AudioEye, Inc.
Q4 2018 Earnings Call Transcript

Published: 28 Mar 2019

[Operator:]

Good afternoon, and welcome to AudioEye’s Fourth Quarter and Full Year 2018 Earnings Conference Call. Joining us for today’s call are AudioEye’s Executive Chairman, Dr. Carr Bettis; and CEO, Mr. Todd Bankofier. Following the remarks, we will open up the call for your 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 Web site at www.audioeye.com. Before I turn the call over to AudioEye’s Executive Chairman, I want to emphasize that some of the information you’ll hear during our discussion today will consist of forward-looking statements that are predictions, projections and other statements about future events. These statements 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 and the comments made during this conference call and in the Risk Factors section of our Form 10-K and other reports and filing with the Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements which reflect management’s belief only as 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:]

Thank you, operator. I’ll warn everyone that I’ll be speaking a little faster, hopefully not too fast. Got a lot to talk about today. So welcome everyone and thank you for joining us. After the market close, we issued a press release announcing our results for the fourth quarter and the full year ended December 31, 2018. A copy of the press release is available in the Investors section of our Web site at audioeye.com. As many of you dialing in today are aware, AudioEye is a leading provider of SaaS-based digital content accessibility solutions. We’re in the business of making Web sites and other digital content accessible for all individuals, especially those individuals with disabilities. We pride ourselves in addressing a very large range of disabilities. With the AudioEye platform, we do more than identify issues with Web properties. We strive to fix, maintain and continuously monitor them. We also certify Web sites 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 can more quickly be in compliance with accessibility standards, regulations and laws. Coupled with manual testing and remediation by subject matter experts, we provide our clients with the best solution to make their Web sites and digital content more accessible and more usable for more people. Furthermore, for our commercial clients we give them the opportunity to get an ROI from their investment in and commitment to the enormous population of individuals with disabilities. Let me move on to the business update. As expected from the preliminary results we released last month, the fourth quarter was a great finish to a great year for AudioEye. With 103% increase in revenues for Q4, we’ve now generated record revenues for the past 12 consecutive quarters which translates to three years of consistent growth and improvement. In a minute I’ll be going into our financial results for the quarter and the year in greater detail, but first I’ll provide an update on some of the bigger picture items we’ve discussed in the current – especially around the current mix of accessibility landscape. So generally believing – we still believe that we are at the forefront of the wave in digital accessibility initiatives galvanized by regulatory demographic and ROI considerations. From a regulatory standpoint and according to preliminary estimates from a law firm Seyfarth Shaw, 2018 saw a 117% increase in ADA Title III Web site accessibility lawsuits in U.S. federal court when compared to 2017. The count for 2018 was more than 2,200 lawsuits. More specifically, the plaintiffs in these cases are alleging they could not use or access information on Web sites because they were not coded properly to work with assisted technologies such as screen readers or switch devices or otherwise not accessible to them. With AudioEye solution, those utilizing assisted technology devices are more resolute than ever to find and to use those sites that are coded properly ensuring they’re accessible and more usable. We not only benefit from this legal climate, but we are also committed to being at the forefront of the conversation about the potential ROI benefits that digital accessibility provides to enterprises that make a commitment to being fully accessible. With this understanding and in recognition of massive untapped opportunity in front of us, I promise not to talk about this into perpetuity, but we raised 6.25 million in capital with the goal of increasing our sales, marketing efforts, building our brand awareness and continuing to invest in our innovative technologies. We did that back in August. Let me be clear about our business strategy and reiterate it. Given our significant advantages in this fast growing emerging markets, we’re continuing to challenge the team to think about how we can the gain greatest market share as fast as possible while still delivering the very high quality managed service we provide to our customers. To that end, we’ve continued to add and improve our sales team. Additionally, we have divided the team by the direct sales market and the indirect channel partner market. We are also ramping our marketing efforts. We know that we can and even should be doing more to improve name recognition of the AudioEye brand. To support these efforts, at the end of the last year we hired a new director of marketing, added two additional marketing professionals to bolster the volume and quality of our lead generation, to assist our partners in better selling for our service and to build out our brand as the digital accessibility industry leader. Our goal is not modest but is to make the AudioEye name synonymous for solving digital accessibility. To that end, we’ve also hired a third party to evaluate and assist us with our public relations effort and strategic marketing choices. Put together and I will say it will take a little time, but we believe these steps will help us gain more market share and mindshare for AudioEye. I’ll now take a minute to go through our financial results for both the fourth quarter and full year 2018 ended December 31. In the fourth quarter of 2018, we generated revenues of 1.78 million reflecting an increase of 16% over the third quarter of 2018 and a 103% increase over the same time period in the prior year. For the full year 2018, we generated revenues of 5.66 million which was an increase of 107% from 2.74 