Checkit — Land-and-expand focus paying off

Checkit (AIM: CKT)

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Last close As at 30/11/2023

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Market capitalisation

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Research: TMT

Checkit — Land-and-expand focus paying off

Having completed its transition to a subscription-based revenue model during the year, Checkit grew recurring revenue by 41% and total revenue by 22% in FY23. Year-end annual recurring revenue (ARR) was 28% higher y-o-y as the company successfully executed on its land-and-expand strategy. As flagged last year, the focus on accelerating profitability has slowed cash consumption. Management anticipates meeting current market expectations for FY24; our FY24 forecasts are substantially unchanged and we introduce forecasts for FY25.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Land-and-expand focus paying off

FY23 results

Software and comp services

24 April 2023

Price

28p

Market cap

£30m

Net cash (£m) at end-FY23

15.6

Shares in issue

108.0m

Free float

56%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.7)

21.7

(28.2)

Rel (local)

(10.8)

20.4

(29.2)

52-week high/low

39p

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

H124 trading update

10 August 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Checkit is a research client of Edison Investment Research Limited

Having completed its transition to a subscription-based revenue model during the year, Checkit grew recurring revenue by 41% and total revenue by 22% in FY23. Year-end annual recurring revenue (ARR) was 28% higher y-o-y as the company successfully executed on its land-and-expand strategy. As flagged last year, the focus on accelerating profitability has slowed cash consumption. Management anticipates meeting current market expectations for FY24; our FY24 forecasts are substantially unchanged and we introduce forecasts for FY25.

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

1.7

01/23**

10.3

11.5

(7.3)

(6.9)

0.0

1.4

01/24e

12.5

13.3

(5.2)

(4.9)

0.0

1.2

01/25e

14.6

15.9

(3.8)

(3.5)

0.0

1.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Continuing operations only; FY22 restated.

Steady growth in ARR despite tough market

Checkit reported ARR growth of 28% in FY23, helped by upsells to its existing customer base and price increases (which resulted in net revenue retention of 116%), new customer wins and the transition of some US maintenance contracts to a subscription basis. Revenue from continuing operations increased 22% y-o-y to £10.3m and recurring revenue (93% of total revenue) increased 41% y-o-y. The adjusted EBITDA loss widened to £6.4m in FY23 but was lower in H2 than H1 as the company reduced headcount and improved gross margins. The focus on operational efficiency resulted in net cash outflows 17% lower in H2 than H1 and Checkit closed the year with net cash of £15.6m.

Outlook maintained for FY24

Trading year-to-date has been in line with board expectations and management anticipates meeting market expectations for FY24. We introduce FY25 forecasts that reflect an acceleration in ARR growth and a further reduction in the EBITDA loss, with net cash of £6.2m forecast for the end of FY25.

Valuation: ARR growth key to reducing discount

On an EV/sales multiple of 1.2x for FY24e and 1.0x FY25e, Checkit trades at a material discount to the UK software sector (2.5x current year sales, 2.2x next year sales) and US SaaS peers (5.8x current year, 4.9x next year). If Checkit were to trade on the UK average for FY24e, it would be worth 43p per share and moving to trade in line with US SaaS peers would imply a valuation of 81p. 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 FY23 results

Exhibit 1: FY23 results highlights

£m

FY22a*

FY23e

FY23a

Diff

y-o-y

Revenues

8.4

10.4

10.3

-1.4%

22.6%

Gross profit

4.6

6.3

6.5

3.3%

41.3%

Gross margin

54.8%

60.2%

63.1%

2.9%

8.3%

Adjusted EBITDA**

(5.6)

(6.5)

(6.4)

-2.1%

14.3%

Adjusted EBITDA margin

-66.7%

-62.6%

-62.1%

0.5%

4.5%

Normalised operating profit

(6.1)

(7.6)

(7.4)

-3.1%

21.3%

Normalised operating margin

-72.6%

-73.2%

-71.8%

1.3%

0.8%

Reported operating profit

(8.5)

(8.3)

(12.4)

48.7%

45.9%

Reported operating margin

-101.2%

-79.9%

-120.4%

-40.5%

-19.2%

Normalised PBT

(6.1)

(7.6)

(7.3)

-4.4%

19.7%

Reported PBT

(8.5)

(8.3)

(12.3)

47.5%

44.7%

Normalised net income

(6.1)

(7.6)

(7.5)

-1.8%

23.0%

Reported net income

(6.8)

(8.2)

(12.3)

49.3%

80.9%

Normalised basic & diluted EPS (p)

(7.0)

(7.1)

(6.9)

-1.8%

-0.8%

Reported basic EPS (p)

(10.0)

(7.6)

(11.4)

49.3%

14.0%

Net debt/(cash)

(24.2)

(15.2)

(15.6)

2.3%

-35.5%

ARR

9.0

10.8

11.5

6.4%

27.8%

Source: Checkit, Edison Investment Research. *Restated. **Excludes share-based payments and exceptional items.

