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AUDIOEYE, INC (NASDAQ:AEYE)
Q1 2021 Earnings Call
May 13, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to AudioEye's first-quarter 2021 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 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, confidence, 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 in 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 belief 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 our website at www.audioeye.com.

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 again today. After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2021. A copy of the press release is also available in the Investor Relations section of our website at audioeye.com.

I'll begin, as we always do, with an overview of our business. AudioEye is a 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 the ADA, and the latest web content accessibility guidelines are WCAG 2.1. Furthermore, for our private sector clients, we also give them an opportunity to gain an ROI from their investment in and commitment to the 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 Q1 2021 results.

We had strong performance in several areas of focus this quarter. We expanded gross margin significantly. We doubled our customer count. We significantly bolstered our balance sheet, and we grew revenue for the 21st straight quarter.

Monthly recurring revenue, MRR, at the end of the first quarter of 2021 increased to just over $1.9 million, which was 36% growth year over year. Revenue also grew 36% year over year, with the first-quarter revenue reaching a new record of $5.8 million. Gross margins that grew from -- to 76 -- they grew to 76.6% from 69% in the first quarter of 2020, a year-over-year increase of 11% and 7.6 percentage points. It is worth looking back even further.

Gross margins has grown to the Q1 76.6% level from 54% in the second quarter of 2019, just seven quarters ago. This dramatic margin expansion is a result of the company's strategy to increase automation and reflects the benefit of scale. We expect margins to somewhat stabilize around these levels but improve as the business scales. Gross profit for the first quarter was $4.4 million, compared to $2.9 million in Q1 of last year.

New customer acquisition was very strong in Q1. We ended Q1 with approximately 68,000 customers, representing about 500% growth year over year. David's going to talk some more about the momentum we are seeing in customer acquisition and its expected impact on our MRR in the coming quarters. Customer retention also remains strong at historical rates.

Our high retention rate speaks to not only the quality, stickiness, and transparency of our solution but to the excellent service that our team provides to our customers. Net loss for the first quarter of 2021 was $2.8 million or $0.27 per share, compared to a loss of $1.7 million or $0.19 per share in the same year-ago period. However, on a non-GAAP basis, our Q1 net loss was a little less than $1 million or $0.09 per share, compared to the same year-ago period of a loss of about $1.4 million or $0.16 a share. The primary adjustments to GAAP earnings and EPS for both comparable quarters were noncash share-based compensation, amortization, and amortization of interest expense related to the debt issuance.

During the first quarter, we strengthened the balance sheet by raising $16 million through our ATM program and ended Q1 with $25.8 million of cash. This is around $2.50 a share using the quarter's average outstanding share count. In addition to the strongest balance sheet the company has had in its history, we also generated free cash flow for the first time in AudioEye's history, producing $350,000 in free cash flow through prudent costs and working capital management. Regarding our two revenue channels.

The partner and marketplace channel includes all revenue from our SMB-focused marketplace products and revenue from a variety of partners, who deploy these same products for their SMB customers. These include CMS partners of all types, such as industry vertical partners like Dealer.com, recently announced partners like DealerCenter, platform partners like Duda and general digital agencies. In the first quarter of 2021, this revenue channel represented around 55% of both revenue and MRR. As 2021 unfolds, we expect to continue to see this channel contribute most of our growth in customer count and ultimately in MRR in the second half of 2021.

Our enterprise channel continued to perform in the quarter as well, contributing about 45% of revenue and MRR. We added prominent enterprise brands from our direct sales effort and continued to renew our enterprise clients at a healthy rate. Large enterprises also benefit from our focus on automation and transparency. As we have noted previously, we are proud that large multinational corporations and government agencies, large and small, trust AudioEye with their digital accessibility solutions.

Finally, before turning the call over to David, I also want to thank Sach for his contributions at AudioEye as AudioEye's CFO and wish him all the best in his future endeavors. David?

David Moradi -- Interim Chief Executive Officer

Great. Thank you, Carr. It's my pleasure to speak with you today. I'm very pleased with the first quarter as we continue to transition to a higher-margin and highly scalable SaaS company.

As I said last quarter, 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. Today, I'd like to speak with you about a couple of things. First, continued enhancements to our team; and second, progress year to date and how we see 2021 unfolding.

First, about the team. During my tenure as CEO, we have continued to add depth and experience to our leadership. On the last call, I said I believe that AudioEye's leadership team was the strongest team in our history. I'm pleased to report that I believe it is even stronger today with the addition of Chris Hundley, who joined AudioEye as CTO in March.

