AudioEye, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[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 non-historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, confident, will and other similar statements of expectation identify forward-looking statements. These statements are predictions, projections or other statements about future events and are not based on current expectations and assumptions that are subject to risks and uncertainties.

[Carr Bettis:]

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.

[David Moradi:]

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 two 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 US 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 one. 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.

[Sach Barot:]

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 two 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 non-cash 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. 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.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Allen Klee with Maxim Group. Please proceed with your question.

[Allen Klee:]

Yes. 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 Moradi:]

Hi, Allen, yeah, 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 Klee:]

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 Moradi:]

Yeah. 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 Klee:]

Thank you. In the last quarter or two, 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?

[Sach Barot:]

Hey, 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 three quarters from that perspective.

[Allen Klee:]

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?

[Sach Barot:]

We expect it to be close to $10.4 million-ish.

[Allen Klee:]

As of what time period is that?

[Sach Barot:]

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. But…

[Allen Klee:]

Okay.

[David Moradi:]

If you do the math it was around 370,000 shares, maybe 380,000 shares; somewhere in that range.

[Allen Klee:]

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 Moradi:]

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.

[Allen Klee:]

Great. Okay. Thank you for everything. Congrats on a quarter.

[David Moradi:]

Thank you.

[Sach Barot:]

Thanks, Allen.

[Operator:]

Our next question comes from the line of Zach Cummins with B. Riley. Please proceed with your question.

[Zach Cummins:]

Oh, hi. Good afternoon, Carr, David and Sach. Thanks for taking my questions and 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 Moradi:]

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.

[Zach Cummins:]

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 Moradi:]

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.

[Zach Cummins:]

Understood. And with the realignment to your two 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 Moradi:]

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.

[Zach Cummins:]

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 Moradi:]

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.

[Zach Cummins:]

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 Moradi:]

Yes. There is a transition going on, that's happening over the next two to three months.

[Zach Cummins:]

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 Moradi:]

That's not really a part of that. No. This is just the difference of the technology, not the pricing points.

[Zach Cummins:]

Understood. That’s helpful, great. Well, thanks again for taking my questions. I really appreciate it, and best of luck going forward.

[David Moradi:]

Thank you, Zach.

[Sach Barot:]

Thanks a lot, Zach.

[Operator:]

We have a follow-up question from the line of Allen Klee with Maxim Group. Please proceed with your question.

[Allen Klee:]

Yes. Hi. It's two 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? Thank you.

[Sach Barot:]

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, remediations 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 two 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 -- continued 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 Klee:]

Thank you, and operating expenses?

[Sach Barot:]

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 non-cash equity comp, which by the way, will fluctuate based on -- so many different factors that play -- come into play, including prices, share prices when the 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.

[Allen Klee:]

That’s great. Thank you so much.

[Sach Barot:]

You’re welcome.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

[David Moradi:]

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.