Checkit — Adapting growth strategy to market conditions

Checkit provides software and services that optimise the performance of people, processes and physical assets in large and complex organisations. Checkit’s intelligent operations software platform is designed to connect people, assets and buildings in real time via workflow management, automated monitoring and buildings management applications. The main focus of the group is to encourage adoption of its platform, both signing up new customers and expanding usage within its existing blue-chip customer base. The company has now completed the transition to a pure-play subscription business with high levels of recurring revenue (93% in FY23).

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. We expect ARR growth of 16% in FY24, accelerating to 19% in FY25. Revenue from continuing operations increased by 22% y-o-y to £10.3m in FY23 and recurring revenue increased 41% y-o-y; we forecast revenue growth of 21% in FY24 and 17% in FY25. 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. We forecast an EBITDA loss of £3.7m in FY24, reducing to £2.3m in FY25. The company remains well funded: cash at the end of FY23 stood at £15.6m and we forecast this to reduce to £9.5m by the end of FY24 and £6.2m by the end of FY25.

On EV/sales multiples of 0.6x for FY24e and 0.5x for FY25e, Checkit trades at a significant discount to the UK software sector (2.5x current year sales, 2.2x next year sales) and US SaaS peers (6.9x current year, 5.8x next year sales. In our view, this reflects its current loss-making position and size. Valuing the company at the average of UK software peers for FY24e would result in a per-share value of 43p and moving to trade in line with US SaaS peers would imply a valuation of 94p. Sustained ARR growth will be the key trigger for Checkit to attract a multiple more in line with SaaS peers, evidenced by new 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.

The main factors that will influence our estimates and the share price include the group’s ability to scale, the dependence on a number of large customers, competition, supply chain and shareholder concentration.

Checkit designs, builds and operates cloud-based services and devices that connect people, processes and places in real time. The Checkit software platform supports several workplace applications: workflow management for remote workers, automated sensors and buildings management.

Checkit has evolved out of the company previously called Elektron Technology (Elektron). In May 2019, Elektron acquired Next Control Systems (a provider of high-end, service-based temperature monitoring for healthcare and life sciences in the UK, as well as data-related buildings energy management system, BEMS, services) for cash of £10.5m and renamed it Checkit UK. In July 2019, Elektron announced that it was selling Elektron Technology UK, which included the Bulgin business, for a cash consideration of £105m. The deal completed in September 2019. The disposal left two businesses within Elektron: Checkit software and Elektron Eye Technology (EET). Of the net proceeds of £94m, Elektron returned £81m to shareholders in a tender offer for shares (two shares for every three held) at 65p per share. This reduced the number of shares outstanding from 186m to 62m. On 2 October 2019, Elektron changed its name to Checkit and in July 2020, Checkit sold the EET assets for total proceeds of £0.9m. In February 2021, Checkit acquired Tutela Monitoring Systems for £0.6m (see Building foundations in the US), expanding its presence in the United States. In November 2021, the company raised gross proceeds of £21m through issuing 45,561,020 shares at 46p per share.

Checkit has developed an intelligent operations platform for deskless workers, combining software, sensors and services. The software is licensed on a subscription basis and is available via the cloud. The group is headquartered and has its product development in Cambridge, with operations centres in Fleet, Hampshire and Florida, US. The group has more than 160 employees and c 400 customers.

The group’s goal is to be the global leader in solutions that improve the productivity of the billions of deskless workers around the globe. Its intelligent operations software platform helps businesses to improve efficiency by capturing, connecting and comprehending actionable insights from what it calls ‘dark operations’ (ie the hidden activity of the deskless workforce and their interactions with critical equipment and buildings).

The main focus of the group is to encourage adoption of its platform, both signing up new customers and expanding usage within its existing customer base. The company is a more recent entrant to the United States, where it is keen to build its presence. The company has more than doubled ARR over the last two years and is targeting ARR of £100m in the longer term.

We outline below the company’s planned areas of focus when it raised funds in 2021 and the current status of those plans:

The group is focused on three main verticals that meet the criteria of having multi-site operations with a high number of non-desk-based workers. Verticals and selected customers include:

The table below shows the market focus and the type of solution offered by size of company.

