AudioEye, Inc. ($AEYE)

Good afternoon, and welcome to AudioEye's First Quarter 2026 Earnings Conference Call. Joining us for today's call are AudioEye's CEO and CFO; Ms. Kelly Georgevich; and Executive Chairman and Chief Product Officer, Mr. David Moradi. [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 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, 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 could materially differ because of factors discussed on 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 quality 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 due on 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 cell 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 Executive Chairman and Chief Product Officer, Mr. David Moradi.

Thank you, operator. and good afternoon, everyone. The first quarter marks the 41st consecutive quarter of record revenue, a significant achievement. Over a decade ago, I began my journey with AudioEye as an investor, leading a few rounds of financing for the company. Back then, the company had virtually no revenue and limited technology. Today is a different story. We have the leading product on the market and more than 127,000 customers to our knowledge, more than any other company in the industry. In 2019, I joined AudioEye, first as a consultant, then as a Board member and became the Chair of the Strategic Operating Committee of the Board of Directors, tasked with improving product, go-to-market margins and scale. Since then, revenues have nearly quadrupled and adjusted EBITDA margins have improved from approximately negative 70% and are expected to be in the high 20% range this year. Revenue per employee has improved from approximately $100,000 per employee in 2019 to over $400,000 per employee, around a 400% increase. Kelly has been instrumental in helping us achieve these top-tier results, since joining AudioEye in 2021. I worked closely with Kelly for almost 5 years, and I'm highly confident that as CEO, she will lead the company through our next phase of growth and continued operating margin improvement. This was a well-planned evolution that reflects the strength of what we have built and the Board of Directors and my confidence in Kelly's ability to lead us going forward. She brings operational discipline, relationships and credibility to sustain the momentum we have. My focus going forward will be on what I love doing most, long-term strategy and product innovation, including AI initiatives now possible with recent LLM improvements. I've served as Head of Product since the second half of 2023 during a period of significant innovation including our next-gen platform, which combines custom fixes with our industry-leading AI, giving customers a complete view of their risk profile, which no competitor can do today. Also, we have continued to improve our industry-leading legal protection rates and the highest levels of automatic detection available. But we are not done. A recent Web AIM study shows that the internet is becoming less accessible while litigation trends are reaching all-time highs. The need to solve digital accessibility at scale has never been greater. We continue to build on our industry-leading proprietary data set, which was developed over 10 years on over 100,000 websites and millions of data points using our unique approach of combining AI automation with custom fixes. And we are very excited about upcoming agentic product releases. As we enter this next phase of growth in AudioEye's journey, I want to thank our team for all their hard work and determination in getting us here and in delivering an incredible product for our customers. After today's call, I may be less visible to shareholders that I will be hard at work in the background. I'm leaving you in good hands with your new CEO. With that, I'll hand it over to Kelly.

