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CREATIVE REALITIES, INC. (CREX)·Q1 2023 Earnings Summary

Executive Summary

  • Q1 2023 revenue was $9.94M, down 8% year over year, but gross margin expanded to a record 51.2% and Adjusted EBITDA rose to ~$1.0M (9.6%), reflecting a mix shift toward higher-margin managed services and SaaS .
  • Management reaffirmed FY2023 guidance: revenue $60M, exit Adjusted EBITDA margin 15%, and ARR exit run-rate $17M; backlog remains “up to $110M,” supporting a 2H23 ramp .
  • CEO highlighted five consecutive ~$10M quarters and record ARR run-rate of $14.8M, underscoring scalability and operating leverage as deployments and subscription revenues grow .
  • Call commentary flagged a step-change in revenue beginning Q3 2023 (to ~$20M/quarter) driven by bounded deployments (e.g., bowling network) and accelerating drive-thru wins; supply chain constraints largely alleviated .
  • Potential stock catalysts: visible 2H23 revenue acceleration, maintained 2023 guidance, record margins/ARR, and secured deployment starts (bowling in July), offset by near-term revenue softness and debt service headwinds .

What Went Well and What Went Wrong

What Went Well

  • Record Q1 gross margin at 51.2%, first time above 50%, driven by higher mix of managed services and improved hardware margins; Adjusted EBITDA margin expanded to 9.6% from 5.6% YoY .
  • ARR run-rate reached a record $14.8M; management reiterated path to exit-run Adjusted EBITDA margin of 15% on 2023 guidance .
  • “We continue to win in the market” with high RFP win-rate (>80% by dollar value since 2022) and secured large-scale deployments (e.g., bowling network kickoff, Starlite expansion), positioning for a Q3/Q4 revenue step-up .

What Went Wrong

  • Top-line declined 8% YoY on hardware revenues down 33% due to prior-year refresh cycles not repeating; however, services revenue grew 31% and managed services +51% YoY partially offset the headwind .
  • GAAP net loss of $1.0M vs prior-year GAAP net income of $2.5M (which benefitted from a $5.469M warrant fair value gain in Q1 2022); interest expense rose to $0.803M .
  • Sales and marketing (+61%) and R&D (+52%) costs increased with Reflect integration and growth investments; legal expenses elevated due to a special committee response and litigation settlements .

Financial Results

Summary vs prior quarter and prior year

MetricQ3 2022Q4 2022Q1 2023
Revenue ($USD Millions)$11.20 $10.50 $9.94
Gross Profit Margin (%)40.4% N/A51.2%
Adjusted EBITDA Margin (%)11.2% 9.8% 9.6%

EPS vs prior year and current quarter

MetricQ1 2022Q1 2023
Basic EPS ($USD)$0.51 $(0.14)
Diluted EPS ($USD)$0.51 $(0.14)

Note: Prior-year EPS benefited from a $5.469M non-cash gain on warrant liability fair value in Q1 2022 .

Segment breakdown (Q1 2023 vs Q1 2022)

SegmentQ1 2022 ($USD Millions)Q1 2023 ($USD Millions)
Hardware Revenue$6.46 $4.32
Services & Other Revenue$4.30 $5.62
Managed Services (SaaS + Help Desk)$2.70 $4.07

KPIs and Operating Metrics

KPIQ1 2022Q4 2022Q1 2023
ARR Run-rate ($USD Millions)N/A$14.8 $14.8
Backlog (Projected Revenue)N/AUp to $110 Up to $110
Gross Profit ($USD Millions)$3.89 N/A$5.09
Cash and Equivalents ($USD Millions)N/A$1.63 $3.91
Deferred Revenues ($USD Millions)N/A$1.22 $3.61
Operating Loss ($USD Millions)N/AN/A$(0.09)
Adjusted EBITDA ($USD Millions)$0.64 $1.03 $0.96

