Q1 2023 AudioEye Inc Earnings Call

Speaker 1: Pardon me everyone, the audio I call will begin momentarily. We appreciate your patience.

Speaker 1: Good afternoon and welcome to AudioEye's first quarter 2023 earnings conference call. Please join us for today's call, our AudioEye CEO , Mr. David Moradi and CFO , Ms. Kelly Djorjevic.

Speaker 1: Following their remarks, we will open the call for questions from the company's publishing analysts. I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.audioi.com.

Speaker 1: Before I turn the call over to audio eyes chief executive officer, the company would like to remind all participants that statements made by audio eye management during the course of this conference call that are not historical facts are considered to be for looking statements. The Private Security's litigation reform act of 1995

Speaker 1: 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.

Speaker 1: and are based on current expectations and assumptions that are subject to risks and uncertainties.

Speaker 1: Actual results could materially differ because of factors discussed in today's press release. In the comments made during this conference call and in the risk factors section of the company's annual report on Form 10K, it's quarterly reports on Form 10Q and it's

Speaker 1: other reports and filings with the Securities and Exchange Commission.

Speaker 1: 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. AudiUI does not undertake any duty to update or correct any forward-looking statements.

Speaker 1: Further, management's remarks today will include certain non-GAB financial measures. A reconciliation of the most directly comparable GAB financial measures to these non-GAB financial measures is available in the company's earnings release posted in the Investor Relations section.

Speaker 1: of our website at www.audioi.com. Now I'd like to turn the call over to audioi's Chief Executive Officer, Mr. David Morotti. Sir, please proceed.

Speaker 2: Thank you, operator.

Speaker 2: Welcome everyone and thank you for joining us.

Speaker 2: To begin, we'd like to highlight our strong financial performance and continued focus on efficiencies.

Speaker 2: We are pleased to announce record revenue of $7.77 million in the first quarter. We ended the first quarter with sequential growth in our key performance indicator, annual recurring revenue for ARR which was $29.6 million.

Speaker 2: up from 29.2 million on December 31st, 2022.

Speaker 2: Growth margins were 78% versus 75% in the year over year quarter.

Speaker 2: Growth profit increased to 6.1 million versus 5.2 million year-over-year, representing a 100% flow-through of additional revenue into growth profit.

Speaker 2: Revenue increased 13% year-over-year while operating expenses decreased by 8%.

Speaker 2: Net loss decreased and we achieved a near non-gap break even versus a $1 million loss in the year over year quarter.

Speaker 2: We were able to achieve near-down gap break even despite increased R&D investment of approximately 200,000 compared to the first quarter of 2022.

Speaker 2: Netcash provided by operating activities improved to 300,000 in the quarter, versus Netcash used by operator A activities of 500,000 in the fourth quarter of 2022.

Speaker 2: In the year of a year quarter, net cash used by operating activities was 1.9 million.

Speaker 2: In addition to our positive financial results, there are several notable items I'd like to highlight on today's call.

Speaker 2: As we have said before, we believe we are in the early and individual accessibility.

Speaker 2: 97% of websites today remain inaccessible to people with disabilities.

Speaker 2: Over the past several years there has been a growing demand for effective accessibility solutions.

Speaker 2: The man has increased due to a variety of factors, including brand reputation, increased litigation, and the ability for companies to generate additional revenue with accessible websites.

Speaker 2: AudioIsle, Pioneer and Visual Accessibility, and hasn't been at many of the products used in the industry today.

Speaker 2: We believe that AudioEye has invested more than any other company in the industry into R&D. As a result, we have the best product to meet companies wherever they are in their accessibility journey.

Speaker 2: whether they want a comprehensive audit to understand scope of the problem.

Speaker 2: Fix issues at the stores, or want us to fix their site with the most advanced automation and customized JavaScript.

Speaker 2: We stand behind our work when our clients receive demand letters or lawsuits by offering a comprehensive technical and legal analysis refuting frivolous claims and false positives from online accessibility website scanners.

Speaker 2: This additional layer of protection helps them reduce or even eliminate their risk exposure.

Speaker 2: In March 2023, we successfully defended a customer, Babylon Marine, and a precedent ADA case for website accessibility.

Speaker 2: Babylon have this to say.

Speaker 2: Before Audi Y, you really didn't know which successfully vendor was right as there are confusing options out there, including ones that make false promises.

Speaker 2: We were confident that audio-wide could not only solve our accessibility issues, but be there as our partners, any issues came up.

documentation that proved the claims were false.

