Participants

Will Logan; Chief Financial Officer; Creative Realities Inc

Richard Mills; Chief Executive Officer, Director; Creative Realities Inc

Brian Kinstlinger; Analyst; Alliance Global Partners

Howard Halpern; Analyst; Taglich Brothers, Inc.

Samuel McColgan; Analyst; Breakout Investors

Presentation

Operator

Good day, and thank you for standing by, and welcome to Creative Realities Incorporated's earnings call for quarter ended March 31, 2024. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Will Logan, Chief Financial Officer. Please go ahead, sir.

Will Logan

Thank you, and good morning, everyone. Welcome to our earnings call for the first quarter ended March 31, 2024. I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The words anticipated, will, believes, expects, intends, plans, estimates, projects, should, may propose, and similar expressions or the negative versions of such words or expressions as they relate to us or our management are intended to identify forward-looking statements.
Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in our Form 10-Q filed with the SEC this morning May 10, 2024, and in our annual report on Form 10-K filed with the SEC on March 21, 2024. 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 will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our public filings and in our earnings release that was issued this morning. We believe the use of certain non-GAAP measures, such as adjusted EBITDA and several other important KPIs represent meaningful ways to track our performance. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities.

Richard Mills

Thanks, Will, and good morning, everybody. Thank you for joining. Once again, we posted record quarterly results for the first quarter. I want to thank everyone at CRI, your dedication to our customers and our company mission is what makes me excited to come in every day.
I am pleased to report the following for Q1 2024, record first quarter revenue of $12.3 million, up 23.5% from $9.9 million in the prior year; record first quarter gross profit of $5.8 million, up from $5.1 million in 2023; adjusted EBITDA of approximately $0.8 million against $1 million last year; and finally, annual recurring revenue or ARR at an annual run rate of $17.7 million versus $16.3 million at the end of the fourth quarter.
We are off to a great start in fiscal 2024 with strong revenue growth and solid margins plus our sales funnel continues to expand which is very encouraging. We remain on track to deliver record results for the full year. First quarter revenue increased by 23.5% versus 2023, despite typical first quarter seasonality as deployments are initiated or restarted and budget cycles reset.
While our consolidated gross margin was lower than the first quarter in 2023 on a percentage basis, it increased in absolute dollars. This reflected our revenue mix. The 45% year-over-year growth in service revenue included significantly higher installations where the margins are not as high as those for our other services, including SaaS, hence the slightly lower gross margin year over year.
However, it is important to note that greater installation activity ultimately leads to higher subscription revenue going forward as deployed hardware utilizes our SaaS solutions. At the end of the first quarter, our ARR stood at an all-time high of approximately $17.7 million on an annual run rate basis. This is an increase of $1.4 million from where we ended 2023 at $16.3 million.
When we announced our 2023 fourth quarter results, this past March, we increased our ARR guidance for exiting 2024 from $18 million to $20 million run rate. We affirm that guidance today as we have stated repeatedly, this is an all-important metric as it provides enhanced visibility into higher margin revenue and improve cash flow generation as well as the increasing trust our customers place in our technology enhanced solution.
Now let's take a moment to go through our recent refinancing announcement. The company has entered into a commitment letter to secure a new $20 million senior revolving credit facility with an additional $5 million accordion feature on top of the $20 million. We expect to finalize the credit facility next week. I cannot overstate the strategic importance and potential value creation implications of this new facility.
As you know, the company has demonstrated a commitment to disciplined debt deleveraging over the past 18 months, working in lockstep with our revenue growth and improved profitability. While we were initially targeting the back half of 2024 for a recapitalization of our existing debt, which was scheduled to mature in 2025, we have always articulated a desire to do so sooner if practical and attractive.
Due to the company's strong performance, we are taking advantage of the opportunity to secure this financing earlier than anticipated under favorable terms and a more conventional banking partner. The company has clearly earned the trust of a number of financial institutions.
I want to restate the implications of this financing. Number one, it is transformative in nature with potential for significant lending capacity. Two, provides a tremendous upgrade to our balance sheet by shifting debt from short term to long term in nature. Three, it allows for flexibility and support for a strong pipeline of organic and acquisition growth opportunities. Finally, it has the capability of unlocking strategic options for the company.
Proceeds from the new credit facility will initially be utilized to repay all outstanding debt held by Slipstream Communications, which currently stands at approximately $13.6 million. There are no prepayment penalties associated with refinancing the existing debt.
We want to thank Slipstream and their parent, Pegasus Capital Advisors, who remains a shareholder for supporting our management's vision and collaborating to build a world-class digital signage and digital media platform.
While the new facility will have a variable interest rate that currently is equivalent to the weighted cost of our existing debt, but with the opportunity to decrease as interest rates decline. We look forward to updating our shareholders once the credit facility has been finalized. This is a tremendous turn of events for CRI and I want to thank Will Logan, George Sautter, and the entire finance team for putting this package together. It is great news for CRI. Now I'll turn it back over to Will to share some additional comments on our financials. Will?

