Creative Realities Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 14, 2025

There are 6 speakers on the call.

Operator

Good morning. This time, I would like to welcome everyone to Creative Realities twenty twenty five First Quarter 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 for the first quarter along with additional industry and company updates. Joining me on the call today is Rick Mills, Chief Executive Officer George Saunders, chief strategy officer and Ryan Mudd, chief financial officer.

Operator

Mister Mudd, you may begin.

Speaker 1

Thank you, and good morning, everyone. Welcome to our earnings call for the first quarter ended 03/31/2025. I would like to take this opportunity to remind you that 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 such statements.

Speaker 1

Factors that could cause these results to differ materially are set forth in our Form 10 ks and other subsequent filings with the SEC. 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 issued this morning. Investors are encouraged to review these materials.

Speaker 1

We believe the use of these 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 2

Thanks, Ryan. Good morning, everybody. Thank you for joining. I'll start by giving some details of our first quarter financials. We posted revenue of $9,700,000 this quarter versus $12,300,000 in Q1 of twenty twenty four.

Speaker 2

As I previously discussed, this revenue decrease is a direct result of installation timing on several large projects. We expect increased revenue as the year progresses. Gross profit was 4,500,000 in the twenty twenty five first quarter versus $5,800,000 last year. Gross margin was 46%, roughly in line with the prior year period. Annual recurring revenue, or ARR, was at a run rate of $17,300,000 at the end of the quarter versus $16,800,000 at the start of twenty twenty five.

Speaker 2

As we discussed on our last earnings call, and similar to the fourth quarter, deployment timing was expected to impact the Q1 results, particularly our revenue and gross profit level. However, our adjusted EBITDA of 500,000.0 was nominally changed versus last year and the previous quarter due to our active management of underlying overhead costs, such that the aggregate SG and A expenses were down 11% to $5,200,000 this year versus $5,800,000 in the first quarter of twenty twenty four. Operating costs were also down sequentially from $5,600,000 in Q4. These reductions will improve profitability as revenue scales back for the balance of the year. And while our debt rose this quarter, it was largely due to the previously discussed settlement of our contingent liability.

Speaker 2

As a reminder, at 12/31/2024, CRI carried a contingent liability on its balance sheet of approximately $12,800,000 from the merger with Reflex Systems Inc. In 2022 that was to become payable in February of twenty twenty five. We ultimately resolved the matter for $3,000,000 in cash utilizing our credit agreement, a $4,000,000 30 month promissory note that includes a balloon payment in September of twenty twenty seven, and the issuance of some warrants. We believe this settlement effectively provides us additional long term financial visibility and flexibility. We replaced some $12,800,000 in contingent liability risk and roughly $13,000,000 of debt with $23,200,000 of debt, which includes some short term working capital increases, as Ryan and Mudd will review in a moment.

Speaker 2

We are now free to focus on growing the company, but will also strategically use our cash flow to manage debt and optimize our capital structure in pursuit of commercial and perhaps strategic growth. We continue to work on an active pipeline of opportunities and are pleased with the win just recently announced. CRI was selected by a well known upscale quick service restaurant chain with over 1,000 locations across more than 25 states and to help lead the transformation of its indoor and outdoor menu boards. The restaurant chain is nationally recognized by its cooked to order food, farm fresh ingredients, and excellent customer service. After a successful pilot, which will begin in select locations during the third quarter of twenty twenty five, national rollout is expected to proceed.

Speaker 2

Through this partnership, we'll play a key role in the chain's digital transformation strategy, shifting from static displays to dynamic, digitally driven customer engagement, including personalized messaging and real time promotions. CRI will deliver a turnkey solution along with consulting, content strategy, hardware provisioning, deployment support, and ongoing day two service, all powered by our proprietary CMS platform, Clarity. It's a great win for CRI and underscores our growing leadership position, leveraging digital applications to elevate a customer's experience and satisfaction. This leadership is not just a matter of our technology, but demonstrates our subject matter expertise in the actual underlying business of a vertical such as quick serve restaurant, something our competitors do not bring at all. We'll help this client build a more agile, connected restaurant environment that meets guest expectations and provides flexibility for enhanced applications in the future.