We appreciate how audio I stepped in to stand behind their solution and customer and how effective they were in resolving the claim. Audio light was an invaluable partner throughout the entire process. In most website accessibility lawsuits or demand letters, the party receiving the lawsuit will spend money on legal fees. Audio light was an invaluable partner throughout the entire process.

pay a settlement, and fix the digital property later.

Most competitors use point-in-time audits or automated-only approaches.

Neither work effectively. Many companies want to do the right thing and address digital accessibility, but because of ineffective solutions, remain vulnerable to future legal actions, grand risk, and sub-par customer experiences.

AudioIU lies a unique combination of automation technology, including artificial intelligence, coupled with industry experts and accessibility compliance and law to help businesses become and stay compliant.

We were pleased to provide clear evidence our solution is effective while eliminating risk for our customers and making the internet a better place for people with disabilities.

The next item I'd like to highlight is our AI initiative centered on accessibility with members of the disability community. We are developing AI models with direct input from people with disabilities to ensure the products and models develop work in our efforts to eradicate digital accessibility errors at scale.

We will have further announcements soon on the specific impact of these initiatives.

Moving on to guidance.

We are guiding for sequential revenue growth with revenue of between 7.8 and 7.9 million for the second quarter of 2023, representing year-of-year growth approximately 4% at the midpoint.

As discussed in the previous earnings call, our results in the first half have been impacted by certain renegotiations.

Even with these renegotiations, we are pleased to see sequential revenue and error growth.

We continue to expect that revenue and ARR growth will accelerate meaningfully in the second half of the year.

With increased R&D investment, we continue to expect a non-gab operating loss in the second quarter with non-gab operating profit in the second half generating break-even operating profit for the full year.

We continue to be well capitalized with 5.5 million of cash as of March 31, 2023.

We believe the current cash on hand is sufficient to fund operations, and we still expect to generate positive cash flow by the fourth quarter of this year.

I'll now turn the call over to audio ICFO, Kelly George-Ditch. Kelly.

Thank you, David. As just mentioned, we are pleased with our first quarter 2023 performance. Q1 2023 marks the 29th straight quarter of record revenue ending Q1 at 7.8 million, which was 13% growth year over year.

Annual recurring revenue for ARR at the end of the first quarter of 2023 was $29.6 million, a $1.5 million increase from ARR at the end of the first quarter of 2022.

Our two revenue channels are continuing to perform well. As discussed in previous updates, the Partner and Marketplace channel includes all revenue from our SMB-focused marketplace products and revenue from a variety of partners to deploy these same products for their SMB customers. In the first quarter of 2023, this revenue channel grew 14% euro.

perform well in the quarter, growing 11% year over year, and contributing approximately 44% of revenue and 41% of ARR.

We continue to see longer sales cycles and more price conscious customers, but overall, we are seeing some of our best logo retention rates.

Total customer count increased notably in Q1 2023 to approximately 95,000 customers from approximately 74,000 customers at March 31st, 2022 and 86,000 customers at December 31st, 2022.

Both revenue channels contributed towards customer count growth in the quarter, with the expansion of platforms as the most material driver customer count increases. Growth profit for the first quarter was $6.1 million, or about 78% of revenue, compared to 5.2 million, and 75% of revenue, and Q1 of last year.

We are pleased to see growth margins continue to increase given the significant investment in our platform including research and development and customer success cut.

We expect gross margin to continue around the 77 to 78% range throughout the remainder of 2023.

While revenues increase 13% over the comparable period of prior year, operating expense decreased approximately 8% or $700,000 to 8.1 million.

This decrease was the result of continued efficiencies in sales and marketing and G&A areas slightly offset by continued investment in R&D.

Our total R&D spend in Q1 2023 was approximately $2.2 million with approximately $475,000 reflected back to the software development cost and the investing section of the cash flow statement.

This total R&D spend is about 29% of our revenue is quarter versus 26% last year and continues to reflect a commitment towards investing in our product and technology to deliver the best product in the market and to ensure companies are protected from risk.

Net loss for the first quarter of 2023 was $2 million or 17 cents per share compared to $3.6 million or $32 cents per share in the same year go period. Total operating loss decreased 44 percent or 1.6 million from the comparable period of prior year thanks to the increase in gross profit as well as strategic and efficient spending in all departments.

An Anongat basis, a Q1 net loss, was near breakeven at a $53,000 net loss, for less than a one cent loss per share compared to a net loss of $1 million or $9 cents per share in the same year's all period.

The primary adjustments to gap earnings and EPS for Q123 were non-cash sharebades compensation, litigation, depreciation, and amortization. Acquisition has for ELF, so a non-gap adjustment in Q122.

