AudioEye Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 23, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to AudioEye's First Quarter 2024 Earnings Conference Call. Joining us today are AudioEye's CEO, Mr. David Maradi 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.audioi.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 in its other reporting 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 direct comparable GAAP financial measures to use these non GAAP financial measures is available in the company's earnings release or otherwise posted in the Investor Relations section of its website at www.audioye.com.

Operator

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

Speaker 1

Thank you, operator. While it's been approximately 6 weeks since our last earnings call, several developments have occurred that we are excited to discuss today. As our last earnings call mentioned, the Q4 was a significant inflection point. We generated record adjusted EBITDA and positive free cash flow while generating solid ARR growth. We are pleased to report that this momentum is continuing and driving the increase in our full year guidance, which I will cover later in the call.

Speaker 1

But first, I'll discuss the changing regulatory landscape, which we expect to impact the business significantly in 2025 beyond. On April 8, the Department of Justice signed a final rule under Title 2 of the Americans with Disabilities Act. These regulations mandate that state and local government entities ensure their websites and mobile applications are accessible to people with disabilities following the Web Content Accessibility Guidelines 2.1a. The documents published by the Justice Department estimates $17,000,000,000 in implementation costs over the 1st 3 years and $2,000,000,000 annually after the initial phase. The regulation applies to public schools, community colleges, universities, public hospitals and clinics, state and local police departments, courts, election offices and state and local government offices that provide benefits or social services like food assistance, health insurance, employment services, libraries, transit agencies and a range of other government related entities.

Speaker 1

The new market opportunity under Title II is significant with most public sites not being accessible today. We are uniquely positioned to meet the demand increase with our direct sales team and our reseller channel. On the reseller side, we are already partnered with the leading SaaS platforms that serve cities, municipalities and K-twelve education websites. We estimate that these partners serve over 80,000 websites, which must all become compliant over the next 2 to 3 years. We are currently penetrated only in the single digits today in these resellers.

Speaker 1

A scalable approach like ours is required to meet this significant demand increase. AudioEye continues to improve its best in class technology platform, including investments in the latest artificial intelligence and scaled infrastructure to serve billions of end users sessions and millions of potential customers. In addition to the Justice Department, we are excited about the opportunity in Europe. As discussed last quarter, the European Accessibility Act takes effect in June 2025 and requires digital accessibility for websites and mobile apps by that date. We are also seeing regulatory developments in additional jurisdictions including California's AB 1757 proposal.

Speaker 1

If passed in its current form, it would expand and solidify the requirement that businesses operating California must have accessible websites and mobile devices. As noted, we are not including any benefit from these upcoming requirements in our guidance for this year, but we expect meaningful demand increases in 2025 and beyond. Since joining the company in 2019, the customer count has increased from 3,500 to 112,000 and revenues have more than tripled. We are prepared to support this significant demand increase from the public sector. With the final rule just announced 2 weeks ago, we are still early in the planning phase and we will share more about our outlook beyond 2024 as the year progresses.

Speaker 1

In the Q1, we achieved system and organizational control or SOC 2 Type 1 compliance. This important milestone underscores our commitment to upholding the highest security and data privacy standards. Achieving SOC 2 Type 1 compliance was a priority for us as we continue to expand our enterprise channel and service large enterprise organizations. SOC 2 Type 1 attainment and products rolled out this past year will further support the enterprise channel's growth initiative. The Board and management remain highly aligned with shareholders.

Speaker 1

Over the last two and a half years, the number of shares outstanding has remained at similar levels, while we have continued to invest and grow. In the current stock buyback, as of April 20 3, we have repurchased 548,000 shares at an average price of $5.73 In addition, under our previous buyback announced in June 2022, we bought 139,000 shares at an average of 5.44. Combining both programs, we have purchased approximately 6% of common shares outstanding over the last 2 years at a valuation of around 2 times revenue for the benefit of long term shareholders. Moving on to guidance. We expect quarterly revenues to accelerate throughout the year without significant additional expense, resulting in increased operating leverage and free cash flow generation.

Speaker 1

For the Q2, we are guiding revenue between $8,400,000 $8,500,000 representing an annualized growth rate of high teens. We also expect to generate adjusted EBITDA between $1,400,000 $1,500,000 and adjusted EPS between $0.12 $0.13 We are increasing 20.24 revenue guidance to between 34.3 $1,000,000 $34,700,000 We are also increasing our adjusted EBITDA guidance by approximately $1,000,000 to between $4,500,000 $5,500,000 with adjusted EPS between $0.38 $0.46 per share. I'll now turn the call over to AudioEye's CFO, Kelly.

