Rick Mills - CEO John Walpuck - COO and CFO [Call Starts Abruptly] Shifting now to our key strategic growth areas. The first growth area, I want to highlight is our automotive solutions. We continue to gain market share in the automotive space.
As we mentioned in the press release, CRI has been chosen as the digital integrator for a luxury automotive manufacturer with headquarters in Germany. We are rolling out a solution over the next 24 months to a large percentage of the dealerships. They have 380 locations in the U.S.
and we have many add-on options, when we go into these dealerships including service department menu boards, which could drive the average price per dealership up considerably. In addition, 10% of these locations move or remodel every year. We look at each one of those opportunities as a six-figure opportunity.
With the addition of these 380 dealerships, we now have relationships with the entire network of 2,400 CDJR, that’s our internal link-up for Chrysler, Dodge, Jeep, Ram. So, we have a contract with FCA to supply or digital technology to those dealerships. Additionally, 125 Alfa Romeo dealerships where we are mandatory.
We are also mandatory in Jeep and our ongoing discussions with Maserati, which has about 100 dealerships. So that really equals to total of about 3,000 plus dealerships with the market potential for our company of 25 million to 30 million over the next 24 months.
We are building an incredible pipeline in this space and feel it will bring great results in 2018 and 2019. Secondary, I would like to discuss is fuel and convenience.
Our strategy to penetrate this segment includes developing a best of breed solution, establishing our industry expertise and credibility, building a significant pipeline, converting the sales pipeline to some type of pilot and then finally converting these pilots to large customer rollouts. We are well down this path.
As you know from prior announcements, we have signed an exclusive supplier agreement with the number one advertiser network in the C-store space. They continue to gain momentum as the total number of locations installed is expected to exceed 800 by year-end.
They still have plans to roll out an additional 2,200 locations in the next 24 months, which again equates to an additional pipeline of $50 million alone.
In addition, while we do not have a contract as of this time, we have been the exclusive supplier of menu board for a $38 billion plus fuel and convenience retailer with 8,000 corporate owned locations in the U.S.. We expect this business to grow significantly as we enter 2018.
The final growth area I want to comment on and highlight is transportation in smart cities. These two industry segments are really rapidly coming together merging as more cities across our U.S. are beginning to embrace advertising supported digital networks throughout their urban area.
The goal of building a smart city is to improve the quality of life by using urban informatics and digital technology to improve the efficiency of services meet resident needs.
We're in the early stages of this growth initiative, however, we're uniquely qualified as we've tremendous expertise in outdoor digital solutions, installations and operations. Look for us to make some smart city announcements over the next coming quarters. We're continuing with consolidation of people and functions across the company.
We've announced the relocation of 13 positions to the Company Headquarters as we reposition the finance and accounting functions to Louisville, Kentucky. In addition, we're in the process of completing a state of the art network operation center and a customer executive briefing center at the headquarters facility.
And then finally, we've been approved for a $0.5 million in tax incentives by the State of Kentucky, these will begin to be utilized in 2018. Let's talk about some personnel additions. We've expanded the sales team across the U.S. to 16 executives from seven.
We exited Q2 in 2016 with seven total people on staff or seven total sales resources on staff and today we've 16. Jason Carr has joined as the Senior VP of Sales and is leading the charge in that area. Jason has a significant track record building and leading sales teams and we're pleased that he is on board.
Jerry Reese who joined us a year ago in the VP of Sales role has moved over and taken the position of VP of Sales Support. However, we expect Jerry to spend 70% of his time managing the luxury automotive showroom rollout as the brand is headquartered in Atlanta where Jerry is located.
Bill Lawrence joined us as the VP of Services, Bill came from an IT Integration Company where he was responsible for the service delivery activity of essentially a $2 billion company with thousands of transactions on a weekly, monthly basis. Adrian Weidmann [ph] joined us just last month. Adrian is responsible for heading up our analytics practice.
Today, all the customers are in discussions on analytics and the type of information, the type of feedback that they need to properly allocate their budgets in the various digital spaces. And so, we're in discussions with many customers about their needs for these analytics and the ongoing measurement of their digital signage initiatives.
I do want to point out that we've continued to make these investments, while we continue to reduce our expenses in many other P&L line items resulting in what we describe as optimal expense control. Our expense controls for the last year have been very disciplined and our OpEx is not growing.
It's up slightly less than 1% or 2% and so we squeezed all the other areas of the P&L to take out, to direct the spending, to the sales initiatives where it is out gaining traction to customers.
Overall, while some of the growth initiatives are moving in the faster pace than others, I believe, we’ll make intangible, demonstrable progress with each initiative.
The fundamentals of our business continue to improve each quarter and we are growing increasingly confident that we have developed the foundation needed to achieve sustainable, ongoing, significant revenue growth. It’s an exciting time for CRI and I remain as confident as ever in the direction we are headed.
I will turn the call over to John Walpuck to discuss our second quarter and first half 2017 financial performance in more detail.
John?.
Thank you, Rick. First off, I’m going to talk about our 2Q ’17 highlights. Comparing 2Q ’17 to 2Q ’16. As Rick indicated 2Q ’17 was the third consecutive quarter of year-over-year revenue growth. Just for reference, 4Q ’16 growth we reported was approximately 70%, 1Q ’17, we reported revenue growth of approximately 160%.
