FQ3 2019 Earnings Call Transcripts

Call Participants

EXECUTIVES

Carr Bettis
Executive Chairman

Sachin Barot
Chief Financial Officer

Todd A. Bankofier
Chief Revenue Officer

ANALYSTS

Allen Robert Klee
National Securities Corporation, Research Division

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

Presentation

Operator

Good afternoon, and welcome to AudioEye’s Third Quarter 2019 Earnings Conference Call. Joining us today for today’s call are AudioEye’s Executive Chairman, Dr. Carr Bettis; and CFO, Sach Barot. Following their remarks, we will open the call up for questions from the company’s publishing analysts. Chief Revenue Officer, Mr. Todd Bankofier will be available for questions. 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 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 risks 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, quarterly report on Form 10-Q and on 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 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. Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2019. A copy of that press release is available in the Investors section of our website at audioeye.com. As some of you may have already seen, we issued another press release this afternoon, too, that including AudioEye’s 2 new Board members, David Moradi and Jamil Tahir. David is a long-term significant shareholder as well as an investor, among many other accolades. He has previously founded highly successful technology companies and now serves as a coveted strategic adviser in the technology industry. We are very fortunate to have him. And we believe with him — we’re very fortunate to have him on the Board. Jamil is also an investor and a shareholder who knows AudioEye’s story and agrees with our aggressive growth mentality. We believe strongly in representing and aligning the company’s interest with that of our shareholders’. Through these appointments, we are further committing to that principle as well as bringing on 2 experienced Board members who have the skills to help take AudioEye to the next level. We look forward to benefiting from their collective wisdom and insight.

I will now provide an overview of the business. As many of you know, we’re not typically known for our brevity on these calls, and today is not going to be exception, and we have a lot to cover. For those of you who’ve been following us, you’ll know that we announced last week an update on our expanding go-to-market strategy. To that end, I’m going to spend a little extra time to now to explain our new offerings, updated strategy and how that strategy has evolved over time. Once that is done, I’ll take a minute to go to some of our major highlights from the quarter before turning it over to our CFO, Sach, who will discuss our financial results for the period. Finally, I’ll come back on the line to discuss our outlook and provide some closing remarks before Q&A. First, a bit of background. AudioEye is a leading provider of SaaS-based digital content accessibility solutions. Our mission is simple, to eradicate barriers to digital accessibility. We provide our — pride ourselves in addressing the largest range of accessibility 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 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. For our managed product, these automated processes are coupled with manual testing and remediation by subject matter experts. The result is, 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 provide a trusted certification of conformity with standards.

Furthermore, for our private sector clients, we also give them the opportunity to get an ROI from their investment in, commitment to the enormous population of individuals with disabilities. As many of you no doubt saw, on November 6, we made an exciting and important announcement. We launched the AudioEye Digital Marketplace, a machine learning powered platform that at its core, is designed to enable companies of all sizes to easily and affordably accelerate the attainment of accessibility. Within the AudioEye Digital Marketplace, we now have a full suite of products through 3 differentiated offerings, which I plan to discuss in greater detail shortly.

I also encourage you to go through the link in today’s press release to more fully understand how these 3 offerings are differentiated from one another. Solution for all price points is the main reason why we’re excited about the potential of what our business can now achieve. For a bit of context, when AudioEye originally transitioned to a SaaS operating model in 2015, we identified the enterprise market as the first frontier we wanted to tackle. We learned a lot from client data and remediations and also market needs and expectations. Over the past few years, while offering the gold standard premium solution to address digital accessibility, we got better and more efficient at what we do. After amassing a library of millions of remediation fixes, increasing the level of automation we provide in our service and building up additional subject matter expertise along the way, we decided we were ready and able to bring digital accessibility to a wider market, one for small to medium-sized businesses, commonly referred to as SMBs. This led to the creation of our indirect channel partner strategy, which we introduced in 2017, and we’ve discussed a lot on prior calls.

Through this go-to-market approach, we began working closely with industry vertical content management systems or CMS providers. These CMS providers generally offer websites, hosting services and other digital solutions, mostly for SMB customers. To note, these SMBs use their CMS providers to do the work for them. CMS providers design, host and provide data security for their SMB clients. Further, CMS providers that partner with AudioEye would then therefore, offer accessibility solutions. In terms of how we get this done profitably at scale, most of the vertical CMS website providers is a small number of templates for their clients. What this means for AudioEye is that once we have successfully remediated a small number of websites on a given platform, we drastically reduce the total cost of delivery over a much larger potential customer base using our extensive library of fixes and automated processes.

