This media distribution company is maximizing retailers' in-store revenue

Major retailers are increasingly upgrading their marketing, customer analytics and security capabilities thanks to a media distribution company delivering dynamic and customizable in-store brand experiences.

INEO Tech (TSXV:INEO; OTCQB:INEOF), a British Columbia-based tech innovator, is outfitting stores across North America with its patented Welcoming Systems, which are catalyzing physical retail growth by combining ad revenue with real-time customer demographic data and a sophisticated loss-prevention system.

The Welcoming System differentiates itself from competing products in a number of key ways: Modern loss-prevention features, integrated advertising displays and content management system, AI-based customer analytics and organized retail crime alerts.

“INEO can operate as the complete in-store retail media platform, if a customer wants us to run the whole operation for them,” Kyle Hall, INEO Tech’s CEO, said in a recent interview with Stockhouse. Hall previously served as CEO of PNI Media, a once TSX-listed company sold to Staples with SaaS-based customers that included Walmart, Costco, Tesco, CVS, Walgreens and Rite Aid.

INEO’s Welcoming System

Retailers across the world employ Electronic Article Surveillance (EAS) systems – resembling large, grey sensor gates – at the front entrances of their stores to sound an alarm in the event of theft. INEO replaces these old sensor gates with its patented technology called the Welcoming System.

INEO’s Welcoming System provides industry leading loss-prevention capabilities for tag and label detection, remote maintenance capabilities, mobile alarm notifications, and video capture for 10 seconds before and after an alarm event (with cloud storage). On top of these features, INEO ORCA, INEO’s AI-based retail organized crime alert technology, analyzes loss prevention event videos captured by the system and delivers exception reporting to the retailer to help stem losses from organized criminal activity. This feature alone sets INEO apart from any other loss prevention provider.

On top of this enhanced safety functionality to protect retail merchandise, the core feature of the company’s Welcoming System is the integrated LED screens, which display ads using targeted ad software, providing retailers with an extra source of revenue and enhanced insights into their clientele. Being located at the front entrance, the Welcoming System is in the ideal spot for advertisers to reach customers, as the system is the first thing they see as they walk into the store.

Overall, the Welcoming System delivers retailers the capabilities to monetize the store entrance, an establishment’s most trafficked location, where ad exposure and customer data collection reach maximum levels.

As we detail later in this article, by introducing ad revenue and customer data to loss-prevention tech – backed by ingeniously cost-effective commercial agreements – INEO is making significant inroads into its multi-billion dollar addressable markets.

INEO’s enviable growth trajectory

The Welcoming System has been enhancing ROI and business intelligence for a growing number of retailers thanks to its consolidation and automation of marketing, loss prevention and customer analytics within one simple solution. This has led INEO to capture a rising wave of global retailer ad spending in the form of recurring high-margin ad and analytics revenue.

Let’s paint a picture of the media distribution company’s growing addressable markets before narrowing down into its financial results:

• According to openPR, the Canadian digital signage market is forecasted to grow at a CAGR of 8.5 per cent from C$828 million in 2018 to C$1.5 billion in 2025 propelled by the increasing adoption of AI, machine learning and IP-based devices. Key vectors include airports, hotels, restaurants and retail malls
• According to Emarketer, U.S. retail media ad spending is forecasted to grow from US$45.15 billion in 2023 to US$106.12 billion in 2027
• Statista projects that global digital retail media ad spending will grow from US$114.4 billion in 2022 to more than US$176 billion by 2028
• Finally, Quadintel Market Research sees the global retail loss prevention market growing at a CAGR of 13.8 per cent from US$41.49 billion in 2021 to US$132.8 billion by 2030

INEO views these tailwinds as intimately linked to how approximately 85 per cent of shopping still occurs in physical stores, where most purchasing decisions are made and where it makes most sense to place an ad.

This in-store concentration is why the company is perfectly positioned to increase client revenue while minimizing theft and growing into a major player in the retail industry. Word of the Welcoming System’s elegant bundling of previously disparate solutions is already spreading across the U.S., where INEO has amassed major retail partners that operate more than 3,000 locations.

INEO’s current progress

In 2022, INEO signed an agreement with a large office supplies retailer, which operates more than 1,000 stores in the United States alone. To date, the media distribution company has completed installations for this retailer in more than 108 locations across 23 states, including in major cities such as New York City, San Francisco, Chicago and Los Angeles, with additional rollouts scheduled through the remainder of 2023. This is in addition to more than 130 active independent locations in Canada.

Plans for additional Welcoming System roll-outs in 2024 and 2025 are already in progress with this major retail partner, which intends to continue moving quickly in expanding the INEO Network across all of its U.S. retail locations. For context, these stores represent approximately 270 million customers and more than 22 billion advertising impressions annually.

To date, INEO estimates current cumulative customer foot traffic to exceed several million shoppers per month in installed locations with major retail partners. This prospective figure, coupled with the calibre of INEO’s media and brand partners, suggests a market cap well beyond the company’s current C$4 million total, a point we’ll explore further in our case for undervaluation later in the article.

INEO’s flurry of activity has resulted in staggering YoY revenue growth, with 74 per cent in fiscal Q1 2023, 50 per cent in fiscal Q2 2023, 19 per cent in fiscal Q3 2023, and 21 per cent year-over-year compared to fiscal 2022.

