Presto Automation Inc. (PRST) Q4 2023 Earnings Call Transcript

Presto Automation Inc. (NASDAQ:PRST) Q4 2023 Earnings Conference Call October 10, 2023 5:00 PM ET

Company Participants

Adam Rogers - Head of Investor Relations

Xavier Casanova - Chief Executive Officer

Stanley Mbugua - Chief Accounting Officer

Conference Call Participants

Brian Dobson - Chardan Capital Markets

Michael Latimore - Northland Capital Markets

Operator

Good day, and thank you for standing by. Welcome to the Presto Automation Inc. Fourth Quarter and Full-Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Adam Rogers, Vice President of Investor Relations.

Adam Rogers

Thank you, and good afternoon, everyone. I'd like to welcome all of you to the Presto Automation fiscal fourth quarter and full-year 2023 earnings conference call. I'm Adam Rogers, Head of Investor Relations here at Presto.

Today's call will include comments from our Chief Executive Officer, Xavier Casanova and our Chief Accounting Officer, Stanley Mbugua. Xavier and Stanley are joined on the line today by Dan Mosher, President of Presto Automation. After our prepared comments, we will open the call for questions. A replay of this call will be made available and information to access the replay is listed in today's press release.

Before we begin, I'd like to remind everyone that during today's call, we will be making forward-looking statements regarding future events and financial performance, including guidance for our fiscal first quarter 2024. These forward-looking statements are subject to known and unknown risks and uncertainties. Presto cautions that these statements are not guarantees of future performance. We encourage you to review our most recent reports or any applicable filings for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events.

Also during today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are included in today's earnings press release, which can be viewed and downloaded from our website.

And with that, we'll begin by turning the call over to our new CEO, Xavier Casanova.

Xavier Casanova

Thank you, Adam, and thanks, everyone, for joining our fiscal fourth quarter and full-year 2023 earnings call. I am pleased to be speaking to you today as the new CEO of Presto. I joined Presto in 2022 as Chief Product Officer to develop and drive the company's innovative solutions. The thing that struck me immediately was a significant opportunity that Presto had in the dynamic and growing restaurant technology sector. In March, I was asked to become Chief Operating Officer.

In this role, I have seen and heard firsthand, the improvements that our AI and automation solutions make to our customers' businesses and their guest spending experiences. Those experiences show me clearly that Presto Automation is one of the most immediately actionable and scalable applications of AI today. These were also among the main reasons I was delighted to accept the opportunity to lead Presto as CEO in its new phase of development and growth.

As CEO, I intend to tap into my 25 years of experience in founding and building successful enterprise software companies. My knowledge of this business, including how our solutions are deployed and their applications for our customers, alongside my experience in developing high-growth profitable businesses will be invaluable for the months and years ahead.

I lead Presto's experienced a diverse executive leadership team and benefit from having a truly engaged Board of Directors. Collectively, we are committed to harnessing Presto's technology solutions to aggressively pursue the significant market opportunity available to us. While clear operational and commercial challenges exist, as they do for many other early-stage AI firms, we have a robust plan to: number one, scale up Presto Voice business in a sustainable way; number two, continue to engage with our customer base of leading restaurant brands and their guests; and three, deliver value for our shareholders.

As well as growing our revenue and further developing our technology, we have been laser focused on reducing our operating expenses and cash burn. Over the last few months, I have taken several steps to operate our business more efficiently. This includes streamlining our operations, reducing costs and deploying our talent in a way that is more closely aligned with our current business needs and strategic plans. We will continue to evaluate the effectiveness of these initiatives on an ongoing basis. I am aware that this maybe one of the first Presto earnings call for many investors and analysts. And so I want to take a step back to provide a brief overview of Presto.

Presto provides enterprise-grade AI and automation solutions to the restaurant industry. Our solutions are designed to lower labor costs, improved staff productivity, increase revenue and enhance the guest experience, both in the restaurant and at the drive-thru lane. The restaurant technology market, whilst still nascent, continues to evolve in response to the challenges faced by restaurant operators. For example, the restaurant industry today faces increasing margin pressures at an unprecedented level.

