Checkit — Moderating costs to accelerate breakeven

Checkit (AIM: CKT)

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Last close As at 30/01/2023

GBP0.24

−4.00 (−14.55%)

Market capitalisation

GBP29m

Research: TMT

Checkit — Moderating costs to accelerate breakeven

During H123 Checkit made further progress in its transition to a 100% subscription business, achieving 82% recurring revenue and a 48% y-o-y increase in annual recurring revenue (ARR). The pipeline has grown and includes material opportunities with enterprise customers for which conversion timing is uncertain. As customers have become more cautious, sales cycles have lengthened, and we conservatively reduce our ARR and revenue forecasts. Despite this, we have improved our EBITDA loss forecasts for FY23/24 on the back of company plans to accelerate the path to profitability, and we note our end FY24 forecast for net cash of £9.5m.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Moderating costs to accelerate break-even

H123 results

Software and comp services

15 September 2022

Price

20.88p

Market cap

£23m

Net cash (£m) at 31 July 2022

19.5

Shares in issue

108.0m

Free float

56%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.9)

(42.9)

(63.3)

Rel (local)

(11.6)

(43.3)

(62.8)

52-week high/low

58p

19p

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

FY23 trading update

February 2023xxxx

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Checkit is a research client of Edison Investment Research Limited

During H123 Checkit made further progress in its transition to a 100% subscription business, achieving 82% recurring revenue and a 48% y-o-y increase in annual recurring revenue (ARR). The pipeline has grown and includes material opportunities with enterprise customers for which conversion timing is uncertain. As customers have become more cautious, sales cycles have lengthened, and we conservatively reduce our ARR and revenue forecasts. Despite this, we have improved our EBITDA loss forecasts for FY23/24 on the back of company plans to accelerate the path to profitability, and we note our end FY24 forecast for net cash of £9.5m.

Year end

Revenue (£m)

ARR
(£m)

PBT*
(p)

EPS*
(p)

DPS
(p)

EV/sales
(x)

01/21

13.2

5.7

(3.1)

(5.2)

0.0

0.2

01/22

13.6

9.1

(4.7)

(7.0)

0.0

0.2

01/23e

10.4

10.8

(7.6)

(7.1)

0.0

0.3

01/24e

12.5

13.3

(5.2)

(4.9)

0.0

0.2

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

H123 reflects transition to subscription business

Checkit reported H123 revenue of £5.4m, a £3.9m EBITDA loss and a £4.7m operating loss. ARR of £10.2m at the end of H123 was 48% higher y-o-y and 12% higher half-on-half, reflecting a mix of new business, upsells and price increases.

Slower pipeline conversion but opportunities intact

Reflecting the uncertain economic environment, we conservatively reduce our year-end ARR forecasts by 10% in FY23 and 16% in FY24, but emphasise there are material opportunities in the pipeline that could convert in the near term and drive upgrades. Checkit has taken measures to cope with inflation and is accelerating the path to profitability, reducing the cost base while protecting product development and sales and marketing initiatives. We have reduced our revenue and operating cost forecasts, resulting in EBITDA loss forecasts improving from £7.8m to £6.5m in FY23 and from £5.1m to £3.7m in FY24. We forecast net cash of £9.5m by the end of FY24 (up from £8.5m).

Valuation: Discount to peers has widened

On an EV/sales multiple of 0.3x for FY23e and 0.2x FY24e, Checkit trades at a material discount to the UK software sector (3.3x current year sales, 2.7x next year sales) and US SaaS peers (6.9x current year, 5.6x next year). If Checkit were to trade on the UK average for FY23e, it would be worth 50p per share and moving to trade in line with US SaaS peers would imply a valuation of 84p. 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. In the current environment, faster movement towards break-even is also likely to support the share price.

Review of H123 results

Exhibit 1 summarises H123 results.

Exhibit 1: Half-yearly results

£m

H123

H122

y-o-y

Revenue

5.4

7.9

(31%)

Gross profit

3.0

4.1

(25%)

Gross margin

55.8%

51.4%

4pp

EBITDA

(3.9)

(1.4)

177%

Normalised operating profit/PBT

(4.2)

(1.7)

146%

Reported operating profit/PBT

(4.7)

(2.7)

76%

Normalised net income

(4.2)

(1.7)

146%

Reported net income

(4.6)

(2.6)

77%

Normalised basic EPS (p)

(3.9)

(2.7)

44%

Reported basic EPS (p)

(4.2)

(4.2)

0%

Net cash

19.5

8.5

129%

Period end ARR

10.2

6.9

48%

Recurring revenue/total revenue

82%

39%

43%

Source: Checkit

Checkit reported a revenue decline of 31%, made up of a 44% increase in recurring revenue to £4.4m and a 79% decline in non-recurring revenue to £1.0m, following the company’s previously announced decision to discontinue one-off BEMS projects with minimal software input. Recurring revenue now makes up 82% of total revenue, up from 39% in H122 and 70% in H222. As the software subscription business is higher margin than the BEMS project business, the gross margin increased by 4pp y-o-y to 56%. Operating costs (excluding depreciation, amortisation and share-based payments) of £6.9m were 26% higher y-o-y reflecting planned investment in sales and marketing and R&D to support the growth of the subscription business. This resulted in an EBITDA loss increasing from £1.4m to £3.9m and normalised net loss increasing from £1.7m to £4.2m. Net cash at the end of H123 was £19.5m, down from £24.2m at the end of FY22.

