AudioEye, Inc.

Good afternoon, and welcome to AudioEye's second quarter 2025 earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Moratti, and CFO, Ms. Kelly Georgievich. Following the 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 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 10-Q, and in its 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 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 earnings release. or otherwise 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 Moratti. Sir, please proceed.

Thank you, Operator, and welcome to everyone joining us today. The second quarter was another record quarter for AudioEye. We achieved $9.9 million of revenue, representing 38 sequential quarters of growth. or nearly 10 years of consistent growth, a remarkable achievement. Sequential ARR growth was 1.1 million in the second quarter. We expect accelerating ARR and sequential revenue growth in the third and fourth quarters, driven by anticipated strong demand for enterprise business in the US and EU, and further growth in our partner and marketplace business. For the third and fourth quarters, we expect annualized sequential revenue growth to be in the high teens. Accelerating sequential revenue growth coupled with prudent expense management is expected to result in record adjusted EBITDA margins in the high 20s by the fourth quarter of this year. With continued operating leverage, we expect to generate strong free cash flow in the second half and beyond. We've proven that our business model is highly scalable with high gross and adjusted EBITDA margins. As we look forward to the next three years, we expect continued positive variable margin contribution and have an aspirational goal of growing adjusted EPS by 30 to 40% annually. As we generate more cash, We believe that in addition to M&A, stock buybacks can be an attractive way to use cash. And in the second quarter, we repurchased approximately 144,000 shares. Next, I'd like to discuss the driver of the adjustment to our revenue outlook, as I am optimistic on our go-forward prospects and want to make sure these intentional integration efforts are understood. As previously discussed, we analyze and buy companies on a synergistic cash flow basis and structure the deals accordingly. Over the past few years, we have completed a few small acquisitions of accessibility companies that are a creative and a good fit for AudioWise products and services. Successfully integrating these acquisitions has contributed to our strong cash flow performance. At times, This has meant discontinuing legacy services the customers were receiving from the acquired company. To that end, we are currently accelerating the integration of recent acquisitions by standardizing our offering to avoid duplicate systems, eliminate tech debt, and focus on synergistic cash flow, resulting in slight reductions in our full year 2025 guidance. Even with the phase-out of this lower margin revenue, We expect a substantial acceleration of sequential revenue and cash flow growth in the second half of the year, and we are excited to put this integration behind us heading into 2026. In late June, the European Accessibility Act, or EAA, officially went into effect. The EAA applies to any company operating in the EU with more than 10 employees or with annual revenue of 2 million euros or more, including international businesses selling to EU customers. It covers a wide range of digital touchpoints, including websites and mobile apps. Noncompliance can result in fines of up to 3 million euros, depending on the member state, and may also expose brands to additional legal risk. Under the EAA, each of the 27 EU member states is required to adopt and implement its enforcement mechanisms. We are beginning to see legal action in France for inaccessible digital platforms. We are expanding our presence in Europe to take advantage of what we believe will be significant demand. We are off to a good start with revenue contribution in the second quarter and acceleration expected in the third and fourth quarters. We are also less than a year away in the US from the first effective date of Title II under the DOJ. As discussed previously, this rule will have a significant impact on some of our biggest partners in the government adjacent space. We're seeing strong growth from the go-to-market initiatives with these partners and expect penetration and growth to accelerate in the second half of 2025 and into 2026. Moving on to guidance. We expect quarterly revenues and ARR growth to continue to accelerate in the third and fourth quarters of 2025 from the pace we saw in the first half. For the third quarter, we are guiding revenue between 10.2 and 10.4 million, a sequential annualized growth rate of 18% at the midpoint. For the third quarter, we also expect to generate adjusted EBITDA between 2.2 and 2.4 million and adjusted EPS between 17 and 19 cents. We are updating our 2025 full-year revenue guidance to between 40.3 and 40.7 million to account for the phase out of certain acquisition related customers. We are reducing our adjusted EBITDA guidance slightly to between 8.9 and 9.1 million around the bottom end of the previous range. With adjusted EPS between 71 and 73 cents per share within the previous range of 70 to 80 cents. With our adjusted EPA margins expected to increase into the upper 20s in the fourth quarter, we expect to generate a run rate adjusted EPS in the mid 80 cent range on an annualized basis as we exit the year. I'll now turn the call over to AudioEye CFO, Kelly.

