Checkit — SaaS software for the deskless workforce

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 recently acquired a foothold in the United States where it is keen to build its presence. Over the last year, Checkit has invested to support its evolution into a pure SaaS software business, including doubling the size of the sales and marketing teams and boosting product development. The company has the opportunity to accelerate this strategy, with net proceeds of £20m available from the recent placing to be targeted at further strengthening sales and marketing and product development as well as transitioning the BEMS business to a Smart Buildings SaaS offering.

Due to the ongoing transition to a SaaS business model, recurring revenue is growing as a percentage of total revenue, from 39% in FY21 to 50% in FY22e and 87% in FY23e. We have revised our forecasts to reflect the new targets set by the company following the recent placing. We revise down our revenue forecast for BEMS in FY22 and FY23, reflecting the cessation of project work. We increase our operating cost forecasts in FY23 to reflect the increased investment in sales and marketing and product development. While we reduce our group revenue forecasts for FY22 and FY23, we forecast strong growth in annualised recurring revenue (ARR) of 34% for FY22 and 56% for FY23. Our FY22 EBITDA forecast is unchanged and our FY23 forecast increases from -£2.0m to -£7.8m. With cash of £6.7m at the end of October plus the £20m net proceeds from the placing, the group is well-funded to support growth.

On an EV/sales multiple of 1.6x for FY22e and 1.9x for FY23e, Checkit trades at a significant discount to the UK software sector (5.4x current year sales, 4.2x next year sales) and US SaaS peers (16.0x CY, 12.3x NY sales). In our view, the value of Checkit Connect as a SaaS offering has been masked by the value attributed to Checkit BEMS (declining and non-recurring revenue). As BEMs is being transitioned to a SaaS business model and we estimate will contribute less than 10% of revenue in FY23, we use FY23e multiples for our valuation as this more accurately reflects the new business structure. With fast growth and high levels of annualised recurring revenue being key drivers of SaaS company valuations, triggers that would help the company attract a multiple more in line with SaaS peers include evidence that customers are signing up to use Checkit’s software, existing customers are expanding their usage and, to a lesser extent, that non-recurring revenues are being converted to subscription services.

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. In July 2020, Checkit sold the EET assets for total proceeds of £0.8m, to be received monthly in cash over a 24-month period. In February 2021, Checkit acquired Tutela Monitoring Systems for £0.6m (see Building foundations in the US), expanding its presence in the US.

The group currently operates through two divisions: Checkit Connect and Checkit BEMS, with headquarters and product development in Cambridge and operations centres in Fleet, Hampshire and Florida, US. The group has c 180 employees in the UK, with c 90 involved in operations, c 40 in product development, c 25 in sales and marketing and c 25 in admin.

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 recently acquired a foothold in the US where it is keen to build its presence. Over the last year, the company has invested to support its evolution into a pure SaaS software business, including doubling the size of the sales and marketing teams and boosting product development.

The group is focused on five main verticals which meet the criteria of having multi-site operations with a high number of non-desk-based workers. The table below shows the market focus and the type of solution offered by size of company.

Verticals and selected customers include:

The group shifted its new business focus away from hospitality and leisure due to COVID-19, but still has customers in this area (Dishoom, Tenpin, Center Parcs, Merlin).

On 26 November, Checkit announced that it had placed 45,561,020 shares at 46p per share (a 4.2% discount to the previous closing price) to raise gross proceeds of £21m and net proceeds of £20m. The company intends to use these proceeds to take advantage of the opportunities presented by the growing deskless working industry and plans to invest in the following areas:

The company expects to spend £7–10m on sales and marketing, £5–9m on product development and £2–3m to transition BEMS to a SaaS model.

The table below shows the outline of the timings to achieve key operational milestones. The company is aiming to double ARR in the short term and reach ARR of £100m in the longer term.

The executive board consists of chairman Keith Daley (who is transitioning to a non-executive role, biography on page 19), CEO Kit Kyte (biography on page 19) and CFO Greg Price (biography on page 19). Keith was the chairman of Elektron for 15 years and is a 19.4% shareholder of Checkit. Non-executive directors include John Wilson (who was CEO of Elektron and led the MBO of Bulgin in 2019) and Simon Greenman (AI specialist with 25 years of global technology leadership experience).

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, HCM1, 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.

Of the current enterprise software market (estimated at $205bn in 2020, 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, eg 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 ‘Smart People’ and ‘Smart Assets and Buildings’. Smart People software tools include workforce management, micro-learning, field service and employee communication, with Checkit focused mainly on the first area. Smart Assets and Buildings encompasses global IoT and smart buildings software.

