Q2 2023 AudioEye Inc Earnings Call
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Good afternoon, and welcome to the audio I second quarter 2023 earnings Conference call.
Joining us for today's call are audio I C O Mr. David Marathi and CFO , Ms Kelly, Georgia Vic following their remarks, we will open the call for questions from the company's publishing analyst.
I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at Www Dot audio I dotcom.
Before I turn the call over to audio is Chief Executive Officer. The company 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 statements.
The private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward looking statements. The words believe expect anticipate estimate confident will and other similar statements of expectation identify forward looking statements. These statements.
Our 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.
The factors discussed in today's press release 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 report on Form 10-Q, and its other reports and filings with the Securities and Exchange Commission.
On this call are cautioned not to place under Lu reliance on these forward looking statements, which reflect management's belief only as of the date hereof 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 measure.
A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures is available in the company's earning release posted in the Investor Relations section of its website at Www Dot audio I Dot com.
Now I'd like to turn the call over to audio is Chief Executive Officer, Mr. David Marathi Sir Please proceed.
Thank you operator, welcome everyone and thank you for joining us.
I've been several developments over the last three months and I'm excited to talk with you about today, but before I do I want to highlight our solid financial performance and continued focus on efficiencies.
We are pleased to announce record revenue up 784 million in the second quarter.
At the end of the second quarter annual recurring revenue or <unk> was $29 7 million.
As discussed previously our results in the first half of 2023 were impacted by certain contract renegotiations.
Despite these renegotiations, we are pleased with sequential revenue and <unk> growth and are excited about expected acceleration in the second half.
In the second quarter gross margins were 77% and gross profit increased to $6 million versus $5 7 million year over year, representing a 100% flow through of additional revenue into gross profit.
Continuing to focus on efficiencies, we expect to increase gross margin further in 2024 as we grow revenues.
Revenue increased by 4% year over year, while operating expenses decreased by 3%.
Our CFO Kelly will discuss our financial performance in more detail shortly.
As we have said we believe we are in the early innings of digital accessibility.
97% of website today I remain inaccessible to people with disabilities. Despite increased litigation under the Americans with Disabilities Act.
Last week the department of Justice issued a proposed rule on website accessibility under title II.
Yeah.
The rule would help ensure people with disabilities equal access to web content and mobile apps.
The proposed rule will drive more awareness and compliance and we are well positioned as we already work with over 900 government organization and school districts.
As a reminder, the European Accessibility Act previously required all EU member states to adopt laws or companies operating many types of products and services.
Including website that e-commerce services to ensure accessibility.
In the EU companies must provide accessible website by June of 2025, and the act requires member states to enforce the accessibility requirements.
In June Bodyweight shared findings from a collaborative initiative with accessibility experts from the disability if needed on the effectiveness and impact of generative AI on identifying fixing and communicating accessibility issue that typically require expert review.
Otherwise accessibility experts, including those who rely on assistive technology found AI could reduce the time needed to assess and correct a complex accessibility issue.
Such as determining whether at Lincoln clear and accurate by up to 10 acts.
We are currently incorporating AI into our processes and believe there is tremendous potential to increase speed and accuracy in the future.
The North Star for AI is when someone with a disability can't distinguish between an experienced hand crafted by an accessibility expert or created by an expert trained AI.
That's the only bar that will let anyone claim Dave saw digital accessibility at scale with AI.
And make no mistake, it's a very high bar, we'll only need it by involving the disability community from day, one getting continuous feedback and actively investing and improving our capabilities over time.
In addition to our findings and initiatives on AI, We recently announced the development and expansion of audio is digital accessibility platform with new enterprise great accessibility offerings.
The expansion of our product solution includes audio is new accessibility maturity management program and the accessibility health advisor.
These programs and tools use our team is certified experts to assess the company's current level of accessibility and helped define the investments required to make measurable sustainable progress and accessibility.
Our accessibility maturity management program identifies the people culture process and system changes in organization needs to perform so big accessibility of first class concern and track progress towards these goals.
When new regulations change accessibility guidelines the health advisor notifies the company if any changes required to comply.
This first of its time program corresponding tools with the further development of AI automation will be powerful drivers and increasing accessibility at scale.
In addition to our R&D efforts this quarter I am pleased to confirm that we recently completed the integration of the Bureau of Internet accessibility, which was acquired in March of 'twenty two.
We are delighted to have fully integrated.
<unk>, which will help enable retention and up sell and result in cost savings in the near term.
Going forward, we expect the product offerings of primarily generate air are under our subscription model instead of nonrecurring audit revenue.
The impact of the integration of <unk> will reduce third quarter revenue by approximately 200000 as we transitioned one time on it into recurring revenue.
Each quarter, we continue to bring on talent and advocates that contribute to <unk> success in the future in July we were thrilled to announce the addition of forming the United States Congressman for Arizona, eight Congressional district, Gabby difference to our advisory Board.
