Q2 2020 AudioEye Inc Earnings Call
Good afternoon and wasn't the audio.
In quarter 2020, <unk> earnings conference call, joining us for todays call audio <unk> executive Chairman Dr. card data and CFO Mr. Sosh borough.
Following their remarks, well open up the call for questions from the company publishing.
I would like to remind everyone that this call will be recorded and made available for replay the length available in the Investor Relations section of the company's website at Www Dot audio I dotcom.
Before I turn the call over the audio ice Karen excuse me before I turn the call overtime audio <unk> executive Chairman.
And he would like to remind all participants that statements made by audio I management. During the course of this conference call that are not historical facts are considered to be forward looking statement.
The private Securities Litigation Reform of 1995 provides a safe harbor for such forward looking statement. The words believe it back and the pace at the night, well and other similar statements of expectation.
If I follow me forward looking statement.
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 uncertainty.
Actual results could materially different differ because of those factors discussed in todays.
And the comments made during this conference call and in the risk factor section of the company annual report on form 10-K, its quarterly report on form 10-Q, and our reports and filings with the securities and exchange submission.
On this call are cautioned not to place undue reliance on these forward looking statements what's your plan.
Management's beliefs only as of the date.
Audio I does not undertake any duty to update or correct any forward looking.
Now I would like to turn the call over audio ice executive Chairman Dr. car better Sir. Please proceed.
Thank you operator welcome everyone.
Thank you for joining us today.
After the market close we issued a press release announcing our results for the second quarter ended June 30 2020.
Copy of the press release will be available later in the Investor section of our web site had already why dot com.
I'd like to open with recognition of a really important milestone for accessibility. The thirtyth anniversary of the idea and the ongoing need for digital accessibility.
Just a few weeks ago, we celebrated the thirtyth anniversary of D.A. become law.
This important legislation transform the U.S. and much of the world by making the world they more physically inclusive placed for everyone.
But the digital world now being as important perhaps even more so lately, especially due to the towable pandemic with about 98% of all website still having critical accessibility barriers. It's clear that much more work is needed to create I truly digitally inclusive world.
As we recognize this important milestone in the journey to an inclusive world the true underlying demand for digital accessibility has never been stronger.
An audio why is well positioned to lead this continued transformation.
Oh began as we always do with an overview of our business.
Oh, the why is a leading provider of SaaS based digital content accessibility solutions.
I'll remind you of our mission eradicate all barriers to digital accessibility.
We provide ourselves in addressing the largest range of services and issues that in fact, many people around the globe.
At all do you like we do more than just identify these accessibility issues, we strive to fix to maintain and continuously monitor them.
We also certify websites to demonstrate compliance with both the idea and the latest web content accessibility guidelines are white CAD 2.1.
Because many of the remediation capabilities, we provide or automated our customers more quickly game compliance with accessibility standards regulations and laws.
For our managed product he's automated processes are coupled with manual testing and remediation by subject matter experts.
The result is we provide our clients with the best solution to make their web sites and digital content more accessible.
We keep their content more accessible through continuous monitoring and remediation and we operate trusted certification of conformity with standards.
Furthermore, for our private sector clients. We also provide then the product it gives them an opportunity to gain in ROI from their investment in and commitment to the enormous population of individuals with disabilities.
[laughter] with its overview of the business completed I'm looking forward to moving on to highlights about our Q2 execution and our operating environment.
Overall, we're very pleased with the company's execution in the second quarter again.
Q2 marks the 18th straight quarter of record revenue ending the quarter at just over 5 billion.
That is a 117% year over year growth.
Since 2019.
Our results continue to be driven largely by growth in adoption or vertical partner in enterprise channels and monthly recurring revenue at the end of June Thirtyth was one point sixmillion at 105% year over year growth from 2019.
Gross profit for the second quarter was 3.7 million for about 70% of revenue. This is a 180% increase from one point threemillion or about 54% of revenue last year.
