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spk01: Good afternoon and welcome to AudioEye's second quarter 2023 earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Moratti, and CFO, Ms. Kelly Georgievic. 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 security's 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 expectations 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 the 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, its quarter report on Form 10-Q, and its other reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place under lieu of 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 earning release. posted in the investor relations section of its website at www.audioeye.com. Now I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Maratti. Sir, please proceed.
spk06: Thank you, Operator. Welcome, everyone, and thank you for joining us. There have been several developments over the last three months that I'm excited to talk with you about today. But before I do, I want to highlight our solid financial performance and continued focus on efficiencies. We are pleased to announce record revenue of $7.84 million in the second quarter. At the end of the second quarter, annual recurring revenue, or ARR, was $29.7 million. As discussed previously, our results in the first half of 2023 were impacted by certain contract renegotiations. Despite these renegotiations, we are pleased with sequential revenue and ARR growth and are excited about expected ARR acceleration in the second half. In the second quarter, gross margins were 77% and gross profit increased to 6 million versus 5.7 million year-over-year, representing a 100% flow-through of additional revenue into gross profit. Continue to focus on efficiencies. we expect to increase gross margins further in 2024 as we grow revenues. Revenue increased by 4% year-over-year, while operating expenses decreased by 3%. Our CFO, Kelly, will discuss the financial performance in more detail shortly. As we have said, we believe we are in the early innings of digital accessibility. 97% of websites today remain inaccessible to people with disabilities. despite increased litigation under the Americans with Disabilities Act. Last week, the Department of Justice issued a proposed rule on website accessibility under Title II of the ADA. The rule would help ensure people with disabilities have equal access to web content and mobile apps. The proposed rule would drive more awareness and compliance. and we are well positioned as we already work with over 900 government organizations and school districts. As a reminder, the European Accessibility Act previously required all EU member states to adopt laws for companies offering many types of products and services, including websites and e-commerce services, to ensure accessibility. In the EU, companies must provide accessible websites by June of 2025. and the Act requires Member States to enforce the accessibility requirements. In June, AudioEye shared findings from a collaborative initiative with accessibility experts from the disability community on the effectiveness and impact of generative AI on identifying, fixing, and communicating accessibility issues that typically require expert review. AudioWise accessibility experts, including those who rely on assistive technology, found AI could reduce the time needed to assess and correct a complex accessibility issue, such as determining whether a link is clear and accurate by up to 10X. We are currently incorporating AI into our processes and believe there's tremendous potential to increase speed and accuracy in the future. The North Star for AI is when someone with a disability can't distinguish between an experience handcrafted by an accessibility expert or created by an expert trained AI. That's the only bar that will let anyone claim they've solved digital accessibility at scale with AI. And make no mistake, it's a very high bar. We'll only meet it by involving the disability community from day one, getting continuous feedback, and actively investing in improving our capabilities over time. In addition to our findings and initiatives on AI, we recently announced the development and expansion of AudioEye's digital accessibility platform with new enterprise-grade accessibility offerings. The expansion of our product solution includes AudioEye's new accessibility maturity management program and the accessibility health advisor. These programs and tools use our team of certified experts to assess the company's current level of accessibility and help define the investments required to make measurable, sustainable progress in accessibility. Our Accessibility and Maturity Management Program identifies the people, culture, process, and system changes an organization needs to perform to make accessibility a first-class concern and tracks progress towards these goals. When new regulations change accessibility guidelines, the health advisor notifies the company of any changes required to comply. This first-of-its-kind program and corresponding tools with the further development of AI automation will be powerful drivers in increasing accessibility at scale. In addition to our R&D efforts this quarter, I am pleased to confirm that we recently completed the integration of the Bureau of Internet Accessibility which was acquired in March of 22. We are delighted to have fully integrated BOIA, which will help enable retention and upsells and result in cost savings in the near term. Going forward, we expect the product offering to primarily generate ARR under our subscription model instead of non-recurring audit revenue. The impact of the integration of BOIA will reduce third quarter revenue by approximately $200,000 as we transition one-time audits into recurring revenue. Each quarter, we continue to bring on talent and advocates that contribute to AudioWise success in the future. In July, we were thrilled to announce the addition of former United States Congressman for Arizona's 8th Congressional District, Gabby Giffords, to our advisory board. Gabby Giffords is a retired United States politician who resigned from Congress in 2012 after sustaining a severe brain injury during an assassination attempt. Today, she helps raise awareness about disabilities. Gabby's influence in the disability community and her passion for change will help Audiowide continue to make great strides in building solutions that close the digital accessibility gap.
spk04: Moving on to guidance.
