Earnings Call Transcript - CREX Q2 2025

Operator, Operator

Good morning. At this time, I would like to welcome everyone to Creative Realities' 2025 Second Quarter Earnings Conference Call. This call will be recorded, and a copy will be available on the company's website at cri.com following its completion. Creative Realities has prepared remarks summarizing the interim results of the quarter, along with additional industry and company updates. Joining the call today is Rick Mills, Chairman and Chief Executive Officer; George Sautter, Chief Strategy Officer and Head of Corporate Development; and Ryan Mudd, Interim Chief Financial Officer. Mr. Mudd, you may proceed.

David Ryan Mudd, Interim CFO

Thank you, and good morning, everyone. Welcome to our earnings call for the second quarter ended June 30, 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 version 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. Factors that could cause these results to differ materially are set forth in our Form 10-K and other filings with the SEC. Any forward-looking statements 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. We believe the use of certain 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.

Richard C. Mills, CEO

Thanks, Ryan. Good morning, everybody. Thank you for joining the call. I'll start by giving some details of our Q2 financials. We posted revenue of $13 million in the second quarter, up 34% versus Q1 and roughly flat year-over-year. While gross profit was $5 million in Q2 2025 versus $6.8 million in Q2 2024. Q2 2024 gross margin of 6.8% was inflated due to the inclusion of $815,000 in media sales revenue as we exited the media sales business. Our consolidated gross margin was 39% versus 52% in the prior year period, with the lower profitability largely due to changes in revenue mix of more hardware versus services. This was driven by a few customers who chose to purchase hardware in advance due to the uncertainty of tariffs. We expect margins to rise in the third and fourth quarters as we are installing those products previously purchased in bulk. As of June 30, 2025, we had an annual recurring revenue run rate, or ARR, of $18.1 million versus $17.3 million at the end of the first quarter. As we have previously discussed, new deployments have a follow-on effect of growing SaaS-based ARR. Adjusted EBITDA rose to $1.2 million for the second quarter of 2025 from $0.5 million in Q1 and was down slightly versus last year's $1.5 million. We anticipate this will improve further going forward as revenue increases and we continue to manage overhead expenses. In fact, we expect adjusted EBITDA as a percent of revenue rising back to 15% by year-end. Notably, we were able to reduce approximately $3.1 million in debt this quarter due to operating cash generated during the period. While some short-term working capital issues impacted Q1, as previously discussed, we're pleased to now be able to once again focus on strategically using cash flow to pay down debt and deleverage the company whenever possible. Let me take this opportunity to address a question that we sometimes get. We have a lot of credit with a sweep account. At the end of Q2, the balance on that account was $16.1 million, down $3.1 million from the end of Q1 due to the cash generation that I just outlined. At the end of Q2, we had $600,000 in cash on hand with additional availability of $6 million. We do not keep excess cash on hand and the cash we have on hand at any point is not a proxy for our true working capital capacity. As stated last quarter, we have a very robust pipeline of opportunities on which we're bidding, reflecting strong demand for our technology as well as generally good economic conditions within our customer base. During Q2, we announced a significant engagement with a well-known upscale quick-service restaurant chain with over 1,000 locations across more than 25 states. We're currently implementing a pilot program in select locations during Q3 and Q4 and expect a national rollout to begin immediately following the completion of the pilot. This is another example of our ability to digitally transform an establishment's menu boards inside and out, shifting from static displays to dynamic digital engagement while increasing basket size and profitability and increasing throughput in the drive-thru operations. We are delivering a 100% turnkey solution, all powered by our proprietary CMS platform, Clarity, along with consulting, content strategy, hardware provisioning, deployment support and ongoing day 2 service. I'll keep everyone updated on the progress of this important implementation, which will result in a more agile connected restaurant environment that meets guest expectations and provides flexibility for enhanced applications in the future. Our AdLogic CPM+ platform continues to impress customers due to its power and flexibility, gives clients the tools to deliver targeted campaigns at significantly reduced cost, combining programming capabilities with a self-serve interface that simplifies campaign execution, enhances targeting precision and eliminates unnecessary intermediation fees. This past quarter, we saw increased traction and interest from existing and new customers. We currently have three customers who are in the testing evaluation phase of the platform, which, if chosen, would power their in-store retail media networks. We have been in the Retail Media Network business for some time and are currently delivering greater than 25 million ads daily. We expect in-store Retail Media Network to grow our revenue and recurring SaaS in 2026 and beyond. The bottom line is that we remain on track for another year of solid performance. As stated last quarter we expect revenue to accelerate in the second half, backlog to grow, and margins to improve, putting us in position for tremendous results in 2026. I'll turn it back over to Ryan to share some additional comments on our financials.