The increase in gross profit and gross margins is the result of our continuous focus on increasing efficiency and the expansion the level of remediation automation as revenues grow.
As mentioned in the past.
While gross margin may fluctuate somewhat between quarters overall, we expect gross margins to continue to improve on an annual basis.
We remain very excited about the benefits of being a scalable SaaS business.
New customer acquisition was also strong in Q2, driven largely by traction in our vertical partner channel ending Q2 at a major milestone of over 20000 customers, we have almost tripled our customer count since year end of 2019.
I'll point out we had our first ever 5 million revenue quarter in Q2 solid performance against all internal metrics that we had executed against.
Building on the strategic initiatives, we put in place last November we continue to implement organizational changes in order to accelerate our efforts to build out the scalable technology and IP and the infrastructure to succeed.
The center for our technology base, which had been Atlanta is now Portland.
Which is also resulted in some changes in our technology personnel.
[noise] Heath Thompson will be moving from his position as C O. The audit a body wash effective today.
And although his tenure was short.
Very grateful for his leadership in contribution Saudi why.
He will transition to work with all the why as a strategic advisor.
And he will advocate for all the wise mission to create a more digitally inclusive world.
David Marty he joins us as Chief strategy Officer, and the interim CEO is a member of the board of directors and the founder and manager of several capital.
There is fully we fully expect to receive the benefit of his deep understanding of the company and as many years of technology and business leadership experience.
You know David has has had a significant influence on the company's strategy and operations since he joined US on the board in the fourth quarter last year. He served as the chairman of the strategy Committee of the board of directors.
Its guidance.
And his insights that significantly helped the business scale and to gain efficiencies during this time.
David has not only willing to assumed the role as interim CEO, but its commitment in belief in the company is reflected in his anticipated compensation package for by who is willing to take a one dollar an annual salary and only receive additional equity the company would seem to achieve significant NR our in stock wrote price growth.
David in Cerro capital had been Arden supporters of all do I since 2014, having participated in every company financing since that time.
It's continued confidence in the prospects of the company's even further evident by Sorrows capital decision to exercise warrants this month.
All for cash, even though the warrants had a cashless exercise right.
These warrant exercises will result in $880000 in cash for the company and a further investment by several capital.
In addition, Dominic for a colleague who has been recently, our CTO has been appointed president.
Dominic who is located in Portland, along with a number of engineers has a strong very strong background in technology and digital products.
He will manage and drive our digital and ecommerce presence you will foster innovation creativity and agile development to ensure continued rapid scalability.
Dominic was previously the CEO and co owner of his own technology consulting firm NFL various technology leadership roles at Kroger digital.
I'm also pleased to say we've added another top tier talent at the company.
The Chief Marketing Officer, we recently hired cool in the Lake.
Groom has a strong and proven track record as a leader in marketing that its growth centric.
He has led multifunctional marketing teams at leading global brands, including Microsoft Facebook and Spotify.
He has brought expertise in product marketing.
In performance marketing.
And in demand generation.
We look forward to is contributing him contributing to our hyper growth efforts and he joins US later this month.
Finally, I will continue as executive chairman and you'll have to continue to hear from start to me on these quarterly calls.
Our focus is still going to remain the same we're going to acquire customers grow revenue anymore.
Focused on increasing margins and becoming cash flow positive in 2021.
Oh, it's worth taking a minute to talk about cobot 19, a as well.
Well, we meet or exceed or internal.
Targets and did so in key metrics in Q2 like other businesses.
We continue to operate in a challenging economic environment, that's driven by the global pandemic.
And although demand for digital accessibility solutions remains very strong we continue to see impacts due to covert like team with our customers and prospects across all our channels.
On the new business front, we've seen some deals that had been a delayed a little.
Even though they still move forward and close.
Times later than originally expected some cases.
