Good morning and welcome to the Creative Realities First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Alternatively questions can be submitted during the call via email to ir@cri.com.

This call will be recorded and a copy will be available on our website at cri.com following the completion of the call. Joining us on the call, we have Rick Mills, CEO; and myself, Will Logan, CFO. Before we get started I would like to take this opportunity to remind you that our remarks today will include forward-looking statements.

Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause the results to differ materially are set forth in our quarterly financial statements on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call we may present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP and non-GAAP financial measures is included in our public filing. It is now my pleasure to introduce Rick Mills CEO of Creative Realities..

Thank you Will. Good morning everyone. Thanks for joining the call. Q1 is clearly our best quarter ever but I do want to point out this did not happen overnight and it didn't happen over the past six months.

This is the result of several years of a very diligent focus on customer acquisition, continual execution, and operational improvement, and finally customer satisfaction. And all those efforts have resulted in where we are today. So before we move on I want to take a moment, I want to thank all the CRI employees across the country.

Some of you have been here for a number of years, you have been here longer than I have as the CEO. Others like the team from Allure in Atlanta who have recently joined the CRI team collectively you have shown a tremendous willingness to pitch in and make this company a success and a leader in our industry that it is today.

So thank you for your effort. To our shareholders, funds, and analysts folks on the call as you evaluate our company over the coming year think of us in this framework, 2018 was the year that we accomplished four key objectives. We wanted to get the company up listed through a major stock exchange.

Transition of the capital structure to a single class of stock with full transparency to all investors, eliminate long-term debt, and then finally raise some additional capital to complete an acquisition and enhance our organic growth.

We accomplished that in November and once that was accomplished we kind of feel like the company foundation is very much complete. 2019 is the year we break through on revenue and profitability.

As we view 2020 and beyond we expect to enhance revenue and grow earnings, not only total earnings but earnings as a percent of revenue which speaks to the scalability of our business model.

We believe by staying very focused on our market the financial models we continue to refine showed dramatic improvement as we grow beyond the $55 million to $60 million range. Once we reach that revenue range we believe every dollar of incremental revenue should drop 25% to 30% to the bottom line assuming our recurring revenue continues to grow.

This is why we continue to be focused on a roll up strategy or some might say a consolidation strategy in the industry to accompany our organic growth. I will turn this back to Will to go over the numbers in detail..

Thank you Rick. I'll now summarize our financial results for the quarter ended March 31, 2019 compared to 2018. Regarding the first quarter of 2019 we note that the MD&A section of our quarterly report on Form 10-Q provides on unaudited 2019 and 2018 quarterly financial information derived from the company's annual and quarterly financial statements.

We've also provided a reconciliation of GAAP net income to non-GAAP quarterly EBITDA for the current and previous four quarters here in. Revenues were 9.5 million for the three months ended March 31, 2019, an increase of 5.4 million or 133% compared to the same period in 2018.

Hardware revenue grew approximately 0.4 million or 33% in the first quarter of 2019 as compared to the same period in the prior year. Gross margin on hardware revenue was 14% compared to 11% in the prior year. Services and other revenue grew approximately 5.0 million or 177% in the first quarter of 2019 compared to the same period in the prior year.

Gross margin on services and other revenue was 44% compared to 49% in the first quarter of 2018. Excluding one engineering services project in the period gross margin on services and other revenue would have been approximately 49%.

Managed services revenue which includes both our SaaS and help desk technical subscription services represented approximately 1.5 million of revenue in the first quarter of 2019, an increase of 1 million or 200% as compared to the same period in the prior year.

This increase was driven by both one, our acquisition of Allure in November 2018 and two, our continued focus to transition a greater percentage of our revenue base to a recurring revenue or subscription model. A key point of emphasis for our sales and management teams beginning in 2018 and continuing today.

Gross profit was 3.7 million for the first quarter of 2019, an increase of 2.2 million or 144% compared to the same period in 2018. Gross margin increased to 39% in first quarter 2019 versus 37% in the same period in the prior year driven primarily by the aforementioned mix of hardware and services and other revenue.

The company achieved operating break even during first quarter 2019 as compared to an operating loss of 1.8 million in the first quarter of 2018. General and administrative expenses increased 0.6 million to 2.3 million in first quarter 2019 versus first quarter of 2018.

