AudioEye, Inc. (AEYE) Earnings Call Transcript

Good afternoon, and welcome to AudioEye's Third Quarter 2026 Earnings Conference Call. Joining us for today's call are AudioEye's Chief Executive Officer; Ms. Kelly Georgevich; and Chief Financial Officer, Mr. Matthew Domeyer. [Operator Instructions] I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website at www.audioeye.com. Before I turn the call over to AudioEye's CEO, 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 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 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 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 CEO, Ms. Kelly Georgevich.

Thank you, operator. We had a great quarter, generating record revenue, record adjusted EBITDA, strong free cash flow and positive GAAP net income, driven by efficiencies and increased AIUs across the company. We are also excited to discuss accelerating revenue growth in Q4 with continued operating leverage. In 2025, we introduced an aspirational goal of 30% to 40% growth in adjusted EBITDA and adjusted EPS per year over the following 3 years. We are pleased to report that we continue to deliver against its aspirational target and now expect approximately 50% growth in adjusted EBITDA in 2026. We also expect a Q4 adjusted EBITDA annualized run rate of over $17 million, up from previous expectations of $15 million. This translates into an annualized run rate for adjusted EPS of around $1.30 in Q4. Gross margin improved over 550 basis points year-over-year with adjusted gross margins of 88% in Q3 driven by efficiency and increased use of AI. Adjusted EBITDA in Q3 was $3.9 million, up 58% year-over-year. The adjusted EBITDA margin was 35% in Q3. As anticipated and as indicated last quarter, litigation expense decreased in Q3. We expect a further reduction in Q4 and believe litigation expense will continue to trend down. We expect meaningful free cash flow generation in Q4 and in 2027 and we recently announced a $15 million stock repurchase program that runs through October 2027. This represents approximately 15% of the outstanding shares at current prices. It's worth noting that our revenue has nearly doubled over the last 5 years, while our outstanding shares have increased by approximately 10% in this time frame. We also had a strong quarter in terms of GAAP profitability. In Q3, GAAP net income was $1 million or $0.08 per share compared to a net loss of $600,000 and $0.04 per share loss last year. Revenue was approximately $11 million, representing our 43rd consecutive quarter of record revenue. ARR grew $1 million sequentially to $43.3 million at September 30, 2026, 12% over the prior year. On October 8, we launched 2 new products: Agentic Audits and our SDK MCP. Both are built on what we call AudioEye Intelligence, our proprietary benefit created from more than 1 million human accessibility reviews across more than 100,000 sites over 10 years. Our SDK MCP brings AudioEye Intelligence into AI coating tools developers already use so they can catch and fix issues while coding is being created. Our Agentic Audits use an AI agent powered by our proprietary data set to move through a site the way a real user would opening menus, filling out forms and going through checkout. They can find up to 50% more high severity issues than automation alone and most results come back within an hour. Our solution already delivers 3 to 4x the legal protection of others. These new products add to that protection, helping developers ship more compliant code from the start and helping companies catch high-risk issues as their sites change. These products represent exciting upsell opportunities. In September, we released a study on how well AI coding tools build accessible websites. We asked AI agents to create 15 sites that comply with WCAG 2.2 AA standards. We found that even when explicitly instructed to make the site accessible it could not. The AI-generated sites averaged 55 issues per page compared to 62 on a typical site. And AI-generated e-commerce sites had 3x as many issues as other e-commerce sites. Because AI models have been trained on an inaccessible web, they repeat the same accessibility failures. Digital accessibility has become a critical part of AI readiness as well as compliance. As more agents complete tasks for humans, they increasingly rely on a web's accessibility tree to navigate the site. To illustrate how important accessibility tree has become, we've published research on how AI agents perform inaccessible website. We ran AI agent through everyday cash and 6 sites with and without Adias fixes. We found that on the least accessible site, AI agents completed only 31% of their tax. With AudioEye fixes, that rose to 96%. The AI agents navigate through site accessibility tree. So when it's broken, they can't complete past like making a purchase or booking. This means an accessible site now serves 2 audiences. -- people with disabilities and that AI agents acting on behalf of customers. On the regulatory side, in September, the European Standards Body published an updated accessibility standard that adopts Weig 2.2, which raises the bar for companies covered by the European Accessibility Act. Stateside, Hawaii signed a new law in July at 257. 257 is the first state latter require all private businesses to conform to Weig2.1 Level A and AA through roles the state is now finalizing. This will have significant implications for the travel and hospitality industry. We believe other states may follow Hawaii's lead. The new law took effect July 14, 2026, with compliance deadlines 24 to 36 months after the rules are final. Turning to guidance. For the fourth quarter of 2026, we expect revenue between $11.4 million and $11.6 million, a sequential increase from the third quarter of 2026 of approximately $550,000 at the midpoint and approximately 20% annualized sequential revenue growth. For the full year 2026, we are narrowing the revenue range to between $43.6 million and $43.8 million. For the fourth quarter of 2026, we expect adjusted EBITDA of between $4.2 million and $4.4 million, a 56% increase over the fourth quarter of 2025 at the midpoint and adjusted EBITDA margin of approximately 37%. We expect adjusted EPS of between $0.32 and $0.33 per share for the fourth quarter of 2026. For the full year 2026, we are increasing adjusted EBITDA guidance from at least $12.7 million to between $13.4 million and $13.6 million, representing approximately 50% year-over-year growth. As mentioned earlier, Q4 adjusted EBITDA guidance represents an annualized run rate of over $17 million, and we expect cash generation to ramp significantly in Q4 in 2027. In the fourth quarter at the midpoint of guidance, and adjusted EBITDA of $4.3 million less around $400,000 of software development costs, implies $3.9 million of adjusted free cash flow. Litigation expenses decreased in Q3, down approximately 50% from the second quarter. Further decreases in litigation expense are expected in the fourth quarter, contributing to substantial cash generation. With that, I'll hand it over to Matt to cover our financial results in more detail.