Fiscal 2023 ended on June 30 with the company posting revenue of C$1,509,008, gross profit of C$373,306, and a gross margin of 24.7 per cent as it remained on track with planned Welcoming System deployments.

CEO Hall believes INEO’s market share is likely to rise with new customer agreements expected in the coming quarters that convert trial systems into full-scale rollouts. This is on top of continued product innovation, with the company recently debuting an RFID (radio frequency identification)-enabled Welcoming System, INEO ORCA, and other AI-driven features.

Global distribution partner

An essential part of INEO’s growth pipeline stems from its global manufacturing and distribution partnership with Prosegur, a Spanish security company that generated more than $4.17 billion euros in revenue in 2022 and maintains large retail chain customers in North America, Europe and Latin America.

As per the agreement with Prosegur, the latter will finance, manufacture, distribute, install and maintain Welcoming Systems, while INEO oversees analytics, ad delivery and network management.

The partners – which boast a combined manufacturing capacity of up to 1,150 units
per month – have already converted a trial system into an order for a large South American grocery retailer, demonstrating the cross-cultural applicability of INEO’s multi-functional innovation.

As per the recently announced agreement, INEO will be selling and shipping 59 systems to be installed in four Jumbo Cencosud retail locations. With approximately 15 systems installed per store, INEO will be managing an immersive in-store retail media network. Revenue will be collected from system sales as well as ongoing SaaS-based fees from operating the advertising network. Jumbo Cencosud, a subsidiary of Cencosud, is a supermarket chain operating in several Latin America countries with more than 300 stores across the region. Jumbo Cencosud looks to be a key entry point into the South American market as its parent company, Cencosud, operates more than 1,000 stores under various brand names and industries. The growth potential of this partnership is outstanding as INEO looks to continue its global expansion and growth.

Multiple pilot systems have been in operation with other retailers in partnership with Prosegur since 2022, and INEO is beginning to see the results from them come to fruition, as the partners begin to convert more pilot systems into full contracts and rollouts.

Refreshingly, Hall is also adamant that INEO’s next stage of growth is intricately tied to a focus on low costs and right-sized workflows, which management has already begun to implement with an eye on long-term operational sustainability.

Growth stock potential at a value stock price

INEO’s new customer agreements hold the promise of share-price momentum on the back of active system deployments, accelerating installations with contracted customers
across North America, as well as ongoing development of a robust sales pipeline of direct sales customers and Prosegur’s customers.

“We have ongoing trials with five large retail chains in the U.S., with pilots
installed and a typical 6-12 months before transitioning to a full contract,” Hall said. “We also expect more pilots throughout 2024 that move into contracts as we source partnerships beyond Prosegur which afford us faster expansion capabilities.”

Standout customer prospects are active in grocery, home hardware, apparel and wholesale
club retail in North America, South America and Europe. INEO’s ability to convert these customers to full contracts is highlighted by a major office supplies retailer across the United States with which INEO is making significant progress, including a signed contract and more than 1,000 locations expected to be outfitted by 2025.

As per INEO’s focus on low costs, the company also recently updated its commercial agreements with national retailers and regional liquor stores to maximize revenue, minimize expenditures, and optimize shareholder value-creation from ongoing growth. Strategic additions include:

• 5-6 year terms and exclusive in-store advertising rights, ensuring long-term revenue security
• The right to deploy additional media screens beyond store entrances, lowering deployment costs and increasing revenue-generating opportunities across customers’ full dwell time in the store
• The right to assign ownership of in-store advertising and hardware to third-party media partners, who would purchase Welcoming Systems integrated with retailers of their choosing (with INEO remaining the owner of the intellectual property), sell the ads, and pay INEO a monthly SaaS fee to manage the in-store media network

Instead of dealing with manufacturing and advertiser sourcing costs, INEO is currently in discussions with numerous media partners with the established brand and agency relationships for them to own the Welcoming System hardware deployed in the retail stores, just like they would own a billboard in a busy urban area, effectively removing capital requirements from INEO’s balance sheet, and paving the way for increased revenue from in-store ad management. This strategy puts INEO on the road to cash-positive operations.

“This updated contract structure should allow us to match the strong demand for INEO
Welcoming Systems from our retail customers with the demand for access to the
INEO Media Network display screens from media companies. We will be paid for our technology, and we will be paid to operate the network. Our business is still going be a monthly fee-based business, but now it’s based on a secure, reliable revenue stream from media partners, who are the ones who own the asset and are out selling the space on that asset,” Hall said.

With 2023 seeing the most deployments and installations in the company’s history, it should be clear by now that INEO is cruising down a path to expanding existing relationships with retailers, growing its presence in strategic global markets, and achieving a critical mass of Welcoming Systems to establish itself as a key player in retailers’ ever-present need to improve the customer experience.

Given the media distribution company’s burgeoning operations, driven by value-added products and world-renown partners, its stock’s 88 per cent drop from its all-time-high represents a substantial discount to intrinsic value, especially for long-term investors willing to weather volatility on the way to wider market awareness and profitability at scale.

Even if the technology sleeve of your portfolio is at or above its allotted
allocation, the time to invest is now.

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