AudioEye, Inc.

Good afternoon and welcome to AudioEye's third quarter 2026 earnings conference call. Joining us for today's call are AudioEye's Chief Executive Officer, Ms. Kelly Georgevich, and Chief Financial Officer, Mr. Matthew Domeyer. 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 in the Investor Relations section of the company's website at www.audioeye.com. Before I turn the call over to AudioEye's CEO, 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 risk and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call. and in the risk factors 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 four looking statements, which reflect management's belief only as of the date hereof. AudioEye does not undertake any duty to update or correct any four looking statements. 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 an investor relations section of its website at www.audioeye.com. Now, I'd like to turn the call over to AudioEye's CEO, Ms. Kelly Georgevich.

Thank you, Operator. We had a great quarter, generating record revenue, record adjusted EBITDA, strong free cash flow, and positive GAAP net income, driven by efficiencies and increased AI use across the company. We are also excited to discuss accelerating revenue growth in Q4 with continued operating leverage. In 2025, we introduced an aspirational goal of 30 to 40% growth in adjusted EBITDA and adjusted EPS per year over the following three years. We are pleased to report that we continue to deliver against this aspirational target and now expect approximately 50% growth in adjusted EBITDA in 2026. We also expect a Q4 adjusted EBITDA annualized run rate of over $17 million, up from previous expectations of $15 million. This translates into an annualized run rate for adjusted EPS of around $1.30 in Q4. Gross margin improved over 550 basis points year over year with adjusted gross margins of 88% in Q3 driven by efficiency and increased use of AI. Adjusted EBITDA in Q3 was $3.9 million of 58% year over year. The adjusted EBITDA margin was 35% in Q3. As we anticipated and as indicated last quarter, litigation expense decreased in Q3. We expect a further reduction in Q4 and believe litigation expense will continue to trend down. We expect meaningful free cash flow generation in Q4 and into 2027, and we recently announced a $15 million stock repurchase program that runs through October 2027. This represents approximately 15% of outstanding shares at current prices. It's worth noting that our revenue has nearly doubled over the last five years while our outstanding shares have increased by approximately 10% in this timeframe. We also had a strong quarter in terms of GAAP profitability. In Q3, GAAP net income was $1 million or 8 cents per share compared to a net loss of 600,000 and 4 cents per share lost last year. Revenue was approximately $11 million representing our 43rd consecutive quarter record revenue. ARR grew $1 million sequentially to $43.3 million at September 30th, 2026, 12% over the prior year. On October 8th, we launched two new products, Agenic Audits and our SDK MCP. Both are built on what we call AudioEye Intelligence, our proprietary dataset created from more than 1 million human accessibility reviews across more than 100,000 sites over 10 years. Our SDK MCP brings audio intelligence into AI coding tools developers already use so they can catch and fix issues while coding is being created. Our agentic audits use an AI agent powered by our proprietary data set to move through a site the way a real user would, opening menus, filling out forms, and going through checkout. They can find up to 50% more high severity issues than automation alone and most results come back within an hour. Our solution already delivers three to four times the legal protection of others. These new products add to that protection, helping developers ship more compliant code from the start and helping companies catch high-risk issues as their sites change. These products represent exciting upsell opportunities. In September, we released a study on how well AI coding tools build accessible websites. We asked AI agents to create 15 sites that comply with WCAG 2.2 AA standards. We found that even when explicitly instructed to make the site accessible, it could not. The AI-generated sites averaged 55 issues per page compared to 62 on a typical site. And AI-generated e-commerce sites had three times as many issues as other e-commerce sites. Because AI models have been trained on an inaccessible web, they repeat the same accessibility failures. Digital accessibility has become a critical part of AI readiness as well as compliance. As more agents complete tasks for humans, they increasingly rely on a web accessibility tree to navigate the site. To illustrate how important the accessibility tree has become, we've published research on how AI agents perform on inaccessible websites. We ran AI agents through everyday tasks on six sites with and without AudioEyes fixes. We found that on the least accessible site, AI agents completed only 31% of their tasks. With AudioEye's fixes, that rose to 96%. AI agents navigate through a site's accessibility tree, so when it's broken, they can't complete tasks like making a purchase or booking. This means an accessible site now serves two audiences, people with disabilities and the AI agents acting on behalf of customers. On the regulatory side, in September, the European Standards Bodies published an updated accessibility standard that adopts WCAG 2.2, which raises the bar for companies covered by the European Accessibility Act. Stateside, Hawaii signed a new law in July, Act 257. Act 257 is the first state law to require all private businesses to conform to WCAG 2.1 Level A and AA through rules the state is now finalizing. This will have significant implications for the travel and hospitality industry. We believe other states may follow Hawaii's lead. The new law took effect July 14, 2026 with compliance deadlines 24 to 36 months after the rules are final. Turning to guidance. For the fourth quarter of 2026, we expect revenue between $11.4 and $11.6 million a sequential increase from the third quarter of 2026 of approximately $550,000 at the midpoint and approximately 20% annualized sequential revenue growth. For the full year 2026, we are narrowing the revenue range to between $43.6 and $43.8 million. For the fourth quarter of 2026, we expect adjusted EBITDA of between $4.2 and $4.4 million a 56% increase over the fourth quarter of 2025 at the midpoint and adjusted EBITDA margin of approximately 37%. We expect adjusted EPS of between 32 and 33 cents per share for the fourth quarter of 2026. For the full year 2026, we are increasing adjusted EBITDA guidance from at least 12.7 million to between 13.4 and 13.6 million dollars. representing approximately 50% year-over-year growth. As mentioned earlier, Q4 adjusted EBITDA guidance represents an annualized run rate of over $17 million, and we expect cash generation to ramp significantly in Q4 in 2027. In the fourth quarter, at the midpoint of guidance, an adjusted EBITDA of $4.3 million, less around $400,000 of software development costs, implies $3.9 million of adjusted free cash flow. Litigation expenses decreased in Q3, down approximately 50% from the second quarter. Further decreases in litigation expense are expected in the fourth quarter, contributing to substantial cash generation. With that, I'll hand it over to Matt to cover our financial results in more detail.

