AudioEye - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered record revenue but a slight revenue miss versus consensus, with adjusted EPS in-line; management tightened FY25 guidance lower on revenue and adjusted EBITDA due to accelerated integration and phase-out of lower-margin legacy customers, while reiterating H2 sequential growth acceleration and margin expansion catalysts from EU EAA enforcement and DOJ Title II.
• Revenue grew 16% year over year to $9.857M, gross margin dipped to 77% on migration costs and amortization, and adjusted EBITDA rose to $1.931M; GAAP EPS was $0.00, adjusted EPS was $0.15.
• FY25 revenue guidance was reduced to $40.3–$40.7M (from $41–$42M), adjusted EBITDA to $8.9–$9.1M (from $9–$10M), while adjusted EPS was narrowed to $0.71–$0.73 (within prior $0.70–$0.80); Q3 revenue guided to $10.2–$10.4M with adjusted EBITDA $2.2–$2.4M and adjusted EPS $0.17–$0.19.
• Stock reaction catalysts: EU pipeline tripled post-EAA going into effect, enterprise momentum remains strong, and buybacks active (144k shares repurchased in Q2) support per-share metrics; near-term watch is customer churn from legacy acquisitions weighing on ARR/revenue into H2 2025.

What Went Well and What Went Wrong

• What Went Well

  • 38th consecutive quarter of record revenue; adjusted EBITDA and adjusted EPS improved YoY with enterprise channel growth +25% YoY and EU contribution beginning to accelerate.
  • EU Accessibility Act enforcement catalyzed pipeline growth (CEO: EU pipeline “probably tripled” Q2→Q3), with early revenue contribution and expansion plans in France, Germany, Italy, UK; new logo momentum (e.g., Motability Operations).
  • Operating leverage intact: operating income turned positive ($0.242M), ARR rose sequentially to $38.2M, and buybacks executed (~144k shares, ~$1.8M at ~$12.26) amid expected margin expansion into upper-20s by Q4.

• What Went Wrong

  • Slight revenue miss versus consensus ($9.857M vs $9.921M*) and gross margin compression to 77% due to migration costs and amortization; GAAP net loss near breakeven.
  • FY25 revenue and adjusted EBITDA guidance reduced to reflect phase-out of certain acquisition-related customers and discontinuation of lower-margin legacy services, with expected churn of $1.0–$1.5M ARR through 2025 (acquisition customers and BOIA).
  • Cash declined sequentially ($6.869M vs $8.265M) and net debt increased, reflecting use of facilities and buybacks; gross retention impacted by acquisition-related churn (ex-acquisitions GRR upper-80s/low-90s).

Transcript

Speaker 4

Good afternoon and welcome to AudioEye's second quarter 2025 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 analyst. 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 differ because of the factors discussed in today's press release, in the comments made during this conference call, and in the risk factor section of the company's annual report on Form 10-K, its 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 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 or otherwise 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. David Moradi. Sir, please proceed.

Speaker 3

Thank you, Operator, and welcome to everyone joining us today. The second quarter was another record quarter for AudioEye. We achieved $9.9 million of revenue, representing 38 sequential quarters of growth, or nearly 10 years of consistent growth, a remarkable achievement. Sequential ARR growth was $1.1 million in the second quarter. We expect accelerating ARR and sequential revenue growth in the third and fourth quarters, driven by anticipated strong demand for enterprise business in the U.S. and EU, and further growth in our partner and marketplace business. For the third and fourth quarters, we expect annualized sequential revenue growth to be in the high teens. Accelerating sequential revenue growth, coupled with prudent expense management, is expected to result in record adjusted EBITDA margins in the high 20s by the fourth quarter of this year.

