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spk07: how AudioLite stepped in to stand behind their solution and customer, and how effective they were in resolving the claim. AudioLite was an invaluable partner throughout the entire process. In most website accessibility lawsuits or demand letters, the party receiving the lawsuit will spend money on legal fees, pay a settlement, and fix the digital property later. Most competitors use point-in-time audits or automated-only approaches. neither work effectively. Many companies want to do the right thing and address digital accessibility, but because of ineffective solutions, remain vulnerable to future legal actions, brand risk, and subpar customer experiences. AudioEye utilizes a unique combination of automation technology, including artificial intelligence, coupled with industry experts in accessibility compliance and law to help businesses become and stay compliant. We were pleased to provide clear evidence our solution is effective while eliminating risk for our customers and making the Internet a better place for people with disabilities. The next item I'd like to highlight is our AI initiative centered on accessibility with members of the disability community. We are developing AI models with direct input from people with disabilities to ensure the products and models developed. work in our efforts to eradicate digital accessibility errors at scale. We will have further announcements soon on the specific impact of these initiatives. Moving on to guidance. We are guiding for sequential revenue growth with revenue of between $7.8 and $7.9 million for the second quarter of 2023, representing year-over-year growth of approximately 4% at the midpoint. As discussed in the previous earnings call, our results in the first half have been impacted by certain renegotiations. Even with these renegotiations, we are pleased to see sequential revenue and ARR growth. We continue to expect that revenue and ARR growth will accelerate meaningfully in the second half of the year. With increased R&D investment, We continue to expect a non-GAAP operating loss in the second quarter with non-GAAP operating profit in the second half, generating breakeven operating profit for the full year. We continue to be well capitalized with $5.5 million of cash as of March 31st, 2023. We believe the current cash on hand is sufficient to fund operations, and we still expect to generate positive cash flow by the fourth quarter of this year. I'll now turn the call over to Audio Eye CFO, Kelly Georgievich.
spk01: Kelly. Thank you, David. As just mentioned, we are pleased with our first quarter 2023 performance. Q1 2023 marks the 29th straight quarter of record revenue, ending Q1 at 7.8 million, which was 13% growth year over year. Annual recurring revenue, or ARR, at the end of the first quarter of 2023 was 29.6 million, a $1.5 million increase from ARR at the end of the first quarter of 2022. Our two revenue channels are continuing to perform well. As discussed in previous updates, 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 2023, this revenue channel grew 14% year-over-year, and represented approximately 56% of revenue and 59% of ARR. We expect to continue to see this channel contribute significantly to our growth in revenue as we build for further traction and expand with larger partners. The enterprise channel continued to perform well in the quarter, growing 11% year-over-year and contributing approximately 44% of revenue and 41% of ARR. We continue to see longer sales cycles and more price conscious customers, but overall we are seeing some of our best logo retention rates. Total customer count increased notably in Q1 2023 to approximately 95,000 customers from approximately 74,000 customers at March 31st, 2022 and 86,000 customers at December 31st, 2022. Both revenue channels contributed towards customer count growth in the quarter, with the expansion of platforms as the most material driver customer count increases. Growth profit for the first quarter was $6.1 million, or about 78% of revenue, compared to $5.2 million and 75% of revenue in Q1 of last year. We are pleased to see growth margins continue to increase, given the significant investment in our platform, including research and development, and customer success costs. We expect gross margin to continue around the 77% to 78% range throughout the remainder of 2023. While revenues increased 13% over the comparable period of prior year, operating expense decreased approximately 8% or $700,000 to $8.1 million. This decrease was the result of continued efficiencies in sales and marketing in G&A areas, slightly offset by continued investment in R&D. Our total R&D spend in Q1 2023 was approximately $2.2 million, with approximately $475,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 29% of our revenue this quarter versus 26% last year and continues to reflect a commitment towards investing in our product and technology to deliver the best product in the market and to ensure companies are protected from risk. Net loss for the first quarter of 2023 was $2 million, or 17 cents per share, compared to $3.6 million, or 32 cents per share in the same year-ago period. Total operating loss decreased 44%, or $1.6 million, from the comparable period of prior year, thanks to the increase in gross profit, as well as strategic and efficient spending in all departments. On a non-GAAP basis, our Q1 net loss was near break-even at a $53,000 net loss, or less than a $0.01 loss per share, compared to a net loss of $1 million, or $0.09 per share, in the same year-ago period. The primary adjustments to GAAP earnings and EPS for Q1 2023 were non-GAAP share-based compensation, litigation, depreciation, and amortization. Acquisition costs were also a non-GAAP adjustment in Q1 2022. Cash usage for the quarter was $1.4 million, which included a $1 million earn-out payment related to the acquisition of the Bureau of Internet Accessibility. The remaining $400,000 of cash earned in the quarter was primarily related to tax payments from employee share-based grants of approximately $250,000 and non-GAAP litigation expenses of approximately $120,000. With that, we open up the call for questions. Operator, please give instructions.
spk02: 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 touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble a roster. Our first question comes from Zach Cummins from B. Reilly FBR. Please go ahead.
