AudioEye Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 5 speakers on the call.

Operator

Afternoon, and welcome to AudioEye's First Quarter 2023 Earnings Conference Call. Joining us for today's call are AudioEye's CEO, Mr. David Moradi 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 atwww.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, confident, will and other similar statements of expectation identify forward looking statements. 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.

Operator

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 report on Form 10 ks, its quarterly reports on Form 10 Q and 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 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 our website at www.audioeye.com.

Operator

Now, I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Moradi. Sir, please proceed.

Speaker 1

Thank you, operator. Welcome everyone and thank you for joining us. To begin, we'd like to highlight our strong financial performance and continued focus on efficiencies. We are pleased to announce record revenue of $7,770,000 in the Q1. We ended the Q1 with sequential growth on December 31, 2022.

Speaker 1

Gross margins were 78% versus 75% in the year over year quarter. Gross profit increased to $6,100,000 versus $5,200,000 year over year, representing 100% flow through of additional revenue into gross profit. Revenue increased 13% year over year, while operating expenses decreased by 8%. Net loss decreased and we achieved a near non GAAP breakeven versus a $1,000,000 loss in the year over year quarter. We were able to achieve near non GAAP breakeven despite increased R and D investment of approximately $200,000 compared to the Q1 of 2022.

Speaker 1

Net cash provided by operating activities improved to $300,000 in the quarter versus net cash used by operating activities of $500,000 in the Q4 of 2022. In the year over year quarter, net Cash used by operating activities was $1,900,000 In addition to our positive financial results, There are several notable items I'd like to highlight on today's call. As we have said before, we believe we are in the early innings of digital accessibility. 97% of websites today remain inaccessible to people with disabilities. Over the past several years, there has been a growing demand for effective accessibility solutions.

Speaker 1

Demand has increased due to a variety of factors, including brand reputation, increased litigation and the ability for companies to generate additional revenue with accessible websites. AudioEye is a pioneer in digital accessibility and has invented many of the products used in the industry today. We believe that AudioEye has invested more than any other company in the industry into R and D. As a result, We have the best product to meet companies wherever they are in their accessibility journey, whether they want a comprehensive audit to understand scope of the problem, Fix issues at The Source or want us to fix their site with the most advanced automation and customized JavaScript. We stand behind our work when our clients receive demand letters or lawsuits by offering a comprehensive technical and legal analysis refuting frivolous claims and false positives from online accessibility website scanners.

Speaker 1

This additional layer of protection helps them reduce or even eliminate their risk exposure. In March 2023, we successfully defended a customer Babylon Marine and a precedent ADA case for website accessibility. Babylon had bits to say. Before AudioEye, we really didn't know which could not only solve our accessibility issues, but be there as our partner if any issues came up. The AudioEye team determined there were no digital accessibility barriers and provided documentation that proved the claims were false.

Speaker 1

We appreciate how AudioEye stepped in to stand behind their solution and customer and how effective they were in resolving the claim. AudioEye was an invaluable partner throughout the entire process. In most website accessibility or demand letters. The party receiving the lawsuit will spend money on legal fees, pay a settlement and fix the digital property later. Most competitors use point in time audits or automated only approaches.

Speaker 1

Neither work effectively. Many companies want to do the right thing and address digital accessibility, but because of ineffective solutions remain vulnerable to future legal actions, brand risk and subpar customer experiences. AudioEye utilizes a unique combination of automation technology, including artificial intelligence, coupled with industry experts in accessibility compliance and law to help businesses become and stay compliant. We were pleased to provide clear evidence our solution is effective while eliminating risk for our customers and making the Internet a better place for people with disabilities. The next item I'd like to highlight is our AI initiative centered on accessibility with members of the disability community.

Speaker 1

We are developing AI models with direct input from people with disabilities to ensure the products and models developed work in our efforts to eradicate digital accessibility errors at scale. We will have further announcements soon on the specific impact of these initiatives. Moving on to guidance. We are guiding for sequential revenue growth with revenue of between 7.8 and $7,900,000 for the Q2 of 2023, representing year over year growth of approximately 4% at the midpoint. As discussed in the previous earnings call, our results in the first half have been impacted by certain renegotiations.

Speaker 1

Even with these renegotiations, we are pleased to see sequential revenue and ARR growth. We continue to expect that revenue and ARR growth will accelerate meaningfully in the second half of the year. With increased R and D investment, We continue to expect a non GAAP operating loss in the 2nd quarter with non GAAP operating profit in the second half, generating breakeven operating profit for the full year. We continue to be well capitalized with $5,500,000 of cash as of March 31, 2023. We believe the current cash on hand is sufficient to fund operations and we still expect to generate positive cash flow by the Q4 of this year.