For example, as of today, AudioEye’s real-time monitoring system runs over 360 core accessibility tests against more than 1.5 million unique pages each week. That system has cataloged well over 1 trillion individual issues and attracts the delivery of nearly 40 million different kinds of remediation. To our knowledge, we are the only company that currently maintains this type of robust database of accessibility issues in fixes.

As I mentioned at the top of the call, our mission at AudioEye is to eradicate barriers to digital accessibility. We want AudioEye solution to be literally everywhere, making the digital world as successful as we can to the widest number of people possible. We are still targeting the large enterprise, where there are thousands of potential customers, and we will continue to sign up more indirect channel partners serving industry verticals, but there are hundreds of thousands of SMBs. However, with the AudioEye Digital Marketplace, our target is tens of millions of websites. This makes the eradicating digital accessibility issues tangible. To meet this objective, we recognized that we must remove the cost barrier for companies who wish to take steps to make their digital website digitally accessible. Put another way, providing digital accessibility that is truly compliant with industry standards, no longer need to be prohibitively expensive for any SMB, whether on a partnered industry vertical CMS platform or not. The 3 major offerings I mentioned before, we now offer solutions to serve virtually any business of any size and also agencies who serve these businesses and developers who want access to tools to help them remediate issues of accessibility.

Let me break it down simply. First is AudioEye Free. Free is a plug-and-play product that enables website managers to deeply and immediately identify, evaluate and dynamically resolve the full range of WCAG violations. This product not only provides immediate free scans of up to 5 pages, but it enables our browser-based testing and remediation tools for those who want to create remediations on their own. They can build fixes and apply them using our JavaScript. Second is AudioEye Pro, which expands on Free by offering unlimited scans, monitoring the websites and the AudioEye tool bar. We believe this offering is more robust than any competitive offering that gets SMB started on the path to conforming with WCAG and ADA standards. Have digital marketplace delivers Pro to the major global CMS providers like wix.com, Weebly, Shopify, Squarespace and WordPress, et cetera. These alone represent a total addressable market in the tens of millions of websites. Designed specifically for SMBs, AudioEye Pro starts $12.99 a month. Third is AudioEye Managed some of you will notice as AudioEye Ally product formally. This premier service is a comprehensive and fully managed solution that has been trusted by a collection of some of the largest and most fluential — influential organizations, agencies and companies in the world. This solution incorporates human-in-the-loop testing, resulting in a trusted certification by AudioEye that the sites substantially conforms with WCAG standards. Managed solutions can be purchased without talking to anyone at AudioEye for SMBs on the wix.com, Weebly, Shopify and Squarespace platforms. To connect the dots for you, if you’ve been listening to prior calls where we’ve discussed investments in areas where we couldn’t be completely transparent about them, this is where a lot of that spend has been going. Because they all now lifted, I’ll say that we plan to continue investing in a number of key areas to support this initiative, including continued product design enhancements, machine learning, investments, user experience, marketing and customer experience areas. Additionally, we’ll continue to invest to make sure we have the right people and processes and infrastructure to support further growth and maximize scalability on the platform over time. One of the key areas where we’ll need to be really effective is with our digital marketing campaigns. This product is truly a digital self-serve product that lends itself perfectly to easy, self-purchase and self-installation. Additionally, we’re looking to leverage early adopters and advocates. In support of this new initiative, we also announced the launch of Team AudioEye, which is our vision for a new community of advocates as well as a comprehensive certification program for digital professionals. Through Team AudioEye, we’re looking to even further accelerate digital accessibility, helping developers and web designers create accessible experiences for the web. To be clear on our financials, our expectation is that this channel will translate into meaningful growth in addition to our existing business beginning in the new year. Given the entirely new nature of this channel, we can’t say with absolute certainty what the immediate initial traction will be. However, we believe in the long-term transformative potential of this opportunity, and we’ll look to provide updates to the market when they become available. We do not believe there’s any suite of products capable of delivering our feature set. Certainly not one that is as affordable, usable or robust as ours.

