AudioEye, Inc. (AEYE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to AudioEye's First Quarter 2021 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 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, confidence, 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.
Carr Bettis: Thank you, operator, and welcome everyone and thank you for joining us again today. After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2021. A copy of the press release is also available in the Investor Relations section of our website at audioeye.com. I'll begin as we always do with an overview of our business. AudioEye is a 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 the ADA, and the latest web content accessibility guidelines are WCAG 2.1. Furthermore, for our private sector clients, we also give them an opportunity to gain an ROI from their investment in and commitment to the 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 Q1 2021 results. We had strong performance in several areas of focus this quarter. We expanded gross margin significantly. We doubled our customer count. We significantly bolstered our balance sheet and we grew revenue for the 21st straight quarter.
David Moradi: Great. Thank you, Carr. It's my pleasure to speak with you today. I'm very pleased with the first quarter as we continue to transition to a higher-margin and highly-scalable SaaS company. As I said last quarter, 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. Today I'd like to speak with you about a couple of things. First, continued enhancements to our team; and second, progress year-to-date and how we see 2021 unfolding. First about the team. During my tenure as CEO, we have continued to add depth and experience to our leadership. On the last call, I said I believe that AudioEye's leadership team was the strongest team in our history. I'm pleased to report that I believe it is even stronger today with the addition of Chris Hundley who joined AudioEye as CTO in March. Chris was most recently at Drift where he led the transition and integration of his company Siftrock into the Drift family of products branded as Drift Email. Siftrock's machine-learning and large-scale email processing technologies have allowed Drift to expand capabilities beyond chat into other forms of digital marketing cementing their position as a leader in the conversational marketing space. I'm also pleased to report that we have made good progress on the CFO position and expect to have more updates for you in the near future. As becoming CEO last August, hiring exceptional talent such as Chris in all departments has been a key focus because AudioEye's success ultimately is not about single individual, but about a complete team of leadership and staff working together. It is an honor to work with such a talented leadership team and with our mission-driven employees.
Sach Barot: Thank you, David and Carr. As I have said before, I've really enjoyed my time at AudioEye and I'm proud of all the collective successes and achievements over the past two years. AudioEye is in a much stronger position now and there is no doubt that with David and the leadership team, the company is well-positioned for long-term success. As you just heard from Carr and David, we had a lot of positives in Q1 from expansion in gross margins to being free cash flow positive. It should be noted that many of the investments in people and resources that we have mentioned in the recent quarters are starting to pay off as evidenced by the new platform launch and the continuous enhancements that our team is focused on to make it scalable and support even higher growth. And importantly, the efficiencies created that help with gross margin expansion. Retention continues to be strong as David mentioned. The business is seeing signs of gaining momentum in the new channels. Now, on to the results, Carr already summarized most of the results and key metrics of the business, but I wanted to mention a couple other items. First, operating expenses. In Q1, OpEx was $7.2 million which was an increase of about 57% versus Q1 last year. The drivers of the increase were across the board in R&D as we focused on product development, sales and marketing, and G&A. The increase in G&A is mainly driven by the equity compensation expenses. Our total R&D spend in Q1 was about $1.3 million with approximately $250,000 reflected as software development costs in the investing section of the cash flow statement. The total R&D spend is about 22% of our revenue this quarter versus 11% a year ago. This reflects the commitment towards investing for scale in this emerging markets. In closing, I would like to thank all of my colleagues at AudioEye for making my journey so memorable and fun. I've enjoyed it and have learned a lot from all of you all along the way. The collective fashion and dedication from the team is amazing. And I'll continue to cheer all of you and company's continued success. With that, we'll open the call for questions. Operator, please give instructions.
Operator: Thank you. The first question is from Allen Klee from Maxim Group. Please go ahead.
Allen Klee: Good afternoon. Can you help us understand the timing of when you add a new enterprise customer and when they start generating revenue? Because I mean, you basically doubled your revenue sequentially, but the -- I'm sorry doubled your customers, but the revenue -- it didn't show up in the revenue. So how should we think about how long it takes to put a -- when you sign up a customer they become revenue-generating and all that? Thank you.
