Creative Realities, Inc.

Good morning. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Creative Realities, Inc. second quarter earnings conference call. This call will be recorded and a copy will be available on the company's website at CRI.com following the completion of the call. All lines have been placed on mute to prevent any background noise. The company has prepared remarks summarizing the second quarter results along with the additional industry and company updates Following the prepared remarks, there will be a live question and answer session. If you would like to ask a question during that time, please hit star 1-1 on your keypad to raise your hand. Alternatively, questions can be submitted during the call via email to ir at cri.com. Joining the call today from the company are Rick Mills, CEO, and Will Logan, CFO. Thank you very much. Mr. Logan, you may begin.

Thanks, Josh. Good morning. This is Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to our financial results and earnings call for the three and six months ended June 30th, 2022. I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The words anticipated, believes, expects, intends, plans, estimates, projects, should, may, propose, and similar expressions of the negative versions of such words or expression 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 quarterly financial statements on Form 10-Q and in our annual report on Form 10-K filed with the SEC on March 22, 2022. 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 to non-GAAP measures is included in our public filings and in our earnings release that was released yesterday. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc.

Thanks, Will. Good morning, everybody. And I do want to let everybody on the call know that I am remote, located remotely today. If for any reason I drop off, Will Logan will continue with my prepared remarks as I try and rejoin the call. So with that said, I want to start this call and tell you we're very pleased to announce our Q2 2022 results. and our continued progress towards our goals this year. Specifically, I'm gonna highlight the following three key points. Number one, we had record revenue of 10.9 million during Q2, representing an increase of 7.6 million or 233% year over year. This brings our year to date revenue to 21.7 million, which is also a record for the six months ended June 30th and represents an increase of 162% year over year. While the acquisition of Reflect in February is contributing to these results, the combined company has grown organically greater than 58% as compared to the pro forma results of the combined company through June 30th, 2021. These results are in line with our previously stated target of achieving at least 43 million of revenue in the current year, which is a 40% organic growth rate from the pro forma combined company results in 2021. Second point, EBITDA and adjusted EBITDA for Q2 2022 were 2.8 million and $933,000 respectively, improving our adjusted EBITDA margin from 5.9 in Q1 to 8.5 in Q2, bringing year-to-date adjusted EBITDA for the six months ended June 30th to 7.2. As we discussed in our prior call, we expect to continue to improve to drive improvements in adjusted EBITDA as we scale this business and complete the integration of Reflect. Number three, the key strategic initiative of our management team is to continue to grow our annual recurring revenue, or ARR, which is primarily comprised of software as a service, or SAP subscriptions, to our enterprise-grade digital signage solutions. Our stated goal as we entered 2022 was to increase our ARR run rate by 25% from approximately 12 million on a pro forma consolidated basis for Reflect and CRI exiting 2021. So we started at 12 million. We expected that our goal was to grow it to 15 million entering 2023. through june 30th 2022 we have grown our arr run rate in excess of 14.5 million achieving 83 of our target growth for the year through the first half of the year we expect it to continue to drive increases in our arr run rate throughout the remainder of the year and expect to easily eclipse our $15 million goal. Will Logan and I are going to provide more detail around our Q2 results, but first, I would like to reiterate what we do and how we create value so everybody on this call understands everything that we do. We operate in the digital signage and media industry, and importantly, several key high value adjacencies. We sell and install digital signage and related technology along with a considerable array of services that build off that installation base. We own several proprietary software platforms which generate significant software as a service or SAS revenue. We serve market leading companies across many prominent verticals. We have a number of revenue sources, including the following. Number one, managed services. These revenues primarily represent sticky long-term contractual agreements comprised of software licensing and support services for our signage software platforms. Second, we surround that with other services, which include assisting our customers in the design, engineering of a solution to fit their specific space, hardware installation, content development, content scheduling, and occasionally custom software development. We also provide post-deployment network and field support services, which we commonly refer to as Day two services. Third bucket of revenue. Media sales and ad tracking. Business through which we conduct the direct and indirect sourcing of advertising revenue for client-owned networks. This was acquired through the Reflect transaction and is a major growth area for the company. This is both a critical technology and capability for the company's entry into a high-margin, high-growth space to deliver network monetization products for our customers. Our fourth and final bucket of revenue is the actual hardware. This is primarily screens or displays, media players, and related equipment. While these revenues typically carry lower margin, the long tail on hardware sales are an essential leading indicator of future growth in SaaS, media, and other high margin services downstream, affecting the sales mix and temporarily margin mix in the short run. Put it very succinctly, folks, we're all about getting that screen sold to a customer, putting it on a wall because the moment that screen goes up on the wall, it starts generating SaaS revenue for our company. As