Presto Automation, Inc. (NASDAQ:PRST) Q3 2023 Earnings Call Transcript May 18, 2023

Operator: Hello. Thank you for standing by. And welcome to Presto Automation Q3 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 . I would now like to hand the conference over to your speaker for today, Adam Rogers. Sir you may begin.

Adam Rogers: Good afternoon, everyone. At this time, I’d like to welcome you all to the Presto Automation fiscal third quarter 2023 earnings conference call. I am Adam Rogers, Head of Investor Relations here at Presto. I’m pleased to be joined on today’s call by Presto’s Interim Chief Executive Officer, Krishna Gupta; and by our Principal Financial Officer, Ashish Gupta.

Operator: Ladies and gentlemen, this is your operator. Please stand by, your conference will resume momentarily .

Adam Rogers: So I’d like to welcome you all to the Presto Automation fiscal third quarter 2023 earnings conference call. I’m Adam Rogers, Head of Investor Relations here at Presto. I’m pleased to be joined on today’s call by Presto’s Interim CEO, Krishna Gupta; and our Principal Financial Officer, Ashish Gupta. Also on the line with us today is Dan .

Operator: Ladies and gentlemen, we apologize for the technical issue. Please continue to stand by.

Adam Rogers: So after our prepared remarks, we will open the call for questions. A replay of this call will be available on our website. Information to access the replay is listed in today’s press release, which is available at presto.com in the Investor Relations section. 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 full fiscal year 2023. 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, including our 10-Q 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.

And finally, we’re not obligating ourselves to revise our results over 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 Investor Relations Web site. And with that, we’ll begin by turning the call over to our CEO, Krishna Gupta.

Krishna Gupta: Thank you, Adam and thanks everyone for joining our fiscal third quarter earnings call. It’s a pleasure speaking to you today as CEO of Presto. I am a longtime Prestonian. I was a first investor and I’m now the largest shareholder in the company. It’s a magical time for us at Presto. I’m even more excited now than I was on day one. Sitting in a little pub next to MIT called the Asgard. I’m actually sitting in a conference room called the Asgard, writing trivia questions for our first product. The reason is simple. We are a market leader for automating drive throughs for voice AI using our product, Presto Voice, which is one of the most immediately actionable applications of generative AI in the enterprise. I want to start off by thanking Raj Suri, our Founder, whose vision and dedication over the last decade has helped build Presto into the company that’s today.

He’s been my friend and partner in this business for all that time and neither changes 15 years a long time, and I appreciate his desire to pursue personal projects and be with his family. He remains an advisor to Presto. I next want to thank our talented and hardworking employees here at Presto for welcoming me. I’ve been even more impressed by our great leadership team since taking over as CEO. As you may have seen, we promoted Dan and Xavier recently both have been key leaders and are instrumental in the successful development and implementation of Presto Voice. The Board has commenced a search both internal and external for permanent CEO who will be able to steer the company for long term as it grows. We will run a proper process in order to find the most suitable candidate.

In the meantime, however, I’m in no rush and I’m having a great time in the role. Presto has had an exciting 2023 and we are at an inflection point. It’s rare to see such convergence of technology revolution and immediate market opportunity and be at a place where we are squarely at the intersection. To that point, earlier this month we signed an MSA with CKE, the parent company of the iconic Carl’s Jr.

Operator: Ladies and gentlemen, please stand by. Your conference will resume momentarily. So let me just start over you know with why does CKE decided it wanted AI across its drive thrus and this is an important point for us, because it is the largest customer to have announced automation of its drive thrus in the country. It’s not just about labor savings. During our pilot with CKE, they mentioned they saw healthy increase in revenue at the deployed stores as a result of the ups All right. Well, looks like our second device also has had some technical difficulties. I’m going to keep moving on. You know, I think the point of what we were saying earlier was Presto Voice it upselled in every order, it increases upsell attempts versus human staff and most importantly, it results in higher check sizes.

