Q1 2021 AudioEye Inc Earnings Call

Yes.

Yeah.

[music].

Yeah.

[music].

Good afternoon, and welcome to audio is the first quarter 2021 earnings conference call joining us for today's call are <unk> interim CEO, Mr. David <unk> Executive Chairman, Dr. Carr, Bettis and CFO, Mr. Such bareboat following their remarks.

We will open up 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 Dot <unk> Dot com.

Before I turn the call over to <unk> Executive Chairman the company would like to remind all participants that statements made by audio on management. During the course of this conference call that are not historical facts are considered to be forward looking statements and the private Securities Litigation Reform Act of bench 95 provides a safe harbor.

For such forward looking statements. The words believe expect anticipate estimate confidence 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.

The assumptions that are subject to risks and uncertainties.

Actual results could could materially differ because of factors discussed in today's press release and the comments made during this conference call and and the risk factors section of the company's annual report on form 10-K, its quarterly reports on form 10-Q, and and its other reports and filings with the securities and <unk>.

The change 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.

<unk> 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 Companys earnings release posted and the Investor Relations section of our website at Www Dot <unk> dot.

Com.

Now I would like to turn the call over to audio is executive Chairman Dr. Carr Bettis, Sir Please proceed.

Thank you operator, and welcome everyone and thank you for joining us again today.

After the market closed we issued a press release announcing our results for the first quarter ended March 31 2021.

A copy of the press release is also available and the Investor Relations section of our website at audio and dotcom.

Ill begin as we always do with it and overview of our business.

<unk> is a leading provider of SaaS based digital content accessibility platform and solutions.

Our mission <unk>.

Eradicate all barriers to digital accessibility.

We pride ourselves on addressing the largest range of issues that impact many people around the globe.

And at Audi why we'd do more than just identify accessibility issues, we strive to fix maintain and continuously monitor them.

We also certify websites to demonstrate compliance with both the Americans with disabilities Act or the Ada and the latest web content accessibility guidelines of our lakehead and $2 one.

Furthermore, for our private sector clients, we also give them an opportunity to gain and ROI from their investment in and commitment to the large population of individuals with disabilities.

Before turning the call over to our interim CEO, David Marathi I'll provide a few highlights around our Q1 2021 results.

We had strong performance in several areas of focus this quarter, we expanded gross margins significantly we've doubled our customer accounts.

We significantly bolstered our balance sheet and we grew revenue for the 20 <unk> straight quarter.

Monthly recurring revenue MLR at the end of the first quarter of 2021 increased to just over $1 9 million.

Which was 36% growth year over year.

Revenue also grew 36% year over year with the first quarter revenue, reaching a new record of $5 8 million.

Gross margins the grew from $2 76 of the grew $2 76, 6% from <unk>.

69% and the first quarter of 2020.

A year over year increase of 11%.

And seven six percentage points. It is worth looking back even further.

Gross margins has grown to the Q1 76, 6% level from 54% and the second quarter of 2019, just seven quarters ago.

This dramatic margin expansion as a result of the company's strategy to increase automation and.

And reflects the benefit of scale.

We expect margins to somewhat stabilize around the levels.

But improve as the business scales.

Gross profit for the first quarter was $4 4 million compared to $2 9 million and Q1 of last year.

New customer acquisition was very strong and Q1, we ended Q1 with approximately 68000 customers representing about 500% growth year over year.

Dave is going to cost and more about the momentum we are seeing and customer acquisition.

And as expected impact on our MLR in the coming quarters.

Customer retention also remained strong at historical rates are high retention rates speaks to not only the quality and stickiness and transparency of our solution.

But to the excellent service that our team provides to our customers.

Net loss for the first quarter of 2021 was $2 8 million or 27 per share compared to a loss of $1 $7 million or <unk> 19 per share and the same year ago period power.

However, on a non-GAAP basis, our Q1 net loss was a little less and 1 million or <unk> <unk> per share compared to the same year ago period of the loss of about $1 4 million or six instances of share.

The primary adjustments to GAAP earnings and EPS for both comparable quarters were noncash share based compensation and amortization and amortization of interest expense related to the debt issuance.

During the first quarter, we strengthened the balance sheet by raising the $16 million.

And program and ended Q1 with $25 $8 million of cash.

This is around $2.50 per share using the quarter's average outstanding share count.

In addition to the strongest balance sheet. The company has had in its history. We also generated free cash flow for the first time and audio wise history of producing 350000 and free cash flow through prudent cost and working capital management.

Regarding our two revenue channels the partner and marketplace channel includes all revenue from our SMB focused marketplace products and revenue from a variety of partners, who deploy the same products for the SMB customers.

These include CMS partners of all types, such as the industry vertical partners like the other dot com.

The recently announced partners like dealer Center platform partners like Duda and general digital agencies.

