Sangamo Therapeutics Q3 2021 Earnings Call Transcript

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November 10, 2021

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to AudioEye's Third Quarter 2021 Earnings Conference Call. Joining us for today's call are AudioEye's Interim CEO, Mr. David Maradi Executive Chairman, Doctor. Carr Bettis and CFO, Ms. Kelly Georgievich.

Operator

Following their remarks, we will open up the call for questions from the company's publishing analysts. I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.audioeye.com. Before I turn the call over to AudioEye's Executive Chairman, the company would like to remind all participants that statements made by AudioEye management during the course of this conference call that are not historical facts are considered to be forward looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward looking statements. The words believe, expect, anticipate, estimate, confident, will and other similar statements of expectation identify forward looking statements.

Operator

These statements are predictions, projections or other statements about future events and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release. And the comments made during this conference call and in the Risk Factors section of the company's annual report on Form 10 ks, quarterly reports on Form 10 Q and in its other reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward looking statements, which reflect management's belief only as of the date hereof. AudioEye does not undertake any duty to update or to correct any forward looking statements.

Operator

Further, management's remarks today will include certain non GAAP financial measures. A reconciliation of the most comparable GAAP financial measures to these non GAAP financial measures is available in the company's earnings release posted in the Investor Relations section of our website at www audioeye.com. Now, I would like to turn the call over to AudioEye's Executive Chairman, Doctor. Carr Bettis. Sir, please proceed.

Speaker 1

Thank you, operator. Welcome everyone and thank you for joining us today. First of all, happy Veterans Day and a special thank you to all of the veterans for their service to our country. After the market closed, We issued a press release announcing our results for the Q3 ended September 30, 2021. A copy of the press release is also available in the Investor Relations section of our website at audioeye.com.

Speaker 1

We would like to begin, as usual, with an overview of our business. AudioEye is a leading provider of SaaS based digital accessibility solutions. That impact the way people around the globe browse and interact with online content. At AudioEye, we address every aspect of web accessibility items from finding and fixing issues to ongoing monitoring and upkeep. We also certify websites to demonstrate compliance with both the American With Disabilities Act or ADA and the latest Web Content Accessibility Guidelines or WCAG 2.1.

Speaker 1

Our comprehensive digital accessibility solutions allow our private sector clients to expand their customer reach and grow revenue by serving individuals with disabilities who make up 15% of the world population. I'll now turn the call over to David, AudioEye's largest shareholder and our interim shareholder, David.

Speaker 2

Thank you, Carr. It is my pleasure to speak with you today. I'm pleased with the Q3 as we continue to transition to a highly scalable SaaS company. Revenue grew across all channels and we increased MRR while achieving high logo and dollar retention. Gross margins remain healthy in the mid-70s, up substantially from prior years.

Speaker 2

As previously communicated, we have continued investing in R and D and sales and marketing to capitalize on our industry's long term expected growth trends. Over time, we expect that R and D and sales and marketing will come down as a percentage of revenue as we increase sales and benefit from efficiencies. Earlier this year, we announced our next generation platform, which features always on monitoring, analysis of issues fixed and remaining and an accessibility score. These features have not only resonated with our existing customer base, but have also supported additional wins this year. Now, I'm very excited to discuss our next major release, issue reporting.

Speaker 2

Yesterday, we publicly unveiled issue reporting. Our technology and transparent approach to solve the accessibility for our clients has always been distinct from the competition. But with the release of issue reporting, this puts us at another level. Customers can now quickly sort accessibility issues by type and severity to view those fixed automatically and those requiring additional attention. Because AudioEye now includes issue reporting with all next gen subscriptions, These advancements allow us to offer us a comprehensive accessibility solution for a fraction of the price of traditional approaches.

Speaker 2

I want to thank our product and engineering teams for their hard work in delivering this world class product. We have already seen an enthusiastic response to issue reporting from our customers and prospects. During the quarter, one of the largest and fastest growing U. S. Digital agencies partner with AudioEye.