Thank you, Kelly. As Kelly mentioned, revenue for the third quarter was a record $11 million, representing our 43rd consecutive period of record revenue. Annual recurring revenue was $43.3 million as of September 30th, 2026, up from $42.3 million as of June 30th, 2026. Year over year, ARR grew 12% driven by double digit growth in both our partner and marketplace and enterprise channels. As of September 30th, 2026, AudioEye had approximately 130,000 customers. up 7,000 or 6% from approximately 123,000 customers as of September 30th, 2025 and up approximately 1,000 from June 30th, 2026. The increase was driven primarily by our partner and marketplace channel with enterprise customers also increasing. Both of our two revenue channels continue to deliver strong results. AudioEye's enterprise channel consists of our larger customers and organization that generally engage directly with AudioEye sales personnel for pricing and solutions. As we have previously discussed, in 2026, we have reduced our emphasis on non-recurring revenue to focus on growing ARR. In the third quarter of 2026, enterprise revenue was relatively flat year over year with lower non-recurring revenue being offset by increases in recurring revenue. Our focus on enterprise ARR is showing results. and it increased 10% over the comparable prior year period as we continue to deliver some of our strongest new and expansion business to date. As of September 30th, 2026, Enterprise ARR represented approximately 41% of total ARR. Our partner and marketplace channel includes all revenue from our SMB-focused marketplace products, as well as from partners who deploy these products for their SMB customers. In the third quarter of 2026, the Partner and Marketplace channel revenue increased 14% year over year. We again saw strong expansion from our state and local government partners in the quarter. Partner and Marketplace ARR grew by 14% compared to the prior year quarter and represented approximately 59% of total ARR as of September 30, 2026. Gross margin for the third quarter expanded over 550 basis points to 83%, compared to 77% in the third quarter of 2025. Gross profit grew 15% to $9.1 million, compared to $7.9 million in the prior year period. While revenue grew 7%, cost of revenue declined 19%, resulting in 160% conversion of incremental revenue to gross profit. The reduction in cost of revenue came primarily from AI-driven efficiencies in engineering and service delivery. Adjusted growth margin was 88% in Q3 2026 compared to 83% in the prior year comparable period. The increase in adjusted growth margin is consistent with the gap change. In the third quarter of 2026, operating expenses decreased 5% or $400,000 to $7.8 million. The decrease in operating expenses was driven primarily by lower R&D and sales and marketing spent. Our total R&D spend in Q3 was approximately $1.3 million, including approximately $400,000 recorded as capitalized software development costs. Total R&D spend decreased 17% year over year and with around 12% of Q3 2026 revenue, down from 15% in Q3 2025, driven by increased AI usage. Net income in the third quarter of 2026 was $1 million or $0.08 per diluted share, compared to a net loss of $0.6 million or $0.04 per share in the same year-ago period, driven by higher gross profit and lower operating expenses noted previously. In the third quarter of 2026, we achieved record adjusted EBITDA of approximately $3.9 million for adjusted EPS of 30 cents per diluted share and an adjusted EBITDA margin of 35%. This compares to Q3 2025, which had an adjusted EBITDA of $2.5 million for adjusted EPS of 19 cents per share and an adjusted EBITDA margin of 24%. The $1.4 million, or 58% increase in adjusted EBITDA over the comparable period of the prior year was primarily driven by increases in gross profit and AI efficiencies. In the third quarter, we generated $3.5 million of free cash flow, calculated as adjusted EBITDA of $3.9 million plus $400,000 of capitalized software development costs. and improvement of $1.5 million from the third quarter of 2025. Turning to the balance sheet, we ended the quarter with $9.3 million in cash, an increase of $600,000 from June 30th, 2026 and $3 million available under our revolving line of credit. As of September 30th, 2026, our net debt defined as total debt less cash was $7.2 million. Net debt has declined approximately $1 million year to date and our net debt to adjusted EBITDA ratio using the midpoint of our updated 2026 adjusted EBITDA guidance is approximately 0.5. With that, I'll turn the call back to the operator to open the line for questions. Operator?