With that overview completed, I’ll move on to our business update, and it’s a good one. Q3 was a transformational quarter for AudioEye in a number of ways. We built on our success from the first half of the year and generated improved results in a number of our key operating areas. More specifically, we recorded $2.8 million in revenues in Q3 and 86% increase over the prior year and a record for the 15th consecutive quarter. Our strong top line led to our MRR increasing 29% sequentially to $997,000 at quarter end, also helping to provide incrementally improved visibility into our financial projections as we look to scale our business over the long term. Additionally, quarterly bookings came in strong at $5.7 million, our second biggest bookings quarter ever and over 100% higher than the third quarter of 2018.

From my favorite non-GAAP metric, as many of you know, is the contracts in excess of recognized revenue and deferred revenue. We grew 140% in Q3 to $15.5 million from $6.5 million in the same period last year. We also effectively doubled our customer count in the quarter, a feature which validates our ability to support large-scale rollouts, both technically and financially and also justifies our decision to continue allocating resources to provide the necessary infrastructure in support of some of their efforts, which we anticipate with new and existing channel partners going forward. Current customer count stands at over 4,300, excluding the digital marketing place customers, which is showing good early traction.

And with that, I’ll now provide a brief update on our indirect channel. Within our indirect channel serving industry vertical content management system providers, we had another quarter of accelerated growth in sales and increasing accounts receivable. As you may have seen from our press release back in early September, we announced a landmark achievement with the addition of Hyundai, Subaru of America and Volvo dealer sites to the AudioEye platform. This equated to AudioEye adding hundreds of new customers, essentially doubling our total customer count overnight. This announcement came as a result of our previously announced premier partnership agreement with Dealer.com, which speaks to the type of value we expect to derive from this ongoing relationship and future premier partnerships just like it. As we mentioned on our last call, some of these channel partners guarantee minimum commitments that will result in a booking with future revenue and cash, but never any deferred revenue.

As I mentioned in my opening remarks, during the quarter, we added 2 new channel partners to reach an even 20. Those new customers are BentoBox and one other large partner that essentially owns its industry category with over 10,000 SMB customers. We’re really excited to be working with BentoBox. So this partnership for us — this partnership represents the first ever digital accessibility partnership for restaurant websites. BentoBox supports over 5,000 restaurant websites worldwide. With this new partnership, BentoBox customers now have the option to include AudioEye Managed on their website. During the quarter, we signed another channel partner. We’re unable to share the details at this time. I’ll just say we’re really excited about the potential opportunity here in the total website customer base, and we feel very confident in our ability to generate sales through this channel team once they’re fully onboard.

Moving to direct sales. We continue to win major brands across many of our targeted verticals, including retail, hospitality, technology and government, among others. From a macro level, many private companies and governments that host their own websites will continue to be a sales channel where we expect to see ongoing sale success. On a basic level, with the burdensome workloads in IT for these organizations, we offer a fully outsourced digital accessibility answer. They find immense value and speed to compliance, manual testing, certification and the monitoring and maintenance of their sites for the life of the contract, allowing our subject matter experts at AudioEye to help in this area and provide an ROI, enables our customers to retain — remain focused on their top business objectives, knowing that digital accessibility is being taken care of by proven leaders in the industry. With the influx of partial incomplete and quite frankly, in some cases, disingenuous solutions coming into the marketplace, this is a substantial differentiator for AudioEye.

Moving to some of our other markets, we continue to make progress within the kiosk space. As we’ve mentioned on previous calls, it’s still very early, early days for this segment, but we remain excited by the opportunity and progress and look forward to being able to share more meaningful updates as they become available. Within document remediation services, or DRS, which is our PDF business, we are also seeing continued traction and interest. Given the project-oriented nature of this offering, sales tend to come in waves. So a quarterly comparison is not necessarily the best way to case this still new space. Operationally, we are continuing to vote time and energy to making the PF remediation process increasingly automated, so they’re able to maintain or expand margins. That said, as of today, we’re ahead of our original bookings target for this category. And a final note on customer retention. We continue to retain an exceedingly high number of our customers and currently maintain retention rates in the mid-90s. That overview completed, I’ll turn the call over to our CFO, Sach, who will walk us through the rest of our financial results for the quarter. Sach?

Sachin Barot
Chief Financial Officer

Thank you, Carr. I would also like to welcome David and to Jamil to our Board. I look forward to collaborating with them closely as we continue to focus on continued growth. As you just heard from Carr, we really feel good about our third quarter results as we continue to deliver on our expectations and make progress on a number of fronts, which will have us well positioned for sustainable, long-term growth.