As a result of incremental payroll benefit and office expenses associated with the acquisition of Allure in November 2018. We believe that our operations have achieved appropriate scale to maintain at or near breakeven operating results as we move through 2019.

We expect our expenses to either remain consistent or improve slightly as we continue to evaluate the combined operations of the company and identify further opportunities for integration and economies of scale. EBITDA was 0.4 million for the first quarter of 2019 compared to an EBITDA loss of 1.2 million for the same period in 2018.

We believe that we will continue to produce positive EBITDA throughout 2019. Cash flows used in operations were 200,000 in the first quarter of 2019 compared to a use of 1.1 million for the same period in 2018. At this point I'll turn the call back over to CEO, Rick Mills..

Thanks Will. Great overview. I would like to take a few minutes and update everyone on some of the business objectives we were focused on throughout the balance of this year. Number one, launch of our new CMS or content management system called Clarity.

This software system is moving from beta to production with a rollout to certainly QSR restaurants before the end of Q2. I think we have it in 20 locations beta now and we're starting the production rollout here. It is our belief that this is the single best platform for -- our industry bar none.

It supports indoor, kiosk, outdoor order confirmation and preliminary feedback from current customers and prospective customers is very, very positive.

Second objective for us is transition of the Allure client base from an older business model called hosting, support and maintenance around software licenses and our goal is we're transitioning those customers to our new software platform with a SaaS agreement.

We expect to start with a number of QSR customers and then migrate our theater customers as we approach year-end. Another objective is elimination of the old Wireless Ronin CMS. As we transfer the few remaining customers to our new CMS Clarity we expect to improve the customer experience while reducing operational cost.

And we expect to accomplish that in the next two or three months. Another focus is the continued growth of our QSR customers and adding new brands, new logos. QSRs are looking to increase the amount of technology in the restaurants including mobile apps, mobile order and pay, digital menu boards, and self-service kiosk.

Drive through is very important to this customer also and we understand and execute extremely well in this discipline. The drive through has tremendous opportunity for digital solutions where digital displays will change in real time based on a number of factors such as weather, what the customer's ordering, and most importantly who's in the car.

As we will enter the age of personalization of these menu boards to the very specific car. And last but not least our continued focus on large venue vertical, sports and entertainment we expect it to have a breakout second half of 2019 but it is moving slower than expected.

It is our intent to use the SEAT Exhibition in July at the Daytona Speedway to meet with many new prospects for 2020 and 2021 opportunities. SEAT by the way is the go to show for all sports and entertainment executives.

We will be showcasing our UCI product which is currently deployed at the AT&T Stadium in Dallas and runs all the menu boards in the AT&T Stadium. This product was selected as the 2019 digi award as the best digital signage content management software. It is clear we are bullish and excited as we continue to execute throughout 2019.

We've given guidance and we reaffirm our guidance for Q2. We do expect to update guidance at the end of Q2 for the balance of the year.

Some other informational and operational details that we have accomplished, we did a refurbishment of our operations center here in Louisville, Kentucky to really support growth and we've got a little grand opening in the next couple of weeks for that.

We have a brand new state of the art network operation center where we manage and monitor these tens of thousands of devices all across the country and that we expect that to be completed and opened in the end of July-August timeframe.

And then we also have an executive briefing center that we are in the middle of finalizing and that will be open hopefully end of Q3. Finally we continue on our goal to find -- our goal to find and complete additional acquisitions, hopefully this year but certainly in 2020. This depends upon valuations and the strength of our currency.

So to summarize we are an organic growth oriented company with a very nimble, agile structure which continues to execute and outgrow our industry peers. We continue to believe our stock is tremendously undervalued by many fundamental metrics. There is no question 2019 will be a record year not only on top line revenue but bottom line EBITDA.

We are 100% aligned with our shareholders. The Board Management continue to own a majority of the company's equity and as a management team we are focused on creating value for our shareholders. That concludes really our message today and we would take a moment and see if we have any questions..

[Operator Instructions]. It looks like the first question that we have is from Brian Kensinger [ph] at AGT..

