- Operating loss widens due to higher investment in growth of subscription business
- Cash burn 'has peaked'
- Analysts reduce cash loss forecasts for next two financial years
Cambridge-based technology group Checkit (CKT:20p) is accelerating its plan to achieve profitability, and the directors believe, reassuringly for investors, that cash burn (£4.7mn in the first half) peaked in the first half of this year.
Checkit’s workflow management software platform offers customers data-driven remote monitoring and automated systems surveillance to manage their teams of deskless workers. By digitising the scheduling and reporting of workflows, it can boost staff efficiency and deliver better management insight. By transitioning the business to a software-as-a-service (Saas) model, the directors are creating an annual recurring revenue (ARR) stream across five key verticals (healthcare, retail, facilities management, restaurants and hospitality), and succsesfully so.
By the end of July 2022, ARR of £10.2mn was 48 per cent higher than 12 months earlier, delivered through upselling to existing customers (Compass, Sodexo and Grifols), winning new clients (Just Eat and Biolife) and through price increases. Having landed its first $1mn contract in the six-month period, the pipeline of new opportunities has grown further, with larger enterprises accounting for two-thirds of the total. However, sales cycles have lengthened in the current economic uncertainty, which has reduced conversion rates. But several large enterprises are at the pilot stage, and if these are converted then it would have a dramatic impact on Checkit’s ARRs and accelerate the move to profitability.
In the meantime, the group remains lossmaking, reporting a first-half cash loss of £3.9mn on revenue of £5.4mn, and ending the period with net cash of £19.5mn, a sum equating to 90 per cent of Checkit’s market capitalisation. An increased focus on operational efficiency prompted analysts at Edison Investment Research to lower their annual cash loss estimate by 17 per cent from £7.8mn to £6.5mn. They also slashed their projected cash loss from £5.1mn to £3.7mn for the 2023-24 financial year, when they expect net cash of £9.5mn, or £1mn higher than previous forecasts.
Although the current macroeconomic environment has undermined confidence in the shares since I outlined the investment case (‘Funded for accelerated growth’, IC, 14 March 2022), the fact remains that the ongoing inflationary environment places greater importance on organisations to make operational savings and improve the productivity of their workers. Importantly, Checkit has not seen a material change in the competitive environment for its products as most companies are moving from manual to digitising processes.
The difficulty is predicting when new contracts will be awarded so that the business can create the scale needed to cover its fixed costs and enable the operational leverage to really kick in. This uncertainty explains why Checkit’s £2mn enterprise valuation equates to only 0.2 times current-year revenue estimates of £10.4mn, a hefty discount to the UK SaaS peer group average of 3.3 times. That said, management’s decision to accelerate the move to break-even, coupled with the potential for several pilots to be converted into material contract wins, suggests the shares are still worth holding on to despite the deterioration in the economic backdrop this year. Hold.
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