Creative Realities, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Will Logan:]

Welcome to the CRI 2020 Financial Results and Earnings Call. All lines have been placed on mute to prevent any background noise. The company’s prepared remarks will include a brief presentation of company materials, which can be viewed during this webcast through the webinar by joining joinwebinar.com and entering the meeting ID 587674747. 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 e-mail to [e-mail]. 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 will be Rick Mills, CEO of CRI.

[Rick Mills:]

Thanks Will. As part of this call, we will be presenting a brief series of slides that provide an overview of 2020 and our current outlook and consideration for 2021. If you have not already, we encourage you to join the webinar so that you may follow along on screen. As a reminder, the slides will be filed and posted to our website following the meeting for reference. I want to start with some quick industry facts. We, as CRI, are lumped in the out-of-home space, it’s how we are viewed and measured in the sector. And as you see the pandemic was a setback for the industry, the consistent annual growth and momentum stopped and there was significant shrinkage in all of the public entities out there. CRI had the same type of reduction in 2020. The good news is as we move forward, we feel like the industry is coming out of COVID as we move into 2021 and we are very optimistic for as we move forward. I want to cover some quick 2020 highlights. I will go through these. January, first part of the year, we added Mike McKim as VP of Operations to bring some real international operational expertise. We changed our auditors to one of the big four providers, Deloitte & Touche. March of course COVID hit, many of our customers specifically in the theater. Industry, retail were very hard hit. We enacted some cost controls very, very quickly. Bottom line is we reduced our core operating expenses from Q1 to Q4 by 26% reduction and that was fully implemented by June. 2Q, we did – we had bankruptcy with theater customer. It’s about 500,000 hit. By the way, we did a significant recovery of that in Q1 and Will will talk about that a little bit later. We did receive a PPP loan of approximately $1.6 million. And in Q2, we did pivot and launched the Safe Space product that has been purchased by over 200 unique customers. Some of these customers have 40 to 60 units deployed across multiple facilities, multiple states. And we also establish distributor relationships for our Safe Space solution with the three largest IT distributors in the United States today.

[Will Logan:]

Sure. Few items that are not fully reflected in the 2020 financial statements that our ongoing activities here in the first quarter of 2021. First on January 11, 2021, we did receive notice from the SBA that the full principal amount and accrued interest for our PPP loan again approximately $1.6 million had been forgiven. That number remains on the balance sheet as of 12/31, but we will be eliminated in the first quarter financial statements. We also completed a registered direct offering, which was previously announced infusing about $2 million of cash into the business to support our continued R&D and growth opportunities in 2021. Next, which we announced just this week, we have completed a refinancing of all of our term debt. We see several benefits coming from this refinance. We have extended the maturity date of each of those facilities out to March 31, 2023. It’s provided us with an additional $1 million availability under a multi-advanced line of credit. We removed a very harmful or potentially harmful 3x liquidation preference on the company’s special convertible loan and secured the ability to repay that loan in the future with cash or stock at the company’s discretion. Finally, we extinguished a small portion of legacy debt for about $200,000 that was converted into common equity. With that, Rick, I will turn it back to you to talk about the current opportunities.

[Rick Mills:]

Well, folks, as you can see from our 2020 activities, we spent a whole lot of time repositioning and managing through the COVID issues that affected not only our industry, but really affected the globe. Let’s go back and reflect today on our current opportunity, because COVID has caused market transformation is going on now as we speak. Today, more than ever, there is an enhanced focus by customers on transitioning to digital signage in particular. Look at the places where we all continued to go during COVID. We went to see stores, we went to some retail, we visited drugstores, and we visited grocery. And so those four industries are looking really focused, how can we transition to digital. We expect to participate in that. Number two, cost efficient business offerings from CRI, first off, we offer more choices in CMS solutions than any of our competitors. We have Clarity, BrightSign and MagicINFO, which is the Samsung CMS. We are providing digital signage as a service. We have some customers who are now including hardware as part of their monthly recurring. It provides the lowest cost entry to the market and we are in discussion with customers.