Speaker 2

As stated last quarter, we remain on track for another year of record performance. We continue to expect revenue to accelerate beginning in Q2 and particularly in the second half of the year. And we are engaged in numerous opportunities that will lead to backlog growth, revenue predictability, and improved margins, even as we look to make headway strengthening our balance sheet through debt reduction whenever possible. We also expect adjusted EBITDA as a percentage of revenue to rise to 15% by year end. The introduction of our AdLogic CPM platform has gone well, with more potential clients looking at the power it brings to the enterprise.

Speaker 2

As a reminder, this innovative solution provides customers with the tool to deliver targeted, high performance campaigns at significantly reduced cost, delivering programmatic capabilities within a self serve interface that simplifies campaign execution, enhances targeting precision, and eliminates unnecessary intermediation fees. It positions CRI as a unique one stop shop for hardware deployments, an array of day two services, and the required ad tech solutions with new monetization models for the company and the customer. We will provide an update on this new innovation and the customers using it in the months to come. CRI remains at the forefront of improving the customer experience across a growing list of innovative clients and brands. We look forward to the year ahead, including growing revenue, expanding margins, solid cash flow, and debt repayment.

Speaker 2

In short, the future looks bright for CRI, and we appreciate our investors' continued enthusiasm and support. I'll turn it back over to Ryan Mudd to share some additional comments on our financials. Ryan?

Speaker 1

Thank you, Rick. An overview of our financial results for the first quarter of twenty twenty five was provided in our earnings release and Form 10 Q filed earlier this morning, which included the condensed consolidated balance sheet as of 03/31/2025, the statement of operations and the statement of cash flows for the three months ended 03/31/2025, and a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the quarter ended 03/31/2025, as well as the preceding four quarters. While Rick reviewed our operational results in detail, let me provide a couple of points of context related to our balance sheet. As of 03/31/2025, the company had cash on hand of approximately 1,100,000.0 versus $1,000,000 at the end of twenty twenty four. As mentioned in prior calls, our consolidated balance sheets reflect minimal cash on hand as the company has set up a sweep instrument to apply against the revolving debt facility to further manage our interest expense.

Speaker 1

Our gross and net debt stood at approximately $23,200,000 and $22,100,000 respectfully at the end of the first quarter as compared to $13,000,000 and $12,000,000 respectfully at the start of 2025. Our debt level rose, as Rick previously discussed, by resolving a $12,800,000 contingent consideration liability for $7,000,000 which was satisfied with a $3,000,000 payment from our credit facility, the issuance of a $4,000,000 promissory note and some warrants. The additional $3,200,000 increase quarter to quarter reflects short term working capital uses. However, when reconstituting debt as it stood at 12/31/2024 to account for this contingent liability, there's an overall reduction of $2,600,000 which is the net of the $5,800,000 reduction in the contingent liability through the settlement, offset by the $3,200,000 increase for working capital needs as we ramp up for the new opportunities discussed herein. With an agreement now in place, we are returning to a strategy of optimizing capital structure and creating capacity on the balance sheet wherever possible.

Speaker 1

At the end of the first quarter, our leverage on a gross and net basis was 4.914.67% respectively, up from 2.592.39% at the beginning of fiscal twenty twenty five. However, we see improvement going forward and remain dedicated to managing our debt as we continue to evaluate and mitigate to an optimized capital structure in support of our growth. I will turn it back to Rick for additional comments on our results and customer activities.

