Creative Realities Inc (CREX) 2021 Q1 法說會逐字稿

Good morning. I am Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to the CRI first-quarter 2021 financial results and earnings call. All lines have been placed on mute to prevent any background noise. (Conference Instructions)

Alternatively, questions can be submitted during the call via email to ir@cri.com. This call 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 anticipates, believes, expects, intends, plans, estimates, projects, should, may, propose, and similar expressions or the negative versions of such words or expression 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 in our annual report on Form 10-K filed 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 may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our public filings.

It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc.

Thanks, Will. I'd like to thank everybody for joining the call this morning. We are starting to see some momentum build as our customers attempt to reopen their facilities and get back to some sense of normal operations. We believe the elimination of the mask requirements by the CDC and the elimination of the occupancy requirements at the state and local level will speed this process up.

In Q1, we generated approximately $5 million in revenue with positive EBITDA. This is similar to the two prior quarters. With three consecutive quarters of positive EBITDA, we are moving forward with a positive outlook.

Three of our verticals are experiencing an immediate uptick in customer activity. Number one, automotive. We're currently negotiating to add another country as approximately 450 auto dealership locations to our software platform.

Number two, the second vertical we're seeing an uptick in is C-store. We're performing installation services of customer-owned hardware in 1,200 locations for a new C-store customer during the last month of Q2 and throughout the first couple of months of Q3 2021. So this is a new C-store relationship.

Number three vertical, stadium and arena. During the second quarter of this year, Cisco announced the end of life of their Cisco vision stadium product. This has resulted in a number of customer discussions about potential replacement and upgrade of their streaming IPTV and digital signage platforms. As a result of investments into this practice in the past 18 months, we believe we are well-positioned to be the vendor of choice for these potential replacement and upgrades in this vertical market.

There is one industry issue that we need to discuss on this call. We are beginning to experience and expect to be impacted by the global shortage and supply chain challenges for semiconductor chips. We expect these short-term supply issues to affect us for the next two quarters at a minimum. This shortage is impacting the supply of screens and related player hardware from every manufacturer.

And as all of us on this call we've all heard it across the industry, the automotive industry, many industries are suffering this shortage. The following is a quote from one of the principal analysts at the Gartner group. And the quote is as follows: the semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021. Foundries are increasing wafer prices, and, in turn, chip companies are increasing device prices.

Displays and players are a key component of our digital systems. Currently, we have customer purchase orders in hand for 2,000-plus systems. Now a system in our world, in our business, is inclusive of a screen, a player, and a mounting system or mounting device. We do not believe we will be able to deliver these 2,000 systems in Q2 as a direct result of the supply shortages.

In addition, we have visibility into future orders for another 6,000-plus systems -- again, a system consists of a screen, a player, and a mounting device -- that we will be managing with our suppliers to achieve delivery throughout the balance of this year. I want to emphasize that we are not losing orders due to this supply chain disruption, as every competitor has the same issue. Instead, we are seeing a delay in our ability to deliver, which will impact the timing of revenue recognition on these orders.

So with that, we're going to take a moment to talk about our financial overview, and I'll turn the call back to Will Logan.

Thanks, Rick. I will now summarize our financial results for the three months ended March 31, 2021, 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 have also provided a reconciliation of GAAP net income to non-GAAP quarterly EBITDA and adjusted EBITDA for the current and previous four quarters therein.

For the first quarter of 2021, with respect to revenue, gross profit, and gross margin, our revenues were $5 million for the three months ended March 31, 2021, an increase of $1.3 million or 35% as compared to the same period in 2020. Hardware revenues were $2.8 million for the three months ended March 31, 2021, an increase of $1.4 million or 106% as compared to the prior year, driven by Safe Space Solutions product sales, which generated approximately $800,000 in hardware sales during the period, and increasing sales through our previously announced expanding customer partnership, which is undergoing conversion of its network to the CRI platform during the first and second quarter of 2021.

Gross margin on hardware sales expanded to 32% during 2021 from 28.1% in 2020 driven by a shift in the mix to higher margin Safe Space Solutions products and higher margins on hardware within our expanding customer relationship than historically achieved.

Services and other revenue were $2.2 million for the three months ended March 31, 2021, a decrease of $0.1 million or 6.8% as compared to the same period in 2020. Current year installation services continue to be challenged during the first quarter of 2021, continuing the trend of suspended, delayed, and canceled projects and initiatives related to our customer capital expenditures which began to decline in March 2020. The result was a decrease of approximately $300,000 in the first quarter of 2021 versus 2020 in those installation services, which was partially offset by an increase of $0.1 million in software development services in the current year.

