AudioEye, Inc.

Good afternoon and welcome to AudioEye's first quarter 2020 earnings conference call. Joining us today for today's call are AudioEye's executive chairman, Dr. Carl Bettis, CEO, Mr. Heath Thompson, and CFO, Mr. Sachs Burrow. Following their remarks, we will open up 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 executive chairman, 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, 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 risk 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 report on Form 10-Q and our reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place under 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. Now, I would like to turn the call over to AudioEye's Executive Chairman, Dr. Carl Bettis. Sir, please proceed.

Thank you, Operator. Welcome, everyone. Thank you for joining us today. After the market closed, we issued a press release announcing our results for the first quarter ended March 31st, 2020. A copy of the press release is available in the investor section of our website at audioeye.com. Before we begin the call, I'd like to just take a minute to express our sincere condolences as well as send our support to all of those who have been directly or indirectly impacted by the ongoing global pandemic. It's fair to say that nearly everyone has been affected in some way by the current environment. We are thankful for the frontline workers and essential service providers who are continuing to help us during this challenging time. At AudioEye, like many other businesses, we've been working remotely for some time. As a technology company with an already distributed workforce, we've been able to make this transition with little disruption. We are working hard and operating efficiently. I'm sure I share the same sentiment we all do when I say we're looking forward to getting back to normal as soon as possible. In the meantime, we have a great team and infrastructure in place to support our growing business. I began our last call with an introduction and formal welcome to our new CEO, Heath Thompson, on what was then his first day. Heath has now been with us for over a month, and we could not be happier with the work he's done so far and the direction we are headed. It has truly been an excellent transition and a smooth handoff to Heath. Heath is focused on executing our business plan, and I really do mean focused. Heath has approached the job with enormous energy. which, coupled with his leadership skills, his experience, and technical background, have him off to a really great start at AudioEye. It's a true pleasure to have him on board with us. Before turning the call over to Heath, I wanted to highlight a couple of key results from our first quarter. Heath will then give you his view on the business, provide more detail about metrics from the first quarter, and discuss the current state of our operations. We're obviously pleased with the execution in the first quarter. To be sure, Q1 was a great start to the year. We had our 17th straight quarter of record revenue driven by consistent growth and adoption in our enterprise and vertical partner channels, respectively. Monthly recurring revenue, MRR, at the end of March grew 17% sequentially to $1.4 million, and contracts in excessive revenue and deferred revenue increased 88% year-over-year to $17.2 million. We are also pleased to report that April was a very strong month. At the end of the first quarter, We had over 11,000 customers across our various channels, and as of April 30th, we had over 16,000 customers. These new customer counts are orders of magnitude larger than just a few quarters ago. Further, MRR grew again to approximately 1.5 million from 1.4 million at the end of the first quarter. Across the board, we've continued to optimize customer implementation and benefit from greater automation, and we increasingly benefit from economies of scales. This is reflected in our margins during the period, which expanded considerably to nearly 70%. Finally, as we discussed on the last call, we believe we are on track to being free cash flow positive in 2021, assuming normal economic conditions for our business. So with that already completed, it's truly a great pleasure to turn the call over to Heath Thompson, our CEO. Heath.

