FQ1 2020 Earnings Call Transcripts

Call Participants

EXECUTIVES

Carr Bettis
Executive Chairman

Heath Thompson
Chief Executive Officer

Sachin Barot
Chief Financial Officer

ANALYSTS

Zachary Cummins
B. Riley FBR, Inc., Research Division

Presentation

Operator

Good afternoon, and welcome to AudioEye’s First Quarter 2020 Earnings Conference Call. Joining us today for today’s call are AudioEye’s Executive Chairman, Dr. Carr Bettis; CEO, Mr. Heath Thompson; 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, 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, in 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 report on Form 10-Q and our 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 beliefs only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements. Now I would like to turn the call over to AudioEye’s Executive Chairman, Dr. Carr Bettis. Sir, please proceed.

Carr Bettis
Executive Chairman

Thank you, operator, and welcome, everyone. Thank you for joining us today.

After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2020. A copy of the press release is available in the Investors section of our website at audioeye.com.

Before we begin the call, I’d like to just take a minute to express our sincere condolences as well as — and our support to all of those who have been directly or indirectly impacted by the ongoing global pandemic. It’s fair to say that nearly everyone has been affected in some way by the current environment. We are thankful for the frontline workers and essential service providers, who are continuing to help us during this challenging time.

At AudioEye, like many other businesses, we’ve been working remotely for some time. As a technology company with an already distributed workforce, we’ve been able to make the transition with little disruption. We are working hard and operating efficiently. I’m sure I share the same sentiment we all do when I say we’re looking forward to getting back to normal as soon as possible. In the meantime, we have a great team and infrastructure in place to support our growing business.

I began our last call with an introduction and formal welcome to our new CEO, Heath Thompson, on what has been his first day. Heath has now been with us for over a month, and we could not be happy with the work he’s done so far and the direction we are headed. It has truly been an excellent transition and a smooth handoff to Heath. Heath is focused on executing our business plan, and I really do mean focused. Heath has approached the job with enormous energy, which, coupled with his leadership skills, his experience and technical background, head him off to a really great start at AudioEye. It’s a true pleasure to have him on board here, on board with us.

Before turning the call over to Heath, I wanted to highlight a couple of key results from our first quarter. Heath will then give you his view on the business, provide more detail about metrics from the first quarter and discuss the current state of our operations.

We’re obviously pleased with the execution in the first quarter. To be sure, Q1 was a great start to the year. We had our 17th straight quarter of record revenue, driven by consistent growth and adoption in our enterprise and vertical partner channels, respectively. Monthly recurring revenue, MRR, at the end of March, grew 17% sequentially to $1.4 million, and contracts in excess of revenue and deferred revenue increased 88% year-over-year to $17.2 million. We are also pleased to report that April was a very strong month. At the end of the first quarter, we had over 11,000 customers across our various channels. And as of April 30, we had over 16,000 customers. These new customer accounts are orders of magnitude larger than just a few quarters ago. Further, MRR grew again to approximately $1.5 million from $1.4 million at the end of the first quarter.

Across the board, we’ve continued to optimize customer implementation and benefit from greater automation, and we increasingly benefit from economies of scales. This is reflected in our margins during the period, which expanded considerably to nearly 70%.

Finally, as we discussed on the last call, we believe we are on track to being free cash flow positive in 2021, assuming normal economic conditions for our business.

So with that overview completed, it’s truly a great pleasure to turn the call over to Heath Thompson, our CEO. Heath?

Heath Thompson
Chief Executive Officer

Carr, thank you very much for that warm introduction.

As Carr mentioned earlier, I’m now in my second month as CEO, and I’m thrilled to be part of this team and the AudioEye mission to eradicate all barriers to digital accessibility. In my career, I’ve had the opportunity to be part of defining and shaping new markets, but there’s perhaps no greater opportunity to do so than here at AudioEye with digital accessibility. The backdrop of the global COVID-19 pandemic has made this an unprecedented time for all businesses and individuals worldwide. But one clear consequence has been reinforcing the criticality of digital interfaces to businesses and organizations everywhere, which also means reinforcing the criticality of digital accessibility along with it.

AudioEye has always been committed to not only meeting compliance with accessibility standards, but truly solving the problem and enabling a disabled user to have timely and usable access to digital content. I believe this is now more important than ever before. Meeting this challenge will require us to continue our investments in technology, integration, user experience, ecosystem partnerships and engagement with the disabled community. Going forward, I’m excited about our mission to — and to execute on our strategy. As we do so, we’ll help our customers make their businesses more resilient, more legal, more lower legal in operating risks and have greater access to potential market share.

