AudioEye Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to AudioEye's Third Quarter 2023 Earnings Conference Call. Joining us for today's call are AudioEye's CEO, Mr. David Marotti and CFO, Ms. Kelly Georgievich. Following their remarks, we will open the call for questions from the company's publishing analysts.

Operator

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 Chief Executive Officer, 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, are confident, will and other similar statements of expectation identify forward looking statements. Today, 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, in the comments made during this conference call and in the Risk Factors section of the company's annual are on Form 10 ks, its quarterly reports on Form 10 Q and its other reports and filings with the Securities and Exchange Commission.

Operator

Participants on this call are cautioned not to place undue reliance on these forward looking statements, which reflect management's beliefs only as of the date hereof. AudioEye does not undertake any is duty to update or correct any forward looking statements. Further, management's remarks today will include certain non GAAP financial measures. A reconciliation of the most directly 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 its website at www.audioeye.com. Now, I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr.

Operator

David Maradi. Sir, please proceed.

Speaker 1

Are today. Thank you, operator. Welcome everyone and thank you for joining us. We've been hard at work and are pleased to deliver several exciting announcements. 1st, record annual recurring revenue or ARR of $30,500,000 are an increase of approximately $800,000 sequentially, representing the largest sequential growth in 6 quarters.

Speaker 1

Are: 2nd, revenue of $7,840,000 representing the 31st sequential quarter of record revenue. Record reported non GAAP profitability of $300,000 in the 3rd quarter ahead of expectations of 100,000 Lastly, we remain on track to deliver positive free cash flow in the 4th quarter. Are Delli will discuss the financial performance in more detail shortly. During the quarter, we released the industry's first are Digital Accessibility Index Report. The results confirm that traditional consulting approaches to solving web accessibility have failed And that mostly Internet remains inaccessible for those with disabilities.

Speaker 1

As part of the study, AudioEye conducted an automated scan of over 2,000,000 pages across 40,000 websites from companies with over $100,000,000 in annual revenue. More than 3,000,000,000 site specific elements were tested, including images, links and headers. Following the scan, accessibility experts, including members of the disability community, audited the top sites in each industry, are revealing which issues are most disruptive to users. Of the 3,000,000,000 website elements tested, The findings concluded every page had at least one accessibility error and the average page had 37 items that failed 1 of the success criteria are W CAG. Our study found that the most frequent barriers were related to image accessibility, are: Descriptive links and keyboard accessibility, which significantly impacts people with a disability in the world trying to utilize the Internet.

Speaker 1

The barriers found were significant, preventing people with disabilities from accomplishing critical paths that many of us regularly depend on, are the best product in the market is to solve digital accessibility at scale, utilizing a unique combination of AI coupled with a scalable approach to leverage human assisted technology are the catch errors that technology alone cannot protect. Recently, we also shared findings from an analysis of over 900 legal claims from over 100 lawsuits and demand letters. The data is compelling. Customers using AudioEye Managed Plan are 67% less are likely to receive a lawsuit with a valid WCAG issue compared to competitors, offering the highest rates of protection against legal claims in the industry. In addition, while digital accessibility lawsuits increased year over year, are the 1st half of twenty twenty three lawsuits against AudioEye customers decreased by over 33% Moving on to guidance.

Speaker 1

We are guiding revenue between $7,900,000 $8,000,000 for the Q4 of 2023. 4th quarter will see the final sequential impact of one time revenue from the BOIA integration. Are now ready to begin with our Q4 results. We expect to generate a sequential increase in non GAAP profitability in the Q4 and remain on track to deliver free cash flow in the quarter. Today is our first question.

Speaker 1

I'll now turn the call over to AudioEye's CFO, Kelly.

Speaker 2

Thank you, David. Q3 2023 marks the 31st straight quarter of record revenue with $7,840,000 which represents are Supercom growth over the comparable period of prior year. Annual recurring revenue or ARR at the end of the Q3 of 2023 was $30,500,000 an $800,000 increase from ARR at the end of the Q2 of 2023 represents an ARR annualized growth rate of 10.8%. We are pleased to see ARR grow at its highest rate in a year and a half. Are continuing to deliver solid performance.