Chris was most recently at Drift, where he led the transition and integration of his company, Siftrock into the Drift family of products, branded as Drift Email. Siftrock's machine-learning and large-scale email processing technologies have allowed Drift to expand capabilities beyond chat into other forms of digital marketing, cementing their position as a leader in the conversational marketing space. I'm also pleased to report that we have made good progress on the CFO position and expect to have more updates for you in the near future. As becoming CEO last August, hiring exceptional talent, such as Chris, in all departments has been a key focus because AudioEye's success ultimately is not about single individual, but about a complete team of leadership and staff working together.

It is an honor to work with such a talented leadership team and with our mission-driven employees. Progress year to date. After the extremely high revenue and MRR growth in the back half of 2020, the first half of 2021 represents the next building block for AudioEye. The replatforming initiative we announced in February was only possible because of our dedicated and talented staff.

It is great to see it come together. This was a massive step forward, building a strong foundation we need to handle growth and scale into the millions of customers. As we have discussed, we have been hiring talented staff since last summer and replatforming was the next vital move before we ramp up marketing efforts. Last year, our efforts in cost control and automation led to the material higher margins we are seeing today, and we think our replatforming and marketing investments will also have an outsized return for our shareholders in the future.

As the largest shareholder of the company, I'm excited about where AudioEye is today. We're in a very strong position. First, the market for accessibility solutions is in the early innings, and it is growing. Second, our technology and transparent approach to solving accessibility for our clients is differentiated.

Third, AudioEye's platform is highly scalable. Fourth, we have exceptional talent to execute on our growth plans. Fifth, we're very well-capitalized. Finally, and importantly, there are tangible reasons for us to be optimistic about what lies ahead.

In addition to the 68,000 current customers we have in various subscription tiers, our current partners have several hundred thousand potential AudioEye clients that are not yet in our customer count. We have a clear plan to tap this giant opportunity over the rest of the year. In addition, we fully expect to add more platforms and agency partnerships this year. In terms of guidance, we remain laser-focused on growing MRR.

We are reiterating our full-year guidance range of $30 million to $32 million. As I mentioned on the call in March, we expect MRR growth to accelerate in the second half of the year as we begin converting customers to higher tier offerings and announce new partnerships. We did have positive free cash flow in the quarter and expect to turn cash flow positive on an operating basis later in 2021. Before I turn the call over to Sach to walk through some additional financial results, I want to thank him again for all his contributions at AudioEye.

His leadership and achievements have been significant given our growth. We have set a strong foundation for the future. He's leaving AudioEye in a much stronger position than when he joined us. We wish Sach good luck in his future endeavors.

Again, thank you, Sach.

Sach Barot -- Chief Financial Officer

Thank you, David and Carr. As I have said before, I've really enjoyed my time at AudioEye, and I'm proud of all the collective successes and achievements over the past two years. AudioEye is in a much stronger position now, and there is no doubt that with David and the leadership team, the company is well-positioned for long-term success. As you just heard from Carr and David, we had a lot of positives in Q1, from expansion in gross margins to being free cash flow positive.

It should be noted that many of the investments in people and resources that we have mentioned in the recent quarters are starting to pay off, as evidenced by the new platform launch and the continuous enhancements that our team is focused on to make it scalable and support even higher growth. And importantly, the efficiencies created that help with gross margin expansion. Retention continues to be strong, as David mentioned. The business is seeing signs of gaining momentum in the new channels.

Now, on to the results. Carr already summarized most of the results and key metrics of the business. But I wanted to mention a couple other items. First, operating expenses.

In Q1, opex was $7.2 million, which was an increase of about 57% versus Q1 last year. The drivers of the increase were across the board in R&D as we focused on product development, sales and marketing, and G&A. The increase in G&A is mainly driven by the equity compensation expenses. Our total R&D spend in Q1 was about $1.3 million, with approximately $250,000 reflected as software development costs in the investing section of the cash flow statement.

The total R&D spend is about 22% of our revenue this quarter versus 11% a year ago. This reflects the commitment toward investing for scale in this emerging markets. In closing, I would like to thank all of my colleagues at AudioEye for making my journey so memorable and fun. I've enjoyed it and have learned a lot from all of you all along the way.

The collective fashion and dedication from the team is amazing. And I'll continue to cheer all of you and company's continued success. With that, we'll open the call for questions. Operator, please give instructions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question is from Allen Klee from Maxim Group. Please go ahead.

Allen Klee -- Maxim Group -- Analyst

Good afternoon. Can you help us understand the timing of when you add a new enterprise customer and when they start generating revenue? Because I mean, you basically doubled your revenue sequentially, but the -- I'm sorry, doubled your customers, but the revenue -- it didn't show up in the revenue. So how should we think about how long it takes to put a -- when you sign up a customer, they become revenue-generating and all that? Thank you.

