AudioEye, Inc. (NASDAQ:AEYE) Q2 2022 Earnings Conference Call August 9, 2022 4:30 PM ET
Company Participants
Brian Prenoveau – IR
David Moradi – Chief Executive Officer
Kelly Georgevich – Chief Financial Officer
Conference Call Participants
Scott Buck – H.C. Wainwright
Operator
Good afternoon and welcome to AudioEye Inc’s Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Brian Prenoveau. Please go ahead.
Brian Prenoveau
Thank you, operator. Joining us for today’s call are AudioEye’s CEO, Mr. David Moradi; and CFO, Ms. Kelly Georgevich. 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 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 risks 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 forward-looking statements, which reflect management’s belief only as 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 posted in the Investor Relations section of our website at www.audioeye.com.
Now, I’d like to turn the call over to AudioEye’s Chief Executive Officer, Mr. David Moradi. Sir, the floor is yours.
David Moradi
Thank you, Brian. Welcome everyone and thank you for joining us. Earlier this afternoon, we issued a press release announcing our results for the second quarter that ended June 30, 2022. You can find the press release on our website’s Investor Relations section at www.audioeye.com. We’re excited to share the progress we have made in the quarter and would like to begin by discussing our strong financial results.
Our second quarter revenue was at the high end of the guidance range we provided last quarter at $7.6 million. Revenue growth continues to accelerate with the second quarter representing 26% year-over-year growth. Revenue growth resulted from senior expansion in our partnership and marketplace channel, which I will discuss in more detail, organic growth in our enterprise sales channel, and revenue from our acquisition of the Bureau of Internet Accessibility. We are pleased with the integration of BOIA into AudioEye, which is performing within expectations.
In addition to achieving the high end of guidance, we are pleased to report our second quarter non-GAAP per share operating loss was reduced to $0.02 in the quarter. The improvement is primarily the result of increased revenue and efficiencies coupled with expense management. Annual recurring revenue or ARR ended the quarter at $28.7 million, up 19% versus the comparable year ago period. The increase was driven by growth across all channels. ARR was affected by the timing of enterprise deals at the end of the quarter and the calling of lower profit margin accounts.
In addition to the solid financial results in the quarter, we recently announced two new partnerships, I would like to highlight. In July, we formally announced new partnerships with Celerant and Vendasta. Celerant is a leading provider of omnichannel retail point of sale solutions, which processes over $2.5 billion in annual retail sales. Vendasta is a leading platform for local experts who sell digital solutions to small and medium businesses, with a network of more than 65,000 partners serving over 6 million SMBs. These opportunities have significant potential and further validate that our product offering is best on the market and that our strategic approach to revenue growth through partnerships is working.
Our cost effective and comprehensive approach to solving web accessibility issues at scale is driving our high deal winning percentage, with these sophisticated and discerning resellers and platforms. Celerant previously used a vendor and have this to say, AudioEye quickly showed us that they are a partner that cares about us, as well as our clients to deliver custom accessible experiences to those that need them. While many make these claims, AudioEye’s world-class technology paired with certified accessibility and legal experts make them stand out as a partner we can trust.
The last development on the partnership side, I would like to touch on is the progress on the digital agency negotiation I discussed in the previous earnings call. In the first quarter of 2022, our customer count decreased due to renegotiations with digital agency upgrading from a basic tier to a more advanced offering. We are pleased to confirm that a new agreement has been signed with this agency. The new deal is a win for all parties. We expect more of their customers to deploy and benefit from our accessibility solution and ARR will be materially higher over time than in the prior agreement.
In the second quarter, we announced a $3 million stock repurchase program. The program is authorized this second quarter of 2024. We are committed to deploying our capital in a manner that delivers the greatest value for all shareholders. We are hard pressed to find many opportunities that represent higher return potential than our common shares, when looking at our growth prospects, and what similar companies are being valued at in the private markets. As of June 30, 2022, we have repurchased approximately $410,000 under the program.
Moving on to guidance. We’re guiding for revenue of between $7.65 million and $7.85 million in the third quarter, representing year-over-year growth of approximately 25% at the midpoint. In the second quarter, our operating loss excluding non-recurring items and non-GAAP adjustments was reduced to approximately $250,000 a substantial sequential improvement. We expect operating loss, excluding non-recurring items to remain stable in the third quarter and near breakeven by the fourth quarter. We ended the second quarter well capitalized with over $9 million of cash on June 30 and have their runway to continue investing in the business for the long term.
