Creative Realities Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 10, 2024

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Creative Realities Incorporated Earnings Call for Quarter Ended March 31, 2024. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Will Logan, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Welcome to our earnings call for the Q1 ended March 31, 2024.

Speaker 2

I would like

Speaker 1

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 Form 10 Q filed with the SEC this morning, May 10, 2024, and in our annual report on Form 10 ks 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.

Speaker 1

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 issued this morning. We believe the use of certain non GAAP measures such as adjusted EBITDA and several other important KPIs represent meaningful ways to track our performance. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities.

Speaker 3

Thanks, Will, and good morning, everybody. Thank you for joining. Once again, we posted record quarterly results for the Q1. I want to thank everyone at CRI. Your dedication to our customers and our company mission is what makes me excited to come in every day.

Speaker 3

I am pleased to report the following for Q1, 2024. Record first quarter revenue of $12,300,000 up 23.5 percent from $9,900,000 in the prior year. Record first quarter gross profit of $5,800,000 up from $5,100,000 in 2023. Adjusted EBITDA of approximately $800,000 against $1,000,000 last year. And finally, annual recurring revenue or ARR at an annual run rate of 17,700,000 dollars versus $16,300,000 at the end of the Q4.

Speaker 3

We are off to a great start in fiscal 2024 with strong revenue growth and solid margins. Plus, our sales funnel continues to expand, which is very encouraging. We remain on track to deliver record results for the full year. 1st quarter revenue increased by 23.5% versus 2023 despite typical 1st quarter seasonality as deployments are initiated or restarted and budget cycles reset. While our consolidated gross margin was lower than the Q1 in 2023 on a percentage basis, it increased in absolute dollars.

Speaker 3

This reflected our revenue mix. The 45% year over year growth in service revenue included significantly higher installations where the margins are not as high as those for our other services including SaaS. Hence, the slightly lower gross margin year over year. However, it is important to note that greater installation activity ultimately leads to higher subscription revenue going forward as deployed hardware utilizes our SaaS solutions. At the end of the Q1, our ARR stood at an all time high of approximately $17,700,000 on an annual run rate basis.

Speaker 3

This is an increase of $1,400,000 from where we ended 2023 at 16,300,000 dollars When we announced our 2023 Q4 results this past March, we increased our ARR guidance for exiting 2024 from $18,000,000 to $20,000,000 run rate. We affirm that guidance today. As we have stated repeatedly, this is an all important metric as it provides enhanced visibility into higher margin revenue and improved cash flow generation as well as the increasing trust our customers place in our technology enhanced solution. Now let's take a moment to go through our recent refinancing announcement. The company has entered into a commitment letter to secure a new $20,000,000 senior revolving credit facility with an additional $5,000,000 accordion feature on top of the $20,000,000 We expect to finalize the credit facility next week.

Speaker 3

I cannot overstate the strategic importance and potential value creation implications of this new facility. As you know, the company has a commitment to disciplined debt deleveraging over the past 18 months, working in lock step with our revenue growth and improved profitability. While we were initially targeting the back half of twenty twenty four for a recapitalization of our existing debt, which was scheduled to mature in 2025, we have always articulated a desire to do so sooner if practical and attractive. Due to the company's strong performance, we are taking advantage of the opportunity to secure this financing earlier than anticipated. Under favorable terms and a more conventional banking partner.

Speaker 3

The company has clearly earned the trust of a number of financial institutions. I want to restate the implications of this financing. Number 1, it is transformational in nature with potential for significant lending capacity. 2, provides a tremendous upgrade to our balance sheet by shifting debt from short term to long term in nature. 3, it allows for flexibility and support for a strong pipeline of organic and acquisition growth opportunities.

Speaker 3

Finally, it has the capability of unlocking strategic options for the company. Proceeds from the new credit facility will initially be utilized to repay all outstanding debt held by Slipstream Communications, which currently stands at approximately $13,600,000 There are no prepayment penalties associated with refinancing the existing debt. We want to thank Slipstream and their parent, Pegasus Capital Advisors, who remains a shareholder for supporting our management's vision and collaborating to build a world class digital signage and digital media platform. While the new facility will have a variable interest rate that currently is equivalent to the weighted cost of our existing debt, but with the opportunity to decrease as interest rates decline. We look forward to updating our shareholders once the credit facility has been finalized.

Speaker 3

This is a tremendous turn of events for CRI and I want to thank Will Logan, George Sowder and the entire finance team for putting this package together. It is great news for CRI. Now I'll turn it back over to Will to share some additional comments on our financials. Will?

