Cambridge-based technology group Checkit (CKT:29.5p) is accelerating its path to profitability by adopting a “land and expand” strategy focussed on higher quality and higher value recurring revenue growth. New contract awards in the latest six-month period include an expanded three-year contract worth £6mn with John Lewis and Waitrose, and three contracts with FTSE 100 food and support services group Compass (CPG).
Chief executive Kit Kyte told Investors' Chronicle that the three Compass contracts will earn Checkit annual recurring revenue (ARR) of £35,000 each, but there are 15 more customer opportunities with the group, some of which are worth £100,000 in ARR. Expect “a few more [of them] to be landed by the year-end”. Kyte also revealed that the group’s total sales pipeline has increased from ARR of £13.3mn to £15mn since January 2023 with a total contract value of £45mn over a typical three-year term. In addition, John Lewis is contracted to trial a new product within 12 months which could add materially to the existing contract value.
It’s easy to see why Checkit’s offering is proving popular. Its 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.
Smart technology platform
Checkit has been adding artificial intelligence (AI) tools to its technology platform to provide customers with valuable predictive insights. Kyte revealed that five customers are in beta testing of AI tools designed to optimise the maintenance of their assets and energy usage. Exploiting data insights is a likely driver of outperformance, making Checkit an under-the-radar AI-enabled data play.
Importantly, the group has a captive target market to tap into across its key healthcare, food retail and hospitality market segments. Inflationary pressures are not only putting greater pressure on companies to make operational savings and improve the productivity of workers, but organisations are faced with increased regulatory compliance, too. Checkit’s technology offers the solution, as its latest financial results highlight.
In the first half, ARR increased almost 25 per cent to £12.6mn, half of the increase resulting from upselling and cross-selling to existing customers. This explains why the group’s net retention rate exceeded 100 per cent. The US market is a key growth driver, delivering 41 per cent higher ARR of £3.2mn, or a quarter of the group total. The improving odds of a soft economic landing in the country is clearly positive. And it’s not the only good news.
Trading ahead of expectations
A focus on reducing operating costs, improving gross margins (up from 63 to 69 per cent) and growing ARR are driving a sustainable move towards cash profitability. Efficiency gains made include ceasing outsourced software development to boost productivity and offshoring part of the group’s customer service team to deliver cost savings.
Analysts at Edison Investment Research have taken note of the improved guidance and now expect the second-half cash loss to be reduced to £1.7mn, a material improvement on the £2.9mn loss in the same period last year. They also expect closing net cash of £9.5mn, a sum that covers the predicted cash loss of £2.3mn in the 2024-25 financial year and provides funding to finance Checkit to cash profitability.
Finance director Greg Price believes the group will hit break-even on ARR of £18mn-£19mn based on a gross margin of 70 per cent, meaning that Checkit only needs to convert a third of its sales pipeline to hit the inflection point. That looks increasingly likely, a fact not reflected in Checkit’s deep 65 per cent share price discount to US software peers based on a multiple of sales to enterprise valuation.
Trading above both the 26p buy call in my 2023 Bargain Shares Portfolio and the 29p opening offer prices on Friday, 10 February 2023, Checkit’s shares continue to rate a buy.
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