Creative Realities, Inc.
Q4 2018 Earnings Call Transcript

Published: 29 Mar 2019

[Will Logan:]

Good morning and welcome to the Creative Realities Inc. 2018 and fourth quarter 2018 earnings call. All participants will be in listen-only mode during this call. A brief question and answer session will follow the discussion. Please note that there is no presentation on the screen if you’re logged into the webcast via computer. Questions can be submitted during the call via email to [e-mail]. Joining us on the call, we have Rick Mills, CEO; and myself, Will Logan, CFO. Before we begin, please be advised that certain matters discussed on this call will include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various factors. Such factors have been set forth in the company’s reports on Form 10-K filed with the Securities and Exchange Commission. In accordance with Regulation FD, this call is being made available to the public. A replay of this webcast and transcript will be available on the company’s website at cri.com later today and will remain available for approximately the next 30 days. It is now my pleasure to introduce Rick Mills, CEO of Creative Realties Inc.

[Rick Mills:]

Thank you, Will. Good morning everybody on the call. 2018 was a significant year for Creative Realities - I can’t overstate that enough. Our objectives for the year were very strategic and important to accomplish. There were four key objectives, I want to take a moment and go through those. Number one, get the company uplisted to a major stock exchange. Why? First and foremost, to make this stock an investable stock for the first time since I arrived as CEO, and that was a key objective. Number two, as part of that to establish credible research in coverage by thoughtful, meaningful, analysts who understand the landscape in our industry, so I want to thank--and we have a couple analysts who are now covering our stock, and we want to thank those folks. We accomplished this uplist in November against tremendous headwinds in the market. It was tough. I think we were one of 58 firms that transitioned to exchanges--transitioned to a major exchange, be it New York Stock or NASDAQ in 2018. Number two, second key objective, transition the company cap structure to a single class of stock with full transparency to all investors, and that was really a key piece for us. We accomplished this with the conversion of all of the outstanding preferred to common, so we accomplished that in November, and we took the additional step of cancelling that class of stock in its entirety, so all the preferred is gone. Third goal of the company was elimination of 100% of our long-term debt, as the burden was just simply too much for the company to carry, it really didn’t make sense, and this was also completed as part of our uplisting in November. It leaves the company with a $4.3 million standard AR line. Fourth part, we wanted to raise some additional capital to allow the company to enhance our organic growth rate, and our organic growth rate is fairly significant anyway at 24% or greater, but we wanted to raise some capital so we could enhance that growth rate with several acquisitions to achieve scale. We raised $10 million and closed on the acquisition of Allure Global in November. We are very excited about the Allure Global team members, the expertise that it brings our company in the form of some QSR vertical expertise, the theater vertical expertise, and large venue. It adds to our large venue initiative that we started a year ago in mid-2018. Then finally, it really brings to us a great set of world-class customers

[Will Logan:]

