AudioEye, Inc.

Good afternoon, and welcome to AudioEyes third quarter 2024 earnings conference call. Joining us for today's call are AudioEyes CEO, Mr. David Marotti, and CFO, Ms. Kelly Georgovich. 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, and 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 risk 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, 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 beliefs 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 and these non-GAAP financial measures is available in the company's earnings release or otherwise posted in the Investors Relations section of its website at www.AudioEye.com. Now, I would like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Marotti. Sir, please proceed.

Thank you, Operator. We are pleased with our strong performance in the third quarter. We achieved the high end of our revenue guidance from July and B, adjusted EBITDA guidance. We also exceeded the rule of 40 for the first time. Sequential revenues grew from 8.47 million in the second quarter to 8.93 million in the third quarter, representing an annualized growth rate of 21%. Adjusted EBITDA margin improved sequentially from 17% in the second quarter to 23% in the third quarter. Third quarter revenue grew 14% year over year while we reduced non-GAAP operating expenses by 10%. Looking at adjusted free cash flow in terms of EBITDA minus CapEx, we generated a record $1.6 million in the quarter compared to 1 million in the second quarter and negative 200,000 in the third quarter of last year. We continue to see impressive performance in our enterprise and partner and marketplace channels. Both channels grew organically around 5% sequentially or 21% annualized. Strong business momentum is leading us to increase our full year guidance, which I will discuss shortly. I will now cover a few other notable developments in the quarter. As discussed in our last earnings call, we recently expanded our partnership with FinalSight, the market share leader in K-12 schools. The goal is to penetrate all their install base over the next three years with a comprehensive go-to-market plan, which is being implemented now. During the quarter, we announced a significant expansion of our partnership with Civic Plus, a leader in public sector SaaS technology solutions with over 10,000 government customers, the most of anyone in the industry. The partnership will include enhanced go-to-market strategies to provide our best-in-class digital accessibility platform to penetrate the local government market. The goal is to penetrate their entire customer base over the next three years. We have a long history of working with Final Site and CivicPlus and expect that these partnerships will generate substantial revenue over the next three years. Next, I'd like to discuss the accretive acquisition of ADA site compliance completed at the end of the third quarter. This acquisition is another positive step in our ongoing mission of eradicating all barriers to digital accessibility. ADA Site Compliance is a website accessibility compliance solution, providing audits and best practices. They have an impressive client list where we can leverage our products to expand customer relationships further. We are also excited about ADA Site Compliance attractive financial profile. This acquisition is immediately accretive. In terms of top line, ADA site compliance generated around $2 million of revenue in 2023, with approximately 70% of its revenue being recurring. We have already integrated their employees into our department and plan to move their customers onto our platform over the next few months. By acquiring ADA Site Compliance, we gained a strong and knowledgeable team. I want to extend a warm welcome to these new AudioEye members. One key reason ADA Site Compliance wanted to combine with us is our breadth and depth of product offering, which is the most comprehensive in the industry. Earlier today, we announced the launch of our accessibility protection status. This innovation builds on our legacy as pioneers in digital accessibility. The accessibility protection status gives customers a transparent picture of what we fix with automation and experts utilizing AI. Customers will receive comprehensive risk assessments, giving transparent reporting details of each customer's level of legal protection. These features will help clients understand their risk profile. Most vendors in the industry use an accessibility score to give customers a level of risk, which creates a false sense of security. An accessibility score is arbitrary and varies significantly from vendor to vendor. Also, the accessibility score will only analyze what automation can detect and does not give you a full picture of your risk, as many high risk issues can only be detected with experts. Customers who implement AudioWise platform and products gain up to 300% greater protection than with traditional accessibility consulting and 400% more than automation-only competitors. In the third quarter, we announced the general availability of our Accessibility Testing Software Kit, or SDK. The SDK helps developers address accessibility issues early in the software development lifecycle. If developers have time and resources to fix accessibility issues at the source, the SDK provides a flexible way to support different types of testing in pre-production environments. This offers yet another option to meet customers wherever they are to solve digital accessibility issues. During the quarter, We also announced that we have achieved HIPAA compliance and SOC 2 Type 2 certification. These milestones reaffirm AudioEye's ongoing dedication to strengthening data protection, security measures, and confidentiality for its customers, particularly those in the healthcare sector, which will be impacted by regulations under HHS and other industries with stringent data protection requirements. Moving on to guidance. We expect revenue for the fourth quarter to increase without significant additional expense. For the fourth quarter, we are guiding revenues between 9.7 million and 9.8 million, representing 24% year-over-year growth. For the full year 2024, we expect revenues between 35.2 and 35.3 million. We are increasing our adjusted EBITDA guidance for the fourth quarter to between 2.2 and 2.3 million, representing a 23% margin. We are also increasing our full year 2024 adjusted EBITDA to 6.62 to 6.72 million, with adjusted EPS between 54 to 55 cents. The updated forecast for the fourth quarter implies rule of 47 at the midpoint. I'll now turn the call over to AudioICFO, Kelly.

