Q3 2024 AudioEye Inc Earnings Call
Speaker Change: Good afternoon and welcome to AudioEye's third quarter 2024 earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Moradi, and CFO, Ms. Kelly Georgevich. Following their remarks, we will open the call for questions from the company's publishing analysts.
Speaker Change: Before I turn the call over to Audio Eye's 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 forward-looking statements.
Speaker Change: The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.
Speaker Change: The words Believe, Expect, Anticipate, Estimate, Confident, and Will, and other similar statements of expectation, identify forward-looking statements.
Speaker Change: These statements are predictions, projections, or other statements about future events and are based on current expectations and assumptions that are subject to risk and uncertainties.
Speaker Change: Actual results could materially differ because of factors discussed in today's press release.
Speaker Change: In the comments made during this conference call and in the risk factor section of the company's annual report on Form 10-K, it's quarterly reports on Form 10-Q.
Speaker Change: And in 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.
Speaker Change: which reflect management's beliefs only as of the date hereof. Audio Eye 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
Speaker Change: Now, I would like to turn the call over to Audio Eye's Chief Executive Officer, Mr. David Moradi. Sir, please proceed.
David Moradi: Thank you, Operator. We are pleased with our strong performance in the third quarter.
David Moradi: We achieved the high end of our revenue guidance from July and beat adjusted EBITDA guidance.
David Moradi: We also exceeded the rule of 40 for the first time.
David Moradi: Adjusted EBITDA margin improved sequentially from 17% in the second quarter to 23% in the third quarter.
David Moradi: Third quarter revenue grew 14% year over year while we reduced non-GAAP operating expenses by 10%.
David Moradi: Looking at adjusted free cash flow in terms of EBITDA minus CapEx we generated a record 1.6 million in the quarter compared to 1 million in the second quarter.
and negative 200,000 in the third quarter of last year.
David Moradi: We continue to see impressive performance in our enterprise and partner and marketplace channels.
Both channels grew organically, around 5% sequentially, or 21% annualized.
David Moradi: Strong business momentum is leading us to increase our full year guidance, which I will discuss shortly.
David Moradi: I will now cover a few other notable developments in the quarter.
David Moradi: As discussed in our last earnings call, we recently expanded our partnership with Final Fight, the market share leader in K-12 schools.
David Moradi: The goal is to penetrate all their install base over the next three years with a comprehensive go-to-market plan, which is being implemented now.
David Moradi: During the quarter, we announced a significant expansion of our partnership with Civic Plus, a leader in public sector SaaS technology solutions with over 10,000 government customers, the most of anyone in the industry.
David Moradi: The partnership will include enhanced go-to-market strategies to provide our best-in-class digital accessibility platform to penetrate the local government market.
David Moradi: The goal is to penetrate their entire customer base over the next three years.
David Moradi: We have a long history of working with Finalsight and Civic Plus, and expect that these partnerships will generate substantial revenue over the next three years.
David Moradi: Next, I'd like to discuss the accretive acquisition of ADA site compliance, completed at the end of the third quarter. Next, I'd like to discuss the accretive acquisition of ADA site compliance, completed at the end
David Moradi: This acquisition is another positive step in our ongoing mission of eradicating all barriers to digital accessibility.
David Moradi: ADA Site Compliance is a website accessibility compliance solution providing audits and best practices.
David Moradi: We are also excited about 88 site compliance, attractive financial profile.
This acquisition is immediately accretive.
David Moradi: In terms of top line, ADA site compliance generated around $2 million of revenue in 2023, with approximately 70% of its revenue being recurring.
David Moradi: We have already integrated their employees into our department and plan to move their customers onto our platform over the next few months.
David Moradi: By acquiring ADA Site Compliance, we gained a strong and knowledgeable team.
David Moradi: I want to extend a warm welcome to these new Audio Eye members.
David Moradi: One key reason ADA site compliance wanted to combine with us is our breadth and depth of product offering, which is the most comprehensive in the industry.
David Moradi: This innovation builds on our legacy as pioneers in digital accessibility.
David Moradi: The accessibility protection status gives customers a transparent picture of what we fix with automation and experts utilizing AI.
David Moradi: Customers will receive comprehensive risk assessments giving transparent reporting details of each customer's level of legal protection.
David Moradi: These features will help clients understand their risk profile. Most vendors in the industry use an accessibility score to give customers a level of risk, which creates a false sense of security.
David Moradi: And accessibility scores arbitrary and vary significantly from vendor to vendor.
David Moradi: Also, the accessibility score will only analyze what automation can detect and does not give you a full picture of your risk, as many high-risk issues can only be detected with experts.
Speaker Change: Customers who implement AudiWise platform and products gain up to 300% greater protection than with traditional accessibility consulting and 400% more than automation only competitors.
Speaker Change: In the third quarter, we announced the general availability of our accessibility testing software kit, or SDK.
Speaker Change: The FTK helps developers address accessibility issues early in the software development lifecycle.
Speaker Change: If developers have time and resources to fix accessibility issues at the source, the SDK provides a flexible way to support different types of testing in pre-production environments.
