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AudioEye, Inc. (NASDAQ:AEYE) Q3 2023 Outcomes Convention Name November 2, 2023 4:30 PM ET
Firm Individuals
David Moradi – CEO
Kelly Georgevich – CFOO
Convention Name Individuals
George Sutton – Craig-Hallum
Zach Cummins – B. Riley FBR
Scott Buck – H.C. Wainwright
Operator
Good afternoon and welcome to AudioEye’s Third Quarter 2023 Earnings Convention Name. Becoming a member of us for immediately’s name are AudioEye’s CEO, Mr. David Moradi; and CFO, Ms. Kelly Georgevich.
Following their remarks, we’ll open the decision for questions from the Firm publishing analysts. I want to remind everybody that this name will probably be recorded and made accessible for replay through a hyperlink accessible within the Investor Relations part of the Firm’s web site at www.audioeye.com.
Earlier than I flip the decision over to AudioEye’s Chief Government Officer, the Firm want to remind all members that statements made by AudioEye administration through the course of this convention name that aren’t historic info are thought-about to be forward-looking statements. The Non-public Securities Litigation Reform Act of 1995 offers a protected harbor for such forward-looking statements. The phrases imagine, anticipate, anticipate, estimate, assured, will; and different related statements of expectation determine forward-looking statements. These statements are predictions, projections or different statements about future occasions; and are based mostly on present expectations and assumptions which might be topic to dangers and uncertainties. Precise outcomes might materially differ due to elements mentioned in immediately’s press launch; within the feedback made throughout this convention name; and within the Threat Components part of the Firm’s annual report on Type 10-Okay, its quarterly stories on Type 10-Q and its different stories and filings with the Securities and Change Fee. Individuals on this name are cautioned to not place undue reliance on these forward-looking statements, which replicate administration’s beliefs solely as of the date hereof. AudioEye doesn’t undertake any responsibility to replace or appropriate any forward-looking statements.
Additional, administration’s remarks immediately will embody sure non-GAAP monetary measures. A reconciliation of essentially the most immediately comparable GAAP monetary measures to those non-GAAP monetary measures is on the market within the Firm’s earnings launch posted within the Investor Relations part of its web site at www.audioeye.com.
Now I want to flip the decision over to AudioEye’s Chief Government Officer, Mr. David Moradi.
Sir, please proceed.
David Moradi
Thanks, operator. Welcome, everybody, and thanks for becoming a member of us. We have been exhausting at work and are happy to ship a number of thrilling bulletins: first, document annual recurring income or ARR of $30.5 million, a rise of roughly $800,000 sequentially, representing the most important sequential development in six quarters; second, income of $7.84 million, representing the thirty first sequential quarter of document income; document reported non-GAAP profitability of $300,000 within the third quarter, forward of expectations of $100,000. Lastly, we stay on monitor to ship constructive free money circulation within the fourth quarter. Kelly will talk about the monetary efficiency in additional element shortly.
In the course of the quarter, we launched the {industry}’s first digital accessibility index report. The outcomes confirmed that conventional consulting approaches to fixing net accessibility have failed and that principally Web stays inaccessible for these with incapacity. As a part of the research, AudioEye performed an automatic scan of over 2 million pages throughout 40,000 web sites from corporations with over $100 million in annual income.
Greater than 3 billion site-specific components have been examined, together with photos, hyperlinks and headers. Following the scan, accessibility consultants, together with members of the incapacity neighborhood, audited the highest websites in every {industry}, revealing which points are most disruptive to customers. Of the three billion web site components examined, the findings concluded each web page had at the very least one accessibility error. And the typical web page had 37 gadgets that failed one of many success standards of WCAG.
Our research discovered that essentially the most frequent obstacles have been associated to picture accessibility, descriptive hyperlinks and keyboard accessibility, which considerably impacts folks with a incapacity on this planet attempting to make the most of the Web. The obstacles discovered have been important: stopping folks with disabilities from undertaking essential duties that many people usually rely upon comparable to on-line procuring, banking, information archives and job-related actions. AudioEye has the perfect product available in the market to resolve digital accessibility at scale, using a singular mixture of AI coupled with a scalable method to leverage human-assisted expertise to catch errors that expertise alone can not detect.
Lately, we additionally shared findings from an evaluation of over 900 authorized claims from over 100 lawsuits and demand letters. The information is compelling. Prospects utilizing AudioEye managed plans are 67% much less prone to obtain a lawsuit with a sound WCAG difficulty in comparison with opponents, providing the very best charges of safety towards authorized claims within the {industry}. As well as, whereas digital accessibility lawsuits elevated year-over-year, lawsuits towards AudioEye prospects are lowering. Within the first half of 2023, lawsuits towards AudioEye prospects decreased by over 33% in comparison with the primary half of ’22 regardless of a rise in industry-wide lawsuits.