spk04: Hi, good afternoon, David and Kelly. Thanks for taking my questions and congrats on the solid Q1 results. David, just starting with the partner channel, I mean, a nice jump in new customers added in this quarter. So can you just talk about your progress with partners and how we should think about that progression here in the next few quarters, especially as new agreements start to kick in?
spk03: Hello, where's your line on mute?
spk01: Yeah, I'm guessing David's line's on mute, but I can jump in here. Overall, we are pleased to see customer count increase and across all channels see that increase. But yeah, we are excited about the developments and partnerships overall. As we noted, the biggest driver of those partnership increases are Our customer count increases as the partnership increases from platforms, but yes, making great traction with partners overall and expect that to continue in future quarters.
spk03: Can you hear me now? Understood. Yeah, I can hear you, David. Okay.
spk07: Yeah, I was talking for about 15 seconds there.
spk04: Great.
spk07: Does that answer your question, Zach, or do you need more color around that?
spk04: No, no. I think that's helpful. I guess, David, just building upon it a little bit, obviously continuing to invest pretty aggressively on the R&D line. Can you talk about some of the opportunities that you see out there that really, I guess, justifies continuing to invest at this pace into R&D?
spk07: Yeah, we're investing in items that we think are going to have a great payback in the near term. We're going to be adding new products in the near term that you're going to see. And we're investing into our AI capabilities. So that's where the money is going.
spk04: Got it. And final question, just really on the enterprise side of it. I know you mentioned last call, there was a couple of outstanding renewals that were in ongoing conversation. Any sort of update you can provide on either of those situations?
spk07: Yeah. Are you talking about the enterprise side?
spk03: Yeah.
spk07: Yes, those are still in negotiations. The demand is still there, but there's been large turnover at both of those companies. So we're still on the hunt. We're hopeful we'll be able to get one of these deals or both of these deals done by the end of the year. It's more a function of a tougher economy.
spk03: Got it.
spk04: That's helpful.
spk03: Well, thanks for taking my questions and best of luck with the rest of the quarter.
spk02: Thank you. The next question comes from Scott Buck from HC Wainwright. Please go ahead. Hi, good afternoon, guys.
spk07: David, I'm curious, on the sales and marketing efficiencies, have you guys exhausted those efforts at this point, or do you think there's still some room for improvement there going forward? Yeah, I think we're pretty exhausted on the efficiencies in sales and marketing. I don't think you'll see more efficiencies there. Yeah.
spk03: Okay.
spk07: And then the second one for me, you know, if we take a step back, you're kind of bumping along here at roughly, you know, cash break even. Should we assume that moving forward, at least in the near term, any incremental cash that you're able to generate, you're going to plow right back into sales and marketing to drive revenue?
spk01: Yeah, we are very prepared. prudently managing cash and costs overall. We did end Q1 at $5.5 million. As David mentioned, and what plays into it is we expect the first half to have non-GAAP net loss, but we expect the second half to have non-GAAP profitability. So it does work in line with that. But we do expect, as we mentioned on the call, to be cash generating by Q4. And so we are keeping all those factors in mind as we think about the rest of the year.
spk07: Okay, great. I appreciate that, Kelly. And then last one for me, you know, first, congrats on the successful defense. But curious if there's anything else on the regulatory front that, you know, we should be keeping an eye on.
spk03: Sure.
spk07: Yeah, there is action on the DOJ side. They have something in the works right now on the state and local government. So we're watching that pretty carefully. Okay, perfect. Appreciate that, Kelly. Additional time, guys. Thank you.
spk02: Thank you. Our next question comes from George Sutton from Craig Hallam. Please go ahead.
spk05: Thank you.
spk06: David, you mentioned that you expect revenues to accelerate meaningfully in the second half. Obviously, that would be different than many companies are anticipating at this point. Could you just walk through the logic of how you see that occurring?
spk07: A good question. When I look at the business, Outside of the renegotiations, our reseller and platform business have been extremely strong, growing at a great clip. So that's where we see the uptick in the second half. It's really driven by that and an uptick in the enterprise business as well with higher close rates with Michael and his team and what they're doing.
spk06: So you mentioned that some businesses are seeing the additional revenues from having accessibility, which for us has always been kind of an interesting dynamic beyond just the litigation. Can you talk as specifically as possible as to what you're hearing in terms of those kinds of numbers?
spk07: Yeah, it's hard to quantify. It could be anywhere from 5% to 10% more revenue, potentially. We have a case study on the website I'd invite you to check out. But it is hard for us to quantify.
spk05: Last, if I could.
spk06: On the R&D side, I'm curious if you can just give us a picture into how you're thinking of the ROI from these investments. And I know some of it is increasing the automation, so thus reducing your sort of people-based cost to deal with this. But any sort of detail you can give us on sort of the ROI you are targeting for these investments?
spk01: Yeah, we definitely are considering what the return on investment is for our R&D spend, and we do think there is notable investment there. We do see opportunities in front of us that we want to capitalize on, and that's why we're funding that effort. In addition to kind of expanding existing features, there are additional product sets and products we plan to put out to the market that we're pretty excited about. And so all of that is a factor in what we're investing in for R&D.
spk03: Okay, thank you.
spk02: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Moratti for his closing remarks.
spk07: 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.
spk02: Conference has now concluded. Thank you for joining us today. 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 Audio's first quarter 2023 earnings conference call. You may now disconnect.
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