If we think about what the customer wants, they want faster speed of service. They want better customer satisfaction and they want higher check sizes and they are getting it all with Presto Voice. As our Generative AI technology gets smarter, we will drive increasingly toward the perfect upsell, we will increasingly have the ability to hyper personalize the upsell in a way that actually does all of the above. It increases customer satisfaction, it enhances brand loyalty, it lowers the labor costs and increases the average check size. So we get a lot of questions around return on investment. And I’d like to take a minute to go into a little bit more detail with numbers to explain our value proposition and the ROI. In March ’23, our Voice AI had an 81% offer rate and 40% acceptance rate across all stores in which it was deployed.

This would represent an extra $3,750 to $4,500 in revenue per month, for a drive thru generating $75,000 in monthly revenue. That is a significant return on investment, even before counting the labor cost savings that the platform provides. Restaurant brands love the experience Presto gives with customers and are excited about the opportunities, savings and additional revenue we can provide. Indeed, the combination of the rise in AI and other macroeconomic factors like the labor shortage issues, rising inflation and the rise of the gig economy continue to create major challenges in the restaurant industry in the US, and in parallel has also led to a spike of interest in Presto’s voice solutions. We have signed and started to implement promising pilots with several new brands that we hope to convert MSAs during calendar 2023 this year.

Presto has also been in discussions with five large restaurant brands located across the country. Many of these brands also expand across the globe, and we are increasingly seeing drive thru increase in popularity in geographies outside the US. We have a $500 million plus ARR opportunity from these five brands if fully expanded. The logos we currently have MSAs with are our near term potential customers, including Checkers, Del Taco, Jack in the Box, Hardees and Carl’s Jr. represent around 6,500 drive thru totaling more than $136 million in potential ARR if fully expanded. At the end of our fiscal third quarter, we had successfully rolled out nearly 350 locations, and we expect these roll outs to quickly accelerate as we implement more live stores every week.

We believe we possess the largest footprint of drive thru voice AI in the restaurant industry. Also this quarter, Presto announced the partnership with OpenAI to enhance our already powerful and industry leading drive thru AI voice assistant. While we have built our own technology, we are excited to also leverage LLMs to improve the speed and personalization of service and intend to further our relationship with OpenAI over the coming months. I want to speak for a couple of minutes about our legacy touch business, which continues to provide opportunity for us. Several of our enterprise partners are now in the process of testing a world class Presto Flex product. Presto has processed over . Although our touch business is not our main focus, we believe we can unlock value from this line of business over time, and could even potentially layer our voice AI technology onto our touch products to further improve the customer experience.

As mentioned last quarter, Presto is continuing to take steps to streamline operations and reduce recurring operating burn by rationalizing headcount and vendor spend without sacrificing the growth initiatives that we talked about earlier. Ashish will give a more detailed overview of these initiatives shortly. Lastly, I’m very excited to be here speaking with you at such a transformational time in the world and for Presto. But AI is rapidly changing everything around us and we have a real opportunity to own a tangible slice of that revolution in the hospitality vertical. So with that, I’d like to hand it over to Ashish Gupta, our Principal Financial Officer.

Ashish Gupta: Thank you, Krishna. Once again, thanks, everyone, for joining us today. This afternoon, I’ll walk you through our fiscal third quarter results, touch on our full year guidance and then open the call for questions. As a quick note, I’ll talk about certain results on a non-GAAP basis. We show a reconciliation to GAAP measures in the press release, which is available in the investor relations section of our Web site at presto.com. Running down the income statement. Revenue was $6.6 million, down 12% from prior year Q3. This reflects the $26.4 million ARR run rate. Transaction revenue increased 44% to $3.5 million versus prior year Q3 due to a successful increase in pricing for our gaming . ARR would have been $31 million in total, but for the accounting treatment related to a specific customer contract that precluded the recognition of certain revenues related to that contract.

Gross profit was lower versus prior year, both due to the voice related accounting adjustment we just mentioned, as well as higher COGS deferred expense amortization from our legacy touch business. This was due to increases in freight and installation costs and the residual impacts of COVID related equipment replacement. We expect legacy accelerated COGS expenses to bleed through our P&L by the end of this fiscal ’23 ending June. Following this, we expect margins to expand over time as we convert voice pilots into system wide roll outs and our AI enabled solution gets fully trained. Q3 fiscal ’23 OpEx was $15 million versus $9 million for Q3 in the prior year. This includes normal operating expenses as well as the impact of trailing items from the merger.

