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 fourth quarter and full year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. I would now like to turn the conference over to Brian Pernavo, Investor Relations. Please go ahead.
Brian Pernavo
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. 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 differ materially because of factors discussed in today's press release and the comments made during the conference call and in the risk factors section of the company's annual report on Form 10-K and its quarterly reports filing 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 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 would like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Marotti. David?
David Marotti
Thank you for joining us on today's call. I want to begin with our strong financial performance and our expectations going forward. Despite macroeconomic uncertainty, The fourth quarter marked the 28th straight quarter of record revenue, achieving $7.74 million, which was 19% year-over-year growth. We were pleased to see gross margin increase to 77% in the fourth quarter from 75% in the third quarter of 2022. The increase in gross margin was a function of continued efficiencies across the board in our organization, which is impressive given our continued investment in R&D and customer success. As in previous quarters, we saw year-over-year revenue growth in our partner and marketplace and enterprise channels. Fourth quarter revenue growth was primarily driven by an increase in recurring revenue, which comprised approximately 97% of total revenue for the fourth quarter, compared to 94% in the third quarter of 2022. In addition to achieving revenue within the guidance range, we are pleased to report improved GAAP results and non-GAAP profitability of approximately 200,000 in the quarter. As noted in the last earnings call, beginning in January 2022, we implemented processes that resulted in efficiencies and reduced operating expenses as a percentage of revenue and on an absolute basis. In the quarter, we were able to drive our year-over-year operating costs down by approximately 19%, while increasing revenue by 19%. Cash burn continued to improve sequentially, from $1.4 million to $900,000 in the fourth quarter, which included non-recurring expense of $600,000. On the partner and marketplace channel, we renegotiated a couple of long-term strategic partnerships, resulting in a short-term reduction of ARR while contractually increasing the minimums and contract length significantly. Specifically, on these two contracts, we expect improvements in ARR in the second half and material increases in 2024. We continue to gain market share in this channel with the leading product in the industry. We signed several new partnerships in the quarter, many coming from competitors. On the enterprise side, we have seen some tightening of budgets and elongation of sales cycles. We have a couple of large contracts which remain in negotiations. These deals impact revenue guidance in ARR growth over the short term, resulting in relatively flat ARR sequentially and 13% ARR growth year over year. Kelly will discuss this in more detail shortly. We are confident that we'll maintain these relationships and grow revenue from these customers over time. Customer logo retention continues to remain strong. During periods of uncertainty, working with customers experiencing cost pressure is important to provide a win-win for both parties in the long term. Moving on to guidance. We're guiding for revenue between $7.7 and $7.9 million in the first quarter, representing year-over-year growth of 13% at the midpoint. As discussed, renegotiating specific partner and enterprise contracts will slow growth in the first quarter. We expect that sequential growth for revenue and ARR will resume in the second quarter and accelerate over the remainder of the year. For 2023, we expect non-GAAP sales and marketing and G&A costs will stay relatively flat from 2022. We expect gap sales and marketing will be relatively flat and G&A will be down. R&D investments will trend up throughout the year as we see high-impact areas to invest in. With increased R&D investment, we expect a non-gap operating loss in the first half of 2023 with a return to non-gap operating profit in the second half. We expect a breakeven non-GAAP operating profit for the full year of 2023. We also expect that GAAP results will improve year over year. We ended December 31st with $6.9 million of cash. As discussed previously, we managed our costs prudently in anticipation of the macroeconomic slowdown. We've seen inflection to positive cash flow by the fourth quarter of 2023. You may recall that we announced a 3 million stock repurchase program last year. We continue to be committed to deploying our capital in a manner that delivers the greatest value for all shareholders. We did not utilize the buyback in the fourth quarter, but we'll maintain it as an option for 2023. Before turning the call over to AudioEye CFO Kelly, I'm excited that Michael Ciotutti has recently joined AudioEye as our Chief Revenue Officer. Michael is an experienced SaaS technology leader with over two decades of go-to-market expertise. He has built industry-recognized, award-winning sales and marketing teams at Adobe, Omniture, and Ancestry.com. Michael oversaw growth and demand creation at Omniture while quickly scaling from $40 million to $400 million of ARR in just four years, leading to its acquisition by Adobe. During Michael's time at Adobe, he led the internal digital transformation scaling growth from 3 billion to over 12 billion of ARR. Being entrepreneurial-minded, Michael left Adobe after eight years to co-found an enterprise SaaS marketing and sales analytics technology company. His company was later acquired by ObservePoint, where he led sales and customer success. Michael has recently been at Guild, a marketplace unicorn helping to scale 50% year-over-year growth. Michael is joining us at a time when we are primed for significant growth. Over the last three years since we embarked on a strategic change in direction, our revenues have increased over 120%, our gross margin is up over 20 points, and we have delivered non-gap profitability. We have invested in R&D and have the best product in the industry, which continues to improve with increased investments I'll now turn the call over to Audiwise CFO, Kelly.