In an era of high inflation, restaurant operators need to both lower their costs and generate higher revenues to leverage their cost structures. Our solutions help restaurant operators address these concerns with compelling end-to-end solutions that seamlessly integrate into restaurants existing technology stack.

As you may have read, California recently passed a law enforcing a $20 minimum wage for workers at fast food chains with at least 60 locations across the United States, starting next April. At the same time, nationwide, the restaurant industry struggles to retain workers and has experienced consistently as high staff turnover rates. In fact, just recently, I was speaking to one of our customers in North Carolina, who told me that they had to close their restaurant early at 3 p.m. every day due to the lack of staff before they installed our solution.

After going out with Presto, this operator was able to remain open for an additional seven hours a day without increasing staff, showing firsthand concrete and significant benefits our product provides. To support our customers with these challenges, we offer two solutions to restaurant operators. Firstly, Presto Voice, our voice AI product for QSL grade-to operators. And secondly, Presto Touch, our pay-at-table tablets for casual dining chains.

Some of the most recognized restaurant names in the United States are among our customers, including Carl's Jr., Hardee's, Del Taco and Checkers for Presto Voice and Applebee's, Chili's and Red Lobster for Presto Touch.

Now let me start with Presto Voice. We are incredibly excited about the opportunity for our Presto Voice solution. There are about 130,000 drive-thru QSR restaurants in the United States. Approximately 56 million people in the U.S. and Canada visit drive-thru daily with the average American spending $1,200 annually at the drive-thru lane. Critically, 58% of U.S. restaurant operators say that they will use technology-enabled solutions to improve efficiency, labor cost management and revenue growth in the future. These needs present a significant opportunity for us.

We developed Presto Voice specifically to address the pressing needs of drive-thru QSR restaurant operators. Presto Voice greet guests, take an order, publishes the order in the restaurants from the cell system and delivers the order to the restaurant's kitchen display system. Our voice solution can compete drive-through orders, including large orders with multiple many modifications and add-ons limited on-site restaurant staffing invention.

We believe that Presto Voice enables orders to be processed more efficiently and with greater accuracy than other systems available in the market today. It does sales on nearly 80% of orders in the drive-thru, which is more reliable than a human. These upsells are accepted by the guest almost 35% of the time resulting in additional revenues to the restaurant, first of which benefits the restaurant staff as well. It removes one of the previous responsibilities of taking orders through the headset. This allows them to enhance the performance in other areas, including fulfilling orders more efficiently and accurately.

Our voice AI solution consists of automated speech recognition and text-to-speech engines, natural language processing and humans in the loop. Humans in the loop is an approach commonly used in the AI industry. Our system currently has Presto humans agents operate offsite from the restaurant. Our human agents enter, review, validate and correct orders received by Presto Voice and make sure that the restaurant guests receive accurate orders.

Presto human agents will always play a role in ensuring order accuracy, and we believe that this is a significant competitive advantage of our solution. However, as the Presto Voice AI evolves, we expect that the level of Presto human input into the process will continue to decrease, further improving our own economics.

We are pleased with the reception Presto Voice has received in the market. As of September 30, 2023, we have rolled out 373 locations with Presto Voice with an additional 95 currently under contract for installation. We have now signed contracts with 17 CKE Franchise Groups, one of our major Presto Voice customers.

These franchise owners collectively own approximately 700 locations nationwide. This was supported by an agreement with one of the largest CKE franchisees in the United States, StarCorp, to be the exclusive voice AI vendor across all of its 58 Carl's Jr. locations, something we announced in September.

We were delighted that StarCorp decided to launch Presto Voice at full scale, following a successful and competitive pilot, which showed that we were able to sell on 91% of orders. We have also signed new corporate pilots. These pilot programs are key as we can use them to demonstrate the ROI of our solution and convert customers to full-scale deployment. This allows us to develop a backlog of rollout that we can execute in the medium term.