Speaker 1

Thank you, Rick. An overview of our financial results for the Q1 of 2024 were provided in our first quarter earnings release and Form 10 Q each filed this morning, which included the condensed consolidated balance sheet as of March 31, 2024, the condensed consolidated statement of operations and statement of cash flows for the 3 months ended March 31, 2024, as well as a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the 3 months ended March 31, 2024 and the preceding four quarters. I want to reiterate what Rick stated with respect to the refinancing strategy we are now implementing. It will improve our financial flexibility, strengthen the balance sheet and should lead to lower interest expense over time. We are excited about bolstering our ability to support future growth and ultimately returns to shareholders.

Speaker 1

Now a couple of additional points of context related to our balance sheet. Cash. As of March 31, 2024, the company had cash on hand of approximately $2,900,000 virtually equivalent to the balance sheet at the end of 2023 despite continued repayments of debt principal during the Q1 of approximately $1,100,000 Gross and net debt stood at $15,100,000 $12,200,000 respectively at the start of 2024. These numbers now stand at $14,000,000 $11,100,000 respectively at the end of the Q1. On a trailing 12 month basis, utilizing adjusted EBITDA, the leverage ratio on gross and net basis were 2.9 and 2.3 respectively as of March 31, 2024.

Speaker 1

As we have discussed before, this is vastly improved from the 5.4x and 5.0x for gross and net debt at the end of 2022. We believe that the risk profile of the company continues to favorably change, a key to obtaining our new financing. As Rick mentioned, the new credit facility will be non amortizing and provides flexibility for the company to continue to evaluate and migrate to an optimized capital structure in support of growth. I will turn it back to Rick for additional comments on our results and customer activities.

Speaker 3

Thanks, Will. A few additional updates on customer and operational activities. BCTV, this project continues to move forward, but remains slower than originally anticipated. We completed 8 locations in 2023, 54 locations in 1Q20 4 at an average sale price of $27,000 We currently expect similar results for Q2 and beyond. While the ramp has been extended, the opportunity is not lost and the customer remains focused on ultimately achieving deployment of 1,000 locations for its ad based network.

Speaker 3

Starlight Media, we deployed another 150 locations in 1Q 2024 and are expecting to receive another order of 250 sites in Q2 for deployment in the second half of this year. Assuming that the media revenue generated by our customer from this network provides an adequate ROI, CRI would expect to supply hardware and complete installation of additional 1,000 units in 2025. The average sale price for a unit inclusive of installation is approximately 12,000 per location. During our year end earnings call in March, I discussed a retail media network for a financial institution that had selected CRI as its partner for an initial deployment of 6.50 sites. We installed 170 in Q1.

Speaker 3

We expect another 185 in 2Q. Upon completion of the initial deployment, we anticipate finishing in Q3, the customer has indicated they will evaluate their media revenue for the balance of 2024 and then make decisions about additional locations for 2025 and beyond. The network has the potential to expand to 40,000 locations in the U. S. Icebox network.

Speaker 3

We have converted all 85 of their test sites to our CMS and ad serving platform. This advertising network could begin rapid deployment as early as Q3 and we would expect an initial deployment of 5,000 plus locations. Finally, adoption of our drive thru solution for quick serve restaurants continues to accelerate. This product continues to be a key driver in both new customer acquisition and existing customer expansion opportunities And our product is very, very competitive. We are installing a drive through every business day somewhere in the U.

Speaker 3

S. And expect to grow that number. Couple of other noteworthy items. We have engaged Darrow Associates as our IR firm. We are very pleased with the team and their activities.

Speaker 3

Frankly, they're working me pretty hard. We've recently presented at several MicroCap Conferences and the organizer of 1 of the conferences commented that the most requested meeting from potential investors was with CRI. Clearly, we are doing something right. And finally, an update on our ERP conversion. We are on track for the transition to NetSuite on July 1.

Speaker 3

This will result in significant improvements to our workflow, internal data accuracy, cost management, etcetera. I could go on and on about the benefits. Suffice to say, this will provide operational efficiency in the quarters years to come. With that, we'll now move to the Q and A portion of the call. Please go ahead, operator.

Operator

Thank you. Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is now open.

Speaker 4

Great. Thanks. Can you talk about business development? You've definitely talked about some of the wins you've already had. You mentioned a sales funnel that continues to grow.

Speaker 4

What verticals would you say you're seeing the most demand in? I mean is there any way to quantify bookings somehow in the quarter, maybe number of new logos, total contract value, any way to think about how that business development played out?