Speaker 1

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

Speaker 2

Kelli? Thank you, David. As just mentioned, we are pleased with our Q1 2023 performance. Q1 2023 marks the 29th straight quarter of record revenue ending Q1 at $7,800,000 which was 13% growth year over year. Annual recurring revenue or ARR at the end of the Q1 of 2023 was 29,600,000 a $1,500,000 increase from ARR at the end of the Q1 of 2022.

Speaker 2

Our 2 revenue channels are continuing to perform well. As discussed in previous updates, the partner and marketplace channel includes all revenue from our SMB focused marketplace products and revenue from a variety of partners to deploy these same products for their SMB customers. In the Q1 of 2023, This revenue channel grew 14% year over year and represented approximately 56% of revenue and 59% of ARR. We expect to continue to see this channel contribute significantly to our growth in revenue as we build for further traction and expand with larger partners. The enterprise channel continued to perform well in the quarter, growing 11% year over year and contributing approximately 44% of revenue and 41% of ARR.

Speaker 2

We continue to see longer sales cycles and more price conscious customers, but overall, We are seeing some of our best logo retention rates. Total customer count increased notably in Q1 2023 to approximately 95,000 customers from approximately 74,000 customers at March 31, 2022, and 86,000 at December 31, 2022. Both revenue channels contributed towards customer comp growth in the quarter with the expansion of platforms as the most material driver customer count increases. Gross profit for the Q1 was $6,100,000 for about 78% of revenue compared to $5,200,000 75 percent of revenue in Q1 of last year. We are pleased to see gross margin continue to increase given the significant investment in our platform, including research and development and customer success costs.

Speaker 2

We expect gross margin to continue around the 77% to 78% range throughout the remainder of 2023. While revenues increased 13% over the comparable period of prior year, operating expense decreased approximately 8% or $700,000 to $8,100,000 This decrease was the result of continued efficiencies Our total R and D spend in Q1 2023 was approximately $2,200,000 with approximately $475,000 reflected the software development costs in the investing section of the cash flow statement. This total R and D spend is about 29% of our revenue this quarter Versus 26% last year and continues to reflect a commitment towards investing in our product and technology to deliver the best product in the market and to ensure companies are protected from risks. Net loss for the Q1 of 2023 was $2,000,000 for $0.17 per share compared to $3,600,000 or $0.32 per share in the same year ago period. Total operating loss decreased 44 percent or $1,600,000 from the comparable period of prior year, thanks to the increase in gross profit as well as strategic and efficient spending in all departments.

Speaker 2

On a non GAAP basis, our Q1 net loss was near breakeven at a $53,000 net loss or less than a $0.01 loss per share compared to a net loss of $1,000,000 for $0.09 per share in the same year ago period. The primary adjustments to GAAP earnings and EPS for Q1 2023 for non cash share based compensation, litigation, depreciation and amortization. Acquisition costs were also a non GAAP adjustment in Q1 2022. Cash usage for the quarter was $1,400,000 which included a $1,000,000 earn out payment related to the acquisition of the Bureau of Internet Accessibility. The remaining $400,000 of cash burn in the quarter was primarily related to tax payments from employee share based grants of approximately $250,000 and non GAAP litigation expenses of approximately $120,000 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. Our first question comes from Zach Cummins from B. Riley FBR. Please go ahead.

Speaker 3

Yes. Hi, good afternoon, David and Kelly. Thanks for taking my questions and congrats on the solid Q1 results. David, just starting with the partner channel, I mean, it's a nice jump in new customers added in this quarter. So can you just talk about your progress with partners and how we should think about that progression here in the next few quarters, especially as new agreements start to kick in.

Operator

Hello, is your line on mute?

Speaker 2

Yes, I'm guessing David's line is on mute, but I can jump in here. Overall, we are pleased to see customer count increase and across all channels see that increase. But yes, we are excited about the developments in partnerships overall. As we noted, the biggest driver of those partnership increases are our customer count increases are the partnership increases from platforms. But yes, making great traction with and expect that to continue in future quarters.

Speaker 3

Can you hear me now? Understood. Yes, yes, I can hear you, David.

Speaker 1

Okay. Yes, I was talking for about 15 seconds there. Great. Does that answer your question, Zach? Yes.

Speaker 1

Do you need some color around that?

