Creative Realities, Inc. (NASDAQ:CREX) Q3 2023 Earnings Call Transcript

Creative Realities, Inc. (NASDAQ:CREX) Q3 2023 Earnings Call Transcript November 10, 2023

Creative Realities, Inc. misses on earnings expectations. Reported EPS is $-0.22162 EPS, expectations were $-0.07.

Operator: Good morning. At this time, I would like to welcome everyone to the Third Quarter 2023 Creative Realities, Inc. 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 interim 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.

William Logan: Thank you, and good morning. This is Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to our financial results and earnings call for the three and nine months ended September 30, 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 quarterly financial statements on Form 10-Q filed with the SEC yesterday afternoon, November 9, 2023, and in our annual report on Form 10-K filed with the SEC on March 30, 2023.

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 and in our earnings release that was released yesterday afternoon. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc.

Richard Mills: Thanks, Will. Good morning, everybody. I want to thank everybody for joining. And as always, I want to thank everyone at CRI. Our people make it happen every day, day-in and day-out. So thanks again to all the CRI folks. So now, let's get started. In addition to discussing our third quarter 2023 results, we have a number of important updates and developments, including our updated guidance for 2024. I am pleased to report Q3 2023 revenue of $11.6 million with a gross profit of $5.3 million, both are company records not only for Q3, but for any quarter in the company history. The gross profit margin percentage for the third quarter of 45.8% is a 500 basis point improvement over the same period last year. This continues a trend that was evident in the first and second quarters of this year.

This trend is a key strategic output from growing our higher margin fast revenue, ultimately with a flow through effect to increased cash flow generation. From time-to-time, a large hardware deployment may suppress our margins in a given period temporarily, but with a diminishing impact on a go-forward basis as we continue to scale our SaaS-based annual recurring revenue or ARR. Please keep in mind that hardware sales further seed high margin ARR once the hardware has been deployed and is being utilized for our SaaS services. Adjusted EBITDA for the third quarter came in at $1 million. The third quarter adjusted EBITDA margin of approximately 8.8% reflects the short-term impact of scaling up our operations as we begin the deployment of the Bowling project.

Revenue for the first nine months of the year totals $30.7 million, with a gross profit of $14.7 million. The latter also a company record for the first nine months of any year. The company's gross margin percentage for this period is 47.8%. Adjusted EBITDA on a year-to-date basis is $2.3 million. Our SaaS-based annual recurring revenue run rate now resides at $15.6 million exiting the third quarter on track for our previously communicated year-end exit run rate of $16 million. On October 20, the company communicated revenue estimates of $27.3 million to 29.3 million for the combined third and fourth quarters of 2023, and projected fiscal 2023 record revenue of $46.4 million to $48.4 million. Our third quarter results are in line with those previously communicated projections, and we expect fourth quarter revenue to come in between $16 million and $17 million, also in line with what we communicated in October.

We continue to anticipate that our SaaS-based ARR will approximate $16 million on a run rate basis exiting 2023. Reiterating 2024 guidance for between $60 million and $80 million with anticipated adjusted EBITDA margins between 12% and 15%. We see ARR growing to an exit run rate of $18 million next year. For the first-time in company history, we are projecting positive free cash flow in 2024. I want to take a moment to address the range in revenue we have provided. Exiting the pandemic and following the acquisition of Reflect, we have scaled the business and repeatedly demonstrated an ability to win business due to the platform that we have assembled. Concurrently, we have increased the amount of information that we communicate to investors with an emphasis on leading indicators associated with the scaling of the business and the projected impact on profit generation and value creation.

Information concerning backlog, RFP win rates, revenue growth, projected margin improvements, and that leverage management are intended to educate and transmit our value creation as we continue to execute our strategy. However, it is important for everyone to understand while we control many facets of our business. We don't always control timing as customers ultimately control the cadence of the rollout. The Bowling project is a great example of the points that I just discussed. We have begun to roll out the Bowling project. As you may recall, we had revenue shift forward from the second quarter of this year, due to an unexpected supply chain challenge for equipment that was being procured and delivered by a third-party. The supply chain issue was alleviated and now with installations beginning, we expect to see the benefits of this rollout reflected in future financial performance beginning in the fourth quarter of 2023 and accelerating during and throughout 2024.

To be clear, this contract has not gone anywhere. CRI expects to deliver $35 million-plus in revenue associated with this customer contract. Only the timing has changed and we are confident our shareholders will be rewarded. We believe this clearly demonstrates that we are on the correct path. It is not a matter of, if value will be created, but simply just when. Our pipeline continues to strengthen. Our backlog remains steady at greater than $110 million. Our backlog calculation is comprised of the anticipated rollout of projects as indicated by our current customers already under contract and includes all revenues that would be received by the company by deploying the products and services necessary to service such projects, and includes projected revenues that are not currently subject to binding purchase orders or commitments.