Thank you, David. Good afternoon, everyone. It's an here to be speaking to you today in my new role as CEO, I want to echo David's gratitude to our team and to David for the incredible work he has been transforming AudioEye into an industry leader in digital accessibility. I look forward to building on the foundation that David and the team have created. I've spent 5 years working with David in driving change, and I'm excited about what the next phase looks like both from an operational standpoint and from a product and market opportunity standpoint. I'll now cover a few other business developments, Q1 2026 financial results and our updated financial outlook for Q2 and the full year 2026. The market environment continues to reinforce the need for solutions with accuracy and scale. Agentic coding solutions are driving fast to web development but are making the web less accessible. As David mentioned, the 2026 WebAIM Million report from 95.9% of the top 1 million homepages had detectable weightage failures, averaging 56.1 errors per page, a 10% increase over the prior year. That reversed six consecutive years of gradual improvement. WebAIM attributes the decline to broader shifts in web development, including increased reliance on third-party frameworks and AI-assisted coding. This is driving accessibility related litigation to reach all-time highs. This environment positions AudioEye as a leader. With over a decade of proprietary data and billions of data points, we have the depth, expertise and scale to address accessibility challenges and to help customers manage the legal risk they face in a way no other solution can currently match. We continue to see strong feedback and engagement with our next-generation platform introduced earlier this year. We built this platform to give customers full visibility into the thousands of fixes AudioEye completes on their behalf through our automation and custom remediation. The response has validated what we believed. And customers see the depth of our work, the gap between AudioEye and any other solution in the market becomes clear. On the regulatory front, in April 2026, the DOJ pushed an interim final rule, extending entitled to Web Accessibility Compliance Guidelines by 1 year for state and local governments with enforcement now slated to begin in April 2027. We view this as an affirmation of the federal commitment to digital accessibility and a recognition that meaningful compliance requires a robust solution like AudioEye. The rule makes clear that covered entities have an ongoing obligation to ensure their web content and mobile apps are accessible to individuals with disabilities under Title II of the ADA. The additional year gives AudioEye and our channel partners a broader runway to engage state and local government entities and ensure they are positioned for compliance well ahead of the new April 2027 enforcement date. In the European Union, we continue to build pipeline into studies, positive early signs as enforcement time lines take shape. We are being disciplined with our investments there, positioning ourselves to capture the meaningful uptick in demand that will occur as enforcement occurs while building awareness of accessibility requirements now in place. Turning to our Q1 2026 financial results. Revenue for the first quarter of 2026 was $10.6 million, representing an 8% increase from the comparable period of the prior year. This marked our 41st consecutive period of record revenue, a street, we are unaware of any current public software company matching. Annual recurring revenue, or ARR, was $41.2 million as of March 31, 2026, up from $40 million as of December 31, 2025, reflecting 12% annualized and bundle ARR growth. Year-over-year, ARR grew 11%. We expect error growth to continue in future quarters and that compounding ARR should generate notable sequential growth rates in revenue in the third and fourth quarter of this year. As of March 31, 2026, AudioEye had approximately 127,000 customers up 8,000 from March 31, 2025. The 4,000 customers decreased from December 31, 2025, was driven by 1 partner's realignment of their own customer base. The partner continues to support thousands of AudioEye customers and the underlying business activity and partnership were not affected and had no material impact on revenue or ARR. Going deeper into revenue by our two channels. AudioEye enterprise channel consists of our larger customers and organizations, including those with non-platform [indiscernible] websites who generally engage directly with AudioEye sales personnel for pricing and solutions. Our enterprise channel continued to perform well in Q1 with steady new business equity and healthy expansion on our existing accounts. In Q1 2026, the enterprise channel grew 9% year-over-year. As of March 31, 2026, the enterprise channel represented approximately 41% of ARR. Our partner and marketplace channel includes all revenue from our SMB-focused marketplace products as well as partnering to deploy these products for their SMB customers. In the first quarter of 2026, the partner and marketplace channel grew 8% year-over-year and accounted for approximately 59% of ARR as of March 31, 2026. Our partner and Marketplace channel also contributed meaningfully to ARR growth in the quarter. We saw solid expansion from our state and local government partners specifically in the first quarter of 2026. In our recent conversations with these partners, Title II delay has not slowed their go-to-market activity or change how they talk to customers. They are moving forward with the same urgency. Gross profit for the first quarter was $8.3 million or approximately 78% of revenue compared to $7.7 million or 80% of revenue in Q1 of 2025. Adjusted gross margin, defined as gross margin adjusted for noncash items in our cost of revenue, such as amortization and capitalized software development costs and stock compensation expense, was 84% in Q1 2026 compared to 85% in the prior year comparable period. In the first quarter of 2026, operating expenses were $10.1 million compared to $8.7 million in Q1 2025. Net loss in the first quarter of 2026 was $2.1 million or $0.17 per share compared to a net loss of $1.5 million or $0.12 per share in the same year ago period. The year-over-year increase in operating expenses and net loss was driven by higher litigation expenses, depreciation and amortization expenses as well as additional investments in sales and marketing. Our total R&D spend in Q1 was approximately $1.6 million, with approximately $500,000 recorded a software development costs in the investing section of the cash flow statement, similar to Q1 2025 levels. Total R&D spend was around 15% of Q1 2026 revenue, down from 17% in Q1 2025, demonstrating our continued progress in operating leverage. In the first quarter of 2026, we achieved adjusted EBITDA of approximately $2.4 million or $0.18 per share and an adjusted EBITDA margin of 22%. This compares to Q1 2025 adjusted EBITDA of $1.9 million or $0.15 per share and 20% of adjusted EBITDA margin. The $500,000 increase in adjusted EBITDA over the comparable period of the prior year was driven by a $500,000 year-over-year increase in gross profit. In the first quarter, we generated $1.9 million of free cash flow, calculated as adjusted EBITDA of $2.4 million plus $500,000 of software development costs, an improvement of $500,000 in the first quarter of 2025. We further strengthened our balance sheet in the first quarter of 2026 by drawing down the remaining $3.6 million of our delayed draw term loan, which would otherwise have expired on March 31st. We ended the quarter with $8.6 million in cash and $3 million available under our revolving line of credit. As of March 31, 2026, our net debt, defined as total debt less cash was $8.4 million, and our net debt to adjusted EBITDA ratio using our 2026 adjusted EBITDA guidance is approximately 0.7x. Now turning to guidance. For the second quarter of 2026, we expect revenue of between $10.65 million and $10.7 million and adjusted EBITDA of between $2.6 million and $2.7 million, representing an adjusted EBITDA margin of approximately 25% at the midpoint and adjusted EPS of between $0.21 and $0.22 per share. For the full year 2026, we are refining our revenue guidance to between $43.25 million and $44.25 million. We now expect full year adjusted EBITDA to be at least $12 million, representing a nearly 27% adjusted EBITDA margin at the midpoint of revenue guidance and adjusted EPS of at least $0.96. This would suggest at least 33% growth in adjusted EBITDA and adjusted EPS from 2025. With compounding ARR expected to drive notable sequential growth rates in the third and fourth quarter of 2026 and expanding operating leverage throughout 2026, we continue to target a $15 million run rate adjusted EBITDA by the end of 2026. 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 George Sutton with Craig-Hallum.