Speaker 3

Brian, great question. The verticals that we're seeing tremendous activity in, number 1, our QSR space, right, specifically led by the drive through seeing tremendous engagement with a number of QSR brands. Number 2, would be our sports and entertainment. We are clearly engaged with somewhere between 10 15 professional teams for large stadium overhauls. So we'll see how that goes.

Speaker 3

Number 3rd vertical is retail media networks, lots of conversations. Now those transactions tend to move a little slower because they tend to be very big in nature and there's a whole lot of complexity around building a retail media network. So that's really it. In terms of new logo wins, not a lot of new logo wins in Q1. We expect that to change in Q2 and beyond.

Speaker 4

Great. That's helpful. And then is there any change to the revenue guidance range given the slower ramp discussion on DCTV or was this contemplated in the low end of the range? And then the second piece of the question, given the heavy services component that you saw in the Q1, is there any thought to for the year a change in your thought on the mix that may result in a slightly lower EBITDA margin for the year? Or is that a 1 quarter phenomenon?

Speaker 3

So far, we believe it's a 1 quarter phenomenon. Yes, we are very comfortable. As we have always indicated, our quarters will be a minimum of 20% to 40% increase over last year. We are still firm in our guidance on $60,000,000 in revenue. Yes, we had contemplated bowling in the lower end of the guidance, Brian.

Speaker 3

I will tell you even though bowling is going to be even a little light of where we contemplated it, we believe we will make it up in other parts of the business. In terms of the relative overall mix, I'm going to throw that one to Will Logan.

Speaker 5

Yes. I think, Brian, we're used to seeing what you've kind of seen here. 4th quarter, we had large hardware that resulted in a roll into Q1 of large or higher than maybe historical installation activities that will then roll into the services bucket. I think expect that trend to continue, but we're not ready to change the overall mix that we expect for the year. So would expect we would trend back towards a higher mix on the hardware side as more deployments are pre purchased or purchased in 2Q and 3Q for deployment later in the year.

Speaker 5

Shouldn't have any impact negatively on our projection for EBITDA margin as we talked about coming into the year, we thought we'd be closer to fifty-fifty or forty-sixty hardware services. Still think we're on track for that for the full year. Just might look a little lumpy or different each quarter.

Speaker 4

Great. Last question I have, you talked about a lot of different clients. The only one client I haven't heard about, I don't think, in the last two quarters is Panera. I know they obviously had some management changes there that maybe changed the short term opportunity. Maybe talk about what's happening there?

Speaker 4

Are you installing? I probably should have checked. I'm not sure if there's new stores coming out. Just maybe an update on what's happening there?

Speaker 3

Yes. We are fully ingrained into Panera. We're fully integrated to their point of sale And all new Panera store openings are getting a new digital drive through of some configuration. So we're on the construction schedule now. And as a ballpark, we expect them to open 40 to 60 locations a year.

Speaker 3

We are anticipating that we will be added ultimately to the remodel schedule sometime later in this year. But as you know, Panera has filed documents with the SEC and is ultimately looking to go public. And we don't expect a material change until they solve that issue that they're trying to solve with going public.

Speaker 4

Thanks for taking all my questions.

Speaker 3

Yes.

Operator

Thank you. One moment for our next question, please. Our next question will come from the line of Howard Halpern with Taglich Brothers. Your line is now open.

Speaker 6

Hi, congratulations on a great start to the year. Could you, I guess, talk a little bit about how you are going about by deepening your relationships with existing customers and expanding on what you already on the platforms that you already have for those customers?

Speaker 2

Well,

Speaker 3

we continue to add services and the customers tend to expand with our services. For example, we brought on a number of customers with the Reflect acquisition that we did several years ago, Howard, right?

Speaker 6

Right.

Speaker 3

Every one of those customers today, their revenue is higher than when we acquired the customer. Number 2, they're buying more services across the board out of our we have approximately 10 essential services and they're buying more out of each bucket. So that's generally true of all of our customers.

Speaker 5

Howard, I would also add that we're seeing a lot of our retail C store customers who were not initially in the monetization game. They're just procuring our CMS software for content management today, beginning to trial, test, explore and ask for our ad tech software as an incremental layer. So as we think about an upsell opportunity, that's where we're seeing the most traction.

Speaker 6

Okay. And I guess just could you give, I don't know, what type of margins as that area builds can we see dropping I guess to the bottom line as they continue to monetize your services?

