Q3 2023 AudioEye Inc Earnings Call
Good afternoon, and welcome to audio is third quarter 2023 earnings conference call joining us for today's call are audio I C. E O Mr. David Marathi and C. F L. Ms Kelly George of it.
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 Dot audio I dotcom.
Before I turn the call over to audio is Chief Executive Officer of the company would like to remind all participants that statements made by audio why 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 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 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 on this call are cautioned not to place undue reliance on these forward looking statements, which reflect management's beliefs only as of the date hereof.
Audio why 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 its website at Www Dot audio I dotcom.
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.
We've been hard at work and are pleased to deliver several exciting announcements.
First record annual recurring revenue or air are up $30 5 million, an increase of approximately 800000 sequentially, representing the largest sequential growth in six quarters.
Second revenue of $7, eight 4 million, representing the 31st sequential quarter of record revenue.
Rockford reported non-GAAP profitability of 300000 in the third quarter ahead of expectations of 100000.
Lastly, we remain on track to deliver positive free cash flow in the fourth quarter.
Kelly will discuss the financial performance in more detail shortly.
During the quarter, we released the industry's first digital accessibility Index report.
The results confirm that traditional consulting approaches to solving web accessibility I fail on that.
Most of the Internet remains inaccessible.
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As part of the study.
Conducted an automated scan at over 2 million pages 40000 websites from companies with over $100 million in annual revenue.
More than 3 billion bispecific elements were tested including images Lee and heathers.
Following the scan accessibility experts, including members of the disability community audited the top sites in each industry is dealing with issues most disruptive to users.
Of the three building blocks that element of it.
The findings concluded every page have at least one accessibility air and the average age has 37 items that build one of the criteria of WC AG.
Our study found that the most frequent there related to imaging possibility descriptive link and keyboard accessibility, but significantly impact people with a disability in the world trying to utilize the internet.
The Baroness found were significant for us.
Many people with disabilities from accomplishing critical path that many of US regularly depend on such as online shopping banking news access and job related activity.
How do you why has the best product in the market to solve digital accessibility upscale utilizing our unique combination of a couple of a scalable approach to leverage human if it's the technology catch errors that technology alone cannot attack.
Recently, we also shared findings from an analysis of over 900 legal claim.
From over 100 lawsuits and demand letters.
The data is compelling.
Using audio display on our 67% less likely to receive a lawsuit with a valid wch issue.
Third the competitors.
Offering the highest rates of protection against the legal claim in the industry.
In addition, while digital accessibility losses increased year over year lawsuit against audio our customers are decreasing.
In the first half of 2023 lawsuits against audio like customers decreased by over 33% compared to the first half of 'twenty two despite an increase in industry wide lawsuit.
Moving on to guidance.
We're guiding revenue between 7.98 million for the fourth quarter of 2023.
Fourth quarter will be the final sequential impact of onetime revenue from the.
Integration.
We expect to generate sequential increase in non-GAAP profitability in the fourth quarter and remain on track to deliver free cash flow in the quarter.
I'll now turn the call over to our CFO.
Okay.
Thank you David.
3023.
30, <unk> straight quarter of record revenue with seven 4 million, which represents 2% growth over the comparable period of prior year.
Annual recurring revenue or a or at the end of the third quarter of 2023 $35 million and $800000 increase from eight at the end of the second quarter of 2023 and represents an annualized.
Annualized growth rate of 10, 8%.
We are pleased to see Eric though.
That's right yeah.
Our two revenue channels.
We aim to deliver solid performance.
The partner and marketplace channels include revenue from our F&B buckets marketplace.
And Robin you know from a variety of partners to play decent product there as well.
Customers.
In the third quarter of 2023. This revenue channel grew 14% year over year and represented approximately 59% of revenue and 61% of D. R.
Q3, 2023, and the highest growth in here with a partner and marketplace channels.
For 2020 with growth coming from a variety of birthdays within this channel.
This momentum to continue in the next quarter.
Our enterprise channel, which debates and best for larger customers and our innovation made up 41% of revenue and 39% up here in the third quarter of 2023.
As mentioned previously this channel face additional headwinds in the first half of 2023 with one large customer contract renegotiation, having an impact on total enterprise revenue, which we expect to normalize in the first half of 2024.
We have seen early in the integration of Eli and finding new customers.
An expanded suite of services so as expected the conversion of one time revenue to reoccurring there with it did have an approximately 200000 dollar impact to Q3 2023 revenue.
Q1 revenue guidance incorporates a lesser impact to complete this process.
The total customer count increased notably in Q3, 2023 to approximately 7000 customers from approximately 81000 customers on September 30th 2022 and 104000 customers on June 30 of 2023.
Increasing the customer count was the result of customer additions and our partner marketplace channel.
Gross profit for the third quarter was $6 5 million or about 77%.
Revenue compared to five 8 million.
We sent a rabbit hole in Q3 of last year.
Can you be inefficiency in the delivery of products and services, which has resulted in lower cost of revenue our revenues increase.
While revenues were relatively consistent with the comparable period of prior year with 2% growth operating expenses decreased approximately 8% or $600000 to 74 million.
This decrease was the result of continued efficiencies in sales and marketing and G&A.
I continued investment in R&D.
Our total R&D spend in Q3 2023 with approximately two 1 million with approximately $500000 just bucket of software development costs.
That seems like the cash flow statement.
Total R&D spend is about 31% up right around the corner.
The first is 33% sequentially, even Boston, notably in R&D over the last 12 months, probably nice top we're not a new product.
We expect R&D investment person, that's an avenue to continue coming down over the next few quarters.