Speaker 2

They indicated how much more manageable and affordable our solution is than the one we displaced. Their old solution require their engineers to update sites for every accessibility item every time the website changed and frequent expensive audits. Additionally, amid a significant acquisition involving thousands of sites, an existing agency customer said they would be using AudioEye as a go forward solution, replacing a competing product in the acquired business. They indicated they would only use AudioEye due to its ease of use, accuracy and issue reporting. As these wins demonstrate, we continue to hear the same feedback over and over.

Speaker 2

Our efficient, accurate and transparent solution reduces or eliminates engineering time and resources that alternative options require. Value proposition is the most compelling at any time in the company's history. To understand why that is the case, it makes sense to understand the overall landscape. Outside of AudioEye, there are 3 approaches to fixing accessibility errors on a website today. The first is building an accessible website From the onset and ensuring accessibility is part of every update process.

Speaker 2

2, software only products, which address only a subset of the issues and do not offer issue reporting, leaving website owners in the dark. 3, additional approaches, which require expensive and recurring manual audits during which developers fix issues and the source code. This costly process must then be repeated to maintain accessibility whenever a website is modified. Unless the website is built with accessibility during the design and development phase and updated accordingly, which is only a small percentage of websites, We offer the most cost effective and straightforward solution. We fix many issues automatically and provide issue reporting bundled into our next gen offerings at no extra charge.

Speaker 2

Customers can use this reporting to resolve the remaining problems independently or hire us to do the rest with our human assisted technology. AudioEye has made tremendous progress in our R and D efforts over the last year and issue reporting is just one exciting outcome of this process. We are unaware of any competitor with our amount of product and engineering talent or any other competitor investing in R and D at a similar rate. Case of development has continued to increase and we look forward to announcing additional features and products as they are released over the next few months. This would not be possible without product and tech leadership, which has instilled processes for repeatable excellence and the tireless efforts from the product and engineering teams.

Speaker 2

In addition to our success with business partners, I'm excited to discuss our outreach with the disability community. In early October, we announced the AudioEye Alliance community at M enabling, an event hosted by Mike Paciello, a prominent accessibility advocate and founder of WebABLE. The AudioEye Alliance community is a community based initiative that brings people with disabilities to the forefront of the product development and quality assurance process. The Alliance's creation makes sure that our technology is backed by the human element people living with disabilities to rely on assistive technology to navigate websites in their everyday lives. By including this feedback in the development process, AudioEye can continue to build the best solutions that allow people with disabilities to navigate the web naturally.

Speaker 2

I encourage you to go to our website where we showcase their experiences and feedback as part of our Making Accessibility Visible series at www.audioEye.com/blog. Also at the M Enable event, Our CEO, Dominic Varicelli, co led a discussion on the contributions of technology and digital accessibility alongside Aneel Lewis, the Director of Advocacy and Policy for the National Federation of the Blind. If you would like to hear the discussion, please go to www at audioeye.com/enable. The trend of web accessibility sought lawsuits continues to rise. This year, we expect almost 4,200 cases versus 3,500 in the previous year.

Speaker 2

In addition to private litigation, items. On November 1, Justice announced an agreement with Rite Aid ID requiring the pharmacy to make its COVID-nineteen vaccine content accessible. And on September 20, Justice filed a statement of interest in a federal court case in Los Angeles called Vargas and American Council of the Blind v. Quest Diagnostics. The DOJ's statement agrees with the plaintiff's claim that inaccessible kiosks violate the FDA.

Speaker 2

Against this backdrop, the team at AudioEye is working tirelessly toward providing the most efficient and transparent solution to the ever present need for digital accessibility. Moving on to guidance. In terms of guidance for the Q4, we believe revenue earnings release. We remain very well capitalized with $22,000,000 of cash on the books at September 30, and we have the runway to continue investing in the business for long term success. CFO.

Speaker 2

I would now like to turn the call over to Kelly, AudioEye's CFO. Kelly?

