Q4 2023 AudioEye Inc Earnings Call
Participants
David Moradi; Chief Executive Officer; AudioEye Inc
Kelly Georgevich; Chief Financial Officer; AudioEye Inc
George Sutton; Analyst; Craig-Hallum Capital Group LLC
Zach Cummins; Analyst; B. Riley Securities, Inc.
Scott Buck; Analyst; H.C. Wainwright & Co, LLC
Presentation
Operator
Good afternoon, and welcome to AudioEye's fourth quarter and full year earnings conference call. Joining us for today's call are AudioEye's CEO, Mr. David Moradi, and CFO, Mr. Kelly Georgevich. (Operator Instructions)
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 Chief Executive Officer, the company would like to remind all participants that statements made by AudioEye management during the course of this conference call that are not historical facts are considered to be forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, 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 based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ because of factors discussed in today's press release, in the comments made during this conference call, and in the Risk Factors section of the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its 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 beliefs only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements.
Further, management's remarks today will include certain non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures is available in the company's earnings release posted in the Investor Relations section of its website at www.audioeye.com.
Now I'd like to turn the call over to AudioEye's Chief Executive Officer, Mr. David Moradi. Sir, please proceed.
David Moradi
Thank you, operator today. I will discuss a few of the accomplishments since joining AudioEye in 2019 and why we are on the strongest trajectory in our history. But first, I want to thank all of our employees for their hard work to get us here as a largest investor and shareholder. I initially joined the Board in 2019 as Chair of the Strategic Committee of the Board of Directors to address operating efficiency and strategy
While our DY. was going up a small revenue days, operating efficiencies needed to improve gross margins were in the mid 50s. Adjusted EBITDA margins were in the mid negative 60 and revenue per employee was in the low $100,000. The Company is in a much stronger position today, we have tripled revenue and dramatically improved operating efficiencies. Gross margins have improved to the high 70s and adjusted EBITDA margins have improved by approximately 80 points to 17% and the fourth quarter revenue per employee is approaching $300,000.
These efficiency metrics are now in the top tier SaaS companies. We are entering 2024 ready to capitalize on all of this hard work, our operating leverage will allow us to drive future revenue growth with only moderate increases in operating furniture. Q4 was an inflection point. We achieved gross margins of 78% and record adjusted EBITDA of $1.3 million, while generating approximately $900,000 of free cash flow.
We delivered solid ARR growth of approximately $700,000 sequentially, and we ended the year with $110,000 paying customers for most of anyone in the digital accessibility industry. Product development team has accomplished a lot over this time after building a new platform and migrating all of our customers over, we invested further into products for enterprise customers. I'm pleased to report that we are seeing that pay off with one of the best enterprise ARR growth quarters to date.
Our balance sheet is strong. As Kelly will discuss, we received a $7 million term loan from SG Partners in November of last year. The term loan did not include any warrants or other equity dilution. The Board and management remain highly aligned with shareholders. In November, the Board announced a stock buyback of $5 million. As of March fifth, we have repurchased 437,000 shares at an average price of [$487].
In addition, under our previous stock buyback announced in June of 2022, we bought 139,000 shares at an average price of [$544]. Combining both programs we have repurchased 5.5% of the shares outstanding over the last two years at a valuation below 2 times revenue for the benefit of long-term shareholders.
Lastly, management and members of the Board have purchased approximately 350,000 shares on the open market over the last 2.5 years. We have also invested substantially in R&D for our knowledge the most with anyone in the industry. Our investment in R&D allows us to meet customers wherever they are in accessibility from the small businesses to large enterprise customers.
We recently announced a few new products and features our annualized accessibility testing SDK allows developers to identify and quickly address accessibility issues at the stores, empowering them to implement changes in pre-production environment proactively recognizing the need for consistency and issue detection. The STK employs the same automated PathLogic utilized by AudioEye's accessibility experts during customer site audits and automated monitor with SSL we address the stringent security requirements of enterprise clients, providing a deeper level of security and policy adherence.
We continue to improve our rules engine and have made ongoing quality improvements to the test fleet incorporating advanced rules that more accurately test the compliance with current legal guidelines, further improving our industry leading losses, protection awareness of digital accessibility has grown and private plaintiff attorneys are following record levels of digital accessibility losses under the wave. Yet Further, we expect that a significant driver of future grants will come from the regulatory environment in 2023, the Department of Justice proposed comprehensive accessibility regulations under Title two at the ADA, we expect further developments and updates over the course of 2024. Also several bills and regulations are currently being considered at the state level.