We think that the ranges in revenue and profit for 2024 that we are communicating represent the appropriate goalposts based on the communication and commitments that we have in hand. We will endeavor to refine our projections as the year plays out, but the key concept is that we expect a surface value at an increasing rate going forward. Revenue growth continues to be driven by the fastest rate of new customer acquisition that the company has ever experienced. We are experiencing wins in the CRI key verticals such as retail, digital out of home ad networks, food service, sports and entertainment venues, and media contracts. With an RFP win percentage that approximates 70% over the past 12 months, both our platform and our personnel continue to be widely acknowledged by our vendor partners and customers as best-in-class.

We are actively competing in a significant number of new customer engagements, and our pipeline has simply never been stronger. With significant scale, improvements in profit, tremendous tailwinds for new business, and a strengthening balance sheet, the company is poised for significant value creation. I will turn it back over to Will for a few notes on our business activities. Will?

William Logan: Thanks, Rick. Just a couple of other areas to highlight from our third quarter financial release. On August 17, 2023, the company sold 3 million shares of common stock at a public offering price of $2 per share and received approximately $5.5 million in net proceeds after deducting underwriting fees of $478,000 and offering costs of $68,000. No warrants were issued in this transaction. The offering proceeds are earmarked for two purposes: first, the repayment of the company's currently amortizing note; and second, to bolster working capital through the end of the first quarter 2024 when we expect to transition to generating positive cash flows on a net basis. The company's cash on hand, as of September 30, 2023, increased to $8.4 million from $1.6 million as of December 31, 2022, as a result of the equity offering, collections on accounts receivable, annual billings associated with our SaaS-based contracts, and increases in customer deposits on future deployments, partially offset by investments in software development projects and the repayment of principal on debt.

Proceeds from the public offering have been invested into short-term, government-backed, fixed income securities, yielding in excess of 5%. Through September 30, 2023, the company has repaid approximately $3.9 million in principal on debt in the current calendar year. The company has now repaid in full the $2 million note drawn in October 2022 and has begun making incremental principal debt payments of approximately $379,000 per month related to the company's $7.2 million amortizing note that matures in February of 2025. The company also continues to repay approximately $105,000 per month on its original $2.5 million seller note from the Reflect merger, which currently has five remaining payments. We are working to strengthen our balance sheet by increasing revenues, improving profitability, and managing our debt leverage.

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We entered 2023 with net debt of $19 million and a leverage ratio of approximately 4.9 times. As of the end of the third quarter, our net debt is $8.4 million and our leverage ratio has reduced to 2.6 times utilizing trailing 12-month adjusted EBITDA. While our public offering in August was instrumental to reduce our debt, it is not the only factor at play to reduce leverage. With the revenue and profit projections that we have communicated for 2024, we project a 2024 exit leverage ratio of between 1.2 times and 1.5 times, barring any additional financing or strategic opportunities. We believe the risk profile of the company is substantially changed and will continue to significantly improve throughout 2024. Rick, would you please provide an update on our customer acquisitions and previously announced customer activities?

Richard Mills: Thanks, Will. I want to highlight several of our customer engagements and other initiatives. First, I'd like to provide an update on a previous announcement. During our second quarter earnings call, we discussed CRI's RFP victory of the Panera Bread business, whereby we were selected as the go-forward digital provider for both indoor menu boards and the digital drive-through. At that time, we had also indicated a press release would be forthcoming, outlining the details of engagement. Throughout 2023, we have worked hand-in-hand with the customer on test sites, content layouts, and custom integrations within our software to provide maximum flexibility and capability for Panera's digital initiatives. As of today, all Panera sites with digital signage have been transitioned to the CRI platform, and we are beginning to install both indoor digital menu boards and digital drive-through outdoor menu board solutions beginning with their new construction and remodel sites in Q4 of this year.

We are actively working with Panera on their evaluation of existing site retrofit activities and ultimately a launch which will allow franchisees to opt into the digital program. Panera is utilizing CRI hardware and deployment, our clarity content management system, as well as day two services including content creation and management. Panera had a change in CEO in July of 2023, which altered the timing of our press release announcing our partnership. I want to reiterate that CRI remains Panera's digital signage provider, that CRI has received high price from Panera thus far, and that Panera has already provided referrals into other QSR brands in lieu of the formal press release. The partnership is alive, well, and we look for this customer to accelerate its adoption of our technology throughout 2024.

When a brand like Panera trusts you, many others are set to follow. BCTV or bowling, we discussed during the second quarter call that the supply chain hurdles were conquered in July, which put us on a path towards deployment. We have been working diligently in Q3 to complete the site surveys, having now completed over 300, and beginning the electrical installation site prep work. Our first complete signage installations are scheduled for next week and our team is excited to be moving into the installation phase. Q4 will be the first period with material revenue from this engagement which should accelerate through the first half of 2024. So enough of bowling, let's talk about another customer, The Human Bean. The Human Bean was founded in 1998 with a commitment to developing the very best coffee drive-through in Southern Oregon.

