AudioEye, Inc. (AEYE) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to AudioEye’s Third Quarter 2018 Preliminary Results Conference Call. Joining us for today’s call are AudioEye’s Executive Chairman, Dr. Carr Bettis; and CEO, Todd Bankofier. Following the remarks, we will open up the call for your questions. I would now like to remind everyone that this call will be recorded and made available for replay via 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, I want to emphasize that some of the information you will hear during our discussion today will consist of forward-looking statements that are predictions, projections or 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 Factor section of our Form 10-K and other reports and filing with the Securities and Exchange Commission. AudioEye does not undertake any duty to update any forward-looking statements. Now, I would like to turn the call over to AudioEye's Executive Chairman, Dr. Carr Bettis. Sir, please proceed.

Thank you, operator. Welcome everyone and thank you very much for joining us today. After market close, we had issued a press release announcing our preliminary results for the third quarter ended September 30, 2018. A copy of that press release is available in the Investor Relations section of our website at audioeye.com. Given our recent successful equity raise and the NASDAQ uplisting, we recognize we are now exposed to a broader investor demographic. So with that in mind, we think it's important to take some time today to essentially reintroduce the AudioEye story to listeners on the call. Some who may be less familiar with AudioEye and our mission and growth strategy. For those who have heard this before and heard the story, please bear with me here today. After that, I'm going into more detail about some of our recent capital market events, some financial results and company updates before turning it over to Todd, our CEO who will provide additional details on some of our key operational updates before we finish with an outlook for the remainder of the year. So first about us, about AudioEye. AudioEye is a leading provider of SaaS based digital content accessibility solutions. We are in the business of making websites accessible for individuals with disabilities, which is a larger challenge by the way than most people realized. According to the world organization -- World Health Organization as much as 15% of the global population is currently living with some form of disability. That equates to over 1 billion people who may have the mobility and access restricted in a digital world. So how do we help those who need it, we'd like to use an analogy. Imagine, a staircase that’s in front the building. A staircase allows most people access to the building, but it's far from perfect. It prohibits anyone who cannot climb stairs from entering the building. Stairs are exclusive, a ramp on the other hand is much more inclusive, both of those who can and cannot climb stairs are able to use the ramp. We'd like to say that our platform is again to a digital ramp. AudioEye helps enable individuals with disability to access website than they previously have been difficult or perhaps impossible for them to access without interrupting the experience of other users. While a metaphor is simple, the execution is a complex one. Most online properties require extensive software code enhancement to become widely accessible by people with disability. Other solutions do exist that can test for and identify a web accessibility to efficiency. Spotting the problem in other words is relatively easy. Actually addressing and correcting the problem is more important and requires more advanced solution and this is where we believe AudioEye really stands out from traditional solutions. With the platform we call it the AudioEye Ally platform, where we do more than identify issues with web property, we strive to fix, maintain and monitor them. We also certify the website to demonstrate compliance with both the Americans with Disabilities Act, the ADA and also the latest Web Content Accessibility Guidelines or WCAG 2.0 AA, which is an international accepted standard for digital accessibility access. Because many of the remediation capabilities we provide are automated, our customers can more quickly gain compliance with accessibility standards, the regulations and all. We provide our clients with the best solutions to make their websites and digital content more accessible and more usable for more people, again while other solutions address the symptoms, we treat the cause. Now, how did we get here, AudioEye incorporated in 2005, but following our restructuring in 2015 we began focusing our efforts on selling our accessibility platform as a SaaS and managed service offering for the first time. That year we booked just under $3,000 in cash contracts. The following year we booked $1.9 million. In 2017, we booked $.6.3 million and we booked more than $8 million so far in the first nine months of this year. We believe we are at the forefront of the way the digital accessibility initiative, galvanized with both regulatory and demographic considerations. Lawsuits and demand letters related to the lack of online accessibility continue to grow in number all over the United States. That affects companies in all industries and in almost all sizes. We believe that one of the effects of this climate is an increasing demand for our solutions, which has followed this litigation trend. For enterprises we frequently also have client marketing officers in the discussions, where we emphasize the potential ROI benefit our clients receive by addressing this large under-addressed market of individuals with disability. That brings us to the past few months. In August, we completed a private placement of $6.25 million