John Walpuck - COO and CFO Rick Mills - CEO.

Analysts:.

All right. Good morning everyone and thank you all for joining the Creative Realities Third Quarter 2017 Earnings Conference Call. On the call today are Rick Mills, Chief Executive Officer; and myself John Walpuck, Chief Financial Officer.

Creative Realities issued its third quarter 2017 earnings press release yesterday which can be found on the company’s website at cri.com. Before we start I would like to remind everyone with some the statements that will be made today on the call will be forward-looking.

These forward-looking statements are based on the company’s current expectations and believes, concerning future developments and their potential effects on the company. All forward-looking statements involve risk and uncertainties that could cause actual results or outcomes to differ materially.

Such projections and statements of expectation should be interpreted in conjunction with the risk factors and other disclosures that may affect our results. All of which can be found on the company’s Form 10-k, Form 10-Q, Annual Report and other SEC related fillings. At this time, I would like to turn the call over to Rick Mills our CEO..

Thanks, John. Appreciate it, good morning everybody that’s on the call. And again thank you for joining our third quarter earnings call. Let’s start off with -- I'm very pleased to announce this is - the third quarter represents the fourth consecutive quarter that we've reported year-over-year revenue growth.

And so, clearly we're headed in the right direction. We are not satisfied and we are continuing to work hard to move the needle and continue to grow the business. If you remember on our Q2 earnings call, we had a timing problem with the $6.1 million in revenue where we have an order that we can't recognize the revenue in 2017.

And as we enter the Q4, we have a similar issue with an additional $1.8 million transaction. It involves a smart city infrastructure deployment in Toronto. So we have the order, the supplier is located in the Far East, and due to some last minute specification changes requested by our customer the product will not ship until first quarter of 2018.

So adjusting our organic revenue growth is now expected to exceed 31% for 2017. And that translates to $18 million in revenue. Ultimately we're adjusting for the delay of two orders totaling $8 million our 2017 revenue would have met our original guidance of $26 million.

So we're still learning a little bit as projects slip from quarter-to-quarter, but we're gaining on it steadily. As I stated in the last quarter and I will repeat it again, we are clearly set up for success when we can recognize these revenues, as the product ships.

Earlier this year we announced a buyback program, 5 million shares over the next 24 months and the reason we did that is we continue to feel our share price is really not reflective of the intrinsic value we have created and continue to build on every day.

So as an update on that, as of today's date, we have purchased 1,195,000 shares give or take through private transactions. And these shares have been cancelled. So now let's give an update on some of the growth areas I talked about last time, specifically automotive, fuel and convenience and smart cities infrastructure.

Automotive continues to be a growth engine for us. We are in active discussions with hundreds of dealers literally at any one time. We deploy our solutions in at least 10 new dealerships per month. However Q4 is traditionally soft or should say, December is traditionally soft in the automotive space.

Everybody here sees all the automotive ads in December, it's a big selling time and no dealership wants any disruption during Christmas. However, we're building just a fantastic pipeline in the space and feel it's going to build great results in 2018 and 2019.

Fuel and convenience, we have finalized the new piece of business in Q3 and as I have previously discussed, we’ve been the supplier of many boards for a $38 billion plus fuel and convenience retailer with 8,000 corporate owned locations in the U.S.

They have ordered digital menu boards and additional screens to feature their drive through car [wash] [ph] capability. And this is the fastest growing area inside the convenient store space. It's fresh food.

According to NACS that’s for the National Association of Convenient Stores, the industry is growing 15% - the fresh food inside these stores is growing at 15% per year compared to your local QSR, which essentially where growth is flat. Hence the continued investment in digital menu systems.

And we are in final stages of contract negotiations and more importantly they have adopted our content management system to power all the digital menu boards and car wash [ph] screens. In Q4 we will install digital menu boards and car wash screens in approximately 200 locations.

Over the next two years we expect to install thousands of locations with an average of three screens per location. This adds additional recurring revenue and we expect this business to grow significantly throughout 2018.

Finally smart cities, one of our initiatives; we’re in the early stages in this growth initiative, but the good news is we’ve landed our first transaction, it’s fairly significant $1.8 million as I discussed earlier. We will focus more resources on this initiative as we execute throughout 2018.

And remember this market these solutions they did not even exist four years ago. The various business models in the smart city they’re still being tested, changed, tweaked, updated a lot of things in play in smart cities. Active discussions are underway to supply our solutions in a number of markets.