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2023$60.0M (updated on 3/30/2023) $60.0M (reaffirmed 5/15/2023) Maintained
Adjusted EBITDA Margin (exit run-rate)FY 202315% 15% Maintained
ARR Exit Run-rateFY 2023$17.0M $17.0M Maintained
Backlog (Projected Revenue)Multi-yearUp to $110M Up to $110M Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2022 and Q4 2022)Current Period (Q1 2023)Trend
Drive-thru and QSR initiativesAnnounced Freddy’s deployments; targeting large fast-casual chain with ~$30–$40M opportunity over 2 years and >1,000 drive-thrus; SOC reduces hardware complexity Secured new discussions with two drive-thru customers (~300 locations each) and expect up to 1,000 drive-thru deployments in 18 months; faster customer acquisition cycles Accelerating adoption
Supply chain conditionsPlayer and network gear availability improving; SOC mitigates hardware constraints “Supply chain no longer an issue” except minor parts; line-of-sight for network equipment in early Q3 Improving
Backlog and deployment timingBacklog communicated at ~$110M; bowling network contract close; anticipated Q2/Q3 2023 start Backlog remains at ~$110M; bowling deployments begin July (possibly June); forecast revenue doubling in Q3 Stable/high; execution starting
ARR and margin trajectoryExit-run Adjusted EBITDA target 15% for 2023; ARR >$14.5M run-rate ARR run-rate $14.8M; reiterating 15% exit Adjusted EBITDA target Expanding at scale
Capital structure & corporate actionsReverse split executed; special committee rejected Pegasus offer ($2.49/share post-split) Reverse split completed; updated Pegasus offer at $2.85/share under review Ongoing

Management Commentary

  • “Our Q1 2023 revenue of $9.9 million includes a record first quarter gross profit of $5.1 million and a record first quarter adjusted EBITDA of $960,000… the fifth consecutive quarter for which our revenue has approximated or exceeded $10 million” — Rick Mills, CEO .
  • “The combination of continued expansion from existing customer engagements and contracts won incrementally in the current year has set the stage for the company's quarterly revenue to double from third quarter 2023” — Will Logan, CFO .
  • “Managed services revenue… were $4,072… driven by expansion in the Company's SaaS subscription revenue, or ARR… This represents a year-over-year growth rate of 51% in our higher margin… managed services revenue” — Q1 press release .
  • “We are continually driving improvements in our profitability… increases in high-margin ARR increase the Company’s gross profit margin… we seek an Adjusted EBITDA run-rate of 15% exiting 2023” — Rick Mills, CEO .

Q&A Highlights

  • Drive-thru ROI and market dynamics: Brands face throughput and accuracy pressure; ROI generally <12 months for in-store and ~14–15 months for drive-thru; OpEx financing model available .
  • Supply chain and scaling: Minimal supply constraints; staffing added in Q1/Q2 to support expected revenue doubling in Q3; working capital supported by upfront customer hardware deposits .
  • Bowling network deployment: Contracts executed, product ordered; significant deployments begin July (~$1.5M/month incremental revenue expected) .
  • EBITDA-to-cash conversion: Historically near neutral during elevated R&D/CapEx; expect 70% EBITDA conversion to cash in 4Q23 and 2024 as CapEx normalizes ($1.5M/year) .
  • Mix outlook: 2023 and 2024 likely ~50/50 hardware/services at current scale with longer-term mix moving to ~1/3 hardware and 2/3 services as ARR grows .

Estimates Context

  • Wall Street consensus via S&P Global for Q1 2023 EPS and revenue was unavailable at the time of request due to data access limits; therefore, we cannot provide an estimates comparison or identify beats/misses for this quarter [functions.GetEstimates error].
  • Given maintained FY2023 guidance and management’s Q3 ramp expectations, sell-side models may need to reflect stronger 2H seasonality and higher ARR-driven margins .

Key Takeaways for Investors

  • Margin quality improving: Record 51.2% gross margin and higher Adjusted EBITDA despite softer hardware revenue underscore mix shift and ARR leverage .
  • Visible 2H ramp: Backlog (~$110M) and scheduled bowling/DOOH/QSR deployments point to material top-line acceleration beginning Q3 2023 .
  • Guidance intact: Reaffirmed FY2023 revenue $60M and 15% exit Adjusted EBITDA margin; ARR exit $17M — de-risking near-term outlook if deployments execute on schedule .
  • Services flywheel: Managed services up 51% YoY; subscription base expansion should drive sustained margin expansion and cash generation into 2024 .
  • Operating leverage: CFO targets ~70% EBITDA-to-cash conversion as investment cycle normalizes; deferred revenue and deposits help working capital during scale-up .
  • Risks: Hardware revenue variability, elevated interest expense, and execution timing on large rollouts; prior-year GAAP comparisons inflated by non-cash warrant gains .
  • Trading setup: Near-term catalysts include confirmed deployment starts (bowling in July), Q3 revenue step-up, and any customer announcements (fast-casual chain, DOOH networks) .