Thank you, David. For the 38th consecutive quarter, we achieved record revenue With Q2 2025 revenue at $9.9 million, up 16% over the comparable period of prior year, ARR increased $1.1 million sequentially and $4.9 million over the same period of prior year to $38.2 million. We continue to see contributions to our ARR and revenue growth from both our enterprise and partner and marketplace channels. Diving into revenue and ARR in more detail. Changes in ARR and revenue are primarily driven by three factors. One, our ability to close new enterprise deals. Two, expansion with our existing partners and engaging with new partners. And three, retention of existing customers. The enterprise channel, which is defined as our large customers and organizations, including those with non-platform websites, has continued to see solid and growing lead volumes. We have built a strong marketing and sales organization that is delivering on our goals and is also producing new and expansion revenue at near record levels. We are also excited about the initial contributions that you is making to our results and expect to see this accelerate in the second half and in 2026. New and expansion business from the partner and marketplace channel defined as revenue from our SMB focused marketplace products and from partners deploying Audioy products for their S&B customers, also have consistently delivered each quarter and did so again in the second quarter. There is a notable opportunity for further material partner expansion in the EU, as well as further expansion of our current partners in anticipation of the DOJ Title II rule, which begins to go into effect May 2026. Retention remains strong in the quarter with current Audioy enterprise customers and partners. As mentioned, in the second quarter, we chose not to migrate certain customers and discontinue legacy services of acquired companies. Our overall enterprise growth retention was impacted by customers acquired through recent acquisitions and a few remaining Bureau of Internet Accessibility customers who we are culling. This will continue to have some impact on ARR and revenue numbers for the rest of 2025 when conversion to AudioEye's platform should be substantially complete. As we have previously discussed, our primary goal when acquiring companies is to generate synergistic cash flow. The cash flow goals and overall returns for these acquisitions remain on track. Overall, the enterprise channel grew 25% over the comparable period of prior year, and the partner and marketplace channel grew around 10% over the same period. In the second quarter, the enterprise channel contributed around 45% of revenue in ARR, and the partner and marketplace channel contributed around 55% of revenue in ARR. On June 30th, 2025, our customer count was approximately 120,000, relatively consistent with June 30th, 2024 customer count, despite the decrease in customers from one partner's customer consolidation in Q1 2025. Customer count increased sequentially by approximately 1,000, with both the enterprise and partner marketplace customers growing. Gross profit for the second quarter was $7.6 million, or about 77% of revenue, compared to $6.7 million, or 79% of revenue, in Q2 of last year. As we highlighted last earnings call, with customer migration to the upgraded platform, we expected margins in the second quarter of 2025 to temporarily decrease. We expect Q3 to have a similar gross margin as Q2 as we continue the migration of customers to the new platform so we expect to return to the high 70s by the fourth quarter of 2025 and beyond. Operating expenses increased approximately 2% or $200,000 over the comparable period of prior year to $7.4 million. The increase in operating expenses was primarily due to additional selling and marketing expense of $800,000, additional stock compensation expense of $500,000, and additional amortization of intangibles related to acquisitions of $400,000, partially offset by a $1.4 million reversal of contingent liability related to earned notes on acquisition. Our total R&D spending Q2 2025 was $1.7 million, with approximately $500,000 reflected as software development costs in the investing section of the cash flow statement. R&D represented 17% of revenue for Q2 2025 versus 20% in the second quarter of 2024. The current 17% is consistent with our Q1 2025 investment levels and we continue to believe the current level of investment in R&D is appropriate for 2025. Net loss in the second quarter of 2025 was nearly zero and zero cents per share compared to a net loss of 700,000 or six cents per share in the same year goal period. The decrease in net loss was primarily due to the increase in gross profit of 900,000 partially offset by the $200,000 increase in operating expenses just discussed. Our Q2 2025 adjusted EBITDA was $1.9 million, or $0.15 per share, increasing 31%, or approximately half a million dollars year over year. The primary adjustment to GAAP earnings and EPS for Q2 2025 were changes in fair value of contingent consideration, non-cash share-based compensation expense, litigation expense, depreciation and amortization, interest expense, and other minor non-recurring items. Adjusted free cash flow calculated as 1.9 million of adjusted EBITDA plus 500,000 in software development costs was 1.4 million in the second quarter. We expect to generate positive adjusted free cash flow throughout 2025. In the second quarter, we repurchased approximately 1.8 million of shares at an average price of $12.26. We remain well capitalized with $6.9 million of cash as of June 30, 2025, with $6.6 million of debt facilities available. At June 30, our net debt was $6.5 million and our ratio of net debt to adjusted EBITDA was 0.7 times. With that, we open up the call for questions. Operator, please give instructions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Again, that's star 1 if you do have a question or comment. Please hold as we poll for questions. And we'll take our first question from Joshua Riley from Needham. Please go ahead, sir.