Sales cycle slower but pipeline still strong

ARR increased 48% y-o-y to £10.2m at the end of H123, with US customers now making up 22% of total ARR. Sales bookings were in line with last year and in H1 Checkit realised its first $1m+ ARR US customer. The increase in ARR came from the combination of upselling to existing customers (eg Compass, Sodexo, Grifols), winning new customers (eg Biolife, Just Eat) and price increases. The company also saw more customers signing up or renewing for longer contract terms, increasing from the standard three-year minimum to four- or five-year contracts.

The company highlighted that contracts with new customers represent initial entry points, providing scope for wider expansion as those customers experience the benefits of using the software.

The pipeline has grown since year-end across the retail, healthcare, facilities management, franchise and pharmaceutical verticals. At the end of H123, 67% of the pipeline by value was for large enterprise targets, 13% for other enterprise targets and 14% for midsize targets. Reflecting the uncertain economic environment, the company has seen sales cycles lengthen, reducing pipeline conversion. However, several large enterprise targets are at the pilot stage and if they decide to use Checkit, should contribute materially to ARR. The difficulty at this point is in estimating exactly when those contracts might convert.

The company has not seen a material change in the competitive environment, with most opportunities found with companies who are shifting from manual to digital processes, and very few competitive tenders.

Product development drives new use cases

Part of the company’s new strategy unveiled last November was the development of an ecosystem of third-party sensor suppliers who would integrate their sensors with the Checkit platform. As an example of this, in March, Checkit signed a partnership with Disruptive Technologies, a Norwegian developer of wireless sensors and IoT infrastructure. This has added Legionnaire’s disease prevention to the use cases supported by the platform, which uses a sensor to monitor the temperature of water pipes to ensure the water temperature is outside of the range in which the legionella bacteria thrives. Potential customers for this include care homes, hospitals, hotels and schools.

Product development includes investment in the data platform (to support the generation of predictive insights for customers and to combine data from the Checkit platform with data from other sources such as third-party sensors) and in the resilience and scalability of the platform (using cloud services to bring down unit costs). The company has also replaced outsourced development resources with in-house staff. It spent £2.0m on product development in H123, of which £0.9m was capitalised.

Outlook and changes to forecasts

The board anticipates delivering an FY23 operating result ahead of expectations set at the start of the year. Checkit believes its monthly cash burn rate peaked in H123 and is accelerating its plan to achieve profitability. Measures to reduce costs include reducing hardware and platform costs to drive higher gross margins and automating functions within the call centre, such as automated calls when a sensor measures something out of range, or the provision of self-service customer support for education.

We have revised our forecasts to reflect:

lower ARR at the end of FY23 and FY24 resulting in lower revenue in both years;

slightly higher gross margins in both years; and

lower operating costs in H223 and FY24.

This results in a reduction in our EBITDA loss and operating loss forecasts in both years. Our net cash forecast for FY23 improves marginally, as we expect slightly lower working capital inflows. Our net cash forecast for the end of FY24 increases by £1.0m to £9.5m.

Exhibit 2: Changes to forecasts

£'m

FY23e

FY23e

FY24e

FY24e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

11.2

10.4

-7.1%

-22.9%

14.0

12.5

-10.9%

19.4%

Gross profit

6.5

6.3

-3.8%

1.4%

8.9

8.1

-8.5%

28.9%

Gross margin

58.1%

60.2%

2.1%

14.5%

63.4%

65.0%

1.7%

4.8%

EBITDA

(7.8)

(6.5)

-15.9%

55.7%

(5.1)

(3.7)

-26.4%

-42.7%

EBITDA margin

-69.1%

-62.6%

6.5%

-31.6%

-36.4%

-30.0%

6.3%

32.6%

Normalised operating profit

(8.8)

(7.6)

-12.9%

62.5%

(6.6)

(5.2)

-20.4%

-31.3%

Normalised operating profit margin

-78.0%

-73.2%

4.9%

-38.5%

-47.1%

-42.1%

5.0%

31.1%

Reported operating profit

(9.4)

(8.3)

-11.0%

17.4%

(6.7)

(5.2)

-21.6%

-37.1%

Reported operating margin

-83.3%

-79.9%

3.5%

-27.5%

-47.8%

-42.1%

5.7%

37.8%

Normalised PBT

(8.8)

(7.6)

-12.9%

62.5%

(6.6)

(5.2)

-20.4%

-31.3%

Reported PBT

(9.4)

(8.3)

-11.0%

17.4%

(6.7)

(5.2)

-21.6%

-37.1%

Normalised net income

(8.8)

(7.6)

-12.9%

62.5%

(6.6)

(5.2)

-20.4%

-31.3%

Reported net income

(9.4)

(8.2)