2Q ’17 revenues increased approximately 20% to 3.6 million growing by about $0.5 million. Gross profit was 1.6 million for 2Q ’17, this is a slight decrease of $100,000 from the 2016 period primarily due to increased investment in our business associated with the growth that we’ve been talking about.
While revenue increased approximately 20% total operating expenses in the second quarter increased by only 5%. As Rick indicated, the two most material components of our operating expenses our sales and marketing and G&A, general and administrative.
Sales and marketing expense increased by approximately 75% or $170,000, primarily as a result of the ongoing expansion of our sales force and related sales activities. The net change of all other expenses was essentially zero due to expense optimization, expense controls and clean-up and capitalized expenditures.
As Rick indicated, we also continue to evaluate on an ongoing basis with additional changes, we should be making to further streamline our operations, our organization, operating efficiency et cetera. CRI generated an operating loss of approximately $1 million for 2Q ’17.
Regarding the balance sheet, our liquidity improved and deferred revenue increased to $6.8 million growing by approximately $6 million from the December 31, 2016, balance sheet measurement day. This is an important component of our 2Q ’17 results.
As Rick mentioned earlier and as summarized in our press release, we have a timing difference with respect to certain anticipated revenue recognition and the matching of the associated cost of goods. This was caused by a timing issue with the third-party vendor dependency.
To build upon Rick’s statement earlier regarding 2Q and revenue recognition, if CRI were able to recognize the anticipated revenue associated with that order, the cost of goods and related gross margin, our 2Q 2017 year-over-year revenue growth would be 115%, year-over-year gross margin growth would be 55% and we would have reported modest operating income for 2Q 2017.
That’s it on the 2Q 2017 results. Now comparing the first half of 2017 to the first half of 2016. Revenues were $10 million approximately for the six months period ended June 30, an increase of 83% compared to the same period in 2016.
Gross profit was $4.5 million for the first half of 2017, an increase of $1.6 million or 56% from the corresponding period in 2016. Total OpEx operating expenses were $5.4 million for the first half of 2017 up a $100,000 or only 2% from the corresponding period in 2016.
Net loss declined by 50% whereas our first half of 2017 operating loss was $2.24 million our one half 2017 net loss was only $1.7 million.
Regarding the balance sheet, due to a change in classification of the non-cash valuation of equity warrants from a liability to shareholders equity associated with an accounting of FASB Accounting Standards Update, the company's shareholders equity increased by $2.5 million as of June 30, 2017.
At this point, I'll turn the call back over to our CEO Rick Mills..
Thanks John. Jus to wrap it up. We were pleased with our improving financial results and the steady and continuing progress we have made against our strategic plan in the second quarter. So, with that, I believe we've had a couple of questions come in and so John I'll let you address Q&A..
Sure. So, couple of question.
One was, were we at DSE and how did that go?.
DSE is Digital Signage Expo, that is a show that happens every year in March timeframe in Las Vegas. We typically take a group of people, we're not an exhibitor at Digital Signage Expo it is mainly for companies in the digital signage space there are very few end user customers at Digital Signage Expo.
So, we do not have a boost but I think this year we had a team of six or seven out there we spent four days and network with budget vendors and is always successful attending DSE..
Okay.
Another question is can you comment on any ongoing industry consolidation and your expected roles to play there?.
Great question. We're starting to some consolidation appear in the industry in the last quarter, we've done due diligence on two companies, we have a third due diligence visit scheduled on another company and we’re doing that in early September. So, we expect to be an aggregator of these businesses as we move forward.
Again, just a little bit about the industry. There are about 600 competitors in our space across the United States.
Most of them 95% plus or between 3 million and 8 million in revenue, they tend to be a single location somewhere between 15 to 25 employees, they have one or two customers that primarily is 40% to 50% of the revenue and they have another 50 customers which makes up there somewhere between 3 million and 8 million in revenue.
And they have been in business 10 to 15 years, they have no exit strategy and no way to grow the business. The fact today that we’re directionally running at a $25 million, $25 million run rate, when we recognize all the proper revenue, we’re already, one of the top five in this space in what we do.
But we do see consolidation coming and we expect to participate in that on an ongoing basis. .
Another question.
Is that new automotive customer you reference have a standard program or type of installation that you’re installing or are they all different?.
It’s a standard program, they have two options actually technically when we restate that. They have three options. Most of them are choosing option B and C, which is significant digital presence in their showroom.
Again, it’s a luxury brand, associated with luxury goods, associated with luxury pricing and the inside of these dealerships are starting to reflect the digital nature of the buyer. .
Other question that we have is what are you looking for, how do you envision additional personnel hires.
If so in what areas?.
As we’ve engaged, as our sales people become productive, in this industry, it takes a minimum of six months for your sales force to get engaged and about nine months, they start dropping orders into the system. So, we expect as we grow business, we will add more project management staff across the country.
They will report up to Bill Lawrence and his team is VP of Services. But that’s the area where we see growth and then finally just simply technical resources on the ground.
We’re getting density in various geographic areas around the country and when we get density in certain cities, we tend to bring on a local technical resource as a full time W2 instead of the 1099. So those are the areas we see for growth. .
Okay. Great. Sorry, I didn’t say that was the last question..
You got it..
Got it. So that was the last question. Again, I’ll just wrap it up, I’d like to thank you all for your time today on the call. Please stay tuned for some press releases, I expect to have a number of ongoing exciting ones over the next couple of months. Thank you and look forward to talking to you soon. Have a great day. Bye..