Creative Realities, Inc.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Will Logan:]

Good morning. I am Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to the CRI’s First Quarter 2021 Financial Results and Earnings Call. All lines have been placed on mute to prevent any background noise. 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 within the webcast control panel. Alternatively, questions can be submitted during the call via email to [e-mail]. 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.

[Rick Mills:]

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 in 2021. So, this is a new C-store relationship. Number three vertical, stadium 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 IP TV, 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 the shortage. The following is a quote from one of the principal analysts at the Gartner Group. And the quote is as follows

[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 period. 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 to a previously announced expanding customer partnership, which is undergoing conversion of its network to the CRF 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 that 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 the 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.

[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 on line. 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 Amphitheater, it’s an outdoor amphitheater located in Mountain View, California in the San Francisco Bay Area. The 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 on -- or on hold for a 14-month period.

[A - Will Logan:]

Great. Thanks, Rick. We will now open the phone lines in order to respond to any questions. If you would like to ask a question, please use the raise hand function within the webcast. 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?

[Rick Mills:]

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 CMSs running all their different screens. So, we’ve eliminated a bunch of them. And as many folks noted there -- 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.

[Will Logan:]

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 in players? And are we able to pass those costs along to our customers?

[Rick Mills:]

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 on line, 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 them on to the customer. We do not expect that to be material.

[Will Logan:]

Yes. 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?

[Rick Mills:]

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.

[Will Logan:]

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.