Earnings Call Transcript - CREX Q4 2021

Will Logan, Chief Financial Officer

Good morning. This is Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to CRI's Year-End 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 2021 results along with additional industry and company updates. The company's prepared remarks will include a brief presentation of company materials, which can be viewed through the webinar by logging into joinwebinar.com and entering the meeting ID 618107963. Following the company's prepared remarks, there will be a live question-and-answer session. If you would like to ask a question during that time, please hit the raise hand button. Alternatively, questions can be submitted during the call via email to [email protected]. This call, including the presented materials, will be recorded and a copy will be available on our website at cri.com following the completion of the call. Joining me on the call today is Rick Mills, CEO of CRI. I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The words anticipated, 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 annual report on Form 10-K filed with the SEC on March 22, 2022. 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.

Rick Mills, Chief Executive Officer

Thanks, Will. Good morning, everybody. I want to take a moment to discuss what we do in a little more detail. We have some new investors, new shareholders, and so I'd like to literally spend some time on that. First, you look at the company information here and all the different things that we do in digital signage. Digital signage typically includes the display technologies and those types of things. We sell and install those devices and services. We own several proprietary digital signage software platforms, which generate significant SaaS revenue. One question we often get is where do you see our work? Well, frankly, it's all around you. We serve market-leading companies. So, there's a good chance if you leave your home today, to shop, work, eat, or play, you will encounter one or more of our digital signage experiences. Our work is in automotive dealerships, theme parks, the lobby of your doctor's office, retailers, movie theater lobbies, convenience stores, restaurants, including quick-serve drive-throughs, and more. Sources of revenue: we really have four core buckets of revenue. The first and most important bucket is recurring services. These are sticky, long-term contractual agreements we provide, which offer subscription licensing and our support services for our digital signage software platforms. And all that is sold through a SaaS model, Software as a Service. The second bucket is services, which is really assisting our customers in hardware design and engineering of their solution to fit their space, the actual hardware installation, content development, content scheduling, and post-deployment network and field support, what we commonly refer to as day two services. The third bucket of revenue is media sales. As part of the merger with Reflect, we acquired a media sales business that generates advertising revenue for client-owned networks. The fourth is obviously the hardware itself, the screens, media players, mounts, and similar items. But be very clear, our value proposition at our core is that we are a software-as-a-service company. We are a SaaS company. We are focused on increasing the number of managed devices and leveraging our subscription-based digital signage platform to deliver ads on ad-supported networks, which ultimately drives annual recurring revenue. We have actually installed or supported thousands of digital menu boards and merchandiser displays at dozens of sports arenas and stadiums around the country. We do a lot of work with LEDs. We started an LED initiative back in 2017 and 2018 as the cost per square foot came down dramatically. In the past three years alone, we’ve installed in excess of 500,000 square feet of large-format LEDs. We're also in connected dealerships, with a presence in 2,700 dealerships in 12 countries. In Q3 this year, we're adding another 440 locations. Let's discuss the market overview. We sit at the intersection of event technology, retail technology, and digital out-of-home. The active size of our market is approximately $20 billion, typically broken down into two components. The first component is what we have historically done, which is about a $6 billion a year business, projecting a combined annual growth rate of about 6.5% to 7% over the next four to six years. The second component is the ad revenue, which is $14 billion generated by ads running across those screens. Growth drivers post-COVID, companies are allocating capital much quicker than before. We see a dramatic change in customer interest in monetization. Five years ago, interests were limited, but today, nearly every customer, minus ultra-luxury brands, is actively seeking ways to monetize their investments and improve their ROI. This industry remains fragmented, with hundreds of companies in the U.S. capable of providing similar services. We are positioned to take advantage of industry consolidation. We believe our ongoing acquisition strategy and robust organic growth will provide benefits like cross-selling products and services, increased profitability, and ultimately, higher valuation.

Will Logan, Chief Financial Officer

Thanks, Rick. We've put a few quarterly highlights on the page. I just picked a few to talk about, and then we'll go through some of the financial performance. We had a couple of debt activities in the period receiving forgiveness for our PPP loan and the elimination of a seller note. We had an announcement in Q2 about winning a C-store customer, which we converted through the balance of Q2 and added up to 7,000 incremental displays onto our network in the current year. In the third quarter, we completed an installation project which we anticipate expanding in 2022 by rolling out 1,300 C-store locations on behalf of a large tobacco chain in a period of only eight weeks. This demonstrates the size and scale of what we can accomplish and deliver in the market as a single vendor sole source provider. In the fourth quarter, we announced a three-year renewal of an OEM automotive contract, which increased the annual SaaS revenue by 300% versus the prior contract. Additionally, we announced the merger with Reflect that closed in February 2022, which has commenced our first sales activities, resulting in a win that likely neither company would have achieved on its own. Turning to the balance sheet, we have compared 2020 to 2021 and wanted to provide some highlights. We achieved an improvement in net working capital year-over-year of about $3.2 million, reducing our inventory balances by $0.5 million. During the period, we received forgiveness for a PPP loan amounting to $1.6 million, eliminating net debt from the balance sheet. We also negotiated a settlement agreement regarding a seller note from a prior acquisition, paying $100,000 to eliminate $1.7 million of total debt, resulting in a gain of about $1.6 million. Throughout the year, we observed a return to normal operations, and our D&B supplier risk evaluation ratings reflect a low risk in all categories. We plan to leverage this to continue improving our working capital position. Our balance sheet for 2021 shows improvements reflecting recent capital activities and the acquisition completed in February 2022. As for debt, today, we have three tranches: a $10 million term loan at 8% interest maturing in February 2025, a $7.2 million term loan at 10% interest maturing in February 2025 with scheduled amortization payments beginning in September 2023, and a $2.5 million escrow note related to the merger with Reflect. Our total debt today is $19.7 million, with monthly debt servicing of about $230,000 for the next year, reducing to $127,000 a month after the seller note is paid off. The leverage based on internal projections of adjusted EBITDA at a revenue base of $43 million is about four times, expected to drop below three times by the end of 2023. As for cash, our position on the balance sheet shows about $2.8 million, and we anticipate about $5 million in cash on hand at the end of the first quarter, which will provide sufficient runway to execute our integration plans and continue growing our business. Notably, to facilitate the Reflect acquisition, we issued certain warrants with strike prices below $3. If those warrants were fully exercised, we would expect an additional $21 million in cash proceeds, exceeding our current debt balance. Comparing year-over-year operations, we saw a 5.6% topline revenue growth, and our core digital signage revenue has increased by 21%. We maintained our margins despite challenges in labor and hardware markets. Overall, as we grow, we expect increased margin expansion, especially with our focus on scalability moving forward. Now, I'll turn it over to Rick to discuss insights for 2022 and beyond.