million in 2017. The increase in revenues for both the quarter and year was primarily due to the execution of the company’s business plans which included hiring of additional sales team members, securing the new negotiated indirect channels partnerships thereby increasing the volume of reselling of AudioEye products and services and a continuing marketing focus on highly transactional industry verticals. Cash contract bookings is the contracted amount of money a customer commits to spend with us over an agreed amount of time generally ranging from 12 months up to 60 months. Our cash contract bookings for the quarter ended total 3.5 million, an increase of 25% compared to 2.8 million in the prior quarter and an increase of 124% from 1.56 million in the same period last year. For the full year 2018, we secured 11.55 million in cash contract bookings, up 83% from the 6.3 million in 2017. The increase in cash contract bookings for both the quarter and year was primarily due to execution in contract closings in the direct channel and securing a number of contracts in the indirect channel. In a minute, Todd’s going to give you a more comprehensive overview of these two important sales channels for our business. Next, gross profit in fourth quarter of '18 was 1.04 million or 58% of total revenues which was a 26% increase from the 820,000 or 55% of revenues reported in the third quarter of '18 and 94% increase from 536,000 or 61% of revenues in the prior year period. For the full year, gross profit was 3.03 million or 54% of total revenues which was an increase of 124% from the 1.36 million or 49% of total revenues in 2017. The increase in gross profit was primarily due to increased sales volume and an increasing revenue renewal rate with longer contract terms. Advancement in the company’s technology also led to certain efficiencies in the delivery of service. Total operating expenses in the fourth quarter were 2.05 million which was a decrease of 3% from 2.12 million in Q3 and a decrease of 4% from 2.14 million in the same year-ago period. The decrease in total operating expenses was primarily due to a decrease in stock-based compensation and increased efficiencies being realized as the company continued to scale its operations. For the full year 2018, total operating expenses increased 30% to 7.61 million from 5.87 million in 2017. The increase in total operating expenses for the year was primarily due to an increased capital investment in technology enhancements, marketing and key personnel. Net loss available to common shareholders for the fourth quarter of 2018 totaled 1.44 million or a negative $0.19 per share. This compares to a net loss of 1.35 million or a negative $0.19 per share in the prior quarter and a net loss of 2.78 million or a negative $0.53 per share in the fourth quarter of last year. For the full year, net loss available to common stockholders was 5.07 million or negative $0.74 per share, which is an improvement from a net loss of 5.68 million or negative $1.21 per share in 2017. We ended the year with 5.74 million in cash and cash equivalents compared to 1.96 million at December 31, 2017 and we have no debt. Moving to our outlook for 2019, we are off to a solid start and expect to be in the ranges we provided in December for both 2019 revenue and cash contract bookings. The indirect channel has started slower than we would like, but we are especially encouraged by our direct channel results this year. To better explain, first let me back up and describe our two main ways we go to market. AudioEye customers fall into one of two distinct sales channels; direct and indirect. In the direct channel, AudioEye sales personnel engage directly with the customer. This was the foundation of our business and we continue to expand our direct sales team and give them even more tools to succeed. In the indirect channel, AudioEye engages with the indirect channel partners who provide a Web site hosting platform for their end used customers. Individually, these hosting platform enterprises can host thousands of these end used customer Web sites. As our partners, they serve as an authorized reseller of the AudioEye solution to their customers. The indirect channel has the potential to be a key factor in the acceleration and proliferation of the AudioEye technology and managed service. It is not unique to our business and Todd and I’ve said previously that the indirect channel is expected to be less predictable because we don’t control the channel partner and don’t own the end used customer directly. And as I mentioned earlier, the indirect channel started slower than we would have liked, but let me explain. For reasons unrelated to AudioEye, more than one partner delayed their AudioEye program loss this quarter. Here’s the good news that the good news is that this includes important channel partners who have made an upfront financial commitment to the AudioEye program within the past few months. That is these commitments already represent cash contract bookings for AudioEye from the partners and reflect the real commitment by them to deliver the AudioEye solution to their clients via their platforms. It is important to note that our technology stands ready to implement our channel partner clients on the AudioEye platform and do it in scale. Revenue recognition starts once we begin implementation. In the direct sales channel on the other hand, we do have more control and visibility. I’m pleased to report that our direct sales pipeline is more than 2x the size of the pipeline at the same time last year and we have some policy developments in the direct channel that we did not have visibility into last quarter. Todd will give you more color in a minute when he discusses the two sales channels in more detail. So stepping back to the big picture, as I already mentioned, we expect to be in the range of our full year guidance. Also with the ramp up in investment in people and processes focused on sales and lead generation, marketing and public relations, we remain excited about the growth prospects for the future. Finally, I want to give you an update on the CFO search. We are making progress as it relates to our open CFO position. Obviously, the process is taking some time. But what I want to convey is that we aren’t taking this decision like this lightly and we set a very high bar for this hire. With that, I’ll turn the call over to Todd, our CEO.

