Creative Realities Inc (CREX) 2021 Q3 法說會逐字稿

(technical difficulty) Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to the CRI third quarter 2021 financial results and earnings call. All lines have been placed on mute to prevent any background noise. The company has prepared remarks summarizing the third quarter results along with additional industry and company update.

Following the company's prepared remarks, there will be a live question-and-answer session. (Conference Instructions) Alternatively, questions can be submitted during the call via email to ir@cri.com. This call, including the presented materials, will be recorded, and a copy will be available on our website at cri.com following completion of the call. Joining me on the call today is Rick Mills, CEO of CRI.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The words anticipate, 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 and our Annual Report on Form 10-K filed with the SEC, and in registration statement on Form S-4 filed November 12, 2021. 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 may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our public filing.

It is now my pleasure to introduce Rick Mills, CEO of CRI.

Thanks, Will. Good morning to everyone who has joined the call today. I want to begin the call by discussing the announcement we made this past Friday last week, about the pending merger with Reflect Systems, Inc.

First and foremost, welcome to the Reflect shareholders and Lee Summers and any of the Reflect employees who have joined us on this call today. We could not be more excited about this transaction and the possibilities that it generates for the companies, our combined employees, and finally, most important, our collective customers. Again, welcome.

We believe the Reflect merger is truly an ideal combination. At CRI, we have a strong history of deploying large-scale, sophisticated digital signage projects, driven by our exceptional creative and project management teams. Reflect has a long history of designing and building world-class content management software platforms. ReflectView is their flagship product. It has become an industry standard for scalable, flexible, reliable, digital signage.

Also, Reflect's advertising technology platform, called AdLogic, is a game-changing solution for digital out-of-home advertisers. It is currently used by publishers to deliver approximately 1 billion ads per month.

In addition, the merger also brings to the combined company immediate sales organization. We expect to introduce the AdTech platform and media sales capability to a number of current CRI customers. This is an area of the digital out-of-home space in which CRI has not historically been a participant.

In the past, CRI has supported digital advertising networks as a supplier of the displays, players, installation services, and content management, but we have not had the ability to integrate and deliver the ads themselves.

In addition, we expect to offer the CRI legacy services, which we are known for -- procurement, logistics, installation, and Day-2 support services -- to all the Reflect customers. Combined, CRI and Reflect offer some of the most comprehensive digital signage and media solutions available in a powerful one-stop shop for our customers.

Post-merger, the combined company will have one of the broadest offerings for true enterprise level, digital signage customers; purpose-built menu board software via the Clarity Platform; digital signage Software-as-a-Service via ReflectView and Reflect Xperience; digital out-of-home advertising platform with the AdLogic solution; complete engineering design and planning services; procurement logistics and installation services; creative planning and content design; IPTV streaming platforms, which we address our large venue and stadiums with; and then finally, post-deployment technical support services.

With that said, let's go into the financial overview of the quarter. Will?

Thanks, Rick. I'll now summarize our financial results for the three months ended September 30, 2021, as compared to the same period for 2020. Regarding the 2021 results, we note that the MD&A section of our quarterly report on Form 10-Q provides unaudited quarterly financial information derived from the company's annual and quarterly financial statements. We've also provided a reconciliation of GAAP net income to non-GAAP quarterly EBITDA and adjusted EBITDA for the current and previous four quarters therein.

As a review, the quarterly financial information, all references to 2021 and 2020 represent results for the three months ended September 30 for each period, unless specifically indicated otherwise. With respect to our revenue, gross profit and gross margin, revenues were $4.8 million representing a decrease of $0.4 million or 7% as compared to the same period in 2020, despite a reduction in revenues generated from the sale of our Safe Space Solutions products and services of $1.9 million.

Revenues generated from our core digital signage products and services increased $1.5 million or 50% for the three months ended September 30, 2021, as compared to the same period in 2020. This supports our continued statements about the reopening and return of the digital signage industry.

Hardware revenues were $2.2 million in 2021, a decrease of $0.6 million or 22% as compared to the prior year, driven by continued supply chain disruptions related to semiconductor chips delaying the delivery of digital displays and media players to the company; and, second, reduced revenues from the sale of our Safe Space Solutions hardware of $1.9 million. The supply disruption for digital displays prevented the company from delivery of hardware and execution of installation activities during the quarter.

As of September 30, 2021, the company had a customer purchase orders for equipment and installation activities in excess of $1.2 million, which were delayed as a result of product unavailability. The company expects to experience continued disruptions and delays related to fulfilment of inventory purchases from vendors throughout the remainder of this year. However, the company currently anticipates those disruptions will be resolved in the first half of 2022.

