Rick Mills - CEO John Walpuck - COO Will Logan - CFO.

Analysts:.

Good morning and welcome to the Creative Realities, Inc. First 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 ir@cri.com. Joining us on the call, we’ve Rick Mills, CEO; John Walpuck, and myself Will Logan. 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 webcast replay and transcript will be available on the company's Web site at www.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 Realities, Inc..

Thank you, Will. Thanks everybody for joining the call. We appreciate those who continue to log in and receive the update on our company's progress. So first and foremost, I want to congratulate Will Logan. Will Logan joined us 7, 8 months ago from Ernst & Young.

He had a wonderful track record there, and Will started his VP of Finance and has now been promoted to the CFO position. We transitioned his operating duties from John Walpuck, who is our Chief Operating Officer to Will.

So Will had a number of years with Ernst & Young, all public companies, several IPOs, ten acquisitions all occurred in his clients under his watch, if you will. And so, we're glad that Will now kind of finalizes what I call the operating management team. And really the goal of that was to free up John Walpuck.

John has been carrying both buckets of duties for the last several years, and we felt it very important to free up John's role as the Chief Operating Officer for some integration duties that we expect in the future. So congratulations, Will..

Thank you..

We also added another member to our team, Scott Werlein. Scott comes to us from a long tenure at Cisco. Scott joined as Director of Content Strategy and Design. He has developed digital content strategies for 500 global brands, etcetera. And so, he has 20 years experience and we welcome Scott to the CRI team. So our timing revenue continues to be choppy.

I want to address that a little bit. We talked -- excuse me, we’ve talked previously about 1.8 million of the smart cities transaction that had slipped from Q4 into Q1.

Well, it became apparent by the end of January or early February that that not only was going to slip out of Q1, it slipped into Q2, and now we already believe it's really slipping into Q3.

And so, remember, part of what we do is tied directly to infrastructure, work and that often involves cities and municipalities and permitting and concrete and construction, and so it -- as you build the pipeline, it leads to some choppiness.

Q2, we expect Q2 to come in somewhere between the high 5s to the mid 8s, and that's just the nature of the business. We still have a couple of projects that are subject to infrastructure stuff that the timing is literally week-to-week. Q3 and Q4, just very solid, very strong.

We are very comfortable with our full-year guidance of $33 million, and so very, very bullish as we exit this -- our weakest quarter of the year which is Q1. So, with that, I’m going to turn it back to Will..

Thanks, Rick. I will now summarize our financial results for the quarter ended March 31, 2018 compared to 2017. Regarding the first quarter of 2018, note that the MD&A section of our quarterly report on form 10-Q provides unaudited 2018 and 2017 quarterly financial information derived from the company's annual and quarterly financial statements.

We’ve also provided therein a reconciliation of GAAP to non-GAAP quarterly EBITDA and adjusted EBITDA for those periods presented. Revenues for the first quarter of 2018 were approximately $4.1 million, $2.3 million lower than the first quarter of 2017.

Excluding a single significant nonrecurring project from the same customer in each period, revenues were approximately $2.9 million for the three-month period ended March 31, 2018, as compared to $2.2 million for the same period in 2017 or growth of approximately 24% in the core business. Gross profit was $1.5 million in the first quarter of 2018.

Gross margin declined to 37% in the first quarter as compared to 44% in the same period in 2017 due primarily to sales mix. During the first quarter of 2018, hardware sales, which traditionally have a lower gross margin than our services revenue, increased approximately $700,000 or 120% versus the same quarter in 2017.

Hardware sales are traditionally the entry point of our sales cycle with revenue related to services recognized over time throughout the remaining contract lifecycle. In addition, the prior period included nonrecurring services revenue of $4.2 million with the gross margin greater than 50%.

The current quarter included approximately $1.2 million of comparable nonrecurring service revenue. Operating loss was approximately $1.3 million excluding the effect of a $0.5 million, one-time non-cash charge related to the exit of a long-term lease.