Managed services revenue, which includes both software-as-a-service, SaaS, and help desk technical subscription services for our traditional digital signage and Safe Space Solutions product offerings, were approximately $1.3 million for both the three months ended March 31, 2021 and 2020. Reductions in the digital signage subscription revenue related to contracts with customers, which were partially or permanently closed during 2020 as a result of the COVID-19 pandemic, were replaced with subscription revenues added to our Safe Space Solutions.

Gross profit was $2.2 million for the three months ended March 31, 2021, an increase of $0.6 million or 39% compared to the same period in 2020 driven primarily by increases in revenue.

With respect to our operating expenses, for the three months ended March 31, 2021 as compared to the same period in the prior year, our sales and marketing expenses decreased $0.1 million or 22%; while research and development expenses decreased by $0.1 million or 45%, each driven by reduction in employee-related expenses as a result of combination of headcount reductions, salary reductions implemented for retained personnel, and a reduction in travel-related expenses in the current year including the elimination of participation in industry trade shows in the first quarter.

General and administrative expenses decreased by $0.4 million during the three months ended March 31, 2021 or 16% compared to the same period in 2020, driven by reduced headcount, salary reductions, and the exit and/or restructuring of several of the company's operating leases for real estate following the start of the COVID-19 pandemic.

During the three months ended March 31, 2021, general and administrative expenses include an increase of $0.3 million in compensation expenses related to the probable vesting of performance-restricted awards. Exclusive of this incremental noncash compensation expense, G&A decreased by $0.7 million or 26% as compared to the three months ended March 31, 2020. We continue to remain laser-focused on our expense infrastructure, balancing personnel and other related costs against revenue-generating activities and ramp-up.

With respect to our operating loss, net loss, and EBITDA, operating loss was $0.2 million for the three months ended March 31, 2021, as compared to an operating loss of $12.2 million during the same period in 2020. The reduction in operating loss was driven by a reduction in cash-based operating expenses of approximately $0.9 million, and non-recurrence of a noncash goodwill impairment loss of $10.6 million recorded during the three months ended March 31, 2020, partially offset by a reduction of $0.9 million in bad debt expense during the three months ended March 31, 2021 as a result of a recovery of a previously reserved customer bankruptcy accounts receivable, and an increase of $0.3 million in noncash share-based compensation expenses as a result of probable vesting of performance-based option awards.

Net income was $1.3 million for the three months ended March 31, 2021, as compared to net loss of $13.2 million for the same period in 2020. In addition to those operating items previously identified, the increase was driven by increases of $0.3 million in the fair value of debt instruments and $1.5 million related to the gain on settlement of obligations including specifically the forgiveness of the company's PPP loan during the three months ended March 31, 2021.

EBITDA was $2.4 million for the three months ended March 31, 2021, as compared to an EBITDA loss of $12.7 million for the same period in 2020. Adjusted EBITDA was $0.7 million for the three months ended March 31, 2021, compared to an adjusted EBITDA loss of $1.9 million for the same period in 2020.

I'd like to take a few minutes to further expand on a few items within our financial statements for the first quarter. On January 11, 2021, the company received notice that the full principal amount of the PPP loan and the related accrued interest had been forgiven. The company recognized the gain of approximately $1.5 million during the three months ended March 31, 2021, as a result of this forgiveness.

On February 18, 2021, the company entered into a securities purchase agreement with an institutional investor in which the company sold 800,000 shares of common stock in a registered direct offering at a purchase price of $2.50 per share for gross proceeds of $2 million, which we intend to use for general corporate purposes.

On March 7, 2021, the company refinanced its debt facilities, which extended the maturity dates of all outstanding secured credit facilities to March 31, 2023. It provided an additional $1 million of availability under our credit line, and it removed the three-times liquidation preference of the company's special convertible term loan. Finally, this extinguished the outstanding obligations owed with respect to a $0.2 million existing disbursed escrow loan in exchange for shares of the company's common stock valued at $2.71 per share.

Subsequent to the quarter-end date, on May 13, 2021, the company and the seller of Allure Global Solutions entered into a settlement agreement, where neither party admitted liability, and the company agreed to pay and seller agreed to accept $100,000 as settlement in full for the outstanding balance of principal and accrued interest under the amended and restated seller note and a mutual release of all claims related to the amended and restated seller note and sale transaction under the Allure purchase agreement and all related agreements. The company expects to record a gain on settlement of obligations of approximately $1.6 million during the three months ended June 30, 2021, as a result of this transaction.

As a brief overview, the highlights from our extensive capital activities during and subsequent to the quarter-end date were the offering provided in additional capital infusion to expand our customer acquisition efforts; the refinancing of our debt provided additional availability for operations and extended the maturity date, giving the company ample runway to achieve growth; and most importantly, through the combination of the PPP forgiveness and settlement of the seller note, we have eliminated a total of $3.3 million in debt in exchange for cash payments of $100,000. This represents a reduction in total debt of 32%, as compared to December 31, 2020.