Yes. The difference is the retired United States politician, who resigned from Congress in 2012 after sustaining a severe brain injury during an assassination attempt.
Today, she helps raise awareness about disabilities.
Gavin influence in the disability community and her passion for change will help audio while continuing to make great strides in building solutions that close the digital accessibility gap.
Moving onto guidance.
Regarding revenue between seven eight and $7 9 million for the third quarter of 2023, which is flat sequentially.
As mentioned the impact of the integration of B O I E will reduce third quarter revenue by approximately 200000 as we transitioned one time on it into recurring revenue.
Business momentum is strengthening and we anticipate that <unk> will increase by approximately 1 million sequentially, representing the fastest growth rate in several quarters, we expect <unk> growth to be driven by an acceleration in our reseller channel and an improvement in our enterprise channel.
While the first half of 2023 saw low single digit growth rate in IRR as we renegotiate specific contracts.
We used to have that process behind us and continue to forecast a return to a higher trajectory in the second half of the year, which we expect will accelerate going forward.
We expect to generate a non-GAAP profit of approximately 100000 in the third quarter.
With a further improvement into the fourth quarter.
Cash on hand is sufficient to fund our ongoing operations and we expect to see cash burn decrease going forward.
We also expect cash flow to inflect positively by the fourth quarter of the year, depending on items such as working capital.
I'll now turn the call over to audio I CFO Kelly.
Thank you David.
Q2, 2023 mine the 13th straight quarter of record revenue ending Q2 at 784 million, which was 4% growth year over year.
Annual recurring revenue.
At the end of the second quarter of 2023 nine.
$9 7 million a $1 million increase from here at the end of the second quarter of 2022.
As David mentioned, we expect growth to accelerate in the second half of 2023, and we anticipate that <unk> will increase by approximately $1 million sequentially.
Overall, we are pleased with our financial results for Q2 of 2023, which came within revenue net loss expectation.
I had two revenue channels are continuing to perform well in a more cost conscious environment.
Partnering marketplace channel includes all revenue from our F&B focus marketplace product and revenue from a variety of partners to play these same products for their SMB customers.
In the second quarter of 2023, that's revenue channel grew 18% year over year and represented approximately 56% of revenue and 60% of air.
We continue to recognize opportunities for expansion in our existing partners.
Overall, we expect to continue seeing channel contributes significantly to our growth in revenue.
Further traction and expand the Biogen partners.
Our enterprise Omni channel, which typically consists of our larger customers and an organization made up 44% of revenue and 40% of ore in the second quarter of 2023.
As mentioned previously this channel faced additional headwinds in the first half of 2023 with my margin customer contract renegotiation, having an impact on total enterprise revenue in the quarter.
Excluding a three negotiation, we continue to grow enterprise E our year over year.
We also continue to see great logo retention rates in 2023 with Q2 similar to Q1 2023, showing some of our best logo retention rate to date.
The total customer count increased notably in Q2 2023 to approximately 104000 customers from approximately 76000 customers in June 30 of 2022 and 95000 customers on March 31st 2023.
Expansion of platform with the most material driver of customer count increases.
Gross profit for the first quarter was $6 million or about 77% of revenue compared to $5 $7 million and 76% of revenue in Q2 of last year.
We are pleased to see the gross margin continue to increase year over year, given the significant investment in our platform product and customer success.
While revenues increased 4% over the comparable period of prior year operating expenses decreased approximately 3% or $300000 to $8 1 million.
Decrease was a result of continued efficiencies in sales and marketing and G&A offset by continued investment in R&D.
Our total R&D spend in Q2 2023 with approximately $2 6 million with approximately 526000 reflected a soccer and development costs in the investing section of the cash flow statement.
This total R&D spend at about 33% of our revenue this quarter versus 23% last year.
As David mentioned the investment in R&D has allowed us to develop new enterprise grade technology and program.
The ability of maturity management program accessibility health advisors, and new AI, driven automation an expert on it.
Net loss in the second quarter of 2023 with $2 million or <unk> 17 per share compared to $2 6 million or 23 per share in the same year ago period.
Total net loss decreased 24% or $600000.
The comparable period of prior year, thanks to the increase in gross profit as well as strategic and efficient spending in all departments.
On a non-GAAP basis, our Q2 net loss of 220000 or <unk> <unk> per share compared to a net loss of 40000 or <unk> <unk> per.
Sharing the same year ago period.
The primary adjustment to GAAP earnings and EPS for Q2, 2023 for noncash share based compensation depreciation and amortization and nonrecurring items.
Please proceed nonrecurring items decreased substantially in Q2 2023 from the comparable period of prior year.
Cash decreased $1 2 million in the quarter, which was the result of cash outlays for tax payments from employee share based grants and approximately 200000 non-GAAP litigation expenses of approximately 200000 software capitalization cost of 500000, and 300000 of net cash used from other operating activities.
With that we open up the call for questions operator, please give instructions.