As it was closed during FY23, the BEMS business is now accounted for as a discontinued operation. The table above shows results from continuing operations down to normalised net income (with FY22 restated). We note that our forecasts included the BEMS business. Discontinued operations contributed a loss of £0.3m for FY23 and a profit of £1.4m for FY22 included within reported net income and reported basic EPS.

Exhibit 2: Revenue breakdown

Revenue from continuing operations £m

FY23

FY22

y-o-y

Recurring

9.6

6.8

41%

Non-recurring

0.7

1.6

-58%

Total revenue

10.3

8.4

22%

Source: Checkit

Our revenue forecast included £9.9m for continuing operations and £0.6m for BEMS; Checkit generated revenue of £10.3m from continuing operations, 4% ahead of our forecast. Total revenue from continuing operations grew 22% in FY23, with recurring revenue growing by 41% and non-recurring revenue declining by 58%. Non-recurring contracts in the US were transitioned to subscription contracts, which accounted for some of the decline in non-recurring revenue. Recurring revenue made up 93% of total revenue in FY23, up from 81% in FY22.

ARR of £11.5m at the end of FY23 was 28% higher y-o-y and 13% higher h-o-h. The company noted that net revenue retention was 116% in FY23, with ARR benefiting from upsells and improved pricing, and gross churn of only 1%. ARR in the US was £2.8m at year-end, up 91% y-o-y, benefiting from contracts with biopharma customers and a large resort and casino operator.

The adjusted EBITDA loss widened in the year from £5.6m in FY22 to £6.4m in FY23. On a halfonhalf basis, the adjusted EBITDA loss reduced from £3.7m in H123 to £2.7m in H223 as the company took action to manage costs (headcount was reduced by 10%) and gross margin increased from 61.0% in H1 to 64.8% in H2.

The reported operating loss includes a £4.3m goodwill write-down for the acquisition of Next Control Systems in 2019. As this related to the BEMS business which has been closed down, it was fully impaired.

The company closed the year with net cash of £15.6m (end FY22 £24.2m), after a £6.4m operating cash outflow, capitalised development costs of £1.8m, other capex of £0.4m, lease payments of £0.3m and final proceeds of £0.2m from the sale of Elektron Eye Technology in FY21.

Outlook and changes to forecasts

The sales pipeline at year-end has moved in favour of large enterprise customers:

Tier 1 (large enterprise): 67% (FY22: 54%)

Tier 2 (enterprise): 13% (FY22: 37%)

Tier 3 (midsize): 14% (FY22: 9%)

In the US, the new customer pipeline includes a number of multi-site organisations in the healthcare, food retail and hospitality sectors. With sales cycles having extended during the current uncertain economic environment, the company has focused on selling more to existing customers and winning smaller projects or pilots at new customers. This provides the business with the ability to expand within those new customers after proof of concept and when the economic environment improves.

The company noted that FY24 has started well, with continued sales momentum in line with the board’s expectations. The board expects to meet market expectations for FY24 and we maintain our normalised forecasts for the year. We introduce forecasts for FY25 that assume 19% growth in ARR (this assumes that the current tough sales environment starts to ease), 17% growth in revenue and a reduction in the EBITDA loss to £2.3m.

The company expects to break-even at the EBITDA level at some point during FY26 which should result in positive EBITDA for FY27, although this is beyond our forecast period. With gross/net cash of £15.6m at the end of FY23, we estimate that the company currently has sufficient funding to reach cash break-even.