Sach Barot -- Chief Financial Officer

Well, the number of customers that we have added is not in enterprise, right? They are coming from SMB channels. And you will see, and you must have noticed, over the last few quarters, as we have more customers, we are going after scale, and it's a very efficient product, the prices are low. And from an enterprise perspective, as soon as customer signs a contract and it is effective, from enterprise, we start recognizing revenue right away because our services are turned on very, very quickly.

Allen Klee -- Maxim Group -- Analyst

Are you saying that for the customers that you added that the revenues did not show up this quarter or that because they were SMB or that they'll start showing up next quarter? Or can you explain it to me?

Sach Barot -- Chief Financial Officer

I'm not saying that. Yeah, with SMBs, the strategy is to get into -- penetrate them first and then raise the ARPU curve as people convert into more highly priced products. Right now, we have adoption at a lower-tier pricing. And that's what David mentioned in his comments, we expect the conversion rate to start happening as the year goes.

And that's when we expect our revenue and MRR to ramp up significantly in the second half of the year.

David Moradi -- Interim Chief Executive Officer

Yeah. Maybe I can add to that a little bit. We're seeing growth this quarter in each of our channels. So talking about the second quarter now, enterprise and vertical partners are growing nicely.

We're seeing month-over-month growth in our new channels, which are digital and agency since the launch of our new platform. So we're expecting to see an acceleration in these new channels in the second half and continue to track that.

Allen Klee -- Maxim Group -- Analyst

OK. The operating expenses in the quarter, and you said how much they were up year over year. Is this quarter a good run rate? Or should we assume that this is going to continue to ramp at kind of on an absolute basis, kind of increase as the year goes along?

Sach Barot -- Chief Financial Officer

Yeah. We actually expect, as the year goes along, our expenses to go up as we continue to invest in platform building, product development, as well as in sales and marketing. There will be some expenses in G&A as well. So we definitely expect our expenses to ramp up.

And those expenses will be supporting our ability to see the pipeline and drive the growth measures to support the hypergrowth we are expecting in the second half.

Allen Klee -- Maxim Group -- Analyst

OK. Just a couple also on your -- building of your new technology development center and a new CTO, what's the status of the new center? And is that starting to bear fruit?

Sach Barot -- Chief Financial Officer

Yes. We announced that in February. And so we have a migration going on from the old platform to the new platform. The new customers love the accessibility score, the monitoring, improvements in our AI and automation, so we're really happy with that.

Allen Klee -- Maxim Group -- Analyst

OK. Just a couple of other numbers. The -- can you tell me what depreciation and amortization expense was in the quarter? How much capitalized software development costs were? And then where -- like post quarter-end, if you've raised more money on the ATM and what the share count is right now.

Sach Barot -- Chief Financial Officer

Yes, the Q should have just crossed, but I'll give you the numbers real quick. So share count on May 7 was about 10.9 million, that is May 7. But obviously, the Q1 average is closer to 10.5-ish. From a software development cost, Q1, we had about 250,000.

And from a D&A perspective, from capitalized software, we had about, call it, roughly 285,000 in Q1.

Allen Klee -- Maxim Group -- Analyst

OK. My last question is you're planning to have expenses to continue to grow through the year. You said margins will kind of stabilize at this level, maybe they can go up a little bit. Revenue will grow, but what -- how do you feel about your confidence of getting to your cash flow guidance by the end of the year?

Sach Barot -- Chief Financial Officer

I think we feel pretty confident. The new channels are all in early stages. We've added product, tech, sales and marketing talent to drive these businesses and are seeing great results so far.

Allen Klee -- Maxim Group -- Analyst

OK. Thank you.

Operator

The next question is from Zach Cummins from B. Riley Securities. Please go ahead.

Zach Cummins -- B. Riley Securities -- Analyst

Yes. Hi, David, Carr, and Sach. Thanks for taking my question, and congrats on the solid results here in Q1.

David Moradi -- Interim Chief Executive Officer

Hi, Zach.

Zach Cummins -- B. Riley Securities -- Analyst

David, just piggybacking off of some of Allen's questions there. Can you walk me through how that process is going to work? Now that you have some of these lower-tier customers on your platform, what exactly does the process look like as you go through and start to upgrade them to higher-tier plans in the coming quarters?

David Moradi -- Interim Chief Executive Officer

Sure. So we're working on migrating those customers over to the new platform, and we'll begin ramping our marketing efforts once that's complete. We expect some of these customers will be able to upgrade the higher levels of product in the coming months, and that should contribute to rapid MRR growth.

