Creative Realities Inc
NASDAQ:CREX
Earnings Call Analysis
Summary
Q3-2023
Creative Realities announced a net debt of $8.4 million and leverage reduction to 2.6x with a projection for 2024 between 1.2 and 1.5x. The Panera Bread partnership advanced with digital initiatives installed and high praise received. The expected Cedar Fair and 6 Flags merger is not seen to impact CRI negatively. The Black Rifle transition to CRI’s platform indicates opportunities for revenue expansion. The introduction of a 2023 stock incentive plan aligns with company growth and transforming objectives. Despite minimal financial review during the call, the company's prospect for installation of 600-700 Bowling centers and 500-1,000 sites for 2024 shows significant growth potential. A projected 50-50 split between hardware and service for the next year, with a possible 45-55 shift, suggests a balanced growth strategy.
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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.
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 3 and 9 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.
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 SaaS 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 9 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 9 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 to 29.3% 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 2020 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.
We 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 Boeing 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 goalpost 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 to 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 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?
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 2 purposes: first, the repayment of the company's currently amortizing note and second, to bolster working capital through the end of the 1/4 of 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 and 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 5 remaining payments. We are working to strengthen our balance sheet by increasing revenues, improving profitability and managing our debt leverage. We entered 2023 with net debt of $19 million and a leverage ratio of approximately 4.9x.
As of the end of the third quarter, our net debt is $8.4 million, and our leverage ratio has reduced to 2.6x 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 and 1.5x, barring any additional financings or strategic opportunities. We believe the risk profile of the company has 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.
Thanks, Will. I want to highlight several of our customer engagements and other initiatives. First, I'd like to provide an update on our previous announcement. During our second quarter earnings call, we discussed CRIs 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 2 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 signings provider that CRI has received high praise from Panera this 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 2020 for. When a brand like Panera trust you, many others are set to follow. BC TV 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 Jamie Paige, who's the Chief Marketing Officer at the human being. Our collaboration with Creative Realities enables us to blend technology seamlessly with our friendly service, ensuring our guests enjoy both convenience and the genuine warrant 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 beans. What a great philosophy.
Okay, another customer, 6 Flags and Cedar Fair. Well, they've been in the news this week. Earlier this week, 2 of our customers, Cedar Fair and 6 Flags and house plans to merge to create an expansive amusement park operator with operations spread across 17 U.S. states and 3 countries. The combined company will boast 27 amusement parks, 15 water parks and 9 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 2 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 CRIs 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 of 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 is 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 as 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 Miguel, who has served as our Board Chairman for the past 4 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. Miguel's resignation, the Board of Directors approved a reduction in the size of the Board to 4 directors.
The Board does plan to evaluate adding another member with formal search activities likely to occur in 2024. Dennis' 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 transform the company into a true service SaaS provider, one in Germany -- thank you, Dennis McGill. Will, any further commentary you'd like to add to our Q3 2023 results?
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 9 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 4 quarters. Regarding the results for the 3 and 9 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 Instructions] Our first question will be coming from Brian Kinstlinger of Alliance Global Partners.
As you mentioned, the $60 million to $80 million range is quite wide. Can you speak to the high end and low end of those and what the scenarios look like? Is the base case, the midpoint based on what you had scheduled and then the ability to ramp faster or if customers ramp slower, gets you the high or low end of the range?
Brian, this is Rick. Thanks for the question. Thanks for joining the call. I would tell you the $60 million range is what we feel like would be minimum performance with our Bowling contract, right? And if Bowling assuming it picks up speed and continues to roll out, we would believe we would be more towards the higher end of the range, but it really is dependent upon how quickly we can deploy Bowling beginning now, but what does it really look like in the 1/4 or 2. We'll have a better sense by January, February time frame, but that's the reason for the wide variability.
And then you mentioned $35 million. First, is that multiyear estimate or 2024 contribution. And then as you look at the schedule for the next 4 to 5 quarters, is that controlled solely by the local Bowling alleys, is [indiscernible] in the PE firm? Is it your ability to procure product? Just take us through what are the main drivers of that schedule.