In total, the restaurant groups that we have currently engaged through a master services agreement, or pilot agreement represent an annual revenue opportunity of over $100 million is fully expanded. Although Presto Voice has contributed a small percentage to our revenue to date, we expect that it will be an increasing proportion of our revenue in the future. This is in part because of the significant growth in the QSR drive-thru market and the operators receptiveness to the benefits of new technologies. We are looking forward to executing our business plan to grow our Presto Voice revenue in line with our market opportunity.

Alongside the increase of proportion of revenue that we expect with Presto Voice, we have a clear plan to increase the profitability of the Voice business. We will do this by realizing greater efficiencies with our humans in the loop, which will be achieved through the continued advancement of our technology and an increase in the number of locations in which Presto Voice is installed.

Now let me provide an overview of Presto Touch. Touch is our pay-at-table solution for casual dining chains. It enables self-service ordering, payment processing and premium gaming experiences for restaurant guests. It also allows restaurants to operate dining rooms with fewer staff, it enables servers to cater to more tables and it equips reference with valuable insights.

In a highly competitive restaurant market, it is crucial for operators to focus on increasing customer loyalty. This generates repeat restaurant visits and increased check size. Presto Touch is well positioned to help restaurants successfully do that by personalizing guest experiences and providing more guest insights to the restaurant marketing team.

As of June 30, 2023, we have installed over 277,000 Presto Touch tablets at 3 of the nation's largest casual lighting restaurants. This has enabled us to develop the human knowledge and account management tools necessary to integrate, install and educate restaurant operators about our solutions. These core competencies are significant competitive strengths for Presto, which have allowed us to penetrate the voice activity drive-thru market quickly. As I hope you've seen, we have several competitive strengths that position us to grow our market position, which I'd like to reiterate here.

First, we are developing an industry-leading technology platform. Second, we have developed a computer human interface that enables our customers to achieve leading levels of order accuracy. Third, we have a proven ability to scale our platforms for our customers as demonstrated through our heritage in Presto Touch. Fourth, we have significant experience of navigating the complex and diverse ownership models of most QSR and casual dining chain restaurants between corporate owners and their franchisees. Fifth, we have a sticky business model with high switching costs, providing increased security of future revenues.

While Stanley will cover our financial results in more detail, I am pleased to report that the full-year 2023 revenue was in line with guidance at $26.1 million. Our fiscal fourth quarter 2023 revenue decreased by 38.9% to $4.8 million compared to the fiscal fourth quarter of 2022. The main reason for this was a decrease in hardware revenue from Presto Touch.

Before I turn the presentation over to Stanley, I would like to review a few important agreements that we have reached recently. One of our major shareholders, Cleveland Avenue, has committed to increasing its ownership in the company with a $3 million investment in Presto's coming stock. The financing for its increased ownership is expected to close on October 16, 2023, subject to customary closing conditions. In addition, shareholders representing 53% of our issued shares have extended their lockup commitments through December 23, 2024. I'm also pleased to share that Presto has revised its credit agreement with the Metropolitan Partners Group, which continues to be a supportive lender to us, through a third amendment with its existing credit facility.

Metropolitan has also committed to increasing the size of its facility by $3 million. This amendment removes certain covenants that retain those related to minimum unrestricted cash and monthly decrease in operating cash. The amendment will become effective with the investment by Cleveland Avenue and the satisfaction of other conditions that are expected to be achieved on or around that date.

We are also pleased to announce that Nathan Cook, a Senior Managing Director of Teneo, a global advisory firm that is supporting us across the business is joining Presto today as interim CFO. We know that Nathan's deep expertise will be critical to this new phase of growth.

With that, I would like to hand it over to our Chief Accounting Officer, Stanley Mbugua to review our financial performance for fiscal 2023 and Q4 2023.

Stanley Mbugua

Thank you, Xavier, and once again, thank you, everyone, for joining us today. It is a pleasure speaking to you today as the Chief Accounting Officer of Presto Automation. I joined the team earlier this year, and I look forward to building on the strong trajectory Presto is on and helping to scale the business.