Net loss in the third quarter of 2023, with one 4 million or 11 cents per share compared to $2 3 million or 25 per share a year ago period.
So it doesn't have a decreased 41% or $900000 from the comparable period of prior year.
An increase in gross profit as well as strategic and efficient spending in all departments.
On a non-GAAP basis, our Q3 net profit was $300000 or coupons per share compared to a net profit of $100000 one per share paid in years out period.
The primary adjustments to GAAP earnings and EPS for Q3, 2023 were noncash share based compensation depreciation and amortization and other non reoccurring items.
Cash decreased by 1 million other coronary which was the result of cash outlay for taxes.
Please share grants of approximately $800000.
non-GAAP litigation expenses of approximately $100000 copper conversation that $500000 and $300000 of net cash used from other operating activities.
As David mentioned, we expect to generate free cash flow and dumped cashed in the fourth quarter.
With that we open up the call for questions.
Later, please give instructions.
Thank you.
We will now take questions from the company's publishing analysts.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble I roster.
Yes.
So our first question will come from George Sutton with Craig Hallum. Please proceed.
Thank you David I wondered if you could.
Work for a second with us on the Doj proposed rule the comment period ended last month.
We should get a final rule in the relative near term.
Hume like Us you.
We're actively reading the comments and have a bit of perspective. So I'm just curious what your perspective would be rolled into the final rule and then separate from that how are you thinking of positioning the business to benefit from the ultimate rule.
Yeah as you said.
That's a good question, there's a 60 day comment period, we're really excited about that for title too.
Hopefully, we hear something soon and we're ramping up.
Looking at this for the government sector as well in terms of what we're gonna do on sales and marketing initiatives, but we think we're going to have some time demand probably picks up on that after the rule comes out and one to two years.
Separate from that you talked about building out your sales team.
Over the last couple of quarters can you just give us an update on the go to market.
Plans and sort of how that.
And your expectations for 2024.
Youre talking about the enterprise sales team right.
Yes.
Yeah.
This process.
Ramp up over the next few months, we just hire these folks back in July.
July August so they took about six months to ramp, but we're seeing really good progress. So far and pipeline is also building and so it gives us a lot of confidence we're going to see good growth into 2024.
And I understand you're not giving guidance, yet I'm 20 corvette and good growth in 2020 for any perspective on what.
That might look like.
More than a 23.
Well 23 to 22.
Our next question comes from Zach Cummins with B Riley FBR. Please proceed.
Hi, David Hi, Kelly, Thanks for taking my questions and congrats on on the sequential increase in the <unk> and strong profitability in this quarter.
David just starting off I mean can you talk a little bit more about the current environment.
Speaking more so to the selling environment on both the partner and marketplace side, and obviously enterprise will take a little more time to ramp up.
In accordance with your sales team, but just curious on your perspective of the overall environment.
What's driving your confidence in continued <unk> growth.
Yes, the macro environment tough out there and you're seeing some tightness on enterprise budget people are looking to cut costs, but.
But we are seeing good pipeline growth because of our products and positioning.
But there are definitely budget and cost pressures I'm sure, you're seeing that as well out there and enterprise SAS.
Got it and in terms of the Thai.
Timeline that positive free cash flow good to see that reaffirmed here in Q4.
I'm, just curious how youre thinking about the necessary capital to continue to execute upon growth plans moving forward say demand really starts to pick up or are you execute on the enterprise side, just how youre thinking about available or necessary capital you need to run the business.
Yeah, I can take that back and we do continue to believe that we have sufficient cash on hand to fund ongoing operations. We do expect revenue with the momentum on the partnership side and an expansion on the enterprise side cats to grow and a lot of that to drop to the bottom line and so we feel good about our cash position and where we stand.
And especially with the generation expected in Q4 and beyond.
Understood and final question for me is you.
<unk> are now going to have multiple quarters in a row of improving profitability.
What's the approach to investing in growth versus continuing to expand margins here.
Foreseeable future.
Yes, it's a good question, we look at things Holistically on the business decide if we should invest more into sales and marketing, but the LTV to CAC ratios are more into R&D, but we think that's coming down.
Or are we buyback stock with cash generation, that's a possibility.
Got it well thanks for taking my questions and best of luck in Q4.
Thanks, so much.
Our next question comes from Scott Buck with H C. Wainwright. Please proceed.
Hey, good afternoon, guys. Thanks for taking my questions. Just a couple from me the first one on gross margin.
So nice year over year expansion, but it looks like we've kind of stalled out here. The past couple of quarters are we at the ceiling here for gross margin or do you think you have a little bit more room to push higher.
You know, we we were happy to see gross margin grow year over year I think we.
Have a proven we can find efficiencies and cost of revenue we did that over the last year as they continue to grow revenue. We expect to continue to see efficiencies in and we do think there is the ability to continue to grow gross margins going forward.
Great I appreciate that Kelly a second one for me you talked about R&D expense coming down a bit over the next few quarters.
Is that due to cash constraints or is that a more intentional and just in terms of of what you need to move the business forward.
Yeah, we've invested a lot in R&D over the past year are really improve the software and new products are out there. So we expect R&D isn't a good place.
Investments should come down as a percentage of revenue over the next few quarters more in line with industry metrics, which would be around.
25% and stuff.
Okay.
And I'm sorry, you said you were at 31% in the quarter is that correct.
Right.
Alright, I appreciate that David that's it for me guys. Thanks a lot.
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.
Thank you for joining us today for audio is third quarter 2023 earnings conference call as always we would like to thank all.
Our employees and stakeholders for your continued hard work and dedication.
You may now disconnect.
Yeah.