We also continue to extend in some cases more flexible pricing and other options to our customers on a case by case basis to help the managed through the impact of their own businesses from a pandemic.
So far we've only seen fortunately a marginal impact on our renewals substantially in these cases do do events that are out of our control such as bankruptcy zippers proceedings are out like business closures.
Overall, we're still pleased to see retention levels, there the 90% right.
And we continue to achieve net promoter scores are in P.S. as many people know it within our installed enterprise client base in the top cortile for technology and SaaS companies.
Our priority throughout this period has been to continued to deliver best in class product and service and the focus heavily on customer and partner success.
This is the right thing to do for the long term any event, but especially during the current economic conditions.
Of course, we did not know how long the cobot 19 related economic factors will persist for.
For now entering the third quarter, where the global pandemic has been affecting businesses worldwide and even more so in the last quarter.
And as such it is gonna be reasonable to expect some impact on audio wise financing an operating performance. We are however on the you know also very encouraged on the other and by the continued focus on the need for digital accessibility solutions, which was highlighted again by the Thirtyth anniversary of the a recently.
[noise] provides us a brief update for a different sales channels and now.
Beginning with their enterprise or direct channel.
We continue to bring on new customers at the same consistent level as we've seen in recent quarters in the second quarter New customers included prominent brands in large enterprises, such as Holland America MTBC Corporation.
Also our PBF remediation been business continued to contribute to revenue in Q2.
The business continues to provide a good compliment to our core web accessibility offerings.
As a reminder.
That part of our businesses project base and is not part of them are.
Moving to our vertical partner or indirect channel.
Customer growth in Q2 was very strong.
Vertical partner Count remained constant in Q2 at 20 partners and we continue to focus on increased penetration with those partners.
[laughter].
We lost the marketplace.
As part of our strategy to make Audi why more accessible to even more businesses and organizations and we've simplified in the marketplace our pricing.
We've enhanced our integration and we've expanded our tools there.
More specifically over the last couple of months, we've released more clearly defined simplified pricing enables our marketplace customers to quickly and easily identify the audio I plan, that's most appropriate for their current needs.
Looking at a much better usability experience for our customers.
We're also committed to meeting customers, where they are.
Not only can they purchase and install do I from our marketplace.
We are natively integrated into some content management system App stores that includes places like shopify do that drupal than others.
Customers, creating websites on these platforms simply select audio I enter immediately on the path to a more accessible website <unk>.
We've also power expanded the power of our audio like pro builder tool shrinking artificial intelligence with more AI machine learning suggested fixes in better guidance, even non developer customers can more easily accelerator accessibility using audio life.
So that overview completed I'm going to turn the call over to Sox, our CFO, who can walk through some of the rest of our financial results for the quarter subs.
Thanks car.
Welcome, David Dominic and anchor I'm really excited to work with David and these new capacity and continue to drive strategy execution Unprofitably thrilled for RDR.
I would give me the financial highlights and then we'll open the call up for questions, let's jump into it.
Starting with revenue.
I've been in Q2 was about 500 million, reflecting 117% increase over the last year.
The increase in revenue was mainly driven by continued to grow technological partner channel as we build our customer base.
Any performance also benefited from timing of video delivery.
We're able to procure and deliver a couple of projects ahead of time.
As mentioned earlier, we continued to better I gross margins that stand that 70% for this quarter.
While it's not fluctuate we expect our margins to continue to grow overtime.
Moving to operating expenses in Q2, Opex, plus 4.5 million, which was an increase of 36% well since Q2 last year. This increase in Opex was driven by increased investments in talent across various functions infrastructure and product development.
As they grow the business will continue to have some variability and expenses from quarter to quarter.
Actually more technology center to Portland, really been investing in technology and intellectual property development.
Additionally, we'll continue to invest in marketing and infrastructure as well.
I restaurants will help us build scalable technology stack and helped drive profitable growth.
The company also expects to pay separation costs actually make executive and team member changes, resulting in a higher normalized run rate for the next couple of quarters.