Speaker 2

Thank you, David. As David discussed, revenue again hit record levels with Q1 2024 revenue at $8,100,000 marking our 33rd quarter of record revenue. Annual recurring revenue or ARR at the end of the Q1 of 2024 was $32,000,000 an $800,000 increase from the end of the Q4 of 2023 and representing an ARR annualized growth rate of 10%. We expect this growth to accelerate notably as 2024 progresses. Our 2 revenue key channels are continuing to deliver strong results.

Speaker 2

The partner 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 Q1 of 2024, this revenue channel grew 9% year over year, representing 59% of revenue and around 60% of ARR. We continue to see expansion of existing partners and new partners contracting with AudioEye, which continues to drive growth. AudioEye's enterprise channel consists of our larger customers and organizations, including those with non platform websites who generally engage directly with AudioEye sales personnel for pricing and solution. The enterprise channels grew 4% sequentially and we expect to resume year over year growth in Q2 2024.

Speaker 2

In the Q1, the enterprise channel contributed 41% of revenue and around 40% of ARR. On March 31, 2024, our customer count was approximately 112,000, an increase from 95,000 customers on March 31, 2023 and an increase of approximately 2,000 customers from December 31, 2023. The increase in customer count is driven by additions in the partner and marketplace channels. Gross profit for the Q1 was $6,300,000 or 78 percent of revenue compared to $6,100,000 in 78 percent of revenue in Q1 of last year. We believe the gross margin has room to expand in future quarters.

Speaker 2

While revenues increased approximately $300,000 from the Q1 of 2023, operating expenses decreased approximately 14 percent or $1,200,000 to $7,000,000 The decrease was primarily due to increased efficiencies in sales and marketing, the completion of significant initiatives in R and D and lower G and A expenses. Our total R and D spend in Q1 2024 was approximately $1,800,000 with approximately $490,000 reflected as software development costs in the investing section of the cash flow statement. This was down from approximately $2,200,000 in Q1 2023. The total R and D spend is about 22% of our revenue this quarter versus 29% in the comparable period to prior year and consistent with Q4 2023 investment. We continue to believe that current investment in RNG is appropriate for 2024.

Speaker 2

Net loss in the Q1 of 2024 was $800,000 or $0.07 per share compared to $2,000,000 and $0.17 per share in the same year ago period. Total net loss decreased by 59 percent or $1,200,000 in the prior year's comparable period, driven by an increase in revenue, strategic and efficient spending in all departments and technological investment. Our Q1 adjusted EBITDA was $920,000 or $0.08 per share, a $1,000,000 improvement year over year. The primary adjustments to GAAP earnings and EPS for Q1 2024 for non cash share based compensation, depreciation, amortization, interest expense and other non recurring items. Our balance sheet is well capitalized with $7,000,000 of cash as of March 31, 2024.

Speaker 2

Cash decreased from approximately $2,200,000 in the quarter, primarily due to $1,700,000 share repurchase. The remaining decrease was primarily due to the timing of customer payment. Free cash flow calculated as $920,000 of adjusted EBITDA less $490,000 of software development costs was $430,000 in the Q1. We expect to generate positive free cash flow throughout 2024 with improvements as the year progresses. 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. The first question comes from George Sutton with Craig Hallum. Please go ahead.

Speaker 3

Thank you. Very nice results. Congratulations. So we're obviously early relative to both the European and the ultimate DOJ opportunities in terms

Speaker 1

of those going into play. Can you

Speaker 3

talk about what sorts of things you're doing to prep for that? You mentioned resellers specifically, but it's interesting you're increasing your EBITDA guidance in spite of the fact we would expect you might invest a little bit more aggressively into that. So any thoughts?

Speaker 1

Yes. We're just clicking on all cylinders here with the enterprise and the reseller channel. So business as is. I think R and D investment has been a major factor. We have a full product suite to meet the customer wherever they are, a small business or a large enterprise.

Speaker 1

So the breadth of offering is a major competitive advantage. We're outgrowing the market, I think. So yes, we're just we're clicking along here on business as usual. And I think you're going to see a significant uptick in demand as you go into 2025 with a multitude of regulations coming.