Thank you, Kelly. As Kelly mentioned, revenue for the third quarter was a record $11 million, representing our 43rd consecutive period of record revenue. Annual recurring revenue was $43.3 million as of September 30, 2026, up from $42.3 million as of June 30, 2026. Year-over-year, ARR grew 12%, driven by double-digit growth in both our partner and Marketplace and enterprise channels. As of September 30, 2026, AudioEye had approximately 130,000 customers, up 7,000 or 6% from approximately 123,000 customers as of September 30, 2025, and up approximately 1,000 from June 30, 2026. The increase was driven primarily by our partner and marketplace channel with enterprise customers also increasing. Both of our 2 revenue channels continued to deliver strong results. AudioEye's enterprise channel consists of our larger customers and organizations that generally engage directly with AudioEye's sales personnel for pricing and solutions. As we have previously discussed, in 2026, we have reduced our emphasis on nonrecurring revenue to focus on growing ARR. In the third quarter of 2026, enterprise revenue was relatively flat year-over-year with lower nonrecurring revenue being offset by increases in recurring revenue. Our focus on enterprise ARR is showing results, and it increased 10% over the comparable prior year period as we continue to deliver some of our strongest new and expansion business to date. As of September 30, 2026, Enterprise ARR represented approximately 41% of total ARR. Our partner and marketplace channel includes all revenue from our SMB-focused marketplace products as well as from partners who deploy these products for their SMB customers. In the third quarter of 2026, the partner and marketplace channel revenue increased 14% year-over-year. We again saw strong expansion from our state and local government partners in the quarter. Partner and marketplace ARR grew by 14% compared to the prior year quarter and represented approximately 59% of total ARR as of September 30, 2026. Gross margin for the third quarter expanded over 550 basis points to 83% compared to 77% in the third quarter of 2025. Gross profit grew 15% to $9.1 million compared to $7.9 million in the prior year period. While revenue grew 7%, cost of revenue declined 19% and resulting in 160% conversion of incremental revenue to gross profit. The reduction in cost of revenue came primarily from AI driven efficiencies in engineering and service delivery. Adjusted gross margin was 88% in Q3 2026 compared to 83% in the prior year comparable period. The increase in adjusted gross margin is consistent with the GAAP change. In the third quarter of 2026, operating expenses decreased 5% or $400,000 to $7.8 million. The decrease in operating expenses was driven primarily by lower R&D and sales and marketing spend. Our total R&D spend in Q3 was approximately $1.3 million including approximately $400,000 recorded as capitalized software development costs. Total R&D spend decreased 17% year-over-year and was around 12% of Q3 2026 revenue. down from 15% in Q3 2025, driven by increased AI usage. Net income in the third quarter of 2026 was $1 million or $0.08 per diluted share compared to a net loss of $0.6 million or $0.04 per share in the same year ago period, driven by higher gross profit and lower operating expenses noted previously. In the third quarter of 2026, we achieved record adjusted EBITDA of approximately $3.9 million or adjusted EPS of $0.30 per diluted share and an adjusted EBITDA margin of 35%. This compares to Q3 2025, which had an adjusted EBITDA of $2.5 million or adjusted EPS of $0.19 per share and an adjusted EBITDA margin of 24%. The $1.4 million or 58% increase in adjusted EBITDA over the comparable period of the prior year was primarily driven by increases in gross profit and AI efficiencies. In the third quarter, we generated $3.5 million of free cash flow, calculated as adjusted EBITDA of $3.9 million plus $400,000 of capitalized software development costs. an improvement of $1.5 million from the third quarter of 2025. Turning to the balance sheet. We ended the quarter with $9.3 million in cash, an increase of $600,000 from June 30, 2026 and $3 million available under our revolving line of credit. As of September 30, 2026, our net debt, defined as total debt less cash was $7.2 million. Net debt has declined approximately $1 million year-to-date and our net debt to adjusted EBITDA ratio, using the midpoint of our updated 2026 adjusted EBITDA guidance is approximately $0.5 million. With that, I'll turn the call back to the operator to open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Josh Reilly with Needham & Company.