The software that has been developed for the Smart People market has come from smaller private companies, typically with a vertical focus. In Exhibit 4, we detail a number of competitors for the workflow management application, all of which are private companies. Looking at Exhibit 3, Checkit views its competitive advantages as having the ability to scale, sensor integration, collaboration and analytics strength, and the growing number of prebuilt 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 improved 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 previously offered three software solutions on its platform but recently combined them into one offering providing functionality to support both Smart People and Smart Assets and Buildings.

We review each functionality in more detail, noting that the company’s focus is first and foremost on growing the Smart People business.

The goal of this functionality is to create effective workforces, with staff doing the right thing, at the right time and in the right place. The software 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 of the software is due for launch imminently. Exhibit 4 shows several screen shots of the app.

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. The company recently introduced shared workflow libraries. This allows 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.

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 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 API2 to business intelligence tools such as Microsoft Power BI.

In October 2019, Checkit announced that it had signed a contract with BP to supply its Smart People and Smart Assets software for use in 325 company-owned locations in the UK over a three-year period; since then, the software has been deployed at more than 400 BP-owned forecourts in the UK, the Netherlands and Luxembourg. In October, the company announced that the contract had been expanded to another 441 forecourts in Australia and New Zealand, with installations expected from the start of FY23.

One use for the software is to manage the food-to-go counters within BP’s Wild Bean Cafés. These typically contain items such as sausage rolls and pies, which must be kept warm within a specific temperature range and can only remain on the shelves for a limited amount of time. BP has two challenges: ensuring that products are safe to eat and that the right quantities of product are available at the right time (stock outs are as much a problem as food wastage). This encompasses several processes: food cooking, hot hold, food wastage, food safety and product expiry. BP has developed checklists to address the challenges:

The Smart Assets functionality 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. Automated Monitoring can be used for general applications including food safety, general medical and environmental temperature checks. Automated Monitoring + (formerly Tutela from Next Control Systems) 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.

The recent launch of event-driven actions enables users of Checkit’s monitoring technology to feed sensor alerts from equipment or buildings directly into a corrective workflow for action by frontline employees

Checkit has worked with the Birmingham and Solihull Mental Health NHS Foundation Trust’s pharmacy team since 2018. The trust has more than 90 medical fridges across more than 40 sites, storing medicines such as vaccines and insulin as well as controlled drugs. The manual, paper-based system for checking the temperature of fridges was vulnerable to gaps when busy clinical staff did not have time to undertake the checks. This resulted in a costly fridge failure and a Care Quality Commission (CQC) report highlighting the need for a better system. The trust signed up to use Smart Assets software to automate the process. The system collects real-time temperature readings from sensors in all medicines fridges across the trust and presents the data on a central dashboard. This helps management pinpoint variance, errors and potential technical issues, and the trust now has evidence of compliance and is inspection-ready at all times.

Checkit has started selling Smart People functionality to existing Smart Assets customers, for example Hallmark Care Homes and University Hospital Southampton. In these cases, Smart People 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 tracking samples from hospital to lab.

The company has been moving from single, ad hoc contracts with individual hospital departments to contracts covering entire hospitals and trusts, and this is a key area of focus for the business.

The functionality has been designed to support the creation of efficient, low-carbon buildings. The platform integrates information from disparate building energy management systems including energy metering, lighting, environment and occupancy so that the customer can run multiple buildings at maximum efficiency, keeping costs down and reducing CO2 emissions across the board. Sensor integrations include humidity, touch, leak detection, temperature and proximity.

The service has traditionally been more people-based than the other solutions, with a call centre that provides a monitoring service so that when an alert is triggered, someone calls the customer. However, the event-driven actions feature described above should 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.

The Checkit BEMS business unit designs, installs and maintains building energy management systems for new and existing customers. The division has a wide customer base, with Waitrose/John Lewis the largest customer. Revenues are non-recurring in nature, although as the business sometimes signs annual maintenance contracts, a proportion of revenues can be defined as repeatable rather than recurring. The company has decided to transition this business to a SaaS business model with project work being phased out. Ultimately, this business will be merged into the Smart Buildings business within the Checkit Connect division and the company will no longer report on a divisional basis.

The division’s product development plans are 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 workplaces combined with the number of users required at each workplace, giving customers access to unlimited activities (unlike some competitors that price according to volume of activities undertaken). Exhibit 1 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 CWM), a Bluetooth probe for temperature checks and sensors can be purchased outright or paid for on a subscription basis. For sensors, Checkit offers its ‘Peace of Mind’ service – customers can pay one subscription fee to include a lightweight version of the software, installation, support and maintenance of software and hardware, and provision of hardware.