First, congrats to both of you on your new roles. I wanted to address the comment that the internet is becoming less accessible and you did give a couple of brief points. I wonder if you could expand on the thought process

Yes. The tools -- I've talked about this before, the tools are pulling from a lot of inaccessible content because the internet wasn't coded with accessibility in mind. And you're seeing the number of sites explode the number of content explode, and that's why we're seeing all-time highs in litigation. And there's that recent WebAIM study that Kelly was talking about that confirmed this. We said this on the last call, and I confirmed it recently through the WebAIM study, that's actually getting worse, not better.

So David, your voice inflected earlier in your prepared comments when you mentioned agentic AI upcoming. Can you talk about plans there?

Yes, there's a lot going on there. We're using agents to make products faster and better for clients, really leveraging our data. And really, the goal is to make things easier for clients more simple to understand, simple to use and increase their protection even further. So there's a lot of unlocks we couldn't do before that we can do now, which are really, really exciting.

Got you. Last question. Kelly, you emphasized the ramp in ARR in Q3 and Q4. Can you just walk us through the rest of the year in terms of what the drivers are in Q2 versus Q3 and Q4?

Yes. We're firing on all cylinders. We're seeing new business and expansion numbers. We're seeing great expansion from partners as well. And so the sequential growth in revenue should pick up notably in Q3 and Q4 with that compounding ARR.

Our next question is from Joshua Reilly with Needham & Company.

I'll echo the congrats on the change in management dynamic here. Maybe just a little bit more color, David, on -- what is -- why is now the right time to make this transition in the management of the business? And what gives you the confidence that the product is in the right place going forward given the dynamics around what's going on with AI?

Yes. I hope my stay wasn't over welcomed here. I've been here quite a long time, a lot longer than I ever thought I would be. But look, things are jumping really well right now. So I think this is a great time to do it. As you recall, the Board had asked me to do this back in 2019 to help turn the company around. And that's really what we've done. We put up 41 straight quarters of record revenue. We have 127,000 customers. We're approaching a 30% adjusted EBITDA margin in [indiscernible]. It was like negative 70% when I joined the Board back in '19. And we're posed to generate significant cash. And also the products really improved. We could do things that no one else in the industry can do. So I think it's a great time. Kelly has been a strong leader for over 5 years. She knows the company better than anyone, and it's going to allow me to focus on product, AI, long-term strategy. Very excited about what we're going to be able to do here.