Will Logan

Thank you, Rick. An overview of our financial results for the first quarter of 2024 were provided in our first quarter earnings release and Form 10-Q each filed this morning, which included the condensed, consolidated balance sheet as of March 31, 2024, a condensed, consolidated statement of operations, and statement of cash flows for the three months ended March 31st, 2024, as well as a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the three months ended March 31, 2024, and the preceding four quarters.
I want to reiterate what Rick stated with respect to the refinancing strategy we are now implementing. It will improve our financial flexibility, strengthen the balance sheet, and should lead to lower interest expense over time. We are excited about bolstering our ability to support future growth and ultimately returns to shareholders.
Now a couple of additional points of context related to our balance sheet. Cash, as of March 31, 2024, the company had cash on hand of approximately $2.9 million, virtually equivalent to the balance sheet at the end of 2023, despite continued repayments of debt principal during the first quarter of approximately $1.1 million.
Gross and net debt stood at $15.1 million and $12.2 million, respectively, at the start of 2024. These numbers now stand at $14 million and $11.1 million, respectively at the end of the first quarter. On a trailing 12-month basis, utilizing adjusted EBITDA, the leverage ratio on gross and net basis were 2.9 and 2.3, respectively as of March 31, 2024.
As we have discussed before, this is vastly improved from the 5.4 and 5.0 times for gross and net debt at the end of 2022. We believe that the risk profile of the company continues to favorably change, a key to obtaining our new financing. As Rick mentioned, the new credit facility will be non-amortizing and provides flexibility for the company to continue to evaluate and migrate to an optimized capital structure in support of growth. I will turn it back to Rick for additional comments on our results and customer activities.

Richard Mills

Thanks, Will. A few additional updates on customer and operational activities. BCTV, this project continues to move forward, but remains slower than originally anticipated. We completed eight locations in 2023, 54 locations in 1Q '24 at an average sale price of $27,000. We currently expect similar results for Q2 and beyond. While the ramp has been extended, the opportunity is not lost and the customer remains focused on ultimately achieving deployment of 1,000 locations for its ad-based network.
Starlight Media, we deployed another 150 locations in 1Q '24 and are expecting to receive another order of 250 sites in Q2 for deployment in the second half of this year. Assuming that the media revenue generated by our customer from this network provides an adequate ROI, CRI would expect to supply hardware and complete installation of additional 1,000 units in 2025. The average sale price for a unit, inclusive of installation is approximately $12,000 per location.
During our year-end earnings call in March, I discussed the retail media network for a financial institution that had selected CRI as its partner for an initial deployment of 650 sites. We installed 170 in Q1. We expect another 185 in 2Q.
Upon completion of the initial deployment, we anticipate finishing in Q3. The customer has indicated they will evaluate their media revenue for the balance of 2024 and then make decisions about additional locations for 2025 and beyond. The network has the potential to expand to 40,000 locations in the US.
IceBox Network, we have converted all 85 of their test sites to our CMS and ad serving platform. This advertising network could begin rapid deployment as early as Q3, and we would expect an initial deployment of 5,000-plus locations.
Finally, adoption of our drive-thru solution for quick-serve restaurants continues to accelerate. This product continues to be a key driver in both new customer acquisition and existing customer expansion opportunities. And our product is very, very competitive. We are installing a drive-thru every business day, somewhere in the US and expect to grow that number.
Couple of other noteworthy items. We have engaged Darrow Associates as our IR firm. We are very pleased with the team in their activities. Frankly, they're working pretty hard. We recently presented at several microcap conferences and the organizer of one of the conferences commented that the most requested meeting from potential investors was with CRI.
Clearly, we are doing something right. And finally, an update on our ERP conversion. We are on track for the transition to NetSuite on July 1. This will result in significant improvements to our workflow, internal data accuracy, cost management, et cetera. I could go on and on about the benefits. Suffice to say, this will provide operational efficiency in the quarters and years to come. With that, we'll now move to the Q&A portion of the call. Please go ahead, operator.