[Will Logan:]

Sure. Revenues for 2020 were $17.5 million compared to a reduction of $14.1 million or 45% as compared to the same period in 2019. What we did see is hardware revenues were $9 million for the year ended December 31, 2020, which is an increase of $0.8 million or 9.3% as compared to the prior year. This is partially driven by the introduction of the Thermal Mirror and other Safe Space Solutions products, which generated approximately $3.1 million in hardware sales during the year. Gross margin on the hardware revenue was 30% during 2020 as compared to 24.1% during the same period in 2019 driven by the shift in mix of hardware revenues from displays to the Thermal Mirror and other Safe Space Solutions products, which typically generate higher gross profit on a per unit basis. Services and other revenues were $8.5 million for the year ended December 31 as compared to the prior year a reduction of $14.9 million driven by reductions in installation services of approximately $4.9 million following a significant increase in suspended, delayed and canceled customer project initiatives and capital expenditures as a direct result of the COVID-19 pandemic. Rick spoke briefly about those and he will add a little bit more color on what those customers are up to today. We also had a reduction in software development services in 2020 as customers put on hold some of those expansions in projects. Managed services revenue, which includes both software-as-a-service and our help desk technical support subscription services for traditional digital signage and our new Safe Space Solutions product offerings were $5.4 million for the year ended December 31, 2020, a reduction of $1.2 million in the current year primarily related to contracts with customers, which were partially or permanently closed during the year as a result of the COVID-19 pandemic. Gross profit was $8.1 million for the year ended December 31, 2020, a decrease of $5.6 million or 41% compared to the same period in 2019. Gross margin increased to 46.5% from 43.5% in the prior year, driven primarily about higher gross profit generated on sale of the Thermal Mirror and Safe Space products.

[Rick Mills:]

Thanks Will. Okay, so talking about 2021, this is a year of significant growth. I got to tell you, we are truly excited to return to a growth phase as we all kind of emerged from this COVID. I think we entered the post COVID phase as vaccines become widely distributed. We are just absolutely exceptionally excited. We are on track to add 4,000 media players in Q1 to our record revenue stream. This is from – I think we announced it back in Q3, we expect to stay on track and add an additional 4,000 media players in Q2. And put it in perspective, if you had 2,000 media players a year that’s a pretty good year. We are going to add 8,000 approximately in the first half of this year alone. So, Safe Space Solution continues to sell as customers recognize and embrace what we call a new standard of care for their employees. So we expect that solution to continue to have strength and continue to engage with customers all throughout 2021. I want to talk about an important pending contract. This contract has been on hold for about 13 months, we are now moving to the execution of the contracts. We expect that to happen in a very brief period, a matter of a few weeks, maybe a month at most. Once launch is expected to add $6 million in revenue for each quarter for the next four to six quarters. Now, first off, contract has to be executed. Second, the decision has to be made to launch. We currently believe that’s in the June-July timeframe and we will keep the market updated. Our sales funnel is absolutely starting to refill. It’s combination of a lot of things. Number one, many customers are coming back online. So, we had thousands of players go dark in 2020 just in the theater industry alone is they all simply closed and shutdown. So between theaters, stadium and arenas, reopening sports facilities reopening so a lot of customers are coming back online. And as they come back online, there is always the discussion of should I refurbish, should I update, should I add? So, lots of those conversations happening as we speak. Number two, reengaging with projects that were on hold or interrupted. We had a project we started in 2019 up in the American Dream Mall. And here we are in March of 2021 and we think we are finally going to finish that project. So, it had simply been stalled for a 15 or 18-month period. Finally, new customer acquisition engagement and RFP activity is increasing. So, to have new customer acquisition engagement, you got to have customers receptive and open to discussions. In 2020, there was simply not a lot of discussions going on about signage, because many of our customers were worried about their own core businesses. Today, customers are receptive and excited and engaged. And as you look at this data provided to us from Peter J. Solomon, the global out-of-home revenue growth as you see the – it shrank in 2020, but it does expect to go back and grow in 2021. And we have got – they forecast an 8.9% aggregate growth rate. So we are excited for the industry to get back to growth more importantly, for CRI to get back to growth.

[Will Logan:]

Sure. One other note on the prepared materials we have provided in the back of the material is a reconciliation of net income or loss to adjusted EBITDA to both EBITDA and adjusted EBITDA for 2020 and 2019. We have provided 2019 as a bit of a place of context for what this business looks like as it returns to scale and then you can imply from our current operating leverage what that might look like as we return to growth in 2021. With that, we will now open the phone lines in order to respond to any questions. As a reminder, if you would like to ask a question, you can use the raise hand function within the webcast or you can send those questions to [e-mail]. We have some questions that have come into the mailbox during the call.

