Quick Pitch: Creative Realities (CREX)

Potential Takeover – Upside TBD

I have already covered CREX in March, so please refer to this write-up for background details.

Several positive developments have happened since. The $2.49/share privatization offer from the largest shareholder Pegasus Capital (20% ownership) has been rejected, whereas CREX has also reported strong 2022 results and increased guidance for 2023. The share price ran up +19% over the last month and currently trades at the level of the recent buyout offer ($2.49/share). The company is still cheap and trades at 5.1x E2023 adj. EBITDA and 2.5x 2024E ARR, while the topline has been growing at 40% (both last year and as guided for this year). Management is now projecting to reach $100m revenue and 25% adj. EBITDA margin in the next few years, which is a killer outlook for a $47m EV company. So in a way, the situation has become even more interesting. However, I’m still unable to overcome the previously bad track record of this business and highly promotional management. These issues make it difficult to understand whether the business is really at an inflection point or whether investors will again be disappointed with over-hyped promises. For now, I’m staying on the sidelines but will continue to track this situation as it develops.

The board rejected Pegasus takeover offer saying it “significantly undervalued the company based on the committee’s views of the intrinsic value”. The valuation gap was once again reiterated in the Q4 conf. call:

At some point, our stock price needs to reflect our intrinsic value and financial results and we believe that it will.

Importantly, the special committee remains available and ready to respond to any revised proposal. It is yet to be seen if Pegasus will return with an increased bid, however, judging from the comments above the price increase would have to be material to appease the special committee.

Furthermore, alongside strong 2022 results CREX also announced increased guidance for 2023. The forecasted revenue for this year is now at $60m (from $54m before), marking 39% expected YoY revenue growth. Adj. EBITDA margin is expected to widen to 15% from 9% last year. ARR is set to grow by 13% to $17m. The ARR stream alone (very stable and sticky software revenues) is already close to fully covering the company’s operating expenses ($20m in 2022). In the conference call, the CFO also dropped this line:

We’re at a point an inflection point in that model internally as we cross $60 million $70 million. And certainly as we progress towards $100 million, we see this continuing to get to 25% on an adjusted EBITDA basis at that scale, and we’re in the middle of that journey.

If the actual performance comes anywhere close to this outlook, the stock price would see a massive re-rate. For now the business is clearly having a strong momentum driven by the post-COVID recovery of the company’s end markets and the increasing popularity of interactive digital screens and digital screen advertising in the retail, restaurant, leisure/entertainment, and other sectors. The company has recently finalized and signed 2 major contracts – Strike Ten Entertainment (1000 bowling locations, estimated $46m revenues in 18 months) and a large national QSR chain, which is now expected to generate $55m over a 3-year period vs previously estimated $30m-$40m. At full deployment, the QSR chain contract will be generating $2m annual ARR. Moreover, CREX is also in advanced discussions with two new potential partners, which might result in a $32m contract over 3 year period time (nothing has been mentioned about the ARR).

However, it’s not clear what is driving this outperformance as in general, the digital signage sector is expected to grow at a much slower 11%-14.5% rate from 2023 to 2026. It remains unclear if management’s comments should be taken at face value or whether these are just promotional gibberish. For example, last year they’ve been hyping up the CREX media business (ad traffic services to client’s displays). However, after the analysts pressed management to give more details, the media segment turned out to be just a few million-dollar business that’s barely growing. In the latest conf. call, again, management put a lot of effort to hype and position all of the above-mentioned recent contract developments as ‘new wins’. However, the first two were not new at all, but rather already disclosed partnerships that management had already discussed several times last year. For this, he management was called out by one analyst:

My follow up question. We heard about a lot of big opportunities, so trying to pretend there are lots of them. But I didn’t hear anything about strike 10. Is that signed, sealed and you’re delivering? Have any expectations changed there? Thank you.

Also, management’s track record with regards to meeting previous guidances is not great and the performance of this business till last year has been pretty poor. Revenue and EBITDA guidance for 2017 and 2018 were missed.