[Todd Bankofier:]

Thanks, Carr. 2018 was a better year for our organization on every level. Operationally, we continue to generate substantial growth through our direct sales as we see our indirect channel partnerships beginning to ramp up in their activities. More specifically, we are progressing through 2019 with more than a 1,000 active total customers and a growing number of channel partners. Our current sales pipeline is now more than double where it was just a year ago at this time, which has been driven by the improved lead generation processes in the areas of more targeted page search frenzies, more purposeful digital content and attendance at more targeted industry conferences. Given the additional resources we’re focusing on marketing and public relations we expect to continue to grow our pipeline. Now I’m going to spend the rest of my remarks providing additional color around really the three sources of customer success for AudioEye which are the direct sales, the indirect channel partnership sales and customer retention. First, the direct sales. While I can’t directly disclose any of the high profile names that have recently become Ally customers, what I can tell you is that we’re continuing to attract large Fortune 500 enterprises to the Ally Managed Service solution at a growing rate. We’ve been saying for some time that the technology that addresses our direct channel is not just our Ally Managed Service solution but also includes our PDF remediation tools and our efforts in the kiosk space. We believe PDF remediation services will increase this year as a result of government and industry organizations needing to address the documents that they house on their Web sites. An organization simply can’t say their site is compliant if the documents on the site are not accessible. PDF remediation services contracts have been a positive surprise for us so far this quarter. Two additional market segments where we are focusing our direct sales efforts are in the federal space and the self-service kiosk space. With the recent signing of the 21st Century IDEA Act by Congress, there is now an additional requirement and focus by federal agencies to ensure that their digital assets are accessible as well. We see opportunity for federal agencies to increase their spend and speed their accessibility in compliance to the IDEA Act by leveraging AudioEye services. To be clear, we are dealing with the federal government here and we will continue to monitor how this new law unfolds in the months ahead, but we feel confident that it’s a direction that is positive for both us and the federal government. Lastly, another area of focus for us has been in the self-service kiosk space. The utilization of kiosk today by a widespread number of companies streamlining their purchasing processes for their clientele is uniquely well suited for our technology. We have a clear strategy to address this additional Ally opportunity while continuing to leverage our core Ally technologies. With an increased focus on kiosk accessibility in compliance with the ADA, we see this channel as adding fuel to our growth strategy over the intermediate and long term. Now the indirect channel. Carr already discussed by working with providers with the proprietary content management systems or CMS providers, our indirect channel partners, AudioEye leverages economies of scale to deliver the AudioEye solution in a cost effective and highly efficient way. One of the big announcements we made recently was that we signed Dealer.com as a new channel partner. Dealer.com is the premier digital marketing solution and platform provider for auto dealerships. Dealer.com services thousands of clients and leverages hundreds of sales professionals each now reselling the AudioEye solution to their existing and prospective clients, so obviously we’re excited about having Dealer.com as a partner. By adding partners representing the size and scope of Dealer.com, we have an incredible opportunity for potential businesses in the days ahead. At the same time that means we need to be able to support the capacity requirements of a given partner decides to quickly ramp up. AudioEye takes very seriously and stands ready for this challenge. We’re bringing indirect channel partner clients onto the Ally Managed Service platform as fast as we can and we continue to make changes and updates to our existing systems to facilitate the on-boarding process. As an example, for a lot of our existing channel partners, the on-boarding and remediation process can be expected to occur in large batches, potentially hundreds or more clients at a time. To address what have otherwise been a big bottleneck issue, last year we considerably augmented our technical capacity and processes to address a much higher volume of client on-boarding, including the ability to more rapidly test Web sites, remediate and monitor tests from our Web sites on an ongoing basis. With these advancements