CREX - Deep Sail Capital - Creative Realities: A Solid Platform Extremely Cheap With A 201% Upside
2023-10-28 04:20:00 ET
Summary
- Creative Realities has completed two major acquisitions to build a robust suite of software for managing digital signage.
- The company is beginning to ramp up a channel sales program to allow other digital signage installers to offer their software.
- The current SaaS business is operating at an annual recurring revenue of $15.2 million and is steadily growing.
The following segment was excerpted from this fund letter.
Creative Realities ( CREX )
Creative Realities is a digital signage installer and digital signage software operating system.
Creative Realities has completed two major acquisitions since 2019 (Reflect Systems in 2022 and Allure in 2019) to build a digital signage software offering that includes a robust suite of software for managing digital signage. Creative Realities offers software solutions, including ReflectView for digital signage management, Clarity for digital menu board management, and Reflect AdLogic for managing advertising on digital signage. Creative Realities has historically only sold their software on screens that they install, but that is beginning to change. Due to the breadth and quality of their software offering, they are beginning to ramp up a channel sales program to allow other digital signage installers to offer their software. This will likely begin as a very small opportunity for Creative Realities, but the gross margins on their software sales (likely ~70–80 margins) are much higher than their core hardware sales (~40%), so from a business model perspective, it could be transformative.
The current SaaS business is operating at an annual recurring revenue ( ARR ) of $15.2 million as per the Q2 earnings report, which has been steadily growing over the past few quarters. As they install new sites, their software ARR will continue to grow, with around 5% of the spend from installation converting into increasing software ARR. If they can deliver $120 million of backlog installations over the next two years, their ARR should be over $20 million per year at the end of the period. Outside of the normal ARR from software operating licenses, they have several areas in which they can expand their ARPU per installed display, including content design, ad delivery, and interactive functionality.
Market Opportunity - Segments
Creative Realities operates in two segments: hardware sales and services and software. Hardware sales include all of the display sales and installation costs associated with installing new digital displays. Services and software sales include engineering, design, content, ad exchange fees, and software licenses via a SaaS model. The hardware business is largely a commodity business, as they are simply resellers and installers of the OEM’s hardware. The services and software business is the higher margin portion of the business, which is where the company is planning to gain leverage in their business model. The entire services and software business operates at a 60% gross margin, but we estimate that the SaaS portion of this business operates at a very high gross margin of 70–80%.
The space for digital signage is a highly competitive business, but within each category, the competition differs. For example, in digital menu signage, Creative Realities competes largely with smaller local or regional digital signage installers, but in retail or entertainment signage, they compete with larger competitors like Stratacache and MagicInfo. Creative Realities is a top 10 digital signage installer (7th by licenses) based on industry research the company provides from the Invidis 2023 Yearbook . The company’s offering has all the elements of a complete offering, including installation, design, operating software, and an advertising platform. Their complete solution has contributed to significant customer wins in the last 24 months. In 2022 and 2023, the company won three major customers: Panera Bread, Starlight Media, and Strike Ten Bowling/Bowling Proprietors Association of America (BPAA). These deals are a significant win for the company and highlight their total offering strength. In terms of the number of digital displays for each win, Panera is forecast at 2,000 sites, Starlight Media is forecast at up to 6,000 media assets, and the Bowling deal will evolve over time, but expectations are at least 250–500 sites. These three larger deals will be delivered over the course of the next few years, with the bowling delivery just starting in October of this year after a significant delay due to third-party equipment delays. The current backlog of the company is $120 million, which they believe they can deliver on over the next two years.
Recent history: Merger, Buyout offer, and Equity Raise
2022 and 2023 has been a very eventful two years for Creative Realities. Here is a quick summary:
February 2022: The company completed an acquisition through a merger with Reflect Systems, which brought together their current software offering. The purchase price for the Reflect acquisition was $35 million, which was paid for via a mix of cash (raised via equity issuance prior to closing) and equity in Creative Realities.
January 2023: Creative Realities was forced into a 3 for 1 reverse stock split in order to meet the Nasdaq minimum bid price requirements.
February 2023: The existing largest shareholder of the company’s equity, Pegasus Capital Advisors, sent the company an unsolicited bid for the company at $2.43 per share.
March 2023: The Creative Realities board rejects Pegasus Capital’s first unsolicited bid at $2.43 per share as they believe it underprices the current backlog and coming revenue and free cash flow ramp from the recent major customer wins. The company increased revenue guidance for 2023 to exceed $60 million.
