Creative Realities, Inc. (NASDAQ: CREX, CREXW) has announced its financial results for the three- and nine-months ended September 30, 2022.
Rick Mills, Chief Executive Officer, commented, “I am pleased to report that the Company generated record revenue of $11.2 million for the third quarter of 2022, a $6.4 million, or 135%, improvement over the same period in 2021. Importantly, this represents a $3.5 million increase over the pro forma combination of Creative Realities and Reflect Systems in 2021, indicative of both organic and strategic growth through the merger of the companies. The Company’s run-rate on annual recurring revenue is also at a record level of $14.5 million, on track for a 25% growth rate in this key profitability driver in the current year. EBITDA and Adjusted EBITDA for the second quarter amounted to $1.5 million and $1.2 million, respectively, which represents continued expansion in our Adjusted EBITDA of 2.6% in the third quarter of 2022 as compared to the second quarter of 2022, consistent with the expansion from first to second quarter of 2022. We believe these results aptly evidence the strength of the platform created by the combination of Creative Realities and Reflect Systems and demonstrate the Company’s ability to drive value for our shareholders. Our current client base continues to expand and the pipeline for clients appears robust.”
Mr. Mills continued, “With the expansion of our SaaS revenue and the momentum within our pipeline, we reiterate our expected target to generate revenue in excess of $43 million during 2022, which would amount to an organic growth rate in excess of 40% on a pro forma combined company basis, as compared to 2021. We are ahead of schedule on delivering the goal of 25% growth in our annual recurring revenue on a pro forma, combined company basis in 2022. Our primary focus continues to be expanding the number of devices managed via our digital signage software platforms generated SaaS revenue, thereby increasing the value of our Company through our growing annual recurring services revenue. As we grow the software subscription base and continue to integrate Creative Realities and Reflect, we expect to further enhance our profit margins over operating leverage and improve financial results.”
Mr. Mills concluded, “Throughout 2022, we have demonstrated our ability to achieve sustained organic and inorganic revenue growth and expansion in Adjusted EBITDA. We believe we have reached an inflection point where our incremental revenue growth will have a meaningful effect on profit. As we look forward to 2023, we are excited to announce our revenue target of at least $54 million, with targeted Adjusted EBITDA of 15%. Despite market and macroeconomic conditions, our industry remains positioned to capitalize on strategic tailwinds and we remain excited about the platform and our prospects for ongoing value creation. Creative Realities is uniquely positioned to service enterprise customers with our end-to-end offering and to drive profitability through our increased scale.”
Third Quarter 2022 Financial Overview
All current year results herein represent the financial results of Creative Realities, Inc. and include financial results for Reflect Systems, Inc., a wholly owned subsidiary of Creative Realities following their merger on February 17, 2022.
- Year-over-year third quarter revenue growth of $6.4 million, or 135%
- Annual Recurring Revenue run-rate exceeds $14.5 million – on-track for targeted 25% growth rate in 2022
Revenue, gross profit, and gross margin:
- Revenues for the three months ended September 30, 2022 were $11.2 million, representing an increase of $6.4 million, or 135%, as compared to the same period in 2021 driven in part by the acquisition of Reflect on February 17, 2022, and the Company’s successful sales activities as a combined company post-Merger. During the three months ended September 30, 2021, the pro forma combined results of Creative Realities and Reflect Systems produced $7.7 million in revenues. The current year combined company results for the three months ended September 30, 2022 represent an increase of $3.5 million, or 45%, over the pro forma combined results for the same period in 2021. The year-to-date organic revenue growth rate was 53% as compared to the pro forma combined 2021 nine months ended September 30, 2021.
- Hardware revenues were $5,015 in the three months ended September 30, 2022, representing an increase of $2,800, or 126%, as compared to the prior year, driven by continued large scale LED deployments continued in the quarter by multiple customers.
- Services and other revenues were $6,165 in the three months ended September 30, 2022, an increase of $3,627, or 143%, with the inclusion of Reflect’s operations in the Company’s consolidated results for the full reporting period. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $3,900 in the three months ended September 30, 2022 as compared to $1,444 in the same period in 2021, driven by the continued expansion in our SaaS software subscription base. The long-tail of hardware ultimately continues to drive these SaaS revenues higher period-over-period. This represents a year-over-year growth rate of 150% in our higher margin, typically subscription-based, managed services revenue.
- Gross profit increased by $2,167, or 92% during the three months ended September 30, 2022 as compared to the same period in 2021 driven by an increase in revenue but offset by a reduction in gross profit margin. Gross profit margin decreased to 40.4% from 49.4% driven by less favorable revenue mix during the three months ended September 30, 2022 related to several material customer hardware rollouts during the year that had a lower gross profit margin than our software services. We expect this contraction in gross profit margin to be less severe as we move beyond 2022. We believe the gross profit margin for the three months ended September 30, 2021 to be more representative of our normalized, long-term gross profit margins.
- Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by $388, or 118%, driven primarily by (i) the acquisition of Reflect via the Merger on February 17, 2022, and (ii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic. Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities, the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that were undercapitalized historically by the Company. Additionally, the Company engaged an investor relations firm and has increased investor relations activities, including conferences and presentations. As a result, we expect the sales and marketing expenses of the Company for the three months ended September 30, 2022 to adequately reflect the pace for spend in these areas in future reporting periods.
- Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development increased by $12, or 5%, in the three months ended September 30, 2022 as compared to the same period in 2021. The prior year included a benefit of $49 related employer retention credit (“ERC”), resulting in a net reduction in research and development expenses year over year for the three months ended September 30, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. The Company’s gross spending on research and development activities has increased in the current quarter and year as a result, however, the capitalized portion of those activities has also increased specifically related to the increased investment into development and enhancement of specific products, features, and functionality associated with our customer acquisition strategy in key vertical markets. We expect an elevated level of expense throughout the remainder of 2022 and 2023 as we develop our current and future product set.
- General and administrative expenses increased $999, or 54%, driven primarily by (i) the inclusion in the prior year of a benefit of $186 related to ERC, and (ii) increased headcount and operations as a result of the acquisition of Reflect via the Merger on February 17, 2022. While the Company anticipates carrying higher general and administrative expenses moving forward as a result of the acquisition and subsequent expansion in organic revenues, the Company continues to execute integration activities (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools, and rightsizing leases for office space) that we expect will be realized by the end of 2022 and into 2023. The Company also reinstituted its 401k matching program for employees in the fourth quarter of 2021, which represents an increase of $52 versus the prior year, and launched several investor relations initiatives, increasing spend $81 in the three months ended September 30, 2022 versus the prior year.
Operating loss, net income, and EBITDA:
- Operating loss was $284 thousand during the three months ended September 30, 2022, inclusive of $0.8 and $0.5 million in non-cash charges for both amortization of intangible assets and non-cash employee & director stock compensation, respectively.
- Net loss was $0.6 million during the three months ended September 30, 2022, which included:
- $0.4 million gain on marking outstanding contingent liabilities to fair value, and
- $0.8 million of interest expense, including $0.4 million in amortization of debt discount included within interest expense.
- EBITDA was $1.5 million and Adjusted EBITDA was $1.2 million for the three months ended September 30, 2022. Adjusted EBITDA margin was 11.2% during this period.
A reconciliation of the GAAP-basis net income/(loss) to Adjusted EBITDA is provided in the table at the end of this press release.