The main drivers of the schedule, really, it comes down to 2 things. First off, there are no supply issues. We have plenty of supply, we have plenty of those things. There is an interim step. Once we contract with the center, we have to schedule electrical installs. So the electrical install adds anywhere from 4 to 8 weeks, just getting it done, the electrical industry today, the electrician industries, they're all full up, right? So getting them to come -- install the plugs is just a long pole in the tent. But that's really it, assuming that we can deploy consistently throughout 2024. There is an expectation that we would install certainly 600 to 700 Bowling centers in 2024. So that's really the rollout thoughts.
Great, thanks for all the updates on the customers. One customer I didn't hear about, which I thought was one of your biggest opportunities to Starlite Media. I actually haven't heard about it in a little bit in our conversations when I've seen you and it's kind of stuck in my memory that it was so big. So maybe talk about what's happening there? Has that moved forward? Has it not moved forward and what the opportunity still is there?
Okay, it's moving forward. Today, we are in the process of finishing the installs from the last order. There is pending another large order that is currently pending. We potentially expect that in 2 to 4 weeks’ time frame, but they are very focused. Starlite is very focused on continuing to deploy their platform. And they have the funding. So it's just a matter as quickly as they can get the locations signed up and get the location because in many locations, they already have a paper poster. So now it's getting permission to convert the paper poster location to a digital, which involves installing electric. But as quick as they're getting that done, we're continuing to roll out. As a matter of fact, I'm having lunch next week with the CEO of Starlite, and the relationship continues to grow. So we expect more news over the next month or 2, just wasn't comfortable announcing anything on this call.
Yes, and Brian, just for a little more context. We had the POC in August for 20 sites. We had an order of 220 sites in the 3/4 that are getting deployed now. And I think the opportunity, if it comes to fruition, would be somewhere between 500 and 1,000 sites in 2024.
Well said, Will, great Okay, [indiscernible] fast as I can. My last question, and I'll get back in the queue, is the 70% run rate is quite high. So congratulations. The natural question for that is, why aren't you bidding on more business? Is it a lack of opportunities, which I doubt. Is it carefully managing your capital, so right now, it's hard to hire next salespeople into your cash flowing. Maybe just help us understand given such a big pipeline that it sounds like, why aren't you casting a much larger web?
It's really a combination of a number of things. Number one, yes, we wish we had more sales resources, and we expect to add more sales resources is 2024 comes on, 1. 2, it really is, there's a whole lot of customers out there across the U.S. and many of them have heard of us, but there's a number of customers who still have never heard a CRI. And so as our name recognition continues to grow and we get invited, it's really simply a reason that a lack of invite. If we are invited, we do very, very well.
Understood, it's an invite not an RFP where you can just be someone who responds.
Yes, I mean we typically don't like RFPs, right, Brian, because we don't -- you don't have a relationship with the customer, you're just a number, We prefer where we really have a relationship with the customer where we understand what they're looking for. And then they do an RFP, we have no issue participating. But out of the blue, hey, here's an RFP. We know nothing about the customer, while we will participate, that's not our most favorite venue.
Our next question will be coming from Howard Halpern with Taglich Brothers Inc.
Congratulations, great quarter, guys. I guess backing off to last question. Are you -- I know you said you're going to increase your sales team as time goes on, but existing customers and referrals, could you talk about how that is playing a role in building that backlog.
Sure, Howard, thanks for joining the call, by the way. I mean our customers, our current customers, we work with them on a project by project basis. So some years, they have budget, some they don't, right? Depends upon their own internal cycles. And that's really what I'd say about current customers. Will, do you have something to add to that?
Yes, Howard. I would just say there's -- we've talked about in the past that there's material expansion opportunity within that existing customer base, right? There's a number of key customers who are not at 100% site deployment, right? And as we continue to add new customers like Panera, that opportunity grows. You know, you've seen over the last 6, 7, 8 quarters, whatever the number is now a $10 million-plus kind of baseline out of that existing customer pipeline, and we expect that to continue into the future. And it's now these new customers who begin to deploy that help us to accelerate the growth.
Okay, and given your forecast and the deployment schedule, would you anticipate a skew now towards hardware versus the service mix and a little bit of a more than a 50-50 split?
Yes, I would tell you the first half of 2024, we are doing a number of significant deployments right, Howard. So it will be hardware have. But remember, hardware see a long tail of recurring revenue. We expect our ARR to increase materially throughout 2024 because we're finally to the point where we're putting a whole lot of screens up, which seeds the ARR.