Speaker 3

Thank you, David. I would like to begin by providing a summary Q3 2021 year to date results. And what we view as one of the most important metrics for our business, in the Q3 of 2021 monthly recurring revenue or MRR grew approximately 24% year over year or $2,100,000 and grew sequentially from $2,000,000 in Q2 2021. In addition, we increased our customer count by approximately 2 70% over the same period of last year with approximately 80,000 customers in September 2021. We continue to see increases in customer counts across each of our revenue channels.

Speaker 3

Revenue for Q3 2021 was $6,200,000 up 17% from $5,300,000 in the Q3 of 2020. Regarding our 2 revenue channels. The partner and marketplace channel includes all revenue from our SMB focused marketplace products and revenue from a variety of partners who deploy these same products for their SMB customers. In the Q3 of 2020 1, this revenue channel grew 33% year over year and represents approximately 55% of revenue and 57% of MRR. We expect to continue to see this channel contribute significantly to our growth in customer count and ultimately MRR.

Speaker 3

The enterprise channel continued to perform in the quarter contributing approximately 45% of revenue and 43% of MRR. IDS. While project oriented PDF revenue was down from Q3 2020, recurring revenue in the enterprise channel grew approximately 12% over the same period in prior year, driving a return to year over year increase for the channel. We again added prominent enterprise brands from our direct sales efforts and continue to renew our enterprise clients at an impressive rate. Gross margins continue to expand year over year reaching 74.7%, and increased from 71% a year ago and consistent with Q2 2021.

Speaker 3

The increase in gross profit from Q3 2020 was primarily due to continued recurring revenue growth and continued improvement in automation in our product offerings. In Q3 2021, cost of revenue remained flat from Q3 2020 items despite increases to revenue and customer counts. In Q3, OpEx inclusive of $1,900,000 of stock compensation was $9,300,000 which was an increase of about 72% versus Q3 last year. This increase was strategic and was primarily driven by increases in R and D as we focus on product development and expanding our sales and marketing efforts. Our G and A expense remained consistent with Q3 2020.

Speaker 3

Our total R and D spend in Q3 was approximately $2,000,000 with approximately $370,000 reflected as software development costs in the investing section of the cash flow statement. This total R and D spend is about 32% of our revenue this quarter versus 9% last year and continues to reflect the commitment towards investing for scale in this emerging market. ID and expansion in our sales and marketing team. Net loss in the Q3 of 2021 was $4,700,000 or $0.41 per share compared to $1,100,000 or $0.12 per share in the same year ago period. On a non GAAP basis, our Q3 net loss was $2,800,000 or $0.24 per share compared to the same year ago period of $200,000 or $0.02 The primary adjustment to GAAP earnings and EPS for both comparable quarters is non cash share based compensation and in Q3 2020 also included non cash valuation adjustments to liabilities, interest expense and severance.

Speaker 3

Our balance sheet remains well capitalized with 0 debt and $22,000,000 of cash at September 30, 2021. With that, we open up the call for questions. Lines. Operator, please give instructions.

Operator

Thank you. We will now take questions from the company's publishing lines. One moment please while we poll for questions. Our first question is from Zach Cummins of B. Riley Securities.

Operator

Please proceed with your question.

Speaker 4

Hi, good afternoon, David, Carr and Talia. Thanks for taking my questions. I appreciate all the incremental items. And just speaking on that front, David, in regards to issue reporting, Is this solution only for new customers at this juncture or do you have any plans to kind of move this through the existing customer base as well?

Speaker 2

All customers on NextGen will have issue reporting. So we're in the migration process right now. Anybody on the website has it. Enterprise customers are starting to get it as well as partners. And so it should be over the next 3 to 6 months.

Speaker 4

Understood. And can you talk a little bit more about some of your success with Digital Agency and partners there with this new issue reporting capability. It sounds like you were actually able to displace a competitor because of your superior solution that I assume comes at a much lower cost.