And the first quarter of 2021. This revenue channel represented around 55% for both of both revenue and demand.

The 2021 unfolds, we expect to continue to see this channel contribute most of our growth and customer accounts, and ultimately and MLR and the second half of 2021.

Our enterprise channel continued to perform in the quarter as well contributing about 45 percentage of revenue anymore.

We added prominent enterprise brands from our direct sales effort and continued to renew oriented price clients at a healthy rates of <unk>.

Large enterprises also benefit from our focus on automation and transparency.

As we have noted previously we are per.

Proud of that large multinational corporations and government agencies large and small trust all the way with their digital accessibility solution.

Finally, before turning the call over to David I also want to thank Scott for his contributions at audio as otherwise CFO and wish him all diverse industries from endeavors.

David.

Great. Thank you Cor.

It's my pleasure to speak with you today I'm very pleased with the first quarter as we continue the transition to a higher margin and highly scalable of SaaS company as.

As I said last quarter, we are not resting on our patting ourselves on the back and instead of a single minded determination to achieve our mission eradicate all barriers to digital accessibility.

Today I'd like to speak with you on about a couple of things.

Continued enhancements to our team and second progress year to day, and how we see 2021 on holding.

First about the team there.

And my tenure as CEO, we have continued to add depth and experience of our leadership.

On the last call I said I believe the <unk> leadership team with the strongest team and our history.

I am pleased to report I believe it is even stronger today with the addition of Chris Conley, who joined <unk> and CTO and March.

Chris was most recently on a trip where he led the transition and integration of the company's safe rock and so the drift family of products parameters drift the email.

<unk> machine learning and large scale E mail processing technologies have allowed <unk> to expand capabilities beyond chat and to other forms of digital marketing cementing our position as the leader and the conversational marketing space.

I'm also pleased to report that we have made good progress on the CFO position and expect to have more updates for you and the near future.

And it's becoming CEO of last August hiring exceptional talent, such as Chris and all departments has been a key focus because of <unk> success. Ultimately is not of a single individual but about a complete team of leadership and staff working together and as and honored to work with such a talented leadership team and with our mission driven employees.

Okay.

Progress year to day.

After the extremely high revenue and MRO growth and the back half of 2020. The first half of 2021 represents the next building block.

The audio line the.

The re platforming of initiative, we announced on February was only possible because of our dedicated and talented staff and it's <unk>.

Wait and see it come together.

This was the massive step toward building a strong foundation, we need to handle growth and scale and for the millions of customers.

As we have discussed we have been hiring talented staff since last summer and re platforming was the net vital move before you ramp up marketing effort.

Last year, our efforts and cost control and automation led to the material higher margins, we're seeing today and we think of re platforming and marketing investments will also have an outsized return for our shareholders and the future.

As the largest shareholder of the company I am excited about where audio Oi and today, we're in a very strong position.

The market for accessibility solutions is and the early inning and it is growing and second our technology and transparent approach to solving accessibility for our clients is differentiated.

The <unk> platform is highly scalable.

We have exceptional talent to execute on our growth plan.

Fifth we are very well capitalized.

Finally, and importantly, there are tangible reasons for us to be optimistic about what lies ahead and addition to the 68000 current customers, we have and various subscription tiers.

Our current partners have several hundred thousand potential audio by clients that are not yet and our customer count.

We have a clear plan to tap the giant opportunity over the rest of the year. In addition, we fully expect to add more platforms and agency partnerships. This year.

In terms of guidance, we remain laser focused on growing <unk>, we are reiterating our full year guidance range of $30 million to $32 million.

As I mentioned on the call on March we expect <unk> growth to accelerate and the second half of the year as we begin converting customers to higher care offerings and announce new partnerships.

We did have positive free cash flow and the quarter and I expect the turn cash flow positive on an operating basis later in 2021.

Before I turn the call over to the thoughts to walk through some additional financial results I want to thank him again for all of the contributions of <unk> and his leadership and achievements have been significant given our growth. We have set a strong foundation for the future. He is leaving the audio and a much stronger position and when he joined us with Bosch and good luck and the future.

And your endeavors again, thank you.

Thank you David and car.

As I said before I really enjoyed my time at audio line.

And I am proud of all of the collective successes and achievements over the past two years.

<unk> and a much stronger position now and there is no doubt that with David and the leadership team. The company is well positioned for long term success.

And you just heard from car and David we had a lot of positives and Q1.

From expansion in gross margins to being free cash flow positive.

It should be noted that many of the investments and people and the sources that we had mentioned and the recent quarters are starting to pay off.

As evidenced by the new platform launch and the continuous enhancements that our team is focused on to make it scalable and support you and high vote.

And importantly, the of.

Patience is created that helped the gross margin expansion.

The retention continues to be strong as David mentioned, the business is seeing signs of gaining momentum and the new channels.

