Presto Automation Inc. (NASDAQ:PRST) Q3 2024 Earnings Conference Call May 22, 2024 5:00 PM ET
Company Participants
Conference Call Participants
Chris Cast – IR
Gee Lefevre – Interim CEO
Stanley Mbugua – Interim CFO
Operator
Greetings, and welcome to Presto’s Financial Third Quarter 2024 Earnings Call. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Chris Cast. You may begin.
Chris Cast
Good afternoon, everyone. I’d like to welcome all of you to the Presto’s fiscal third quarter 2024 earnings call. Today’s call will include prepared remarks from our Interim Chief Executive Officer, Gee Lefevre; and our Interim Chief Financial Officer, Stanley Mbugua. After these prepared remarks, we will open the call for questions. A recording of this call will be made available and information to access the recording is listed in the 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 our guidance for Presto’s fiscal fourth 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 the 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 the press release. This press release can be viewed and downloaded from our website.
Gee Lefevre
Thank you, Chris, for the introduction, and thank you everyone for joining the call. It’s my pleasure to speak to you today, for the first time as the CEO of Presto. While I only assumed this role, a little over three months ago, I’ve been working with Presto in a variety of capacities for over a year, and therefore already had deep experience of the company and its potential.
By way of some brief background, I have extensive experience working with some of the world’s largest restaurant chains on commercial and operational issues. And so, I have a deep understanding of what matters to our customers. My personal focus will always skew to the customer, commercial and strategic elements of this business, while I will work closely with our excellent engineering, product and operational leaders to deliver in those areas.
In this, my first earning school, I wanted to spend a majority of the time updating you all on the business, and operational progress we have made since I assumed my role, which includes some new approaches, and how these initiatives position us for the future.
First, however, I need to review Presto’s current financial position. We recently made several public statements, relating to our plans for the coming months in relation to financing, and wish to address and recap these before moving on to the business itself. On May 20, 2024, we completed a financing of $3 million in common equity, and subordinated debt from various parties, including our existing investor, Remus Capital.
In conjunction with this financing, Presto’s principal senior secured lender, Metropolitan Partners Group, agreed to extend forbearance with respect to existing defaults, under the company’s credit facility until June 15, 2024. The capital raised together with cash on hand, and projected revenues is expected to be sufficient, to finance the company through June 15, 2024.
Metropolitan has agreed to further extend forbearance until July 15, 2024, if the company raises $3 million in additional equity by June 7, this year. Crucially, during this forbearance period, Metropolitan has agreed to negotiate in good faith, to complete an agreement to transfer its debt position, to a new lender in consideration for $20 million and evidence of a minimum of $12 million, of operating capital in the company.
Metropolitan will also receive convertible notes in the company. If a transfer of the debt, is not completed or if forbearance is otherwise terminated, the company has agreed to cooperate with Metropolitan as it explores its other financial alternatives, including seeking new investors or M&A options. Please refer to the Form 8-K filed by the company on May 16, for full details.
As we have articulated previously, we are singularly focused on creating a capital structure that will position Presto for the future. This agreement with Metropolitan to explore the transfer of its debt position to a new lender, is viewed as a critical step in achieving this outcome. There is substantial work underway from both myself and the Board, to execute on this in the coming days and weeks.
Before I get into the business detail, I would also like to provide a brief update on the wind down of our heritage Touch pay-at-table business. As has previously been communicated, we have taken the decision to focus all of our efforts and resources on Voice AI, and such made the difficult decision to exit our Touch business.
Over the last few months, we have been executing on that decision and expect to have completed the wind down, by the end of next quarter. This initiative, has allowed us to focus the whole team exclusively on one goal, improving our Voice AI product, which has led to a greater pace of innovation and progress. It also has significant cost reduction benefits, which, as we said, are critical as we move forward, towards a profitable business model.
I will later reference specific advantages or advancements, which have been made due to the singular focus. And we are confident as ever that this was the correct strategic decision, for the good of the long-term future of Presto. As referenced above, I would like to spend the remainder of my time detailing the substantial progress we have made, across four core areas of the business.
These are commercial developments, including new logo wins, existing customer expansions and differentiators in the market. Strategic product developments, highlighting our latest product innovations and discussing potential opportunities for Presto Voice AI product evolution. And tactical product developments, including new features we’ve recently introduced, and product improvements we’re already working on.
And finally, operations, emphasizing the importance of customer success, support and our deployment capability. First, let me discuss commercial and customer development. This is an exciting time for Presto. The market opportunity for Voice AI remains substantial in the drive-thru restaurant sector, at well over $2.5 billion per year in the U.S. alone.
The industry is only just starting to embrace automation, with fewer than 1% of U.S. drive-thrus having adopted any form of Voice AI yet. Moreover, due to the underlying complexity of the technology, it is an extremely difficult market for new players to enter. Providing those already in the space with a significant advantage. I’ve witnessed firsthand the intricacy involved in integrating into restaurant systems, and building one’s own AI product.