These opportunities typically vary from $2 million on the small end to $10 million for larger implementations and some of them as in New York City are hundreds of millions of dollars. We believe CRI is uniquely qualified as we have tremendous expertise in outdoor, digital solutions, installation and operations and this market is huge.

Just to expand upon that a little bit, Peter J. Solomon gave some information and guidance on smart city solution, expected to reach $210 billion by 2020 and that’s the infrastructure part. Cities around the world will invest a total of $41 trillion over the next 20 years to upgrade infrastructure and benefit from the Internet of Things.

Local governments are turning to technology for solutions to their cities problems. To give you an idea of spend growth spend on smart technology has grown from 7% of city IT budgets in 2005 to 4.1% in 2015 and is expected to grow to 7.5% of a city’s budget in 2025. So it really will be a game changer.

Digital out of home and the pure retail digital signage market is currently $16 billion a year and is expected to go to $22 billion in the same timeframe. So some other things retail tech integration is going to help the physical retailer weather the storm that’s going on in retail right now.

Some of the things that we’re playing with or trying out beta dynamic pricing ensures consistent competitive pricing with online retailers and you need digital price displays to do that. Customized service and experience, smart mirrors in retailers try on rooms, these kinds of things.

Product information and discovery assist shoppers with product discovery both in-store and online, augmented reality technology and then last but not least personalized in-store targeting, feeds recommendation, promotions to consumers based on shopping history across channels. And we are engaged with our customers on a number of these initiatives.

So let’s talk about some of the operational aspects, we have effectively transitioned to finance and accounting options to the U.S. Headquarters in Louisville. We’ve hired a new staff are headed up by Will Logan, Will joins us after 10 years at Ernst & Young and we’re glad to have him onboard.

Will’s overall responsibility is to lead the Louisville finance team and produce all the financial reporting. Our sales team is continues to grow it is led by Jason Carr who is doing an outstanding job of engaging with the right type of prospects. We now have 16 people on our revenue generation team.

And five or six of them joined us in the last six months. So we expect them to become productive in 2018.

We just finished the three day sales launch where we had all our sales people in for enhanced training, really understanding, we’re focused in our mission and we launched the specific program to address 268 retailers that are actually growing and expanding their physical presence. So we’re going after the right kind of customers.

We’ve made these investments while we continue to reduce our expenses and I use the phrase optimal expense control. We essentially have flat lined our expenses on a year-to-year basis, yet we’ve squeezed all of the inefficient spending in other areas and really pointed it directly at the sales initiatives.

Overall, our some of the growth initiatives moving at a faster pace than others we are making intangible progress with each initiative. The fundamental of our business continue to improve each quarter and we are growing extremely confident of develop the foundation needed to achieve sustainable ongoing organic growth and that’s a key.

As we pointed out in the press release we currently have $12 million in signed purchase orders from customers in hand to be delivered in 2018. We started the year with less than a $3 million backlog at the beginning of 2017.

Where we’re headed in 2018 from a revenue perspective, if you take our run rate for 2017, which will be $18 million and then understand the fact that we have $12 million of the $18 million, which is effectively two-thirds of that already committed in orders today.

As we look at the big picture 2016 revenue was $13.5 million when we lost money because the businesses were coming together. 2017 the revenue is $18 million for the year and we lost a much smaller sum, which by the way we would have been breakeven on an EBITDA basis had we have been able to recognized the additional $8 million that slipped into 2018.

2018 we will exceed $28 million in revenue and we will be profitable on a GAAP basis. It’s an exciting time for CRI and I remain extremely bullish and confident on the direction we are headed the team that we’ve built. And with that I am going to turn it back over to John to discuss our third quarter financial results..

Thank you, Rick. Let’s talk about 3Q ‘17 first. So, comparing 3Q ‘17 to 3Q ‘16 the three months period. As Rick indicated 3Q ‘17 was the fourth consecutive quarter of year-over-year revenue growth. 3Q ‘17 revenues increased 32% year-over-year to $3.6 million growing by $0.9 million.

Gross profit was $1.4 million for 3Q ‘17, this was a slight increase of $0.1 million from 2016. Growth in revenue outpaced growth in gross profit as a result of our revenue mix. While 3Q ‘17 included a higher ratio of non-recurring hardware sales, services, and other gross margin percentage remain very strong at approximately 60%.