Let me now jump right into Q3 results. Starting with bookings. As a reminder, we define bookings as a contracted amount the customer commits to spend with us, which could be over multiple years. For the quarter, bookings totaled $5.7 million, which was an increase of 102% from $2.8 million in the same period last year. The year-over-year increase in bookings was driven by strength in both our direct and indirect channels driven by strong execution against our sales pipeline. Revenue in Q3 was $2.8 million, reflecting an 86% increase from $1.5 million over the same period last year. The increase in revenue was driven by better penetration with our partners in the indirect channel and new customer acquisition in our direct channel. We continue to show solid retention in both of these channels. Gross profit was $1.7 million or 60% of total revenue, which was 101% increase from $822,000 or 55% of revenue last year. This improvement is driven by enhanced efficiencies as we automate more remediations while growing our top line. This also reflects the mix of products that we deliver during a particular quarter. As we shared with you during prior calls, we are in the midst of investing in several key areas to drive long-term growth and profitability. We strongly believe that these investments will provide the best long-term return for our business and shareholders.

Moving to operating expenses. In Q3, OpEx was $3.8 million, which was an increase of 15% from $3.3 million in Q2 this year and an increase of 80% from $2.1 million last year. The increase in total expenses year-over-year was due to increase in both our sales and marketing as well as G&A costs. Sales and marketing cost increases are driven by expansion of sales teams, and it also reflects investments in marketing to drive a better digital experience and further enhance our leadership. On the G&A front, the increase in expenses was driven by personnel costs, cost of building infrastructure, consulting and legal expenses. As Carr mentioned earlier, we plan on continuing to invest in various areas to support future growth such as technology enhancements, machine learning and AI, onboarding additional personnel in critical areas, product development, increased PR marketing efforts and financial infrastructure. Over the next several months, we expect to make further technology enhancements that will not only benefit our end users and customers, but we also believe it will continue to lower our marginal cost of delivery over time and strengthen our IP portfolio in key areas.

Turning towards bottom line. The net loss available to common stockholders for the third quarter totaled $2.2 million or a loss of $0.27 per share. This compares to a net loss of $1.3 million or a loss of $0.19 per share last year. Now some key performance indicators.

Moving to contracts in excess of revenue recognized 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 measures a presence, a contractually agreed upon amount that is remaining to be built and that will be recognized in future periods. In Q3, contracts in excess of revenue recognized and deferred revenue increased 140% to $15.5 million from $6.5 million in the same period last year. Moving to monthly recurring revenue or MRR. At the end of the third quarter, MRR totaled $997,000, which was an increase of 29% compared to $774,000 at the end of Q2 this year and a 99% increase on a year-over-year basis. Some balance sheet items. Beginning first with deferred revenue. As a reminder, any funds received for services not yet provided or invoice amounts for noncancelable contracts, where we have not yet earned revenue, are in deferred revenue. In the third quarter, deferred revenue was $4.3 million, up 36% sequentially from 2 — $3.2 million in Q2 this year, reflecting continued strength in our bookings. Our accounts receivable balance at the end of Q3 was $1.4 million compared to $632,000 at the end of Q2 this year. This quarter-over-quarter increase was driven by overall sales growth and the mix within that growth that we’re experiencing. As we increase penetration rates with our indirect partnerships, we anticipate additional jumps in AR due to the month-to-month nature of some of these contracts. Additionally, from our direct channel, invoice contracts that are noncancelable are growing as well. The overall timing of the contract date and thereof invoicing impacts our AR balance. Our accounts payable balance was $670,000, which is sequentially lower by about 4% from Q2. We ended the quarter with $3.5 million in cash. As discussed in our last earnings call and in an 8-K filing subsequent to the end of the second quarter, the company previously negotiated an unsecured line of credit of up to $2 million, which is still at our disposal, if needed. At this point in time, we have not drawn on this line of credit. And we have no further need to raise additional funds for the short term. Furthermore, we believe we have sufficient capital to run our business over the next few quarters as we continue to build our long-term road map, execute on new strategies and invest in scalable growth. We plan to provide a more comprehensive update with respect to our future capital market clients as well as our 2020 plans and path to profitability in the new year. This completes my financial summary. I will now turn the call over back to Carr. Carr?