to fuel the next stage of growth of AudioEye. We’re focused on deploying the capital on what we believe are high ROI opportunities. Specifically, for allocating additional resources to both sales and implementation teams with the goal of accelerating growth and deploying our service to new customers in an even more timely and efficient manner. After our financing we affected a 1 for 25 reverse split of our common stock. Both the financing and the split aided our recent uplisting from the OTC Bulletin Board to the NASDAQ Capital Market Exchange. Our listing on NASDAQ represents another important milestone for AudioEye and our shareholders. We believe it has increased visibility, made our common stock more attracted to a broader range of institutional and other investors and increased liquidity. We are now in a stronger position to accelerate our objectives of establishing the company as a high growth SaaS business in a rapidly expanding Greenfield opportunity. Before I turn to the numbers, while the company does not currently have a full time CFO, we recognize that we will benefit from a pretty experienced finance professional on the team in this capacity. We are actively recruiting for the position. We expect to complete the search process in the not too distant future. In the meantime, I am personally spending more and more time on the details of the metrics we report to investors and that we use to evaluate the operations of the business. Some changes are already being reflected in investor materials as we update them. Now turning to our preliminary financial results for the third quarter ended September 30, 2018. For many SaaS based businesses, the third quarter is typically slow with the month of August being particularly affected. Our business is no exception, but we’re still very pleased with our third quarter performance. In the third quarter of 2018, we generated revenue of $1.49 million, reflecting an increase of 101% over the same period in the prior year. Year-to-date, we have generated $3.88 million in revenue, which is up 108% from $1.86 million for the same nine months period in 2017. With Q3 results we have also achieved 11 straight quarters of revenue growth. Our cash contract bookings for the quarter totaled $2.8 million compared to $1.49 million in the same period in the prior year, reflecting an increase of 88% over the same period in the prior year. In the first nine months of 2018 as I mentioned before was we secured more than $8 million in cash contract bookings. We’ve previously talked about our expectations for the year and we continue to expect total cash contract bookings of between $11 million and $12 million for the year, that represent an increase to somewhere between 75% and 90% compared with 2017. With the total revenue we expect to earn and total cash we expect to collect under our existing contracts remains unchanged. The expected timing of revenue recognition has changed. This year we expect revenue to range between $5 million and $6 million, representing an increase of 83% to 119% compared to 2017. This new range is down from our previous guidance of $6.5 million to $7.5 million. And it’s due to increased length of contracts we’ve signed with the majority of our customers. Based on our experience at the time when we forecasted revenue for 2018, we’ve used 15 months as an assumed cash contract length. However, on average, cash contract lengths have increased this year from 15 months to about 23 months. That’s resulting in more revenue being associated with future period and less revenue being associated with the current period than we expected. So to be clear, because bookings are on target and contract lengths are longer, the future revenue under contract at quarter-end is now $8.95 million comprised of $2.5 million in deferred revenue and $6.45 million of contract value in excess of the deferred revenue that is either cash contracts in play, a backlog of revenue if you will. So overall, we like this trade-off. We believe the longer contracts reflect our clients’ confidence in our ability to deliver a long-term solution and it lead to longer term revenue growth. In 2015 and 2016, we were stabilizing the company and providing our solutions in the marketplace, at one year contract was all that we could expect. As time goes by, we would not be surprised to continue to see our average contract length approached three years. We also think it’s important note that the terms of our agreements with our indirect channel partners do vary. As an example, one of our indirect channel partner only signs monthly contracts with their end use clients. So, these indirect channel customers of AudioEye are also on one month contract. In contrast, some of our indirect channel partners are now signing three year deals with their customers and our contracts will mirror those contracts spending for years. Moreover, we expect some of our indirect partners to ramp up adoption with their clients faster than some of the others, this means we could see some lumpiness in cash contract bookings for these partners in the short-term, but of course as we add more partners, we expect the predictability of revenues to increase. We got to continue obviously to track these items closely and we're going to adjust assumptions with respect to contract terms as appropriate when we set our revenue guidance for 2019. So just to summarize, we remain very confident in the strength here of the long-term potential of our business and the growth potential of our business. We are rapidly maturing into a well-rounded SaaS growth business and we continue to expect high recurring revenue with a clear path to sales. So with that, I'm going to turn the call to CEO, Todd Bankofier. He's going to provide some additional details on some of our key operational updates.

