Q4 2020 AudioEye Inc Earnings Call TUCSON Mar 12, 2021 (Thomson StreetEvents) — Edited Transcript of AudioEye Inc earnings conference call or presentation Thursday, March 11, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Carr Bettis AudioEye, Inc. – Executive Chairman * David D. Moradi AudioEye, Inc. – CEO & Director * Sachin Barot AudioEye, Inc. – CFO ================================================================================ Conference Call Participants ================================================================================ * Allen Robert Klee Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst * Zachary Cummins B. Riley Securities, Inc., Research Division – Analyst ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Good afternoon, and welcome to AudioEye’s Fourth Quarter 2020 Earnings conference call. Joining us for today’s call are AudioEye’s Interim CEO, Mr. David Moradi; Executive Chairman, Dr. Carr Bettis; and CFO, Mr. Sach Barot. Following their remarks, we will open up 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 Executive Chairman, the company would like to remind all participants that statements made by AudioEye management during the course of this call that our nonhistorical 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 not based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today’s press release and the comments made during the conference call and in the risk factor sections of the company’s annual report on Form 10-K and its quarterly reports filing 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 Executive Chairman, Dr. Carr Bettis. Sir, please proceed. ——————————————————————————– Carr Bettis, AudioEye, Inc. – Executive Chairman  ——————————————————————————– Thank you, operator. Welcome, everyone, and thank you for joining us today. After the market close, we issued a press release announcing our results for the fourth quarter ended December 31, 2020. A copy of the press release is available in the Investor Relations section of our website at audioeye.com. I’ll now begin, as we always do here with the business overview. We are the leading provider of SaaS-based digital content accessibility platform and solutions. Our mission, eradicate all barriers to digital accessibility. We pride ourselves in addressing the largest range of issues that impact many people around the globe. At AudioEye, we do more than just identify accessibility issues. We strive to fix, maintain and continuously monitor them. We also certify websites to demonstrate compliance with both the Americans with Disabilities Act, or ADA, and the latest web content accessibility guidelines for WCAG 2.1. Furthermore, for our private sector clients, we give them an opportunity to gain an ROI from their investment in and commitment to a large population of individuals with disabilities. Before turning the call over to our interim CEO, David Moradi, I’ll provide a few highlights around our Q4 and full 2020 results. We had another truly excellent quarter and fiscal year. Q4 marks the 20th straight quarter of record revenue, ending the quarter at about $5.6 million, which was over 57% growth year-over-year. Monthly recurring revenue, or MRR, at the end of the fourth quarter of 2020 was about $1.9 million, a 54% increase over MRR at the end of the fourth quarter of 2019. On a full year basis, in 2020, our revenue grew 90% to $20.5 million from $10.8 million in 2019. Gross profit for the fourth quarter was $4.1 million or about 73% of revenue compared to $2.4 million and 66% of revenue in Q4 of last year. It’s worth looking back a bit further to put our margins and gross margin progress into context. Gross margin was 54% in the second quarter of 2019. Again, in the fourth quarter, gross margin was up materially to 73%. This is a result of the company’s strategy to increase automation and reflects the benefit of scale. As we mentioned in the past, we expect our gross margins to continue to improve. On a full year basis, gross profit increased 128% to $14.5 million or about 71% of total revenue from $6.4 million or about 59% of total revenue in the same year ago period. New customer acquisition is also very strong in Q4. We ended Q4 with approximately 32,000 customers, representing about 370% growth year-over-year. We are also very proud of our customer retention, which remains strong at historical rates. Our high retention rates speak to not only the quality, stickiness and transparency of our solution but to the excellent service that our team provides to our customers. Net loss in the fourth quarter of 2020 was $3 million or about $0.30 per share compared to $1.4 million or $0.16 per share in the same year ago period. However, on a non-GAAP basis, our Q4 net loss was about $900,000 or $0.09 per share compared to the same year ago period of about $1.3 million loss or $0.15 per share. On an annual basis, the net loss for 2020 was $7.2 million or $0.77 per share compared to $7.8 million or $0.97 per share for fiscal year 2019. On a non-GAAP basis, for the full year 2020, net loss improved to $2.6 million or $0.28 per share from $6.6 million or $0.81 per share for fiscal year 2019. The primary adjustments to GAAP earnings and EPS for both the full year and Q4 was noncash share-based compensation and amortization of interest expense related to the debt issuance. In the recent past, we provided an update on 3 revenue channels; enterprise, vertical partners and other, which has included the marketplace. However, our growth and strategy has evolved over the last 6 quarters to focus on 2 primary channels today; the partner and marketplace channel, and secondly, the enterprise channel. The partner and marketplace channel includes all revenue from our SMB focused marketplace products and revenue from a variety of partners who deploy these same products for their SMB customers. These include CMS partners of all types, such as industry vertical partners like Dealer.com, platform partners like Duda and general digital agencies. In the fourth quarter of 2020, this revenue channel represented more than 50% of our revenue and our MRR. As 2021 unfolds, we expect to continue to see this channel contribute explosive growth in customer count and MRR. We also remain excited about our enterprise channel. In the fourth quarter, we continue to add prominent enterprise brands from our direct sales efforts and continue to renew our enterprise clients at a healthy rate. Large enterprises also benefit from our focus on automation and transparency. We are proud that large multinational corporations and government agencies, both large and small, trust AudioEye with their digital accessibility solution. Finally, just a word about COVID-19. Since the spring of 2020, we discussed the uncertain impact of the global pandemic and its negative impact on our business. While there is still uncertainty about the impact of the pandemic in general, we’re pleased to say you’re seeing the COVID-driven headwinds being replaced with new business opportunities as commercial activity picks up. I’ll now turn the call over to David, who will provide a brief update on our platform and leadership development. David? