This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good afternoon and welcome to AudioEye's first quarter 2022 earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Murady, and CFO, Ms. Kelly Drudgevich. Following their remarks, we will open the call for questions from the company's publishing analyst. 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 a forward-looking statement. 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. In the comments made during this conference call and in the risk factor section of the company's annual report on Form 10-K, quarterly reports on Form 10Q and in its 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, 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 our website at www.audioeye.com. Now I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Mirati. Sir, please proceed.
David Murady
Thank you, Operator. Welcome, everyone, and thank you for joining us. After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2022. A copy of the press release is also available in our website's investor relations section at www.audioy.com. To begin, we'd like to highlight our strong financial performance. We are pleased to announce we exceeded revenue guidance with $6.9 million in the first quarter. This continues our accelerated revenue trend with 19% year-over-year growth in the first quarter. We also ended the first quarter with accelerated growth in annual recurring revenue, or ARR, which was $28.1 million, up 22% in the comparable period. Our revenue and ARR increases resulted from continued organic growth across our enterprise, partnership, and marketplace channels and our acquisition of the Bureau of Internet Accessibility, or BOIA, on March 9, 2022. As discussed on the previous earnings call, the acquisition of BOIA adds a key dimension to our product suite for those customers who prefer to fix accessibility issues at the source. giving us an end-to-end solution for all customers in their accessibility journey. In terms of our large strategic partnerships initiative, we are now moving forward with two new significant partners and are already seeing them contribute to revenue. While these partnerships will take time to develop and meet their full potential, this is an exciting step in achieving one of AudioEye's goals of expanding partners who can offer AudioEye to their vast customer base. While building out new partner relationships, we are also reviewing and revisiting existing partnerships, including our lower-tier offering and pricing. As you recall, our partner strategy for increasing ARR included a land and expand approach. While this has worked very well with some partners, others continue to have untapped potential. We're working closely with these partners to update economics that work better for our business while also providing them a higher level of service. As a result of a specific renegotiation underway, our customer count decreased in the first quarter from the fourth quarter. All other revenue channels continue to see customer count increase in the quarter. During the first quarter of 2022, AudioEye published an industry-first white paper titled, Building for Digital Accessibility at Scale. One of the paradoxes in web accessibility today is that while the general awareness is growing, fueled by the increase in lawsuits, DEI initiatives, and recent DOJ statements, there's still a tremendous lack of practical information and transparency on how to implement accessibility best practices. This has created a vacuum, leading to misguided assumptions and poor decision making. We published this white paper to clarify the problems and the role of technology in solving digital accessibility. We invite you to go to our website and download the full white paper to learn more, but I'll give a few key takeaways. Digital accessibility is still in its early innings and remains a largely unsolved problem. Based on our market research, there are 1.9 billion websites worldwide, with more than 250,000 new sites going live every day. Even if society aimed at making only half of the Internet accessible, we estimate it would need 83.5 billion hours to accomplish. Using an average work week, approximately 40 million people for a year would be required, which would cost roughly $4 trillion. Additionally, our research shows that traditional manual approaches to accessibility are leaving most business websites inaccessible to users with disabilities. even the sites where significant time and money was spent. AudioEye recently conducted a manual audit of 55 randomly selected websites that use traditional audit and remediation services offered by consultants. And we found that 41 of these sites had one or more severe accessibility issues. Based on AudioEye's research and considering the overall state of accessibility, it's clear that we need an ongoing, sustainable, and affordable solutions that can enable business owners and web professionals to create inclusive experiences while solving for the scale of the Internet. Today, that solution is a hybrid approach that ensures responsible, transparent implementation of technology backed by subject matter experts. Moving on to guidance. We are guiding for revenue of $7.4 to $7.6 million for the second quarter, representing year-over-year growth of 25% at the midpoint. We continue to be well capitalized, with $12 million of cash on March 31st, and have the runway to continue investing in the business for the long term. We expect to make strategic investments in talent going forward, but at slower rates compared to 2021. We're also running under our previous cash usage assumptions, excluding non-recurring items. We expect our second quarter operating cash usage to be relatively consistent with our first quarter and then trend down in the third quarter and be near break-even by the fourth quarter. I will now turn the call over to AudioEye CFO, Kelly Gorkovich. Kelly.