Sach Barot: Well the number of customers that we have added is not in enterprise right? They are coming from SMB channels. And you will see and you must have noticed over the last few quarters as we have more customers, we are going after scale and it's a very efficient product the prices are low. And from an enterprise perspective as soon as customer signs a contract and it is effective from that -- from enterprise we start recognizing revenue right away because our services are turned on very, very quickly.
Allen Klee: Are you saying that for the customers that you added that the revenues did not show up this quarter, or that because they were SMB or that they'll start showing up next quarter, or can you explain it to me?
Sach Barot: I'm not saying that. Yeah with SMBs the strategy is to get into -- penetrate them first and then raise the ARPU curve as people convert into more highly-priced products. Right now, we have adoption at a lower-tier pricing. And that's what David mentioned in his comments, we expect the conversion rate to start happening as the year goes. And that's how -- and that's when we expect our revenue and MRR to ramp up significantly in the second half of the year.
David Moradi: Yeah. Maybe I can add to that a little bit. We're seeing growth this quarter in each of our channels. So talking about the second quarter now enterprise and vertical partners are growing nicely. We're seeing month-over-month growth in our new channels which are digital and agency since the launch of our new platform. So we're expecting to see an acceleration in these new channels in the second half and continue to track that.
Allen Klee: Okay. The operating expenses in the quarter and you said how much they were up year-over-year. Is this quarter a good run rate, or should we assume that this is going to continue to ramp at kind of on an absolute basis kind of increase as the year goes along?
Sach Barot: Yeah. We actually expect as the year goes along, our expenses to go up as we continue to invest in platform building, product development as well as in sales and marketing. There will be some expenses in G&A as well. So we definitely expect our expenses to ramp up. And those expenses will be supporting our ability to see the pipeline and drive the growth measures to support the hypergrowth we are expecting in the second half.
Allen Klee: Okay. Just a couple also on your -- building of your new technology development center and a new CTO, what's the status of the new center? And is that starting to bear fruit?
Sach Barot: Yes. We announced that in February. And so, we have a migration going on from the old platform to the new platform. The new customers love the accessibility score, the monitoring, improvements in our AI and automation. So we're really happy with that.
Allen Klee: Okay. Just a couple of other numbers. The -- can you tell me what depreciation and amortization expense was in the quarter? How much capitalized software development costs were? And then, where -- like post-quarter end, what -- if you've raised more money on the ATM and what the share count is right now?
Sach Barot: Yes. The Q should have this crossed, but I'll give you the numbers real quick. So share count on May 7 was about 10.9 million, that is May 7. But obviously the Q1 average is closer to 10.5-ish. From a software development cost Q1 we had about 250,000. And from a D&A perspective from capitalized software we had about, call it, roughly 285,000 in Q1.
Allen Klee: Okay. My last question is you're planning to have expenses to continue to grow through the year. You said margins will kind of stabilize at this level, maybe they can go up a little bit. Revenue will grow but what -- how do you feel about your confidence of getting to your cash flow guidance by the end of the year?
Sach Barot: I think, we feel pretty confident. The new channels are all in early stages. We've added product tech sales and marketing talent to drive these businesses and are seeing great results so far.
Allen Klee: Okay. Thank you.
Sach Barot: Thank you.
Operator: The next question is from Zach Cummins from B. Riley Securities. Please go ahead.
Zach Cummins: Yes. Hi, David, Carr and Sach. Thanks for taking my question and congrats on the solid results here in Q1.
David Moradi: Hi, Zach.
Zach Cummins: David, just piggybacking off of some of Allen's questions there. Can you walk me through how that process is going to work? Now that you have some of these lower-tier customers on your platform, what exactly does the process look like as you go through and start to upgrade them to higher-tier plans in the coming quarters?
David Moradi: Sure. So we're working on migrating those customers over to the new platform and we'll begin ramping our marketing efforts once that's complete. We expect some of these customers will be able to upgrade the higher levels of product in the coming months and that should contribute to rapid MRR growth.