in place, accessible platforms now provide efficiencies that yield amazing economies of scale allowing AudioEye to offer practical, more affordable pricing for potentially thousands of clients supported across a single CMS platform. We realize we are still in the first inning when it comes to application of digital accessibility in the indirect channel platform space. We have learned a lot, however, from our current partners and in the last year. And with each new partner we sign on, we have gained more experience and more confidence in how to anticipate growth and better garner adoption data to better forecast our indirect channel business. To support this effort, we have continued to improve our training programs. For example, we have added a dedicated channel partner marketing team member who now assist partners with product training, messaging and sales training. To conclude on this subject, I’m very pleased to announce that we have signed two new indirect channel partners just in the last two weeks and look forward to bringing on additional two to three more in the very near term. Moving to customer retention. At AudioEye we are incredibly proud of the stickiness of our technology solutions. We continue to retain almost all of the business we bring onto the platform. Customers stick with our service offering because they realize that after the first year of service we have done everything that we said we would do. We have kept their site accessible and compliant. We have unlocked their digital content to a significant number of additional people, in particular those with disabilities. And based on our records to-date, our revenue renewal rates are as expected and remain in the mid-90s based on client renewal revenues and bookings. Further on the idea of retention, it is important to remember that most consulting firms are competitors that we compete with in the direct channel, project-based businesses meaning that once they make a Web site compliant, they presumably pay for the work they did and then move on to the next job. They do not continue maintenance and monitoring in the way that we do at AudioEye. As a result, these consultants aren’t able to generate a reliably consistent source of income, in essence a recurring revenue stream and their Web site clients are likely unable to address any subsequent errors or regulatory updates to their Web site once the consultant has moved on. Most Web sites are highly dynamic and ever changing. And as the content changes are made, additional inaccessible features are added to the site unbeknownst to the Web site owner. Our ability to achieve and sustain conformance in a cost effective manner is what has been so appealing to our clients and a large competitive advantage for us. As Carr stated about Q1, we’re off to a good start in 2019. Consistent with our internal business plan we have and will continue to bring on key personnel and always aim to put the right people in the right positions. We will continue to fortify the sales pipeline, add more partners and unfold a large scale marketing plan to brand ourselves as the leaders in this space. Regarding putting people in the right places, we’re proud to say we recently promoted AudioEye Co-Founder, President and now Former Chief Technical Officer Sean Bradley to the newly created position of Chief Strategy Officer. Sean is a Co-Founder of AudioEye and while he has been more than capable of CTO for us over the years, we realized that our business will benefit with his expertise spanning a variety of areas not just the technical aspects. In this new role, Sean will oversee a number of day-to-day strategic planning audience, but most important and his main focus going forward will be overseeing the ongoing build out of our indirect sales channel. With Sean’s change of the role also comes the transition of former AudioEye Chief Development Officer Mark Baker to Chief Technology Officer. Mark has been with AudioEye for five years as an extremely capable leader. As an AWS certified engineer and patented inventor, Mark’s tenure with AudioEye has been marked by a series of timely successful product releases that have revolutionized the way AudioEye delivers highly scalable and secure technology solutions to our diverse and growing customer base. So in conclusion, our focus remains on taking an increasing share of the market with respect to the tremendous opportunity in the digital accessibility space. Access to digital content is about building in an inclusive world. It has been an honor to work alongside such a talent team of 69 passionate, capable, committed individuals who share a common purpose, making digital content more accessible, more usable for more people. And with that, we’re ready to open up the call for your questions. Operator, please provide appropriate instructions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Zach Cummins, B. Riley FBR. Please proceed with your questions.