With continued operating leverage, we expect to generate strong free cash flow in the second half and beyond. We've proven that our business model is highly scalable with high gross and adjusted EBITDA margins. As we look forward to the next three years, we expect continued positive variable margin contribution and have an aspirational goal of growing adjusted EPS by 30% to 40% annually. As we generate more cash, we believe that in addition to M&A, stock buybacks can be an attractive way to use cash. In the second quarter, we repurchased approximately 144,000 shares. Next, I'd like to discuss the driver of the adjustment to our revenue outlook, as I am optimistic on our go-forward prospects and want to make sure these intentional integration efforts are understood. As previously discussed, we analyze and buy companies on a synergistic cash flow basis and structure the deals accordingly.

Over the past few years, we have completed a few small acquisitions of accessibility companies that are accretive and a good fit for AudioEye's products and services. Successfully integrating these acquisitions has contributed to our strong cash flow performance. At times, this has meant discontinuing legacy services the customers were receiving from the acquired company. To that end, we are currently accelerating the integration of recent acquisitions by standardizing our offering to avoid duplicate systems, eliminate tech debt, and focus on synergistic cash flow, resulting in slight reductions in our full year 2025 guidance. Even with the phase-out of this lower margin revenue, we expect a substantial acceleration of sequential revenue and cash flow growth in the second half of the year, and we are excited to put this integration behind us heading into 2026. In late June, the European Accessibility Act, or EAA, officially went into effect.

The EAA applies to any company operating in the EU with more than 10 employees or with annual revenue of €2 million or more, including international businesses selling to EU customers. It covers a wide range of digital touchpoints, including websites and mobile apps. Non-compliance can result in fines of up to €3 million, depending on the member state, and may also expose brands to additional legal risk. Under the EAA, each of the 27 EU member states is required to adopt and implement its enforcement mechanisms. We are beginning to see legal action in France for inaccessible digital platforms. We are expanding our presence in Europe to take advantage of what we believe will be significant demand. We are off to a good start with revenue contribution in the second quarter and acceleration expected in the third and fourth quarters.

We are also less than a year away in the U.S. from the first effective date of Title II under the DOJ. As discussed previously, this rule will have a significant impact on some of our biggest partners in the government-adjacent space. We're seeing strong growth from the go-to-market initiatives with these partners and expect penetration and growth to accelerate in the second half of 2025 and into 2026. Moving on to guidance, we expect quarterly revenues and ARR growth to continue to accelerate in the third and fourth quarters of 2025 from the pace we saw in the first half. For the third quarter, we are guiding revenue between $10.2 and $10.4 million, a sequential annualized growth rate of 18% at the midpoint. For the third quarter, we also expect to generate adjusted EBITDA between $2.2 and $2.4 million and adjusted EPS between $0.17 and $0.19.

We are updating our 2025 full-year revenue guidance to between $40.3 and $40.7 million to account for the phase-out of certain acquisition-related customers. We are reducing our adjusted EBITDA guidance slightly to between $8.9 and $9.1 million around the bottom end of the previous range, with adjusted EPS between $0.71 and $0.73 per share within the previous range of $0.70 to $0.80. With our adjusted EBITDA margins expected to increase into the upper 20% in the fourth quarter, we expect to generate a run-rate adjusted EPS in the mid-$0.80 range on an annualized basis as we exit the year. I'll now turn the call over to AudioEye's CFO, Kelly.

Speaker 4

Thank you, David. For the 38th consecutive quarter, we achieved record revenue with Q2 2025 revenue at $9.9 million, up 16% over the comparable period of prior year. ARR increased $1.1 million sequentially and $4.9 million over the same period of prior year to $38.2 million. We continue to see contribution to our ARR and revenue growth from both our enterprise and partner and marketplace channels. Diving into revenue and ARR in more detail, changes in ARR and revenue are primarily driven by three factors: one, our ability to close new enterprise deals; two, expansion with our existing partners and engaging with new partners; and three, retention of existing customers. The enterprise channel, which is defined as our large customers and organizations, including those with non-platform websites, has continued to see solid and growing lead volumes.