Turning towards the bottom line.
And that lots available to common stockholders for the second quarter of trying to find totaled 1.4 million or 16 cents per share.
This compares with net loss of 2 million or 27 cents per share in Q2 last year.
Some additional metrics as noted earlier.
As of Q2 monthly recurring revenue RMR, our was about 1.6 million, which was an increase of 105% year order here.
Some balance sheet items, beginning with deferred revenue and the second quarter deferred revenue was flat Frank to Mullen.
Which was up 65% from 3.2 million last year.
Our comps receivables balance at the end of Q2 was 4 million compared to about 2.5 million at the end of last quarter.
The sequential increase in yeah. It was primarily due to both continuous growth and some delayed payments.
The aging is primarily with customer I spoke chosen to deliver payments temporarily off note. We continue to collect on our receivables, albeit slightly slower on average than before.
This point, we did not see any major issues, that's collectibility of RDR portfolio.
We ended the quarter, it's about 2.1 million in cash compared to about 1.8 million I've done to freshwater.
Our cash balance Aflacs contribution of 1.3 million from BPP long.
So your capital X. exercise of warrants related to liner threaded this week, which will infuse $880000 off additional capital into the company.
During the quarter and to date, we have not drawn on our existing do millen line of credit.
Rejects class Tomorrow, and we don't intend to draw on it.
We are confident and underlying strength of our business model as follows the diversity and strength off our customer base.
We will remain focused on executing against our strategy drive sustainable long term grows that continuing to invest and area has mentioned earlier.
In closing I'd like to thank all our employees our customers partners and all our shareholders for their continued support as we execute against that vision to bring equality.
And it just looks.
And I wish everyone and their families safety and sound helped with that we'll open the call for questions. Operator can you just gave instructions for publishing analysts.
Thank you, we'll now take questions from the company's publishing analysts.
But.
It was asked the question. Please press star one on your telephone.
It's hard for me I can tell I wanted to take your line is in the question to you know if I start to you, but some of your questions on the Q for participants you think you correctly, then maybe necessary to pick up your hands that before passing the start.
One moment please.
Question.
Our first question comes on line.
Let's see Riley SCR. Please proceed with your question.
Hi, good afternoon car in such a football as well with both you and congrats on the strong quarter.
Thanks, Jack Thank you very much yeah, absolutely, yes, I mean, just starting off with that indirect or vertical partner channel. I mean were there any particular verticals that stand out in terms of adoption.
We're seeing some traction across a across some of the different verticals that that's not all one when you know one focused area we are saying.
Some pretty broad interest and adoption and finding accessibility solution. So.
Turning to make progress within those chat within the channel.
Understood and then I know you don't break it out but partner, but I mean in terms of the entire base. I mean can you give us a sense of where you're at for penetration rate and kinda give us a sense of what's the opportunity that's still ahead.
Were you know, we're still a where it within many of the partners, where it's I'd still stay where an early innings I, we're making good progress but early innings. So we were not publishing as you said penetration rates, but there's a lot of runway left a significantly the majority of the runway left across the majority of the partners that we are still a there were still having success with.
So we're still remain optimistic live with a lot of runway with them on average.
Understood. Thanks, that's helpful. And then he did note there was a little bit of attrition in the quarter I mean, what does this related to any specific verticals.
Any sort of trends you could put out.
No. There there you know there's no. There's no you know alarming trends here at all.
We did have we did have what I would call selected cases.
There's been some there've been some bankruptcies and there's been some other things that have occurred that have had an impact on us, but again, it's not material to where we are in the business or in the business cycle and you know we'd like for that to continue of course.
Understood and then I guess in fairness renewal cycle. It seems like you had a a few clients.
Taking a little longer than normal I mean, what are you, saying, thus far just in recent months and maybe even into the start of Q3 here in terms of the pace of renewal cycles.