Now onto the results.

Ireland and you summarized most of the results and key metrics of the business, but I wanted to mention a couple of the items.

First on.

Operating expenses.

And Q1 Opex of $7 2 million, which was an increase of 57% versus Q on last year.

The drivers of the increase of across the board and R&D as we focus on part of development sales and marketing and G&A.

The increase in G&A is mainly driven by the equity compensation expenses.

Our total R&D spend and Q1 was about one 3 million with approximately 250000 effect of the software development cost and the investing section of the cash flow statement.

The the total R&D spend is about 22% of our revenue this quarter versus 11% a year ago.

This reflects the commitment towards investing for scale in this emerging market.

In closing.

I would like to thank all of my colleagues at <unk> for making my journey, so memorable and fun.

I've enjoyed it and how to learn a lot from all of you all along the way the <unk>.

Elective passion and dedication from the team is amazing and out of continuing to achieve all of you.

And from Key's continued success with that we'll open the call for questions. Operator, Please give instructions.

Thank you we will now take questions from the company's publishing analysts to join the question queue. You May Press Star then one on your telephone keypad and you will hear a tone of acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question is from Allen Klee from Maxim Group. Please go ahead.

Good afternoon can you help us understand the timing of when you add of new.

Enterprise customer and when they start generating revenue of course.

You basically doubled your revenue sequentially, but the I'm sorry of doubled your customers, but the revenue and it didn't show up and the revenues. So how should we think about how long it takes to put of when.

And you sign up of customer they've come and revenue generating and and and all of the thank you.

Well the number of customers that we've added is not the enterprise right now coming from SMB channels and.

And you will see and you must have noticed over the last few quarters as we add more customers and we're going off the scale and.

It's a very efficient product the prices are low and.

And from an enterprise perspective, as soon as customer signs the contract on it is effective from the.

From enterprise and we start recognizing revenue.

By the way.

And because our services are turned on.

And very very quickly.

Are you, saying that for the customers that you added.

And that the revenues did not show up this quarter or the.

Because of their SMB or that they will start showing up next quarter or can you explain I'm not saying that.

Yes, with Smbs and the strategy is to get into.

Benefited them first and then raise the AVO curve SB built on work into more highly price products right. Now we have adoption at the lower tiered pricing and Thats, what David mentioned in his comments, we expect the conversion rate to start happening as the year goes and.

And that's how and that's when we expect our revenue and MRO of just ramp up significantly and the second half of the year.

Yes, maybe I can add to that a little bit.

We're seeing growth this quarter and and each of our channel. So.

Talking about the second quarter now enterprise and vertical partners are growing nicely, we're seeing month over month growth and our new channels, which are digital and the agency since the launch of our new platform that we're expecting to see and acceleration of these new channels and the second half and continue the to track that.

Okay.

The operating expenses in the quarter and you said how much they were up year over year.

This quarter of good run rate or should we assume that this is going to continue to ramp.

Kind of on.

On an absolute basis kind of.

Increase as the year goes along.

Yes, we actually.

I expect as the year goes along the expenses to go up as we continue to invest and platform building the other development as well as and CS sales and marketing.

And maybe some expenses and Jan as well so we definitely expect of.

Expenses to ramp up and those expenses will be supporting our ability to see the pipeline and drive the growth measures to support the hyper growth, we are expecting and the second half.

Okay, and just a couple of.

Also on your building of your New Technology Development Center, and a new CTO.

And what's the status of the the New center and is that starting to.

Just to bear fruit.

Okay.

Yes.

Announced in February.

And so we have of migration going on from the old platforms of the new platform.

The new customers love the accessibility of score the monitoring and improvements and our AI and automation.

So we're really happy with that.

Okay, and just a couple of other numbers.

And the.

Can you tell me, what the depreciation and amortization expense was in the quarter, how much capitalized software.

And then costs were and then.

We're quite post quarter end.

And what.

If you have raised more money on the ATM and what the share count is right now.

Yes.

You Shouldnt of just crossed but I'll give you the numbers real quick.

So the share count on the <unk> plus <unk>.

The $10 9 million.

That is mace island.

But obviously the Q1 averages closer to $10 five ish.

From a.

And software development cost skew and we had about 250000 and.

And from and DNA perspective from capitalized software, we had about call it roughly 285 and Q1.

Okay. My last question is Youre planning to have.

Expenses to continue the growth through the year, you said margins will kind of stabilize at this level, maybe they can go up a little bit revenue will grow but what.

How do you feel about your confidence of getting to your <unk>.

Cash flow guidance by the end of the year.

I think we feel pretty confident.

New channels of our all in early stages, we've added product tech sales and marketing and talent to drive these businesses and are seeing great results. So far.

Okay. Thank you.

Yes.

Thank you.

The next question is from Zach Cummins from B Riley Securities. Please go ahead.