I will now turn the call over to AudioEye’s CFO, Kelly Georgevich. Kelly?
Kelly Georgevich
Thank you, David. As David mentioned, we are pleased with our second quarter 2022 performance. The second quarter marked the 26th straight quarter of record revenue, ending the quarter at $7.6 million, which was 26% growth year-over-year.
Annual recurring revenue or ARR at the end of the second quarter of 2022 was $28.7 million, a 19% increase over ARR at the end of the second quarter of 2021. Both revenue channels experienced organic growth, with the Bureau of Internet Accessibility acquisition also contributing to enterprise revenue growth in the quarter.
Looking at our revenue channels in more detail. The Partner and Marketplace channel, which includes revenue from our SMB focused marketplace products, and a variety of SMB targeted partners grew 16% year-over-year and represented approximately 52% of total revenue and 55% of ARR. We expect to continue to see this channel contribute significantly to our growth in revenue as we continue to both land (ph) new partners and expand existing partnerships.
The enterprise channel, inclusive of revenue from the Bureau of Internet Accessibility had a strong quarter, increasing 38% year-over-year and contributing approximately 48% of total revenue and 45% of ARR. In addition, recurring revenue from the enterprise channel increased 27% over the same period in prior year. We were pleased to see project based revenue increase over the same period of prior year with the addition of BOIA revenue, which help offset decreases in project based mobile and PDF revenue in 2022.
On June 30, 2022, our customer count was approximately 76,000, an increase from 75,000 customers at June 30, 2021. As David highlighted, we also signed an updated contract with the agency that was going through renegotiations in Q1 and fell out of the customer count. We are excited to have extended and expanded this partnership going forward.
Gross profit for the second quarter was $5.7 million or about 76% of revenue compared to $4.5 million and 75% of revenue in Q2 of last year. We are pleased with the consistent gross margin percent given the significant investment in our next generation platform and customer success costs which play a factor in cost of revenue. We expect gross margin to be around 75% for the remainder of 2022.
With revenues up 26% year-over-year, operating expenses in the second quarter of 2022 increased 10% to $8.3 million from $7.6 million in the same quarter last year. This increase was primarily driven by expenses from the Bureau of Internet Accessibility and investments in headcount offset by efficiencies in sales and marketing and lower stock compensation expense. Sequentially from Q1 2022, operating expenses decreased by approximately $500,000, as a result of more effective marketing spend, lower non-reoccurring items and efficiencies across all departments, partially offset by a full quarter of BOIA related expenses in Q2 2022.
Our total R&D spend in Q2 was approximately $1.7 million with approximately $325,000 reflected the software development costs in the investing section of the cash flow statement. This total R&D spend is about 23% of our revenue this quarter versus 32% last year. We are committed to investments in R&D to maintain a best-in-class product and increasing revenue is providing us additional operating leverage.
Net loss in the second quarter of 2022 was $2.6 million or $0.23 per share compared to a net loss of $1.8 million or $0.17 per share in the same year ago period. The second quarter of 2021 benefited from a $1.3 million gain on loan forgiveness, which was non-recurring. On a non-GAAP basis, net loss in the second quarter was about $250,000 or $0.02 per share compared to a non-GAAP net loss of $650,000 or $0.06 per share in the same year ago period. The primary adjustments to GAAP earnings and EPS for Q2 2022 for non-cash share-based compensation, depreciation and amortization costs and litigation costs.
Cash burn in Q2 2022 was with an expectation with decreased cash of $2.7 million in the quarter. The decrease in cash was related to operating burn of approximately $250,000, software capitalization of approximately $325,000, $410,000 for stock repurchase, $150,000 for tax payments related to employee share-based grants, $1 million for non-reoccurring items and approximately $600,000 from other working capital movements.
Going forward, we expect overall cash used to go down sequentially in the third and fourth quarters. Our balance sheet remains well capitalized with zero debt and $9.3 million of cash on June 30, 2022.
With that, we open up the call for questions. Operator, please give instructions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Buck with H.C. Wainwright. Please go ahead.
Scott Buck
Hi. Good afternoon, guys. Thank you for taking my questions. I think the first one, David, you called out the Celerant and Vendasta partnerships in the release and spoke to them (ph) on the call. Can you remind us what the lead times are like in terms of when we’ll start see some revenue? And then maybe how large are these individual customers that they can present to you in terms of revenue?