Kelly
Thank you, David. Revenue for Q4 2022 was $7.74 million, a 19% increase from Q4 2021 and up sequentially from Q3 2022. While there were several negotiations in play in the quarter, as David discussed, we were pleased to see high logo retention and revenue growth from both the enterprise and marketplace channels. On a full year basis in 2022, our revenue grew 22% to $29.9 million from $24.5 million in 20% growth in 2021. I will now discuss our two revenue channels, Partner and Marketplace and Enterprise. The Partner and Marketplace channel includes all revenue from our SMB-focused Marketplace products and revenue from a variety of partners who deployed these same products for their SMB customers. For the fourth quarter of 2022, Our partnership and marketplace channel grew 14% year-over-year and represented approximately 55% of revenue and 58% of ARR. On a full year basis in 2022, this channel's revenue grew 17% from $13.6 million of revenue in 2021 to $16 million in 2022. We were pleased to expand existing revenue and commitments and partnerships in this channel throughout the year and in Q4 2022 specifically, which will contribute to the stability and growth of revenue in 2023 and beyond. AudioEye's enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites who generally engage directly with AudioEye sales personnel for custom pricing and solutions. This channel also includes federal, state, and local government agencies and revenue from the acquisition of the Bureau of Internet Accessibility, or BOIA, on March 9, 2022. The enterprise channel grew approximately 26% in Q4 2022 from the comparable period of the prior year and contributed approximately 45% of revenue and 42% of ARR. On a full year basis in 2022, our enterprise revenue grew 28% from $10.9 million of revenue in 2021 to $13.9 million in 2022. Annual recurring revenue, or ARR, at the end of the fourth quarter of 2022 was $29.2 million, a 13% increase over ARR at the end of the fourth quarter of 2021. ARR is slightly lower from Q3 2022 ARR of $29.3 million because of enterprise contracts and renegotiations being excluded from ARR. As David mentioned, we expect ARR to return to sequential growth next quarter and accelerate over the remainder of 2023. On December 31, 2022, our customer count was approximately 86,000, an increase from 81,000 customers on September 30, 2022, and an uptick of approximately 4,000 customers from December 31, 2021. The uptick was driven by higher enterprise, partner, and marketplace customers. Gross profit for the fourth quarter was $6 million or about 77% of revenue compared to $4.8 million and 74% of revenue in Q4 of last year and 75% in Q3 2022. For the full year 2022, gross margins were approximately 76% with gross profit increasing from $18.4 million in 2021 to $22.7 million in 2022. There are a number of factors that go into cost of revenue, including web hosting, customer support, and other costs directly related to delivering the product. In 2022, we were able to drive these costs down but continue to add additional value to customers, such as reducing our average service time for remediation to less than 30 days and improving our automation. We expect gross margin to be around 77% going forward. With revenue up 19% year-over-year, operating expenses in the fourth quarter of 2022 decreased 19% to $7.9 million from $9.8 million in the same quarter last year. On a full-year basis, revenue increased 22% while operating expenses reduced from $33.9 million in 2021 to $33.1 million in 2022. This quarterly and annual 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 and lower stock compensation expense, partially offset by investments in BOIA and R&D. Our total R&D spend in Q4 was approximately $1.9 million, with approximately $300,000 reflected as software development costs in the investing section of the cash flow statement. R&D spend for the full year 2022 was $7.2 million, inclusive of $1.2 million reflected as software development costs. This total R&D spend is around 25% of our Q4 and 2022 revenue, compared to 24% of Q4 2021 revenue and 27% of full-year 2021 revenue. We will continue to invest in R&D as we see opportunity to build out and maintain a best-in-class offering. Net loss in the fourth quarter of 2022 was $1.9 million, or 17 cents per share, compared to a net loss of $5 million or $0.44 per share in the same year ago period. On a full year basis, net loss for 2022 was $10.4 million or $0.91 per share compared to a net loss of $14.2 million or $1.29 per share in 2021. On a non-GAAP basis, in the fourth quarter of 2022, we were once again profitable with net income at approximately $200,000 or $0.01 per share compared to a non-GAAP net loss of $1.4 million or $0.12 per share in the same year ago period. On a full year basis, the 2022 non-GAAP net loss was approximately $900,000 or $0.08 per share compared to a non-GAAP net loss of $4.5 million or $0.41 per share in 2021. This is a dramatic improvement and was the result of revenue increase, improved margins, and reductions in expenses. The primary adjustments to GAAP earnings and EPS for Q4 2022 and full year 2022 were non-cash share-based compensation, depreciation and amortization, litigation, and other miscellaneous costs. Cash burn continued to improve sequentially from negative 1.4 million in Q3 2022 to negative 900,000 in the fourth quarter. The cash use of 900,000 was primarily related to software capitalization of approximately 300,000, $100,000 for tax payments related to employee share-based grants, $600,000 for non-recurring litigation expenses offset by non-GAAP earnings of approximately $200,000. Our balance sheet remains well capitalized with $6.9 million of cash and no debt on December 31, 2022. As mentioned on our last earnings call, we expect cash usage related to litigation to trend down materially starting in Q1 2023 as a result of the settlement in October 2022. We expect cash usage will increase in first half of 2023, which will include continued R&D investment and an earn-out payment to BOIA. We believe the current cash on hand is sufficient, and we expect to see cash generating by Q4 2023. With that, we open up the call for questions. Operator, please give instructions.