Thank you, Cart. Now as Cart completed our financial overview, I'll take a minute to get into some of our operational highlights from the quarter before turning the call over to questions. And to do that I'm going to focus on what we refer to as our three sources of customer success: direct sales, indirect channel partnership sales and customer retention. First the direct sales. We continue to win major brands across all our targeted verticals education, government, consumer retail and financial services. The direct sales channel provides us with a much greater revenue opportunity on per deal basis than the indirect channel. For that reason alone, we expect to continue to pursue direct sales aggressively and hire additional sales people in the major market across our country. Our recently announced agreement with an innovative fashion brand NYDJ is just the prime examples of a major business that now uses our platform and was obtained via direct sales. We believe their decision to work with AudioEye also underscores the increasing recognition of this issue of accessibility across this country and the push to enhance online sales as well as increased social inclusion. That being said, we are continuing to experience significant growth from our partnership sales channel for the indirect sales channel. We began this initiative in 2016 and we believe this area will be the driving factor behind the scaling of our business in the coming quarters and years. This market is vastly penetrated from an industry perspective and even in our own business. To understand why we decided to go to the capital markets and why we believe in the indirect sales channel is the future driver of our business. It helps to have a basic understanding of how this indirect sales channel functions, so let me lay that out. These channel partners are typically a content management system or CMS provider with hundreds or thousands of websites under their per view. These websites are their customers. In a nutshell once we sign a master agreement with one of these new CMS channel partners, they customarily agree to rollout the AudioEye LI managed service as an accessibility offering to all the customers on their platform. The setup is a win-win for all the parties involved. Our CMS channel partners' garners incremental revenue upon selling the AudioEye platform to their existing customer, who in many cases already looking for an accessibility solution and comes to them with a request. AudioEye wins additional customers who are now able to do so without the time and expense associated with the customer acquisition process focused broadly on hundreds or thousands of potential targets. And of course the CMS customers or websites like our direct customers receive a return on investment by gaining and maintaining compliance, which helps avoid costly potential legal issues and makes their service and or content available to a much broader audience. What’s also great for us in these arrangement is that the majority of the sites on the given CMS platform tend to follow a standardized template. This means that once we go through an implementation for a given customer on one platform, we are able to rapidly rollout subsequent implementations for other customers on that platform in a large scale with minimum incremental cost on our end. We remain in ongoing negotiations with additional large industry platform providers on potential new partnerships. In the third quarter, we announced new agreements with CU Solutions Group and Anexinet. Subsequent to the quarter-end, we also secured channel partnerships with NetSuite, an Oracle owned company that provides ERP, CRM and CMS services for thousands of companies across the world. And also Simpleview, a leading CRM and CMS provider within the travel and tourism industry. To-date, we have 14 channel partnerships in place, which translates to an addressable market opportunity of more than 78,000 websites. At this time, we estimate that there are over 300 potential partners with we can join to sell to their existing website customers across this country. Even though we're growing our direct customer account at a healthy pace, we believe the value of the total addressable market our partners provide is undeniable. The current revenue mix for these channels still favors on direct model, but we're seeing that starting to change. In short for our sales channels, we are very well aligned with a rapidly growing market demand. And we believe that we are the only software solution addressing the full breadth of disabilities today. And lastly, customer retention, at AudioEye we're proud of the stickiness of our solution. While we have lost customers due to normal business events, for example, some customers have been acquired or no longer needed our service and others have chosen to move to a new CMS platform provider that was not yet the channel partner of ours. To our knowledge, we've not lost a single customer in the past three years for reasons associated with our ability to provide a quality service. We are also pleased to report that we are retaining almost all of the business we bring onto the platform. Based on our experience to-date our renewal rates are currently and are expected to remain in the mid to high 90s going forward. Based on customer feedback the reasons for our success in providing customer value is twofold. First, we take great pride in building a quality product and providing a service that allows our customers to no longer worry about whether their website is accessible and compliant. And second, the alternatives to our service are unsustainable. The resources and attention required to install and make updates to maintain conformance, make it impractical for most enterprises to do this in-house. The updates are simply too expensive and too time consuming to do internally. At AudioEye, we use technology to monitor our customer sites throughout the length of their contract with us and when accessibility issues arise, we address them in real time. This feature have always been on is extremely valuable to our customers. And with that, we are ready to open up the call for questions. Operator, please provide the appropriate information.