Zach Cummins: Got it. And in your script, I know you mentioned that, even within some of these existing partners that there's hundreds of thousands of potential customers that potentially could be unlocked. I mean, what does that process look like as well, in terms of being able to unlock a bigger portion of those available customers with some of these new partners?
David Moradi: Yes. It's a new platform. Its sales, marketing and getting the customers more comfortable and ramping them up. There's a big demand out there for accessibility at the moment.
Zach Cummins: Got it. That's helpful. And then, I'm just curious, starting off this year, it seems like with the improving environment, I mean, what are you seeing from a business development perspective? It seems like your retention rates have really stabilized now. And I was just wondering if there is an increasing appetite, especially at the SMB level for your accessibility solutions.
Sach Barot: Zach can you repeat that question, please?
Zach Cummins: Yes. I was just going to ask around the overall environment. Just seeing, it seems like some of your retention rates have really stabilized. And I was wondering if, with the reopening of the economy, if you're actually seeing an uptick in demand from a lot of your SMB customers around digital accessibility.
David Moradi: I think it's been more on the enterprise side. We've had a -- we're having a good quarter this quarter. We had a decent last quarter on enterprise. It's not really affecting the SMBs from what I can tell. Sach, do you have any comments on that?
Sach Barot: No. And I'll just highlight the pipeline, right? So just to cover -- just to broaden a little bit from what David said is, our pipeline is strong, both on enterprise side and partnership side which covers most of our SMBs. And we are seeing traction on digital market as well. And as David mentioned, as we start migrating customers on our new platform, and start providing the scale that we have open it up to our customers, the business is definitely expecting to drive much higher penetration and adoption. And the stickiness with small- and medium-sized customers is really good as well. We are not seeing a lot of churn. So those are all healthy signs for future growth.
Zach Cummins: Understood. And then, I saw some of your recent hiring postings that you're looking for account executives in the public sector. I'm just wondering, with a lot of the initiatives here with the Biden administration to really focus on, modernizing their technology investments if you're seeing a big uptick with digital accessibility moving forward on the public sector side?
David Moradi: We haven't seen that yet. We're continuing to see the number of ADA and other accessibility cases exceed the total number of previous years. So last year, I think it was around 2,500. And this year it's running a bit hotter. And the demand letters are probably three to five times that. But we haven't seen it exactly in the public sector yet, but we do expect it.
Zach Cummins: Got it. And then, on gross margin, I mean, this is a portion that continues to pace well ahead of my model at least. I mean, it sounds like it's going to stabilize in the upcoming quarters. But can you talk about just some of the actions that you've taken that have really driven a lot of the flow-through to that gross margin line that we're seeing here in Q1?
Sach Barot: Absolutely Zach look, as David mentioned, right, the transition for the company has been less people-based services and more reliance on automation. And with that, comes reduction in our fulfillment costs, as we continue to sell more-and-more customers. That's, the biggest driver. And also as the platform continues to improve, we should be able to stabilize this. But as the company scales, as the revenue scales that should further drop to the bottom-line, but that may happen down the line. But we still believe that, annually we should be improving upon those gross margins as we go. Its efficiencies, right? It's also the cost with fulfillment in terms of cloud support and all that. And with the new platform, we expect to continue to drive the efficiencies even better.
Zach Cummins: Understood. And just final question for me, I mean, David, do you feel like you largely have your team in place from an executive perspective, just given all the hires that we've seen over the last eight or nine months? It feels like, you've built a pretty strong team here at the top.
David Moradi: Yeah. I think it's going there. We've hired a lot of people in a lot of different positions and very strong leadership team, people that come from big companies and start-ups as well. So I think we're definitely getting there. I don't know if it's ever fully done, you're always trying to improve.
Zach Cummins: Understood. Well, thanks again for taking my questions and congrats on strong start of the year.
David Moradi: Thank you, Zach.
Sach Barot: Thanks, Zach. Thank you.
Operator: At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to, Mr. Moradi for his closing remarks.
David Moradi: Thank you for joining us today. I especially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call.
Operator: Before we conclude today's call, I would like to remind everyone, that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today, for AudioEye's First Quarter 2021 Earnings Conference Call. You may now disconnect.