David Ryan Mudd, Interim CFO

Thank you, Rick. An overview of our financial results for the second quarter of 2025 was provided in our earnings release and Form 10-Q, which included the condensed consolidated balance sheet as of June 30, 2025, the statements of operations for the 3 and 6 months ended June 30, 2025, the statement of cash flows for the 6 months ended June 30, 2025, and a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the quarter ended June 30, 2025, as well as the preceding 4 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 June 30, 2025, the company had cash on hand of approximately $600,000 versus $1 million at the start of 2025. As previously mentioned, our consolidated balance sheet reflects minimal cash on hand as the company has set up a sweep instrument to apply cash against the revolving debt facility to further manage our interest expense. Our gross and net debt stood at approximately $20.1 million and $19.5 million, respectively, at the end of the second quarter as compared to $13 million and $12 million, respectively, at the start of 2025. Our debt level was reduced by approximately $3.1 million during the period, as Rick previously discussed, due to operating cash flow as we continue to deleverage the company whenever possible to strengthen the balance sheet. At the end of the second quarter, our leverage on a gross and net basis was 4.53 and 4.4, respectively, versus 2.59 and 2.39 at the beginning of fiscal 2025. The increase in the leverage was caused by the settlement of the contingent liability in Q1 of 2025. We see this as continuing to improve going forward and remain dedicated to managing our debt as we evaluate and migrate to an optimized capital structure in support of our growth. I will now turn it back to Rick for additional comments on our results and customer activities.

Richard C. Mills, CEO

Thanks, Ryan. In closing here, our engagement with prospects is at an all-time high. We are pleased with the pipeline and the sheer number of discussions going on with potential prospects. We continue to focus on our primary four vertical markets: QSR, C-store, retail, sports and entertainment. The demand for improved drive-thru performance in the QSR vertical continues to accelerate. We have introduced our latest drive-thru hardware and software solution, which features a 1-by-3 55-inch digital display at a market price of $14,999 fully installed. This represents a new price point in the drive-thru industry and a price reduction of 20% below most of our competitors. This will allow the smaller mid-market regional QSRs to adopt and implement digital drive-thrus. In the C-store vertical, our long-time customer, 7-Eleven, stated in a news release on August 6, they plan to open 1,100 new restaurants in its U.S. stores by 2030. The aggressive investment in restaurants is part of an updated transformation plan released by the retailer's Tokyo-based parent company, Seven & i Holdings. In addition to adding more than 1,000 restaurants over the next five years, 7-Eleven said it intends to open a total of 1,300 new larger format stores during that time frame, all of them with an enhanced focus on food service. Assuming this occurs and 7-Eleven continues as a customer, we would expect this to add an additional 17,000-plus displays, generating $30 million in revenue and an additional $5 million annually in SaaS over a 5-year period. One additional note on the C-store vertical, we did deploy our first C-store in Mexico. This is a proof of concept for Circle K Mexico. More to come on that opportunity in 2026. As the transition to digital continues to move forward in our key verticals, the adoption and conversion opportunities continue to grow in scope and complexity. This leads to increasingly long sales cycles and requires patience and persistence. As CRI's market share and influence continues to grow, we expect to be the provider of choice. Other areas of continued growth are coming from our live venue IPTV team. Along with growing our existing live venue customers through seasonal projects, highlights of Q2 would include the conversion of a large D1 college campus stretching across six athletic venues, the expansion of club level enhancements for two different NHL arenas and one NBA arena. And finally, the successful IPTV deployment to our first soccer stadium in Mexico. Menu board mobile phone to screen language translation for an NFL stadium that will be a host venue for several World Cup matches. And by the way, it's the first stadium to deploy this type of fan experience in the U.S. And finally, the award of two additional Minor League Baseball stadiums. With more than 12 net new logos or customers in the first half of the year, we expect to continue to secure our portion of the live venue market by providing IPTV solutions, digital signage, and content strategies throughout the United States as well as we will build on the recent wins in Canada and Mexico. One additional network we have previously announced is the Digi Point Media Network. This is a retail media network on ICE boxes across groceries and C-stores. The anticipated deployment, which we originally estimated to begin in Q3, is behind schedule. We now expect this network to begin deployment in Q4 of this year. This is expected to be approximately 2,000 sites and generate in excess of $4 million in hardware and installation revenue with additional SaaS revenue from our CMS and ad tech software solutions. One quick update on our SOC Type 2 certification. We achieved SOC 2 Type 1 compliance in Q1 and have now achieved SOC 2 Type 2 certification. This compliance is a valuable credential that demonstrates the trustworthiness and credibility of our products to enterprise customers. This is yet another indicator of our acceleration in the marketplace. We remain well positioned in the digital transformation landscape and look forward to delivering further improved operating results. With that, we'll now move to the Q&A portion of the call. Please go ahead, operator.

Operator, Operator

And my first question today will be coming from the line of Jason Kreyer of Craig-Hallum.