a SaaS and media company, we're excited as to how we are favorably positioned to acquire and defend significant market share in a highly fragmented industry owing to our extended product set, our technology stack and people, all driven by compelling business model. We are built for scale and ultimately profit and free cash flow. We will get in the QQ results in more detail, but before we do, I wanted to speak to two important events for which we recently issued press releases. On June 28th, the company announced a marketing partnership with the Bowling Proprietors Association of America, or BPAA, and Strike 10 Entertainments, whereby Creative Realities will become the official digital signage and digital menu board provider of the BPAA. The partnership was announced at the Bowl Expo Convention in Las Vegas during the last week of June. This is significant for several reasons. Number one, the BPAA has more than 3,000 member bowling alleys for whom CRI is the exclusive digital signage and digital menu board provider. We will be launching a campaign offering digital menu boards to these proprietors and will continue to be published in BPAA magazine and participate with menu board related activities, booths, et cetera, at their industry trade shows. Number two, Strike 10 Entertainment. They're the centralized sponsor activation arm of the bowling industry, and the BPAA have announced plans to roll out a bowling-specific digital network, which will feature advertising in addition to to circuit and location-specific content. Strike 10 and the BPAA have significant plans for this network. While the contract remains pending for deploying the network, the program has launched, and more information can be found via the Strike 10 website at bowlingcentertv.com. You can go to that website, there's a video, shows the announcement, et cetera. This event is an important event for many reasons. Helping clients monetize their networks is a key part of our strategy. We will do this by trafficking ads to client screens to take advantage of significant on-premise attendance. Sometimes we simply traffic the ads to the screens and sell the software on a SaaS basis to do this. However, in other instances, we also bring advertisers to our clients and actually sell them media. This is one reason why the Reflect systems, why the merger with Reflect this past February was so important. We acquired an advertising trafficking platform called AdLogic, which is in the forefront of our media capabilities. Our work with BPAA and Strike 10 is yet another example of how we can effectively power client networks in a matter where our screens generate profit and are simply not a cost. The company is currently doing this with other entertainment venue customers. In fact, our strategy to support, aggregate, and power networks for our customers is is a key driver of value creation for the company. There are quite a number of client networks out there which are not currently being monetized in this manner, but the demand is absolutely there. With our products and capabilities, we anticipate being able to acquire and defend substantial share directly and indirectly in this rapidly growing space. In addition, we recently issued a press release highlighting our growing relationship with Freddy's frozen custard and steak burgers, a longtime customer of the company. Let's talk to why this was such an important announcement and what it could mean for the company. This represents a new product launch for CRI in the form of of design optimized digital menu boards for outdoor drive-through and walk-up locations. This solution has the capability to start static and then be upgraded to digital over time, further assisting clients in managing costs of converting to digital deployment. This data-driven product is all about helping Quick service restaurants, or QSR, such as Freddy's, our clients, use optimized menu boards to reduce ordering friction points and thereby improve the cycle and fulfillment times, which are so key to profitability for this industry. As many of you know, the QSR industry was already in the middle of transformation prior to the pandemic, which has further accelerated the need for efficient order processing and reduced cycle times. This has placed additional emphasis on drive-through, curbside delivery, and takeout. GRI intends to be at the forefront of enabling this unit-level transformation, and the deployment of our recently announced new drive-through solution is a key part of the strategy. Through capabilities recently developed and acquired, the company is situated to compete for market share in the vast investments being made in drive-through technology. Second part of this, scale matters. Freddie's alone has 420 restaurants across 32 states, and it's publicly stated it intends to drive its unit count to 800 by 2026. All new Freddy's locations going forward will be adopting our solution, and we believe there's a tremendous opportunity to deploy our solution at pre-existing sites through a retrofit program. To understand the math, at 800 sites, as an example, the digital outdoor menu board program represents an opportunity for up to $24 million in revenue, and that's just one solution for one customer. There are over 200,000 drive-through operations in the U.S. with Americans visiting drive-through lanes about 6 billion times each year by some counts. As you can see from these two announcements, CRI is well positioned to exploit high growth opportunities in the marketplace. On our last earnings call, we discussed our strategy for value creation, And we introduced our six-point plan for value creation that remains a focus of the company's multi-year strategic planning. As a reminder, our value creation focus includes the following. Number one, grow revenue. Number two, improve margins. Well, clearly, folks, we are continuing to do one and two and continuing to do it well. Point number three, grow our annual recurring revenue Translate ARR to EBITDA and free cash flow. Again, Q2 points to further evidence of that. We will pursue capital stack plays for optimal structure and growth. Number five, scale high margin SaaS services and media. And then number six, opportunistically pursue accretive M&A. I'll discuss the specifics around each of these value creation points. and relate them to our Q2 numbers after Will Logan provides the Q2 2022 results. Will, I'll turn it back over to you.