Speaker 5

Will? Yes, Howard, we're selling the ad tech layer right now on a SaaS basis. So if it's an existing customer that's already deployed and is adding that, that would be incremental price per device per month that should be consistent with our other SaaS offerings, 90% margin on a pure basis, 75% to 80% on a fully loaded basis. So that's a big opportunity. On some of the other customers that Rick talks about where we are growing or expanding services where folks have acquired our software already and we were not the full services provider, expect us to continue to expand the offering with hardware and installation activities.

Speaker 5

So same as the rest of our revenue from a profitability standpoint or a margin view depending on the service that we upsell or cross sell.

Speaker 6

Okay. And just one last one, what are you seeing in the competitive environment? I mean, are you when you get submit your proposals, are you winning a good majority of the business that you submit for?

Speaker 3

Yes, Howard. We typically have a track record of when we're invited and we participate, we win about 70% of the engagements. Okay. And I would tell you that we have been invited. We continue to grow in invitations, if you will.

Speaker 3

As we've gotten larger and have really expanded the base across the United States and are truly operating in the enterprise territory, Every enterprise customer generally has CRI on the list somewhere to have a discussion with.

Speaker 6

Okay. That sounds great. Keep up the good work guys.

Speaker 5

Thanks Howard.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Samuel McGoughgan with Breakout Investors. Your line is open.

Speaker 2

Congratulations. It's an exciting start to the year. I just had a couple of questions. One was about now that you've got the new financing, well, almost in place. I just wondered if that changes your kind of your priorities in terms of kind of deleveraging versus potentially like acquiring other companies.

Speaker 2

I just wondered if you now that you have that in place or almost in place, whether you're kind of leaning more towards doing acquisitions sooner than later or if that's kind of changed the outlook there at all?

Speaker 3

Great question, Samuel. Thanks for asking. We've always been acquisition inquisitive, if you will. We continue to look at the marketplace. The difference is before we had minimal capacity.

Speaker 3

Today, I have capacity. The issue still remains buying and acquiring somebody at reasonable multiples and valuations will always tend to be the hurdle. But if we found the right company, it is something we would certainly be laser focused on.

Speaker 5

Yes, Samuel, no change in strategic focus. We're just excited that the strategic optionality now exists should something come.

Speaker 2

Yes. It's brilliant news. Thanks for the color there. My second question was on the expenses. They have come up a little bit, especially the kind of admin expense.

Speaker 2

I just wondered if that's kind of about where it will stay for the rest of the year?

Speaker 3

My comment to you would be yes. Go ahead, Will. Go ahead.

Speaker 5

Yes, Samuel. We've done some incremental investments. We've talked about the ERP application. We've brought a couple of incremental sales folks. Those are things in the 1Q filing that should remain consistent throughout the rest of 2024.

Speaker 5

We've built up that infrastructure and don't look to expand that through the calendar year.

Speaker 2

Brilliant. Last one from me was just on your backlog. I think the last I heard it was about at 100 and $10,000,000 Is it about in the same range?

Speaker 3

I would tell you it's in the same range. It is slightly reduced from those numbers, but still very significant.

Speaker 2

Yes. Okay, brilliant. That's all from me, but congratulations again and looking forward to next quarter.

Speaker 3

Thank you.

Operator

Thank you. And at this time, I'm showing no further questions. I'd like to hand the conference back to Mr. Rick Mills for closing remarks.

Speaker 3

Thank you. Let me conclude the call by thanking all our shareholders, clients, partners and employees for their continuing efforts, commitment and support as we work together to transform creative realities into leading brand in digital signage solutions. We look forward to speaking with you again next quarter.

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Key Takeaways

  • Creative Realities delivered record Q1 revenue of $12.3 M (up 23.5% YoY), gross profit of $5.8 M and ARR at a $17.7 M annual run rate, while reaffirming full‐year revenue guidance of $60 M.
  • The company secured a $20 M senior revolving credit facility (plus a $5 M accordion) to refinance $13.6 M of existing debt, shift to long‐term financing and provide flexibility for organic growth and acquisitions.
  • Service revenue jumped 45% YoY due to higher installation activity, which will drive future SaaS subscription revenue despite a slight dip in gross margin percentage.
  • Deployment momentum continues with Starlight Media (150 sites in Q1, 250 more in Q2), conversion of Icebox’s 85 test sites with a potential 5,000+ network rollout, and daily QSR drive-thru installations across the U.S.
  • Operational enhancements include an ERP conversion to NetSuite by July 1 and engagement of Darrow Associates for IR, both aimed at boosting efficiency and investor visibility.
A.I. generated. May contain errors.
Earnings Conference Call
Creative Realities Q1 2024
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