Speaker 3

Yes. No, no, I think that's helpful. And I guess, David, just building upon it a little bit, I mean, obviously, continuing to invest pretty aggressively on the R and D line. Can you talk about some of the opportunities that you see out there that really, I guess justifies continuing to invest at this pace into R and D.

Speaker 1

Yes, we're investing Ian Adams that we think are going to have a great payback in the near term. We're going to be adding new products in the near term that you're going to see And we're investing into our AI capabilities. So that's where the money is going.

Speaker 3

Got it. And final question is just really on the enterprise side of it. I know you mentioned last call there was a couple of outstanding Renewals that were in ongoing conversation. Any sort of update you can provide on either of those situations?

Speaker 1

Yes. With the are you talking about the enterprise side?

Speaker 3

Yes.

Speaker 1

Yes. Those are still in negotiations. The demand is still there, but there's been large turnover at both of those companies. So we're still in the hunt. We're hopeful we'll be able to get one of these deals or both of these deals done by the end of the year.

Speaker 1

It's more a function of a tougher economy.

Speaker 3

Got it. That's helpful. Well, thanks for taking my questions and best of luck with the rest of the quarter. Thank you.

Operator

The next question comes from Scott Buck from H. C. Wainwright. Please go ahead.

Speaker 1

Hi, good afternoon guys. David, I'm curious on the sales and marketing efficiencies, have you guys exhausted those efforts at this point? Or do you think there's Still some room for improvement there going forward. Yes. I think we're pretty exhausted on the efficiencies in sales and marketing.

Speaker 1

I don't think you'll see more efficiencies there. Yes. Okay. That's fair. And then the second one for me, if we take a step back, You're kind of bumping along here at roughly cash breakeven.

Speaker 1

Should we assume that moving forward at least in the near term, any incremental cash you're able to generate, you're going to plow right back into sales and marketing to drive revenue?

Speaker 2

Yes. We are very Prudently managing cash and costs overall. We did end Q1 at $5,500,000 kind of as David mentioned and what plays into it is We expect the first half to have non GAAP net loss, but we expect the second half to have non GAAP profitability. So it is kind of does work in line with that. But we do expect, as we mentioned on the call, to be cash generating by Q4.

Speaker 2

And so we are kind of keeping all those factors in mind as we think about the rest of the year.

Speaker 1

Okay, great. Appreciate that, Kelly. And then last one for me, first congrats on the successful defense. But curious if there's anything else on the regulatory front that we should be keeping an eye on? Sure.

Speaker 1

Yes, there is action on the DOJ side. They have something in the works right now on the state and local government. So we're watching that pretty carefully. Okay. Perfect.

Speaker 1

Appreciate the additional time guys. Thank you. Thank you.

Operator

Our next question comes from George Sutton from Craig Hallum. Please go ahead.

Speaker 4

Thank you. David, you mentioned that you expect revenues To accelerate meaningfully in the second half, obviously, that would be different than many companies are anticipating at this point. Could you just walk through the logic of how you see that Curry?

Speaker 1

Good question. When I look at the business outside of the renegotiations, our reseller and platform business have been Strong growing at a great clip. So that's where we see the uptick in the second half and really driven by that and an uptick in the enterprise business as well with higher close rate with Michael and his team and what they're doing.

Speaker 4

So you mentioned that some businesses are seeing additional revenues from having accessibility, which For us, it's always been kind of an interesting dynamic beyond just the litigation. Can you talk as specifically as possible As to what you're hearing in terms of those kinds of numbers?

Speaker 1

Yes. It's hard to quantify. It could be anywhere from 5% to 10% more revenue Lee. We have a case study on the website I'd invite you to check out, but it is hard for us to quantify.

Speaker 4

Last, if I could, on the R and D side, I'm curious if you can just give us a picture into how you're thinking of the ROI from these investments. And I know some of it is increasing the automation, so thus reducing your sort of people based cost to deal with this. But Any sort of detail you can give us on sort of ROI you are targeting from these investments?

Speaker 2

Yes. We definitely are considering what the return on investment is for our R and D spend and we do think There is notable investment there. We do see opportunities in front of us that we want to capitalize on and that's why we're funding that effort. In addition to kind of expanding existing features, there are additional product sets and products we plan to put up to the market that we're pretty excited about. And so all of that is a factor in what we're investing in for R and D.

Speaker 4

Okay. 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. Marardi 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.

Operator

Conference has now concluded. Thank you for joining us today. 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 in the Investors section of the company's website. Thank you for joining us today for Audio's Q1 2023 earnings conference call. You may now disconnect.

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Earnings Conference Call
AudioEye Q1 2023
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