Question and Answer Session

Operator

(Operator Instructions) Brian Kinstlinger, Alliance Global Partners.

Brian Kinstlinger

Hey, thanks. Can you talk about business development? You've definitely talked about some of the wins you've already had and you mentioned a sales funnel that continues to grow. What verticals would you say you're seeing the most demand in and is there any way to quantify bookings somehow in the quarter, maybe number of new logos, total contract value? Any way to think about how that business development played out?

Richard Mills

Brian, great question. The verticals that we're seeing tremendous activity in number one, our QSR space right, specifically led by the drive-thru, seeing tremendous engagement with a number of QSR brands. Number two would be our sports and entertainment. We are clearly engaged with somewhere between 10 and 15 professional teams for large stadium overhauls. So we'll see how that goes.
Number third vertical is retail media networks, lots of conversations. Now those transactions tend to move a little slower because they tend to be very big in nature. And there's a whole lot of complexity around building a retail media network. So that's really it. In terms of new logo wins not a lot of new quote logo wins in Q1. We expect that to change in Q2 and beyond.

Brian Kinstlinger

Great. That's helpful. And then is there any change to the revenue guidance range, given the slower ramp discussion on BCTV or was this contemplated in the low end of the range? And then the second piece of the question, given the heavy services component that you saw in the first quarter, is there any thought to for the year a change in your thought on the mix? It may result in a slightly lower EBITDA margin for the year, or is that a one quarter phenomenon?

Richard Mills

So far we believe it's a one-quarter phenomenon. Yes, we are very comfortable as we have always indicated our quarters will be a minimum of 20% to 40% increase over last year. We are still firm in our guidance on $60 million in revenue. Yes, we had contemplated bowling in the lower end of the guidance, Brian. I will tell you, even though bowling is going to be even a little light of where we contemplated it, we believe we will make it up in other parts of the business. In terms of the relative overall mix, I'm going to throw that one to Will Logan.

Will Logan

Yeah, I think, Brian, we're used to seeing what you've kind of seen here. Fourth quarter we had large hardware that resulted in a roll into Q1 of large or higher than maybe historical installation activities that will then roll into the services bucket. I think expect that trend to continue, but we're not ready to change the overall mix that we expect for the year.
So I would expect we would trend back towards a higher mix on the hardware side as more deployments are pre-purchased or purchased in 2Q and 3Q for deployment later in the year. Shouldn't have any impact negatively on our projection for EBITDA margin. As we talked about coming into the year, we thought we'd be closer to 50-50 or 40-60 hardware services. I still think we're on track for that for the full year, just might look a little lumpy or different each quarter.

Brian Kinstlinger

Great. Last question I have, you talked about a lot of different lines. The only one client I haven't heard about I don't think in the last two quarters is Panera. I know they obviously had some management changes there that that maybe change the short term opportunity. Maybe talk about what's happening there. Are you installing -- I probably should have checked, I'm not sure if there's new stores coming out just maybe an update on what's happening there?

Richard Mills

Yes, we are fully ingrained into Panera. We're fully integrated to their point of sale. And all new Panera store openings are getting a new digital drive-thru of some configuration. So we're on the construction schedule now. And as a ballpark, we expect them to open 40 to 60 locations a year.
We are anticipating that we will be added ultimately to the remodel schedule sometime later in this year. But as you know, Panera has filed documents with the SEC and is ultimately looking to go public, and we don't expect a material change until they solve that issue that they're trying to solve with going public.

Brian Kinstlinger

Great. Thanks for taking all my questions.

Operator

Howard Halpern, Taglich Brothers.

Howard Halpern

Hi, congratulations on a great start to the year. Could you I guess, talk a little bit about how you are going about like deepening your relationships with existing customers and expanding on what you already have on the platforms that you already have for those customers?

Richard Mills

Well, we continue to add services and the customers tend to expand with our services. For example, we brought on a number of customers with the Reflect acquisition that we did several years ago, Howard, right?

