AudioEye, Inc. (NASDAQ:AEYE) Q1 2024 Earnings Conference Call April 23, 2024 4:30 PM ET

Company Participants

David Moradi - CEO
Kelly Georgevich - CFO

Conference Call Participants

George Sutton - Craig-Hallum
Zach Cummins - B. Riley Securities
Scott Buck - H.C. Wainwright

Operator

Good afternoon and welcome to AudioEye's First Quarter 2024 Earnings Conference Call. Joining us today 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. 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.audioeye.com.

Before I turn the call over to AudioEye's Chief Executive Officer, the company would like to remind all participants that statements made by AudioEye 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 is subject to risks and uncertainties. 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 10-K, its quarterly reports on Form 10-Q, and in its other reportings 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. AudioEye 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 direct comparable GAAP financial measures, to use these non-GAAP financial measures is available in the company's earnings release, or otherwise posted in the Investor Relations section of its website at www.audioeye.com.

Now, I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Moradi. Sir, please proceed.

David Moradi

Thank you, operator.

Well, it's been approximately six weeks since our last earnings call. Several developments have occurred that we are excited to discuss today. As our last earnings call mentioned, the fourth quarter was a significant inflection point. We generated record adjusted EBITDA, and positive free cash flow while generating solid ARR growth. We are pleased to report that this momentum, is continuing and driving the increase in our full year guidance, which I will cover later in the call.

But first, I'll discuss the changing regulatory landscape, which we expect to impact the business significantly in 2025, and beyond. On April 8, the Department of Justice signed a final rule under Title II of the Americans with Disabilities Act. These regulations mandate that state and local government entities, ensure their websites and mobile applications are accessible, to people with disabilities following the Web Content Accessibility Guidelines 2.1 AA.

The documents published by the Justice Department estimate $17 billion in implementation costs, over the first three years and $2 billion annually, after the initial phase. The regulation applies to public schools, community colleges, universities, public hospitals and clinics, state and local police departments, courts, election offices, and state and local government offices that provide benefits, or social services like food assistance, health insurance, employment services, libraries, transit agencies, and a range of other government-related entities.

The new market opportunity under Title II is significant, with most public sites not being accessible today. We are uniquely positioned to meet the demand increase, with our direct sales team and our reseller channel. On the reseller side, we are already partnered with the leading SaaS platforms that serve cities, municipalities, and K-12 education websites.

We estimate that these partners serve over 80,000 websites, which must all become compliant over the next two to three years. We are currently penetrated only in the single-digit today in these resellers. A scalable approach like ours, is required to meet this significant demand increase. AudioEye continues to improve its best-in-class technology platform, including investments in the latest artificial intelligence and scaled infrastructure, to serve billions of end-user sessions, and millions of potential customers.

In addition to the Justice Department, we are excited about the opportunity in Europe. As discussed last quarter, the European Accessibility Act takes effect in June 2025, and requires digital accessibility for websites and mobile apps by that date. We are also seeing regulatory developments in additional jurisdictions, including California's AB 1757 proposal.

If passed in its current form, it would expand and solidify the requirement that businesses operating in California, must have accessible websites and mobile devices. As noted, we are not including any benefit from these upcoming requirements in our guidance for this year, but we expect meaningful demand increases in 2025, and beyond.

Since joining the company in 2019, the customer count has increased from 3,500 to 112,000, and revenues have more than tripled. We are prepared to support this significant demand increase from the public sector. With the final rule just announced two weeks ago, we are still early in the planning phase, and we will share more about our outlook beyond 2024, as the year progresses.

In the first quarter, we achieved system and organizational controls, or SOC 2 Type 1 compliance. This important milestone underscores our commitment, to upholding the highest security and data privacy standards. Achieving SOC 2 Type 1 compliance was a priority for us, as we continue to expand our enterprise channel, and service large enterprise organizations.

SOC 2 Type 1 attainment and products rolled out this past year, will further support the Enterprise channel's growth initiatives. The board and management remain highly aligned with shareholders. Over the last two and a half years, the number of shares outstanding has remained at similar levels while we have continued to invest and grow.

In the current stock buyback, as of April 23, we have repurchased 548,000 shares at an average price of $5.73. In addition, under our previous buyback announced in June 2022, we bought 139,000 shares at an average of $5.44. Combining both programs, we have purchased approximately 6% of common shares outstanding, over the last two years at a valuation of around two times revenue, for the benefit of long-term shareholders.