All right. Thanks for taking my questions. Maybe just starting off on the customers being phased out. Can you give us some sense of how much this impacted the numbers in the first half of this year relative to what you expect the impact to ARR and revenue for the second half of the year, just to kind of give us some context? And then, you know, how does that affect the year-over-year comparisons maybe as well in terms of when did this kind of process start last year?

Yeah, I can take that one. Acquisition churn is the driver for the reduction in revenue. We did see customers churn out in Q2 related to that migration and the forced migration to Ottawa products and services. We do think this will still have some impact going into the Q3 and Q4 of 2025. We think kind of overall ARR will probably be about one to one and a half million of churn for acquisition related customers, which includes some calling of old BOA customers, which we acquired in 2022. We do expect most of that, the large majority of those customers to be phased out by the end of 2025. So it's really a 2025 impact.

Got it. And then, okay, that's helpful. Maybe moving on to some business-related questions. You know, some of the industry data that we've seen is highlights that the digital accessibility lawsuits are up 20% year over year, year to date. Is that what you're hearing in the marketplace? And how much has that been a catalyst for you on a year to date basis that the lawsuits just continue to increase?

It's hard to really know that because you're probably getting federal and you're missing some of the states. We do think it's up. It may be up 20%. It may be up 10%. Obviously, we're growing and we're outgrowing the market. So that's a good thing. And now we have the EU coming online as well.

Got it. And then on the EU stuff, I guess, what type of visibility do you have into the pipeline now? for the balance of the year relative to a quarter ago or two quarters ago. You know, some of the other areas that I cover with these type of regulatory items, there's a surge of orders once the, you know, the law or implementation takes effect. So I'm just curious, you know, what's the sequential change in the pipeline there?

The pipeline is definitely growing. I'd say if I had to hazard a guess from the second quarter to the The third quarter in terms of total pipe, what I'm seeing right now, it's probably tripled. So it's definitely moving the right direction. Those are from smaller numbers, though, but it's moving the right direction. And I think it's going to be even more into next year. I think this thing is really going to take off.

Got it. Understood. I'll put it back in the queue here. Thanks, guys. Thank you.

Thank you. And we'll take our next question from George Sutton from Craig Hallam. Please go ahead, George.

Thank you. Just a clarification on your 3X pipeline growth. Is that referring specifically to Europe?

Yes, for the EU business.

Okay. And you'd mentioned that you were expanding your presence in Europe. Can you be a little more specific how you're expanding your presence?

Sure. Yeah, without going into too much detail, we have all types of competitors that listen to these calls. We're adding salespeople, increasing marketing budgets in the EU, becoming just a lot more active in the area. It's a really big focus for us. And over the long haul, I think it's going to be a huge growth driver for the company.

Now, you mentioned that international sellers are also implicated in this in the EU. I'm curious, is that driving any opportunities in the U.S., in particular for international sellers selling in Europe that start to make some changes to their U.S. practice as well?

Not yet. I think when we see enforcement, we're going to start to see that as they target other companies based abroad.

So, David, you laid out your 30% aspirational goal for EPS. Can you just give us a little bit more of a picture of what you see driving that?