These efforts and investments place us at a substantial advantage in terms of our future growth. We believe that through these investments in development, Presto is ideally suited to address the needs of the middle market restaurant operators, a sector we are now strategically targeting. With that backdrop, I want to address our significant commercial progress over the past quarter.
First of all, we are engaged in expanding live deployments among our existing customers. There are currently active expansion negotiations with seven franchise groups, which have nearly 500 total locations to expand to. This is equivalent to nearly $10 million in ARR. I am delighted to report, we’ve also made real strides in expanding our customer base, and enhancing our top of funnel pipeline.
We currently have successful pilot programs with four well-known QSR brands, which collectively represent 1,300 locations or approximately $25 million in ARR. Of these four pilots, we just last week signed an MSA with one brand that has approximately 350 locations, and have agreed to deploy Presto Voice in 25 of their drive-thrus immediately.
For another operator, we have already deployed Presto Voice in seven of its 35 drive-thru locations. We are close to completing MSA negotiations, with the other two brands. And we are also in separate new pilot discussions, with a major household name brand.
In closing on the commercial front, I’d like to take a step back and re-articulate the core elements of our proposition, which are most attractive to our customers and are driving the commercial success outlined above. First, we have the proven ability to integrate into a broad range of customer environments, including four different point of sale systems and the customer hardware.
This flexibility is crucial in such a fragmented market. Our new approach to menu ingestion. This is the way in, which we take a customer’s menu and build it out to link to our AI product. This will enable us to significantly simplify the menu building process, and will deliver a step change in our ability to expand rapidly, across multiple brands at the same time.
We possess a 10-year track record serving restaurant operators, including corporate owners and their franchise networks. We understand complex customer environments exceptionally well. Moreover, we have proved our ability to deploy at pace, operating at an average rate of around 30 deployments per month from November through February, with a peak of nearly 50 in December.
This demonstrates our ability to scale quickly and safely with our partners, even across a range of different point of sale systems and environments. Finally, we’ve built and own our own proprietary hardware specifically designed to improve successful and quick integration. Because of these capabilities, we believe we are the only player in the market, who has the ability to serve the mid-market of the North American QSR space.
Other providers do not possess the technology, or deployment experience to allow them to expand across multiple different brands, with different technology environments and many structures. As such, mid-market brands will be a key focus of our short to medium-term growth plan.
We will, of course, continue to build relationships and develop pilots with the largest brand, which will represent a greater proportion of our long-term opportunity. In the short to medium-term, we anticipate a significant proportion of our deployments will come from these customers in the mid-market, whom we are purpose built to serve.
Second, I would like to outline our strategic product development. As we disclosed a few weeks ago, we have recently launched Presto Voice Pure AI, a transformational feature that eliminates humans in the loop in an initial test location. Candidly, the technology has performed at a level far above what we have been anticipating, with AI efficiency rising from around 50% to around 80% at the initial test location.
We’ll be expanding Pure AI to a greater range of stores, over the next few weeks to collect more data. Why is Pure AI so exciting? Well, we found that humans-in-the-loop often intervene early in the order process before the AI has a chance to complete the order and learn. The Pure AI feature enables a smooth transition to the restaurant team member, only when the AI determines that it’s unable to process an order.
We believe that this feature will allow the Voice AI system, to improve more quickly while still providing the efficiency and level of accuracy we are known for. For us, the gradual eliminations of human-in-the-loop will allow us to improve our margins and reach profitability more quickly. I believe humans-in-the-loop will still play a crucial role in our overall solution, but this advancement is testament to the strength of our underlying technology solution.
With this backdrop of our new AI configuration, I do think it would be helpful to explain my vision for the evolution of Presto Voice AI’s capabilities on the whole. There are effectively five modes of Presto that we can deploy. Pure AI, where AI leads order management and does not require any agents. When uncertain, it will just escalate directly to the store.
Unsupervised AI, where AI leads order management with agents pulled in from a pool, to support if issues emerge. Supervised AI, where AI leads order management with constant oversight from agents in case issues emerge. Agent-led, where remote agents lead our order management use, but using Voice AI infrastructure to input the orders.
And finally, Snooze, a new feature where if for any reason the customer would like to take orders manually, they can choose to Snooze Presto for a set period of time, say 30 minutes during the rush hour. In addition to Pure AI, we have been focused on developing the unsupervised AI elements of this spectrum and have been – trialing this in initial test location.
Unsupervised AI also significantly outperformed our expectations, with AI efficiency rising from around 45% to 70% at the initial test location. We have demonstrated that agents can successfully join a session already in progress, and can help complete tasks that are challenging for the AI. Initially, we were concerned about the fact that agents couldn’t do this consistently, given the lack of time they have to view the order.