Moving on to guidance, we expect quarterly revenues to accelerate, throughout the year without significant additional expense, resulting in increased operating leverage and free cash flow generation. For the second quarter, we are guiding revenue between $8.4 million and $8.5 million, representing an annualized growth rate of high teens. We also expect to generate adjusted EBITDA, between $1.4 million and $1.5 million and adjusted EPS, between $0.12 and $0.13.

We are increasing 2024, revenue guidance to between $34.3 million and $34.7 million. We are also increasing our adjusted EBITDA guidance, by approximately $1 million to between $4.5 million and $5.5 million. With adjusted EPS, between $0.38 and $0.46 per share.

I'll now turn the call over to AudioEye's CFO, Kelly.

Kelly Georgevich

Thank you, David.

As David discussed, revenue again hit record levels with Q1, 2024 revenue at $8.1 million, marking our 33rd quarter of record revenue. Annual recurring revenue, or ARR, at the end of the first quarter of 2024, was $32 million, an $800,000 increase from the end of the fourth quarter of 2023, and representing an ARR annualized growth rate of 10%.

We expect this growth to accelerate notably as 2024 progresses. Our two revenue channels, are continuing to deliver strong results. The Partner and 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.

In the first quarter of 2024, this revenue channel grew 9% year-over-year, representing 59% of revenue and around 60% of ARR. We continue to see expansion of existing partners, and new partners contracting with AudioEye, which continues to drive growth. AudioEye's Enterprise channel consists of our larger customers and organizations, including those with non-platform websites, who generally engage directly with AudioEye's sales personnel for pricing and solutions.

The Enterprise Channel grew 4% sequentially, and we expect to resume year-over-year growth in Q2, 2024. In the first quarter, the Enterprise channel contributed 41% of revenue and around 40% of ARR. On March 31, 2024, our customer count was approximately 112,000, an increase from 95,000 customers on March 31, 2023, and an increase of approximately 2,000 customers from December 31, 2023.

The increase in customer count, is driven by additions in the Partner and Marketplace channels. Growth profit for the first quarter was $6.3 million, or 78% of revenue, compared to $6.1 million and 78% of revenue in Q1, of last year. We believe the growth margin has room to expand in future quarters.

While revenues increased approximately $300,000 from the first quarter of 2023, operating expenses decreased approximately 14%, or $1.2 million to $7 million. The decrease is primarily due to increased efficiencies in sales and marketing, the completion of significant initiatives in R&D, and lower G&A expenses.

Our total R&D spend in Q1, 2024, was approximately $1.8 million, with approximately $490,000 reflected as software development costs, in the investing section of the cash flow statement. This was down from approximately $2.2 million in Q1, 2023. The total R&D spend is about 22% of our revenue this quarter, versus 29% in the comparable period of prior year, and consistent with Q4, 2023 investment. We continue to believe the current investment in R&D, is appropriate for 2024.

Net loss in the first quarter of 2024 was $800,000, or $0.07 per share, compared to $2 million and $0.17 per share in the same year-ago period. Total net loss decreased by 59%, or $1.2 million, in the prior year's comparable period, driven by an increase in revenue, strategic and efficient spending in all departments, and technological investment.

Our Q1 adjusted EBITDA was $920,000, or $0.08 per share, a $1 million improvement year-over-year. The primary adjustments to GAAP earnings and EPS for Q1, 2024 were non-cash share-based compensation, depreciation, amortization, interest expense, and other non-recurring items.

Our balance sheet is well-capitalized with $7 million of cash as of March 31, 2024. Cash decreased by approximately $2.2 million in the quarter, primarily due to $1.7 million share repurchased. The remaining decrease was primarily due to the timing of customer payments.

Free cash flow, calculated as $920,000 of adjusted EBITDA, plus $490,000 of software development costs, plus $430,000 in the first quarter. We expect to generate positive free cash flow throughout 2024, with improvements as the year progresses.

With that, we open up the call for questions. Operator, please give instructions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from George Sutton with Craig-Hallum. Please go ahead.

George Sutton

Thank you. Very nice results. Congratulations. So, we're obviously early relative to both the European and the ultimate DOJ opportunities in terms of those going into play. Can you talk about what sorts of things you're doing to prep for that? You mentioned resellers specifically, but it's interesting. You're increasing your EBITDA guidance in spite of the fact we would expect you might invest a little bit more aggressively into that. So, any thoughts?

David Moradi

Yes. We're just clicking on all cylinders here, with the enterprise and the reseller channel. So, business as is. I think R&D investment has been a major factor. We have a full product suite to meet the customer wherever they are, a small business or a large enterprise. So, the breadth of offering is a major competitive advantage. We're outgrowing the market, I think.