-12.1%

21.2%

(6.7)

(5.2)

-21.6%

-36.3%

Normalised basic & diluted EPS (p)

(8.1)

(7.1)

-12.9%

1.0%

(6.1)

(4.9)

-20.4%

-31.3%

Reported basic EPS (p)

(8.7)

(7.6)

-12.1%

-23.6%

(6.2)

(4.9)

-21.6%

-36.3%

Net debt/(cash)

(15.0)

(15.2)

1.3%

-37.0%

(8.5)

(9.5)

12.1%

-37.4%

ARR

12.0

10.8

-9.9%

18.8%

15.9

13.3

-16.1%

23.2%

Source: Edison Investment Research

Exhibit 3: Financial summary

£'m

2019

2020

2021

2022e

2023e

2024e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.2

13.6

10.4

12.5

Cost of Sales

(1.0)

(7.2)

(6.7)

(7.4)

(4.2)

(4.4)

Gross Profit

0.0

2.6

6.5

6.2

6.3

8.1

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(4.2)

(6.5)

(3.7)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(4.7)

(7.6)

(5.2)

Amortisation of acquired intangibles

(0.1)

(1.0)

(1.3)

(1.4)

(0.6)

(0.0)

Exceptionals

0.0

(1.7)

(0.9)

(1.0)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

(0.1)

0.0

Reported operating profit

(4.5)

(9.2)

(5.3)

(7.1)

(8.3)

(5.2)

Net Interest

0.0

0.1

0.0

0.0

0.0

0.0

Joint ventures & associates (post tax)

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

Profit Before Tax (norm)

 

 

(4.4)

(6.4)

(3.1)

(4.7)

(7.6)

(5.2)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(7.1)

(8.3)

(5.2)

Reported tax

0.0

0.1

0.3

0.3

0.1

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(4.7)

(7.6)

(5.2)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(6.8)

(8.2)

(5.2)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.8

0.6

0.0

0.0

0.0

Net income (normalised)

(4.4)

(6.4)

(3.1)

(4.7)

(7.6)

(5.2)

Net income (reported)

4.1

80.8

(4.4)

(6.8)

(8.2)

(5.2)

Basic average number of shares outstanding (m)

178

161

62

68

108

108

EPS - basic normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.0)

(7.1)

(4.9)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.0)

(7.1)

(4.9)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(10.0)

(7.6)

(4.9)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

34.7

2.7

(22.9)

19.4

Gross Margin (%)

0.0

26.5

49.2

45.8

60.2

65.0

EBITDA Margin (%)

(230.0)

(50.0)

(18.9)

(31.0)

(62.6)

(30.0)

Normalised Operating Margin

(440.0)

(66.3)

(23.5)

(34.7)

(73.2)

(42.1)

BALANCE SHEET

Fixed Assets

 

 

5.0

8.5

6.8

8.3

9.6

10.3

Intangible Assets

2.9

7.3

6.0

7.3

8.4

8.9

Tangible Assets

1.7

1.2

0.8

1.0

1.2

1.4

Investments & other

0.4

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

19.5

19.8

17.5

28.7

19.0

13.3

Stocks

4.3

1.7

1.1

1.8

1.4

1.2

Debtors

5.1

3.4

4.4

2.6

2.3

2.6

Cash & cash equivalents

10.1

14.3

11.5

24.2

15.2

9.5

Other

0.0

0.4

0.5

0.1

0.0

0.0

Current Liabilities

 

 

(7.9)

(5.6)

(5.9)

(5.4)

(5.2)

(5.4)

Creditors

(7.6)

(5.1)

(5.6)

(4.9)

(4.7)

(4.9)

Tax and social security

(0.3)

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

Other

0.0

(0.5)

(0.3)

(0.5)

(0.5)

(0.5)

Long Term Liabilities

 

 

(0.3)

(1.3)

(0.8)

(0.6)

(0.6)

(0.6)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(1.3)

(0.8)

(0.6)

(0.6)

(0.6)

Net Assets

 

 

16.3

21.4

17.6

31.0

22.9

17.6

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

21.4

17.6

31.0

22.9

17.6

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(4.2)

(6.5)

(3.7)

Working capital

(0.5)

(1.0)

0.3

0.2

0.4

0.2

Exceptional & other

9.1

5.3

(0.7)

(1.0)

0.0

0.0

Tax

(0.5)

(0.5)

0.0

0.1

0.1

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(4.9)

(6.1)

(3.5)

Capex

(2.2)

(0.3)

(0.3)

(2.3)

(2.6)

(1.8)

Acquisitions/disposals

1.3

84.2

0.3

0.0

0.1

0.0

Net interest

0.0

0.1

0.0

0.0

0.0

0.0

Equity financing

0.0

(77.9)

0.5

20.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.4)

(0.3)

(0.4)

(0.4)

Net Cash Flow

4.9

4.2

(2.8)

12.7

(9.0)

(5.7)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(11.5)

(24.2)

(15.2)

FX

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

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(11.5)

(24.2)

(15.2)

(9.5)

Source: Checkit, Edison Investment Research

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280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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