The charge represents the final anticipated restructuring charges and centralizing the company's operations to the Louisville, Kentucky headquarters. At this point, I'll turn the call back over to Rick Mills..

Thank you, Will. Let's talk about some recent wins. We highlighted some of that in our press release, but I thought I’d just add a little bit of color to it. The first when we talked about in the press release was a French company that has 850 retail locations in airports throughout the country.

They’ve several thousand stores around the world, 850 plus here in the U.S., and they went through a complete RFP process, we participated in that RFP. We were the clear winner of that RFP, and our planning right now they’ve identified locations for pilot rollout in the month of July.

So what's compelling about that is our relevance in the marketplace. We are out there.

We are now participating in the RFP processes, and we are winning, and that's something that didn't happen 18 months ago, so it really speaks to how relevant we are in today's marketplace of digital signage in the integration here in the U.S., okay? Our partnership with one of the largest convenience chains in the country, it's actually the largest corporate owned, fuel and gas chain in the country, and we are continuing to provide all the menu board solutions as they transition from static menu boards to digital menu boards.

We expect that to be an ongoing process as they equip 6,000 to 8,000s plus stores over the next 2, 3, 4 years. That’s an ongoing project.

Then, we were asked to participate with one of the top three screen manufacturers and join them in a presentation to really the largest oil company in the world that has 4,000 plus fuel and convenience stores around the world.

And they are launching really more of an upscale look in their fuel and convenience, and they’re giving a separate select brand name. And so, they flew in from Houston. They were here. We did presentations for six hours, and we're ultimately notified that we've been selected to install the first pilot locations. So again very relevant win.

Very much tied to our expertise in our history in successfully implementing large scale fuel and convenience. We do have a little local PET project year that we're very pleased and proud of with our partnership with the University of Louisville.

They’re expanding the Papa John's football stadium here and we will be providing digital signage throughout the football facilities, throughout some sections of the concourse etcetera.

So we look forward to that project and that’s one of the ones that [indiscernible], do we get all that stuff in by end of June or is that going to move into July, and we're seeing schedule and issues that we continue to work on. Another sign of confidence in us and in our company, we were selected by North American based LED manufacturer.

They were growing rapidly, large-scale LED large-format LED is -- there whole industry is expanding rapidly. And they needed some help in their installation maintenance and support activities. Everything from help on-site installation engineering resources and project management.

And we were selected as their outsource provider to support them as they grow and we're very pleased with that. We turn that project on I think it was February 1, and so we're answering phone calls and out engaged in projects today. So those are really some of the recent wins.

We are excited to continue that and I would also tell you that our automotive practice continues to grow and show promise, specifically the Alfa Romeo brand is doing some very unique things and we expect to talk more about the Alfa Romeo stuff as we move throughout the year. Okay, M&A activity.

I would just tell you that we are well down the path with a number of companies. As a matter of fact, I was with another candidate yesterday for four hours. And -- but I will tell you very clearly, we must acquire the right partner, at the right price, and the right transaction.

And my definition of the right transaction is a win-win-win, and there are three constituents that all must participate and win. Number one, first and foremost, is our shareholders. It must be accretive. Number two, us as the acquirer.

It must bring something significant to our business, and number three, at least to be fair in a -- for the person or the company that we acquire. And again, we're not looking for somebody that’s exiting the business. We are looking for the right partner.

Many of you may have heard me use this phrase before, certainly here in the company that I’m looking for a partner that is buying in and not selling out. And so, we're finding the right companies, but smart acquisitions take time and patience.

So I will continue to exercise the right time, in the right patience to find the right partner or partners, so that we end up with a win for all three constituents. Our goals for 2018 remain the same as previously discussed. I will just reiterate that one more time. Number one, we expect to improve the balance sheet.

Number two, we expect or hope continue to work on possibilities for elimination of long-term debt, okay? Number three, our goal is to simplify the capital structure. And I would tell you we have number of discussions about those things and don't have solutions today. But we certainly are well down the path in achieving solutions at all of those.