Nice job on the quarter here. I know it's early on 2 new AI products you released in October, but maybe you can share how much you're seeing in terms of the push-pull dynamics on AI features from customers? And are customers requesting more AI functionality? Or are you seeing that you need to build awareness of what AI can do for them.

Yes, it's definitely still early days. We just released the product a couple of weeks ago. So far, feedback has been very positive, especially with the customers who have been in beta. I think I'd say both, but I'd say some of it has to be education on the customer side. We think these are really powerful add-ons for customers, especially to do more in real time or between audits. But yes, we're pretty excited about what they can do, especially on the expansion side.

Got it. And then as we think about the ARR growth going forward, how sustainable is this low double-digit growth rate for the balance of 2026 without giving any specific guidance. What are the puts and takes investors should be considering for Q4 ARR growth that could maybe lead to outperformance? And then in 2027, once again, it seems the demand environment should be further improving given the tailwinds out there. Is there anything we should be considering in terms of the macro or otherwise that may impact demand trends?

We had about 12% year-over-year ARR growth, which is good to see. I think we expect that to continue into Q4. We're seeing really good momentum across the board, near record new and expansion business really sell the growth from partners and so all of that is just a positive for Q4 and expectations there on ARR. I think we can expect something similar for 2027 with some additional accelerators or things that could move the needle, things like our new product offerings, I think as agents take over more path, the readability of the sites and how accessibility plays into that could be really interesting. And then, of course, enforcement of the EU could move the needle further.

Up next in the queue, we have George Sutton with Craig Hallum Capital Group.

Logan on for George here. First one for me, I'm wondering if you could just unpack step down in cost of goods sold this quarter a bit more. And maybe just talking in any more detail about where the AI efficiencies are coming into play. And I guess, is there more room for margin improvement here? Should we think about this as sort of a onetime step function improvement?

Logan, it's Matt. Yes, so we saw a 550 basis point increase in margin, which was a really great improvement. The gross profits helped by the growing ARR and we're able to scale. We've also -- we've got a long track record of lowering expenses and working to manage and scale. And so I think where we're at right now, we expect to be able to maintain those rates and we'll keep looking for room to expand the margins as we can going forward.

Got it. And then going back to the new AI products and again, recognizing that it's early, but can you give any sense for what kind of uplift in sort of revenue per customer, those new products might have?

Yes, it's probably too early to quantify it, but I do think they are expansion opportunities for customers kind of like as in between their audits and additional current services that they already have.

Up next in queue, we have Richard Baldry with ROTH Capital Partners.

I'm going to probably ask a few times going forward because people seem worried about AI sort of becoming a competitive threat in a lot of different verticals. So we've had these tools out for a little while, the large language models. Have you seen any actual new competitors enter the market in trying to leverage those tools to create new businesses and competition with yourselves?

We haven't seen much in the market, no. I think that study we put out emphasizes what we've been talking about for some time, which is we have this proprietary data set that no one else has over 1 million human fixes over 100,000 websites over 10 years, so no one can replicate that. And what well that's been trained on and what AI is trained on has been inaccessible sites. So the idea of a new product coming in or a new competitor coming in that can just do what we've been doing for 10 years is just not possible. And that's part of the reason we put out the study over the last 3 months or so is to prove that I just can't do this. We found that AI eventually had no impact when you instructed it to create a site that was accessible and our AI tools are powered with our proprietary dataset.

And when you think about the new tools and the automation you're able to achieve with them -- is there a way to think about how much of your prior workload you're able to automate and how much you think you could incrementally automate over time? And how much sort of either now or long term remains probably manual because of complex or other issues?