I’ll now begin, as we always do, with an overview of our business. AudioEye is a leading provider of SaaS-based digital content accessibility 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 also 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, or WCAG 2.1. Because many of the remediation capabilities we provide are automated, our customers more quickly gain compliance with accessibility standards, regulations and laws. From our managed product, these automated processes are coupled with manual testing and remediation by subject matter experts. The result is that we provide our clients with the best solution to make their websites and digital content more accessible. We keep their content more accessible through continuous monitoring and remediation, and we offer a trusted certification of conformity with standards. Furthermore, for our private sector clients, we also provide them with a product that gives them an opportunity to gain an ROI from their investment in and commitment to the enormous population of individuals with disabilities.

With the overview of the business completed, I’d like to move to our business results. Carl has already mentioned some of the excellent results from our Q1. We’re now really starting to see the benefits of AudioEye’s long-term growth strategy getting traction. Our vertical partner channel is a standout example of this uptick. Our focus on quality over quantity has been what’s allowed us to achieve consistently strong results over the past year. We choose our partners as much as they choose us. When they work with AudioEye, they’re signaling commitment to our program and to prioritizing digital accessibility for their collective thousands of customers.

While AudioEye continues to operate generally according to plan, like any business, we’re not immune to the global effects of a global pandemic or a related macroeconomic slowdown. The same goes for our customers, many of whom are small businesses that have been disproportionately impacted by the current economic environment. In response, we’ve been proactive in providing options to our customers on a temporary basis, including more flexible pricing and other concessions to help them withstand the financial impacts that they may be seeing from COVID-19.

From a logo perspective, we’ve also seen a slight uptick in attrition that we hope is temporary. Despite this, we’re able to still maintain enterprise retention near our historically attractive 90% rates.

While no one knows how long the current business environment will persist, it’s our expectation that some of the COVID-19-related programs will need to continue for some time. In that case, it would be reasonable to expect more meaningful negative impacts to our financial and operating performance. Based on what we know right now, we do anticipate at least a near-term impact on our revenue and collections.

To address the near-term operating risk, in April, we entered into a $1.3 million loan program through the Paycheck Protection Program under the SBA’s CARES Act. As a small public company with limited access to capital in the current environment, we believe that this action was appropriate for our business. We appreciate the support of the federal government as we all work to navigate through these unprecedented times. We’re utilizing the capital consistently with the goals of the PPP to maintain our payroll.

On a positive note, we do have some tailwinds working in our favor. First, the shelter-in-place and social distancing environment has further accentuated the need for digital accessibility. We’re seeing a rapid shift in digital transformation strategies and companies of all sizes. Anecdotally, Microsoft’s CEO, Satya Nadella, remarked recently that they’ve seen over 2 years of digital transformation impact in just a few months. In an environment like this, the need for accessible solutions has become greater than ever, and we’re looking forward to leading that charge. Second, we continue to realize margin improvements through our automation efforts and process improvements.

I’d like to now move into some quick updates with our respective channels. Beginning with our enterprise or our direct channel, we continue to bring on new customers at the same consistent level as we have for the past few quarters. In Q1, the makeup of these new customers comes from many of our targeted verticals, including consumer goods, construction, major electronics, state government agencies, financial institutions and the automotive space, among others. Our PDF remediation business was also tracking well in Q1, both on the bookings side as well as revenue. While less predictable in some of our other segments due to the nature of the work and the contracts, we expect to generate significant ROI on an annualized basis.

Moving to our vertical partner or our indirect channel. From a customer growth standpoint, this channel is really starting to take off, and we feel the opportunity for expansion within our current partner base remains substantial. During the quarter, our active vertical partner count remained at but 20. But we’re focused on increasing penetration with our current partners’ customer base, and we’re continuing to evaluate new opportunities and expect to widen this channel only when we find partners — strong partners, who are also committed to driving adoption with their user base.

Lastly, within our new digital marketplace, we’re starting to see a lot of positive activity, which we expect to materialize over coming quarters.

With that overview completed, I’ll turn the call over now to our CFO, Sach Barot, so that he can walk us through the rest of the financial results for the quarter. Sach?

Sachin Barot
Chief Financial Officer

Thank you, Heath.

Let me jump right into our Q1 results. Starting with bookings. As a reminder, we define bookings as the contracted amount our customer commits to stand with us, which could be over multiple years. For the quarter, bookings totaled $3.9 million, which was an increase of 14% from $3.4 million in the same period last year. The increase in bookings was primarily due to consistent performance in our enterprise channel, driven by execution against the sales pipeline as well as improved performance within our vertical partner channel through deeper penetration within existing partners.

Revenue in Q1 was about $4.3 million, reflecting a 115% increase from about $2 million over the same period last year. The increase in revenue was mainly driven by continued growth in our vertical partner channel, benefit from deferred revenue coming, contribution from our PDF business and renewals during the same period.

