and is discussing further opportunities. The company signed its largest ever contract renewal with John Lewis, worth £6m over three years.

Pipeline development focused on high-quality enterprise

Checkit noted that while sales cycles have lengthened due to customer caution in the current economic environment, the pipeline remains strong. The company is developing new customer relationships globally, focused on large multinational enterprise accounts. As well as its direct sales approach, it is looking for complementary partnerships to accelerate expansion. At the end of H124, the company noted that the pipeline split by customer size was 64% tier one (large enterprise), 22% tier two (enterprise) and 15% tier three (mid-size). In the US, the pipeline includes a number of multi-site organisations in the healthcare, food retail and hospitality sectors.

Product development: Looking at broader applications, simplifying installation, supporting growth

While to date, Checkit’s applications have focused on food service operations and compliance in the storage of medical products and samples, its products can be applicable to multiple other industries. As an example, recently Checkit’s collaborative workflow functionality has been adopted by facilities managers in care homes to ensure safety levels are maintained and maintenance is performed efficiently. The company is investigating applications and developing propositions in further sectors.

Investment in the data platform over the last year supports the company’s development of machine learning models to help managers take proactive steps to improve their operational efficiency; these models are currently being tested. The R&D team is working on applying rapidly developing AI technologies, including large language models, to Checkit’s customers’ problems.

The company has also invested in simplifying sensor installation procedures, including using Checkit’s workflow tools to guide and manage installations, to make it easier for third parties to implement Checkit’s sensor solutions without its direct involvement.

Checkit has continued to invest in improving app functionality for iOS and Android and improving resilience and performance to support growth.

Outlook and changes to forecasts

The board is confident it can deliver an FY24 operating performance ahead of current expectations (analyst forecasts for adjusted LBITDA in the range £3.7–3.8m) and management reconfirmed its target to achieve break-even at the EBITDA level during FY26. The company noted that it is planning to offshore part of its customer support team in H224, which should result in some cost savings. We have slightly reduced our revenue forecasts to reflect the timing of roll-out of recent contract wins and increased our gross margin assumptions. Our FY24 LBITDA forecast reduces from £3.8m to £3.6m and we maintain our FY25 forecast. As the company generated interest income of £0.2m in H124, we have factored in higher interest income for FY24 and FY25. Our net cash forecasts are maintained and we continue to estimate that the company has sufficient cash to reach cash flow break-even.

Exhibit 2: Changes to forecasts

£m

FY24e

FY25e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

12.5

12.0

-4.0%

16.2%

14.6

14.2

-2.3%

19.0%

Gross profit

8.2

8.4

2.2%

28.5%

10.0

10.0

-0.2%

19.4%

Gross margin

65.5%

69.8%

4.3%

6.7%

68.5%

70.0%

1.5%

0.2%

EBITDA

(3.7)

(3.6)

-4.2%

-43.9%

(2.3)

(2.3)

2.1%

-35.1%

EBITDA margin

-30.0%

-30.0%

0.0%

32.1%

-15.7%

-16.4%

-0.7%

13.6%

Normalised operating profit

(5.2)

(5.1)

-3.0%

-31.2%

(3.8)

(3.8)

1.2%

-24.8%

Normalised operating margin

-42.1%

-42.5%

-0.5%

29.3%

-25.9%

-26.9%

-0.9%

15.6%

Reported operating profit

(5.4)

(5.6)

2.6%

-54.9%

(3.9)

(4.2)

8.9%

-24.3%

Reported operating margin

-43.7%

-46.7%

-3.0%

73.7%

-26.6%

-29.7%

-3.1%

17.0%

Normalised PBT

(5.2)

(4.7)

-10.6%

-35.8%

(3.8)

(3.6)

-4.0%

-22.6%

Reported PBT

(5.4)

(5.2)

-4.7%

-57.8%

(3.9)

(4.0)

3.8%

-22.4%

Normalised net income

(5.2)

(4.7)

-10.6%

-37.5%

(3.8)

(3.6)

-4.0%

-22.6%

Reported net income

(5.4)

(5.1)

-6.5%

-58.6%

(3.9)

(4.0)

3.8%

-20.8%

Normalised basic & diluted EPS (p)

(4.9)

(4.3)

-10.6%

-37.5%

(3.5)

(3.4)

-4.0%

-22.6%

Reported basic EPS (p)

(5.0)

(4.7)

-6.5%

-58.6%

(3.6)

(3.7)

3.8%

-20.8%

Net debt/(cash)

(9.5)

(9.5)

0.4%

-39.1%

(6.2)

(6.2)

-0.3%

-35.0%

ARR

13.3

13.3

-0.3%

15.6%

15.9

15.9

-0.3%

19.4%

Source: Edison Investment Research

Exhibit 3: Financial summary

£m

2019

2020

2021

2022

2023

2024e

2025e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.2

8.4

10.3

12.0

14.2

Cost of Sales

(1.0)

(7.2)

(6.7)

(3.8)

(3.8)

(3.6)

(4.3)

Gross Profit

0.0

2.6

6.5

4.6

6.5

8.4

10.0

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.6)

(2.3)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(6.1)

(7.4)

(5.1)

(3.8)