Speaker 2

Thanks, Ryan. Our engagement with potential customers and prospects is at an all time high. We are pleased with the pipeline and the sheer number of discussions going on with potential prospects. Our sports entertainment team has also been expanded to facilitate our anticipated growth in this sector as we move into 2025. The company completed an NHL Arena during the third quarter of twenty twenty four, its largest deployment of this kind, and we have tremendous momentum in this market moving into the New Year.

Speaker 2

In Q1 twenty twenty five, we were awarded three MLB projects of varying sizes and types, and we have an additional seven POCs, or proof of concepts, going on at other venues across The U. S. Now let's talk about BCTV. The BCTV project continues to move forward at a slower pace in the first two quarters of twenty twenty five. All total, we have completed 300 plus site installations to date and have recently received communication to move forward with the next 200 or so sites beginning in Q3.

Speaker 2

We would expect to install more than 50% of these locations through the balance of the year, which would generate approximately $3,000,000 in revenue. Another additional network we have previously announced is the DigiPoint Media Network. This is a retail media network on ice boxes across groceries and C stores. It appears they are ready to move forward with deploying approximately 2,000 sites beginning in the third quarter. Assuming this moves forward and we install all locations in the second half of twenty twenty five, it would generate in excess of $4,000,000 in hardware and installation revenue with additional SaaS revenue from our CMS and AdTech software solutions.

Speaker 2

Our cloud and software development teams have been working towards SOC two Type two compliance. CRI achieved SOC two Type one compliance in Q1 of this year and expect to achieve Type two by year end. SOC two compliance is a valuable credential that demonstrates the trustworthiness and the credibility of our products to enterprise customers. This is yet another indicator of our acceleration in the marketplace. One additional fact about We revamped our operations and warehouse facilities.

Speaker 2

We transitioned to a larger space in the same building and significantly increased the capacity of our warehouse to process orders and projects. This significant increase in capacity came at a minimal increase in our cost. We are well positioned for the tremendous growth we expect in the second half of this year. With that, we'll now move to the Q and A portion of the call. Please go ahead, operator.

Operator

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

Speaker 3

Great. Thank you. Can you talk about the expectations as it relates to screen installs for your large QSR win, maybe second half twenty five in 2026? And then what percentage of franchisees have expressed interest in opting in?

Speaker 2

Brian, Rick here. Thanks. Great question. So, it is our expectation that we've got POCs actively happening, a couple of test sites literally this quarter, POCs in q three, and then beginning end of q three, twenty locations or more per month. As we announced, they have over a thousand locations, and they have 600 of those locations have already indicated interest or, quote, signed up to convert to digital.

Speaker 2

So excited about that. Overall, we look at it as a is it a two year project? Probably not. Probably three years. So probably about 300 sites a year ballpark ish.

Speaker 3

Great. That's helpful. And then you highlighted delays in the first quarter. Can you just give us some more detail of what led to those delays? And is it broad based?

Speaker 3

Or is it, you know, one or two clients? And have it have has that has that reversed yet in the second quarter?

Speaker 2

We started to see a reverse. It was actually three separate projects. Okay? So it's not it's not across the board. Right?

Speaker 2

But we had three clients, three unique projects. Each had its own set of difficulties, and that's why we saw that back in q three of last year. And it's why we wanted to communicate crisply to you and the investor base that q four and q one were gonna be like. We're through that period. We're on track and feel very comfortable on a go forward basis.

Speaker 3

Great. Now it's great to see the QSR win kicking over the goal line. I know you talked about a handful that were right there. Can you talk about the pipeline of the other large procurements that you've highlighted in recent quarters? And with the global trade uncertainty, is that slowing decisions?

Speaker 3

Or are you still progressing with your discussions on some of the other large opportunities?

Speaker 2

You know, we're still progressing, but with a number of opportunities. Again, our our top 10 opportunities, the quality and size of the top 10 opportunities, even versus eighteen months ago, are significantly enhanced and improved. Okay? Number one. So very, very bullish on those opportunities.