Hi, David Carr, and such and Thanks for taking my question and then and congrats on the solid results here in Q1.

And David just piggybacking off of some.

And some of Alan's questions. There can you walk me through how that process is going to work and now that you have some of these lower tier of customers on your platform what exactly does the process look like as you go through it and start to upgrade them to higher tier plans and.

And the coming quarters.

Sure. So we're working on migrating those customers over to the new platform and will begin ramping on the marketing efforts once that's complete.

We expect some of these customers will be able to upgrade the higher levels of product and the coming months and industrial contribute to rapid MSR growth.

Got it and in your script I know you mentioned that.

Even within some of these existing partners debt. There is hundreds of thousands of potential customers that potentially could be unlocked I mean, what does that process look like as well and in terms of being able to unlock a bigger portion of those available customers with with some of these new partners.

Yes, the new platform and it sales and marketing.

And getting the customers more comfortable and ramping them up.

Theres the big demand out there for accessibility at the moment.

Got it thats helpful and.

And then I'm just curious the starting off this year it seems like with the improving environment.

What are you seeing from a business development perspective, it seems like your retention rates have really stabilized now and I was just wondering if there is an increasing appetite, especially at the SMB level.

The euro accessibility solutions.

Does that can you repeat that question. Please.

Yes.

Just ask around the overall environment.

Just seeing it seems like some of your of your retention rates of really stabilize and I was wondering if with the reopening of the economy, if youre actually seeing an uptick in demand from a lot of your SMB customers around digital accessibility.

Okay.

And then more on the enterprise side, we've had.

And we're having a good quarter this quarter, we had a decent last quarter on enterprise and it's not really affecting the SMB from what I can tell.

Posture of the comments on that.

No and I'll just highlight the pipeline right. So.

Just to cover just to broaden and little bit from what David said is our pipeline is strong both on the enterprise side and partnership side, which covers most of our Smbs and we are seeing traction on digital market, because as well and as David mentioned as we start migrating customers on our new platform.

And Scott.

Providing the.

Scale that we have opened it up to our customers.

The business is definitely expecting to do.

And much higher penetration and adoption and the stickiness with the small and medium size customers is really good as well we are not seeing a lot of churn. So the lid on all healthy signs for future growth.

Understood and then I'm sorry.

And some of your recent hiring on the things that Youre looking for account executives and the public sector.

And I'm, just wondering with a lot of the initiatives here with the by the administration to really focus on modernizing their technology investments.

If youre seeing a big uptick with with digital accessibility moving forward on the public sector side.

We haven't seen that yet we're continuing to see the number of Ada and the other accessibility cases exceed the total number of previous years. So last year I think it was around 2500 and this year, it's running a bit hotter and.

And the demand letters of probably three to five ex that.

Haven't seen it exactly and the public sector, yet, but we do expect that.

Got it and then on gross margin and this is a portion of that continues the pace well ahead of my model at least I mean, it sounds like it's going to stabilize and the upcoming quarters, but can you talk about just some of the actions that you've taken that of really driven a lot of the flow through to that gross margin line out of that we're seeing here in Q1.

Absolutely.

No.

As David mentioned right the transition for the company has been less.

People based services and more reliance on automation.

And with that come said reduction and our fulfillment costs as we continue to sell more and more customers. That's the biggest driver and.

And also as the platform continues to improve.

We should be able to stabilize this but as the from key scales as the revenue scales that should further drop to the bottom line, but.

And that May happen down the down the line, but we still believe that.

Annually, we should be improving upon those gross margins as we go.

Yes.

It's the efficiency rate is also the cost of its fulfillment in terms of cloud simple and on that and with the new platform. We expect to continue to drive the efficiencies even better.

Understood and just a final question from me I mean, David do you feel like you largely have your team in place from an executive of perspective, just given all of the hires that we've seen over the last eight or nine months. It feels like you've built a pretty strong team here at the top.

Yes, I think it's Gary and there we've hired a lot of people and a lot of different positions and very strong leadership team people that come from big companies and startups as well.

So I think we're definitely getting there I don't know if its ever fully done you're always trying to improve.

Understood well, thanks again for taking all my questions and congrats on a strong start to the year.

Thank you Doug.

Thanks Zack.

This time. This concludes our question and answer session I would now like to turn the call back over to the Nextgen <unk> for his closing remarks.

Thank you for joining us today, especially one of the thank our employees partners and investors for their continued support we look forward to updating you on our next call.

Before we conclude today's call I would like to remind everyone that Evercore day of today's call will be available for replay via a link available and the investors section of the Companys web site.

And you for joining us today for Rd of ice first quarter 2021 earnings Conference call you may now disconnect.

Okay.

[music].

Okay.

Okay.

[music].

And then.

Okay.

[music].

Yes.

Yes.

Okay.

Yes.

Okay.