It's overall, it's pretty good actually they're you know there are isolated cases, I would call them, where there's a little slower.
But to but I would say actually it's going or it's going pretty well overall nothing alarming.
The at all and it is selected cases, where renewals are a little slower.
Being more flexible it's it's not the norm.
Understood. That's that's helpful. And then I guess, there's gotta go across all the like customer bases I I mean for your marketplace operate.
I mean could you give us a sense of the adoption trends you've seen their thus far I know what do you were rolling this out your give a 90 day free trials. So I was wondering if you're you're starting to get to the end of those to where you're seeing if customers are deciding to proceed forward and actually become a paying customer.
You know that we're pleased with the progress we're making there we really do we have been learning a lot also in that a new new channel for us.
So yeah, we are starting to see conversions. We're we're pleased with the progress we're making there I'll point out you may have noticed we have a new hire a the CMO he's going to bring a wealth of experience and skill.
We believe is gonna benefit all channels than certainly I think we'll continue to do it if it what we're doing in that marketplace on her own channel I'm. So we have Oh, we have a you know we're early but I would say, it's going well and we're pleased with the progress you're making in that channel right now.
Got it that's helpful and then a pretty nice transitioning to the next question that I mean, why now in terms of all the executive changes, you're making good moving much of your development resources from Atlanta to Portland.
You know, where we're really trying hard to put a put in place. So we started last November really with the organizational changes, we're making our just trying to accelerate or efforts to build out the scalable tech and our IP and the infrastructure necessary due to succeed we're not here to we're here to eradicate the barriers to digital access to build.
They are Dominic and his team.
What's your which says joined US as you know not too long ago.
I really really strong in directions that we're taking the technology, we're going to continue to focus our efforts there on on scalable Tech.
Thats Gonna grow help us grow our customer base and bring MRM market bring him are higher in margins higher.
You know so I feel like we're no David David joining as interim CFO. There's also joining as the Chief strategy Officer has really been very important since he joined the board Oh in November. So so we really thought as a board the best in the best way to a cheaper objectives to go fast hard and lean but to make the chain.
Does that did that we made it and it's been very and by the way it's been a very amicable.
And smooth.
Transition as weak as Weve done folded it here today.
Understood and then car in terms of legal environments, I mean with a the surge in E commerce and the digital world really becoming much more important during October 19.
Can you give us an update in terms of what you're seeing a on the front for digital accessibility lawsuits has there been an uptick in any specific verticals with what the rising E commerce.
You know I would say that the activity has been high this year again and it's not just in the federal courts. It's in the state courts. It was continued to be at focus area.
We are we continue to remain optimistic that their tailwinds here that are strong.
So yeah, there's been there's a lot of demands that are still in play.
Probably a more diverse than they were you know a nine months or a year ago in terms of the segments.
There's it's it's clearly more diverse I think the issue is going to remain a there's just not enough web sites, providing you know accessibility and its caught the attention of the as you know the legal community.
I think it's in the mines of above and many more people than it was you know nine months or you're going so.
We we see the tailwind still very very strong for the for the market for digital accessibility.
Understood and such I guess, just closing out, but let's see I imagine Alaska financial question, but I mean, excluding the loan from the Pvp. This quarter I think cash burn was close to 950000 to sum up one way or the other.
I mean, you're going to have another almost 900000 coming out of balance sheet next quarter. I guess, how are you thinking about the progression of the cash burn rate as we move towards your target of positive free cash flow at some point not by 21.
Yes, Thanks Chuck.
Zach so.
The way I think about cash burn you have to come scissor year to date, a and if it comes when you compare year over year first half of the year the cash burn a significantly down fix that it could afford you used to being the first half last year and.
And you're not really be getting some capital infusion from us here the capital exercising warrants as well.
Look as we continue to grow.
Revenues and continue to expand margins, we strongly believe that we've continued to generate more more cash of course is what we are generating today from from sales.
