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.