spk06: We are guiding revenue of between $7.8 and $7.9 million for the third quarter of 2023. which is flat sequentially. As mentioned, the impact of the integration of BOIA will reduce third quarter revenue by approximately $200,000 as we transition one-time audits into recurring revenue. Business momentum is strengthening, and we anticipate that ARR will increase by approximately $1 million sequentially, representing the fastest growth rate in several quarters. We expect ARR growth to be driven by an acceleration in our reseller channel and an improvement in our enterprise channel. While the first half of 2023 saw a low single-digit growth rate in ARR as we renegotiated specific contracts, we are pleased to have that process behind us and continue to forecast a return to a higher trajectory in the second half of the year, which we expect will accelerate going forward. We expect to generate a non-gap profit of approximately $100,000 in the third quarter, with a further improvement into the fourth quarter. Cash on hand is sufficient to fund our ongoing operations, and we expect to see cash flow decrease going forward. We also expect cash flow to inflect positively by the fourth quarter of the year, depending on items such as working capital. I'll now turn the call over to AudioICFO, Kelly.
spk02: Thank you, David. Q2 2023 marks the 30th straight quarter of record revenue ending Q2 at $7.84 million, which was 4% growth year over year. Annual recurring revenue, or ARR, at the end of the second quarter of 2023 was $29.7 million, a $1 million increase from ARR at the end of the second quarter of 2022. As David mentioned, we expect ARR growth to accelerate in the second half of 2023, and we anticipate that ARR will increase by approximately $1 million sequentially. Overall, we were pleased with our financial results for Q2 2023, which came within revenue and net loss expectations. Our two revenue channels are continuing to perform well in a more cost-conscious environment. 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 second quarter of 2023, This revenue channel grew 13% year-over-year and represented approximately 56% of revenue and 60% of ARR. We continue to recognize opportunities for expansion in our existing partners. Overall, we expect to continue seeing this channel contribute significantly to our growth in revenue as we build further traction and expand with larger partners. Our enterprise revenue channel, which typically consists of our larger customers and organizations, made up 44% of revenue and 40% of ARR in the second quarter of 2023. As mentioned previously, this channel faced additional headwinds in the first half of 2023 with one larger customer contract renegotiation having an impact on total enterprise revenue in the quarter. Excluding this renegotiation, we continue to grow enterprise ARR year over year. We also continue to see great logo retention rates in 2023, with Q2, similar to Q1 2023, showing some of our best logo retention rates to date. The total customer count increased notably in Q2 2023 to approximately 104,000 customers from approximately 76,000 customers on June 30, 2022, and 95,000 customers on March 31, 2023. The expansion of platforms was the most material driver of customer count increases. Gross profit for the first quarter was $6 million, or about 77% of revenue, compared to $5.7 million and 76% of revenue in Q2 of last year. We are pleased to see the growth margin continue to increase year over year, given the significant investment in our platform products and customer success. While revenues increased 4% over the comparable period of prior year, operating expenses decreased approximately 3%, or $300,000, to $8.1 million. The decrease was a result of continued efficiencies in sales and marketing and G&A offset by continued investment in R&D. Our total R&D spend in Q2 2023 was approximately $2.6 million, with approximately $526,000 reflected as software development costs in the investing section of the cash flow statement. This total R&D spend is about 33% of our revenue this quarter versus 23% last year. As David mentioned, the investment in our R&D has allowed us to develop new enterprise-grade technology and programs, like our Accessibility Maturity Management Program, Accessibility Health Advisor, and new AI-driven automation and expert audits. Net loss in the second quarter of 2023 was $2 million, or 17 cents per share, compared to $2.6 million, or 23 cents per share, in the same year-ago period. Total net loss decreased 24%, or $600,000, 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 Q2 net loss was $220,000 or $0.02 per share, compared to a net loss of $240,000 or $0.02 per share in the same year-ago period. The primary adjustment to GAAP earnings and EPS for Q2 2023 were non-cash share-based compensation, depreciation and amortization, and non-recurring items. We were pleased to see non-recurring items decrease substantially in Q2 2023 from the comparable period of prior year. Cash decreased $1.2 million in the quarter, which was the result of cash outlays for tax payments from employee share-based grants of approximately $200,000, non-GAAP litigation expenses of approximately $200,000, software capitalization costs of $500,000, and $300,000 of net cash used from other operating activities. With that, we open up the call for questions. Operator, please give instruction.
spk01: Thank you. We will now take questions from the company's publishing analysts. If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. Our first question comes from Zach Cummings from B Reilly. Please proceed.
spk03: Hi, David and Kelly. Good afternoon and thanks for taking my questions. David, just starting with the outlook for ARR, I mean, increasing in Q3, I mean, can you just talk about some of the factors that are driving that expansion there? Is it mainly just continuing to ramp with some of your partners, or are we getting a pretty meaningful bump from those renegotiated agreements coming back online here in the second half?