Howard Halpern

Right.

Richard Mills

Every one of those customers today, their revenue is higher than when we acquired the customer. Number two, they're buying more services across the board out of our we have approximately 10 essential services and they're buying more out of each bucket. So that's generally true of all of our customers.

Will Logan

Howard, I'd also add that we're seeing a lot of our retail C-store customers who were not initially in the monetization game, they're just procuring our CMS software for content management today beginning to trial, test, explore, and ask for our ad tech software as an incremental layer. So as we think about an upsell opportunity, that's where we're seeing the most traction.

Howard Halpern

Okay. And I guess just could you give, I don't know what type of margins as that area of builds, can we see dropping, I guess, to the bottom line as they continue to monetize US services?

Richard Mills

Will?

Will Logan

Yes, Howard, we're selling the ad tech layer right now on a SaaS basis. So if it's an existing customer that's already deployed and is adding that that would be incremental price per device per month that should be consistent with our other SaaS offerings, 90% margin on a pure basis, 75% to 80% on a fully loaded basis.
So that's a big opportunity as on some of the other customers that Rick talks about where we are growing or expanding services, where folks have acquired our software already, and we were not the full services provider, expect us to continue to expand the offering with hardware and installation activities. So same as the rest of our revenue from a profitability standpoint or a margin view depending on the service that we upsell or cross-sell.

Howard Halpern

Okay. And just one last one. What are you seeing in the competitive environment. I mean, when you get -- you know, submit your request proposals, are you winning a good majority of the business that you submit for?

Richard Mills

Yes, Howard, we typically have a track record of when we're invited and we participate. We win about 70% of the engagements. And I would tell you that we have been invited, we continue to grow in invitations, if you will, as we've gotten larger and have really expanded the base across the United States and are truly operating in the enterprise territory, every enterprise customer generally has CRI on the list somewhere to have a discussion with.

Howard Halpern

Okay. That sounds great. Keep up the good work guys.

Operator

[Samuel McColgan, Breakout Investors].

Samuel McColgan

Congratulations. It's an exciting start to the year, and I just had a couple of questions. One was about now that you've got the new financing well almost in place, I just wondered if that changes your priorities in terms of deleveraging versus potentially like acquiring other companies. I just wondered if you -- now that you have that in place -- almost in place, whether you're leaning more towards doing acquisitions sooner than later or if that's changed your outlook there at all.

Richard Mills

Great question, Samuel. Thanks for asking. We've always been acquisition inquisitive if you will. We continue to look at the marketplace. The difference is before we had minimal capacity. Today, I have capacity. The issue still remains buying, acquiring somebody at reasonable multiples and valuations, will always tend to be the hurdle. But if we found the right company, which is something we would certainly be laser focused on.

Will Logan

Yes, Samuel, no change in strategic focus, we're just excited that the strategic optionality now exists should something come.

Samuel McColgan

Yeah, it's brilliant news. Thanks for the color there. My second question was on the expenses, they have come up a little bit, especially the admin expense. I just wondered if that's kind of -- about where it will stay for the rest of the year.

Richard Mills

My comment here would be --

Will Logan

Yes.

Richard Mills

Go ahead, Will. Go ahead.

Will Logan

Yes, Samuel, we've done some incremental investments. We've talked about the ERP application. We brought a couple of incremental sales folks and our media channel as well has grown. So those are things in the 1Q filing that should remain consistent throughout the rest of 2024. We've built up that infrastructure and don't look to expand that through the calendar year.

Samuel McColgan

And then last one for me was just on your backlog. I think the last I heard it was about [$110 million]. Is it about in the same range?

Richard Mills

I would tell you it's in the same range. It is slightly reduced from those numbers, but still very significant.

Samuel McColgan

Yeah, okay. Brilliant. That's all from me, but congratulations again and look looking forward to next quarter.

Operator

Thank you. (Operator Instructions) And at this time, I'm showing no further questions. I'd like to hand the conference back to Mr. Rick Mills for closing remarks.

Richard Mills

Thank you. Let me conclude the call by thanking all our shareholders, clients, partners, and employees for their continuing efforts, commitment, and support as we work together to transform Creative Realities into the leading brand in digital signage solutions. We look forward to speaking with you again next quarter.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.