Lastly, a European accessibility of the acquired businesses in the EU. You have accessible website and mobile app by June of 2025 for Phase two fine, approximately 96% to 97% of all websites on the Internet remain inaccessible has become clear that the old way of trying to fix issues at the source of Mossville and will not solve the problem. Our approach of combining AI with human assistive technology is the only way to solve this problem.
Yes, one of the most respected leaders in digital accessibility. Microsd yellow recently joined AudioEye as chief accessibility officer. We also believe that Norway is not working on a new vision as needed to meet the scale of the problem. Mike is a pioneer of digital accessibility with a deep understanding of the challenges faced by individuals with disabilities in the digital world.
Mike brings over 40 years of expertise to this critical role, including offering the first work on what accessibility found in the past yellow group, a pioneering accessibility solution providers and Co-Founder and Co-Chairman accessibility, industry committees to drive advancements and policies and legislation as the former co-chair United States Federal access for telecommunication and Electronics and Information Technology Advisory Committee and recognize that President Bill Clinton was contribution for the W. three C. web accessibility initiative has played a pivotal role in shaping accessibility, standards and practices.
Moving on to guidance for the first quarter, we are guiding for revenue of between $8 million and $8.1 million for Social Security taxes and other beginning of year expenses, we expect to generate adjusted EBITDA between $700,000 to $900,000 on adjusted EPS of $0.06 to $0.08 per share. We are entering 2024 with strong business momentum. In addition to continued operating margin improvement, we expect revenue growth to accelerate throughout the year. For 2024, we are guiding for revenue of between $34 million to $34.4 million, with growth rates approaching the high 10s by the fourth quarter, we expect adjusted EBITDA between $3.5 million and $4.5 million and adjusted EPS between $0.29 and $0.38 per share.
I'll now turn the call over to our AudioEye CFO, kelly?
Kelly Georgevich
Thank you, David. As David discussed, revenue again, hit record levels in Q4 2023, with revenue at $7.87 million, a 2% increase from Q4 2022 and a minor increase sequentially from Q3 2023. On a full year basis, in 2023, our revenue grew 5% to $31.3 million from $29.9 million. As we have discussed on previous earnings calls, 2023 was impacted by several contract renegotiations.
Turning to channels. The partner marketplace channel includes all revenue from our SMB-focused marketplace products and revenue from a variety of partners who deploy the same products for their SMB customers for the fourth quarter of 2023. Our partner marketplace channel grew 10% year over year and represented approximately 59% of revenue and 60% of ARR on a full-year basis. In 2023. This channel's revenue grew 13% from $16 million of revenue in 2022 to $18 million in 2023.
We continue to see expansion of existing customers and additional partners engaging with AUA, which continues to fuel growth. Our US enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites who generally engage directly with added sales personnel for pricing and solutions. Last year, the enterprise channel was impacted by a large enterprise customer rolling off.
However, with the momentum we are seeing in enterprise growth, we expect to resume year-over-year growth in Q2 2024. In Q4 2023, the enterprise channel contributed approximately 41% of revenue and 40% of ARR. Annual Recurring Revenue or ARR at the end of the fourth quarter of 2023 was $31.2 million, a 7% increase over ARR at the end of the fourth quarter of 2022, ARR grew approximately 700,000 sequentially. And as David mentioned, we expect this growth to accelerate going into 2024.
On December 31st, 2023, our customer count of approximately 110,000, an increase from 107,000 customers on September 30th, 2023 an increase of approximately 24,000 customers from December 31st, 2022. The increase in customer count was driven by additions in the partner marketplace channel gross profit for the fourth quarter was $6.2 million or about 78% of revenue compared to $6 million and 77% of revenue in Q4 of last year. For the full year 2023, our gross margins were approximately 78%, with gross profit increasing from $22.7 million in 2022 to $24.3 million in 2023.
There are several factors that go into cost to revenue, including web hosting, customer support and other costs directly related to delivering the product in 2023, we are able to drive these costs down while also growing revenue and adding additional value to our customers. As we continue to implement efficiencies, we believe gross margin has room to expand in future quarters.