Speaker 2

The partner and marketplace channel includes are revenue from our SMB focused marketplace products and revenue from a variety of partners to deploy these same products for their SMB customers. Are 59% of revenue and 61% of ARR. Q3 2023 saw the highest are growth in ARR for the partner marketplace channel since Q4 of 2020 with growth coming from a variety of sources within this channel. We expect this momentum to continue in the next quarter. Our enterprise revenue channel, which typically consists of our larger customers and organizations, are the most important part of the business made up 41% of revenue and 39% of ARR in the Q3 of 2023.

Speaker 2

As mentioned previously, This channel faced additional headwinds in the first half of twenty twenty three with one large customer contract renegotiation having an impact on total enterprise revenue, are the Q1 of 2019, which we expect to normalize in the first half of twenty twenty four. We have seen early success in the integration of POIA in selling existing customers and expanded suite of services. So as expected, the conversion of one time audit revenue to reoccurring services did have an approximately $200,000 impact to Q3 2023 revenue. Our Q4 revenue guidance incorporates a lesser impact to complete this process. The total customer count increased notably in Q3 2023 to approximately 100 are nearly 107,000 customers from approximately 81,000 customers on September 30, 2022 are 100 and 4,000 customers on June 30, 2023.

Speaker 2

Increasing the customer count was the result of customer additions in our partnering marketplace channel. Are the 1st quarter of the 3rd quarter was $6,100,000 or about 77% of revenue compared to are $5,800,000 75 percent of revenue in Q3 of last year. We continue to gain efficiency in the delivering of our products and services,

Speaker 1

are the results which have resulted

Speaker 2

in lower cost of revenue, while revenues increased. While revenues were relatively consistent with the comparable period of prior year with are 2% growth, operating expenses decreased approximately 8% or $600,000 to 7,400,000 This decrease was a result of continued efficiencies in sales and marketing and G and A, offset by continued investments in R and D. Are our total R and D spend in Q3 2023 was approximately $2,400,000 with approximately $500,000 are directed at backward development costs in the investing section of the cash flow statement. The total R and D spend is about 31% of our revenue this quarter are the 1st quarter versus 33% sequentially. We have invested notably in R and D over the last 12 months, improving our software and adding new products.

Speaker 2

Are the following questions. We expect R and D investment as a percent of revenue to continue coming down over the next few quarters. Are now ready to begin. Net loss in the Q3 of 2023 was $1,400,000 or $0.11 per share compared to $2,300,000 are $0.20 per share in the same year ago period. Total net loss decreased 41% or $900,000 from the comparable period of prior year, are thanks to an increase in gross profit as well as strategic and efficient spending in all departments.

Speaker 2

On a non GAAP basis, our are Q3 net profit of $300,000 or $0.02 per share compared to a net profit of $100,000.01 per share in the same year ago period. Are the primary adjustments to GAAP earnings and EPS for Q3 2023 were non cash share based compensation, depreciation and amortization are the following questions on the call and other non recurring items. Cash decreased by $1,000,000 in the quarter, which was the result of cash outlays for tax payments from employee share based grants of are approximately $100,000 non GAAP litigation expenses of approximately $100,000 software capitalization of $500,000 are $300,000 of net cash used from other operating activities. As David mentioned, we expect to generate free cash flow and build cash in the 4th quarter. With that, we open up the call for questions.

Speaker 2

Operator, please give instructions.

Operator

Thank you. We will now take questions from the company's publishing analysts. At this time, we will pause momentarily to assemble our roster. Is now our first question will come from George Sutton with Craig Hallum. Please proceed.

Speaker 3

Thank you. David, I wondered if you could work for a second with us on the DOJ proposed rule, the comment period ended last month, meaning we should get a final rule in the relative near term. Your perspective would be relative to the final rule. And then separate from that, how are you thinking of positioning the business to benefit from that ultimate rule?

Speaker 1

Yes. As you said, it's a good question. There's a 60 day comment period. We're really excited about this for Title 2. Hopefully, we hear something soon and we're ramping up looking at this for the government sector as well in terms of what we're going to do on sales and marketing But we think we're going to have some time.