[Zach Cummins:]

Hi. Good afternoon, Carr and Todd. Thanks for taking my questions and congrats on the strong finish to the year. So just starting off with bookings year-to-date in Q1, it sounds like you’re off to a little bit of a slow start in the indirect channel. Much of this is really not to do with any of the fault of your own. But can you talk about some of the reasons that some of these partners are delaying I guess impending rollout of the AudioEye solution to their customer bases?

[Carr Bettis:]

Hi, Zach. This is Carr. Thanks for your question. It’s actually interesting. There have been a few things that have happened from some M&A activity that impacted us that we didn’t expect and just organizational decisions with the timing of their own programs to launch this and delay the launch slightly. So again, some of the important channel partners that we’re talking about have already made a financial commitment to us. They’ve shown that they’re very interested in it and we have insight into their programs and how they’re going to be unfolding. So I would call it – we clearly say that’s what it is, it’s the delay that is out of our control. Nothing to do with AudioEye being ready.

[Zach Cummins:]

Understood. That’s helpful. And in terms of the direct channel, it seems like you’ve had some strength in both the federal and the kiosk side of the business. But were there any other verticals there that you saw some strength in the first quarter? I know that the automotive sector has been more of one that’s been to the forefront. Is a lot of your penetration on the automotive side going to come more so from the indirect channel partnership with Dealer.com or more of these direct relationships?

[Carr Bettis:]

Yes, so first thing I want to make sure we’re clear about the federal channel, Zach. This is what we see as an evolving opportunity for us because of the IDEA Act. We’re trying to imply that we were doing a lot of direct bookings so far. We just see it as an opportunity that needs to be invested in and pursued. That’s got future benefit for us if we’re successful in that channel. So I think that’s important to recognize. I’m sorry, the second part of your question, Zach.

[Zach Cummins:]

Yes, understood. That’s helpful. And in terms of the automotive vertical, that’s been one that’s been to the forefront of where you’ve been seeing some strength there. Should we expect a lot of the increased penetration to come from this indirect partnership with Dealer.com or are you also establishing some direct relationships with some automotive customers?

[Todd Bankofier:]

For the most part, Zach, they’ve come through mostly our dealer channel partners and we have four of them now. So we have surrounded ourselves with the majority of the CMS platforms in the automotive industry. We do see the automotive industry moving quickly on this. Our partners have engaged us in what they’re planning to do in some marketing programs to their auto dealers in the months ahead. So we really are excited about the next couple of quarters.

[Zach Cummins:]

Understood. And then in your prior update you actually gave a monthly recurring revenue metric. Is that something that you are going to provide or anything you can give color on in regards to the performance of that metric in Q1?