Today, their franchise family spans hundreds of locations open and/or in development across the country. As stated by Janie Page, who is the chief marketing officer at The Human Bean. Our collaboration with creative realities enables us to blend technology seamlessly with our friendly service, ensuring our guests enjoy both convenience and the genuine warmth that defines The Human Bean, now and in the future. We love the following statement on The Human Bean home page. Today is the smallest we will ever be. When hundreds of stores turn into thousands, we will always treat our people like good human beings. What a great philosophy. Okay. Another customer, Six Flags and Cedar Fair. Well, they've been in the news this week. Earlier this week, two of our customers, Cedar Fair and Six Flags, announced plans to merge to create an expansive amusement park operator with operations spread across 17 U.S. States and three countries.

The combined company will boast 27 amusement parks, 15 water parks, and nine resort properties in the U.S., Canada, and Mexico. The combined entity is utilizing our CMS and ad serving platforms to power 100% of the Fun Tv network along with all their food service venues. More to come in 2024, assuming the merger closes, but we do not expect the merger to negatively impact our business with these two customers, and we intend to seek out additional cross-sell opportunities when appropriate. Another new customer win, Black Rifle Coffee. CRI executed an agreement with Black Rifle in Q4, which will see the customer transition all of their current screens to our Clarity CMS platform. The customer had previously deployed with another software provider, but was not happy with the breadth of features and functionality and the customer support it received.

We expect this customer to significantly expand its footprint in the second half of 2024 and throughout 2025, which will generate incremental revenue opportunities for CRI. This provides another key example of how CRI's full service approach resonates with customers in the market and evidence our ability to compete and win new business, even in the instances where the customer has previously chosen another provider. Retail media networks, as we remain in discussion with multiple potential prospects who are evaluating the build out of retail media networks throughout their physical locations. We intend to keep you all updated as these conversations evolve. The opportunity continues to grow in both quantity and scale. Okay, so that's really an update on some customer activities.

A couple other pieces, I want to highlight. 2023 Stock Incentive Plan, the CRI Board of Directors approved a 2023 Stock Incentive Plan on November 8, 2023, authorizing the potential future issuance of up to 1.5 million shares of common stock. The company's previous plan, which was initiated in 2014, expired in April of this past year. This plan was designed to provide tools for management to increase shareholder value and advance the interest of the company by furnishing economic incentives designed to recruit, retain, and motivate key employees, consultants, and other individuals that provide services to the company. Along with tremendous growth and transformation that the CRI team is delivering, comes the need to drive and reward productivity and incentive plan such as this is an effective vehicle for doing so.

Any awards issued under this plan would be subject to board approval. We intend to seek shareholder approval of the plan in the future via our annual proxy procedures in the normal course. And until we receive approval, we will not issue any shares of common stock under the plan and no options will be able to be exercised. One other parting note, I want to give a shout out to Dennis McGill. I want to take a moment and acknowledge Dennis McGill, who has served as our Board Chairman for the past four years. On November 8, 2023, Dennis McGill resigned as Chairman and as a Director of the company effective immediately. Mr. McGill resigned for family reasons and did not resign as a result of any matter relating to the company's operations, policies, or practices.

As a result of Mr. McGill's resignation, I have been appointed to serve as Chairman of the Board of Directors. Following Mr. McGill's resignation, the Board of Directors approved a reduction in the size of the board to four directors. The board does plan to evaluate adding another member with formal search activities likely to occur in 2024. Dennis's contributions to the CRI Board were meaningful with tremendous focus on completing the company's platform and a drive towards generating profitability, each of which have provided lessons for us into the future. We fought through COVID disruption together, and Dennis has added tremendous value as we transformed the company into a true service SaaS provider. What a journey. Thank you, Dennis McGill.

Will, any further commentary you'd like to add to our Q3 2023 results?

William Logan: Thank you, Rick. An overview of our financial results for the quarter and year-to-date periods were provided in our earnings release report yesterday afternoon, which included the condensed consolidated balance sheet as of September 30, 2023, along with the condensed consolidated statement of operations and statement of cash flows for the nine months ended September 30, 2023, as well as a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the current and immediately preceding four quarters. Regarding the results for the three and nine months ended September 30, 2023, we note that the MD&A section of our interim report on Form 10-Q provides reviewed financial information. In the interest of time and in light of insights and comments provided earlier in this call, we will move to the Q&A portion of the call at this time.

Operator: Certainly. [Operator Instructions] And our first question will be coming from Brian Kinstlinger of Alliance Global Partners. Your line is open.

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