Gross profit for the first quarter was $2.9 million or about 69% of revenue, which was a 177% increase from $1.1 million or about 54% of revenue last year. The increase in gross profit and gross margins, they were particularly due to the increased efficiency realized as we improve and expand the level of remediation automation as well as increase in revenues.

The sequential improvements we have been able to generate in our margins over the past few quarters have been encouraging and according to plan. Going forward, based on current market expectations, we expect to continue expansion in our margins over the long term and on an annual basis.

As we shared with you during prior calls, we’re in the midst of investing in several key areas to drive long-term growth and profitability. This may lead to fluctuations in the trend of improving margins quarter-over-quarter. However, we strongly believe that these investments will provide the best long-term return for our business and shareholders. Examples of these investments include new rollout with vertical partner channels and initial set-up costs associated with our PDF remediation business among other areas. In both of these examples, there is a more substantial investment of time and resources to put programs and automation in place. This will eventually lower our marginal cost of delivery as additional customers come on to our platform.

Moving to operating expenses. In Q1, OpEx was $4.6 million, which was an increase of 18% from $3.9 million in Q4 and an increase of 45% from $3.2 million in Q1 last year. Increase in OpEx was across the board, driven by increased investments in talent across various functions, infrastructure and product development.

Turning towards the bottom line. Net loss available to common stockholders for the first quarter of 2020 totaled $1.7 million or a loss of $0.19 per share. This compares with net loss of $2.1 million or loss of $0.28 per share last year. The improved net loss was primarily due to increased efficiencies as well as an increase in revenues, which was offset by increase in total operating expenses.

Now on to some additional non-GAAP metrics. As noted earlier, as of March 31, 2020, monthly recurring revenue, or MRR, was approximately $1.4 million, which was an increase of 17% compared to approximately $1.2 million at the end of last year.

Moving to contracts in excess of recognized revenue and deferred revenue. As you know, this metric is the remaining amount of bookings that have not yet been recognized as revenue or booked as deferred revenue. This measure presents a contractually agreed-upon mount that is mostly remaining to be built and that we expect to recognize in future periods. In Q1, contracts in excess of revenue recognized and deferred revenue increased 88% to $17.2 million from $9.2 million in the same period last year.

Some balance sheet items, beginning with deferred revenue. As a reminder, any funds received for services not yet provided or invoiced demand for noncancelable contracts while we have not yet earned revenue are in deferred revenue. In the first quarter, deferred revenue was $5.3 million, which was up 83% from $2.9 million last year. Our accounts receivable balance at the end of Q1 was $2.5 million compared to about $3 million at the end of last year and about $290,000 at the end of Q1 2019. The sequential decrease in AR was primarily due to a payment received from a large customer — enterprise customer, which was signed prior to the end of the year and was collected during Q1. Our accounts payable balance was $1.2 million compared to about $250,000 at the end of the last year. We ended the quarter with about $1.8 million in cash compared to about $2 million at December 31, 2019.

During the quarter and to date, we have not drawn on our existing 2 million line of credit, which remains available to us through August of this year.

As I mentioned in our past few calls, we are continuing to evaluate a variety of financing options with the goal of incurring the lowest cost of capital in support of our long-term growth needs. This is within the context that without the major impact of economic uncertainty, we still expect to achieve cash flow positivity in 2021. This completes my prepared remarks. We will now turn the call over to questions. Operator, please provide appropriate instructions.

Question and Answer

Operator

[Operator Instructions] Our first question comes from the line of Zach Cummins of B. Riley FBR.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Welcome aboard, Heath, and congrats on a strong start to the year. First question here is specifically within that vertical partner channel, can you talk about some of the verticals where you’re seeing the most adoption there? And can you give us really a sense of what’s the average penetration rate across all of those partners?

Heath Thompson
Chief Executive Officer

Yes, Zach, this is Heath. Yes, I’ll provide a little bit of color there. We’re obviously seeing strong uptake in the automotive dealership vertical. That’s historically been a strong performance area for us. And we see very high penetration there in those markets. We’re actively working — as I mentioned before, we’re actively working across our entire vertical base to drive the penetration up higher. And we’re working with many of our partners in that regard now to make that a focus, to really do that before we start consciously expanding the partnership channel.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Understood. That’s helpful. And then, Sach, in terms of the gross margin leverage once again in this quarter, I mean, are there any one-time items to call out for the meaningful improvement here? And what’s really the expectation that we should be building in going forward?

Sachin Barot
Chief Financial Officer

Look, there is no really material one-time item here, Zach. But from an expectation perspective, right, I just want to remind that the margins may fluctuate based on the mix. But in the long term, as I’ve always said, and on an annual basis, we continue to and want to and will see margin expansion. And the expectation is we’ll strive to continue to improve, do more automation, but there may be some fluctuation as we go. But there is no one-time item in this quarter.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Understood. And then in terms of the cash contract bookings, up 14% year-over-year, it’s just a lot lower than we’ve typically seen from that number. I mean, can you give us any insights into that bookings metric? Was there any sort of impact to sales cycles from COVID-19 at the end of the quarter? Just any sort of help reconciling that would be helpful.