Speaker 2

Number two, you talked about, you know, global uncertainty and tariffs and and those things. As of yet, our industry, when I say industry, the specific signage, okay, market has not yet been terribly affected by tariffs. All the screen manufacturers' product comes out of Mexico. Right? So as long as The US and Mexico keeps open and doesn't go crazy, should not be an issue with screens.

Speaker 2

The other issue that we have concerns about are the mounts. Mounts are made of steel, and the price of steel coming into The US could affect that. As of now, we don't have any customers that says, hey, I'm putting this project on hold because of tariffs. We have not had any of those conversations. However, I think we would all be cognizant, all of us are looking around and trying to understand the new normal landscape, which appears to be very uncertain with these tariffs in play.

Speaker 3

Great. My last question. The company's ad tech solution has gone through some significant upgrades in functionality. Can you talk about either how you're seeing any increased demand, how attach rates maybe are improving, just any kind of progress or success you're seeing as it relates to that that offering?

Speaker 2

Well, first off, the ad tech or what what what let me back up. The market our ad tech is very much focused on is what we would use the term retail media networks. Right? Retail media networks is very much in the early game. Okay?

Speaker 2

And why is that in the early game? Because retail media networks require significant capital outlay. Now, the benefit of an end user who is flipping their signage to a retail media network is it now becomes an income producing machine for the end user customer instead of an OpEx expense. So everybody's interested. Everybody's looking.

Speaker 2

Everybody's testing. As you know from our pedigree, we have 10 significant large retail customers. You know, we talk about Macy's. We talk about Verizon, Best Buy, etcetera. All of them are investigating media networks.

Speaker 2

And so we are primed and positioned with a number of current customers and prospective customers to deploy retail media networks. We see our ad tech having significant impact significant potential impact from a revenue perspective in twenty twenty six and twenty twenty seven.

Speaker 3

Great. Thank you, Rick.

Speaker 2

Thanks, Brian.

Operator

Thank you. And our next question coming from the line of Jason Kreyer from Craig Hallum Capital Group. Your line is now open.

Speaker 4

Great. Thank you. This is Kail on for Jason. So first, maybe we can just revisit the large QSR win that you had. Just curious, you know, why you won and if you believe that this win could also contribute to larger you know, additional large wins as you continue to validate your position in the market.

Speaker 2

Great question, Cal. So number one, the answer is to the second half of the question is will it give us credibility for additional wins? Absolutely. You know, it's a first class brand. And when you win first class brands, people sit up and take notice.

Speaker 2

Maybe I need to be talking to those folks. Right? That's number one. Number two, this one was a unique circumstance in that they actually went through two RFP processes over a two year period. And due to some internal shuffle at the customer, we actually won the first time and they decided to repeat the process using third party advisers, and then we ultimately won again.

Speaker 2

So we feel very comfortable that that's a sign of how strong we have emerged in this vertical over the last three or four years.

Speaker 4

Great. And then maybe secondly, you know, just curious what are the things that you guys are doing today? You kind of alluded to some things, with the warehouse capacity, but just kind of curious the investments and, different changes that you're making today to position your company to kind of build on the second half of the momentum and into 2026?

Speaker 2

Again, great question. Number one, we wanted to we needed to reposition our facility a little bit. We had been in an older part of the building that hadn't been, quote, upgraded, remodeled. We took advantage to move to more space at a lower cost per square footage. It was nice upgrade from the administrative operational side of the business.

Speaker 2

From the warehouse side of the business, we have effectively increased significantly. I'm not prepared to say that 50 or a %, but our cubic storage to move pallets of product through is significantly increased. Why? Because that we believe we need that for the second half of this year. Other than that, investments that we make tend to be on our technology.

Speaker 2

You know, we don't we don't spend a lot of money on brick and mortar and and the the need for enhanced machinery and and computer equipment all tend to be very de minimis in the overall scheme of things. So for us, it's investing in our platforms, and we continually invest in our platforms every month. But that's about it. Other than that, we don't anticipate any significant CapEx spends by any means.