Today, I will walk you through our fiscal fourth quarter and full-year 2023 results and then cover our guidance for fiscal first quarter of 2024. I will talk about certain results on a non-GAAP basis. We show a reconciliation to GAAP measures in our recent press release, which is available in the Investor Relations section of our website at presto.com.

For the fiscal fourth quarter of 2023, we reported revenue of $4.8 million, down 38.9% compared to fiscal fourth quarter of 2022. Transaction revenue increased by 23.4% to $3.2 million compared to fiscal fourth quarter of 2022 due to a successful increase in pricing for our gaming fees.

Full-year 2023 revenue was in line with our guidance at $26.1 million compared to $30.4 million in full-year 2022, a 14.1% decrease mainly due to contract terminations and expirations, a decrease in hardware revenue and certain renewals and lower prices. Transaction revenue was $12.9 million, up 25.3% from last year, driven by increases in pricing for gaming fees.

For the fiscal fourth quarter of 2023, OpEx was $13.7 million compared to $9.6 million for fiscal fourth quarter of 2022. This was primarily driven by the impact of additional costs associated with being a newly public company. Full-year 2023 OpEx was $56.9 million, compared to $33.8 million in full-year 2022.

The increase was primarily due to three reasons: an increase in stock-based compensation, an increase in research and development payroll costs associated with Presto Voice; and costs associated with being a public company, including hiring additional staff, and implementing new processes and procedures to address public company compliance requirements.

Adjusted EBITDA for the fiscal fourth quarter of 2023 was a loss of $9.1 million compared to a loss of $10.8 million in the same quarter of 2022. Full-year 2023 adjusted EBITDA was a loss of $39.1 million, up from a loss of $27.9 million in full-year 2022. As Xavier outlined, we have taken steps throughout the year to reduce our OpEx and cash burn. We are continuing to focus on increasing our operating efficiencies, our head count and vendor rationalization processes and detailed initiatives to achieve cost synergies across all functions.

Now I would like to finish with our guidance for our fiscal first quarter of 2024. We expect revenue to be between $4.8 million and $5 million. With that, Xavier, Dan and I are ready to take your questions.

Operator, please open the line for any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Brian Dobson with Chardan Capital Markets. You may proceed.

Brian Dobson

Hi. Thanks very much for taking my question. So thanks for the revenue guidance for the coming quarter, but I was wondering if you could elaborate on your outlook for potential restaurant additions in the coming year, what the tone at business has been perhaps or what you're hearing in the market in terms of the shift toward automation?

Xavier Casanova

Yes. Thanks for your question. So for Presto Voice, we actually have a pretty strong pipeline of several brands that are currently piloting or have signed pilot agreements, in addition to others that we're actively engaging with. And for Presto Touch, we're at this moment, actively seeking renewals from our current customers to the new hardware, which is called Presto Flex.

Brian Dobson

Thanks for that color. Do you think that you could elaborate on the margin enhancement that a restauranteur could expect from implementing your AI product as it stands now? And you mentioned enhancing that product through further software development. Where would you like to get that margin enhancement for the restaurateur?

Xavier Casanova

You mean for the restaurant, right? Yes.

Brian Dobson

Yes, that's correct.

Xavier Casanova

On Presto Voice, the value prop of our product is basically labor savings for the restaurant because you now have someone who used to take orders at the drive-thru who can be redeployed to other areas of the restaurant and do other things. The second thing is through our upsell engine, we are able to deliver more consistent upsells and the acceptance rate of those upsells is higher than a human. So that's on the drive-thru side.

And then on the Touch side, we're helping restaurants with our Touch product pay-at-table essentially save on labor because you no longer require the payment processing to happen with the server involved, but the guests can do that at the table. So overall, and this is a Presto theme, our core mission is to make the restaurants more profitable and enhance the customer experience.

Brian Dobson

Thanks. And then just finally, you had focused on – or you had mentioned your focus on reducing operating expenses since joining the company. Which areas, in particular, are you looking at cutting?

Xavier Casanova

I think we're looking at it across the board. I mean, there's always room for efficiencies when you grow a business like Presto in two different products. So we're looking at efficiencies in engineering, in support, in account management sales, everywhere where we can bring more streamlining of operations.