Over time, Checkit expects to be able to integrate with third-party sensor networks. This is likely to reduce the volume of hardware sold by the company and also reduce the need to design and manage the supply chain for 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 year, management has worked to reshape the business to ensure it is built for scale. As the company is shifting its focus from a hardware-based business to a SaaS software business with international ambitions, the structure of the company is evolving 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.

Over the last 12 months, the company has doubled the size of the sales and marketing teams, hiring heads for both. As part of the US acquisition in February, Steve Peck was appointed managing director of the US business to spearhead the overall US growth strategy. The sales pipeline has grown from £2.6m in January to £13.2m in November, with an increasing proportion from tier 1 prospects (from 21% to 66% of the pipeline) and from existing customers (from 33% to 60% of the pipeline).

The company has also strengthened the product engineering team, adding a new head of delivery and a head of development operations. As part of the process of transforming the company into a SaaS-focused business, Salesforce software is being rolled out to all parts of the business (it is already used by the sales team) to bring better visibility and operational control.

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

The company discloses revenue by division and also discloses the split between recurring and non-recurring revenues in each division. The company disclosed pro forma revenues for Checkit Connect and Checkit BEMS for FY20, which we have included in Exhibit 6 for reference.

The company expects to change the way it reports gross margin from the end of FY22, shifting some costs from cost of sales into operating costs. We have reflected this change in FY23. We forecast operating expenses at group level. Excluding depreciation, we forecast operating cost growth of 37% in FY22 (reflecting recent investment in sales, marketing and product development as well as the US acquisition) and to increase by a further 64% in FY23 as the company invests further in its growth strategy. The company incurred exceptional costs of £0.3m in H122, related to the organisational restructure, and we forecast an additional £0.2m in H222. As the company has tax losses carried forward during our forecast period, we assume a tax rate of zero.

We forecast that Checkit will capitalise £1.5m in development costs in FY22 and a further £1m for the digital transformation project. We expect the company to capitalise c £2m in development costs in FY23. The company spends minimal amounts on tangible fixed assets and has property lease commitments of c £0.4m per year.

As subscription licences are paid for 12 months in advance, the company does not have significant working capital requirements. Non-recurring revenues can result in work-in-progress, with inventory at 32 days’ sales outstanding at the end of H122.

Gross/net cash stood at £8.5m at the end of H122 and £6.7m at the end of October. The company received net proceeds of £20m from the recent placing. We forecast net cash of £24.1m at the end of FY22 and £15.3m at the end of FY23.

We summarise the changes to our forecasts below:

With Checkit not expected to hit full year EBITDA profitability within our forecast period, comparison with peer multiples is restricted to EV/sales multiples. The table below shows how Checkit is trading compared to the UK software sector and to the average of c 50 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. As we expect BEMS revenue to drop significantly in FY23, we use FY23 as our reference year as this more accurately reflects the targeted structure of the business.

Checkit trades at a significant discount in both years, even with the revenue decline factored in for FY23, in our view reflecting its current loss-making position and mix of recurring versus non-recurring business. Currently, just over half of Checkit’s revenues could be considered as SaaS-based (ie Checkit Connect revenues), but for FY23 we expect this to increase to more than 90%. Within Checkit Connect, we also expect recurring revenues to increase as a proportion of divisional revenues and expect these to be more highly valued.

As BEMS will make up less than 10% of FY23 revenue and will eventually be merged into Checkit Connect, we have moved away from a sum-of-the-parts valuation, instead basing it on a group sales multiple for FY23. The table below shows the valuation based on a range of EV/Sales multiples.

Valuing the company at the average of UK software peers for FY23e would result in a per share value of 70.1p. For Checkit to be valued more in line with SaaS software peers, investors will want to see further evidence of growth in annualised recurring revenue. Some of this could continue to come from shifting current one-off services onto a subscription basis but, more importantly, it should come from signing up new customers for Checkit’s software. Evidence that new customers are signing up and existing customers are adopting the software on a wider scale would, in our view, be more valuable than reaching break-even. As the business grows, we expect management to start to disclose additional SaaS-type metrics such as bookings, net revenue retention and lifetime value/customer acquisition cost (LTV/CAC), which should give investors better insight into the progress of the business. In our original initiation note (Smarter operations management), as an example of how SaaS companies can grow and are valued, we outlined how accounting software company Xero successfully grew from a market cap of NZ$55m (A$50m) when it first listed (essentially as a start-up) to its current A$21bn market cap.

The company is well funded (£6.7m cash at the end of October plus £20m net proceeds), so following the typical SaaS company strategy of investing in product and sales to grow the business rapidly is well within its means. In our view, investors should consider growth in recurring revenues as the key measure of success in the medium term, rather than seeing EBITDA break-even as the main goal.