Management

The board consists of Non-executive Chairman Keith Daley, CEO Kit Kyte and CFO Greg Price (see biographies at the end of the report). Daley was the chairman of Elektron for 15 years and is a 19.4% shareholder of Checkit. Non-executive directors include Simon Greenman (an AI specialist with 25 years of global technology leadership experience) and Alex Curran (regional CEO, North America, for Aptitude Software, an LSE-listed company).

With its workflow management software, the company is focused on connecting and empowering deskless mobile workers who are not able to use desktop software in their day-to-day working environment. Roughly 80% of the global workforce (2.7 billion people) does not work at a desk, instead working on the front line in sectors such as retail, hospitality, facilities management, healthcare, manufacturing, agriculture and leisure. These workers are not able to make use of the typical software packages that office workers rely on such as ERP, CRM, HCM,2 accounting, communications or productivity software. Instead, front-line workers may use pen and paper to complete checklists, spreadsheets, one-off apps, legacy solutions or simple task management systems. The use of these methods results in what Checkit calls ‘dark operations’. Management has little oversight of what employees are doing and fails to capture operational intelligence from workers’ activities. It can be difficult for those workers to feel engaged with the companies they work for and it also makes it more complicated to ensure that company procedures and policies are followed, which can have implications for a company’s brand. As well as helping companies gain oversight of their deskless workers’ activities, other demand drivers include:

Of the current enterprise software market (estimated at $247bn in 2022, source: Statista), only a small proportion is designed for this group of workers. Venture capital investment firm Emergence Capital has estimated that only 1% of software venture funding is focused on this type of software. The large enterprise software vendors may add some mobile functionality to their applications but have not developed applications that are specifically focused on the workflows of deskless workers. Software companies tend to develop applications for specific processes when there is a high volume of similar types of transactions, for example supply chain software for purchasing, CRM software for customer interaction. Checkit’s sweet spot is supporting workers who perform a combination of routine tasks, and infrequent but important tasks where the volume and variety of tasks is such that it is difficult to build a targeted application.

Checkit targets three of the seven sectors described above (retail, hospitality, healthcare) and estimates this is a market of 800 million workers. The company breaks down the addressable market into solutions for developing ‘Smarter People’ and ‘Smarter Assets and Buildings’. Smarter People software tools include workforce management, micro-learning, field service and employee communication, with Checkit focused mainly on the first area. Smarter Assets and Buildings encompasses global IoT and smart buildings software.

The software that has been developed for the Smarter People market has come from smaller private companies, typically with a vertical focus. In Exhibit 2, we detail a number of competitors for the workflow management application, all of which are private companies. Looking at Exhibit 2, Checkit views its competitive advantages as having the ability to scale, sensor integration, collaboration and analytics strength, and the growing number of pre-built processes and dashboards. Management believes that it would require the combined solutions of two or three other vendors to match Checkit’s end-to-end functionality.

Checkit’s intelligent operations platform for deskless workers is designed to support smarter operations management – to enable companies to provide a better customer experience and improve efficiency while meeting all compliance requirements.

Checkit’s intelligent operations platform includes the cloud-based core apps for workflow management and automated monitoring, integrated with sensor networks where appropriate. Information from the apps is fed back to the platform where it can be reviewed by management. The data are available for analysis either within the platform or for use with third-party business intelligence applications. The platform is based on four pillars:

Checkit offers software, sensors and services and we describe each in more detail below.

The goal of the software is to create effective workforces, with staff doing the right thing, at the right time and in the right place. It has been developed to be a digital assistant that guides and tracks the actions of deskless workers and it also gives managers the ability to oversee and respond in real time.

Currently, front-line workers may use pen and paper to complete checklists, spreadsheets, one-off apps, legacy solutions or simple task management systems. Often, these methods mean information is not provided to management on a timely basis, work may not be performed in a consistent manner, it is difficult to get an overview of how different sites and teams are performing, and staff can feel disconnected from the rest of the company. Checkit’s software has been developed to address these problems. The app currently can be used on any Android device, and an iOS version is currently being piloted by several customers. Exhibit 3 shows several screen shots of the app.