Operator
Thank you. We will now take questions from the company's publishing analysts. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Scott Buck with HC Wainwright. Please go ahead.
Scott Buck
Hi, good afternoon, guys. Thank you for taking my questions. I'm curious, can you provide a little bit of additional color on maybe where some of the incremental R&D spending is going in 2023?
David Marotti
Sure, I'll take that one. We see opportunities in the market for continued product expansion that justifies increasing the R&D. We expect the additional R&D to generate a really good ROI for us. And as always, we're looking to weigh the risks on investments and against the risk reward and the ROI potential.
Scott Buck
I appreciate that, David. And then on the broader sales environment, is there something specific that would help accelerate those sales cycles or What are the conversations with potential customers like there, and what event gets them to kind of sign that dotted line?
David Marotti
Are you talking about enterprise or resellers?
Scott Buck
Yeah, specifically on enterprise. What gets them off the fence from a macro standpoint?
David Marotti
Yeah, look, we've just seen an elongation of sales cycles, as we mentioned last quarter. We also have a couple larger deals that were expiring where we're still in negotiations are. We're very bullish on the enterprise side, though. We're seeing close rates go up on smaller deals, so that's a good sign. But it is a tougher environment out there. We think it's going to grow, but it is tougher.
Scott Buck
All right, that's helpful. And then last, given the improved efficiency on the sales side, at what point does it make sense for you to, you know, put some additional dollars towards sales and marketing and help drive, you know, acceleration in the top lines?
David Marotti
Yeah, I don't think we need to do that. We're pretty efficient on generating leads, as efficient as we have ever been. We expect the close rates to continue over time on the leads we are generating. We're generating a ton of leads. So I think we're going to grow revenue even in this tough macro backdrop with the current S&M spend.
Michael
I appreciate the additional color, guys. Thank you very much. Thank you.
Operator
Again, if you have a question, please press star then 1. The next question comes from Zach Cummins with B-Rally Securities. Please go ahead.
Zach Cummins
Yeah, great. Hi, David. Hi, Kelly. Thanks for taking my questions. David, just starting off, it sounds like you've renegotiated a couple of partnerships in the channel partner side of it. I mean, can you talk about, I mean, the reasons for looking at renewed terms or different terms there? It seems like it's going to have a little bit of an impact here in the short term, but seems like something that could be a win-win longer term.
David Marotti
Yeah, that's right. Some partners out there are just feeling cost pressure, which was the main driver of most of the renegotiation. So in exchange for giving some short-term relief, we were able to extend contract terms significantly with nice step-ups. And this is a win-win. It puts us in a much better place over time.
Zach Cummins
Got it. That's helpful. And on the enterprise side, it sounds like you have a couple large renewals that are still ongoing. I mean, can you give any sort of insight into how you feel about those likely coming back into the fold here within the next couple of months or any sort of incremental insight you can give into those renewals would be helpful?
David Marotti
Yeah, we're just seeing that elongation of the sales cycle in a tougher environment. We have a couple larger deals that were expiring. We're still in negotiations. Those couple deals did reduce ARR at the end of the quarter. We're still working with them and still providing services and hopefully moving forward to much bigger contracts with them. New business continues to be strong. We're closing it. It's just these couple deals we're working through and we think we're going to get them in a good place.
Zach Cummins
But we'll go
David Marotti
will grow regardless.
Zach Cummins
Got it. Got it. That's helpful. And final question is just really on the new chief revenue officer hire. I mean, you called it out a little bit within the script, but I mean, give some insight into why you had to shake up in terms of leadership there on the sales side of it. And is there going to be any sort of changes in terms of how you attack the enterprise or the partner channels?
David Marotti
Yeah, Michael's a rock star. He has a proven track record and has scaled multiple companies, has been a CRO before. We just think he's the right fit for the right time, and he's going to help us unlock a ton of potential in sales and marketing. He's done this before, so I think it's really good.
Michael
Got it. Well, thanks for taking my questions, and best of luck with the rest of the quarter. Thanks so much.
Operator
And we have a follow-up from Scott Buck with HC Wainwright. Please go ahead.
Scott Buck
Okay, guys, I figured I'd throw one more at you here. David, I wonder if you could speak a little bit to the competitive environment and maybe how some of your peers are addressing a more challenging environment.
David Marotti
Yeah, the market's still pretty fragmented. Look, we like the competition. We're confident that we have the best product. We actually think we're outperforming the market today based on checks. And we have some very exciting things coming soon, so stay tuned.
Michael
All right, great.
David Marotti
Appreciate it, guys.
Michael
Thank you. Thank you.
Operator
At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Muradi for his closing comments.
Michael
Thank you for joining us today.
David Marotti
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 a 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 fourth quarter and full year 2022 earnings conference call. You may now disconnect.
Disclaimer