Yes. I would tell you, Howard, that from a modeling standpoint, it's probably safe to look at a 50-50 split for 2024 at this time. First pass on or in, probably that trends more to 45-55, right? But I think it's safe to go with 50-50 until we get into January and have a little bit more visibility into the full year.
Okay, and in terms of now you're getting all the screens up and running, talk a little bit about, I guess, how your team feels about media and ad sales on those screens. How is that trending?
Will, do you want to talk about that?
Still early stages, Howard, right, we have the theme parks to our customers. We have a number of retail customers who are exploring and have created what we'll call media companies within their businesses. So they're exploring and planning and prepping. We have a number of ad network or ad opportunities in the pipeline. None that we would say today has moved the needle as far as the media sales operations, but we can see the industry moving in that direction. Probably a larger opportunity for the second half of '24 into 25.
Okay, and one last one. Your cost structure, you -- your cost structure in place can support the projections going forward with just modest increases in G&A down the road?
Yes, that is correct.
[Operator Instructions] Our next question will be coming from John Roy of Water Tower Research.
So, Rick, I want to start off and congrats on your promotion. I did want to get maybe a step back and look at possible new use cases for your products, and in particular, the software. I was curious if you might be getting entrees into what you can do with the data is most of the data owned by the company? And is there any chance for some AI to go in there and help with the software?
Great question, John. Thanks for joining the call. The answer is we continue to play with AI in the background. There's generative AI, which we believe will help customers release the burden of fresh content. So it will do some auto content generation. That's number 1. Number 2, we believe there will be process improvements with AI and significant reduction in the maintenance work that customers sometimes have to do around their signage network, some of the operational aspects. So we think AI will play in both of those. In terms of the data, today, under our network agreements, all the data really belongs to our customers. We have access to it. We can run and glean information from it, but technically, today, the data belongs to our customers. Will, anything to add?
No, I think that's correct. I think there's an opportunity down the line. We're starting to get questions and more inquiries about analytics projects. We have done some in the past with respect to AB testing on menu boards or in retail environments. I think as customers start to look at driving that customer behavior through the technology more, we will see growth in that area today, still early stages.
Great, that sounds interesting. So as a follow-on, do you see possibly increasing R&D spend in the future going forward?
I would tell you that there's likely a reduction in R&D spend moving forward, particularly in cap software, not because we don't think there are investments to make. We've highlighted over the last couple of years and heightened the level of spend in those areas associated with the key customer contract and the internationalization of our automotive platform. We've been slowly spinning that down here in the second half of 2024 as we move towards an end of year launch or relaunch, if you will. So I would expect those numbers to reduce in the future and stabilize somewhere in the $2 million to $2.5 million a year range.
That completes the questions from the line today. Mr. Logan, are there any additional inquiries from the Investor Relations in box that you would like to address?
Yes. Thanks, [indiscernible]. There were a few that have come in during the call, so I'll just read them and respond. The first was do your customers ask you to sign agreements not to provide your services to their direct competition? The answer is typically no. We have one legacy contract with some limitations on it that is expiring. Otherwise, no, we do not have any limitations on chasing competitive environments with our customers. Second, I think Rick addressed this, there were a couple of questions that came in about the supply chain and whether there were any lingering issues with respect to the third-party sourced product. The answer is that, that is behind us. We currently have no supply chain challenges.
Next question. Based on current conditions and backlog, do we foresee the need to issue any more stock to service our existing debt? The answer today is no. Based on our current operating plan, we did the capital raise in August, and we thought that the quantity of cash that we brought on to the balance sheet was sufficient to service the debt and get us through to production of cash -- free cash flow on a net basis. So we look forward to getting there in the 1/4, 1/2 2024. I don't believe we'll need to take any other supplemental actions.
Last item that came in, there were a couple of brokers that look like they reported or sent out some notifications with respect to our warrants yesterday about warrant exercises. We have looked into that, a couple of inquiries there. There are some -- a batch of warrants expiring on November 19 from our 2018 offering. So I think that was just an air by some of the brokers there that's not an exercise, but instead an expiration. Those were the questions that have come in to the inbox. So let me conclude the call by thanking all of our shareholders, clients, partners and employees for their continuing efforts, commitment and support as we work together to transform creative realities into the leading brand in digital signage solutions. This concludes the Creative Realities 2023 Q3 Earnings Call.