AudioEye - Q1 2023

Transcript

Operator (participant)

Good afternoon, and welcome to AudioEye's 1st quarter 2023 earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Moradi, and CFO, Ms. Kelly Georgevich. Following their remarks, we will open 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 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. 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-K, 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. 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. I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Moradi. Sir, please proceed.

David Moradi (CEO)

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 $7.77 million in Q1. We ended Q1 with sequential growth in our key performance indicator, annual recurring revenue or ARR, which was $29.6 million, up from $29.2 million on December 31, 2022. Gross margins were 78% versus 75% in the year-over-year quarter. Gross profit increased to $6.1 million versus $5.2 million 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 million loss in the year-over-year quarter.

We were able to achieve near non-GAAP breakeven despite increased R&D investment of approximately $200,000 compared to Q1 of 2022. 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 fourth quarter of 2022. In the year-over-year quarter, net cash used by operating activities was $1.9 million. 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.

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&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 the 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.

This additional layer of protection helps them reduce or even eliminate their risk exposure. In March 2023, we successfully defended a customer, Babylon Marine, in a precedent ADA case for website accessibility. Babylon had this to say: "Before AudioEye, we really didn't know which accessibility vendor was right as there are confusing options out there, including ones that make false promises. We were confident that AudioEye 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. 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 lawsuits 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. 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.

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 million and $7.9 million for the second quarter 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. 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&D investment, we continue to expect a non-GAAP operating loss in the second quarter, with non-GAAP operating profit in the second half, generating break-even operating profit for the full year. We continue to be well-capitalized, with $5.5 million of cash as of March 31st, 2023. We believe the current cash on hand is sufficient to fund operations, and we still expect to generate positive cash flow by the fourth quarter of this year. I'll now turn the call over to AudioEye CFO, Kelly Georgievich. Kelly.

Kelly Georgevich (CFO)

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 $7.8 million, which was 13% growth year-over-year. Annual recurring revenue, or ARR, at the end of Q1 of 2023 was $29.6 million, a $1.5 million increase from ARR at the end of Q1 of 2022. Our two 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 who deploy these same products for their SMB customers.

In 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. 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 31st, 2022, and 86,000 customers at December 31st, 2022.

Both revenue channels contributed towards customer count growth in the quarter, with the expansion of platforms as the most material driver customer count increases. Gross profit for Q1 was $6.1 million, or about 78% of revenue, compared to $5.2 million and 75% 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. We expect gross margin to continue around the 77%-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 $8.1 million.

This decrease was the result of continued efficiencies in sales and marketing and G&A areas, slightly offset by continued investment in R&D. Our total R&D spend in Q1 2023 was approximately $2.2 million, with approximately $475,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 29% of our revenue this quarter versus 26% last year, 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 risk. Net loss for Q1 of 2023 was $2 million or $0.17 per share, compared to $3.6 million or $0.32 per share in the same year ago period.

Total operating loss decreased 44% or $1.6 million from the comparable period of prior year, thanks to the increase in gross profit as well as strategic and efficient spending in all departments. 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 million or $0.09 per share in the same year ago period. The primary adjustments to GAAP earnings and EPS for Q1 2023 were 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 $1.4 million, which included a $1 million earnout 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. Operator, please give instructions.

Operator (participant)

Thank you. We will now take questions from the company's publishing analysts. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Zach Cummins from B. Riley Securities. Please go ahead.

Zach Cummins (Senior Research Analyst)

Yep. Hi, good afternoon, David and Kelly. Thanks for taking my questions. Congrats on the solid Q1 results. David, just starting with the partner channel, I mean, a nice jump in new customers added in this quarter. 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?

David Moradi (CEO)

Hello, was your line on mute?

Kelly Georgevich (CFO)

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

Zach Cummins (Senior Research Analyst)

Can you hear me now?

David Moradi (CEO)

Understood.

Zach Cummins (Senior Research Analyst)

Yeah. Yeah, I can hear you, David.

David Moradi (CEO)

Okay. Yeah, I was talking for about 15 seconds there. Great. Does that answer your question, Zach, or do you need-

Zach Cummins (Senior Research Analyst)

Yeah. Yeah.

more color around that?

No, I think that's helpful. I guess, David, just building upon it a little bit, I mean, obviously continuing to invest pretty aggressively on the R&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&D?

David Moradi (CEO)

We're investing in items that we think are gonna have a great payback in the near term. We're gonna be adding new products in the near term that you're gonna see, and we're investing into our AI capabilities. That's where the money's going.

Zach Cummins (Senior Research Analyst)

Got it. Final question, 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?

David Moradi (CEO)

Are you talking about the enterprise side?

Zach Cummins (Senior Research Analyst)

Yeah.

David Moradi (CEO)

Those are still in negotiations. The demand is still there, but there's been large turnover at both of those companies. 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. It's more a function of a tougher economy.

Zach Cummins (Senior Research Analyst)

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

David Moradi (CEO)

Thank you.

Operator (participant)

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

Scott Buck (Managing Director and Senior Technology Analyst)

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?

David Moradi (CEO)

I think we're pretty exhausted on the efficiencies in sales and marketing. I don't think you'll see more efficiencies there.

Scott Buck (Managing Director and Senior Technology Analyst)

Okay. That's,

David Moradi (CEO)

If you wanna, Kelly?

Scott Buck (Managing Director and Senior Technology Analyst)

That's fair. The second one for me, you know, if we take a step back, you're kind of bumping along here at roughly, you know, cash break even. Should we assume that moving forward, at least in the near term, any incremental cash that you're able to generate, you're gonna plow right back into sales and marketing to drive revenue?

Kelly Georgevich (CFO)

We are very prudently managing cash and costs overall. We did end Q1 at $5.5 million, kind of as David mentioned, what plays into it isWe expect the first half to have non-GAAP net loss, but we expect the second half to have non-GAAP profitability. It is kind of does work in line with that. We do expect, as we mentioned on the call, to be cash generating by Q4. We are kinda keeping all those factors in mind as we, as we think about the rest of the year.

Scott Buck (Managing Director and Senior Technology Analyst)

Okay, great. Appreciate that, Kelly. Last one from me. You know, first congrats on the successful defense. Curious if there's anything else on the regulatory front that, you know, we should be keeping an eye on?

David Moradi (CEO)

Sure. Yeah, there is action on the DOJ side. They have something in the works right now on the state and local government. We're watching that pretty carefully.

Scott Buck (Managing Director and Senior Technology Analyst)

Okay, perfect. Appreciate the additional time, guys. Thank you.

David Moradi (CEO)

Thank you.

Operator (participant)

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

George Sutton (Senior Research Analyst)

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 occurring?

David Moradi (CEO)

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

George Sutton (Senior Research Analyst)

You mentioned that some businesses are seeing additional revenues from having accessibility, which for us has 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?

David Moradi (CEO)

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

George Sutton (Senior Research Analyst)

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

Kelly Georgevich (CFO)

We definitely are considering what the return on investment is for our R&D spend, and we do think there is notable investment there. We do see opportunities in front of us that we wanna 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 out to the market that we're pretty excited about. All of that is a factor in what we're investing in for R&D.

George Sutton (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

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

David Moradi (CEO)

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

Operator (participant)

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 AudioEye's Q1 2023 earnings conference call. You may now disconnect.