[Carr Bettis:]

Yes, so subject to review by a new CFO, Zach. We’ve decided we’re going to make that a practice for us to disclose that when we report quarterly results going forward. By the way with a CFO onboard, we may also provide some additional metrics as well.

[Zach Cummins:]

Understood. Thanks, again, for taking my questions and best of luck here as you go into 2019.

[Carr Bettis:]

Thank you, Zach.

[Operator:]

Our next question comes from Ilya Grozovsky, National Securities. Please proceed with your questions.

[Ilya Grozovsky:]

Thanks. Given that we are essentially done with Q1, what kind of visibility do you have on revenues in the first quarter? And also if you could just talk a little bit about the gross margin trends, obviously you guys put up about 58% in Q4. How does that play out in your mind through 2019? Thanks.

[Carr Bettis:]

Hi. Thank you for your question. We’ll talk about the Q1 results at a different time in terms of once we have them finalized, we’ll feel comfortable talking about those. We’re very excited about the pipeline that we have. Also where we sit today, also excited about that and again we had a solid start to our first quarter. So we’ll give you more information on the first quarter later. So yes, thank you for that.

[Ilya Grozovsky:]

As far as the gross margins in '19?

[Carr Bettis:]

As far as gross margins go, we’re going to continue to expect to see gross margins improve over time. We’re also going to continue to invest significantly in the sales process, right, when we see these emerging markets available, we’re going to make investments. And we continue to ramp up the sales cost in the process as well. But we still expect to preserve some pretty strong margins here.

[Ilya Grozovsky:]

Okay. Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Jim Kennedy, Marathon Capital Management. Please proceed with your question.

[James Kennedy:]

Hi, Carr. Hi, Todd. Congratulations on the progress.

[Carr Bettis:]

Thank you, Jim.

[Todd Bankofier:]

Thank you.

[James Kennedy:]

My question is related to the two new indirect channel partners. Can you give us some color on either size, where they rank in the industry, what it takes to onboard them, are they already on-boarded, just kind of what that process looks like? And how from just a gross market standpoint what they add to the footprint that you already have out there in the indirect channel?

[Todd Bankofier:]

Well, we’re not at liberty to give the names yet, Jim, but we feel really excited about unveiling these. We’ve just signed one in the last week and we’re obviously going through the process of getting them set up on a training process and getting them going through what we coined as our indirect channel marketing process. But they represent a large number of new – in the thousands of new potential clients on their current CMS platform. They are an industry leader in an assorted number – they’re not necessarily industry classified, they’re not specific industry classified. They do an assortment of industry clients. So it’s not narrowed down to a specific industry sector.

[James Kennedy:]

Got you.

[Todd Bankofier:]

But I will tell you --

[James Kennedy:]

I was just going to say prior to the addition of these two, how many indirect channel partners do you have?

[Todd Bankofier:]

We have 16 today, so we had 14 prior to that.

[James Kennedy:]

Okay. So adding to would mean that you probably added maybe 12% to 15% capacity, it sounds to me like adding these two are more additive than Q1 top of 14. Am I reading that correctly?

[Todd Bankofier:]

Yes.

[James Kennedy:]

Okay, good. That’s what I wanted to know. Thank you.

[Carr Bettis:]

Well done.

[Operator:]

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

[Carr Bettis:]

Thank you everyone for spending time with us today. I appreciate the questions as well. We’re excited to be talking to you further as we get through into the next quarter; looking forward to it. Thanks for being here. Cheers.

[Todd Bankofier:]

Thank you very much.

[Operator:]

Before we conclude today's call, I would like provide AudioEye's Safe Harbor statement that includes important cautions regarding forward-looking statement made during this call. 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 subject to risks and uncertainties. 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. Forward-looking statements are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in the AudioEye’s public filings with the U.S. 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. The company undertakes no obligation to update or revise its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Finally, 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 Web site. Thank you for joining us today for AudioEye's fourth quarter and full year 2018 earnings conference call. You may now disconnect.