May 2023: The Creative Realities board rejects Pegasus Capitals second unsolicited bid at $2.85 per share.
August 2023: Pegasus refuses to re-negotiate a ~$7 million amortizing note. Creative Realities, seeking to secure all needed cash until they turn the corner to FCF-positive, raised cash from selling 3 million shares at $2 per share.
October 2023: Shares trade down to their lowest level ever of $1.35. Creative Realities confirms revenue will be within guidance for Q3 2023 and reiterates their $60–80 million revenue guidance for the next 12 months. Shares trade up to $1.75.
Creative Realities - 4 Pillars of an Exceptional Investment:
| Pillar |
| Rating |
| Comments |
| Pillar 1 - High Quality Business Model |
| B + |
| • The core display installation business is relatively commoditized and competitive. Gross margins in this business are likely stable at around 40% but barely cover the company's overheads. |
| • The SaaS offering is completely unappreciated by the market. This is an incredibly sticky business, with almost zero churn due to the fact that the operating system is essential to running the digital assets. |
| • The SaaS business is steadily growing at a 70–80% gross margin, and there are huge opportunities to sell their software through other third-party installers (channel partners) as well as through advertising and interactive upcharges. |
| Pillar 2 - Exceptional Management |
| C+ |
| • Recent equity issuance and missteps in their dealings with their largest equity and debt owner, Pegasus Capital, do not reflect well on management. Both the CEO and the CFO did participate in the equity offering, suggesting they believe the stock is cheap at these levels. |
| • I do respect them for shooting down the Pegasus Capital takeover bid, as I too believe it underpriced the equity in the company. |
| • A solid combination of an excellent salesman in CEO Rick Mills and an excellent finance mind in CFO Will Logan |
| Pillar 3 - Substantial Long Term Growth Prospects |
| A- |
| • The company has done most of the difficult work of putting together a full software offering and selling that to a few large customers. At this point they just need to execute on delivering on those deals. |
| • Software offering as multiple points of optionality, including channel partner sales, up sales on advertising and interactive functionality. |
| • The digital display industry is still very early in its progress to convert billboards, menu boards, and other media devices over to digital, with the industry forecasted to growth at a 15-20% for the next decade. |
| Pillar 4 - Reasonable Valuation |
| A+ |
| • EV/EBITDA for NTM = 4.4. Revenue Growth +50% over the next 12 months. |
| • As their SaaS business scales to a larger portion of revenues their Gross Margins will expand from low 40% up towards 50% |
| • The company is forecasting they will be FCF positive in Q4 2023 or Q1 2024. They believe there is little incremental investment required to scale the business on a go forward basis. |
Conclusion
Creative Realities is a unique situation in which the company has built a solid platform for their industry vertical and sold that offering to major customers. All that is waiting for the company now is to execute on those sales, which are largely based on them getting access to sites and availability of third-party equipment. The stock is extremely cheap at this level, trading at 4.4x EV/NTM EBITDA estimates. The company has a sizable portion of their EV in debt, providing the equity significant upside if they can deliver.
We currently believe the business is worth $5.6 per share or a 201% upside to the current market price of $1.85 per share , which rests purely on them delivering on already sold projects and considers no new major sales wins or the potential to expand their software business through channel partnerships.
| Disclosure: Deep Sail Capital LLC (“Deep Sail Capital”) is an investment adviser to funds that are in the business of buying and selling securities and other financial instruments. This information is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associate subscription documents. Past performance is no guarantee of future results. “Deep Sail Capital Partners” returns in this document are shown as net returns or gross returns where stated. Historical net returns assume a 1.5% and 15% management and performance fee, respectively. For Net Returns of fees and expenditures figures please reach out to the fund manager at the email info@deepsailcapital.com . “Deep Sail Capital LLC” name was changed on April 7 th 2022 from the previous name “Organon Capital LLC”.“Deep Sail Capital Partners LP” name was changed on April 6 th 2022 from the previous name “Westropp Funds LP”.* - “Strategy Since Inception” refers to the Strategy inception date of July 2016. Deep Sail Capital Partners LP’s predecessor incubator fund, “Westropp Funds LP” pivoted from a Value Investment style to a Growth at a Reasonable Price (GARP) style fund on that date. For more details on this transition or the calculation behind the “Strategy Since Inception” returns please reach out to the fund manager at info@deepsailcapital.com . |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Deep Sail Capital - Creative Realities: A Solid Platform, Extremely Cheap With A 201% Upside