Brian Dobson

All right. Thanks very much.

Operator

Thank you. [Operator Instructions] Our next question comes from Mike Latimore with Northland Capital Markets. You may proceed.

Michael Latimore

Thanks very much. Yes, congratulations on the new roles and positions here. First question just around the Voice business, voice AI business. You talked about a $70 million pipeline there. Can you just elaborate a little bit on what might be some of the catalysts to realize that value and what's sort of in your control versus what does the customer have to do? And how much do you have to rely on the customer to have to realize that full value?

Xavier Casanova

Yes. So the $70 million is essentially an aggregate number that captures the expected revenue if fully expanded across franchisees that have either signed an MSA with us or piloting our technology. When we signed an MSA or a pilot agreement with the franchisee, there's a series of steps that need to take place before we're actually fully rolled out. And sometimes, it includes a pilot for demonstrating the technology will work for the franchisee, realizing the labor savings, validating the upsells and all of that.

Other times, we are actually able to sign MSAs with franchisees directly for deploying the technology across their entire store fleet. And that was the case, for example, with StarCorp, which was announced in September with 58 locations that were signed with us. So in the case of StarCorp, they're making a commitment to Presto with their 58 locations, it's an exclusive agreement to Presto to deploy the technology across their fleet of stores.

Michael Latimore

Okay. Great. And then in terms of just the voice AI price per store, has that been relatively consistent over the last year? Or are you seeing any variability just kind of pricing here?

Xavier Casanova

So in terms of the pricing for the voice AI technology, it's been quite consistent, but you should know that it's early in the market, right? So we're still figuring out what is the best way to enable this type of technology for drive-thru of all sizes. So I'll give you an example. The needs of a drive-thru that's open 24/7 are not the same needs as customers that are open only 12 hours a day. And so we're fairly consistent in our pricing policy at the time. But it's early in the market.

And the other thing that I'll say is that in April of 2024, we have this new law in California that basically increases the minimum wage for staff members in the drive-thru. And we expect actually to be a to be a big help to Presto because the cost of running the drive-thru is going to go up dramatically on the labor side, and that's going to help Presto with these customers.

Michael Latimore

Yes. Makes sense. And then just last on the technology front. Maybe can you just elaborate a little bit on, say, the unique technology needs of a QSR versus, say a, standard enterprise call center that also has some voice recognition capabilities. What's the kind of unique complexity with QSRs? And then what are some couple advancements you'd like to see over the next year here?

Xavier Casanova

Yes, good question. So I think the first thing that is different in our world in the drive-thru voice AI world is that we are working with the menu and customers that show up, guests that show up at the speaker box are there to essentially place their order as quickly as possible and get their food – make their payment, get their food and then move on. I would say that the important things for a restaurant operator are, number one, making sure that the orders are taken accurately with our voice AI system, but also that they're processed much quicker than with humans, right, and more consistently. And in that sense, the scope of our solution is very narrow, but it's also very – the expectations for accuracy are much higher than in the other verticals.

Michael Latimore

Got it. And then as you look out over the next year, what would be kind of a key tech enhancement or two you'd like to see?

Xavier Casanova

I think for us, there's a – so we have a 24-months road map with all the things that we want to build for the drive-thru and we're quite excited about it. I think when it comes to the next few months, what matters the most to restaurant operators are basically fighting this increasing cost that they see with this high inflation environment, right? And also making sure that while we do that, we actually deliver a high level of accuracy and a high throughput in the drive-thru.

And so that – to execute on that is more complex than the way it sounds. There's a lot of little things that you have to do to match the intent of a guest to a menu item, right? Or there's like sophistication that needs to happen to make sure that the upsell that we propose to guests as they show to the speaker box is actually the right upsell and leads to a high conversion. So in aggregate, I think we will win, so to speak, in the drive-thru if we're able to do – to basically meet the needs of these drive-thru operators, more accuracy, speed of service and also more consistency in the upsell that we can offer through the system.

Michael Latimore

Okay. Great. That makes sense.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.