Exhibit 3: Changes to forecasts

£m

FY24e

FY24e

FY25e

Old

New

Change

y-o-y

New

y-o-y

Revenues

12.5

12.5

0.1%

21.1%

14.6

16.9%

Gross profit

8.1

8.2

0.8%

25.7%

10.0

22.3%

Gross margin

65.0%

65.5%

0.5%

2.4%

68.5%

3.0%

Adjusted EBITDA

(3.7)

(3.7)

0.0%

-41.5%

(2.3)

-39.1%

Adjusted EBITDA margin

-30.0%

-30.0%

0.0%

32.1%

-15.6%

14.4%

Normalised operating profit

(5.2)

(5.2)

0.0%

-29.1%

(3.8)

-27.9%

Normalised operating margin

-42.1%

-42.1%

0.0%

29.8%

-25.9%

16.1%

Reported operating profit

(5.2)

(5.4)

3.8%

-56.1%

(3.9)

-28.7%

Reported operating margin

-42.1%

-43.7%

-1.6%

76.7%

-26.6%

17.0%

Normalised PBT

(5.2)

(5.2)

0.0%

-28.1%

(3.8)

-27.9%

Reported PBT

(5.2)

(5.4)

3.8%

-55.7%

(3.9)

-28.7%

Normalised net income

(5.2)

(5.2)

0.0%

-30.1%

(3.8)

-27.9%

Reported net income

(5.2)

(5.4)

3.8%

-55.7%

(3.9)

-28.7%

Normalised basic & diluted EPS (p)

(4.9)

(4.9)

0.0%

-30.1%

(3.5)

-27.9%

Reported basic EPS (p)

(4.9)

(5.0)

3.8%

-55.7%

(3.6)

-28.7%

Net debt/(cash)

(9.5)

(9.5)

-1.0%

-39.4%

(6.2)

-34.5%

ARR

13.3

13.3

0.0%

15.9%

15.9

19.4%

Source: Edison Investment Research


Exhibit 4: 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

12.5

14.6

Cost of Sales

(1.0)

(7.2)

(6.7)

(3.8)

(3.8)

(4.3)

(4.6)

Gross Profit

0.0

2.6

6.5

4.6

6.5

8.2

10.0

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.7)

(2.3)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(6.1)

(7.4)

(5.2)

(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)

(0.1)

(0.1)

Reported operating profit

(4.5)

(9.2)

(5.3)

(8.5)

(12.4)

(5.4)

(3.9)

Net Interest

0.0

0.1

0.0

0.0

0.1

0.0

0.0

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)

(5.2)

(3.8)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(8.5)

(12.3)

(5.4)

(3.9)

Reported tax

0.0

0.1

0.3

0.3

0.3

0.0

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(6.1)

(7.5)

(5.2)

(3.8)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(8.2)

(12.0)

(5.4)

(3.9)

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)

(5.2)

(3.8)

Net income (reported)

4.1

80.8

(4.4)

(6.8)

(12.3)

(5.4)

(3.9)

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)

(4.9)

(3.5)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(9.0)

(6.9)

(4.9)

(3.5)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(10.0)

(11.4)

(5.0)

(3.6)

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

21.1

16.9

Gross Margin (%)

0.0

26.5

49.2

54.8

63.1

65.5

68.5

EBITDA Margin (%)

(230.0)

(50.0)

(18.9)

(66.7)

(62.1)

(30.0)

(15.6)

Normalised Operating Margin

(440.0)

(66.3)

(23.5)

(72.6)

(71.8)

(42.1)

(25.9)

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

16.3

11.7

Stocks

4.3

1.7

1.1

1.8

2.4

2.4

1.9

Debtors

5.1

3.4

4.4

2.9

4.5

4.4

3.6

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)

(7.9)

(8.2)

Creditors

(7.6)

(5.1)

(5.6)

(5.2)

(7.5)

(7.6)

(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

13.6

9.8

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

13.6

9.8

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(5.6)

(6.4)

(3.7)

(2.3)

Working capital

(0.5)

(1.0)

0.3

0.2

0.1

0.2

1.6

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

0.0

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(4.9)

(6.4)

(3.5)

(0.7)

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

0.0

0.0

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. Note: *Restated; FY22 onwards continuing operations only.

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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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Vantiva — Broadband remains the main growth driver

Vantiva’s FY22 accounts show the first clear picture of the business post the spin-out of the majority of Technicolor Creative Studios (TCS). In the Connected Home (CH) segment, trading conditions remain demanding, with global macroeconomic uncertainty making network service providers (NSPs) wary. However, supply chain issues have been easing and technical enhancements continue to buoy end-user demand for domestic broadband, with additional opportunities opening in Internet of Things applications. In the smaller Supply Chain Solutions (SCS) segment, newer activities, such as vinyl pressing, present the more dynamic opportunities. The shares still sit well below their valuation on a DCF basis.

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