Creative Realities, Inc. (NASDAQ:CREX) Q4 2023 Earnings Call Transcript
Creative Realities, Inc. (NASDAQ:CREX) Q4 2023 Earnings Call Transcript March 21, 2024
Creative Realities, Inc. misses on earnings expectations. Reported EPS is $-0.22 EPS, expectations were $-0.1. CREX isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. At this time, I would like to welcome everyone to Creative Realities Incorporated 2023 year-end earnings conference call. This call will be recorded, and a copy will be available on the company's website at cri.com. Following the completion of the call, the company has prepared remarks summarizing the fourth quarter and calendar year 2023 financial results, along with additional industry and company updates. Joining me on the call today is Rick Mills, CEO; and Will Logan, CFO. Thank you very much. Mr. Logan, you may begin.
Will Logan: Thank you, and good morning. I'm Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to our financial results and earnings call for the year ended December 31, 2023. I would like to take this opportunity to remind you that our remarks today will include forward looking statements. The words anticipated, will, believes, expects, intends, plans, estimates, projects, should, may, propose, and similar expressions, or the negative versions of such words or expressions as they relate to us or our management are intended to identify forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in our annual report on Form 10-K filed with the SEC on March 21, 2024.
Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our public filings in our earnings release that was issued this morning. Use of non-GAAP measures, such as adjusted EBITDA and several other important KPIs will be discussed by management during today's conference call because we believe they represent meaningful ways to track our performance. After several years of economic, geopolitical, and healthcare uncertainties, we are very pleased with the progress of our business has made, particularly through the course of 2023 is our intent to provide investors with appropriate disclosures and transparency to measure our success.
With that, it is now my pleasure to introduce Rick Mills, CEO of Creative Realities to kick things off.
Richard Mills: Thanks, Will. Good morning, everybody. Thank you for joining the call. For fiscal 2023, we posted record quarterly and annual results in almost every aspect with which we measure our company today. I want to thank everybody at CRI for making it happen day in and day out. Let's get started. I'm really pleased to report the following. For Q4 2023, an all-time quarterly record revenue of $14.5 million, an all-time quarterly record gross profit of $7.5 million, an all-time quarterly record of adjusted EBITDA of $2.8 million, and for fiscal year 2023, all-time annual record revenue of $45.2 million, all-time annual record gross profit of $22.2 million. I know it sounds like a broken record all-time annual, but we're achieving great results.
Operating income of $1.3 million, which marks the first time that the company has posted a positive result on an annual basis. All-time annual record of adjusted EBITDA of $5.1 million and an all-time annual record of 11.2% of revenue for the EBITDA, growth of annual recurring revenue or ARR to an all-time record $16.3 million run rate exiting 2023. Additionally, our ARR run rate as we sit today here in middle of March now stands at an all-time high of $17.7 million. This is an important metric as it provides enhanced visibility into our high-margin revenues as well as the increasing trust our customers are placing in our enhanced solutions. I hope everyone can see the spectacular performance, tremendous execution, and continued focus on profitability and debt reductions.
Well done, team. I will turn it back over to Will for a few notes on our business activity.
Will Logan: Thanks, Rick. I'd like to add some additional context and information about our financial statements and position. First, with respect to cash, as of December 31, 2023, the company had cash on hand of approximately $2.9 million. As of the date of this earnings release, the company has cash on hand of approximately $4.5 million despite repayment of approximately $1 million in additional debt principal since January 1, 2024, driven in part by customers with annual SaaS billings at the start of each calendar year. As we stated when we completed our equity offering last August, we believe the company has sufficient cash to continue to repay its currently amortizing debt obligation until such time as the company generates free cash flows on a net basis.
Next, I'll cover our net debt position. As of December 31, 2023, the company had outstanding principal debt of approximately $15.1 million, resulting in net debt of approximately $12.2 million as of that date. This represents a reduction of approximately $7 million in net debt as compared to December 31, 2022, at which point net debt was $19 million. The company continues to repay approximately $370,000 in debt principal monthly with a focus to reduce its leverage ratio to between 1.0 and 1.5 times by December 31, 2024. As of the date of this earnings release, the company's net debt position is approximately $9.5 million. We continue to focus on strengthening our balance sheet by increasing revenue, improving profitability, and managing our debt leverage.
We entered 2023 with net debt of $19 million and a leverage ratio of approximately 5 times. As of the end of the two of 2023, our leverage ratio has reduced to approximately 2.4 times on trailing 12-month adjusted EBITDA. We believe the risk profile of the company has substantially altered and will continue to significantly improve throughout 2024. In connection with entering into a significant new multiyear media sales contract during the fourth quarter of 2023, the company modified its accounting for media sales to be recorded at net rather than gross beginning in Q4 2023 and in forward periods. This change has and will continue to have the effect of recognizing revenues at a lower value than under previous reporting for similar transactions.
Revenues were reduced by $0.9 million for Q4 2023 and fiscal 2023, respectively as a result of this change. While this change will not impact gross profit, operating income, adjusted EBITDA, or net income in terms of absolute dollars over the life of the contracts, the percentage of such metrics as a factor of sales in the reporting period, their book does change. In a manner, management believes it's more appropriate depiction of the actual profitability of the company. The results reported in Q4 2023 are records under either reporting methodology and the company's calculation of ARR is completely unaffected by these contract amendments. I'll turn it back to Rick for additional comments on our results and customer activities.