Speaker 1

Demand probably picks up on this after the rule comes out in 1 to 2 years.

Speaker 3

Separate from that, you talked about building out your sales team over the last couple of quarters, can you just give us an update on the go to market plans and sort of how that

Speaker 1

You're talking about the enterprise sales team, right? Today is Chris. Yes. We expect this process to ramp up over the next few months. We just hired these folks back in July, August, so they take about 6 months to ramp, but we're seeing really good progress so far and pipeline is also building.

Speaker 1

So it gives us a lot of confidence We're going to see good growth into 2024.

Speaker 3

And I understand you're not giving guidance yet on 2024, but Good growth in 2024, any perspective on what that might look like?

Operator

Our next question comes from Zach Cummins with B. Riley FBR. Please proceed.

Speaker 4

Hi, David. Hi, Kelly. Thanks for taking my questions and congrats on the sequential increase in the ARR and Just speaking more so to the selling environment on both the partner and marketplace side and obviously enterprise will take a little more time to ramp up in accordance with Sales team, but just curious on your perspective of the overall environment and what's driving your confidence in continued ARR growth?

Speaker 1

Yes, the macro environment is a bit tough out there. You're seeing some tightness on enterprise budget. People are looking to cut costs. But we are seeing good pipeline growth because of our products and positioning. But there are definitely budget and cost pressures.

Speaker 1

I'm sure you're seeing that as well out there In Enterprise SaaS. Got it. And in

Speaker 4

terms of the, I guess, timeline to positive free cash flow, good to see that reaffirmed here in Q4. I'm just curious how you're thinking about The necessary capital to continue to execute upon growth plans moving forward, say demand really starts to pick up or you execute on the enterprise side, just How are you thinking about available or necessary capital you need to run the business?

Speaker 2

Yes, I can take that, Zach. We do continue to believe That we have sufficient cash on hand to fund ongoing operations. We do expect revenue with the momentum on the partnership side and is expansion on the enterprise side to grow and a lot of that to drop to the bottom line. And so we feel good about our cash position and where we stand, especially with the Generation expected in Q4 and beyond.

Speaker 4

Understood. And final question for me is, you are now going to have multiple quarters in a row of improving profitability. What's the approach to investing in growth versus continuing to expand margins here in the foreseeable future.

Speaker 1

Yes, it's a good question. We look at things holistically on the business, decide if we should invest more into sales and marketing with LTV to cap ratios or more into R and D, but we think that's coming down Or we buy back stock with cash generation, that's a possibility.

Speaker 4

Got it. Well, thanks for taking my

Operator

our next question comes from Scott Buck with H. C. Wainwright. Please proceed.

Speaker 1

Hi, good afternoon, guys. Thanks for Just a couple for me. First one on gross margin. So nice year over year are expansion, but it looks like we've kind of stalled out here the past couple of quarters. Are we at the ceiling here for gross margin or do you think you have a little bit more room to push higher?

Speaker 2

We are happy to see gross margin grow year over year. I think we have have proven we can find efficiencies in cost revenue. We did that over the last year. As we continue to grow revenue, we expect to continue to see efficiencies and we do think there is the ability to continue to grow gross margins going forward.

Speaker 1

Great. I appreciate that, Kelly, second one for me. You talked about R and D expense coming down a bit over the next few quarters. Is that due to cash Constraints or is that more intentional just in terms of what you need to move the business forward? Yes, we've invested a lot in R and D over the past year, really improved the software and new products are out there.

Speaker 1

So we expect R and D is in a good place and investment should come down as a percentage of revenue over the next few quarters more in line with industry metrics, which would be around 25% in SaaS. And I'm sorry, you said you were at 31% in the quarter, is that correct? Are Brad. All right. Appreciate that, David.

Speaker 1

That's it for me, guys. Thanks a

Speaker 2

lot. Thank

Operator

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

Speaker 1

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. Are now ready to begin

Speaker 2

the call.

Operator

Thank you for joining us today for AudioEye's 3rd Quarter 2023 Earnings Conference Call. As always, we would like to thank are employees and stakeholders for your continued hard work and dedication

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Earnings Conference Call
AudioEye Q3 2023
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