Hi, can you guys hear me. .

Yes.

Hey Brian, how are you?.

Great. I wasn't sure if I got this technology. I'm only a technology analyst, I couldn't tell if I could get the technology to work.

Can you quantify the pipeline of opportunities maybe and how this compares to last year at this point and if you can't give numbers maybe directionally how it looks? And then can you discuss what types of sales cycles you're experiencing the length?.

Okay, I will take the latter first. Sales cycles in this industry just, Brian, tend to be very long. So they're minimum six months and some as long as two years. I actually have one that we've been working on for more than five years and finally could be bring it to fruition. So it just takes a long time.

And that's not that customer's not excited, we get with the customer and then they're clearly excited. Yes, I need to do this to drive my business. But then the customer may have to go through a budget cycle or two to allocate capital, to go do it and go deploy it.

So that's the challenge and we kind of feel like that's why the business has now caught up after two years of hard work and investment. So that's the first thing I would tell you. The second thing I would tell you quotes submitted actually in front of customers today is north of $30 million. And so the pipeline is very, very robust.

We continue to talk to a number of customers. So we're excited about that as we move forward. Will you have anything to add to that. .

No, I think you covered it. Thanks Rick. .

Okay Brian..

And then which industry do you see with the most opportunity, is it QSR that you mentioned and if so are there any other industries that you think stand out as growth drivers for your business?.

Oh, great question Brian, growth drivers. Number one, QSR is an area for us that tends to be very robust. One of the reasons we bought the Allure company and brought that expertise in as their tremendous pedigree, the relationship with Coke and their analytics training and background all around the QSR space.

Number two, I talked earlier on the call about the QSRs and the opportunity because they are looking at how to enhance the drive through experience, as drive through is typically 70% of the QSRs revenue comes through the window. So a 10 second improvement in drive through has enormous impact to the bottom line.

So for us we will continue to focus on that. Number two C Store [ph]. We continue to see C Store because C Stores fuel and gas convenience, feel like they can compete head to head with QSR. So they're equipping themselves with the same digital technology to enhance customer behavior.

And it's why in these C Stores you're seeing large footprint of digital because there is no other place where the advertiser can talk to a consumer closer to the point of activation. It is C Store, they are 30 feet away from the cash register and so we see that growing.

And then the third element a large venue is something that we have put a lot of time and effort in. We have not gotten great returns at this time. We expect those returns to come over the next year or two. And then fourth last but not least our luxury retail or just retail in general has always been a strong focus for us.

So those are the areas we continue to push..

Great. I thought it would be helpful maybe to talk about the competitive landscape on the call.

How it has changed over the last few years especially as you bid on larger deals, how does the competitive landscape look?.

We're starting to see some minor consolidation within the industry. Again just to be clear about what does the industry look like, what is the footprint. We believe 97% to 98% of all of our competitors they tend to be very small, say small. They tend to be anywhere from 3 million to 5 million to 10 million in revenue. They tend to be single location.

They tend to have two or three customers that are large that represent 40% to 50% of their revenue. And then they would tend to have another 20 or 30 customers that are regional in nature. So that's really the competitive landscape.

We believe today there are four or five companies that are above the -- in the $40 million and north of $40 million range. And so we expect to compete with those companies for the enterprise customers all across the U.S. that have tens of thousands of locations. .

Great, that was helpful.

The last question I have is can you talk about if there is any seasonality in your business?.

Will, will you address that. .

Yeah Brian, I would say that there is certainly some level of seasonality within certain verticals right. We see theater for example may have a busy spring summer and then a busy holiday season at the end of the year. You know a QSR and retail tend to go a little darker in the fourth quarter than they do earlier in the year.

It does not in our opinion have a massive impact on our overall consolidated results given that we play in six to eight different verticals. We would also think that as we continue to grow from our current level of revenue that that would further disseminate and we would not really have any seasonality as we move into 2020 or later in 2019.

But historically speaking fourth quarter tends to be lighter than the other three. So it is a function of large retail and others that kind of go dark in construction during that holiday season..

Yeah, I would just add for example in New York City there's a moratorium. And of course New York City is a very large market for fashion and retail and so there is a moratorium that comes into effect November 15th. You can't install anything after that date so they just don't allow it.

