Q3 2021 AudioEye Inc Earnings Call
Good afternoon, and welcome to the audio as third quarter 2021 earnings conference call joining us for today's call are audio as interim CEO, Mr. David Marathi Executive Chairman, Dr. Carr, Bettis, and CFO Ms Kelly, Georgia edge. Following their remarks, we will open up the call for questions from the company's publishing analysts.
I'd 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 audio I dotcom.
Before I turn the call over to audio is 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.
Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward looking statements.
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.
And the and 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.
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 and audio I 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 posted in the Investor Relations section of our website at Www Dot audio I dotcom.
Now I would like to turn the call over to audio is executive Chairman Dr. Carr Bettis, Sir Please proceed.
Thank you operator.
Welcome everyone and thank you for joining us today.
First of all happy Veterans day, and a special thank you all of the veterans for their service to our country.
After the market close we issued a press release announcing our results for the third quarter ended September 32021.
A copy of the press release is also available in the industrial relations section of our website at <unk> Dot com.
We'd like to begin as usual with an overview of our business audio is a leading provider of SaaS based digital accessibility solutions.
Mission is to eradicate all barriers to digital accessibility.
To deliver on that mission, we saw the largest range of issues that impact the way people around the globe browse and interact with online content.
And all the while we address every aspect of web accessibility from finding and fixing issues ongoing monitoring it up to you.
We also certify websites to demonstrate compliance with both the Americans with disabilities Act or <unk> and the latest web content accessibility guidelines awake I took my one.
Our comprehensive digital accessibility solutions allow our private sector clients to expand their customer reach and grow revenue by serving individuals with disabilities make up 15% of the world population.
I'll now turn the call over to David <unk> largest shareholder and our interim CFO John Davis.
Thank you Cor.
It's my pleasure to speak with you today.
I am pleased with the third quarter as we continue to transition to a highly scalable SaaS company.
Revenue grew across all channels, and we increased MRI, while achieving high logo and dollar retention.
Gross margins remained healthy in the mid seventies up substantially from prior years.
As previously communicated we have too.
Turning to investing in R&D and sales and marketing to capitalize on our industry's long term expected growth trends.
Over time, we expect that R&D and sales and marketing will come down as a percentage of revenue as we increase sales and benefit from efficiencies.
Earlier this year, we announced our next generation platform, which features always on monitoring analysis of issues fixed and remaining and an accessibility score.
These features have not only resonated with our existing customer base, but also support additional wins this year.
Now I'm very excited to discuss our next major release issue reporting.
Yesterday, we publicly unveiled issue reporting.
Our technology and transparent approach to solving accessibility for our clients has always been distinct from the competition.
But with the release of issue reporting this puts us at another level.
Customers can now quickly sort accessibility issues by tight and severity to view those fixed automatically and those requiring additional attention.
Because audio line now includes this reporting with all next Gen sets up skins.
These advances allow us to offer a comprehensive accessibility solution for a fraction of the price of traditional approaches.
I want to thank our product and engineering teams for their hard work in delivering this world class product.
Yeah.
We have already seen an enthusiastic response to history reporting from our customers and prospects.
During the quarter, one of the largest and fastest growing U S. Digital agencies pardon me with Audi why they indicated how much more manageable and affordable our solution is than the one we displaced.
They're all solution require their engineers to update sites for every accessibility item every time the website changed and frequent expensive audits.
Additionally, <unk> made a significant acquisition involving thousands of sites and existing agency customer said, they would be using audio why as the gulfport solution, replacing a competing product in the acquired business.
They indicated they would only use audio I due to its ease of use accuracy and issue reporting.
As these wins demonstrate we continue to hear the same feedback over and over our efficient accurate and transparent solution reduces or eliminates engineering time and resources that alternative options required.
Today, Ari wise value proposition as the most compelling at any time in the company's history.
To understand why that is the case it makes sense to understand the overall landscape.
Outside of the body why there are three approaches to fixed and accessibility errors on our website today.
The first is building an accessible website from the onset and ensuring accessibility as part of every update process.
Two software only products, which address only a subset of the issues and do not offer issue reporting leaving website honors in the dark.
Three traditional approaches which require expensive and recurring manual audits during which developers fix issues and the source code. This costly process must then be repeated to maintain accessibility whenever a website is modified.
Unless a website is built with excessively.
India design and development phase and updated accordingly, which is only a small percentage of the websites. We offer the most cost effective and straightforward solution, we fix many issues automatically and provide its reporting bundled into our next gen offerings at no extra charge.
Customers can use this reporting to resolve the remaining problems independently or hire us to do the rest with a few minutes just to technology.
Audio or has made tremendous progress in our R&D efforts over the last year and is reporting its just one exciting out of this process.
Unaware of any competitor with our amount of product and engineering talent or any other competitor investing in R&D at a similar rate.
Pace of development has continued to increase and we look forward to announcing additional features and products as they're released over the next few months.