While revenues were up 2% operating expenses in the fourth quarter of 2023 decreased 16% to $6.7 million from $7.9 million in the same quarter last year. On a full year basis, revenue increased 5%, while operating expenses decreased $2.8 million and $33.1 million in 2022 to $30.3 million in 2023. The annual year-over-year decrease was driven primarily from efficiencies implemented in sales and marketing, which is continuing to produce impressively generation with lower investment needed and lower stock compensation and other nonrecurring expenses, partially offset by investments in R&D.
In Q4 2023, with major R&D initiatives completed, we were able to gain more efficiencies in R&D. Our total R&D spend in Q4 was approximately $1.7 million with approximately $465,000 infected IT software development costs in the investing section of the cash flow statement. This was down approximately $2.4 million in Q3 2023. R&D spend for the full year 2023 was $8.9 million, inclusive of $1.9 million reflected as software development costs. The total R&D spend is around 22% of our Q4 and 29% of our full year 2023 revenue compared to 25% of Q4 2022 revenue and 24% of full year 2022 revenues. We feel the current investment in R&D is appropriate for 2024.
Net loss from the fourth quarter of 2023 was $500,000 or $0.04 per share compared to a net loss of $1.9 million or $0.17 per share in the same year ago period and a full year basis, net loss for 2023 was $5.9 million, or $0.5 per share compared to a net loss of $10.4 million or $0.91 per share in 2022.
This is a dramatic improvement from net loss a few years ago. And as a result of both increases in revenue and efficiencies, including technological investments.
In the fourth quarter of 2023, we achieved record profitability with adjusted EBITDA of approximately $1.3 million or $0.11 per share compared to adjusted EBITDA of 200,000 or $0.01 per share in the same year ago period and a full year basis. We also produced adjusted EBITDA of approximately $1.3 million or $0.11 per share compared to negative adjusted EBITDA of $900,000 or loss $0.08 per share in 2022. The primary adjustments to GAAP earnings and EPS for Q4 2023 and full year 2023 are non-cash share-based compensation, depreciation and amortization, noncash valuation adjustments to liabilities related to the earn out of the oh eight and other miscellaneous costs.
In November 2023, we partnered with SD credit partners for $7 million term loan. We plan to use of proceeds from the loan for share repurchase and to add additional liquidity to our balance sheet. In Q4 2023, we implemented a share repurchase program of up to 5 million with 1.1 million of shares repurchased in the fourth quarter of 2023. As David discussed, in the fourth quarter of 2023, we hit a significant milestone positive free cash flow. In the quarter, we generated $900,000 of free cash flow, calculated as adjusted EBITDA of $1.32 million that is $465,000 in software development costs.
We are pleased we are able to achieve this milestone and expect to continue to generate positive free cash flow in 2024 with the addition of the term loan. Our balance sheet is well capitalized with $9.2 million of cash as of December 31st, 2023.
With that, we open up the call for questions. Operator, please give instructions.
Question and Answer Session
Operator
Thank you. We will now take questions from the company's publishing analysis. (Operator Instructions)
George Sutton, Craig-Hallum.
George Sutton
Thank you. Congratulations on the results. I wanted to walk through what you are defining as an accelerating growth throughout the year ahead and just want to understand the factors behind that obviously, we do have some easier comps. Slide wanted to make sure I was fully appreciating what's driving the acceleration growth?
David Moradi
Yes, when you look at the guidance, it implies revenues are going to ramp as the year unfolds. So I said on the call, we're expecting high 10s revenue growth in the back half with strong EBITDA margins. Also the sequential growth rates should pick up and compound even higher than the high 10s as we get to the second half compounded ARR when I'm talking about and we expect the enterprise channel and the partner and marketplace channel to contribute to this. EU, by the way, is not in these numbers at all, because I know you're about to us that.
George Sutton
We are focused on investment in Europe, but I would say that you've made some CRM changes. Some you've added a little folks, you've added new salespeople. I wondered if you can give us a bigger an explanation of sort of what's driving the go to market plan?
David Moradi
Yes, I think it's just the full product suite we have now with all that R&D investment we've made, we can meet you wherever you are, whether you're a small business or you're a big, large enterprise. So we have this breadth of offering, and I think that's a major competitive advantage. And like you said, there's been a lot optimization in our go to market. So we're seeing some record leads there, and we're seeing the most robust pipeline on the enterprise side in our history.
George Sutton
Great. And lastly, if I could bring two things together. You mentioned a record number of lawsuits that you're seeing under the ADA, where obviously we believe months away from getting a more defined law from the DOJ on what do you think is driving this record number of losses right now? And is there any way you can quantify that?