Speaker Change: This offers yet another option to meet customers wherever they are to solve digital accessibility issues.
Speaker Change: During the quarter, we also announced that we have achieved HIPAA-compliant and SOC 2 Type 2 certification.
These milestones reaffirm AudioEye's ongoing dedication to strengthening data protection
Speaker Change: security measures, and confidentiality for its customers, particularly those in the healthcare sector, which will be impacted by regulations under HHS and other industries with stringent data protection requirements.
Moving on to guidance.
Speaker Change: We expect revenue for the fourth quarter to increase without significant additional expense.
Speaker Change: For the fourth quarter, we are guiding revenues between $9.7 million and $9.8 million.
representing 24% year-over-year growth.
Speaker Change: For the full year 2024, we expect revenues between $35.2 and $35.3 million.
Speaker Change: We are increasing our adjusted EBITDA guidance for the fourth quarter to between 2.2 and 2.3 million, representing a 23% margin.
Speaker Change: We are also increasing our full year 2024 adjusted EPS to $6.62 to $6.72 million with adjusted EPS between $0.54 to $0.55.
Speaker Change: The updated forecast for the fourth quarter implies rule of 47 at the midpoint.
Thank you, David.
Speaker Change: As David discussed, revenue again hit record levels with Q3 2024 revenue at $8.9 million.
Speaker Change: which translates to a 21% annualized growth rate and 14% growth rate over the comparable period of prior year.
marking our 35th quarter of record revenue.
Speaker Change: Annual recurring revenue, or ARR, at the end of the third quarter of 2024 was $36.2 million, a $2.9 million increase sequentially, which was driven by both a significant enterprise and reseller ARR increase and contributions from the acquisition of ADA site compliance.
Speaker Change: Our two revenue channels are continuing to generate strong results with high annualized sequential growth rates in both channels.
Speaker Change: The Partner Marketplace channel includes all revenue from our SMB-focused marketplace products and revenue from a variety of partners who deploy these same products for their SMB customers and had near record-setting ARR growth with approximately 1 million of sequential ARR increase in Q3.
Speaker Change: In the third quarter of 2024, this revenue channel grew 13% year-over-year and 5% sequentially or 21% annualized. This channel represents 59% of revenue and around 58% of ARR.
Speaker Change: Audiwise Enterprise Channel consists of our larger customers and organizations including those with non-platform websites who generally engage directly with Audiwise sales personnel for pricing and solutions.
Speaker Change: The enterprise channel grew organically around 14% year-over-year and 5% sequentially or 21% annualized.
Speaker Change: In the third quarter, the Enterprise Channel contributed 41% of revenue and around 42% of ARR.
Speaker Change: On September 30, 2024, our customer count was approximately 126,000, an 18% increase from 107,000 customers on September 30, 2023, and an increase of approximately 5,000 customers from June 30, 2024.
Speaker Change: The increase in customer count was driven by additions in both the partner and marketplace and enterprise channels.
Speaker Change: Gross margin picked up 1% sequentially and 3% year-over-year to 80% of revenue with gross profit at $7.1 million compared to $6.1 million in Q3 of last year.
Speaker Change: The increase in gross margin was a result of approximately 1.1 million of revenue growth year over year and only marginal increases to cost of goods sold over the same period.
Speaker Change: On a gap basis, operating expenses increased approximately 9% to $8.1 million, driven by higher non-reoccurring and business combination expenses.
Speaker Change: Outside of these items, we saw decreases in expenses of approximately $500,000 year over year.
Speaker Change: Our total R&D spend in Q3 2024 was approximately $1.6 million with approximately $450,000 reflected the software development costs in the investing section of the cash flow statement.
This was down from 2.4 million in Q3 2023.
Speaker Change: The total R&D spend is about 18% of our revenue this quarter versus 31% in the comparable period of prior year and 20% in the second quarter of 2024.
Speaker Change: We continue to believe that current investment in R&D is appropriate.
Speaker Change: Net loss in the third quarter of 2024 was $1.2 million, or $0.10 per share, compared to a net loss of $1.4 million, or $0.11 per share, in the same year-ago period.
Speaker Change: Our Q3 adjusted EBITDA was a record $2 million, or $0.16 per share, a $1.7 million improvement year over year.
Speaker Change: The primary adjustments to GAAP earnings at EPS for Q3 2024 were non-cash share-based compensation, business combination costs associated with the acquisition of ADA site compliance, depreciation, amortization, interest expense, and litigation expense.
Speaker Change: Our balance sheet continues to be well-capitalized with $5.5 million of cash as of September 30, 2024.
Speaker Change: Cash increased approximately $400,000 in the quarter, driven by net cash provided by operating activities and proceeds from our at-the-market offering of around $2.9 million, offset by $3.1 million payment for the acquisition of ADA Site Compliance.
Speaker Change: Free cash flow calculated as $2 million of adjusted EBITDA, that's $450,000 of software development costs, was $1.6 million in the third quarter. We expect to see this continue to increase in the fourth quarter.