Amortisation of acquired intangibles

(0.1)

(1.0)

(1.3)

(1.4)

(0.5)

(0.1)

0.0

Exceptionals

0.0

(1.7)

(0.9)

(1.0)

(4.3)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

(0.2)

(0.4)

(0.4)

Reported operating profit

(4.5)

(9.2)

(5.3)

(8.5)

(12.4)

(5.6)

(4.2)

Net Interest

0.0

0.1

0.0

0.0

0.1

0.4

0.2

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(4.4)

(6.4)

(3.1)

(6.1)

(7.3)

(4.7)

(3.6)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(8.5)

(12.3)

(5.2)

(4.0)

Reported tax

0.0

0.1

0.3

0.3

0.3

0.1

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(6.1)

(7.5)

(4.7)

(3.6)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(8.2)

(12.0)

(5.1)

(4.0)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.8

0.6

1.4

(0.3)

0.0

0.0

Net income (normalised)

(4.4)

(6.4)

(3.1)

(6.1)

(7.5)

(4.7)

(3.6)

Net income (reported)

4.1

80.8

(4.4)

(6.8)

(12.3)

(5.1)

(4.0)

Basic average number of shares outstanding (m)

178

161

62

68

108

108

108

EPS - basic normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(9.0)

(6.9)

(4.3)

(3.4)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(9.0)

(6.9)

(4.3)

(3.4)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(10.0)

(11.4)

(4.7)

(3.7)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

34.7

(-36.4)

22.6

16.2

19.0

Gross Margin (%)

0.0

26.5

49.2

54.8

63.1

69.8

70.0

EBITDA Margin (%)

(230.0)

(50.0)

(18.9)

(66.7)

(62.1)

(30.0)

(16.4)

Normalised Operating Margin

(440.0)

(66.3)

(23.5)

(72.6)

(71.8)

(42.5)

(26.9)

BALANCE SHEET

Fixed Assets

 

 

5.0

8.5

6.8

8.3

4.9

5.9

7.0

Intangible Assets

2.9

7.3

6.0

7.3

4.0

4.9

5.9

Tangible Assets

1.7

1.2

0.8

1.0

0.9

1.0

1.1

Investments & other

0.4

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

19.5

19.8

17.5

29.0

22.5

16.6

12.4

Stocks

4.3

1.7

1.1

1.8

2.4

3.1

2.2

Debtors

5.1

3.4

4.4

2.9

4.5

4.0

4.1

Cash & cash equivalents

10.1

14.3

11.5

24.2

15.6

9.5

6.2

Other

0.0

0.4

0.5

0.1

0.0

0.0

0.0

Current Liabilities

 

 

(7.9)

(5.6)

(5.9)

(5.7)

(7.8)

(7.6)

(8.2)

Creditors

(7.6)

(5.1)

(5.6)

(5.2)

(7.5)

(7.3)

(7.9)

Tax and social security

(0.3)

0.0

0.0

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.5)

(0.3)

(0.5)

(0.3)

(0.3)

(0.3)

Long Term Liabilities

 

 

(0.3)

(1.3)

(0.8)

(0.6)

(0.7)

(0.7)

(0.7)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(1.3)

(0.8)

(0.6)

(0.7)

(0.7)

(0.7)

Net Assets

 

 

16.3

21.4

17.6

31.0

18.9

14.2

10.6

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

21.4

17.6

31.0

18.9

14.2

10.6

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.6)

(2.3)

Working capital

(0.5)

(1.0)

0.3

0.2

0.1

(0.4)

1.4

Exceptional & other

9.1

5.3

(0.7)

0.4

(0.2)

0.0

0.0

Tax

(0.5)

(0.5)

0.0

0.1

0.1

0.1

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(4.9)

(6.4)

(3.9)

(0.9)

Capex

(2.2)

(0.3)

(0.3)

(2.3)

(2.2)

(2.3)

(2.3)

Acquisitions/disposals

1.3

84.2

0.3

0.0

0.2

0.0

0.0

Net interest

0.0

0.1

0.0

0.0

0.1

0.4

0.2

Equity financing

0.0

(77.9)

0.5

20.2

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.4)

(0.3)

(0.3)

(0.3)

(0.3)

Net Cash Flow

4.9

4.2

(2.8)

12.7

(8.6)

(6.1)

(3.3)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(11.5)

(24.2)

(15.6)

(9.5)

FX

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(11.5)

(24.2)

(15.6)

(9.5)

(6.2)

Source: Checkit, Edison Investment Research

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United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Healthcare

Creo Medical — Detailed half-yearly reflecting Speedboat traction

Following Creo Medical’s H123 trading update (see our August note), management has reported detailed results, including a 42% increase (sequentially over H222) in the volume of Speedboat Inject procedures, coupled with expansion into the US consumables business market. Creo continues to build momentum with its Pioneer training programme. Management remains active on licensing and regulatory fronts, through its robotic deals with Intuitive and CMR, further exploration of potential licensing for its core technology, Kamaptive, and continued collaboration with the National Institute for Health and Care Excellence (NICE). Adjusting for reported cash, our valuation changes to £512m or 142p per share (versus £528m or 150p per share previously).

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