Thank you we will now take questions from the company's publishing analysts if you would like to ask a question. Please press star one on your counsel he's had now.
You'll be placed into the queue in the order received.
We prepare to ask a question when prompted.
Once again, if you have a question. Please press star one on your phone now.
Our first question comes from Zach Cummins from B Riley. Please proceed.
Yes, Hi, David Kelly, Good afternoon, and thanks for taking my questions.
David just just starting with your outlook for <unk> increase.
Increasing in Q3, I mean can you just talk about some of the factors that are driving that expansion. There is it mainly just continuing to ramp with some of your partners or are we getting a pretty meaningful bump from those renegotiated agreements coming back online here in the second half.
Yeah. Good question, we expect both our partner and enterprise channel to contribute to the growth going forward in error.
We have a new revenue team wrapping up the pipeline starting to build.
Really a lot of improvement in processes systems and people were.
We're seeing great traction in the in the partner channel as well.
And our partners are seeing a lot of success in selling the product.
To renegotiate it seems you mentioned did slow growth earlier this year, but as we move away those core growth core growth is there and we expect to accelerate even more and I think with the new enterprise products. So those are a game changer in the industry as they start to ramp up we should really start to accelerate.
Okay.
Understood and can you just talk about the integration with our BLA.
In terms of transitioning some of that revenue.
<unk> recurring in nature, and kind of what sort of benefit that gives them to do that integration.
Yeah, I'm happy to talk about that had been back yeah. We're excited that we were able to complete the integration of the OE and.
Liber more value to those customers under our model historically, they've been essentially one time on it that are one time and revenue and we see opportunity to upsell existing customers and retain customers with our set of products and.
And the automation and additional things we can offer to them. It doesn't have a one time impact in Q3, but we see the value in reoccurring revenue phosphates for the customers, but they are reoccurring product in automation and also on our end game here I'll pick up from here.
Customers going forward.
Got it and final question you raised is really just around the expenses going forward.
I mean, the company is expecting to flip to positive non-GAAP income in Q3 and positive free cash flow in Q4.
Or are you expecting to see a ramp down in development expenses now that you have some of these AI products and enterprise.
Expanded capabilities out in the market or how should we think about investments going forward.
Yeah, we did invest quite notably in R&D in 2023, we have a really high performing team and we're excited on the products, we're delivering and you know in the last six months, specifically, but over the last couple of years and we do see more products coming down the pipe and so where we're happy with that investment. We do also see a large opportunity.
You need to scale up our revenue org, especially with these new enterprise products that we're introducing.
And so I think we would expect to continue to invest in sales and marketing.
We generate more profit going forward.
Okay.
Understood well, thanks for taking my questions and best of luck with the rest of the quarter.
Thank you.
Okay.
Our next question comes from George Sutton from Craig Hallum. Please proceed.
Thank you David I want to address the low penetration rate, we've seen thus far in terms of compliance and.
What some of these.
Things will do like the NPL M from the Justice department relative to pursuing a much larger opportunity and then also the EU in terms of how significant that might be in that market and then how you are attacking those specific markets.
Sure.
I'm not sure there's going to be a large revenue effect in the near term with the Doj efforts, but I expect over the longer term.
For two years.
Going to see a meaningful ramp with state and local governments.
And I think the Doj is thinking about the private sector as well I wouldn't be surprised if they take some action there which could be very very meaningful.
But the EU. They are on track for 2025, it's pretty comprehensive it covers many websites except for really the smallest ones.
Very large Tam here, we estimate the Tam of around $3 billion.
And more specifically how do you go after state and local governments today, and how might that change and in the on the EU side. How are you positioned to go after opportunities there.
Yeah, just blocking and tackling with the revenue work and selling setting up a sales office over in London, probably first quarter of next year is what we're thinking.
So it's really blocking and tackling we have the product now so just about going out and getting the business.
And lastly to be clear on the EU when the compliance date is June 25.
My assumption is not everyone has.
Pleading that the end of June of 'twenty five can you just walk through how you anticipate seeing people, yes imply like everything in life. Some will do it a year early some will do it a little bit late it's all over the board as what we saw with the OTA in Canada.
So it's really just depends on the company themselves.
Okay. Thank you.
Thank you.
Our next question comes from Scott Buck from H C. Wainwright. Please proceed.
Hey, just a quick one guys the contingent consideration.
I saw that moved to.
Current assets is that paid in cash or do you have the option to pay that in stock with shares.
And the purchase agreement has that essay and cash payment.
Engine based on 2022, and 2023 performance of M D.
Right.
But it but it is a cash payment.
Second.
Contingent payment it is.
Sorry, guys.
Q2, 2024 time period.
Yes.
Yeah.
Great I appreciate it that's it for me guys. Thank you.
Yeah.
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. Marotta 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.
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 I second quarter 2023 earnings Conference call you may now disconnect.
The host has ended this call goodbye.