Services and other revenues were $2.5 million in 2021, an increase of $0.3 million or 13% as compared to 2020, driven by increases in both installation activity and managed services revenue. Managed services revenue, which includes both software-as-a-service and help desk technical subscription services for our traditional digital signage and Safe Space Solutions product offerings, were $1.4 million in 2021 as compared to $1.3 million in 2020, as the digital signage subscription revenue began to rebuild, following: one, the customer reopening activities; and two, the continued expansion in the number of devices managed by the company generating such revenues.

Gross profit decreased $0.1 million or 4% during the three months ended September 30, 2021, as compared to 2020, driven by a reduction in revenue, but offset by an increase in gross profit margin. Gross profit margin increased to 49.4% from 47.9% during the same period in 2020, as a result of improved mix from increasing managed services revenue.

With respect to our operating expenses, a relatively flat quarter. Sales and marketing expenses decreased $0.1 million or 20%, having benefited by approximately $0.1 million in the current period from employee retention credits.

Research and development expenses were flat in the P&L 2021 as compared to 2020. During the third quarter of 2021, we did kick off a material project in which we undertook a platform architecture upgrade for our [automotive] market software tools. We expect to invest approximately $1 million in aggregate and to complete this project by the end of the first quarter of 2022.

As a result, we anticipate tripling our current annual recurring revenue stream related to this product from approximately $1 million annually to approximately $3 million annually, as well as the rewrite facilitating the ability to sell this product into international markets.

General and administrative expenses were flat in 2021, as compared to 2020. General and administrative expenses included a benefit of $0.2 million in 2021, which was offset by an increase of $0.1 million in non-cash stock compensation expenses.

With respect to operating loss, net loss, and EBITDA. Our operating loss was $0.4 million in both 2021 and 2020, reducing by approximately 4% in 2021, which included a benefit of $0.4 million of employee retention credits recorded in the three months ended September 30, 2021, partially offset by an increase of $0.1 million in non-cash share-based compensation expenses as a result of probable vesting of performance-based awards.

Net loss was $0.3 million in 2021 as compared to a net loss of $0.6 million in 2020, representing a reduction of the net loss of 41%. EBITDA was $0.5 million in 2021 as compared to EBITDA of $0.3 million in 2020. Adjusted EBITDA was $0.3 million in 2021 compared to an adjusted EBITDA of $0.2 million in 2020.

See our earnings release for a description of these non-GAAP financial measures and a reconciliation to our net loss. This does mark the fifth quarter in a row for positive EBITDA generated by Creative Realities.

Two other notes from the quarter. We had a -- in September 2021, the statute of limitations expired with respect to the possibility of the claim against the company related to the abandonment of a legacy lease in 2015. The company recorded a gain on the settlement of this liability or potential liability of approximately $0.3 million during the three months ended September 30, 2021.

Secondly, the company qualified for the ERC credits beginning in March of 2020 through September 30, 2021. During the three months ended September 30, 2021, the company recorded an ERC totaling $0.4 million which were included as a reduction in payroll taxes within the condensed consolidated statement of operations and allocated to the financial statement caption from which the employee taxes were originally incurred.

The company currently has approximately $1.2 million in receivables recorded as of September 30, 2021, related to the ERC program and has received $0.4 million in cash refunds year to date. We anticipate that our revenue will be too high in the fourth quarter of 2021 to further qualify for ERC in that period.

At this point, I'll turn the call back over to our CEO, Rick Mills.

Thank you, Will. So let me take a minute and do an update on kind of the other pieces of our business and current opportunities. During the third quarter of 2021, we saw demand for our core digital signage offerings beginning to approach pre-pandemic levels. Revenues from our core digital signage products and services increased $1.5 million or 50% versus the same period in 2020, so some significant growth and rebound.

Throughout 2021, we've been engaged in customer conversations, who -- like many customers -- were simply challenged by understanding how to move their own business forward, what to do, and how much do I do budget allocation for 2021 calendar year as a reaction to the COVID-19 pandemic.

As many of our current and prospective customers enter into the 2022 budget cycle, we are witnessing a significant expansion in both marketing and IT budgets with respect to the allocation of funds for digital transformation and specifically signage projects. We are engaged in meaningful conversations which we believe will translate into a return to a strong top line growth beginning in the fourth quarter and continuing throughout 2022.