So it was fantastic to see this level of outperformance. We will also be expanding unsupervised AI to a greater number of stores, over the next few days and weeks to collect more data. Over the coming quarters, we will begin to test a single solution that allows for these different modes I outlined to be used in different parts of the day. This initiative allows us to maximize non-intervention and customer satisfaction while improving our margins by optimizing agent costs.
This level of flexibility is not something currently on the market, and is something that customers have expressed an interest in. Last week alone, we received several inbound inquiries from existing customers, keen to be part of our trials of these new forms of the product. The testing of this potential end state for Presto Voice will be a landmark moment in the ongoing growth of this business, and I look forward to updating you in due course.
The third major topic, I wanted to cover was some tactical product developments. On the more tactical product front, we continue to develop and deliver new features for customers alongside the more fundamental product strategy outlined above. We recently successfully piloted a Spanish language ordering feature, at a location in Southern California, which allows drive-thru customers to easily place orders in Spanish, and effortlessly transition between English and Spanish when necessary.
This new feature allows us to provide a seamless, and inclusive experience for this important demographic. We intend to pursue a broader rollout of our Spanish language capability, following additional on-site testing. We are working on a variety of other features to optimize our Voice AI platform, and deliver value to our drive-thru customers, including multi-lane support, customizable upsell, (Nextio) integration, and further audio improvements.
Finally though, I just want to touch on our approach to operations. We have renewed our commitment to develop robust customer success and customer support functions, as they are critical to the overall effectiveness of Presto Voice for our customers, and our ability to scale this business. We have invested and will continue to invest heavily behind this important area of our company.
I personally view customer success as a fundamental part of the product, which has the ability to further differentiate us in this market. We have implemented a much more streamlined and integrated customer support process that, enables customers to easily report issues, and obtain immediate assistance from the Presto team. We have focused on integrating customer support with the engineering and product teams, to triage and prioritize issues and solve them more quickly.
With the proper customer support, our customers achieve significantly higher non-intervention rates. Over the past several quarters, we have demonstrated that we have the ability to deploy new – locations at a rapid pace, and have refined our hardware to further improve our install success rate. We feel confident in our team’s ability, to continue to expand our live locations during the next quarter.
In summary, we believe this market is there for us to capture. We have invested heavily in the fundamental product advancements required to service our customers. We are now executing on driving continued commercial momentum in the coming weeks and months.
With that, I’d like to hand it over to our Interim Chief Financial Officer, Stanley, to review our financial performance for Q3, 2024.
Stanley Mbugua
Thank you, Gee. And once again, thank you, everyone, for joining us today. It is a pleasure speaking to you today as the Interim Chief Financial Officer. This is my second year at Presto, and prior to my current role, I have been the Chief Accounting Officer at the company.
Today, I will walk you through our fiscal third quarter results, and then cover our guidance for fiscal fourth quarter of 2024. I’ll talk about certain results on a non-GAAP basis. And in that case, we show reconciliation to GAAP measures in our recent press release, which is available in the Investor Relations section of our website at presto.com.
We have taken a number of strategic steps over the past year, to reduce operating expenses and cash back. In particular, the wind down of the heritage Touch business, which Gee mentioned earlier. We will continue to focus on closely managing our headcount and vendor costs, along with streamlining of our operations to allow us to maximize the rollout of new Voice AI locations.
For the fiscal third quarter of 2024, we reported revenue of $4.5 million, compared to $6.6 million for Q3 in the prior year. This quarter’s revenue comprised platform revenue of $2.2 million, and transaction revenue of $2.3 million.
Q3, fiscal 2024, operating expenses were $15.5 million, compared to $15 million for Q3, in the prior year. This modest increase of $0.5 million, was driven by higher generated administrative expenses of $3.3 million, offset by lower research and development costs of $2.8 million.
Sales and marketing expenses were virtually flat year-over-year. Research and development expenses, decreased 52% to $2.7 million in Q3, fiscal 2024, as compared to $5.4 million for Q3, in the prior year. That was primarily due to lower payroll costs, and stock-based compensation expenses resulting from reduced headcount.
Sales and marketing expenses were $2 million in Q3, fiscal 2024, virtually flat as compared to Q3, of the prior year. In contrast, general and administrative expenses increased 45% to $10.8 million for Q3, fiscal 2024, as compared to $7.4 million for Q3, in the prior year. The increase was primarily due to higher professional fees for legal, audit, and public company compliance costs.
Adjusted EBITDA for the quarter was a loss of $12.2 million, compared to a loss of $9.7 million in the same quarter last year. Now I would like to finish with our guidance for our fourth quarter. We expect fiscal fourth quarter 2024, revenue to be between $1.6 million and $1.9 million.
That concludes our prepared remarks. Thank you all for joining us today, and we look forward to continuing the dialogue, as we move through the remainder of fiscal 2024.
With that, Gee and I are ready to take your questions. Operator, please open up the lines for any questions.
Question-and-Answer Session
Operator
Certainly. (Operator Instructions) And I’m not showing any questions in the queue at this time. This does conclude the question-and-answer session, as well as today’s program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