Car, thank you very much for that warm introduction. As Car mentioned earlier, I'm now in my second will be part of this team and the AudioEye mission to eradicate all barriers to digital accessibility. In my career, I've had the opportunity to be part of defining and shaping new markets, but there's perhaps no greater opportunity to do so than here at AudioEye with digital accessibility. The backdrop of the global COVID-19 pandemic has made this an unprecedented time for all businesses and individuals worldwide. but one clear consequence has been reinforcing the criticality of digital interfaces to businesses and organizations everywhere, which also means reinforcing the criticality of digital accessibility along with it. AudioEye has always been committed to not only meeting compliance with accessibility standards, but truly solving the problem and enabling a disabled user to have timely and usable access to digital content. I believe this is now more important than ever before. Meeting this challenge will require us to continue our investments in technology, integration, user experience, ecosystem partnerships, and engagement with the disabled community. Going forward, I'm excited about our mission and to execute on our strategy. As we do so, we'll help our customers make their businesses more resilient, more legal, lower legal and operating risks, and have greater access to potential market share. I'll now begin, as we always do, with an overview of our business. AudioEye is a leading provider of SaaS-based digital content accessibility solutions. Our mission, eradicate all barriers to digital accessibility. We pride ourselves in addressing the largest range of issues that impact many people around the globe. At AudioEye, we also do more than just identify accessibility issues. We strive to fix, maintain, and continuously monitor them. , and the latest web content accessibility guidelines for WCAG 2.1. Because many of the remediation capabilities we provide are automated, our customers more quickly gain compliance with accessibility standards, regulations, and laws. For our managed product, these automated processes are coupled with manual testing and remediation by subject matter experts. The result is that We keep their content more accessible through continuous monitoring and remediation, and we offer a trusted certification of conformity with standards. Furthermore, for our private sector clients, we also provide them with a product that gives them an opportunity to gain an ROI from their investment in and commitment to the enormous population of individuals with disabilities. With the overview of the business completed, I'd like to move to our business results. Kar has already mentioned We're now really starting to see the benefits of AudioEye's long-term growth strategy getting traction. Our vertical partner channel is a standout example of this uptake. Our focus on quality over quantity has been what's allowed us to achieve consistently strong results over the past year. We choose our partners as much as they choose us. When they work with AudioEye, they're signaling commitment to our program and to prioritizing digital accessibility for their collective thousands of customers. While AudioEye continues to operate generally according to plan, like any business, we're not immune to the global effects of a global pandemic or a related macroeconomic slowdown. The same goes for our customers, many of whom are small businesses that have been disproportionately impacted by the current economic environment. In response, we've been proactive in providing options to our customers on a temporary basis, including more flexible pricing and other concessions, from the Department of Health and Human Services. From a logo perspective, we've also seen a slight uptick in attrition that we hope is temporary. Despite this, we're able to still maintain enterprise retention near our historically attractive 90% rates. While no one knows how long the current business environment will persist, it's our expectation that some of the COVID-19 related programs will need to continue for some time. In that case, it would be reasonable to expect more meaningful Based on what we know right now, we do anticipate at least a near-term impact on our revenue and collections. To address the near-term operating risk, in April, we entered into a $1.3 million loan program through the Paycheck Protection Program under the SBA's CARES Act. As a small public company with limited access to capital in the current environment, we believe that this action was appropriate for our business. and many more. On a positive note, we do have some tailwinds working in our favor. First, the shelter-in-place and social distancing environment has further accentuated the need for digital accessibility. We're seeing a rapid shift in digital transformation strategies in companies of all sizes. Anecdotally, Microsoft CEO Satya Nadella remarked recently that they've seen over two years of digital transformation impact in just a few months. are all looking forward to leading that charge. Second, we continue to realize margin improvements through our automation efforts and process improvements. I'd like to now move into some quick updates with our respective channels. Beginning with our enterprise or our direct channel, we continue to bring on new customers at the same consistent level as we have for the past few quarters. In Q1, the makeup of these new customers comes from many of our including consumer goods, construction, major electronics, state government agencies, financial institutions, and the automotive space, among others. Our PDF remediation business was also tracking well in Q1, both on the booking side as well as revenue. While less predictable in some of our other segments due to the nature of the work and the contracts, we expect to generate significant ROI on an annualized basis. Moving to our vertical partner, our indirect channel. From a customer growth standpoint, this channel is really starting to take off, and we feel the opportunity for expansion within our current partner base remains substantial. During the quarter, our active vertical partner count remained at 20. We're focused on increasing penetration with our current partner's customer base, and we're continuing to evaluate new opportunities and expect to widen this channel only when we Thank you, Heath. Let me jump right into our Q1 results, starting with bookings.