Thank you, David. As David discussed, revenue again hit record levels with Q3 2024 revenue at 8.9 million, which translates to a 21% annualized growth rate and 14% growth rate over the comparable period of prior year. marking our 35th quarter of record revenue. Annual recurring revenue, or ARR, at the end of the third quarter of 2024 was $36.2 million, a $2.9 million increase sequentially, which was driven by both a significant enterprise and reseller ARR increase and contributions from the acquisition of ADA site compliance. Our two revenue channels are continuing to generate strong results with high annualized sequential growth rates in both channels. The partner 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 and had near record-setting ARR growth with approximately $1 million of sequential ARR increase in Q3. In the third quarter of 2024, this revenue channel grew 13% year over year and 5% sequentially or 21% annualized. This channel represents 59% of revenue and around 58% of ARR. AudioEye's enterprise channel consists of our larger customers and organizations, including those with non-platform websites who generally engage directly with AudioEye sales personnel for pricing and solutions. The Enterprise Channel grew organically around 14% year-over-year and 5% sequentially or 21% annualized. In the third quarter, the Enterprise Channel contributed 41% of revenue and around 42% of ARR. On September 30th, 2024, our customer count was approximately 126,000, an 18% increase for 107,000 customers on September 30th, 2023, and an increase of approximately 5,000 customers from June 30th, 2024. The increase in customer count was driven by additions in both the partner marketplace and enterprise channel. Gross margin picked up 1% sequentially and 3% year over year to 80% of revenue with gross profit at 7.1 million compared to 6.1 million in Q3 of last year. The increase in gross margin was a result of approximately 1.1 million of revenue growth year over year and only marginal increases to cost of goods sold over the same period. On a GAAP basis, operating expenses increased approximately 9% to $8.1 million, driven by higher non-recurring and business combination expenses. Outside of these items, we saw decreases in expenses of approximately $500,000 year over year. Our total R&D spend in Q3 2024 was approximately $1.6 million with approximately $450,000 reflected the software development costs in the investing section of the cash flow statement. This was down from $2.4 million in Q3 2023. The total R&D spend is about 18% of our revenue this quarter versus 31% in the comparable period of prior year and 20% in the second quarter of 2024. We continue to believe the current investment in R&D is appropriate. Net loss in the third quarter of 2024 was $1.2 million, or $0.10 per share, compared to a net loss of $1.4 million, or $0.11 per share, in the same year goal period. The decrease was driven by additional revenue and gross profit and efficiencies in R&D, offset by increases in sales and marketing, non-recurring litigation, and business combination expense. Our Q3 adjusted EBITDA was a record $2 million, or 16 cents per share, a $1.7 million improvement year over year. The primary adjustments to GAAP earnings and EPS for Q3 2024 were non-cash share-based compensation, business combination costs associated with the acquisition of ADA site compliance, depreciation, amortization, interest expense, and litigation expense. Our balance sheet continues to be well capitalized with $5.5 million of cash as of September 30, 2024. Cash increased approximately $400,000 in the quarter, driven by net cash provided by operating activities and proceeds from our at-the-market offering of around $2.9 million, offset by $3.1 million payments for the acquisition of ADA site compliance. Free cash flow, calculated as $2 million of adjusted EBITDA, that's $450,000 of software development costs, was $1.6 million in the third quarter. We expect to see this continue to increase in the fourth quarter. On November 1st, we completed the at-the-market offering, raising $7 million in cash at an average share price of $24.65. With that, we open up the call for questions. Operator, please give instructions.