Jason Michael Kreyer, Analyst

Great. So Rick, for the last few quarters, we've talked about this growing pipeline and a bunch of volume kind of getting jammed up at the one yard line. It was great to see last quarter, you get that QSR win. Just curious if you can give general updates on the progression of those deals through the pipeline and any visibility in any unlock?

Richard C. Mills, CEO

Jason, great question. Everything continues to move forward. They move forward, it seems like an inch at a time. The quality of our top 10 is really spectacular. But we just simply do not have anything that we are comfortable announcing at this time, but we do expect to make some announcements in this calendar year.

Jason Michael Kreyer, Analyst

That's good to hear. So when you talk about the acceleration in the back half of the year in terms of revenue and profitability, what is that predicated on? Is that visibility that you have to those deals getting through? Is that pipeline of new wins that are going to roll out? Like just trying to understand what gives you that confidence.

Richard C. Mills, CEO

What gives us confidence is that when we announced the QSR wins last quarter or the quarter before, those are all now coming together. We expected to start installing some of those right at the end of Q2, but that didn't happen because each of those restaurants had to pour a new footer for their drive-thru. Now that's getting resolved, and starting next month, we will begin deploying a significant quantity of new sites. This delay has held things up, but when it gets back on track, we'll be installing a large number of locations. Additionally, we have a couple of stadium announcements that contribute to our confidence. To clarify, Jason, when we announce wins this year, it typically takes several months from announcement to actual deployment.

Jason Michael Kreyer, Analyst

Got it. Okay. Last question for me. So if you look across the different verticals that you serve, where do you see the most pressure on businesses to kind of modernize their technology and adopt the digital solutions that you guys can provide?

Richard C. Mills, CEO

Clearly, the drive-thru is crucial in the quick-service restaurant sector, especially in the post-pandemic era. Transitioning to digital can reduce drive-thru times by 10, 15, or even 20 seconds per vehicle. When considering a busy drive-thru line that lasts for six hours, this time savings can significantly boost revenue for quick-service operators. Therefore, there is a strong incentive for them to update and innovate. Secondly, retail media networks are gaining a lot of attention. In-store digital technology is a game changer, but it requires substantial investment in physical retail space and a considerable amount of time to implement internally, not to mention the involvement of suppliers like us. Currently, we have three pilots running and are engaging with about six other retailers. We anticipate that by 2026, we will launch our first large-scale Retail Media Network, which will involve deployments worth tens of millions of dollars.

Operator, Operator

And the next question will be coming from the line of Brian Kinstlinger of Alliance Global Partners.

Brian David Kinstlinger, Analyst

Just a follow-up. I was confused. The QSR installs in the second half of the year that give you confidence, is that 1,000 store location that you recently announced because I thought that was a pilot? Or is that a different one? I'm just trying to understand what the driver of that is.

Richard C. Mills, CEO

The driver of that is the customer. We are deploying 50 POC locations, and we already have a queue of locations behind that. We're receiving sign-ups, deposits, and so on. It’s not a situation where we’ll deploy a certain number of locations and then wait for evaluation. They're moving full steam ahead because that project from the customer was delayed a year, making them feel like they're already behind. So, it's progressing at a relatively consistent pace now that we've navigated the construction issues of needing to pour new footers at the drive-thru.

Brian David Kinstlinger, Analyst

Got it. And then I think last time we talked, there was an initial survey that had 600 locations on board or opting in. Has there been another survey? Has there been more commitments? Just kind of where are you with opt-ins?

Richard C. Mills, CEO

I don't have an update on that, Brian, but it's still very consistent. So I can reach out to you and get an update, but I believe it is very consistent.

Brian David Kinstlinger, Analyst

Okay. And then as it relates to sports and entertainment, clearly, we've got baseball, the only really sport going on right now, NHL and NBA obviously are in the off-season. Does that drive increased installs opportunities in the short term? Or is the sales cycle too long in the installation process? I'm just trying to understand how that impacts revenues in the short term?

Richard C. Mills, CEO

Yes, we expect to engage during the off-season for those sports. We have several proposals out, and it depends on who has the budget available. These decisions typically happen quickly. Once they make a decision and sign, we can start installing about 60 days later. It's not a long wait time; these processes usually move swiftly.

Brian David Kinstlinger, Analyst

And my last question is, you clearly had customers buying screens ahead of tariffs. How are tariffs now that are in place impacting decisions? Is it leading to longer sales cycles? Is it not impacting that much? Just trying to frame for how that changes, if at all, the discussions you're having right now.

Richard C. Mills, CEO

We had a few customers who expressed concerns about uncertainty regarding tariffs. As a result, some of them purchased screens in bulk to secure their supply for the remainder of the year. Currently, none of the manufacturers that we work with have increased their prices due to tariffs. I believe we are nearing the end of the uncertain tariff period, as there seems to be some finalization of tariffs across different countries. However, we are unsure of the potential impacts these changes may bring in the future.

Operator, Operator

And the next question is coming from Jon Hickman of Ladenburg.