We have built a strong marketing and sales organization that is delivering on our goals and is also producing new and expansion revenue at near record levels. We are also excited about the initial contributions that the EU is making to our results and expect to see this accelerate in the second half and in 2026. New and expansion business from the partner and marketplace channel, defined as revenue from our SMB-focused marketplace products and from partners supporting AudioEye products for their SMB customers, also have consistently delivered each quarter and did so again in the second quarter. There is a notable opportunity for further material partner expansion in the EU, as well as further expansion of our current partners in anticipation of the DOJ Title II rule, which begins to go into effect May 2026. Retention remains strong in the quarter with current AudioEye enterprise customers and partners.

As mentioned, in the second quarter, we chose not to migrate certain customers and discontinue legacy services of acquired companies. Our overall enterprise growth retention was impacted by customers acquired through recent acquisitions and a few remaining Bureau of Internet Accessibility customers who we are calling. This will continue to have some impact on ARR and revenue numbers for the rest of 2025 when conversion to AudioEye's platform should be substantially complete. As we have previously discussed, our primary goal when acquiring companies is to generate synergistic cash flow. The cash flow goals and overall return for these acquisitions remain on track. Overall, the enterprise channel grew 25% over the comparable period of prior year, and the partner and marketplace channel grew around 10% over the same period.

In the second quarter, the enterprise channel contributed around 45% of revenue and ARR, and the partner and marketplace channel contributed around 55% of revenue and ARR. On June 30, 2025, our customer count was approximately 120,000, relatively consistent with June 30, 2024 customer count, despite the decrease in customers from one partner's customer consolidation in Q1 2025. Customer count increased sequentially by approximately 1,000, with both the enterprise and partner and marketplace customers growing. Gross profit for the second quarter was $7.6 million, or about 77% of revenue, compared to $6.7 million, or 79% of revenue in Q2 of last year. As we highlighted last earnings call, with customer migration to the upgraded platform, we expected margins in the second quarter of 2025 to temporarily decrease.

We expect Q3 to have a similar gross margin as Q2 as we continue the migration of customers to the new platform, but we expect to return to the high 70s by the fourth quarter of 2025 and beyond. Operating expenses increased approximately 2%, or $200,000, over the comparable period of prior year to $7.4 million. The increase in operating expenses was primarily due to additional selling and marketing expense of $800,000, additional stock compensation expense of $500,000, and additional amortization of intangibles related to acquisitions of $400,000, partially offset by a $1.4 million reversal of contingent liability related to earnouts on acquisitions. Our total R&D spend in Q2 2025 was $1.7 million, with approximately $500,000 reflected as software development costs in the investing section of the cash flow statement. R&D represented 17% of revenue for Q2 2025 versus 20% in the second quarter of 2024.

The current 17% is consistent with our Q1 2025 investment levels, and we continue to believe the current level of investment in R&D is appropriate for 2025. Net loss in the second quarter of 2025 was nearly zero and $0.00 per share compared to a net loss of $700,000 or $0.06 per share in the same year or goal period. The decrease in net loss was primarily due to the increase in gross profit of $900,000, partially offset by the $200,000 increase in operating expenses just discussed. Our Q2 2025 adjusted EBITDA was $1.9 million or $0.15 per share, increasing 31% or approximately $0.5 million year over year. The primary adjustment to GAAP earnings and EPS for Q2 2025 were changes in fair value of contingent consideration, non-cash share-based compensation expense, litigation expense, depreciation and amortization, interest expense, and other minor non-recurring items.

Adjusted free cash flow calculated as $1.9 million of adjusted EBITDA plus $500,000 in software development costs was $1.4 million in the second quarter. We expect to generate positive adjusted free cash flow throughout 2025. In the second quarter, we repurchased approximately $1.8 million of shares at an average price of $12.26. We remain well-capitalized with $6.9 million of cash as of June 30, 2025, with $6.6 million of debt facilities available. At June 30, our net debt was $6.5 million and our ratio of net debt to adjusted EBITDA was 0.7 times. With that, we open up the call for questions. Operator, please give instructions. Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. Again, that's star one if you do have a question or comment.