Kelly Gorkovich
Thank you, David. As David mentioned, we are pleased with our first quarter 2022 performance. Q1 marks the 25th straight quarter of record revenue ending the quarter at $6.9 million, which was 19% growth year-over-year. Annual recurring revenue, or ARR, at the end of the first quarter of 2022 was $28.1 million, a 22% increase over ARR at the end of the first quarter of 2021. Our two revenue channels continue to perform, with the Bureau of Internet Accessibility Acquisition also contributing to the enterprise revenue in the quarter. Looking at our revenue channels in more detail, as discussed in previous earning calls, 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 2022, this revenue channel grew 20% year-over-year and represented approximately 55% of revenue and ARR. We expect to continue to see this channel contribute significantly to our growth in revenue as we continue to have traction with larger partners. The Enterprise Channel, inclusive of revenue from the acquisition of BOIA on March 9, 2022, continued to perform in the quarter, contributing approximately 45% of revenue and ARR. Decreases in project-oriented PDF revenue from Q1 2021 were fully offset by contributions from BOIA's non-recurring revenue. In addition, reoccurring revenue from the enterprise channel increased 18% over the same period and prior year. As David mentioned, the total customer count decreased from Q4 2021 as we look to expand our level of service with a partner still at an entry-level offering. Review these adjustments to be a positive step for our business, which will increase the average revenue per customer. On March 31st, 2022, our customer count was approximately 74,000 compared to 68,000 customers on March 31st, 2021. Gross profit for the first quarter was 5.2 million or about 75% of revenue compared to 4.4 million and 77% of revenue in Q1 of last year. We are pleased with the consistent gross margin percent given the significant investment in our platform and research and development, and customer success costs, which all play a factor in cost of revenue. We expect growth margin to be relatively consistent throughout the remainder of 2022. In Q1 2022, OPEX, inclusive of $1.1 million of stock compensation and $900,000 of litigation expense, was $8.8 million, which was an increase of about $1.6 million versus Q1 last year. The main driver for this increase is our continued investment in research and development and sales and marketing, with G&A expense staying relatively stable to Q1 2021. Our total R&D spend in Q1 was approximately $1.8 million, with approximately $240,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 26% of our revenue this quarter, versus 22% last year and continues to reflect the commitment towards investing in our product and technology to deliver the best product in the market. Sales and marketing Q1 2022 expenses increased approximately 35% from Q1 2021 to approximately 3.7 million. We continue to be strategic and refine sales and marketing spend to address the large opportunity in the market while gaining efficiencies from previous learnings. Net loss in the first quarter of 2022 was $3.6 million, or about $0.32 per share, compared to $2.8 million, or $0.27 per share, in the same year-ago period. On a non-GAAP basis, our Q1 net loss was about $1.4 million, or $0.12 per share, compared to a net loss of $700,000, or $0.07 per share, in the same year-ago period. The primary adjustments to GAAP earnings and EPS for Q1 2022 for non-cash share-based compensation, litigation, and acquisition-related expenses. Cash usage for the quarter was $7 million, which included a $5 million cash outlay for acquisitions and $2 million related to normal business activities. Our balance sheet remains well-catalyzed with zero debt and $12 million of cash on March 31, 2022. With that, we open up the call for questions. Operator, please give instructions.
Operator
Thank you, ladies and gentlemen. The floor is open for questions. If you have any questions or comments, please indicate so by pressing star 1. Pressing star 2 will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Thank you. We will now take questions from the company's publishing analysts. Please hold while we poll for questions. Okay, the first question is coming from Zach Cummins with B Reilly Securities.
Zach Cummins
David, just starting off, can you give us a little more insight into the two partnerships that you mentioned during the transcript? Sounds like they're relatively early days, but any sort of incremental detail or update you can give us there and kind of what are the next steps that need to happen for this to start meaningfully scaling?
David Murady
Sure. These are both large platform partnerships. One's a significant reseller platform, which we already started generating revenue from in the first quarter. This has a big opportunity in front of us to produce revenue over the next one to two years. The other one is one of the most significant website platforms in the world. We're generating revenue from the enterprise side today, and we're now in discussions with them on the platform side. So these are pretty significant. These deals have been worked on for a long time and it's finally started to bear fruit. This is what I came in here to do and we're actually doing it now. So we're excited to work with these partners. I want to thank the AudioWite team for all their hard work getting to this point as well. We're unaware of anyone else winning similar deals in the industry right now.
Zach Cummins
I understand. That's great to hear. And in terms of The partner on the flip side of that, it seems like you're kind of taking a pause with some of those customers. I mean, can you give us some more insight into kind of why you decided to go that direction and is there still an opportunity to potentially get that partnership back and win some of those customers back?
David Murady
Yeah, it's just being caused by a renegotiation with the digital agency. We're moving away from that very basic tier to a more advanced offering, which will give the client a much higher level of accessibility. So it's better for them, better for us, and we expect that to hit later in the year.