The software supports real-time collaboration, so multiple staff can work on a single set of actions at the same time, reducing the amount of duplicated effort.

The diagram below shows the configuration of Checkit’s platform. Workflows and data are all managed in the control centre, with data stored in the cloud. The platform features no-code workflows – new activities or processes can be designed with a drag-and-drop builder. These are then allocated to the relevant sites and roles. Shared workflow libraries allow organisations to build, share and easily update workflow templates. From time to time, Checkit will add new pre-built workflows to the platform based on customer demand. Use cases include health and safety, compliance, workforce management, production planning, and escalation and alerting.

The workflow management app communicates with the control centre, allowing management to review worker activity across the company’s entire estate. Data can be tracked by site, team, individual or process. Checkit provides some standard key performance indicators (KPIs) and dashboards to give an overview of performance and customers can also feed data from the control centre into their own business intelligence (BI) systems. Checkit provides an open API3 to business intelligence tools such as Microsoft Power BI.

The two brands operated by the John Lewis Partnership (JLP), John Lewis and Waitrose, work with Checkit to digitise and automate a variety of different processes.

Checkit provides asset protection and 24/7 compliance via automated monitoring of temperature sensors. Wireless monitoring solutions collect continuous data from multiple sites, enabling trend analysis and live alerts. Connected Automated Monitoring (CAM) can be used for general applications including food safety, general medical and environmental temperature checks. Connected Automated Monitoring + (CAM+) meets the exacting standards of healthcare, pharmaceutical, life science and biotech research, providing temperature control and assurance for samples, reagents and drugs. Customers typically operate in a demanding regulatory regime where there is financial risk to the stock value and potential legal liabilities if any harm arises from improper storage of products/samples.

The solution provides specialist wireless sensors, cloud data recording, compliance process management, manned alert management, calibration and onsite QA processes. Alert to Workflow technology enables users of Checkit’s monitoring technology to feed sensor alerts from equipment or buildings directly into a corrective workflow for action by front-line employees.

The service includes a call centre that provides a monitoring service so that when an alert is triggered, someone calls the customer. The company has started using Twilio to automate some alert calls and the Alert to Workflow feature described above could also reduce the level of manual intervention required. This supports Checkit’s growth ambitions as the company will not need to grow call centre headcount to match growing demand for the software, and existing call centre staff will be able to focus on providing value-added services for customers.

Checkit also sells its workflow management software to existing sensor customers, for example Hallmark Care Homes and University Hospital Southampton. In these cases, functionality is not targeted at clinical applications, but instead is focused on improving operational efficiency within hospitals or care homes, for example ensuring patients are provided meals on time or rooms are checked.

Switzerland-headquartered Octapharma is one of the world’s largest human protein manufacturers, developing human protein from human plasma and human cell lines. The company has more than 190 donation centres globally and serves hundreds of thousands of patients a year in more than 118 countries.

The goal: protect valuable plasma products by managing temperature safety at scale.

The challenge: temperature was monitored using paper chart records and manual interpretations. The process was inefficient, costly, time-consuming and prone to technical issues. Maintenance and calibration services often involved costly calls to multiple vendors and managing scheduled visits from a variety of technicians. For repairs, it could take 24–28 hours for technicians to address and obtain replacement parts.

The solution: Octapharma uses Checkit’s digital temperature safety solution to replace manual processes. This comprises automated and fully calibrated sensors, digitised reporting, cloud-based compliance records storage and highly responsive customer support.

The outcome: on an annual basis, Octapharma has saved hundreds of hours of staff time. It has also cut management auditing time, reduced costs by consolidating systems and minimised the risk of product spoilage.

Product development is focused on the following areas:

The software is sold on a subscription basis, with a minimum contract length of three years. Previously, some contracts had been sold with a minimum contract length of one year, and those customers are now on rolling contracts that terminate with 12 months’ notice. Customers are required to pay yearly in advance. Licences are usually based on the number of active devices in use, allowing customers to bring their own handheld devices if so desired. Exhibit 2 shows the segmentation of the market, with Checkit’s offerings sold in three tiers: enterprise, mid-tier and essentials.