Shifting on to steerage. We’re guiding revenues between $7.9 million and $8 million for the fourth quarter of 2023. Fourth quarter will see the ultimate sequential impacts of onetime income from the BoIA integration. We anticipate to generate a sequential enhance in non-GAAP profitability within the fourth quarter and stay on monitor to ship free money circulation within the quarter.
I will now flip the decision over to AudioEye’s CFO. Kelly?
Kelly Georgevich
Thanks, David. Q3 2023 marks the thirty first straight quarter of document income with $7.84 million, which represents 2% development over the comparable interval of prior 12 months. Annual recurring income or ARR on the finish of the third quarter of 2023 was $30.5 million, an $800,000 enhance from ARR on the finish of the second quarter of 2023 and represents an ARR annualized development price of 10.8%. We have been happy to see ARR develop at its highest price in 1.5 years.
Our two income channels are persevering with to ship stable efficiency. The Accomplice and Market channel consists of all income from our SMB-focused market merchandise and income from quite a lot of companions to deploy these similar merchandise for his or her SMB prospects. Within the third quarter of 2023, this income channel grew 14% year-over-year and represented roughly 59% of income and 61% of ARR. Q3 2023 noticed the very best development in ARR for the Accomplice and Market channel since This fall of 2020, with development coming from quite a lot of sources inside this channel. We anticipate this momentum to proceed within the subsequent quarter.
Our Enterprise income channel, which [typically consists] of our bigger prospects and organizations, made up 41% of income and 39% of ARR within the third quarter of 2023. As talked about beforehand, this channel confronted further headwinds within the first half of 2023, with one massive buyer contract renegotiations having an affect on whole Enterprise income which we anticipate to normalize within the first half of 2024.
We now have seen early success within the integration of BoIA and promoting current prospects an expanded suite of providers, in order anticipated, the conversion of onetime audit income to recurring providers did have an roughly $200,000 affect to Q3’s 2023 income. Our This fall income steerage incorporates a lesser affect to finish this course of.
The whole buyer depend elevated notably in Q3 2023 to roughly 107,000 prospects from roughly 81,000 prospects on September 30, 2022, and 104,000 prospects on June 30, 2023. Enhance within the buyer depend was the results of buyer additions in our Accomplice and Market channel.
Gross revenue for the third quarter was $6.1 million or about 77% of income in comparison with $5.8 million and 75% of income in Q3 of final 12 months. We proceed to achieve effectivity within the delivering of our services and products, which has resulted in decrease price of income whereas revenues elevated.
Whereas revenues have been comparatively according to the comparable interval of prior 12 months with 2% development, working bills decreased roughly 8% or $600,000 to $7.4 million. This lower was the results of continued efficiencies in gross sales and advertising and G&A, offset by continued investments in R&D.
Our whole R&D spend in Q3 2023 was roughly $2.4 million, with roughly $500,000 mirrored as software program growth prices within the investing part of the money circulation assertion. The whole R&D spend is about 31% of our income this quarter versus 33% sequentially. We now have invested notably in R&D during the last 12 months, bettering our software program and including new merchandise. We anticipate R&D funding as a % of income to proceed coming down over the subsequent few quarters.
Internet loss within the third quarter of 2023 was $1.4 million or $0.11 per share in comparison with $2.3 million or $0.20 per share in the identical 12 months in the past interval. Complete web loss decreased 41% or $900,000 from the comparable interval of prior 12 months, because of a rise in gross revenue in addition to strategic and environment friendly spending in all departments.
On a non-GAAP foundation, our Q3 web revenue was $300,000 or $0.02 per share in comparison with a web revenue of $100,000 and $0.01 per share in the identical 12 months in the past interval. The first changes to GAAP earnings and EPS for Q3 2023 have been noncash share-based compensation, depreciation and amortization and different nonrecurring gadgets.
Money decreased by $1 million within the quarter, which was a results of money outlays for tax funds from worker share-based grants of roughly $100,000, non-GAAP litigation bills of roughly $100,000, software program capitalization of $500,000 and $300,000 of web money used from different working actions. As David talked about, we anticipate to generate free money circulation and construct money within the fourth quarter.
With that, we open up the decision for questions. Operator, please give directions.
Query-and-Reply Session
Operator
We’ll now take questions from the Firm’s publishing analysts. [Operator Instructions] Our first query will come from George Sutton with Craig-Hallum.
George Sutton
David, I questioned in the event you might work for a second with us on the DOJ proposed rule. The remark interval ended final month, that means we should always get a remaining rule within the relative close to time period. I assume, like us, you have been actively studying the feedback and have a little bit of perspective, so I am simply curious what your perspective can be relative to the ultimate rule. After which separate from that, how are you pondering of positioning the enterprise to profit from that final rule?