David Moradi
Sure. Yeah. The lead time deals like this typically take multiple quarters very significant opportunities over the long haul as we’ve seen with mega resellers in the past or platforms. Vendasta would qualify as a platform with 6 million SMBs on their side. What else were you asking your question?
Scott Buck
Just in terms of the size of the individual customers you can sign through the reseller channel here, I mean, are they — in terms of annual revenue, are they a couple hundred or are they, several thousand dollars?
David Moradi
Yeah. In terms of annual revenue, it could be anywhere from $500 to $700, up to $20,000 to (ph) $30,000 in that range.
Scott Buck
Okay. That’s helpful. And then, Kelly, do you mind telling us what BOIA (ph) contributed in the quarter in terms of revenue?
Kelly Georgevich
We’re not disclosing contributions from BOIA specifically in the quarter. We can say that they did contribute to enterprise and we did see organic growth in both the enterprise and reseller channel and we are pleased to see the BOIA revenue offset decreases in PDF and mobile project based revenue in 2022.
Scott Buck
Okay. Do you guys mind telling us, how you’re marketing that now that it’s, under the AudioEye umbrella or, is it operating as a standalone at the moment or have you integrated it with some of your other products?
David Moradi
Yeah. It’s currently being integrated in. So we’re in the process of doing that with product and sales and marketing.
Scott Buck
Okay. That’s helpful. And then last one for me. Just curious on the repurchase, how should we think about repurchases going forward or how are you looking at it? If the stock trades under 6, should we assume that you guys are in the market repurchasing or what’s the criteria that you look at?
David Moradi
We’re looking at a variety of factors. First, the stock is extremely cheap at — I think less than 2 times revenue if you take out the cash from the NOL. So we’re hard pressed to find many opportunities like this, especially when you look at the private market, we see transactions that are very similar to us anywhere from 8 times to 12 times even in the current market environment. And so that’s the reason for the stock repurchase. We can’t give you exact levels of where we’re going to go in and buy, and it to change at any time. And so I don’t really want to talk about what we’re doing intra quarter.
Scott Buck
Sure. That’s fair. Well, I appreciate the time guys and congrats on all the progress.
David Moradi
Thank you Scott.
Operator
[Operator Instructions] Our next question comes from Zach Cummins with B. Riley. Please go ahead.
Unidentified Participant
Hi, there. This is [indiscernible] on for Zach today. Just a few questions from me. Have you — first of all, have you seen any elongation of sales cycles or softness in demand related to the current macro environment?
David Moradi
Hi, Kat (ph). We’ve seen a little tightening on the enterprise side of budgets and that was towards the end of the quarter. However, we did bring in a lot of those deals over the past five weeks in this new quarter. So there’s a little bit of tightness on the enterprise side that we’ve seen. I think you’ve also seen in the market SMBs has said similar commentary in terms of the large public website builders are signaling some weakness in terms of SMBs.
So I don’t think we’re immune to recessionary environment. I think we’re holding in very well. Like I said, we closed a lot of these enterprise deals that came in because of budget reasons. They still have to solve their problems of accessibility. So even though they put it off in a given quarter, they got to come back and solve this eventually. Otherwise, they’re opening themselves up to litigation and brand risk.
Unidentified Participant
Great. Okay. The next from me, so can you give a little bit more insight into the new contract with your agency partner. Again, kind of what is this expected to contribute in terms of customer count in ARR, if you could give any kind of insight there? That’d be helpful.
David Moradi
Yeah. I don’t think we can speak about specific customers or contracts. We’re just very positive on these type of deals going forward and think they’re going to contribute a lot of ARR and customer count in the future. So we look to scale those up over the next few quarters.
Unidentified Participant
All right. Okay. And then the last one for me. can you give any more detail regarding partnerships with Celerant and Vendasta? Currently, like what type of revenue are they contributing and what sort of growth opportunities can we see with these two?
David Moradi
Yeah. That’d be the same as the last answer. We can’t really speak to specifics on those. There’s just very significant opportunities in the long haul.
Unidentified Participant
Okay. Thanks you guys.
David Moradi
No problem.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to David Moradi for any closing remarks. Please go ahead.
David Moradi
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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