AEYE - NASDAQ

Good afternoon, and welcome to AudioEye's Third Quarter 2025 Earnings Conference Call. Joining us for today's call are AudioEye's CEO, Mr. David Moradi; and CFO, Ms. Kelly Georgevich. Following their remarks, we will open 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 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 and 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, that 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 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 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 or otherwise 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.

Thank you, operator. I want to begin by highlighting our record third quarter results. We have achieved 39 straight quarters of record revenue with $10.2 million in revenue. In the third quarter of 2025, we also achieved a record $2.5 million in adjusted EBITDA, up from $1.9 million sequentially. The adjusted EBITDA margin was a record 24%. We expect a significant increase in fourth quarter ARR revenue adjusted EBITDA and adjusted EBITDA margin. As you may recall, we have made significant R&D and go-to-market investments in our Enterprise channel. And we are now seeing the rewards. In the third quarter, we had one of the best quarters in new business in our history, including contributions from the EU. This momentum has continued into the fourth quarter with many deals already closed in the EU and U.S. We currently have several late-stage deals with ARR over $100,000, and in EU and the U.S., which would imply a record quarter in new business ARR based on historical close rates. Our partner and marketplace channel also continues to ramp in anticipation of the DOJ Title II rule, which begins to take effect in May 2026. Our biggest partners in the government and government adjacent spaces contributed significantly to partner ARR growth this quarter. We believe there is significant additional runway for these partners to further expand in 2026. As discussed last quarter, we opted to migrate customers acquired from small acquisitions to eliminate duplicate systems and processes, which should further improve margins in the fourth quarter and into next year. The integration of these customers into the AudioEye Core platform is on track to be completed this quarter. As we finalize attrition from customer integrations this quarter, we expect our reported results to reflect ARR acceleration in our core direct business and growth in our reseller revenue. There have been significant recent advancements in AI which we are very excited about. One recent advancement is the combination of the open source Playwright framework with the Model Context Protocol or MCP. Using Playwright MCP enables large language models to integrate with websites and for AI agents to perform tasks like humans. Things like interacting with buttons, billing in forms, scrolling, et cetera. Instead of analyzing code statically, an AI agent using Playwright MCP would navigate using the accessibility tree, the same structured data that screen readers for people with disabilities use. The key change is that it uses a site accessibility tree rather than the Document Object Model or DOM. Since Playwright MCP uses the accessibility treat, an AI agent using this framework should be more efficient when factoring in compute and LLM token usage, especially at scale. We also see significant potential for Playwright MCP and our product and expect to further improve our industry-leading detection and accuracy. Based on an analysis of 1,500 legal claims, our solution is already 300% to 400% more effective than competitors. We are excited to further improve the detection accuracy and scale of our software with Playwright MCP. These product advancements should drive further margin expansion and cash flow as we head into next year. As we generate more cash, we believe that in addition to M&A, stock buybacks can be an attractive way to deploy cash. In the third quarter, we repurchased approximately 154,000 shares, bringing our total to roughly 300,000 shares in 2025. Moving on to guidance. For the fourth quarter, we are guiding revenue between $10.45 million and $10.6 million. For the fourth quarter, we also expect to generate a record adjusted EBITDA of $2.7 million to $2.8 million and adjusted EPS of $0.21 to $0.23. We are narrowing our 2025 full year revenue guidance to $40.3 million to $40.4 million and refining our profitability guidance towards the top end of the range with adjusted EBITDA of $9 million to $9.1 million and adjusted EPS of $0.72 to $0.73 per share. Based on our expectation of adjusted EBITDA margins in the upper 20s in the fourth quarter, we expect to generate an annualized adjusted EPS of nearly $0.90. We are very excited about ARR growing significantly and the operating leverage in our model. We continue to have an aspirational goal of increasing adjusted EBITDA and adjusted EPS by 30% to 40% annually for the next 3 years. I'll now turn the call over to AudioEye's CFO, Kelly.