Speaker 4

Great. And then maybe just to kind of follow-up on that one. You talked about the increased warehouse capacity. You kind of alluded to some of the tariff impacts earlier. But just curious if you're seeing anything as far as a pull forward in demand for signage or deployments, given kind of some of the tariff uncertainty and how things like expanded warehouse capacity can give you more flexibility to kind of adjust to any impact that the tariff kind of back and forth can have on the business and customer demand?

Speaker 2

We have had some minor, hardware pull forwards because people three months ago were concerned as the tariffs started to get implemented. Nobody knew the landscape, and I think today nobody really knows the landscape at this moment on a go forward basis. So we had a couple smaller customers looking, Hey, I'm going to go ahead and hedge my bet. They were relatively small. Might be 200 screens here, 300 screens there.

Speaker 2

We do not have anybody that hedged the bet and said, I'm gonna take 10,000 screens my next year, year and a half, and put it in storage. We have not seen that at this point in time. If we do see that, we would see the use of a bonded warehouse type strategy, to get the product in the country but avoid tariffs, etcetera.

Speaker 4

Great. Thank you so much for taking my questions.

Speaker 2

Thanks, Cal. Thank you.

Operator

And our next question in queue coming from the line of Howard Halpern from Sackers Brothers Inc. Your line is now open.

Speaker 5

Good morning, guys. Good morning.

Speaker 2

Hey, Howard. Hi. Could you talk a

Speaker 5

little bit more about the sports and entertainment vertical? You know, you talked about you have seven proof of concepts coming down the road, but could you maybe discuss what's behind that and, you know, what type of appetite those type of customers have for spending and deploying your product?

Speaker 2

Great question. Number one, the answer is the sports entertainment vertical has a high appetite to spend. And when we say high appetite to spend, everybody is looking at how can I upgrade my facility and make it more fan friendly? Right? That's number one.

Speaker 2

Number two, as they make it more fan friendly, they deploy digital, which then gives them a greater ability to generate income from those screens. Because remember, sports and entertainment were the first vertical that generated income from screens. Right? That's been doing that for a long time. So they're now all looking at enhancing theirs.

Speaker 2

So number one. Number two, you tend to look at POCs. You do a POC, and you tend to do that during your team's season. So that once the off season occurs, that's when you tend to upgrade the facility. So, for example, we had a lot of POCs in, quote, baseball.

Speaker 2

Because now they're all POCing, when the baseball season ends, we, in theory, could expect to see some POCs at the end of baseball in the fall go into we could have some wins. So you you gotta think about the team or the the sport and then when is its season. Okay. So we expect our goal is, you know and and we're way out in front of that. We're engaged in probably three to five conversations with folks who have stadiums either, a, under construction or, b, in the planning stages.

Speaker 2

And the beauty of sports entertainment is we have the ability as we move into 2026 to sign some potential agreements that are a year a year and a half out that give us real predictability of revenue. Hope that helps. And we're Okay.

Speaker 5

If we could talk a little bit about, you know, the the you mentioned the DigiPoint I icebox. Is that if that gets deployed, you expect it to, is that gonna be incrementally an incremental improvement into revenue and to day two services, on maybe the ad tech side or running some of the ad tech that might go on those,

Speaker 4

go on the hardware?

Speaker 2

Spot on. The thing we really like about the that particular network is they've adopted our entire tech stack from top to bottom. So it would use our CMS. It would use our ad server. It would it uses our campaign planning management tool.

Speaker 2

So it uses all three of the major points of our SaaS and AdTech software. So that's you know, we're looking forward to getting that deploy and running so that it we can use that to show other retailers how it works when it's been deployed at scale at, you know, several thousand locations across America.

Speaker 5

Okay. And one last one. How is the landscape looking in Mexico for opportunities down there?

