AudioEye, Inc. (NASDAQ:AEYE) Q2 2023 Earnings Call Transcript August 10, 2023
AudioEye, Inc. reports earnings inline with expectations. Reported EPS is $-0.02 EPS, expectations were $-0.02.
Operator: Good afternoon, and welcome to AudioEye's Second Quarter 2023 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. 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 such 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 the safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, confidence, 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 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.
Participants on this call are cautioned not to place under lieu reliance on these forward-looking statements, which reflect management's belief 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 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.audioeye.com. Now, I'd like to turn the call over to AudioEye's Cheif Executive Officer. Mr. David Moradi. Sir, please proceed.
David Moradi: Thank you, operator. Welcome, everyone, and thank you for joining us. There have 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 of $7.84 million in the second quarter. At the end of the second quarter, annual recurring revenue, or ARR, 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 ARR growth and are excited about expected ARR 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 the financial performance in more detail shortly. As we have said, we believe we are in the early innings of digital accessibility. 97% of websites today remain inaccessible to people at disabilities despite increased litigation under the Americans with Disabilities Act. Last week, the Department of Justice issued a proposed role on website accessibility under Title II of the ADA.
The rule would help ensure people with disabilities to have 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 organizations and school districts. As a reminder, the European Accessibility Act previously required all EU member states to adopt logs for companies offering many types of products and services, including websites and e-commerce services to ensure accessibility. In the EU, companies must provide accessible websites by June of 2025, and the act requires member states to enforce the accessibility requirements. In June, AudioEye shared filings from a collaborative initiative with accessibility experts from the disability community on the effectiveness and impact of generative AI on identifying, fixing and communicating accessibility issues that typically require expert review.
AudioEye's accessibility experts, including those who rely on assisted technology found AI could reduce the time needed to assess and correct the complex accessibility issue such as determining whether a link is clear and accurate by up to 10x. 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 experience and crafted by an accessibility expert or created by an expert trimming AI. That's the only bar that will let anyone claim they solve digital accessibility at scale with AI. And make no mistake, it's a very high bar. While only need it by involving the disability community from day one, getting continuous feedback and actively investing in improving our capabilities over time.
In addition to our findings and initiatives on AI, we recently announced the development and expansion of AudioEye's digital accessibility platform with new enterprise-grade accessibility offerings. The expansion of our product solution includes AudioEye's new accessibility maturity management program and the accessibility health advisers. These program controls use our team of certified experts to assess the Company's current level of accessibility and help define the investments required to make measurable, sustainable progress and accessibility. Our accessibility maturity management program identifies the people, culture, process and system changes, an organization needs to perform to make accessibility of first-class concern and track progress towards these goals.
When new regulations change accessibility guidelines, the health adviser notifies the Company's any changes required to comply. This first-of-its-kind program corresponding tools with the further development of AI automation will be powerful drivers in 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 '22. We are delighted to have fully integrated BoIA, which will help enable retention and upsells and result in cost savings in the near term. Going forward, we expect the product offering to primarily generate ARR under our subscription model instead of nonrecurring audit revenue.
The impact of the integration of BoIA will reduce third quarter revenue by approximately $200,000 as we transition one-time audit into recurring revenue. Each quarter, we continue to bring on talent and advocates that contribute to AudioEye's success in the future. In July, we were thrilled to announce the addition of forming United States congressman for Arizona's 8 Congressional District Gabby Giffords to our advisory board. Gabby Giffords is retired United States politician who resigned from Congress in 2012 after sustaining a severe brain injury during annassasination attempt. Today, she helps raise awareness about the facilities. Gabby's influence in the disability community and her passion for change will help AudioEye continue to make great strides in building solutions that close the digital accessibility gap.
Moving on to guidance. We are guiding revenue of between $7.8 million and $7.9 million for the third quarter of 2023, which is flat sequentially. As mentioned, the impact of the integration of BoIA will reduce third quarter revenue by approximately $200,000 as we transition one-time audits into recurring revenue. Business momentum is strengthening, and we anticipate that ARR will increase by approximately $1 million sequentially, representing the fastest growth rate in several quarters. We expect ARR 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 a low single-digit growth rate in ARR as we renegotiate specific contracts, we are pleased 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.
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We expect to generate a non-GAAP profit of approximately $100,000 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 flows 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 AudioEye's CFO. Kelly.
Kelly Georgevich: Thank you, David. Q2 2023 marks the 30th straight quarter of record revenue, ending Q2 at $7.84 million, which was 4% growth year-over-year. Annual recurring revenue or ARR at the end of the second quarter of 2023 was $29.7 million, a $1 million increase from ARR at the end of the second quarter of 2022. As David mentioned, we expect ARR growth to accelerate in the second half of 2023, and we anticipate that ARR will increase by approximately $1 million sequentially. Overall, we are pleased with our financial results for Q2 2023, which came within revenue and net loss expectations. Our two revenue channels are continuing to perform well in a more cost-conscious environment. 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 second quarter of 2023, this revenue channel grew 13% year-over-year and represented approximately 56% of revenue and 60% of ARR. We continue to recognize opportunities for expansion in our existing partners. Overall, we expect to continue to be in this channel contribute significantly to our growth in revenue as we build further traction and expand with larger partners. Our Enterprise revenue channel, which typically consists of our larger customers and organizations made up 44% of revenue and 40% of ARR in the second quarter of 2023. As mentioned previously, this channel faced additional headwinds in the first half of 2023 with one larger customer contract renegotiations, having an impact on total enterprise revenue in the quarter.
Excluding this renegotiation, we continue to grow enterprise ARR 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 rates to-date. The total customer count increased notably in Q2 2023 to approximately 104,000 customers from approximately 76,000 customers on June 30, 2022, and 95,000 customers on March 31, 2023. The expansion of platforms was 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 products and customer success.
While revenues increased 4% over the comparable period of prior year, operating expenses decreased approximately 3% or $300,000 to $8.1 million. The 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 was approximately $2.6 million with approximately $526,000 reflected a software development cost in the investing section of the cash flow statement. This total R&D spend is up 33% of our revenue this quarter versus 23% last year. As David mentioned, the investment in our R&D has allowed us to develop new enterprise-grade technology and programs like our Accessibility Maturity Management Program, Accessibility Health Advisers and new AI driven automation and expert audit.
Net loss in the second quarter of 2023 was $2 million or $0.17 per share compared to $2.6 million or $0.23 per share in the same year ago period. Total net loss decreased 24% or $600,000 in 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 was $220,000 or $0.02 per share compared to a net loss of $240,000 or $0.02 per share in the same year ago period. The primary adjustment to GAAP earnings and EPS for Q2 2023 were noncash share-based compensation, depreciation and amortization and nonrecurring items. We are pleased to see 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 of approximately $200,000, non-GAAP litigation expenses of approximately $200,000, software capitalization costs of $500,000 and $300,000 of net cash used from other operating activities. With that, we open up the call for questions. Operator, please give instructions.