David Moradi
Most sites are inaccessible on the Internet today, only 3%or 4% of sites are accessible. So lawyers find an easy time suing companies and making money off of this. And that's why you're seeing the record ADA lawsuits. It's just wide open here. I mean, the TAM is humungous. We're in the early innings, so I can't really quantify that. Think this is going to be, but it's going to be big.
George Sutton
Okay. I'll leave it there. Thanks, guys.
David Moradi
Thank you.
Operator
Zach Cummins, B. Riley FBR.
Zach Cummins
Hi, good afternoon, David and Kelly. Congrats on solid results and the building momentum into 2020 for David, just starting off, can you just talk a little bit more about what you're seeing from that enterprise team? I know it was a big focus for you throughout 2023 to really build up that motion. So just curious of maybe some of the initial, what payback you're getting from that investment here in recent months?
David Moradi
What do you mean in terms of payback in terms of ARR or --?
Zach Cummins
In terms of just productivity that you're seeing from that team now that they're fully kind of built out in working towards kind of fully ramped up.
David Moradi
Yes, like I said, the pipeline's building, we've optimized a lot of we have record lead. It's not going to stop. That's just going to continue. I can see than the Domo system we use and so on, it's just really clicking. So I'm happy to see that.
Zach Cummins
Got it. And when it comes to the step down in R&D expenses, that we saw here in Q4. I mean, can you give you a sense of kind of is that really just a wind-down of some major projects that you've been working on for multiple quarters in the past? Or what's kind of the appropriate way to think of ongoing R & D expense?
David Moradi
Yes. Look, we made a lot of improvements to our product over the last two to three years. We're continuing to invest to maintain our lead, but we have completed a number of initiatives in the R&D side. So we are able to drive some efficiencies. So you should expect similar levels and R&D going forward.
Zach Cummins
Got it. And final question is really just on the competitive landscape. Obviously, another acquisition of one of your competitors at the end of last year. I was just curious if you evolve the nature of that competitive landscape and how AudioEye stacks up amongst this consolidation?
David Moradi
Yes, LPE. got a base of three to four years ago. There's been a lot of M&A activity and seeing buyouts and seeing capital raises as they think the space is going to grow a lot more. That's why they're putting all this money into this competitor was recently taken now use away for about eight times revenue, and that was a subscale company about $12 million or $13 million of revenue. So the flex the face is clearly consolidating their likely be only a handful of players at the end here. So I think it's a good setup.
Zach Cummins
Got it. Well, thanks for taking my questions and best of luck with the rest of quarter.
David Moradi
Thank you.
Operator
Scott Buck, H.C. Wainwright.
Scott Buck
Hi, afternoon, guys. Thanks for taking my questions. First, David, I'm curious the conditions that are set up to high 10s year over year revenue growth in the back half of this year to date potentially carry over into 2025? And I guess I'm asking because I'm curious, we could see that on the acceleration of revenue in 2024 but then further acceleration in the following year.
David Moradi
And so we've turned the corner here and nothing's going to stop this train. And so I think you'll see higher growth rates with EU into 2025 and the DOJ regulation on the state and local government and this train is leaving the station.
Scott Buck
Great. That's helpful. And then on the guide, it looks like the adjusted EBITDA margin is somewhere around 12% based on the midpoint. What does the EBITDA margin look like on this business and kind of maturity, I guess?
Kelly Georgevich
Yes, we'd like to see that the 17% in Q4 2023, as you look at the guide, it does per check and double digit. We do expect to accelerate revenue in the second half. And so you can assume EBITDA margins would accelerate. Some of it's similar rates. But we do think there's an opportunity to have 11% at its full year and grow further in the second half of 2024.
Scott Buck
That's helpful, Kelly. And then last one for me, guys, just on the buyback, stocks obviously appreciated quite a bit from where your average purchase price was to date. I'm curious how you guys are feeling about the price today?
David Moradi
Is still pretty attractive, can't get into levels with you about last I checked, it was around two times revenue or so. So it's still pretty cheap when companies are getting taken out for a time.
Scott Buck
Yes, that's it for me, guys. Appreciate the added color and congrats on the results.
David Moradi
Thank you.
Operator
At this time, this concludes our question and answer session. I would like to turn the call back over to Mr. Moradi for any closing remarks. Please go ahead.
David Moradi
Thank you for joining us today. As always, I want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next, call.
Operator
Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for AudioEye's fourth quarter and full year 2023 earnings conference call. You may now disconnect.
