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spk03: Good day and welcome to the AudioEye third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Brian Protovo. Please go ahead.
spk05: Thank you, Operator. Joining us for today's call are AudioEye's CEO, Mr. David Marotti, and CFO, Ms. Kelly Georgievich. 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 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 in the risk factors section of the company's annual report on Form 10-K its quarterly reports on Form 10Q, and in 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 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 measure, 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.audioi.com. Now I will turn the call over to AudioEye's Chief Executive Officer, Mr. David Marotti. David?
spk06: We want to begin by discussing our positive financial results. Despite some macroeconomic headwinds, the third quarter marked the 27th straight quarter of record revenue, achieving $7.7 million which was 24% year-over-year growth. Growth margins remain consistent at 75%. Our revenue growth resulted from both our partner and marketplace channel and the enterprise channel. In addition to achieving revenue within the guidance range, we are pleased to report non-GAAP profitability of approximately 100,000. We had previously guided to near break-even in the fourth quarter, We are excited to achieve this milestone ahead of our target. Beginning in January of this year, we implemented new processes that resulted in efficiencies and reduced operating expenses as a percentage of revenue. In the quarter, we were able to drive both our GAAP and non-GAAP year-over-year operating expenses down on an absolute basis by approximately 13% and 12%, respectively, while increasing revenue by 24%. We believe this is notable given the inflationary environment most companies are facing. Cash burn also improved sequentially from 2.7 to 1.4 million, excluding non-recurring items such as litigation and stock repurchases. Cash burn, including working capital, declined to 500,000. Ellie will give further details shortly. Now I will dive a bit further into revenue and our business momentum. We added several new resellers in the quarter, while expanding revenue from existing partnerships. Partnership and marketplace channel continues to show strong demand. One of the main drivers of our high retention, despite economic uncertainty, is that we have the best offering in the market due to our industry-leading R&D investments. Like most other companies, resellers are looking for new ways to expand revenue and provide a robust offering compared to their competition. Our cost-effective and comprehensive approach to solving web accessibility issues at scale while providing services as required continues to drive our high deal-winning percentage with these sophisticated resellers. We continue to see year-over-year growth in the enterprise revenue channel as well. While we have seen some elongation in sales cycles, especially for those customers who do not yet have an accessibility solution, we continue to see high retention for existing customers. Our product is increasingly viewed as a necessity in the software stack for businesses. We have also made progress by integrating BOIA's product into our core SaaS offering, now providing new and existing AudioWire customers the option to purchase complete audit reports and site reviews. Outside of our positive financial results, there are a few other business developments I'd like to highlight. We are pleased to confirm we have migrated the remaining customers who were using the old platform to AudioEye's next-generation platform. We're excited that customers now have access to our next-gen platform's features and functionality. Platform migrations are never easy. We are especially pleased that over the last couple of years, we were able to stand up a new platform with much more functionality and scale and simultaneously migrated our existing customers and grew revenue substantially. This was a significant accomplishment, and I'd like to thank the product, engineering, and operations teams for all their hard work. In October, Senator Tammy Duckworth and Representative John Sarbanes introduced the Websites and Software Applications Accessibility Act in the United States Senate and House of Representatives. While the bill is still in draft form and changes will likely be made, the passage of the bill will put further emphasis on truly solving web accessibility. If passed, we also expect it to have a material impact on digital accessibility demand, as only 3% of websites are currently accessible. In the press release announcing the bill, AudioEye board member Tony Coelho, the author and architect of the ADA, which passed 32 years ago, had this to say. The bill is as significant as the introduction of the ADA and shows the cooperation and support from the disability community. As President Bush said on the signing of the ADA, the walls of exclusion need to be taken down. This is another step in that direction. Also in October, we announced AudioEye and a competitor have agreed to a global settlement of all pending legal disputes. We cannot comment further on this announcement, but highlight that cash burned from litigation should trend down materially over the coming quarters. You may recall in the second quarter of this year that we announced a $3 million stock repurchase program. We continue to be committed to deploying our capital in a manner that delivers the greatest value for all shareholders. We continue the buyback in the third quarter. As of September 30th, we have repurchased approximately $750,000 under the program. Moving on to guidance. We have set ourselves up for success with our growing recurring revenue base, high gross margins, and operating expense management. We continue to invest in industry-leading R&D and have heard positive feedback from many happy customers who have migrated to our next-gen platform. Simply put, we have the most effective offering on the market at the best price. We're excited to further strengthen our product offering in the near term and delight customers even more. We're guiding for revenue between $7.7 to $7.9 million in the fourth quarter, representing year-over-year growth of approximately 20% at the midpoint. We expect non-GAAP income results for the fourth quarter to remain relatively consistent with our solid results in the third quarter. We ended the third quarter well capitalized with $7.8 million of cash and have the runway to continue investing in the business for the long term. I will now turn the call over to AudioEye CFO to share further financial information. Kelly.