David Moradi
Sure, as you mentioned — it is a good query. There was a 60-day remark interval. We’re actually enthusiastic about this for Title II. Hopefully, we hear one thing quickly. And we’re ramping up, this for the federal government sector as nicely when it comes to what we’ll do on gross sales and advertising initiatives, however we expect we’ll have a while. Demand in all probability picks up on this after the rule comes out in a single to 2 years.
George Sutton
Separate from that, you have talked about constructing out your gross sales crew during the last couple of quarters. Are you able to simply give us an replace on the go-to-market plans and form of how that feeds into your expectations for 2024?
David Moradi
You are speaking in regards to the Enterprise gross sales crew, proper?
George Sutton
Sure.
David Moradi
Sure. We anticipate this course of to ramp up over the subsequent few months. We simply employed these of us again in July, August. In order that they take about six months to ramp, however we’re seeing actually good progress, to date. And pipeline can be constructing, so that provides us quite a lot of confidence we’ll see good development into 2024.
George Sutton
And I perceive you are not giving steerage but on ’24, however good development in 2024, any perspective on what that may appear to be?
David Moradi
Greater than ’23, ’23 to ’22.
Operator
Our subsequent query comes from Zach Cummins with B. Riley FBR.
Zach Cummins
Congrats on the sequential enhance within the ARR and robust profitability on this quarter. David, simply beginning off, I imply, are you able to speak somewhat bit extra in regards to the present atmosphere, simply talking extra so to the promoting atmosphere on each the Accomplice and Market facet — and clearly Enterprise will take somewhat extra time to ramp up in accordance together with your gross sales crew. However simply curious in your perspective of the general atmosphere. And what’s driving your confidence in continued ARR development?
David Moradi
Sure. The macro atmosphere is a bit robust on the market. You are seeing some tightness on enterprise budgets. Folks wish to minimize prices, however we’re seeing good pipeline development due to our merchandise and positioning. However there are positively price range and value pressures. I am positive you are seeing that as nicely on the market in enterprise SaaS.
Zach Cummins
Obtained it. And when it comes to the, I suppose, time line to constructive free money circulation, good to see that reaffirmed right here in This fall. I am simply curious the way you’re eager about the required capital to proceed to execute upon development plans shifting ahead. Say demand actually begins to select up otherwise you execute on the Enterprise facet. Simply the way you’re eager about accessible or vital capital you have to run the enterprise.
Kelly Georgevich
Sure. I can take that, Zach. We do proceed to imagine that we’ve ample money available to fund ongoing operations. We do anticipate income, with the momentum on the partnership facet and enlargement on the Enterprise facet, to develop and quite a lot of that to drop to the underside line. And so we be ok with our money place and the place we stand, particularly with the era anticipated in This fall and past.
Zach Cummins
Understood. And remaining query for me is you at the moment are going to have a number of quarters in a row of bettering profitability. What is the method to investing in development versus persevering with to develop margins right here within the foreseeable future?
David Moradi
Sure, it is a good query. We have a look at issues holistically on the enterprise, resolve if we should always make investments extra into gross sales and advertising, with LTV-to-cap ratios, or extra into R&D, however we expect that is coming down. Or we purchase again inventory with money era. That is a risk.
Operator
Our subsequent query comes from Scott Buck with H.C. Wainwright.
Scott Buck
Only a couple for me. First one, on gross margin. So good year-over-year enlargement, nevertheless it seems prefer it’s type of stalled out right here within the type of simply final couple of quarters. Are we on the ceiling right here for gross margin, or do you assume you will have somewhat bit extra room to push increased?
Kelly Georgevich
We’re comfortable to see gross margin develop year-over-year. I feel we’ve confirmed we will discover efficiencies in price of income. We did that during the last 12 months. As we proceed to develop income, we anticipate to proceed to see efficiencies. And we do assume there may be the power to proceed to develop gross margins going ahead.
Scott Buck
Nice. Second one for me: You talked about R&D expense coming down a bit over the subsequent few quarters. Is that as a consequence of money constraints? Or is that extra intentional and simply when it comes to what you have to transfer the enterprise ahead?
David Moradi
Sure, we have invested quite a bit in R&D over the previous 12 months, actually improved the software program. And new merchandise are on the market, so we anticipate R&D is in a very good place. And investments ought to come down as a proportion of income over the subsequent few quarters, extra in keeping with {industry} metrics, which might be round 25% in [SaaS].
Scott Buck
And I am sorry. You mentioned you have been at 31% within the quarter. Is that appropriate?
David Moradi
Appropriate.
Operator
Presently, this concludes our question-and-answer session. I might now like to show the decision again over to Mr. Moradi for his closing remarks.
David Moradi
Thanks for becoming a member of us immediately. As at all times, I need to thank our staff, companions and traders for his or her continued help. We stay up for updating you on our subsequent name.
Operator
Thanks for becoming a member of us immediately for AudioEye’s third quarter 2023 earnings convention name. As at all times, we want to thank our staff and stakeholders, in your continued exhausting work and dedication. Chances are you’ll now disconnect.
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