Richard Mills: Thanks, Will. There is no doubt that 2023 was another transformable year for the company and the performance that we have reported for Q4 and fiscal year 2023 are a solid foundation for ongoing growth going forward. I'd like to address certain results in more detail, how they tie into our strategy and value creation plan and how this represents momentum for our performance in 2024. As we have detailed previously, due to significant new customer acquisitions, we have projected a step function increase in revenue beginning with Q4 2023. This has been achieved, and we see this continuing in 2024 and beyond. While we are not revising our revenue guidance for 2024 at this point in time, we project between 20% and 40% revenue growth for each year-over-year quarter in 2024.
This allows us to account for seasonality as Q1 is our traditionally slowest quarter with budget approvals happening and then project ramp-ups then comes Q2 in Q3, where things tend to be moving at full speed. And finally, Q4, where you have a slowing of projects as Thanksgiving and Christmas appear on the horizon. Exceptions to Q4 can occur when customers have money to spend on equipment at year end and occasionally do. Let's talk about our overperformance, over-execution, and our ARR against prior projections and how important it is with respect to meeting or exceeding our revenue and profitability projections moving forward. The fact that we were able to outperform on ARR helped the company to substantially achieve its revenue projections in Q4 with superior gross profit despite delayed rollouts of major customer deployments.
In addition, new customer contracts and pricing changes have already driven our ARR on SaaS to $17.7 million, well on its way to exceeding the $18 million in guidance we had previously conveyed for fiscal 2024. Therefore, we are increasing the 2024 guidance for exit run rate ARR on our SaaS-based subscription license revenue from $18 million to $20 million. This will have a significant impact on future profitability, increasing ARR will continue to drive improved profitability and free cash flow as we accelerate top-line growth throughout 2024. In conjunction with this step change in revenue supported by new customer acquisitions and significantly higher ARR is improved profitability. We are at an inflection point where every new dollar in revenue is coming to us with improved margins.
So we are beginning to benefit from meaningful operating leverage, which has further implications for improving our capital structure, investing in our platforms, and potentially enabling future acquisitions. We've also discussed how we intend to pay down debt in 2024, delevering the company and strengthening our balance sheet. Since reporting our results, we reduced gross long-term debt to $15.1 million at the end of 2023 from $17.2 million previously. And as of today, our debt now stands at approximately $14 million, down another $2 million since the start of the year. With $4.5 million in cash on hand at present, net debt stands at approximately $9.5 million. And utilizing our trailing adjusted EBITDA at $5.1 million as of the end of 2023, our leverage ratio amounts to 2.7 times on gross debt and 1.9 times on net debt.
This is vastly improved from the 5.4 and 5.0 times for gross and net debt at the end of 2022. We believe that the risk profile of the company has changed dramatically and is much more favorable. We intend to continue using cash to pay down debt and delever the company in the quarters to come. I cannot overstate the strategic importance of these accomplishments as they unlock numerous commercial and strategic options in the back half of the year and in dealing with the maturity of long-term debt obligations in 2025. Now let's address a couple of other items. Number one, customer concentration; number two, customer retention; and then three, just some updated customer activities. In 2022, there were four customers that accounted for 54% of the total revenue of the company.
With additional customer acquisition throughout 2022 and 2023, no single customer exceeded 10% of the company's revenue in 2023. Customer retention on a dollar-for-dollar basis is in excess of 100% for 2023, all trending in the right direction for a company like us is focused on the enterprise marketplace. Okay, some other activities channel program, we launched a channel program formally on February 1, starting small, but we're already approaching 100 licenses. It's all pure SaaS play from SMBs that CRI would not otherwise penetrate. Goal is to ramp up to 1,000 licenses quickly generating additional SaaS revenue. Bowling or BCTV, we did absorb some start-up costs in 2023, it was $400,000, primarily consisting of onboarding and training of the team prior to installations beginning.
We performed eight installations in 2023 at an average sale price of $27,000 per location. Q1 2024 looks to be 50 to 60 locations installed with acceleration happening throughout Q2 and Q3. Our new retail media network, we landed another customer at this point, unnamed. This customer in the financial sector and has chosen us as their deployment partner. This includes our ad tech software with initial deployment of 650 sites and approximately 1,300 screens. It will generate $16,000 a month in SaaS once these are fully deployed by the end of Q2 this year. They will evaluate the success of media revenue over the summer and could deploy thousands of locations in the future. Starlite Media, this ad base network continues to transition from static to digital.
We expect this network to convert and/or add several hundred locations to digital every quarter throughout 2024 and 2025. Starlite's premium network is known for its big, bright, and bold displays in outdoor shopping centers across the US. Our drive-thru product introduced the product in 2021 just coming out of COVID. Today this product line is continuing to accelerate, and we believe we are one of the largest suppliers of drive-thru solutions in the QSR industry. On average, every business day in America we are installing one or more drive-thru solutions somewhere. Finally, let's discuss our transition to a comprehensive company-wide ERP solution. We are heads down in the middle of this project. We are in process of transitioning from the planning and setup stages to the implementation and utilized phase.
Our first department or departments come online in Q2. More to come on this as the company completes the transition to this ERP solution this year. Will, any further commentary you'd like to add on our Q4 and 2023 annual results?
Will Logan: Thanks, Rick. In the interest of time and in light of the insights and comments provided earlier on the call, I think we'll move into the Q&A portion of the call at this time.
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