Speaker 2

You know, actually quite good. We have we have you know what? I I may be not up to date. Literally, I believe it is next week. We have a POC going in, one of the top three convenient or c store chains in Mexico.

Speaker 2

It's supposed to install in May, and I think it's May 20. So it's probably another week or two. So there's that. As a matter of fact, I there's a call this week with one of the top five major retailers in Mexico, to talk about a retail media network. So it's you know, we put our toe in the water.

Speaker 2

We've been steadily making progress. But for us and by the way, we also have a couple stadiums that we are engaged in discussions with. We look at Mexico as really potentially adding revenue potentially in 2026. Okay. Okay.

Speaker 2

Well, thanks, guys, and keep up the great work. Thanks, Howard.

Operator

Thank you. And I'm showing no further questions from the phone lines. I will now turn it back to mister Rhinemuth.

Speaker 1

Thank you. And before we make any closing remarks, I do wanna take a moment and acknowledge we did receive some questions through our investor inbox. Rick, can I ask you to go ahead and take a moment to address those questions?

Speaker 2

Sure. Happy to. So a couple of investors took time to send us some questions. Number one, there were some questions about bowling. And I think we've kind of clarified that.

Speaker 2

So I won't really talk about that. Number two, somebody wanted an update on our, you know, win rate and what does that look like, our success rate, and how many RFPs or competitive processes do we enter in a year. So, typically, that number in the last twelve to eighteen months, realistically, is between thirty and forty per year. However, the main thing to understand is typically, in a typical year, 50% of those customers will not make a decision. It will push for two or three years.

Speaker 2

Just like we talked about the QSR win that took two years. So just because we answer 30 to 40 RFPs, 50% of them never see the light of day. Or I don't say see the light of day, 50% of them get pushed or rolled down the pike. Out of the others, we have a still healthy success rate. We've talked about a 70% win rate.

Speaker 2

Our track record shows that. However, then once you've won, the customer has to make the decision to go ahead and deploy. And that may take a year or two for a capital cycle. So, as we've always talked about, our process tends to be long and drawn out. Another question about, you know, this customer was one of the customers at the quote one inch line or one yard line.

Speaker 2

The answer is yes. That recent win is. We have a couple more that we have been fostering for quite some time that we are very close. And hopefully, we look forward to making some significant announcements throughout the balance of the year. I think is there were there any others, Ryan, that that

Speaker 1

should look at? I'm showing no more. No, sir. Alright.

Speaker 2

So let me, I guess, go ahead let me conclude the call by thanking all the shareholders, clients, partners, and employees for their continuing effort, commitment and support as we work together to transform Creative Realities into the leading brand and digital signage solution. We look forward to speaking with you and everybody again next quarter. Thank you.

Operator

This concludes today's conference call. Thank you all for your participation. And you may now disconnect.

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Key Takeaways

  • Revenue fell to $9.7 million in Q1 2025 from $12.3 million a year ago due to installation timing, but gross margin remained stable at 46% and adjusted EBITDA held at $0.5 million thanks to an 11% reduction in SG&A costs.
  • The company settled a $12.8 million contingent liability for $7 million, replacing it and other liabilities with $23.2 million of more transparent debt to enhance financial visibility and flexibility.
  • Creative Realities won a major contract with an upscale quick‐service restaurant chain (over 1,000 locations), with 600 franchisees opting in and a pilot starting in Q3 2025 ahead of a ~300‐site/year rollout.
  • Management expects revenue acceleration in the second half of 2025, a recurring revenue run rate (ARR) reaching $17.3 million, and adjusted EBITDA margins rising to 15% by year-end.
  • The company is advancing new opportunities in sports & entertainment (NHL arena completed, three MLB wins, seven POCs) and retail media networks (DigiPoint icebox project and SOC 2 Type II compliance planned), positioning for growth in 2026.
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Earnings Conference Call
Creative Realities Q1 2025
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