spk01: Thank you, David. As David mentioned, we are pleased with our third quarter 2022 performance. Annual recurring revenue, or ARR, at the end of the third quarter of 2022 was $29.3 million, a 19% increase over ARR at the end of the third quarter of 2021. Both revenue channels experienced organic growth with the Bureau of Internet Accessibility Acquisition also contributing to enterprise revenue growth in the quarter. The Partner and Marketplace channel, which includes revenue from our SMB-focused Marketplace products and a variety of SMB-targeted partners, grew 19% year-over-year and represented approximately 52% of total revenue and 56% of ARR. The Enterprise channel, inclusive of revenue from the Bureau of Internet Accessibility, increased 30% year-over-year and contributed approximately 48% of total revenue and 44% of ARR. Recurring revenue in Q3 2022 increased 22% from the comparable period in the prior year. Project-based revenue also increased over the same period in prior year with the addition of new products from DOIA, which helped offset decreases in project-based mobile and PDF revenue in 2022. We are focused on an ARR model going forward, and we expect non-recurring revenue decline as a percentage of sales to low single digits from about 6% in Q2 and Q3. On September 30, 2022, our customer count was approximately 81,000, an increase from 80,000 customers on September 30, 2021, and an uptick of approximately 5,000 sequentially. The uptick was driven by higher enterprise and partner and marketplace customers. As noted on our last earnings call, in August we signed an updated contract with the agency that was going through renegotiations in Q1 and fell out of the customer count. We expect this specific deal to start contributing to customer count and revenue in Q4 2022. Gross profit for the third quarter was $5.7 million, or about 75% of revenue, compared to $4.6 million and 75% of revenue in Q3 of last year. We are pleased with the consistent growth margin percent given the significant investment in our next generation platform and customer success costs, which play a factor in cost of revenue. We expect growth margin to be around 75% for the remainder of 2022. With revenues up 24% year over year, operating expenses in the third quarter of 2022 decreased 13% to $8.1 million from $9.3 million in the same quarter last year, and decreased from Q2 2022 by approximately 300,000. This year-over-year decrease was driven primarily from efficiencies implemented in sales and marketing, which are continuing to produce impressive lead generation with lower investment needed, partially offset by investments in VOIA. We have decreased expenses from Q2 2022 primarily as a result of lower G&A expenses and stock compensation. Our total R&D spend in Q3 was approximately $1.8 million, with approximately $300,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 24% of our revenue this quarter versus 32% last year. We are committed to investments in R&D to maintain a best-in-class product. Net loss in the third quarter of 2022 was $2.3 million or $0.20 per share compared to a net loss of $4.7 million or $0.41 per share in the same year-ago period. On a non-GAAP basis, net income in the third quarter was about $100,000 or $0.01 per share compared to a non-GAAP net loss of $1.9 million or $0.17 per share in the same year-ago period. The primary adjustments to GAAP earnings and EPS for Q3 2022 were non-cash share-based compensation, depreciation and amortization costs, and litigation costs. Cash burn of $1.4 million in Q3 2022 was within expectations and an improvement compared to $2.7 million cash burn in Q2 2022. The decrease in cash of $1.4 million was primarily related to software capitalization of approximately $300,000, $400,000 for stock repurchase, $100,000 for tax payments related to employee share-based grants, and $600,000 for non-recurring litigation expenses. As David noted, we expect cash usage to trend down materially with the settlement of litigation. Our balance sheet remains well capitalized with zero debt and $7.8 million of cash on September 30, 2022. With that, we open up the call for questions. Operator, please give instructions.
spk03: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that's Starvin1 if you have a question. And today's first question comes from Zach Cummins with V-Reilly Securities. Please go ahead.
spk04: Hi. Good afternoon, David and Kelly. Congrats on the solid results here, and thanks for taking my questions. David, just starting off, in terms of the 4Q guidance that you're giving out there, I mean, can you give us a sense of the different puts and takes? It sounds like You have some enterprise customers that are maybe taking a little bit longer in terms of pulling the trigger with purchasing decisions. But I'm just curious of some of the assumptions you made when setting the 4Q outlook.
spk06: Hey, Zach. Yeah, I think that's right. We've seen some elongation of the sales cycles with the enterprise customers. I will say we're seeing record leads. We just got to close these deals coming in. We're seeing all-time high leads. So the demand is definitely there. We're just dealing with some budget constraints from enterprises. Resellers are doing pretty well, so that's good, and we're growing our penetration within them. We modeled for leaner economic times a while ago, back in January, February, so we right-sized our business, and we were able to grow about 24% and reduce absolute costs by 12%, so we think that was pretty good. Yeah, so our guidance considers all of this. We're guiding for about 20% growth at the midpoint.
spk04: Understood. That's helpful. And to that point of profitability, congratulations on getting to your target a quarter ahead of schedule here. And now that you've hit this key inflection point, David, you've spoken to a pretty challenging operating environment right now. Can you just give me a high-level sense of how you're thinking about balancing profitability versus continuing to invest for some of these growth opportunities going forward?
spk06: Yeah, we're guiding for non-GAAP profitability in the fourth quarter. Besides that, going into next year, we're not guiding at this point. We think we're right-sized and the cost structure is in place, and we're going to see nice growth with the reseller partners in the future.
spk04: Understood. That's helpful. And just from a broader sense, some of these other developments outside of the business with the legislation that was introduced in October, I mean, can you give us a sense of maybe the timeline of when we start seeing additional steps forward with this and potentially getting this passed? And, I mean, have you seen any sort of incremental demand uplift even just with the introduction of legislation? I'm just curious of your thoughts on the topic.
spk06: I don't think I've seen additional demand. It's obviously too early to say, but this could be a huge driver for demand going forward. As you know, only 3% of websites are accessible today. There's just a growing trend here with legislation, the DOJ, companies requiring accessibility in their contracts. So we look at this as a multi-billion dollar TAM opportunity. I don't know the timing of the legislation. It could be next year, but I think it's a positive in conjunction with all these other things.
spk04: Understood. Well, thanks for taking my questions, and congrats again on the solid results. Thank you, Zach.
spk02: Thank you.
spk03: And ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then 1 on your touchtone phone at this time.
spk02: Once again, ladies and gentlemen, that's star then 1 if you have a question, and we will pause momentarily to assemble our roster. And, ladies and gentlemen, this includes today's question and answer session and today's conference call.
spk03: We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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