This would not be possible without product and tech leadership, which has been still processes for repeatable excellence and tireless efforts from the product and engineering teams.
In addition to actually start with business partners I'm excited to discuss our outreach with the disability community.
In early October we announced the audio why alliance community at M. Enabling an event hosted by Mike Potts yellow, a prominent accessibility advocate and founder, but well have Abel.
The audio I aligns community is acuity based initiative that brings people with disabilities to the forefront of the product development and quality assurance process.
The alliances creation make sure that our technology is backed by the human element of people living with disabilities, who rely on assistive technology to navigate websites in their everyday lives.
By including this feedback and the development process. How do you I can continue to build the best solutions that allow people with disabilities to navigate the web naturally.
I encourage you to go to our website, where we showcase their experiences and feedback as part of our making accessibility visible series at Www Dot audio our dotcom forest slashed law.
Also at the M enable to that our CEO Domenick Marcelli Colette a discussion on the contributions of technology and digital accessibility alongside a nail Lewis the director of advocacy and policy for the National Federation of the Blind you liked to hear the discussion. Please go to www.
That audio our dotcom Ford slash enable.
Okay.
The trend of web excessively salt lawsuits continues to rise. This year, we expect almost 4200 cases versus 3500 in the previous year.
In addition to private litigation, we have noticed increased activity from the department of Justice.
On November 1st Justice announced an agreement with Rite aid requiring the pharmacy to make its COVID-19 vaccine content accessible.
And on September 20th Justice file a statement of interest in a federal court cases in Los Angeles called Bouygues, and American Council of the blind versus quest diagnostics.
The Doj statement agrees with the plaintiffs claim that an accessible kiosks violate the F D. A D a.
Against this backdrop the team at <unk> is working tirelessly towards providing the most efficient and transparent solution to the ever present need for digital accessibility.
Moving onto guidance in terms of guidance for the fourth quarter. We believe revenue will be between $6 three to $6 5 million, representing 15% year over year growth at the midpoint.
We remain very well capitalized with $22 million of cash on the books at September 30, and we have the runway to continue investing in the business for long term success.
I would now like to turn the call over to Kelly audio is CFO Kelly.
Thank you David I would like to begin by providing a summary of Q3 and 2021 year to date results.
And what we'd do it one of the most important metric for our business.
In the third quarter of 2021 monthly recurring revenue grew approximately 24% year over year, our viewpoint a million essentially.
In Chile, and $2 million in Q2 2021.
In addition, we increased our customer count by approximately 270% over the same period of last year with approximately 80000 customers in September 2021.
We continue to see increases in customer counts across each of our revenue channels.
I have known for Q3, 2021 with $6 2 million up 17% from $5 2 million in the third quarter of 2020.
Regarding Nike revenue channel and.
Partner and marketplace channels.
Revenue can be focused marketplace products and revenue from a variety of partners to deploy these same products for their SMB customers.
In the third quarter of 2021, describing your channel grew 33% year over year and represented approximately 55% of revenue.
7% of MRI.
Expect to continue to see this channel contributes significantly to our growth in customer count and ultimately Amar.
The enterprise channel continue to perform in the quarter contributing approximately 45% of revenue and 43% of them.
Well project oriented PDF revenue went down from Q3 2020, bringing revenue in the enterprise channel grew approximately 12% over the same period in prior year, having returned to year over year increase for the channel.
Added prominent enterprise brands from our direct sales right.
During your enterprise clients at an impressive rate.
Gross margins continue to expand year over year, reaching 74, 7% an increase from 71% a year ago and consistent with Q2 2021.
And gross profit from Q3 2020 was primarily due to continued recurring revenue growth and continued improvement in automation in our product offering.
Q3, 2021 constant revenue remained flat from Q3 2020.
Slight increases to revenue and customer count.
In Q3, Opex increases of one 9 million and stock compensation was $9 3 million, which was an increase of about 72% versus Q3 last year. This increase was strategic and it was primarily driven by increases in R&D as we focus on.
On product development, and expanding our sales and marketing effort.
<unk> expense remained consistent with Q3 2020.
Total R&D spend in Q3 was approximately $2 million with approximately 370000 reflected the software development costs, and then investing section of the cash flow statement.
Total R&D spend is about 32% of our revenue this quarter versus 9% last year and continues to reflect our commitment towards investing for scale in this emerging market.
Sales and marketing expense increased over Q3 2020 due to significant investment in paid media and stuff.
Marketing costs and expansion in new sales and marketing team.
Net loss in the third quarter of 2021 was $4 $7 million 41 per share compared to $1 1 million or 12 cents per share in the same year ago period.
On a non-GAAP basis, our Q3 net loss of $2 8 million or 24 cents per share compared to the same year ago period, a point 2 million or two cents.
And any adjustment to GAAP earnings and EPS were both comparable quarters is noncash share based compensation and in Q3 2020 also included noncash valuation adjustment to liability interest expense and severance our balance sheet remains well capitalized with zero debt and $22 million of cash at September 30 of 2021.