Speaker 3

You mentioned being positioned with some of the key resellers that will ultimately be taking you to market, particularly I think in the U. S. With the DOJ impact. Can you walk through some of the reseller relationships that are key? And how are those typically structured?

Speaker 3

Are you, in many cases the key player they are going to market with or are they going with multiple partners? Just any help there would be great.

Speaker 1

Yes. Those are exclusive relationships. So I mentioned our current partners on the government side serve around 80,000 websites and our penetration rate is in only the single digits. So we think there's a massive opportunity to grow here. We don't see any reason why this is not going to be close to full penetration over the next 2 to 3 years.

Speaker 1

And you can get full penetration with our current reseller partners on the government side. That's going to dramatically change the current business.

Speaker 3

Lastly for me, Kelly mentioned additions in the partner and marketplace channel being behind the strength you saw this quarter, can you just give any specificity as to specific partners that drove that new partners or new relationships with those partners?

Speaker 2

I think there are a lot of Go

Speaker 3

ahead, Helen.

Speaker 2

We're seeing growth in both expansion of existing resellers, which we continue to see every quarter and we think there's additional opportunity there, as David mentioned, but we also are contracting with new resellers. So that growth is coming from both of those buckets, which we're happy to see.

Speaker 3

Beautiful. Okay. Thanks, guys.

Speaker 1

Thank you.

Operator

Our next question comes from Zach Cummins with B. Riley Securities. Please go ahead.

Speaker 4

Hi, good afternoon, David and Kelly. Thanks for taking my questions and congrats on the solid results. I really just wanted to hone in on the margin leverage that you're seeing in the model here. I mean, can you just talk about maybe the up the what's really the key underlying factor that's driving kind of the upside in terms of the adjusted EBITDA margin that we have, especially exiting this year?

Speaker 2

Yes. We've been able to prove we can be efficient with capital and scale revenue without increasing expenses, essentially decreasing expenses. As David mentioned, we expect Q2 to have adjusted EBITDA margins of the high teens. And if you look at guidance, we expect that to continue in Q3 and Q4. It's really we've been able to figure out the formula and generate that extra revenue without needing those additional expenses.

Speaker 4

Understood. And David, in terms of incremental investments into the direct channel, I know you have relationships in place with major partners, especially on the public sector side. But any additional investments that you need to make with your direct channel to really take full advantage of the growing demand opportunity?

Speaker 1

Not right now. We're still formulating the plans. We think we're pretty well balanced between growth and profitability. And it's been a tremendous effort to get to this point to get to high teens EBITDA margins. So we're happy with that.

Speaker 4

Understood. And final question for me is just around capital allocation. I mean, with the business continuing to generate positive free cash flow, how are you thinking about just investments in the organic business versus maybe even potentially looking at incremental M and A?

Speaker 1

Yes, we don't really comment on incremental M and A. I'm sure you can understand that. There have been a number of financings in M and A in space. The latest acquisition of UserWay was at 8x ARR. We're going to look at LTV to CAC and increase that potentially more on sales and marketing and R and D if we see that go favorably.

Speaker 1

But we think these operating margins are sustainable going forward and we like them.

Speaker 4

Understood. Well, thanks for taking my questions and best of luck in the coming quarter.

Speaker 1

Thank you.

Operator

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

Speaker 1

Hey, good afternoon guys. Thanks for taking my questions. David, you guys have obviously been fairly aggressive in repurchasing shares here so far this year. Curious what your thoughts are on the stock today, given the move in shares versus the opportunity you see here over the next 12 to 24 months? Yes.

Speaker 1

It still seems pretty cheap to me. I think last I checked it was around 4 times revenue and we're approaching rule of 40 now. And I think we can exceed rule of 40 as we go into next year. So those companies tend to trade over 10 times revenue. Yes.

Speaker 1

No, that makes sense. And then second one for me. It sounds like from the commentary that not only are we looking at accelerating revenue in 'twenty four and likely 'twenty five, it looks like you actually set up pretty well already for '26. So this momentum has legs, right? I think this is going to go on for a few years with high growth rates and high EBITDA margins.

Speaker 1

All right, perfect. That's good to hear. I appreciate it, guys. That's it for me. 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 his closing remarks.

Speaker 1

Yes. 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 in the Investors section of the company's website. Thank you for joining us today for AudioEye's Q1 2024 Earnings Conference Call. You may now disconnect.

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