Please hold as we pull for questions. We'll take our first question from Joshua Reilly from Needham. Please go ahead, sir.

Speaker 5

All right, thanks for taking my questions. Maybe just starting off on the customers being phased out, can you give us some sense of how much this impacted the numbers in the first half of this year relative to what you expect the impact to ARR and revenue for the second half of the year, just to kind of give us some context? You know, how does that affect the year-over-year comparisons maybe as well in terms of when did this kind of process start last year?

Speaker 6

Yeah, I can take that one. Acquisition churn is the driver for the reduction in revenue. We did see customers churn out in Q2 related to that migration and the forced migration to other products and services. We do think this will still have some impact going into Q3 and Q4 of 2025. We think kind of overall ARR will probably be about $1 million to $1.5 million of churn for acquisition-related customers, which includes some culling of old BOA customers which we acquired in 2022. We do expect most of that, the large majority of those customers, to be phased out by the end of 2025. It's really a 2025 impact.

Speaker 5

Got it. Okay, that's helpful. Maybe moving on to some business-related questions. You know, some of the industry data that we've seen highlights that the digital accessibility lawsuits are up 20% year over year to date. Is that what you're hearing in the marketplace, and how much has that been a catalyst for you on a year-to-date basis that the lawsuits just continue to increase?

Speaker 3

It's hard to really know that because you're probably getting federal and you're missing some of the states. We do think it's up. It may be up 20%, it may be up 10%. Obviously, we're growing and we're outgrowing the market. That's a good thing. Now we have the EU coming online as well.

Speaker 5

Got it. On the EU stuff, I guess what type of visibility do you have into the pipeline now for the balance of the year relative to a quarter ago or two quarters ago? Some of the other areas that I cover with these types of regulatory items, there's a surge of orders once the law or implementation takes effect. I'm just curious, what's the sequential change in the pipeline there?

Speaker 3

The pipeline is definitely growing. I'd say if I had to hazard a guess from the second quarter to the third quarter in terms of total pipe, what I'm seeing right now, it's probably tripled. It is definitely moving the right direction. Those were from smaller numbers though, but it's moving the right direction. I think it's going to be even more into next year. I think this thing's really going to take off.

Speaker 5

Got it. Understood. I'll put it back in the queue here. Thanks, guys.

Speaker 3

Thank you.

Speaker 4

Thank you. We'll take our next question from George Sutton from Craig Hallum. Please go ahead, George.

Speaker 1

Thank you. Just a clarification on your 3X pipeline growth, is that referring specifically to Europe?

Speaker 3

Yes, for the EU business.

Speaker 1

Okay. You had mentioned that you were expanding your presence in Europe. Can you be a little more specific how you're expanding your presence?

Speaker 3

Sure. Without going into too much detail, we have all types of competitors that listen to these calls. We're adding salespeople, increasing marketing budgets in the EU, becoming just a lot more active in the area. It's a really big focus for us. Over the long haul, I think it's going to be a huge growth driver for the company.

Speaker 1

Now you mentioned that international sellers are also implicated in this in the EU. I'm curious, is that driving any opportunities in the U.S., in particular for international sellers selling in Europe that start to make some changes to their U.S. practice as well?

Speaker 3

Not yet. I think when we see enforcement, we're going to start to see that as they target other companies based abroad.

Speaker 1

David, you laid out your 30% aspirational goal for EPS. Can you just give us a little bit more of a picture of what you see driving that?

Speaker 3

Yeah, it's really the record levels, near record levels of enterprise growth we're seeing with the EU beginning to contribute, the continued strong expansion of the partners, good core GRR metrics really in the upper 80s, low 90s, ex-acquisitions, just more of those types of things with scale of the business that Kelly can get into if you want.

Speaker 1

Let me just ask finally, I'm curious, the product or the customers that have been forced migrated. Can you explain what the product is that you're moving away from, and does this directly relate to the earnout that was reversed?