Yeah, it's really the record levels, near record levels of enterprise growth we're seeing with the EU beginning to contribute, the continued strong expansion of the partners, good core GRR metrics really in the upper 80s, low 90s acquisitions. Just more of those type of things with scale of the business that Kelly can get into if you want.

Let me just ask finally on the – I'm curious, the product or the customers that have been forced migrated, can you explain what the product is that you're moving away from, and does this directly relate to the earn out that was reversed? Yes.

Yeah, I'd say the products that they're migrated away from are, you know, consulting or one-time audits, and we want them to move over to our products and services, which, you know, we like automation, we like custom fixes and our audits. So that is the move we're pushing clients to make that are on these legacy services. It is directly related. The higher churned and expected is directly tied to that reversal of contingent liability that is related to their note, yes.

Gotcha.

Okay. They're lower margin revenue customers. That's who we're really phasing out that don't want to pay more money for a better platform.

I understand. Okay. Thanks, guys. Thank you.

Thank you. And we'll take our next question from Zach Cummings from E. Reilly Securities. Please go ahead.

Hi, David and Kelly. Thanks for taking my questions. David, I wanted to ask about your partnership strategy in the EU. What's kind of the ideal partner for AudioEye to be targeting to most effectively get the coverage that you want and really drive adoption on that front?

Yeah, there's a lot of agencies over there. We're probably targeting around 300 to 500 agencies that make websites for clients. So those are the ideal partners over there.

Understood. And are there any particular member states within the EU where you've seen more traction out the gate versus others, just given the strict penalties? I know it can vary from member state to member state, but just curious if there's any light you can shed on that.

It's been all over. We've seen it in France, Germany, Italy, UK. That's from top of mind what I'm seeing right now, the bigger countries. So that's where I'm seeing it. Got it.

And final question for me is just around Title II of the DOJ. I know you have some pretty big partners in place that you've been building out of practice with. Just curious if you can give any sort of update around that. It sounds like you're expecting a pickup here in the second half and maybe even accelerating in 2026. So any additional color on that front would be great.

Yeah, they're focusing on investing resources, obviously, to capture the opportunity in front of them. And when I say they, that's Final Sight, Civic Plus. They've both implemented very aggressive go-to-market plans, and their pipelines are building nicely. We are working with them on a few initiatives and expecting some pretty good momentum as we get into the second half here and next year.

Understood. Well, thanks for taking my questions, and best of luck for the rest of the quarter. Thank you.

As a reminder, that's Star 1 if you do have a question or comment. And we'll take our next question from Richard Baldry from Roth Capital. Please go ahead, Richard.

Thanks. I'm sorry if you've already covered this, but more and more of the companies I've talked to are talking about AI more internally than necessarily externally. They're finding they can get some pretty tremendous efficiencies on mostly development productivity right now, but they think across the board. Can you talk about how much you feel like that's already starting to impact your internal ability and where you think that it matters the most in Does it move the dial on long-term profitability or not in your model? Thanks.

Yeah, that's a good question. Look, we're building AI into everything we do from testing, remediation. We think that's going to improve the accuracy and margins over time. Our internal tests show that AI is very good at solving specific common accessibility issues but not great at issues requiring contextual understanding. But we are continuing to experiment with AI for issue detection. We're already the best out there for that. We're also integrating, to your point, AI in our development workflow and within our own CICD pipeline. And we're using AI with our accessibility experts when writing custom fixes. So I think it's a long-term driver of margin and scale.

Again, I don't know if you've already addressed this, so I apologize if you have, but when you look at the mandates that are coming into play, how much do you think the clients will be, you know, early adopters to avoid or to, you know, to be compliant versus waiting to try to understand what the penalties would be and how severe, how common enforcement will be? What's your sort of sense on that? And does that change sort of between sort of the enterprise players and versus, you know, rest of the business? How do we think about that?

I think it's going to take a while there. Over the next five years is what I've said before, similar to how GDPR was adopted. And the big players will adopt first, in my view.

Got it. Thanks. Thank you.

Thank you. At this time, this concludes our question and answer session. I'd like to turn the call back over to Mr. Marotti for his closing remarks.

Yep. 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.

Thank you. 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 2025 earnings conference call. You may now disconnect and have a great day.