So, yes, we're just - we're clicking along here on business as usual, and I think you're going to see a significant uptick in demand, as you go on to 2025, with the multitude of regulations coming.

George Sutton

You mentioned being positioned, with some of the key resellers that will ultimately be taking you to market, particularly I think, in the U.S. with the DOJ impact. Can you walk through some of the reseller relationships that are key, and how are those typically structured? Are you, in many cases, the key player they are going to market with, or are they going with multiple partners? Just any help there would be great?

David Moradi

Yes, those are exclusive relationships. So, I mentioned our current partners on the government side serve around 80,000 websites, and our penetration rate is in only the single-digit. So, we think there's a massive opportunity to grow here. We don't see any reason why this is not going to be close to full penetration, over the next two to three years. And you can get to full penetration, with our current reseller partners on the government side. That's going to dramatically change the current business.

George Sutton

Lastly from me, Kelly mentioned additions in the Partner and Marketplace channel being behind the strength you saw this quarter. Can you just give any specificity as to specific partners that drove that, new partners, or new relationships with those partners?

Kelly Georgevich

I can't get a lot of…

David Moradi

Go ahead, Kelly.

Kelly Georgevich

I was going to say, we're seeing growth in both expansion of existing resellers, which we continue to see every quarter, and we think there's additional opportunity there, as David mentioned. But we also are contracting with new resellers, so that growth is coming from both of those buckets, which we're happy to see.

George Sutton

Beautiful. Okay, thanks, guys.

David Moradi

Thank you.

Operator

[Operator Instructions] Our next question comes from Zach Cummins with B. Riley Securities. Please go ahead.

David Moradi

Hi, David.

Zach Cummins

Hi, good afternoon, David and Kelly. Thanks for taking my questions, and congrats on the solid results. I really just wanted to hone in on the margin leverage that, you're seeing in the model here. I mean, can you just talk about maybe - what's really the key underlying factor that's, driving kind of the upside in terms of the adjusted EBITDA margin that we have, especially exiting this year?

Kelly Georgevich

Yes, we've been able to prove we can be efficient, with capital and scale revenue without increasing expenses, essentially decreasing expenses. As David mentioned, we expect Q2 to have adjusted EBITDA margins of the high teens, and if you look at guidance, we expect that to continue in Q3 and Q4. It's really, we've been able to figure out the formula, and generate that extra revenue without needing those additional expenses.

Zach Cummins

Understood. And David, in terms of incremental investments into the direct channel, I know you have relationships in place with major partners, especially on the public sector side, but any additional investments that you need to make with your direct channel, to really take full advantage of the growing demand opportunity?

David Moradi

Not right now. We're still formulating the plans. We think we're pretty well balanced between growth and profitability, and it's been a tremendous effort to get to this point, to get to the high teens EBITDA margins, so we're happy with that.

Zach Cummins

Understood. And final question from me, is just around capital allocation. I mean, with the business continuing to generate positive free cash flow, how are you thinking about just investments in the organic business versus maybe even potentially looking at incremental M&A?

David Moradi

Yes, we don't really comment on incremental M&A. I'm sure you can understand that. There have been a number of financings and M&A in the space. The latest acquisition of UserWay was at eight times ARR. We're going to look at LTV to CAC and increase that potentially, more on sales and marketing and R&D if we see that grow favorably, but we think these operating margins are sustainable going forward and we like them.

Zach Cummins

Understood. Well, thanks for taking my questions and best of luck in the coming quarter.

David Moradi

Thank you.

Operator

Our next question comes from Scott Buck with H.C. Wainwright. Please go ahead.

Scott Buck

Hi, good afternoon, guys. Thanks for taking my questions. David, you guys have obviously been fairly aggressive in repurchasing shares here so far this year. Curious what your thoughts are on the stock today, given the move in shares, versus the opportunity you see here over the next 12 to 24 months?

David Moradi

Yes, it still seems pretty cheap to me. I think last I checked, it was around four times revenue and we're approaching Rule of 40 now. I think we can exceed Rule of 40 as we go into next year. So, those companies tend to trade over 10 times revenue.

Scott Buck

Yes, that makes sense. And then second one from me, no it sounds like from the commentary that not only, are we looking at accelerating revenue in '24, and likely 25, it looks like you're actually set up pretty well already for '26. So, this momentum has legs, right?

David Moradi

I think this is going to go on for a few years, with high growth rates and high EBITDA margins.

Scott Buck

All right, perfect. That's good to hear. I appreciate it, guys. That's it from me.

David Moradi

Thank you.

Operator

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

David Moradi

Yes. 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.

Operator

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 AudioEye's first quarter 2024 earnings conference call. You may now disconnect.