Zach Cummins
I understand. That's helpful. And then in terms of just the acquisition of BOIA, I mean, can you give us some insight into how the integration with that's been going thus far and Maybe a question more geared towards Kelly, but can you give me any sort of sense of the contribution that we saw from BOIA and Q1 and maybe what's really baked into your Q2 revenue guidance in terms of contribution from BOIA?
David Murady
Yeah, all in all, it's going very well. It's a very complementary product to what we have. If customers have more complex sites or are using languages like React, They may prefer to fix accessibility issues at the source. So now we have an end-to-end solution for any customer coming to us, depending on their needs. And I'll pass off to Kelly now.
Kelly Gorkovich
Yeah. BYU was acquired in late Q1, so it contributed nominally to enterprise revenue and net income. As David mentioned, looking ahead, we expect BOIA to be integrated into our product suite and expected to have overlapping services. So going forward, we'll likely not be splitting out legacy BOIA revenue contributions, but instead folding it into the enterprise number. So looking at guidance in the Q2, we don't provide specific guidance on each of our revenue channels, but do think it'll contribute in the quarter.
Zach Cummins
Understood. Finally, just on the cash usage front, I think it's nice to see that firm operations was only $2 million in usage this quarter. I think you were guiding to around $3 million, if I recall correctly, from the last quarter. It sounds like it should continue to improve in the second half of the year as well as we approach that breakeven number. Is it safe to assume, as you continue to scale, we're likely going to see this business at least staying near breakeven or potentially generating cash as we get beyond this year?
Kelly Gorkovich
Yeah, we were happy to see cash burn come in lower than expected in Q1, and we expect that to continue into Q2. As we mentioned on the call, we expected to continue to tick down and get approach break even by Q4. We're not commenting specifically on what it looks like for 2023, but we do see efficiencies across all of our departments, and we do see as we're adding revenue and gross profit, we're not scaling expenses to the same rate, so should continue to see efficiencies there.
Zach Cummins
Understood. That's helpful. Well, thanks for taking my questions, and best of luck here with the rest of Q2. Thanks, Zach.
Operator
Once again, that's Star 1 if you have a question or a comment. Up next, we have Scott Buck with HC Wainwright. Your line's live.
David Murady
Hi, good afternoon, guys. Thank you for taking my questions. The first one, just on the renegotiation that you have going on with the digital agency, was there any revenue impact from that during the quarter? It was fairly small. Kelly can get into that.
Kelly Gorkovich
Yeah, I would say it was nominal. It was the lowest you're offering, so not a material impact to revenue.
David Murady
Okay, I appreciate that. And it looks like, you know, I know OpEx is up year over year, but you're down from the last couple of quarters. Is that just, you know, seasonal, or is there something structurally different in the way that you're looking at OpEx going forward?
Kelly Gorkovich
Yeah, overall we're being strategic with our investments. So we are gaining efficiencies year over year, and so I think that's what you're seeing there is just efficiencies across all of our departments. We will continue to invest, but just doing better in each of those departments.
David Murady
Okay, very good. That's helpful. And then just a bit of a follow-up on Zach's question. Now that you've had a chance to kind of peek behind the curtain with BOIA, you know, do you see a need for increased investment there or were all their, you know, was their platform kind of up to, you know, your expectations pre-deal?
Kelly Gorkovich
Yeah, we are really excited about the acquisition kind of Looking under the hood a little bit now that it's been integrated, we think there's really good upsell opportunity and integration into our product suite. We don't see significant additional investment needed in the VOIA space.
David Murady
Okay. And what's the timeline for integration? I mean, when could you be out, you know, marketing kind of joint services?
Kelly Gorkovich
Yeah, we're moving forward with that currently. So we're taking initial steps to do integration as we speak. We actually expect it to be folded into our product suite and upsell and new business offerings sooner than later.
David Murady
Okay, perfect. And then just last one for me, if we could get a little more color on the pipeline. Obviously a lot of distractions in the world these days. I'm curious how conversations are going and then whether you've seen you know, either an acceleration or, you know, a slowdown in how active people are on the other side of the table? Yeah, we're feeling pretty good. The revenue is accelerating. We're guiding for 25% at the midpoint. Feels good about our position in the industry and the investments we're making into technology. Look, as we scale, it's going to become more and more difficult for the smaller players to compete with us. especially when you factor in the R&D budget, product development, marketing, and sales. So this is kind of a scale game, and I think we're winning it. Okay, great. Well, I appreciate all the added color, guys. Have a good rest of the quarter. Thank you.
Operator
Okay, we have no further questions in queue at the moment. I'd like to turn the floor back to management for any remarks.
David Murady
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
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
Disclaimer