Rick Mills, Chief Executive Officer

Thanks Will. 2022, let's start with the Reflect merger. What did we gain? Well, we acquired several great customers with a combined SaaS revenue of about $7 million. We gained some excellent technology: ReflectView, a world-class digital signage management system, and AdLogic, our patented ad-serving capability, which delivers 50 million ads per day. This merger opens up enhanced revenue opportunities for us. It creates long-term value and positions us as one of the leaders in the industry due to the strategic acquisitions we've made. We have robust marketing capabilities, allowing us to tap into new markets. However, the real value lies in the talent we bring on board through this merger. Talent is what distinguishes winners from losers in this industry. Our combined pro forma revenue coming out of COVID for 2021 was $30.7 million, and we anticipate a 40% growth year-over-year for 2022, expecting to cross the $43 million threshold in revenue. Moreover, our annual recurring revenue run rate as of the end of 2021 was about $12 million, and we project it to grow 25% year-over-year. As of now, we're managing over 120,000 endpoints, and the number of devices we are managing exceeds 300,000. Our target adjusted EBITDA margin for 2022 is set at 5%, which we expect to increase to 10% by 2023 as we achieve more scale. Growth drivers include cross-selling additional services and products to both CRI and Reflect customers, expanding our LED business, and a significant increase in ad dollars allocated to digital out-of-home advertising. The vision for our company is clear: our goal is to become a $150 million global marketing solutions provider, accomplished through a combination of organic growth and strategic acquisitions. As the leading acquirer in the industry, we have the infrastructure to support significant profitable growth, and we aim for a million endpoints under management generating high-margin annual recurring revenue. With that, I'll turn it back over to Will Logan to close.

Will Logan, Chief Financial Officer

Great. We've received several questions through the IR inbox, and we'll address them now before we open the phone lines for additional questions. The first question is about the integration of the two companies. Overall, the integration has gone exceptionally well thus far, despite some bumps along the way. We are about 30 days into the merger, and both organizations are aligned on our business model, efficiency improvements, and growth strategies. We've approached this transaction with a merger mentality. We recognized Reflect as having incredible processes and talent to complement our organization and vice versa. We're well on our way to integrating operations, procurement, warehouse, fulfillment, order entry, and project management. We're also evaluating our combined branding and marketing strategy. Our existing customers are responding positively to cross-selling opportunities as a single-vendor provider for enterprise customers. We expect to complete the majority of the planned integration activities by the end of Q3 2022, targeting about $2 million in cost synergies, which will begin to materialize in 2023.

Rick Mills, Chief Executive Officer

I don't have anything to add there.

Will Logan, Chief Financial Officer

Next question: Are companies using COVID relief funds to invest in digital marketing? We have observed some utilization of COVID relief funds for digital transformation investments. Most of those funds were used in 2020 and early 2021. Presently, we're witnessing a recognition of the value of digital transformation among our clients, leading to reduced onboarding timeframes for new clients. Previously, our onboarding cycle averaged 18 months, but now it's significantly shortened, and we're seeing corporate budgets increase for digital initiatives across various vertical markets.

Rick Mills, Chief Executive Officer

As for the large contract we've discussed in the past, it's currently on hold due to the pandemic. We hope to provide news on that contract over the next two quarters as discussions have resumed.

Will Logan, Chief Financial Officer

Could you share whether there's been any movement in the discussions?

Rick Mills, Chief Executive Officer

Yes, we have ongoing discussions and are at the finish line with this customer. We're actively engaging in weekly calls about launch markets and other details, indicating lots of activity, but nothing to announce at this time.

Will Logan, Chief Financial Officer

To clarify our revenue projections for 2022 referring to that contract: it is not factored into our current projections. If we execute it, we would plan to update our guidance in subsequent quarters.

Rick Mills, Chief Executive Officer

There are many factors at play, but there are numerous observable trends indicating expansion.

Will Logan, Chief Financial Officer

As for the projected stock price, while we acknowledge there’s a dislocation in the markets, we believe our stock is trading well below its intrinsic value. While we're not ready to provide a specific number, we are actively pursuing a strategy to surface the company's underlying value by engaging an IR firm and executing our operational plan to meet or exceed our budgeted goals.

Rick Mills, Chief Executive Officer

I might add that our stock's potential is based on multiple factors and strong future growth.

Will Logan, Chief Financial Officer

We are now opening the floor for additional questions. It appears there are currently no raised hands. Let me conclude by thanking all our shareholders, clients, partners, and employees for their ongoing efforts, commitment, and support as we work together to transform CRI into the leading brand in digital signage solutions. This concludes the CRI 2021 earnings call.