[A - Will Logan:]

I will start there. From Brian Kinstlinger at AGP. Could you provide Rick some more detail around the recent convenience store chain signage project that you won? Specifically, are you saying that this is a new customer where you are upgrading the first 8,000 menu board displays and some context around how long that will take to get all these displays up and running and revenue expectations?

[Rick Mills:]

Got it. Great question, Brian. So yes, it is a new customer from the CMS and supply of hardware. We have actually been doing installations for the customer for the last 2 or 3 years, but they finally made a decision to give us the CMS and to manage all of their screens and content and also procure all our hardware through us. So all that’s new revenue, we expect to convert all of the screens currently in the field, the media players all to our system by the end of April, it could roll into mid-May. And we expect installations beginning in Q3 and Q4 of approximately 120 to 150 stores per quarter on a go forward basis, with some significant opportunity as they enter 2022.

[Will Logan:]

Great. Thanks, Rick. On the general broad digital signage outlook, which industries do we see as the strongest current demand, where are we seeing that RFP activity?

[Rick Mills:]

Well, couple – we talk about the places where people go, think about your pandemic life and specifically, people still continue to go to C-stores, grocery and pharmacy/drugstore. So, those are three strong initiatives. Then number four, people have a hankering that people have a desire to get back out in public spaces. So, all the and stadium guys are looking at refurbishing and doing something to enhance the fan experience. So, we see that. And those are probably the areas it just so happens. We are also participating in a large RFP for a couple of banks right now. So, it’s all across the board.

[Will Logan:]

Thanks, Rick. Couple other questions to wrap up the questions that we received from AGP. We talked about the digital signage industry and business being challenging during COVID. Any thoughts on competition, whether they are struggling, keeping up, valuations, M&A, those are things we have talked about in the past, do you have any current outlook on those items?

[Rick Mills:]

Well, first off, I got to believe in discussions with all of my peers throughout this industry. Everybody had severe downturn. There was nobody exempt of severe downturn. So there are, as we know, this is a very, very fragmented industry with a lot of very small mom and pop operators, they are all wonderful, but their businesses are between $6 million and $10 million or $12 million. A lot of those folks have felt a tremendous amount of pain. So, we do expect activity in the space in 2021 as people finally say, I need to do something else.

[Will Logan:]

Great. So, one last question here from the team at AGP, with respect to the Thermal Mirror and Safe Space Solutions products or how does that sales process work or enterprise testing various solutions, how have we fared in competition? And I will take that one, Rick and you can chime in if you see fit. We have seen in the front end of the process for many customers that they do go through either a trial period or a competitive process. What we have seen over time is two things

[Rick Mills:]

Yes. I would just add one thing. Our Safe Space Solution is what I use the term enterprise grade. When we meet with an enterprise customer, this is one who is going to deploy 40, 60, 80 solutions across multiple building hands down we win those engagements hands down virtually every time.

[Will Logan:]

Okay, great. I will now look to the phone. It looks like we have a question from Arthur Morgan. Arthur, are you with us?

[Unidentified Analyst:]

Yes sir. I am. Hi, this is Arthur Morgan with MM Experts Group LLC. I have a question in regards to the article on March 3 with your current deal with the 14,000 stores. Can you or can you not confirm whether or not that chain is 7/11?

[Rick Mills:]

It’s neither confirmed nor denied.

[Unidentified Analyst:]

Okay, okay. And since you can’t do that when or do you have a timeframe as to when that news will be released as far as the name goes for that convenience store?

[Will Logan:]

Unfortunately, Arthur and this is common in our industry, particularly at the enterprise level customers, we have certain legal requirements to not name in our marketing materials or any of our public disclosures, those customers. Certainly, there will be instances where that is not the case. And we do make those requests. So we have asked if we could do a joint press release at this time that is not something that we expect to happen with respect to that specific engagement.

[Unidentified Analyst:]

Awesome, understood, and I appreciate it. Shout out to pull at it.

[Will Logan:]

Thanks, Arthur. Okay, that appears to be all of the questions we have received in today. 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 2020 earnings call.