Thanks Rick. First I’ll go through some of the 2018 calendar year highlights. Revenues for the year were $22.5 million for the year ended December 31, 2018, representing an increase of $4.8 million or 27% compared to 2017. This included organic revenues excluding the one month of Allure ownership increasing $4.2 million or 24% versus 2017. Gross profit for the year was $10.2 million, an increase of $2.8 million or 38% compared to 2017. Gross margin improved to 45% in 2018 compared to 42% in 2017. The expansion in gross margin was driven primarily by a combination of improved purchasing power on hardware transactions and increased services revenue during the year. Hardware revenues increased $1.6 million or 29% and service revenues increased $3.2 million or 26% in 2018 compared to 2017. Our revenue mix for 2018 was consistent with 2017, with services revenue representing approximately 69% of total revenue for the year. Operating loss declined to $4.5 million, or $1.6 million compared to 2017. Excluding the effects of one-time charges in both periods, including lease termination expense, severance expense, non-cash charges for stock compensation and acquisition expenses, adjusted operating loss declined $2.3 million or a reduction of $1.8 million from 2017. As Rick mentioned a few of our other highlights, on October 17, 2018, the company effectuated a one-for-30 reverse stock split of our outstanding common stock in an effort to effectuate our uplist to NASDAQ. On November 19, 2018, the company announced the closing of its underwritten public offering, 2.8 million shares of common stock and warrants at a combined price of $3.50 per share and warrant. The gross proceeds to the company from the public offering were approximately $10 million before deducting underwriting discounts and commissions and other estimated offering expenses. The proceeds were primarily used in the acquisition of Allure and in the repayment of approximately $1.3 million of debt. As part of the public offering, the holder of our convertible promissory notes converted approximately $4.9 million of outstanding debt into common stock, and the holders of our Series A preferred stock also converted their shares into common stock, cleaning up our cap structure. On November 20, we closed on the Allure acquisition for $6.3 million in cash, a $900,000 seller note, and the assumption of two retention bonus agreements between seller and the former Allure management team. Regarding Q4 2018, we note that the MD&A section of our annual report on Form 10-K provides unaudited 2018 and 2017 quarterly financial information derived from the company’s annual and quarterly financial statements. We’ve also provided a reconciliation of GAAP to non-GAAP quarterly EBITDA for 2018 and 2017 therein. Revenues were $5.2 million for the three-month period ended December 31, 2018, representing an increase of $1.1 million or 26% compared to the same period in 2017. Organic revenues excluding the one month of Allure ownership increased $0.5 million or 12% for the same comparable period. Gross profit was $1.9 million for the fourth quarter of 2018, an increase of $0.4 million or 26% compared to the same period in 2017. Gross margin remained flat at 36% in the fourth quarter of ’18 versus fourth quarter of ’17. Service revenues represented approximately 73% of total revenue for the quarter compared to 58% in the comparable period in the prior year. Operating loss was $2.1 million in fourth quarter ’18 as compared to $1.6 million in fourth quarter 2017. Excluding the effects of one-time charges in both periods, including the severance expense and non-cash charges for acquisition expenses, operating loss declined to $1.1 million or a reduction of $0.5 million from fourth quarter 2017. At this point, I’ll turn the call back over to our CEO, Rick Mills.

[Rick Mills:]

Thanks Will. Okay, just a couple other things. I want to update on several things that we talked about in our Q2 and Q3 conference calls of 2018. We did launch what we called a large venue vertical last year in the middle of the summer. We enhanced that when we added some of the large venue customers and expertise when we added the Allure transaction to it. That business unit is currently on track, and we’d really expect them to what we’d call have a breakout year in the second half of 2019, so we’re really looking forward to that and we will update you on future conference calls about that group and that division. We’d also talk about one of the top five home improvement retailers in the nation and they were going to do a test, and they were doing stuff. Well, that finally consummated in a purchase order and they currently have bought 700-plus players and are deploying them throughout their locations in the upper midwest. Our transit vertical continues to make significant gains. Just simply in the first half of 2019 alone, we’re deploying over $1 million worth of technology, large screens in JFK Airport in the first half of 2019, and we’re right now in discussions with another $2 million in additional transit opportunities that we would expect to close and facilitate throughout 2019. I hope it’s very clear to everybody on the call, we are very bullish and excited as we continue to execute throughout 2019. As you can see from our announcement of guidance for the first two quarters, we are very focused on this business and feel extremely bullish. To summarize, we are an organic growth-oriented company with a very nimble and agile structure finally. We got rid of a lot of those burdens as we got through Q4. We continue to execute and outgrow our industry peers throughout the industry. NASDAQ listing beginning this year with research coverage and expect to add more. We believe our stock is tremendously undervalued by almost every fundamental metric. If you look at it as a percentage of revenue, you look at any number of fundamental metrics, we believe we are undervalued. There is no question that 2019 is a record year not only for top line revenue but bottom line EBITDA and earnings. I do want to point out we are 100% aligned with our shareholders. The board and management, including myself, continue to own a majority of the company’s equity. We are very focused on creating value for our shareholders. Last but not least, we will continue to look at and evaluate a number of companies as there are a number of potential candidates for acquisition to help us achieve scale. We define scale as achieving revenue north of $60 million. We look forward to achieving that at some point in time in the future, whether that be through continued organic growth or adding acquisitions. With that, that ends our formal comments and we’ll see if we received any questions. No questions came into IR? Okay.

[Rick Mills:]

With that, that ends our call. Thank you very much.