Despite continued disruptions in delivering -- in executing sold engagements due to the supply chain lack of availability of semiconductor chips, which have delayed the delivery of digital displays and players to CRI. We have received ongoing shoutouts from customers and our vendor partners for consistent and transparent communications which frankly have helped further build trust and engagement with these customers and vendor partners.

While we have seen a significant increase in market activity and remain bullish on the number of opportunities as we move into 2022, we expect to continue to experience some of the disruptions and delays related to the fulfillment of inventory purchases from vendors and the associated services well into the first half of 2022.

Despite these industry challenges, specifically the lack of availability of these displays, I'm proud of our team's ability to have generated positive EBITDA for the fifth consecutive quarter.

We gained two new significant customers in the last half of the year. The first is in the process of placing orders, and in Q1 2022, we expect to bring online an additional 1,300 players and screens to our CMS platform from this one customer.

The other significant new logo or new customer is a national pet store brand with over 1,500 locations. We are installing their first digital experience store. The expectations and discussions are that they expect to convert an additional 300-plus stores in 2022.

As it concerns Q4 revenue, we expect our Q4 revenue to come in certainly north of $6 million. And assuming we continue to receive the screens and players that have been committed, we believe our revenue will exceed $7 million. Had we been combined with Reflect Systems for the fourth quarter of 2021, we believe revenue would have exceeded $10 million.

On an additional note, CRI and Reflect will exit Q4 with a combined backlog of 4 million in orders which we have not fulfilled due to the supply chain issues previously discussed.

As I close out my remarks, I want again to thank all of the employees of CRI and a special shoutout to Lee Summers and the employee team at Reflect.

Our combined company is a significant supplier for enterprise customers in the digital signage industry. As we fully integrate our offerings and business operations, it is clear we provide the most competitive product and service offerings available for the digital signage market, including the potential for integrated programmatic advertising solutions. We expect the merger with Reflect to close in the first quarter of 2022.

With that, back to you, Will.

Thanks, Rick. We will now open the phone lines in order to respond to any questions. (Conference instructions) We do have a few questions that were sent into the IR inbox. These first few were from Kevin Sheldon. Kevin, thanks for sending in the questions.

Rick, the first question is, has the large contract for the automotive dealer in Canada that you referenced on the prior call been executed? And if so, what is the projected revenue from that project?

Great question, Kevin. So first off, it's an automotive manufacturer with 440-plus dealerships. That contract has been executed, purchase order received. We are in the process of planning, and that will be deployed throughout or during the first quarter, certainly beginning April 1 of 2022. That adds approximately a little less than $0.5 million a year in recurring revenue.

Perfect. Thanks.

And one other issue, we are -- there is a press release going out on that, I believe, tomorrow. Is that right, Will?

That is correct.

Yeah. So, look for the press release tomorrow, we're announcing it.

Great. Thanks, Rick. Next question, are you still on track for the large contract that has been discussed for the last 18 months? When do you believe that may be announced or further detail?

Yeah. Obviously, that's been really delayed, first, obviously by the pandemic and closing of the number of their facilities across the U.S., but now as entertainment facilities have reopened, then we got into a little bit of a supply chain issue. But it's interesting; I have a meeting with that customer today, close of business at the end of the day, to begin the process of executing contracts and announcing rollout schedules, et cetera. So look for that shortly.

Great. Next question. Without getting into specifics, are there any additional merger targets that are being evaluated presently?

Yeah. We launched a sales -- or buy side program. We brought in a third-party consultant who has been on board now for six months, Will. We had [him] under engagement for five to six months. We've identified and targeted well -- excuse me, we've identified well over 100 potential targets. We are in outreach and in various levels of discussion with all types of supply -- vendor or potential acquisition candidates. Obviously, our short-term focus is closing the Reflect transaction and integrating Reflect, but expect additional news on acquisitions throughout 2022.

Great. Thanks, Rick. There was a question about the criteria for granting [stock] our senior management team. I'll take that one, Rick.

That is outlined in our public filings. Effectively, we have stock compensation that's time vested, and then the Board of Directors -- specifically, the compensation committee -- does an assessment of competitive like-sized entities and has put in place performance restricted awards. So those awards typically vest when the company hits certain milestones. Again, additional detail for that is available in our 10-Q.

Again, thank you, Kevin, for the questions. We'll look at the line now to see if there are any other raised hands. Okay. It looks like there are no other questions on the line at the moment.

So with that, let me conclude by thanking all of our shareholders, clients, partners and employees, for their continuing efforts, commitment, and support as we work together to transform CRI into to the leading brand in digital marketing solutions.

This now concludes the CRI 2021 third-quarter earnings call.