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

Thanks, Will. Great job on the whole debt reduction. That's a significant improvement of our balance sheet. So as we look at 2021, we see this as a year of continued growth. We do see the supply chain issues affecting us. However, we do continue to see the order book growth.

As we discussed on our last call, we added approximately 4,000 media players in Q1 to our recurring revenue stream, and we are on track to add an additional 4,000 media players in Q2. I want to take a moment and talk about an important pending contract, which we first discussed on the prior earnings call. This contract has now been on hold for about 16 months, and we are now moving to the execution phase of the contract.

The additional delays over the last quarter were driven by the continued facemask mandates and occupancy limitations. With these constraints removed, we expect to announce the details of this contract later this quarter. Once launched, this contract is expected to deliver an additional $6 million in revenue for each quarter for four to six consecutive quarters.

As we stated on our prior call, these results are contingent upon getting the contract executed and the decision by the customer to launch. We currently believe this contract will begin fulfillment in Q3, and we will keep you updated. Due to the supply constraints, we anticipate a slower initial rollout of the contract.

Let's talk about the sales funnel. We see it beginning to fill, and it's a combination of several factors. First, many of our movie theater and theme park customers are coming back online. Secondly, as the stadium and arena customers are beginning to open back up, there are many requests coming in to provide content updates, refresh equipment as part of that process. And then finally, we are reengaging with projects that were on hold or interrupted.

One such project is Shoreline Amphitheatre. It's an outdoor amphitheater located in Mountain View, California in the San Francisco Bay Area. Venue has a capacity of 22,500. And here we are in Q2 of 2021, and we think we are finally going to finish that project as it has been in process and/or on hold for a 14-month period.

Finally, new customer acquisition engagement in RFP activity is increasing. We see an RFP coming in typically about one or two per month right now. So as we respond to them, we look forward to potentially winning some new customers, but you've got to have customers who are open and receptive to have discussions. And we have those ongoing as we speak.

With that, I'll turn it back over to Will to manage our Q&A.

Great. Thanks, Rick. We will now open the phone lines in order to respond to any questions. (Conference Instructions) I'll start with a few questions that were submitted via email to the IR inbox. First from Brian Kinstlinger, who's the Director of Research and senior technical analyst at AGP.

Rick, I think you've touched on this briefly, but can you provide any additional updates on the timing of the two large signage deals that we spoke about last quarter? First, being the convenient retail store location chain; and then second, the material contract, which I believe you just touched on.

Okay. So the convenient -- or C-store chain continues to move along. We continue to do installs. We continue to convert all of their existing screens and eliminate -- the customer had, at the time, up to five competitive CMS' running all their different screens. So we've eliminated a bunch of them.

And as many folks noted, they recently closed an acquisition of another large C-store chain with 3,800 locations. So we expect that to bring enormous opportunity over the next two to three years. In regard to the large contract, we think the facemask mandate and occupancy limitations were significant problems, because these screens are going in locations where there is customer athletic activity. And so the removal of the facemask mandate and occupancy limitations will allow that to finally start to roll out.

Perfect. Next question from Brian. With respect to the shortage of components that you mentioned as well as the overseas shipping issues, what are we seeing with respect to costs on displays and players? And are we able to pass those costs along to our customers?

Great question. The answer is, so far, the impact has been minimal. As we go into Q3 and Q4, I expect the impact to really happen on new customer special pricing. And frankly, they just won't be issuing it. So as new customers or new projects come online, where they may have received some discounted screen pricing due to volume procurement in the past, a year ago, today they're not going to see that discount in the volume procurement and volume pricing.

Number two, we have seen some small increases on players coming out of the far east, and we expect to be able to manage those. And we will absorb a little bit, we'll pass some on to the customer. We do not expect that to be material.

Yeah. I would add that most of our sales process even on pre-existing customers are not locked into fixed sales prices on the hardware. So those move over time, and the majority of those will be passed to the customers.

Okay. Next question, Rick. With so much of retail reopening, what does the pipeline for RFPs look like today versus three and six months ago?

Well, six months ago, the RFP box was empty, pretty simple. Today, the RFP box, like I say, we're participating in one to two a month. So customers are really sorting through what they're attempting to do and look at reopening facility, but that's really it. And we do not expect those RFPs, should we even win them, to have a material impact in 2021 because of the supply shortage. We think they will affect 2022 and add additional revenue should we be fortunate enough to win additional contracts.

Thanks, Rick. In reviewing the inbox, it appears we've answered all questions, and there are no hands currently raised. 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 the leading brand in digital marketing solutions. This now concludes the CRI 2021 first-quarter earnings call.