Speaker 2

Yes, I mean the product differentiated and it's a superior product. It's the most transparent solution, you have an accessibility score, continuous reporting, the highest level of automation. This is really disruptive actually with issue reporting. We're giving this away for much cheaper than competitors. Competitors are charging upwards of $10,000 $20,000 $30,000 for something we're essentially giving away now and subscription packages.

Speaker 4

Understood. That's helpful. And David, can you give me a little more depth on the investments that you're ID. I think Kelly called it out in her script that really starting to look at incremental investments in paid media as well as headcount.

Speaker 2

Yes. We're in the early innings of digital accessibility and expect that the market is going to grow rapidly over the next few years. So we're trying to get in front of that. We're balancing the opportunity to further increase our tech lead with investments against near term profitability to maximize the long term for us. As you can see, the R and D has been going up and we're starting to get a nice return on that investment.

Speaker 2

We expect to generate efficiencies from sales and marketing over Next few quarters and expect that will go down as a percentage of revenue.

Speaker 4

Got it. And David, 2nd year in a row that you've

Speaker 2

Yes, we can't really comment on specifics of partnerships. But yes, you should assume that we're speaking to them.

Speaker 4

Understood. And I guess final question, just speaking around relationships on the partner side. I know we had some of those relationships push out and no longer expected to happen in this year. But can you give us any sort of update on that? Are these still in the pipeline and still ongoing discussions Gen Z for pretty meaningful partnerships for AudioEye.

Speaker 2

Yes, nothing really changed except the timing. We're still discussing the same partnerships with the same folks. It's just not their highest priority at the moment. And so hopefully that changes in the future and we can start to do the upgrade processes and Disney's large platform integrations.

Speaker 4

Understood. Well, thanks for taking my questions. Really appreciate it and looking forward to speaking soon.

Operator

IPs. One moment please while we poll for additional questions. Our next question is from Allen Klee of Maxim Group. Please proceed with your question.

Speaker 5

Hi, this is Derek Greenberg on for Alan. My first question is how much you guys have left of your ATM? Has it changed at all this quarter?

Speaker 3

We're ending the quarter at $22,000,000 of cash. If you look at our year to date net increase to cash, it is $12,800,000 that is inclusive of the $16,500,000 generated from the market offering.

Speaker 5

Okay. Thank you. And then what was your guys operating cash flow and capitalized software development costs for this quarter?

Speaker 3

Capitalized software development costs for the quarter were $370,000 and operating cash flow was 2.4 Sorry, a burn of $2,400,000

Speaker 5

Okay. And then lastly, what about G and A?

Speaker 3

G and A as an expense.

Speaker 5

No. Did you say

Speaker 2

D and A or G and A? Or

Speaker 3

D and A sorry. Depreciation. Depreciation was $357,000 in the quarter.

Speaker 5

Okay, great. Thank you.

Operator

Our next question is from Scott Buck of H. C. Wainwright. Please proceed with your question.

Speaker 6

Hi, good afternoon guys. A bit of a follow-up on Zach's question regarding sales and marketing. Could you give us a little color about how you think about ROI there? And maybe when we should

Speaker 2

and testing things out and getting better at what we're doing. So there is some inefficiency there at the moment, but that should get better.

Speaker 6

All right. That's helpful. And then second one for me. Can you just kind of give us a reminder? This is the 2nd or third quarter where you've shown pretty significant year over year Expansion in gross margins.

Speaker 6

What's kind of the expectation there moving forward? And are we kind of topping out here in the mid-70s?

Speaker 3

Yes, we're happy with our gross margins over the last few quarters. Eyes. It's been consistently in the mid-70s and we expect that to continue or improve going forward. We're not giving specific guidance on future quarters, but are pleased with our range and don't expect any significant differences to occur.

Speaker 6

Okay, perfect. I appreciate the time guys. Thank you very much.

Speaker 2

Thank you.

Operator

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Maradi for closing remarks.

Speaker 2

Great. Thank you. Thank you for joining us today. As always, I want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call.

Operator

Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via a link available on the Investors section of the company's website. Thank you for joining us today for AudioEye's Q3 2021 earnings conference call. You may now disconnect.

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