With that we'll open up the call for questions operator, please give instructions.
Thank you we will now take questions from the company's publishing analysts.
He would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question is from Zach Cummins of B Riley Securities. Please proceed with your question.
Hi, Good afternoon, David Carr and Kelly, Thanks for taking my questions I appreciate all the incremental color around that that technology development and kind of where you're going next.
Just speaking on that front, David in regards to issue reporting.
Is this solution only for new customers at this juncture or do you have any plans to kind of move this through the existing customer base as well.
All customers on Nextgen will harvest to reporting so we are in the migration process right now.
Yeah on the website has that enterprise customers are starting to get it as well as partners and so it should be over the next three to six months.
Understood and can you talk a little bit more about some of your success with digital agency and partners. There with this new issue reporting capability. It sounded like you were actually able to displace a competitor because of it.
But your superior solution.
Assume it comes at a much lower cost.
Yeah, I mean, the product differentiated and it's a superior product that's the most.
Sparing solution you have an accessibility score a continuous recording the highest level of automation.
This is really disruptive actually issue reporting.
This away for for much cheaper than competitors competitors are charging upwards of 10 20 $30000 for something we're essentially giving away now under subscription packages.
Yes.
Understood. That's helpful and David can you give me a little more depth on the investments that youre, making in sales and marketing I think Kelly you called it out in their scripts that are really starting to look at incremental investments in paid media as well as head count.
Yeah, you know we're in the early innings of digital accessibility and expect that the market is going to grow rapidly over the next few years.
So we're trying to get in front of that we're balancing the opportunity to further increase our tech lead with investments against near term profitability to maximize long term for us.
As you can see the R&D has been going up and we're starting to get a nice return on that investment.
We expect to generate efficiencies from sales and marketing over the next few quarters and expect that will go down as a percentage of revenue.
Got it and David a second year in a row.
You've been at the inbound event says the accessibility provider.
I was just curious does that exposure to provide you an opportunity for a deeper partnership with hub spot and I imagine it serves as a pretty good lead generation tool for new customers.
Yeah, we can't really comment on specifics the partnerships.
But yes, you should assume that we're speaking to them.
Yeah.
Understood and then I guess final question just speaking around relationships on the partner side I know, we had some of those are relationships push out and no longer expected to happen in this year, but can you give us any sort of update on that or are these still in the pipeline and it's still ongoing discussions for a pretty meaningful partnerships.
All right.
Yeah.
Yeah, nothing really changed the timing we're still discussing in these different partnerships with these same folks.
It's just not their highest priority at the moment and so.
Hopefully that changes in the future and we can start to do the upgrade processes.
And then these large platform integrations.
Understood well thanks for taking my questions really appreciate it and look forward to speaking to you.
Thank you Jack.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
One moment, please Holly Paul for additional question.
Yeah.
Our.
Next question is from Allen Klee of Maxim Group. Please proceed with your question.
Hi, This is Derek Greenberg Entre Allen.
First question is how much do you guys have had left of your ATM has it changed at all this quarter.
We're ending the quarter at $22 million of cash and if you look at our year to date net increase that cash it is $12 8 million increase or about $16 5 million generated from it.
Kathy.
Okay. Thank you and then what was your guys' operating cash flow and capitalized software development costs for this quarter.
Capitalized software development costs for the quarter were 370000.
And operating cash flow was $2.
I'm, sorry, I'm, sorry into two points.
Okay, and then lastly, what about DNA.
Hum G&A S as an expense.
Did you say DNA or DNA.
I appreciate appreciation.
Depreciation was 357000.
Okay, great. Thank you.
Okay.
Our next question is from Scott Buck of H C. Wainwright. Please proceed with your question.
Hi, good afternoon guys.
A bit of a follow up on <unk> question regarding sales and marketing can you give us a little color about how you think about our ROI in there and maybe when we should expect to see.
Some of the revenue benefits from this investment.
I would think over the next year, you'll see the benefits, it's really increasing leads at the top of the funnel and we're in the optimizing things. We're trying a lot of new things and testing things out and getting better at what we're doing.
So there is some inefficiency there at the moment, but that should get better.
Alright, that's helpful. And then second one for me can you just kind of give US a reminder, this is the.
Second or third corner, where you're showing pretty significant year over year.
The expansion in gross margin, what you know what's kind of the expectation there moving forward and are we kind of topping out here in the mid <unk> mid seventies.
Yeah, we're happy with that gross margins over the last few quarters and think he says gently in the mid Seventy's and we expect that.
To continue our improved going forward, we're not giving specific guidance on future quarters, but I'm pleased with her a range and I'm not expecting a significant differences to it.
Okay perfect I appreciate the time guys. Thank you very much.
Yeah.
Thank you.
At this time. This concludes our question and answer session I'd now like to turn the call back over to Mr. Marotta for closing remarks.
Great. Thank you.
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.
Yeah.
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 audio is third quarter 2021 earnings conference call you may now disconnect.
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Okay.
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