And so we were certainly subject to that over the last couple of years but as our other sectors have grown as we have pointed out we expect that to moderate over time..

Great, thanks so much for taking my questions..

Thanks Brian, appreciate it..

Next call or question that we have is Bill Sutherland at Benchmark Company. .

Thanks Will, hey Eric. .

Bill, how are you?.

Good sir.

Could you go back to your commentary about a couple of the technology developments, the transitions to Clarity and then the one off related to Allure and just wanted a little more detail on that if you don't mind?.

Okay, sure. So one of the benefits of the acquisition of Allure is Allure had spent literally millions of dollars and I should say Allure and the prior owner Christie Digital had spent millions of dollars building a brand new content management system from the ground up. And it was 99% complete.

And so as part of the acquisition we acquired that and the technology is outstanding, it is digital signage generation 2.0 or 3.0. So it's the newest latest technology with really many, many years of learning and partnering with the Allure and Coca-Cola Company and a tremendous amount of knowledge around the QSR.

So it has tremendous capability for QSR operators. So when they see that and they sit through a demo of Clarity it's wow, that's exactly what I mean. That's how I run my business. And so all that learning was put into that product. So we are excited now, it's actually today it is powering -- I think it's 20 or 30 locations.

I don't have the exact number but it's out, it's running and we expect the second half of the year to transition multiple large scale customers over to the Clarity platform. .

And Bill just to add there it's our go to market technology today for the consolidated company. So we see this as an improvement over the prior CMS offerings from CRI and we'll continue to go to market with this product. Does that answer..

Yeah, that's good color.

The Rick had mentioned in the past some large retailer opportunities and is there any way to talk about the status, I know one was in automotive space?.

You know the automotive, great question. So the automotive we have rolled out all ten of their demo test locations. They are all up and running. They are all performing exceedingly well in terms of their customers interpretation of it. I was most recently informed they want to gather two months worth of sales data for the month of May and June.

We will be reviewing that in July and making the termination of a full scale roll out. In the early information and feedback we have received is that the uplift is exceeding their expectation. And that they believe they will go forward but they really want a formal review of that before the Board in early Q3 time frame.

So, now the next question will be does that mean they are then going to roll out? No, that could be that all the test results are there, they may have to go through a budget cycle. It could be 2020 before they'd pull the trigger to go roll out. And that's what we do for a number of our customers. .

Yeah, I figured you don't get the okay and [indiscernible] gate and is it the same with the QSR, do you end up talking or developing the specific franchises in certain cases or is it more of a top down decision. .

Typically it is made at the franchises decision and they review it. For example we have been involved with a burger chain that has 2000 locations across the U.S. We started that about a year and half ago and then a year ago we put in seven stores and six months ago we said, you know what we want to change the location of the screen.

Change the location in the screen. And so we did that and our team was actually there yesterday at the headquarters [indiscernible].

It had been done all the analytics and all the point of sale details and the uplift in the soda and certain other high margin items and all that was actually presented to the senior management of this large chain yesterday.

So that is very typical and so now the question is what's their ROI, what is their requirement for an ROI, what does that look like. And I think in the QSR space it is not if they are going to roll out, it is just it is a matter of when. .

Okay, and then do you feel the same way about large venue despite the fact that's it is pushing out, is it just a sales cycle issue?.

Yeah, large venues is just a sales cycle issue. You know just you got to get in front of them and in some cases it is two and three years in advance as construction planning goes in etc. .

And so that's retrofitting old venues. .

Yes, there is a retrofit. In those projects you got to be out in the front of it in about a year minimum..

Okay..

And to answer your question on retrofit, it is part of the reason we are excited about our UCI product that did win the digi award because that is an opportunity, software application that can come in and help to control and remote access control venues with deployments that are already in place. So it is in short term.

And most of these large venues typically football games and others they really have a challenge at the end of the third quarter or they quit selling alcohol beverages. And that you change over 300 venue screens in a venue etc. And our product addresses that problem for them. .

Got it, thanks guys, appreciate it. .

Great, at this time it looks like those were the only questions submitted on the call. So 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 concludes the CRI first quarter 2019 earnings call..