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

Hi, good afternoon. Congrats on the really strong revenue and cash contract bookings growth. So just starting off with your revenue guidance for the year. So you really attributed a lot of that downside to moving to these longer term contracts. Can you talk about when it became more apparent that some of your customers in both the direct and indirect channel were actually more interested in moving to these longer term agreements with you guys?

Yes. I mean, I think the change in focus, the big change in focus from direct to indirect. Indirect, we didn't have a whole lot of experience with coming into the year. And we use what we knew at the time to base the forecast the contract length. But the reality is that many of these -- as I have mentioned, many of these channel partners to have three year deals with their customers or two to three year deals in that range. And when they do, they sign up to the same terms. So it's almost inevitable that it's going to happen. It's not a not a uniform contract length for them for their CMS providers and their customers it’s just I gave you an example. Some even have one month contract. So when they have a one month contract with their customer, we get a one month contract as well. But by and large, they do tend to be longer and that's what you're seeing reflected in the longer contract length that the year has unfolding. We’re obviously mindful of this when we set our forecast going into next year, it's possible that's the length would -- were sort of expected to get even a little bit longer. It does wonderful things, right because for the long-term revenue for really sitting with a large backlog of revenue for future periods, and some cash if you will because some of the contracts that three year contract will get paid annually as well. So we have a backlog there as well. So it bodes well for the future revenue, it’s pent-up revenue if you will.

Great, that's really helpful. And then looking at your pipeline specifically on the indirect channel. It sounds like you've already announced a few partnerships subsequent to the quarter end, but I'm just kind of curious how you're feeling about the overall pipeline as you go into Q4 of this year. It sounds like Q3 is typically a seasonally slower quarter, but just curious to hear your thoughts around kind of activity and potential partnerships that are forming here in this last quarter of the year.

Yes, Zach, it's almost like September 30th allows us to the market to sort of free up again because it seems like October 1st the channels all opened up again in a big way and we are really excited as we announced the addition of NetSuite and Simpleview. These are two large well-known indirect channel partners now for us. They are obviously in the beginning stages. We obviously put them through some training and do all the things that we do to sort of ramp up our partners, but we're really excited about where they're going to. For the fourth quarter specifically, we like where our current partners are from a standpoint of the school districts, the e-commerce sites, the government sites, through civic plus, the school districts the final site. These are where we're starting to see our acceleration. And then I can't speak highly enough for the three auto dealer TDK, dealer.com and Dealer Inspire, Dealer Inspire is ramping up really nicely and we're seeing the pipeline in their forecast increasing as well. So we're really bullish about fourth quarter, really excited about how things have kicked off here in the first 24 days of October and we see nothing, but great things through the end of the year.

Hey, I want to just add something. We were very pleased with the third quarter number because internally we fully expected it to be a tougher quarter and then the numbers we put up we were very pleased with them in light what we are expecting to do. So, we're very happy with where we stand going into the fourth quarter right now.

Understood. And then finally just last question for me. In terms of the regulatory environment, has the pace of demand letters and lawsuits regarding website accessibility been similar to what we've seen here in the first half of the year?

Yes, they stay consistent. We continue to receive numerous calls each week from companies that have received demand letters. So we don't see any reduction in that tide and we really have not seen any regulatory changes in the past three months for sure and we don't anticipate any until after the elections and probably into the new year if there's going to be any.

Okay, great. Well, thank you for taking my questions and congratulations once again on these strong results in 3Q.

Thanks, Zach.

Our next question comes from the line of [indiscernible] from Marathon Capital Management. Please proceed with your questions.

Hey, thanks, Cart, Todd. Question on the revenue guidance again. I was curious with longer contract terms, do you see meaningfully lower monthly or annual revenue when you link another contract?

No, it's not meaningfully different, I mean, these are negotiations with them as well. On direct clients we'll give some multi-year discount, but it's not very large.

Okay.

It's very small. I mean, it's almost -- it's not material.