Zach Cummins -- B. Riley Securities -- Analyst

Got it. And in your script, I know you mentioned that even within some of these existing partners that there's hundreds of thousands of potential customers that potentially could be unlocked. I mean, what does that process look like as well in terms of being able to unlock a bigger portion of those available customers with some of these new partners?

David Moradi -- Interim Chief Executive Officer

Yes. It's a new platform. It's sales, marketing, and getting the customers more comfortable and ramping them up. There's a big demand out there for accessibility at the moment.

Zach Cummins -- B. Riley Securities -- Analyst

Got it. That's helpful. And then I'm just curious, starting off this year, it seems like with the improving environment, I mean, what are you seeing from a business development perspective? It seems like your retention rates have really stabilized now. And I was just wondering if there is an increasing appetite, especially at the SMB level for your accessibility solutions.

Sach Barot -- Chief Financial Officer

Zach, can you repeat that question, please?

Zach Cummins -- B. Riley Securities -- Analyst

Yes. I was just going to ask around the overall environment. It seems like some of your retention rates have really stabilized. And I was wondering if with the reopening of the economy if you're actually seeing an uptick in demand from a lot of your SMB customers around digital accessibility.

David Moradi -- Interim Chief Executive Officer

I think it's been more on the enterprise side. We're having a good quarter this quarter. We had a decent last quarter on enterprise. It's not really affecting the SMBs from what I can tell.

Sach, do you have any comments on that?

Sach Barot -- Chief Financial Officer

No, and I'll just highlight the pipeline, right? So just to cover -- just to broaden a little bit from what David said is our pipeline is strong, both on enterprise side and partnership side, which covers most of our SMBs. And we are seeing traction on digital market as well. And as David mentioned, as we start migrating customers on our new platform and start providing the scale that we have, open it up to our customers, the business is definitely expecting to drive much higher penetration and adoption. And the stickiness with small- and medium-sized customers is really good as well.

We are not seeing a lot of churn. So those are all healthy signs for future growth.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. And then I saw some of your recent hiring postings that you're looking for account executives in the public sector. I'm just wondering with a lot of the initiatives here with the Biden administration to really focus on modernizing their technology investments, if you're seeing a big uptick with digital accessibility moving forward on the public sector side?

David Moradi -- Interim Chief Executive Officer

We haven't seen that yet. We're continuing to see the number of ADA and other accessibility cases exceed the total number of previous years. So last year, I think it was around 2,500. And this year, it's running a bit hotter.

And the demand letters are probably three to five times that. But we haven't seen it exactly in the public sector yet, but we do expect it.

Zach Cummins -- B. Riley Securities -- Analyst

Got it. And then on gross margin, I mean, this is a portion that continues to pace well ahead of my model at least. I mean, it sounds like it's going to stabilize in the upcoming quarters. But can you talk about just some of the actions that you've taken that have really driven a lot of the flow-through to that gross margin line that we're seeing here in Q1?

Sach Barot -- Chief Financial Officer

Absolutely, Zach. Look, as David mentioned, right, the transition for the company has been less people-based services and more reliance on automation. And with that comes reduction in our fulfillment costs as we continue to sell more and more customers, that's the biggest driver. And also, as the platform continues to improve, we should be able to stabilize this.

But as the company scales, as the revenue scales, that should further drop to the bottom line, but that may happen down the line. But we still believe that, annually, we should be improving upon those gross margins as we go. It's efficiencies, right? It's also the cost with fulfillment in terms of cloud support and all that. And with the new platform, we expect to continue to drive the efficiencies even better.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. And just final question for me. I mean, David, do you feel like you largely have your team in place from an executive perspective, just given all the hires that we've seen over the last eight or nine months? It feels like you've built a pretty strong team here at the top.

David Moradi -- Interim Chief Executive Officer

Yes. I think it's going there. We've hired a lot of people in a lot of different positions and very strong leadership team, people that come from big companies and start-ups as well. So I think we're definitely getting there.

I don't know if it's ever fully done, you're always trying to improve.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. Well, thanks again for taking my questions, and congrats on strong start of the year.

David Moradi -- Interim Chief Executive Officer

Thank you, Zach.

Sach Barot -- Chief Financial Officer

Thanks, Zach. Thank you.

Operator

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

David Moradi -- Interim Chief Executive Officer

Thank you for joining us today. I especially 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. [Operator signoff]

Duration: 32 minutes

Call participants:

Carr Bettis -- Executive Chairman

David Moradi -- Interim Chief Executive Officer

Sach Barot -- Chief Financial Officer

Allen Klee -- Maxim Group -- Analyst

Zach Cummins -- B. Riley Securities -- Analyst

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