Carr Bettis
Executive Chairman

Thanks, Sach. I’ll now update you on a few items before turning it over to Q&A. First, as it relates to our ongoing CEO search, we continue to have active discussions with a select list of potential candidates. And as we’ve said previously, there really isn’t a way to model out a time frame for a selection here as a number of factors impact the final decision-making process. We take this process seriously and any candidate goes through quite a lot of rigor. Moving to our outlook. To keep it simple, we are reiterating both our bookings and revenue guidance for the year. We expect bookings in 2019 to range between $20 million and — $22 million and $24 million. And we expect revenue to fall between $10 million and $11 million. More generally, as I stated on the last call, we anticipate another strong fourth quarter to end the year. This belief is driven both by historic results as well as a large number of contract renewals coming up during the period. Halfway through Q4 at this point, we feel increasingly confident in their ability to meet our stated financial goals. Throughout its history, AudioEye has generated strong renewals, and we expect strong renewals to continue, an important factor that gives us confidence in the long-term health of our business as we continue to grow bookings. I hope I made my point clear today. AudioEye is in the strongest position to date, and we’re continually finding ways to improve and grow. Our long-term goal providing AudioEye everywhere and it becomes synonymous with digital accessibility moving us from a category leader to category owner. Our recent launch of the AudioEye Digital Marketplace has us one major step closer to that goal. Going forward, we’re going to continue to take bold, decisive action to build on our leadership position in this nascent growing market, which will ultimately enable us to have a company built to both scale and to last.
And with that, I’ll now turn the call over for questions. Operator, please provide the 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

Congrats on a strong quarter. Yes. In terms of the direct channel, I mean can you speak to any particular verticals of strength that you’re seeing there that are driving the strong results? And then how are you feeling about that pipeline going forward? I guess the question’s more centered you have any deals that were pulled forward into Q3 that maybe you thought would have closed in Q4?

Carr Bettis
Executive Chairman

Zach, Todd’s also here with us, and I’m going to have him address your question.

Todd A. Bankofier
Chief Revenue Officer

Zach, let me just say that the pipeline for direct continues to be strong, we’re really satisfied about where we are. Some of the specific verticals that we see strengthen are obviously in retail e-commerce space for all the obvious reasons. And we also see that hospitality and government space is starting to come around, slowly but surely. So those have been 3 big ones in Q3.

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

Great. And in terms of the indirect channel, I think, can you speak to what really drove the rapid adoption that you saw with your customer account nearly doubling in Q3 and that momentum continuing to build here in 4Q? I mean how should we be thinking about this adoption as we move forward? Is it going to come in waves, similar to the one that you had at the start of Q3? Or should that smooth out over time?

Carr Bettis
Executive Chairman

The indirect channel has been difficult for us to forecast in terms of timing, right? But the way to think about what we’ve observed, I really believe we’re at the start of continued momentum across some of these sectors and some of these partners, and we’re adding partners. So as we add partners is where it’ll — we’ll have ways, but the way would be maybe less dramatic than the ones we’ve seen. So — but continued growth, strong growth within these channel partners is what our objective is. We’re committing resources to that and we’re seeing very good results from it. It’s not just one partner, we’re seeing some results from multiple channel partners, and they’re starting to see improvements, which is exciting to us.

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

Got it. And then, Sach, you referenced this on the call in terms of the impact of the accounts receivable line as you get increasing penetration into that indirect channel. Can you provide a little more detail around the timing of those collections as you move forward? And how this is going to be impacting the accounts receivable line on a go-forward basis?

Sachin Barot
Chief Financial Officer

Yes. So as I mentioned, Zach, there are 2 factors, right? From the indirect side, as you know, while we don’t get deferred, we definitely get AR for all the contracts that come in. Look, it’s lesser of the 2 factors that’s behind AR jump from Q2 into Q3. We expect some help over the next few quarters from this phenomenon as we continue to drive more penetration with our partners and also, we expect to continue to grow our direct channel. And we are making efforts here to drive more and more noncancelable contracts as well. So with that said, Zach, I think the best way to think about it is over the next 2, 3 quarters, you may see this kind of an increase from year-over-year basis, quarter-to-quarter, it may be a little modest, but we expect the number to persist.

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

Understood. And then, Carr, you talked about the launch of the AudioEye Marketplace, specifically your 2 new solutions with the AudioEye Free and AudioEye Pro. I mean it sounds like it’s been off to a pretty good start thus far. And is this going to be included in the customer account as we move forward?