And we are confident and becoming cash recalls are different 2021.
Understood. That's that's helpful. Thanks, again for taking my questions and best of luck here in the second half the here.
That's exactly like you.
Thank you. Our next question comes from your line of Allen Klee with National Securities. Please proceed with your question.
Hi, you guys had been doing a really nice job of with steadily improving the gross margin coming up with 70% in this quarter I was just wondering if there was anything.
The mix this quarter I know you mentioned PDF was was it.
Do you active.
Does that have a higher margin and then the average or or is there anything unusual or would you say that the mix was was.
Kind of a reasonable number to think about going forward.
Yeah, you know Alan Thank you for that question you know the does the place we're gonna have our highest margins over time is going to be the continued expansion within our relationships and the continued high margins that we can get through you know enterprise efforts as well.
We do we're going to continue to expect margins to grow and improve overtime.
There's there's no question that we are investing in the earlier cycles of the new product markets that we're serving where you are margins are going to reflect the mix that's sort of acceleration in margins for our historical product offering in segments that are SAS based and earlier stage markets, where initial margins may be lower or you know Pds, where you know margin.
Be quite as a sustainably high overtime.
But I think we're well I think we're set up well to continue to grow in improving over time, that's our expectation. So some of the moves. We've made today are centered around continue to remind us that we are focused on.
EMR growing EMR.
And and improving margins over time, we expect to be able to do that on our path to you know being cash flow positive next year.
Thank you and can you remind us thing.
Exercise of the warrants second or increase your.
Diluted share count and if so by how many shares.
Yeah, It's a it's about 846000 shares.
Shares and yes, it will increase the division amount a wintry converted.
Okay, and then you talked about that you were going to do so.
Certain type of 'em higher expenses in the next few quarters, but I missed what you said that was related to could you delve into that.
Yeah, you know, there's there's a mix right because we are going against that we're going to continue to gain efficiencies, but we are going to carry around some separation costs.
Over the next you know several weeks I even months.
And and as we reallocate resources into Portland So.
So there's little overlap there.
We're continuing to invest in you know keep people I mentioned the CMO.
So we're going to continue to make investments billet. All all of this is designed to do what to make us accelerate growth and to accelerate growth faster, which you know overtime is going to show up in EMR and an improved margins.
So the the board feels very confident about this strategy and the decisions that that's the ultimate goal here and there were on the right path. We have the right pieces in place to continue on that path accelerating EMR and improving margins over time here.
I would agree there's it sounds like it's definitely the right thing to do for the long run. It is there anyway, you can help us [laughter] with our models in terms of the magnitude of what they used.
Kind of no temporary type additional costs would be.
I think.
I think we don't have any in the queue is going to disclose some I'm information I think that you'd be able to <unk>, you will attain tonight and work through.
In terms of what the what some of the severance is a you know how the severance will show up that's probably a good good starting point.
But you know where we're still making adjustments along this path again, we're going in the long term are gonna be gaining the we really believe we're gonna be gaining efficiencies and improve margins as a result of this sort of dynamic moves that we're making today.
Well, we wouldn't be making them, we're focused on like as they were focused on him or our growth customer acquisition and improving the margins and we think these steps are are the white steps to do that for the longer term.
Okay. Thank you very much.
Thank you. Thanks very much on appreciate your questions. Thank you think thank you I find this includes our question and answer session I'd like to turn the call back over to Dr. battle for any closing remarks.
I just want to say thank you to all of you for joining US today would you know good attendance I really appreciate you being here I also want to thank our employees partners and investors for their continued support in general and we certainly look forward to updating you on our next to honor next call.
Thanks, everyone do well.
Thank you before we conclude todays call I would like to remind everyone that a recording of todays call will be available for replay.
That was on the Investor section of the company's website. Thank you for joining us today for all your eyes second quarter 2020, earning conference call you may now disconnect.
[noise] Oh.
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