Customers can use Checkit-sourced hardware (designed by Checkit and manufactured by a third party) or their own hardware (customers are increasingly using their own smartphones or tablet devices). Checkit-sourced hardware such as the Memo (a rugged handheld device for dedicated use with Checkit’s workflow management software) and a Bluetooth probe for temperature checks can be purchased outright. For sensors, Checkit offers its ‘Peace of Mind’ service – customers can pay one subscription fee to include software, installation, support and maintenance of software and hardware, and provision of hardware.

Over time, Checkit intends to increasingly integrate with third-party sensor networks. This is likely to reduce the need to design proprietary sensors.

For the Checkit software platform, this includes consulting, platform customisation and ad hoc product enhancements. Other non-recurring work includes installation of sensors (first-time and additional), small works and maintenance of equipment, and callouts for engineers. Work tends to be charged on a day rate basis and is mostly undertaken on site.

Over the last few years, management has worked to reshape the business to ensure it is built for scale. The company recently completed the transition of the BEMS business to a SaaS business model and now Checkit is a pure-play subscription business. As the company has shifted its focus from a hardware-based business to a subscription business with international ambitions, the structure of the company has evolved to reflect the requirements of a SaaS business.

The key features of SaaS software are as follows:

Successful SaaS software businesses typically focus on growing the number of subscribers as fast as possible, which requires a significant investment in sales and marketing headcount. At the same time, product development is a key investment area, so that software remains competitive and adapts to customer demand for new functionality.

During the course of FY22, the company doubled the size of its sales and marketing teams and appointed a managing director of the US business to spearhead the overall US growth strategy. As the first crucial step to growing its subscriber base, the company focused on the size and quality of the new business pipeline. In the US, the new customer pipeline includes a number of multi-site organisations in the healthcare, food retail and hospitality sectors. The mix by customer type has shifted in favour of tier 1 enterprise customers (see Exhibit 5). In the Financials section below, we discuss how the company has converted this pipeline to grow its subscriber base.

Our forecasts and the share price will be sensitive to the following factors:

The company discloses revenue split between recurring and non-recurring revenues and period end ARR. Checkit closed down the BEMS one-off project business in FY23 and it is now reported in discontinued operations. The remaining software-related business has fully transitioned to a SaaS business model. We forecast revenue growth of 21% in FY24, reflecting further expansion in the subscription base, and 17% in FY25.

The main KPI to track is ARR, which measures how quickly the company is growing its base of subscription licences. In FY23, the company grew ARR by 28% over the year. It 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. We forecast ARR growth of 16% in FY24 and 19% in FY25.

We forecast that Checkit will capitalise £2.0m in development costs in FY24 and FY25. The company spends minimal amounts on tangible fixed assets and has property lease commitments of c £0.3m per year.

As subscription licences are paid for 12 months in advance, the company typically has negative working capital. The company has built up hardware inventory to ensure it can deliver as customer projects are rolled out.

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.

With Checkit not expected to hit full year EBITDA profitability within our forecast period, comparison with peer multiples is restricted to EV/sales multiples. Exhibit 7 shows how Checkit is trading compared to the UK software sector and to the average of c 100 US SaaS companies. Very few of the UK group are pure-play SaaS companies, with many in the midst of a shift from perpetual to SaaS-based licensing. In Exhibits 8 and 9, we show the valuation of Checkit based on a range of EV/sales multiples for FY24 and FY25.

Checkit trades at a significant discount in both years in our view reflecting its current loss-making position and size. The company recently revised its growth strategy to accelerate the timescale to reaching profitability. By the end of FY25, we expect Checkit will still have a net cash position of £6.2m and reduced EBITDA losses and we estimate the company should have sufficient cash to reach EBITDA break-even.

Valuing the company at the average of UK software peers for FY24e would result in a per share value of 43p and moving to trade in line with US SaaS peers would imply a valuation of 94p. 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.