Carr Bettis
Executive Chairman

Zach, this is Carr. We continue to deliver to the large enterprise clients, who are contributing to bookings in sort of the traditional way. The excess of bookings over revenue and deferred revenue comes from those longer — comes from longer-term contracts, right? We also expect, for long-term contracts, to continue in the enterprise channel. How they’re affected by COVID-19, we’ll continue to see how that plays out. But in the past, we’ve also had significant bookings in excess of revenue and deferred revenue from vertical partners, who’ve made long-term commitments. We may still have some of those contracts. But as Heath said, we’re concentrating our efforts on maximizing the relationships we have and the quality of the relationships we have in building them out and fully taking advantage of the opportunities we have. But we expect it to be more common for us to enter into more agreements with partners and affiliates that are more aligned to their own contract and billing cycles, and that gives us the best margin to doing it that way moving forward. So the metric we’re going to continue to focus on is going to be MRR here. Contract in excess of booking, if we go to a monthly booking situation with the relationships, will obviously slow. So there’s not anything fundamentally bad about this. We’re excited about what we’re doing in the way in which we’re acquiring customers.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Got it. That is helpful, Carr. And then in terms of areas of churn, I know within Heath’s commentary, you’re pointing out that you’re starting to see some churn here, at least in the beginning of Q2 from some of your customers, but still maintaining that retention rate right around that 90%-plus area. Can you talk about any specific areas that you’re seeing outsized churn, in particular verticals that you’re seeing more impact than others, and kind of how you’re thinking of mitigating that churn risk as we move forward?

Heath Thompson
Chief Executive Officer

Yes. Zach, I’ll — this is Heath again. I’ll comment a little bit more on that. I think we’ve looked at this pretty carefully. We’re not seeing customer losses per se here. We’re just seeing some delays in customers entering into long-term contracts and renewals with us. And so we believe that that’s predominantly COVID-19-related. Frankly, we’ve actually seen situations where key contacts with some of our customers have been furloughed. And so that’s created some delays as we reestablish those connections back into the organization. But that having been said, we’re monitoring it very closely. And we work proactively with those accounts and those situations. Our focus right now is really on the client relationship, preserving that client relationship through this — through the pandemic times and helping our customers wherever we can during the downturn.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Understood. And then I know it’s still relatively early, but it sounds like you’re getting some pretty good traction within your marketplace offering. And I know you’re doing a 90-day free trial for a lot of SMB customers that help them out during this tough time. So can you talk about the feedback you’ve seen from customers thus far? And what really are your expectations for that channel as we move forward?

Heath Thompson
Chief Executive Officer

Yes. Again, this is Heath. Yes, it’s still a bit early on the marketplace, but we’re seeing some really good results. The COVID-19 promotion, as you pointed out, we’ve actually seen very good uptake from that. And I think, over time, the marketplace will continue to become an important part of our business, really blending in nicely with our direct business and also with our indirect channel business. But we are starting to see the traction here coming along nicely here at the beginning of Q2.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Understood. And then final question for me is geared towards Sach. Any thoughts around cash on the balance sheet, a material improvement in the cash burn rate here just given the reversal of some of those client collections here in Q1? I mean, I understood that you took on some funding from the Paycheck Protection Program here in April. I mean, can you give us an update on maybe potentially where cash was at, at the end of April? Kind of what are the expectations for that burn rate as we proceed forward in the coming quarters?

Sachin Barot
Chief Financial Officer

Yes. I wouldn’t give you what cash we had at the end of April, but I can share this. You will see that in Q1, the burn rate is a reflection of working capital management that we’ve had here. And you know about the collection timing as well. And our AEP has grown a little bit as well. But going forward, look, we continue to feel very comfortable that under normal circumstances, we’ll continue to improve our cash burn, and, in 2021, we’ll be cash positive.

Zachary Cummins
B. Riley FBR, Inc., Research Division

Got it. And congrats again on the strong start to the year.

Operator

[Operator Instructions] And at this time, this concludes our question-and-answer session. I’d now like to turn the call back over to management for closing remarks.

Carr Bettis
Executive Chairman

All right. Thank you, everybody, for joining today. Thank you, Zach, for your questions. We appreciate your time. Everyone, stay healthy. Thank you.

Sachin Barot
Chief Financial Officer

Thank you, everybody.

Heath Thompson
Chief Executive Officer

Thank you.

Operator

And 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 2020 Earnings Conference Call. You may now disconnect.

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