Carr Bettis
Executive Chairman

We haven’t talked about that internally yet, and it’s certainly not included when I say we have over 4,300 customers today. We have customers through the Digital Marketplace. This is a place where customers can go and self serve, if you will, right? I think it’s a self shopping experience for people in all kinds of platforms and small businesses on platforms, it’s fantastic. So the customer account there, we’ve got very strong aspirations and high expectations. And we’ll figure out how best to communicate that with you guys.

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

Understood. And final question for me, Carr, on these 2 new products, it sounds like in the direct channel, there’s a — you have a new landing page where you have customers that can come directly to the new AudioEye website. But in terms of the indirect channel, are — the AudioEye Pro solution, is that something that your indirect channel partners are going to be offering to some of their customers now?

Carr Bettis
Executive Chairman

Look, at the moment, what happens if you come to our site and you’re one — and you’re an SMB that’s part of the network for our content management as a system provider that is a partner, you get directed to that partner experience. It doesn’t mean that some of these indirect channel partners might like the idea of offering a couple of levels of service as well. And remember, the only way to get to the point where we are going to give you a certification of standard of compliance and accessibility, which these partners have adopted as a principle, by and large, is to use the Managed service. That’s where you get it. And it’s delivered to them in an affordable way. So at the moment, we continue to offer anybody who comes as an SMB to our platform, who is part of our indirect channel partners or industry vertical content management system providers system, they get directed to that solution and that answer. It is the right answer and the best answer for every company that wants to adopt accessibility and make sure that they’re certified for life and such. And certainly, at that price point, it’s an amazing offer for our content management system providers or SMBs.

Operator

Our next question comes from the line of Allen Klee of National Security.

Allen Robert Klee
National Securities Corporation, Research Division

Yes. For the new marketplace, could you talk about how you think about the economics and the size of this potential market? I heard you say there were tens of millions of potential websites. And if I just did some basic math of, I don’t know if there’s 20 million, and you’ve got 1% of that and if you — that did the professional plan for 12 million or 13 million, I think — at $12 to $13 a month, I think it works out to close to like $30 million potential annual revenue just from that hypothetical, but how do you think of it and what — and the margins on that but — compared to your margins overall?

Carr Bettis
Executive Chairman

I love — thanks a lot, Allen. Thanks for the question. You’re on the right track. Let me just make it more specific to relate partners that we are offering solutions for right now. Our TAM is huge here, and this is how we think about it. Giving them — sort of the math you were doing, the number of websites potentially available us through Wix, Weebly, Shopify, Squarespace and WordPress assists of those alone are about $42 million globally. We get 1% penetration rate just for Pro, you were doing this math yourself, but I’m giving slightly different numbers for specificity. Just for Pro that’s $65 million of yearly revenue. We don’t expect these to stop at Pro, right? We expect to see lots of managed service offerings come from these as well over time or even initially in some early adoptions. So you can see the potential. That doesn’t include enterprise customers and doesn’t include vertical part — channel partners of our — or our managed service offerings. So it’s a really significant market opportunity. As it relates to margins, look this is a really special opportunity because it’s truly, truly a self-serve enterprise solution for our individuals on the platforms that we are supporting, they can get all the way to managed — through the website portal itself. So it’s going to lower the margin cost of delivery substantially. We will continue to see marginal cost of delivery go down. By the way, our investment in machine learning and automation continue to payoff significantly as we continue to move forward. We’ve got a lot of things that we’re doing there that are continued to prove efficiencies and enhancements and lower the cost of delivery. So we’re pretty excited about the combination of things that we’re announcing over the last couple of weeks.

Allen Robert Klee
National Securities Corporation, Research Division

Okay. So you’ve kind of answered a little bit of my second question, but it was — your gross margin was quite strong in this current quarter, close to 60%. Is there — and is there — is that something that is potentially sustainable at those levels and then can grow from that? Or is there any reason that it was uniquely high in the quarter?

Sachin Barot
Chief Financial Officer

Allen, this is Sach. So the way I think about it is 2 different ways. As we grow and scale and as we automate more and more remediation, we expect that gross margin number to improve. But also, as I said in my prepared remarks, it may swing a little bit before we actually get to that scale. And one of the things is the amount of the manual remediations we end up doing for certain contracts or for some of our DRS business, and that mix may reduce it a little bit. But over the next 12 to 24 months, we hope, and we know, it should continue to get in the upward direction and continue to improve over time. But you may see a little lumpiness here and there based on the mix of what we delivered.