Speaker Change: On November 1st, we completed the at-the-market offering for using $7 million in cash at an average share price of $24.65.
Speaker Change: With that, we open up the call for questions. Operator, please give instructions.
Speaker Change: Thank you. We will now take questions from the company's publishing analysts.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions.
And our first question comes from George Sutton, Craig Hullam.
Speaker Change: Thank you. Nice results, guys. So David, I'm curious when you talk about Final Sight and Civics Plus both being
Speaker Change: Resellers, you can fully penetrate over a three-year period. I just want to make sure I'm hearing that correctly. Is that a practical assumption or is that just simply touching their customers and then giving them the ability to buy? I just want to see how significant we're talking.
David Moradi: We think it's very significant. Full penetration would be all of their customers buying the product. So it would change the face of the company. I mean it'd be tens of millions of dollars additional.
Thank you.
Speaker Change: Okay, we are 36 hours past finding out we're going to have a new administration coming in next year and I'm just curious given what I would expect to be a less
Pressure Regulatory Environment
Speaker Change: The things that are driving our regulatory changes, can you talk about if there is any change to those? I believe they're in the register, so I don't think so, but I just wanted to confirm that.
Speaker Change: I don't think so. We've analyzed it. I don't think the rule for Title II or HHS can be rolled back, so not concerned with that.
Okay.
Speaker Change: Last question is a go-to-market question. When I think of ADA being an audit business, you being a software business, those have historically been 2 somewhat separate offerings. Can you just explain to us how you are going to market with the combination? Are you still going separately and then finding cross-sell opportunities? Just curious how that's working.
Speaker Change: Yeah, I think it's a good match with our customer base. We've seen an opportunity to migrate and upsell their customers to IDY products and services.
Speaker Change: We are going pretty quickly with this integration. We've moved the employees over to our departments and expect to move their customers over over the next few months.
Gotcha. Okay. All right. I appreciate the time. Thanks, guys.
Thank you.
Speaker Change: Thank you. Our next question comes from Richard Baldry, Roth Capital Partners.
Richard Baldry: Thanks. When we look at the acquisitions first, do you think you view the synergies you can get out of that more from sort of overlapping in OPEX or do we view it as more
Speaker Change: You keep people because they've got some domain expertise and you can slow your own internal hiring ahead. How do we think about when those two are integrated and how they work?
Speaker Change: Yeah, we think we're going to grow the revenue base like we did with the Bureau back in 2022. We grew that by about 50% from where we bought it. So we think there's a similar opportunity there over the next two, three years. And it's accretive from day one and will continue to be accretive.
Speaker Change: Right. Then, you know, when you think of some of these partnerships, if they were to gain meaningful traction on sort of a near-term basis,
Speaker Change: On the implementation side, sort of adding heads to do that. Is it on the challenges of integration more determined by each customer's ability to sort of work with your teams? What would, you know, how do you view your ability to respond if sort of that customer adoption was to take off? Thanks.
Speaker Change: I think it's highly scalable. I don't foresee any problems on implementation the way we do things with AI and automation, so I don't see that. We can handle it. They're doing the selling and account management, so we can handle the implementation side.
Speaker Change: Last for me, you know you're exceeding sort of rule of 40 now. Do you think, you know, is it the right time to continue to try to scale the EBITDA line or do you think it's more important to take any upside you have now and sort of push it back into the go-to-market part of the business?
Speaker Change: Or do you think you still have an ability to sort of balance the two and sort of grow that number over time? Thanks.
Speaker Change: I think we can grow them both in the future. So there's more scale on EBITDA margin. I think it can push up over time and you could generate in the 20s or 30s potentially on the revenue side.
Thanks, congrats on a great quarter.
Thank you.
Speaker Change: Thank you. Once again, if you would like to ask a question, press star 1 on your telephone keypad. That's star 1.
Our next question comes from Zach Cummins, B Raleigh Securities.
Zach Cummins: Hi, good afternoon. Thanks for taking my questions. David, I was curious if you've started getting any sort of inbound demand with the upcoming mandates for accessibility in Europe in June of 2025.
David Moradi: We're seeing quite a few leads come in. They're not converting to deals yet, but people are more and more aware of it as the months go on. I'm seeing more and more in the calls that I'm monitoring.
David Moradi: Understood. And my one follow-up is really on the gross margin side of it, nice to see it hitting the 80% mark this quarter. Just curious how we should think about the progression of that moving forward. Is there still room for expansion as we go forward on that side?
Speaker Change: Yeah, I think, you know, we're pleased to see it take off both year-over-year and sequentially. We feel good about the 80% going forward. It's all about product mix and efficiencies, but we have been able to scale that revenue and be efficient in cost of revenue. We see that going forward as well.
Speaker Change: Got it. Well, thanks for taking my questions and best of luck with the rest of the quarter.
Thank you.
Speaker Change: Thank you. At this time, this concludes our question and answer session. I'd now like to turn the call back to Mr. Moradi for his closing remarks.
Speaker Change: 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 website. Thank you for joining us for today for Audio Eye's third quarter 2024 earnings conference call. You may now disconnect.