As such, adjusted EBITDA for the quarter with a loss of $9.3 million as compared to a loss of $7.1 million for the same quarter last year. The OpEx increase of $6 million though primarily represents $4.4 million of stock based noncash compensation expense. $1.6 million higher legal accounting fees and temporary service expenses, which included $1.1 million related to professional public company related compliance service fees and $0.5 million of executive recruiting fees. As we operate the business going forward, we have started to take specific steps to reduce OpEx and cash . This is part of our specific goal to get the business to profitability, combined with voice fueled growth that Krishna talked about. As we mentioned, in our last call, we had initiated a headcount and vendor rationalization process, along with the detailed exercise to achieve cost synergies across all functions.

Phase 1 of the interest initiative was completed by March and we’re now layering on Phase 2 rationalization that will complete by the end of the current quarter, so we start fiscal ’24 with a more efficient and lower cost base. We expect fiscal ’23 revenue ending June 30th to be between $26 million and $28 million. Please note, this range of guidance is primarily due to the GAAP accounting adjustment around that specific voice customer contract we discussed earlier, which we now expect to continue in Q4. Further and as mentioned earlier this week, this was a noncash change not material to commercial operations. The total impact of this GAAP accounting adjustment is expected to be in the range of $4 million to $5 million for the year with the impact expected to mitigate starting fiscal ’24 as we roll out more stores with two new voice logos Del Taco and CKE that we have announced.

That concludes our prepared remarks. I want to thank everyone for joining us today and we look forward to connecting with you again as we proceed throughout the year. With that, Krishna and I are ready to take your questions.

Q&A Session

Operator: Our first question comes from the line of Greg Pendy with Chardan.

Greg Pendy: Hi, it’s Greg Pendy in for Brian Dobson at Chardan. Just a couple of questions. One, did you say earlier there’s several more pilots targeting MSAs, were you talking fiscal this year you thought that could happen or calendar this year at 2023?

Krishna Gupta: Calendar year.

Greg Pendy: And then…

Krishna Gupta: Yes, we’re in several pilots now. But in terms of converting the MSAs we think of it as a calendar year.

Greg Pendy: And then just I think earlier you’re talking — just in the pecking order, you’re seeing that, I guess, is this specifically with the Carl’s Jr. that you’re starting to see that the interest is less on labor savings and more on just the upselling in higher check sizes, or was that across the board that you’re seeing that with all three customers you’re working with on voice AI?

Krishna Gupta: I wouldn’t say it’s less. So first of all, I think this is a learning that we’ve had from the first customer that we started rolling out onward. And I don’t think I would characterize it as — that labor savings are less of interest. I think what’s more important is when we started down this path, we felt labor savings would be largely the totality of the ROI. However, what we’re really realizing is that upsell is that equal or perhaps even more value to the chain. And so that’s been a learning that’s frankly partially the reason why there’s been an accelerated market momentum. We can show those numbers, we can prove the ROI and the upsell engine keeps getting better and better. And it just sort of makes sense that the AI can upsell a lot better than a human being can.

Greg Pendy: And then just one more final one, if I can. Your transactions were pretty good in the quarter and just kind of looking at your full year guidance and trying to balance those out a bit. Do you think transactions are likely to slow in the fourth quarter, and was that just kind of because of an uptick in restaurant traffic?

Krishna Gupta: I mean, we expect it to hold steady. There isn’t any significant seasonality in our business. And in fact, the price increase, which was the primary driver of our transaction uptake should continue to hold steady. So this — I would posit this as a new run rate that we would expect going forward.

Operator: Thank you. I’m showing no further questions in the queue. I would now like to turn the call back over to Krishna Gupta for closing remarks.

Krishna Gupta: Yes. Thanks so much, and thank you for bearing with our technical difficulties. We look to create magic at Presto and we hope to see you again in three months time. And thank you again for being here.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.