Cash usage for the quarter was $1.4 million, which included a $1 million earn-out payment related to the acquisition of the Bureau of Indian Accessibility. The remaining $400,000 of cash earned in the quarter was primarily related to tax payments from employee share-based grants of approximately $250,000.

non-GAAP litigation expenses of

To ask a question, you may press star then one on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then too. At this time we'll pause momentarily to symbol a roster.

My first question comes from Zach Cummins from B Riley FBR. Please go ahead.

Yes, hi, good afternoon, David and Kelly. Thanks for taking my questions and congrats on the Follick Q1 results. David, just starting with the partner channel. I mean, a nice jump in new customers added in this quarter. So can you just talk about your progress with partners and how we should think about that progression here in the next few quarters, especially as new agreements start to take in?

Hello, was your line on mute? Yeah, I'm guessing David's line is on mute, but I can jump in here.

and partnerships overall. As we noted, the biggest driver of those partnership increases our customer count increases. I have the partnership increases from platforms, but yes, making great traction with partners overall and expect that to continue in future quarters. Can you hear me now, understood? Yeah, I can hear you David.

Okay, yeah, I was talking for about 15 seconds there.

Great. Does that answer your question, Zach, or do you need to have a color around that?

No, no, I think that's awful. And I guess David just building upon it a little bit, I mean, obviously, continuing to invest pretty aggressively on the R&D line. Can you talk about some of the opportunities that you see out there that really justifies continuing to invest at this pace and into R&D? Yeah, we're investing in items that we think are going to have a great payback. We're going to have a great payback.

in the near term, we're going to be adding new products, in the near term that you're going to see, and we're investing into our AI capability. So that's where the money's going. And final question, just really on the enterprise side of it. I know you mentioned last call, there was a couple of outstanding renewals that were in ongoing conversation. Any sort of update you can provide on either the situations? Sure.

Yeah, what the... are you talking about the enterprise side?

Yeah, what the are you talking about the enterprise side? Yeah.

Yes, those are still in negotiations. The demand is still there, but there's been large turnover at both of those companies. So we're still in the hunt. We're hopeful we'll be able to get one of these deals or both of these deals done by the end of the year. It's more a function of a tougher economy. But many of you might be able to afford the Controller net share this discussions.

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

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

The next question comes from Scott Buck from HC Wainwright. Please go ahead. Hi, good afternoon guys. David, I'm curious, on the sales and marketing efficiencies, have you guys exhausted those efforts at this point or do you think there's still some room for improvement there going forward?

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

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

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

But we do expect, as we mentioned on the call, to be cash generating by Q4, and so we are kind of keeping all those factors in mind as we think about the rest of the year.

Okay, great. Appreciate that, Kelly. And then last one for me, you'll first congrats on the successful defense. But curious if there's anything else on the regulatory front that we should be keeping an eye on.

Shirts

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

The game.

Perfect. Appreciate the additional time, guys. Thank you. Thank you. Our next question comes from George Sutton from Craig Hallam. Please go ahead.

Thank you. David, you mentioned that you expect revenues to accelerate meaningfully in the second half. Obviously, that would be different than many companies are anticipating at this point. Could you just walk through the logic of how you see that occurring? A good question when I look at the business.

Outside of the renegotiations, our reseller and platform business have been extremely strong, growing at a great clip.

So that's where we see the uptick in the second half and really driven by that. And an uptick in the enterprise business as well with higher close rate with Michael and his team and what they're doing.

So you mentioned that some businesses are seeing the additional revenues from having accessibility which for us has always been kind of an interesting...

dynamic beyond just the litigation. Can you talk as specifically as possible as to what you're hearing in terms of those kinds of numbers?

Yeah, it's hard to quantify. It could be anywhere from 5% to 10% more revenue potentially. We have a case study on the website. I didn't buy you to check out. But it is hard for us to quantify.

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

with this, but any sort of detail you can give us on sort of ROI, ROI you are targeting for these investments.

Yeah, we definitely are considering what the return on investment is for our R&D spend and we do think there is notable investment there. We do see opportunities in front of us that we want to capitalize on and that's why we're funding that effort in addition to expanding the steam features. There are additional products that we plan to put up the market that we're pretty excited about.

And so all of that is a factor in what we're best to men for R&D.

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

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.

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. Conference has now concluded.

Thank you for joining us today. Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the investors section of the company's website. Thank you for joining us today for audio's first quarter 2023 earnings conference call.

You may now disconnect.

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