Speaker 6

I'd say the products that they're migrated away from are consulting or one-time audits, and we want them to move over to our products and services, which you know we like automation, we like custom fixes, and our audit. That is the move we're pushing clients to make that are on these legacy services. It is directly related. The higher churn than expected is directly tied to that reversal of contingent liability that is related to their earnout.

Speaker 3

Gotcha. Okay. They're lower margin revenue customers. That's who we're really phasing out that don't want to pay more money for a better platform.

Speaker 1

Understand. Okay, thanks, guys.

Speaker 5

Thank you.

Speaker 4

Thank you. We'll take our next question from Zach Cummins from B. Riley Securities. Please go ahead.

Speaker 0

Hi, David and Kelly. Thanks for taking my questions. David, I wanted to ask about your partnership strategy in the EU. What's the ideal partner for AudioEye to be targeting to most effectively get the coverage that you want and really drive adoption on that front?

Speaker 3

Yeah, there's a lot of agencies over there. We're probably targeting around 300 to 500 agencies that make websites for clients. Those are the ideal partners over there.

Speaker 0

Are there any particular member states within the EU where you've seen more traction out the gate versus others, just given the strict penalties? I know it can vary from member state to member state, but just curious if there's any light you can shed on that.

Speaker 3

It's been all over. We've seen it in France, Germany, Italy, UK. That's from top of mind what I'm seeing right now, the bigger countries. That's where I'm seeing it.

Speaker 0

Got it. Final question for me is just around Title II of the DOJ. I know you have some pretty big partners in place that you've been building out a practice with. Just curious if you can give any sort of update around that. It sounds like you're expecting a pickup here in the second half and maybe even accelerating in 2026. Any additional color on that front would be great.

Speaker 3

Yeah, they're focusing on investing resources, obviously to capture the opportunity in front of them. When I say they, that's Finalsite and CivicPlus. They've both implemented very aggressive go-to-market plans, and their pipelines are building nicely. We are working with them on a few initiatives and expecting some pretty good momentum as we get into the second half here and next year.

Speaker 0

Thank you for taking my questions and best of luck for the rest of the quarter.

Speaker 3

Thank you.

Speaker 4

As a reminder, that's star one if you do have a question or comment. We'll take our next question from Richard Baldry from Roth Capital. Please go ahead, Richard.

Speaker 2

Thanks. I'm sorry if you've already covered this, but more and more of the companies I talk to are talking about AI more internally than necessarily externally because they're finding they can get some pretty tremendous efficiencies on mostly development productivity right now, but I think across the board. Can you talk how much you feel like that's already starting to impact sort of your internal ability to and where you think that it matters the most, and does it move the dial on long-term profitability or not in your model? Thanks.

Speaker 3

Yeah, that's a good question. Look, we're building AI into everything we do from testing, remediation. We think that's going to improve the accuracy and margins over time. Our internal tests show that AI is very good at solving specific common accessibility issues, not great at issues requiring contextual understanding. We are continuing to experiment with AI for issue detection. We're already the best out there for that. We're also integrating, to your point, AI in our development workflow and within our own CI/CD pipeline. We're using AI with our accessibility experts when writing out custom fixes. I think it's a long-term driver of margin and scale.

Speaker 2

I don't know if you've already addressed this, so I apologize if you have, but when you look at the mandates that are coming into play, how much do you think the clients will be early adopters to avoid or to be compliant versus waiting to try to understand what the penalties would be and how severe, how common enforcement will be? What's your sort of sense on that? Does that change between the enterprise players versus the rest of the business? How do we think about that?

Speaker 3

I think it's going to take a while there over the next five years, is what I said before, similar to how GDPR was adopted. The big players will adopt first, in my view.

Speaker 2

Got it. Thanks.

Speaker 3

Thank you.

Speaker 4

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

Speaker 3

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.

Speaker 4

Thank you. 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 investor section of the company's website. Thank you for joining us today for AudioEye's second quarter 2025 earnings conference call. You may now disconnect and have a great day.