Thank you, David. As David discussed, revenue again hit record levels with Q3 2025 revenue at $10.2 million, up 15% over the comparable period of prior year, and an increase of $370,000 over the second quarter of 2025. The third quarter marked our 39th quarter of record revenue. Annual Recurring Revenue, or ARR, at the end of the third quarter of 2025 was $38.7 million, a $2.5 million increase over the end of the third quarter of the prior year and a $500,000 increase from the end of the second quarter of 2025. Our two revenue channels are continuing to generate strong results with high year-over-year and annualized sequential growth. Overall, the enterprise channel grew around 26% over the comparable period of the prior year, and the partner and marketplace channel grew around 7% over the same period. In the third quarter, the enterprise channel contributed around 45% of revenue and 42% of ARR and the Partner and Marketplace channel contributed around 55% of revenue and 58% of ARR. The Partner and Marketplace channel includes all revenue from our SMB-focused marketplace products as well as revenue from partners to deploy those products for their SMB customers. We saw solid ARR growth in this channel in the third quarter of 2025, driven by additional partner penetration, which will soon be affected by the DOJ Title II rule. We continue to see strong retention rates in this channel. We opted to migrate customers acquired some small acquisitions to eliminate duplicate systems and processes. While the ongoing integration will impact the fourth quarter, we expect ARR growth to reaccelerate Customer integration will be substantially complete in the fourth quarter. On September 30, 2025, our customer count was approximately 123,000 and a sequential increase of 3,000 from June 30, 2025. Customer accounts decreased approximately 3,000 from September 30, 2024, due to one partner renegotiation in Q1 2025. Gross profit for the third quarter was $7.9 million or around 77% of revenue compared to $7.1 million or 80% of revenue in the third quarter of last year. As we highlighted on the last earnings call, with customer migration to the upgraded platform, we expected margins in the second and third quarter of 2025 to temporarily decrease. We are pleased with the margins remain in the high 70s in the third quarter, and we expect gross margin to be up approximately 1 percentage sequentially in Q4 as the migration to the upgraded platform complete. While revenue increased 15% over the comparable period of prior year. On a GAAP basis, operating expenses increased only 2% or around $150,000 to $8.2 million with additional investments in sales and marketing, offset by savings and other departments. Our total R&D spend in Q3 2025 was approximately $1.6 million with approximately $450,000 reflects the software development cost in the investing section of the cash flow statement. This was consistent with Q3 2024 R&D investment. The total R&D spend was about 15% of our revenue this quarter versus 18% in the comparable period of prior year and 17% in the second quarter of 2025. We see increased efficiencies with AI tools and our product development team. Net loss in the third quarter of 2025 was $600,000 or $0.04 per share compared to a net loss of $1.2 million or $0.10 per share in the same year ago period. The decrease was primarily driven by additional revenue, partially offset by increases in sales and marketing expense. Our Q3 2025 adjusted EBITDA was a record $2.5 million, and our adjusted EPS was $0.19 per share. The primary adjustments to GAAP earnings and EPS for Q3 2025 for noncash share-based compensation, depreciation, amortization, interest expense and litigation expense. In the third quarter, we repurchased approximately $1.8 million of shares at an average price of $11.86. During 2025 and through September 30, 2025, we have repurchased approximately 3.6 million worth of shares at an average price of $12.05. Our balance sheet remains well capitalized with $4.6 million in cash as of September 30, 2025 and an additional $6.6 million in debt facilities available. As of September 30, our net debt defined as total debt less cash was $8.9 million, and our net debt to adjusted EBITDA ratio was 0.9x. Free cash flow, defined as $2.5 million of adjusted EBITDA plus $450,000 of software development cost was $2 million in the third quarter. We expect this to continue increasing in the fourth quarter. We will now open the call up for questions. Operator, please give instructions.

[Operator Instructions] Your first question comes from

This is Ethan Widell calling in for

Yes. I think we had some deals closed in the third quarter. We have some large deals active in the late-stage pipeline today. And this is before any real enforcement. We expect a substantial pickup once the fines are issued, similar to what happened with GDP.

Got it. And then it sounds like you're on track for your platform migration. Can you maybe speak to where you're at as of right now?

Sure. Yes, the migration is going well. Most customers are going to be on the new platform this quarter. So we're happy to see that. It's going really well. Yes.

Great. And then maybe if I can squeeze the third one in. Just with regard to Title II of the ADA. Have you seen any impact to the rate of compliance adoption there from the government shutdown?

No, we're not seeing anything there.

Your next question comes from George Sutton with Craig Hallum.

We have Logan on here for George. It obviously sounds like Europe is contributing nicely here. I'm just curious if you can give us anything on how the pipeline has developed over the past quarter. And kind of beyond that, is there anything you can say about close rates or conversion rates kind of relative to expectations or maybe the business historically?

It's too early to tell on the close rates. It's going very well in the EU at the moment. Kelly, anything to add on that?

No. I think just that pipeline is also growing in the EU, and we're seeing some good opportunities come up.

Okay. Got it. Kind of staying on the same note, one of the things that we picked up is that potentially in Europe under the EAA, there's a bit more emphasis on documentation of accessibility and usability statements, things of that nature. Just curious if you're seeing that also. And does that change anything competitively? Or how does that play into your product offering?

That's true. We've adopted accordingly with that. We have all the statements for each member state. .

Your next question comes from Scott Buck with HC Wainwright.

David, could you remind us what average deal size looks like in Europe versus the U.S.?

It's a bit higher. It's running I would say about 50% higher than the average field in the U.S., it's more enterprise deals that we're seeing there in upper mid-market.

And what percentage of total revenue in the quarter is coming out of Europe versus the U.S.?

In the third quarter or fourth quarter?

Third quarter. But if you want to give fourth quarter, that's fine, too.

Do see contribution still mostly U.S. and it's picking up into the third quarter or fourth quarter.

Okay. Perfect. I appreciate that. And then I wanted to ask about the aspirational goal you laid out in the release and the early comments in the call. How do we think of that in terms of what's coming from revenue growth versus gross margin expansion versus ongoing cost discipline. I mean, how do we kind of piece that out? To get to that 30% to 40% on the adjusted EBITDA line.

Yes. I think they're all coming into play. To reach that aspiration all we do need revenue to continue to increase. We see good opportunities with you, resellers, U.S. business demand. So that is obviously a factor, but there is also the gross margin opportunity. And then what we've proven is with revenue scaling, we can still be efficient with costs. So all three of those things are contributing to that aspirational goal.

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.

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.