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Thank you, Carr. It is my pleasure to speak with you today. I am pleased with the excellent fourth quarter and our results for 2020, but we are not resting or patting ourselves on the back. Instead, we have a single-minded determination to achieve our mission, eradicate all barriers to digital accessibility. Our bold, uncompromising mission requires execution and a great team of leaders and employees. I want to speak with you about 2 important things; first, AudioEye’s differentiated platform. Second, our team, which will execute on the strategy. First, I will discuss the platform. AudioEye’s platform is the most comprehensive technology-first answer to accessibility, period. Yes, we are trusted by tens of thousands of SMB’s, by some of the world’s biggest brands and by some of the largest U.S. government agencies, but we also have a truly differentiated product offering. On February 2, we announced our next-generation platform, representing a significant advancement for digital accessibility. The new platform features always on accessibility monitoring, coupled with the most advanced artificial intelligence in the industry. We provide an accessibility score that shows customers what we do and do not fix. We can improve a client’s accessibly score by up to 30 points on Day 1. Our IAAP certified subject matter experts are available to help clients further improve their accessibility with human assisted technology. Since at present, there is no 100% fully automated solution on the market, we believe that transparency is paramount to addressing issues of web accessibility. Customers should and will demand it. We think that as the industry develops opaque products making unsubstantiated claims will be left behind. It is worth remembering that we not only build great technology that is robust, cost-effective and highly scalable, but we create the technology to help our clients and partners meet the needs of individuals with disabilities. Without full transparency, this is not possible. About the team. During my tenure as CEO, we have continued to add depth and experience to our leadership. I believe that, without question, today, we have the strongest leadership team in AudioEye’s history. Since we spoke last quarter, we have added 2 additional key members to our leadership team. In December, Rob Ulveling joined as Chief Business Officer. Rob was most recently at Pinterest, where he led the platform integration strategy, delivering significant revenue growth and new client acquisition. Before Pinterest, he led platform integration partnerships at Facebook, creating integrations with dozens of platforms globally. The partnerships drove the acquisition of hundreds of thousands of clients for Facebook and billions of dollars in revenue. He also served as VP of Business Development and Sales at TheFind, where he helped steer the company through a Facebook acquisition. At the beginning of this month, we announced Zach Okun joined as Chief Product Officer. Zach was most recently at Facebook, where he led their off-site data products like the Facebook Pixel and Conversions API. Zach’s products served millions of customers and powered tens of billions of dollars in revenue. Before Facebook, he led product teams at Oracle Cloud Infrastructure, Amazon Web Services and several high-growth startups. Our ability to attract exceptional talent such as Rob and Zach is because they, too, believe that AudioEye is posed for explosive growth, and they can help us achieve our full potential. That said, AudioEye’s success is not about a single individual, but about our complete team of leadership and staff working together and is an honor to work with such a talented leadership team and with our mission-driven employees. In February, we follow an S-3 shelf registration and implemented an ATM program to raise additional capital. We’re pleased to report that we have raised over $14 million in net cash at an average price of around $0.38 a share. This cash strengthens our balance sheet and gives us the flexibility to take advantage of new market opportunities in this rapidly growing space. In terms of guidance, we remain focused on growing MRR and becoming cash flow positive in 2021. We are off to a good start in 2021 and reiterate our full year guidance range of $30 million to $32 million. We expect growth to accelerate in the second half of the year as we begin converting customers to higher tier offerings and announce new partnerships. Before I turn the call over to Sach to walk through some additional financial results, I want to take a minute to thank him for his contributions at AudioEye. We have improved critical systems and processes during the last 2 years, added talent and necessary infrastructure. These achievements have been significant given our growth, and we have set a strong foundation for the future. We are confident of a smooth transition and wish Sach, good luck in his future endeavors. Again, thank you, Sach. ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– Thank you, David. Let me start by saying, I really enjoyed my time at AudioEye, and I’m proud of all our collective successes and achievements over the past 2 years. I’m a strong believer in AudioEye and its mission, and I will continue to cheer on the company and its future success. As you have heard from Carr and David, we had a great Q4. We remain focused on enhancing our capabilities, driving top line revenue growth with expanding gross margins and drive shareholder value. Even with the ongoing pandemic and related macroeconomic challenges, there is a major need for our solutions, and we are continuing to provide immense value for our customers in an increasingly digital world. Now on to the results. Carr already summarized most of the results and key metrics of the business, but I wanted to mention a few other items. First, about operating expenses. In Q4, OpEx was $7.1 million, which was an increase of about 84% versus Q4 of last year. The primary drivers of the increase in OpEx were increased investments in talent across various functions, specifically in sales, marketing and product and an increase in noncash equity compensation costs. On a full year basis, OpEx was $21.6 million or about 53% higher than prior year. The drivers for this increase are similar to that for the fourth quarter. If you also like to highlight — I would also like to highlight additional information about our total research and development spend. Our total R&D spend in 2020 was $2.4 million, but due to accounting rules, approximately $1.1 million of it runs to the cash flow statement as capital investment. For comparison purpose, this $2.4 million of investment represents 12% of revenue in 2020 compared to $900,000 or 9% in 2019. The we think it is important for shareholders to understand that we are enthusiastically investing for scale in this emerging market. We ended the quarter with approximately $9.1 million in cash compared to about $2 million at the end of last year. In closing, I would like to thank all our employees, customers, partners and our shareholders for their continued support as we execute against our vision to bring equality in digital access. And I continue to wish everyone in their family’s safety and sound health in 2021. With that, we’ll open the call for questions. Operator, please give instructions. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Our first question comes from the line of Allen Klee with Maxim Group. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– Congratulations on the strong results. The question, the new customer that you signed in January that’s a digital advertising agency. Can you talk about how that’s progressed and how you think about the potential of up-selling to higher price point plans to that customer? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Allen, yes, we added the 33,000 customers, you mentioned in January. We expect to begin upgrades in the coming months and think it could be material to revenues. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– Okay. And then the new platform that you signed that you rolled out, could you talk about the feedback you got? And if there’s a different price point associated with it? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Yes. We’re the category leader, and we’ll continue to invest in tech and R&D. The fact that we hired somebody as the pedigree of Zach as CPO, makes clear our commitment to AudioEye’s product and its customers. The new platform is part of our commitment to scale with increasing efficiency and also demonstrates our commitment to transparency. The platform delivers an objective accessibility score to show clients where they are today, how far our technology can take them and their accessibility journey and the opportunity for further improvement using our certified accessibility experts. We’ve gotten great feedback on the platform so far. People love the score, love knowing where they’re at. And so it’s been going well. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– In the last quarter or 2, you’ve mentioned that some of your smaller customers were a little challenged with COVID in terms of some things. Is that happening at the same pace in the fourth quarter? Or did you see any change with that? ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– Allen, this is Sach. We saw some impact, but I wouldn’t call it material. I think some of that [changing] has happened. Q4 was better than the first 3 quarters from that perspective. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– Great. And then on — just a follow-up. You mentioned that you raised money through March with the ATM. Could you tell us what — as a result of that, what the current share count is? ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– We expect it to be close to $10.4 million-ish. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– As of what time period is that? ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– Well, a couple of things, right? I can’t give you a specific date, but it’s about $10.4 million. And our Q will [detail] it for — if you look at March 5, if you on March 5, it will be $10.7 million. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– But — okay. ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– If you do the math, it was around 370,000 shares, maybe 380,000 shares; somewhere in that range. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– Okay. Thank you. My last question is — my last — Sach, it’s been a pleasure working with you. Could you guys just explain how you’re thinking about the transition of — for a new CFO? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Only that Sach is not leaving us right now, and we really appreciate his commitment to ensuring we have a smooth transition. And we’re conducting a search. ——————————————————————————– Operator  ——————————————————————————– Our next question comes from the line of Zach Cummins with B. Riley. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Sach, best of luck in your new endeavors. It’s really been a pleasure working with you over the past year. David, I wanted to ask about the overall environment for digital accessibility. I mean we’re seeing a rebound in lawsuits here in January and expect this incoming — the current administration is likely going to be much more aggressive in terms of enforcement of web accessibility. I just want to get your perspective of, are you baking in any sort of tailwind around kind of the current improving environment? Or how are you thinking about that as we progress through the next couple of years? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– I think that’s upside with this kind of administration, we’ll see what they do and enforce it at the DOJ or not, but we’re just running our business and executing on plan at the moment. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Understood. And then, of course, with the talent upgrades that we’ve seen over the past couple of months, I mean, pretty big names with impressive backgrounds. I mean can you give us some insight into kind of the direction you’re going with your strategy and how this is going to play into that for, I guess, what we would call, AudioEye’s next phase of growth? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Well, it’s clearly an integration strategy with major platforms, major customers have hundreds of thousands of sites, if not millions. So that’s the direction this is going. And that’s why we’re hiring people like Zach and Rob to execute. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Understood. And with the realignment to your 2 segments, I appreciate the disclosure there. I mean how should we be thinking about that mix moving forward? With it clearly moving towards an integration type of strategy? It seems like it’s a little bit like a 50-50 mix. I’m just trying to get a sense of the pace of that move towards what would be more of the SMB in the marketplace type of segment? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Yes. I think it will accelerate. Really, the market for us is SMB’s going forward. Enterprise is a good market. We like it, but the explosive growth is on SMB market. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Understood. And then I guess with the $14 million of extra proceeds that you’ve gotten under the ATM, I mean, how are you thinking about deploying the extra cash that you have right now, whether it be just accelerating investments in organic initiatives or potentially even exploring any sort of M&A that could help accelerate your strategy? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– We like having the cash on the balance sheet, and we think it’s going to help us attract more customers and partners, but we’re really focused on maximizing value for all shareholders and always evaluating risk reward opportunistically. So wherever we can invest, and we think we’re going to maximize value. That’s what we’re going to do. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Understood. And then I guess just final question for me, around the new platform that you’ve rolled out, is this automatically disseminated to every customer? Or is that something that you have to have somewhat of a transition through the existing customer base to upgrade to the new platform that you launched? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Yes. There is a transition going on that’s happening over the next 2 to 3 months. ——————————————————————————– Zachary Cummins, B. Riley Securities, Inc., Research Division – Analyst  ——————————————————————————– Got it. And is that part of the kind of upgraded subscription plans that are kind of planned in there for the second half of the year? ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– That’s not really a part of that. No. This is just the difference of the technology, not the pricing points. ——————————————————————————– Operator  ——————————————————————————– We have a follow-up question from the line of Allen Klee with Maxim Group. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– It’s 2 questions. I think you answered the first one, but I want to confirm it. I thought I heard you say that you expect gross margins to continue to improve. Is it true based on where they were this quarter that you think they can continue to improve? And then secondly, how do we think about kind of the run rate of operating expenses for 2021? ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– So I’ll take both. From a gross margin perspective, right, Allen, we have always mentioned this that we expect based on our increased automation, remediation’s and new technology. We continue to expect to — for gross margins to improve over time. They may fluctuate, but over time, over the next year to 2 years, we want them to be touching 80% and even more. And you saw in Q4, we touched 73%. So over the next few quarters, we expect it to be — continue to grow. I can’t give you a specific number. It comes down to contracts and what we implement. But you should, for your modeling purposes, you should expect us to continue to improve margins, for sure, not only in 2021, but beyond as well. ——————————————————————————– Allen Robert Klee, Maxim Group LLC, Research Division – MD & Senior Equity Research Analyst  ——————————————————————————– And operating expenses? ——————————————————————————– Sachin Barot, AudioEye, Inc. – CFO  ——————————————————————————– Yes. Look, as we have mentioned — talked about this before. From an OpEx perspective, right, we expect OpEx to increase a bit, especially driven, you saw in my prepared remarks, we are investing a lot in R&D. We are hiring talent in sales and marketing as well as product. And we are investing to take advantage of this emerging market. We have a lot of runway in front of us. So from that perspective, you should expect sales and marketing costs to increase over the next few quarters. And G&A should more or less start plateauing outside of noncash equity comp. Which, by the way, will fluctuate based on so many different factors that play — come into play, including prices, share prices when stocks are issued. So that will be a fluctuating number as well as we go. But overall, from an OpEx perspective, expect sales and marketing to be one of the big drivers. ——————————————————————————– Operator  ——————————————————————————– There are no further questions in the queue. I’d like to hand the call back to management for closing remarks. ——————————————————————————– David D. Moradi, AudioEye, Inc. – CEO & Director  ——————————————————————————– Yes. Thank you for joining us today, especially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call. ——————————————————————————– Operator  ——————————————————————————– Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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