Carr Bettis
Executive Chairman

Allen, I want to point out, too, that when we’re growing contracts so quickly, and as we — I think we’ve discussed and articulated several times now, there’s a — there tends to be a heavy burden of cost in the implementation periods up front. And then so we’re growing as fast as we are in acquiring customers, we’re incurring still a significant portion of cost upfront. That’s why we continue to see this contracts in excess of revenue and deferred revenue can rapidly, but in a way that puts pressure on short-term margins with the rapid growth of contract accumulation. So there’s a whole bunch of things going on here. The marketplace doesn’t have that phenomenon because in the marketplaces as it gets more and more revenues, that phenomenon will go away. But for indirect channels, as long as they’re an important part of what we’re doing with premier partnerships with contracts upfront, I think we’re going to continue to see margins sort of, in my mind, artificially held down. So there’s a lot — I think we think there’s a lot of upside for margin here.

Allen Robert Klee
National Securities Corporation, Research Division

Okay. So when I think about your business, you have attractive gross margins, you have low churn and you have a recurring revenue business model. So that can generate an attractive lifetime value for a customer. And so it makes sense to spend a lot to kind of go for a land grab on them. What would be very helpful is if there’s anything you can generalize in terms of thinking about, as you take that approach today, is there a way to think about when you — as you leverage your fixed cost that when you get to a certain scale of revenue that you’d hit that inflection point of turning profitable on the bottom line?

Carr Bettis
Executive Chairman

Yes. So we haven’t talked specifically about when we expect to see that inflection point, but we are making substantial investment and have been making substantial investment now for 2 — couple of quarters into this and even beyond that, even earlier, specifically into these initiatives that we’ve been — we’ve launched and talked about today. Those — we’re going to continue to invest, but the payoff is the land grab that we see in the high margins that we think we will deliver. So yes, we’ll talk more about our visibility and the profitability of the business when we get into the beginning of next year. That’s our plan. And we’ll have a good answer for you, but we’re excited about it. Do we believe we’re going to grow on the faster profitability? Absolutely. When you have the ability to increase margins and have rapid growth, and we’ve made a substantial investment already in what we’re doing and we’ll be doing over the next 2 or 3 quarters here, investing really heavily. We’re very excited about the prospects, and we believe in it. We’re certainly focused on growth, though, not to be confusing right now. We’re very focused on that land grab.

Allen Robert Klee
National Securities Corporation, Research Division

What’s your — what’s the update on the industry litigation? And thoughts on how that might be helping awareness and increasing adoption for your services?

Carr Bettis
Executive Chairman

A big thing for us, right, in the nation market is awareness. And some of that’s coming through litigation, getting attention such as the Domino’s case. They went to SCOTUS. And that kind of pushed back by SCOTUS. So that, for example, I think, is really impacting the restaurant space and litigation around the restaurant space. It’s really exciting in that context for us to gain a partner like Bentobox, who by the way, had gone off and tried to get accessibility through other means and said, we need AudioEye. So I think anything that’s happening in the litigation front, which is continuing at a torrid pace over the last year or more will bring awareness. And more and more companies show up in the media, the more awareness gets focused on this issue and the better for us. We’re very well positioned as we continue to offer solutions for everyone here.

Allen Robert Klee
National Securities Corporation, Research Division

Okay. My last question is, if I were to look at you 5 years from now, how do you think your financial business model looks like?

Carr Bettis
Executive Chairman

You’re a little ahead of me here except for I would say we’re excited about what we think is possible or we wouldn’t be working as hard as we are doing what we’re doing and investing the time, energy and capital. I mean we’re very, very bullish about the long-term prospects for the business, but I’m not willing to go out on a limb on a 5-year forecast today.

Operator

At this time, this concludes our question-and-answer session. I’d now like to turn the call back over to Dr. Bettis for his closing remarks.

Carr Bettis
Executive Chairman

Thanks again, everyone, for your time. We really appreciate you being here, and we’re looking forward to the next steps for the business and executing here. Thank you.

OperatorBefore 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 Third Quarter 2019 Earnings Conference Call. You may now disconnect.

 

 

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