Okay. So if you normalize the contract length, so you've stripped out the length of how long a deal is, did you see any difference in say your monthly recurring revenue or your annual recurring revenue in the quarter versus what you expected to sign?

So for revenue, there's a difference, if you -- say if you normalize it, no, if we normalize it, we're on track.

Okay.

Adjust the contract length. Yes, and that's reflected in bookings right because what really truly the businesses targets are internally have been booking targets, heretofore because we’re focus on getting the contract values in, we run the business on a sort of the cash perspective transitioning now to the NASDAQ we start to transition and making sure we're revenue focused as much as we are bookings focused. But we really traditionally really only reported bookings until very recently. The business has been managed with targets to go out and get cash contracts or service and what's happened as those contracts lengths have extended. That's a good thing right, as it locks in longer term future revenue and we now have more visibility into the future for revenue forecasting. But still this lumpiness possibilities right because we don't have complete control over nor we have a ton of experience here with channel partners. We expect some of them to accelerate faster than others. You can look at our historical, the ones we had the longest and I think we've got 80% penetration in one of our smaller EMS older relationships and 60% or so in our oldest relationship where some of the newer ones the individual speed of ramp will be different depending on size and other variables. So it could still be some lumpiness in the way in which this acceleration occurs we feel very, very excited about the potential for these channel partners in what they can do to us in future periods -- do for us in future periods.

Now you talked about this a little bit but was there more indirect business in the quarter versus direct than you were expecting?

I think we are pretty close to what we expected in terms of the mix of direct and indirect. We continue to see an acceleration in the interest in the indirect channel, we are working very hard to try to continue to expand that -- those with the partners. I think it was about 60% direct and 40% indirect in the quarter. We've been saying by the time we get to the end of the year that balance to be shifted -- should be shifting.

Is that 60% in terms of dollars or in terms of contracts?

In terms of contract dollars, bookings, yes.

Okay. Contract dollars, okay, got it. All right, great. Thank you.

Sure.

Our next question comes from the line of Christopher Cross [ph] from Morgan Stanley. Please proceed with your question.

Todd, how are you?

Hey, Chris.

Hey, congratulations on the quarter.

Thank you.

I got a couple of softball questions for you. Just in terms of thinking about OpEx and how that looks for 2019 and what kind of investments you guys are looking at making in the business over the next I guess call it 15 months, how do I kind of think about that?

As we alluded in our opening comments, we're going to take advantage of this what we call operational land grab [ph], because our greenfield is out in front of us with limited competition is really the timing is everything. So we're increasing the sales and size -- increasing the size of the sales team. We've hired three new people in the last two months and we're continuing to obviously increase the size of our implementation in Q18. So that they can handle the influx of new customer sites. We've hired five people there. So we have spent some money like we stated we are going to do with our raise and we're continuing to carry that out. So right now it's 100% focused on sales. We're excited about our sales cycle getting more transactional. We've enhanced our messaging, we're getting to customers faster. We've got some much better marketing capabilities in getting leads. And so we're really excited about where we're going with our operational landgrab.

Okay. So you'd probably say you're going to looking maybe investing a bit more as you go into 2019?

Yes. In sales and implementation team, that's where we're going to spend our money. We obviously still spend money and making sure our product the technology keeps being enhanced, it's really important to us and we've got some new features that we're going to roll out here at the end of the year as well. So there is money spent there, but the majority of it is in new team members that go out and take advantage of this opportunity that lays before us.

All right. Thank you very much, Todd.

Thanks, Chris.

[Operator Instructions] At this time, this does conclude our question-and-answer session. And now I’d like to turn the call back to Dr. Bettis for closing remarks.

Yes, I just want to thank everybody for taking the time to come today. We continue to remain excited about what we're doing on the business model and the opportunity. So appreciate you taking time to listen. Thanks for your questions as well. Thank you, operator.

Before we conclude today's call, I would like provide AudioEye's Safe Harbor Statement that could include 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 as 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 caution not to place under reliance on these forward-looking statements, which reflect management's release only as of the date hereof. The company undertakes no obligation to update or revise its forward-looking statements, which may be made 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 on the Investors section of the company's website. Thank you for joining us today for AudioEye's third quarter 2018 preliminary results conference call. You may now disconnect.