Number four, we expect to achieve additional scale. Scale to us is not $33 million. While $33 million certainly achieves profitability, bur our goal is to achieve additional scale, not just profitability, okay? And then last, but not least, we expect -- we will ultimately pursue potentially achieve an uplifting.

And so those are really our primary goals that we expect to accomplish between now and year-end. And obviously a number of things to come in the way of those things, but those are our goals and continue to remain our focus. We are -- expect to be a leader in consolidation in this industry.

We are well down the path and I’m extremely bullish as we move forward at this stage. Turn it back over to John Walpuck for any Q&A that may have come in.

John?.

Thanks, Rick, and congratulations, Will. Super pumped to have you in that role and capacity. Couple of questions. First one is, bottom line, Q1 was crappy.

Can you please add some more color on what went on in Q1?.

Okay. Q1, number one, traditionally it's our softest quarter. And so, number two the addition of having the $1.8 million in smart cities transaction move out, we had two other infrastructure transactions that got caught up, and we just simply could not [indiscernible] up the door by March 31. So that's really it.

It’s -- I don't consider it a huge issue, because I remain very bullish on our overall annual number, okay?.

Okay.

Number two, the company and you’ve previously discussed on multiple occasions the expansion in the new sales team, how is that team gaining traction in the marketplace?.

Great question. John, that tells me somebody remembered. We talked about the sales force expansion 8, 10, 12 months ago. So, yes, so we expanded our sales force and we're very pleased with the results.

We realigned our sales force into verticals, so we have Beth Warren, who leads our retail practice, and Beth has a sales team underneath her as she leads the retail team. We have Alan Buterbaugh, and Alan runs our automotive and QSR Group and C-store falls into the QSR team.

So -- but Alan Buterbaugh runs that and he has been very diligently working as we expand our work with a large German automotive manufacturer headquartered in Atlanta. So Alan is doing a great job and also runs one of our Detroit automotive practices.

So, Paul Kline based out of New York, and Paul runs our infrastructure, our smart cities and transportation sector. A lot of that work come -- falls under Paul, and so that continues to grow, and Paul has a whole sales team as does Alan underneath him, and they’re all doing well. We have expanded.

We added Anthony Woods who joined us about three months ago, and we have taken up the additional verticals of financial, corporate communication, and then sports and entertainment.

So, with the addition of Woody in -- as Anthony Woods is known, we call him Woody here, but we are building a sales team underneath Woody and to continue to grow the backlog, and due to that -- due to the addition of those teams, we felt -- because all of them are generating content services work, and therefore we had to expand the content team and brought on Scott Werlein as Director of Content Strategy, etcetera.

So, going extremely well and we're very pleased with the direction we’re headed..

Great.

Time for one more, Rick?.

Sure..

Okay. So this last one, both may want to comment on it.

Read some about the non-cash charge in the Q, can you provide a little more color on what's going on there and is there more to come?.

Will, why don’t you start and then I'll finish, but I will let you talk about that..

Yes, the non-cash charges related to the shutdown in [indiscernible] of our Fairfield New Jersey operations, where historically our accounting and finance function have operated. The charge in the current period is an accounting charge when you [indiscernible] facility, you take that full charge in the current period.

It’s accrued at the present value of the future minimum lease payments, so we will work through a potential settlement agreement with the landlord for formal exit, but that is the current charge in the period..

Okay. Thanks, Will. So, I guess, I would tell you folks, John whoever asked the question, but specifically that really represents to me the closure on the old CRI, the old company because today it's a new company. The headquarters has transitioned here to Louisville, Kentucky. All operating functions for finance and accounting are here.

Will is now on board as our new CFO, all of those folks we've ended all severance payments etcetera to all those folks and have really just transitioned to here. So it really represents a closure, and the company is now operating here. We have five facilities across the U.S and we're very, very bullish on moving forward.

So that's really it, and no more of those charges -- type of charges that we see in the immediate future at all..

That’s it John..

Yep, that’s it..

All right, folks. Thank you very much for joining the call and I look forward to our continued progress, and we will continually update you as things -- as we grow and things change. Thank you..