spk06: Yeah, good question. We expect both our partner and enterprise channel to contribute to the growth going forward in ARR. We have our new revenue team wrapping up. The pipeline's starting to build. Really a lot of improvement in processes, systems, and people. We're seeing great traction in the partner channel as well. And our partners are seeing a lot of success in selling the product. The renegotiations you mentioned did slow growth earlier this year, but as we move away, those core growths, the core growth is there, and we expect to accelerate even more And I think with the new enterprise products, those are a game-changing industry as they start to ramp up. We should really start to accelerate.
spk03: Understood. And can you just talk about the integration with BOIA in terms of transitioning some of that revenue into recurring in nature and kind of what sort of benefit that gives to do that integration?
spk02: Yeah, I'm happy to talk about that a bit, Zach. Yeah, we're excited that we were able to complete the integration of BOIA and deliver more value to those customers under our model. Historically, they've been essentially one-time audits that are one-time in revenue, and we see opportunity to upsell existing customers and retain customers with our set of products and some of the automation and additional things we can offer to them. It does have a one-time impact in Q3, but we see the value in reoccurring revenue, both for the customers with their reoccurring product and automation, and also on our end, seeing ARR take up from COA customers going forward.
spk03: Got it. And final question for me is really just around expenses going forward. I mean, company expecting to flip to positive non-GAAP income in Q3 and positive free cash flow in Q4. Are you expecting to see a ramp down in development expenses now that you have some of these AI products and enterprise expanded capabilities out in the market? Or how should we think about investments going forward?
spk02: Yeah, we did invest quite notably in R&D in 2023. We have a really high performing team and we're excited on the products we're delivering. in the last six months specifically, but over the last couple of years. And we do see more products coming down the pipe. And so we're happy with that investment. We do also see a large opportunity to scale up our revenue org, especially with these new enterprise products that we're introducing. And so I think we'd expect to continue to invest in sales and marketing as we generate more profit going forward.
spk03: Understood.
spk04: Well, thanks for taking my questions and best of luck with the rest of the quarter.
spk05: Thanks, Jack.
spk04: Thank you.
spk05: Our next question comes from George Sutton from Craig Hallam.
spk01: Please proceed.
spk07: Thank you. David, I want to address the low penetration rate we've seen thus far in terms of compliance and what some of these things we'll do like the NPRM from the Justice Department relative to pursuing a much larger opportunity, and then also the EU in terms of how significant that might be in that market, and then how you're attacking those specific markets?
spk06: Sure. I'm not sure there's going to be a large revenue effect in the near term with the DOJ efforts, but I expect over the longer term, call it one to two years, you're going to see a meaningful ramp with state and local governments. And I think the DOJ is thinking about the private sector as well. I wouldn't be surprised if they take some action there, which could be very, very meaningful. With the EU, they're on track for 2025. It's pretty comprehensive. It covers many websites, except for really the smallest ones. It's a very large TAM here. We estimate the TAM of around 3 billion.
spk04: And more specifically,
spk07: How do you go after state and local governments today, and how might that change? And on the EU side, how are you positioned to go after opportunities there?
spk06: Yeah, just blocking and tackling with the revenue org and selling, setting up a sales office over in London, probably first quarter of next year is what we're thinking. It's just really blocking and tackling. We have the product now, so it's about going out and getting the business going.
spk07: And lastly, to be clear on the EU, when the compliance date is June of 25, my assumption is not everyone is completing that the end of June of 25. Can you just walk through how you anticipate seeing people begin to comply?
spk06: Like everything in life, some will do it a year early, some will do it a little bit late. It's all over the boards, what we saw with IOTA in Canada.
spk04: So it really just depends on the company themselves. Okay, thank you. Thank you.
spk01: Our next question comes from Scott Buck from HC Wainwright. Please proceed.
spk06: Hey, just a quick one, guys. The contingent consideration, I saw that move to current assets. Is that paid in cash or do you have the option to pay that in stock or shares?
spk02: The purchase agreement has that as a cash payment. It's contingent based on 2022 and 2023 performance of the OIA, but it is a cash payment. And the second contingent payment is like a Q2 2024 time period.
spk04: Great. I appreciate it.
spk02: That's it for me, guys. Thank you.
spk04: Thank you.
spk01: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Marotti for his closing remarks.
spk06: Thank you for joining us today. As always, I want to thank our employees, partners, and investors for their continued support.
spk04: We look forward to updating you on our next call.
spk01: 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 investor section of the company's website. Thank you for joining us today for AudioEye's second quarter 2023 earnings conference call. You may now disconnect.
spk05: The host has ended this call. Goodbye.
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