Q1 2024 AudioEye Inc Earnings Call

Participants

David Moradi; Chief Executive Officer, Director; AudioEye Inc

Kelly Georgevich; Chief Financial Officer; AudioEye Inc

George Sutton; Analyst; Craig-Hallum Capital Group LLC

Zach Cummins; Analyst; B. Riley Securities, Inc.

Scott Buck; Analyst; H.C. Wainwright & Co., LLC

Presentation

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 at 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. Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements.
Words believes, expect, anticipate, estimate, confident, we'll 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 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 directly 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 conference call over to AudioEye's chiefs, Executive Officer, Mr. David Moradi. Sir, please proceed.

David Moradi

Thank you, operator, but then 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 and 2025 and beyond.
On April eig8hth, the Department of Justice signed a final rule under Title two of the Americans with Disabilities Act. These regulation mandates 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 double-A 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, court election offices and state and local government offices that provide benefits or social services like food assistance, health insurance and Plant Services libraries, transit agencies and a range of other government related entities.
The new market opportunity under Title two is significant with most public sites not being accessible today. We are uniquely positioned to meet the demand if rates 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 through 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 digits today. And these resellers scalable approach life art is required to meet the 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 users 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 required digital accessibility for websites and mobile apps. By that date, we are also seeing regulatory developments in additional jurisdictions, including California 8B 1757 proposal is passed in its current form. It would expand and solidify the requirement that businesses operate in. California must have accessible website 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 of more than tripled we are prepared to support the 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 are thought to type one compliance. This important milestone underscores our commitment to upholding the highest security and data privacy standards. Achieving stock to type one compliant was a priority for us as we continue to expand our enterprise channel and service. Large enterprise organizations saw two Type one attainment and products rolled out this past year.
We'll further support the enterprise channels growth initiatives. The Board and management remain highly aligned with shareholders over the last 2.5 years, the number of shares outstanding has remained at similar levels while we are continuing to invest in growth. 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. Combined 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 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 10s. 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 a 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 June revenue channel by continuing to deliver strong results. 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. 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 annualized, which continues to drive growth by the wide enterprise channel consists of our larger customers and organizations, including those with non-platform websites, we generally engage directly with our direct sales personnel for pricing and solution. 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. At 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 marketplace channels.
Gross profit for the first quarter was $6.3 million or 78% of revenue compared to $6.1 million or 78% of revenue in Q1 of last year. We believe that gross 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 was primarily due to increased efficiencies in sales and marketing, the completion of significant initiatives in R&T 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 investments. 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 from the prior year's comparable period, driven by an increase in revenue, strategic and efficient spending in all departments and technological investments. 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 for non-cash share-based compensation, depreciation, amortization, interest expense, and other non-reoccurring 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 repurchase. The remaining decrease was primarily due to the timing of customer payments. Free cash flow calculated as $920,000 of adjusted EBITDA was $490,000. In software development costs was $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

(Operator Instructions) George Sutton, Craig-Hallum.

George Sutton

Thank you. Our 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 and in spite of the fact we would expect you might invest a little bit more aggressively into that. So any thoughts?

David Moradi

Yeah, we're just clicking on all cylinders here with the enterprise and the reseller channel business, as is, I think R&D investment's 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. And so yes, 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 into 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 US 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 is great data.

David Moradi

Those are exclusive relationships. So I mentioned our current partners on the government side serve around 80,000 web site and our penetration rate is in only the single digits, but 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 the full penetration with our current reseller partners on the government side, that's going to dramatically change the current business.

George Sutton

And lastly for 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 think we're seeing growth in both and expansion of existing resellers, which we continue to see every quarter emerge. 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.

Operator

Zach Cummins, B. Riley Securities.

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 the of the 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

Yeah, we've been able to prove we can be efficient with capital and scale revenue without increasing expenses, essentially decreasing expenses. And as David mentioned, we expect Q2 to have adjusted EBITDA margins of the high 10s. 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 them 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 plan. So we think we're pretty well balanced between growth and profitability. And it's been a tremendous effort to get to this point. It's a high 10s EBITDA margin. So we're happy with that.

Zach Cummins

Understood. And final question for 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 user way was that eight times ARR, we're going to look at LTV to cap and an increase of potentially more on sales and marketing and R&D we see that go favorably, but we think these operating margins are sustainable going forward and we like them.

Operator

Scott Buck, H.C. Wainwright.

Scott Buck

Hey, good afternoon, guys. Thanks for taking my questions. As 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 and given the move in shares versus the opportunity you see here over the next it 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, no, makes sense. And then second one for me, and it sounds like from the commentary that definitely we're looking at accelerating revenue and '24 and likely '25, it looks like you actually set up pretty well already for '26 or so. This momentum has legs, right?

David Moradi

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

Operator

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.

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 our current 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.