Operating expenses increased 17% excluding the effects of onetime non-cash charges. Most importantly regarding our operating expenses we have rebuilt our sales leadership and sales team as Rick has discussed. So sales and marketing expense as a component of operating expenses increased by approximately 125% in 3Q ‘17 compared to 3Q ‘16.

This was a direct result of expansion and rebuilding of our sales force and related sales activities. And as Rick mentioned earlier and also highlighted in our press release CRI booked $5 million in new sales orders during 3Q ‘17.

Regarding the balance sheet, our liquidity improved, moreover the combination of deferred revenue and customers' deposits increased to $8.5 million growing by approximately $7.1 million or more than 500% from December 31, 2016.

This in part reflects our growing backlog of booked sales orders associated with the rebuilt sales team and our new sales leadership. Now let’s talk about the first nine months of 2017 compared to 2016. Revenues for that period were $13.6 million, an increase of 66% compared to the same period in 2016.

Gross profit was $5.9 million for the first nine months of 2017, an increase of $1.7 million or 41% from the corresponding period in 2016. While revenue and gross profit increased 66% and 41% respectively. Total operating expenses excluding the effects of onetime non-cash charges increased by only 7%.

Sales and marketing increased by approximately 100% as a result of the ongoing expansion of our sales force and sales activities. The net change of all the other operating expenses excluding the onetime non-cash charges was essentially zero, they went down slightly.

This was due to expense optimization, expense controls and the ongoing cleanup that Rick talked about as well as capitalized expenditures. We also continue to evaluate on an ongoing basis, what additional changes we should be making to further streamline our organization, improve operating efficiency, et cetera.

Net loss before incomes taxes was approximately $5.3 million for the nine months ended September 30, 2017. This includes a onetime non-cash charge of $2 million in Q3 for stock issuances expenses as a result of the ConeXus acquisition.

Excluding this change, net loss before income taxes for the nine months was $3.3 million, an improvement of $1.1 million or 25%, compared to the same period in 2016. That sums up the results for 3Q and year-to-date through September 30, 2017. At this point, I'll turn the call back over to our CEO, Rick Mills..

Thanks, John. Appreciate the recap. Again I think you see a company that is extremely focused on number one expense control, we are not spenders, we're very focused on delivering value.

Number two, we have taken every as we have optimized our expenses and we've put them right where it needs to be, which is in our sales generation and revenue generation.

Number three, we are focused -- you look around the industry today at our public peers they are growing at somewhere between 1% to 4%, we grew 31% this year and we’re tremendously disappointed and it's set, but it has set as up for another tremendous organic growth easily exceeding 60% in 2018.

So, with that I'll conclude my remarks and turn it back over to John, I don't know if we have any questions come in. I'll turn it back to you, if we have questions..

So, we had a couple of questions, I think two, let me run through them, I think they were partly already answered, this one was not.

So, in the past, we've mentioned a deal acquisition and that we are looking at one or two or three, where are we with that process?.

We continue to investigate acquisitions we have visited -- first off we have a number of companies under NDA, last counted was north of 15 that we had discussions with. Most recently we have done three visits for two day intense check, examination of three different companies, one of those companies was eliminated.

We are in discussions with the other two and we expect to continue to move forward. Our goal is to be an aggregator in this business, and we think in 2018, we will begin to achieve that goal..

Got it.

Another question, I believe you spoke to this earlier, how many sales reps we have today, I believe you mentioned 16, is that correct?.

Yes, that is correct. That consists of 13 folks out calling on customers every day, a Senior VP of Sales. And then two insides sales folks who deal with kind of common core business every day orders in and out of the door. So it’s 16 sales assets all total calling on customers..

Got it. Third question was about ConeXus World stock acquisition issuance expense. I'll take that one. That is a non-cash charge that's related to hold back shares that were issued from the acquisition of ConeXus World by Creative Realities.

It is non-cash, it's a $2 million charge, thereby reducing - improving our operating loss by 25% we mentioned earlier, pre-tax. Rick that's it on the questions.

Do you want to wrap up?.

Great. So again everybody thanks for joining us. We appreciate your joining us this morning spending your time on the call. And I'm certainly welcome for anybody that -- many of you have reached out to me and I've had one-on-one discussions and I'm happy to continue to do that. Everybody have a great day and thank you..