Got it. That's helpful. And then what are you seeing from customers in terms of their understanding of how AI is going to impact website development going forward. And I don't think you've really seen a significant pause in terms of how customers are evaluating this. But do you think that they understand how they're going to manage their websites going forward and how they could integrate your solution to have a more compliant and...

Yes, most people are still trying to understand with the coding tools, a lot are not using the coding tools, a lot are not AI native yet. So they're working to understand things. I don't think there's a uniform view at this point of how they're going to use things, but it's evolving quickly.

And then on the Title II change and the timing there, it's interesting. It didn't seem like it was going to be realistic to ever have all of the potential customers ready with the compliance solution by the previous deadline. How do you think the dynamic is going to change with the new deadline? Do you think that the customers will be more aggressive with getting their websites compliant by this new deadline, and it's more realistic, or do you think that there's going to have to be more exceptions made and push outs over the next few years?

Yes. From what we see, the DOJ seems pretty committed to accessibility. You look at the cases of Uber and SeaWorld and Greyhound, and they didn't change anything with the rule. We view this as giving us additional runway to penetrate customers. We've seen great momentum with in outpace, but there is a lot of opportunity to continue to penetrate. And in talking to those partners, the message is full time ahead. They still feel the urgency and they're still going with the same go-to-market and the same urgencies to their customers.

Our next question is from Richard Baldry with ROTH Capital Partners.

Is it possible that the delay to that deadline actually helps you find more partners because it gives them more of a thought process that there is a longer time ahead to be generating customers and partnership with yourself?

Yes, absolutely. I think we view it that way. There is a -- we still have plenty to penetrate on our two key partners in this space and just across the board. I think there's still a lot of people who need a solution, so it gives us additional runway ahead of that April 2027, new deadline.

I think you've been adding some resources...

[indiscernible] have a solution just to be clear. The market is still very wide open on that side of the business. So I think this is actually a good thing.

Got it. And I think recently, you've been adding some resources in Europe. Do you want to update on where that's at, where the capacity is or the ramp in productivity there, where you think you can get to?

Yes. We continue to invest in EU. We'll keep investing in it through the rest of the year and beyond. EU is moving a bit slower. It's a bit bureaucratic, but we are seeing positive signals more thing of pipeline build. And I think just the team there, we're building as well. So once enforcement up in solved that fast, but we are setting ourselves up well for when that happens.

Got it. Maybe last for me. The litigation expense was up a bit in the quarter. Can you give a little update on where that's at? Did it peak in the quarter? Do you think it ends from here forward? Any thoughts around that wrapping up?

Yes. We can't comment on current litigation, but we are aggressively pursuing it. There's a trial date for Q4. So we do expect cost to go down substantially at some point this year.

Our next question comes from Erik Suppiger with B. Riley Securities.

Kelly, just curious if there are any immediate changes or strategic changes that you think you'll bring as you fill taking your new role? And then David, from an AI perspective, what opportunity is there for automating more of the product that you currently offer? Is there efficiencies to be realized in a significant way in terms of the process of making these sites more accessible?

Yes, I can take that first, Erik. Thanks to David leadership we're in the best position we've ever been. We have a really strong product. We have a great financial profile, strong revenues and record margins. And we have this huge demand driver in the EU once we see enforcement. So all of that is both steam ahead. We have a great team, and we're excited to have David focus further on product. And we're also excited about the opportunities to leverage our tech and customer base in new verticals with AI advancements. So I think that's on the deck as well.

Yes. We're using our proprietary data with agents to really unlock a lot of value, and we think that's going to drive our margins up over time and give clients a lot more value in the future accuracy detection, legal protection, things like that.

Can you reduce the amount of professional services that's required in a lot of these cases?

That's the goal. That's what we do as a disruptor here in this industry against the consultants, and that is our goal to keep reducing that.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Ms. Kelly George vice for her closing remarks.

I'd like to thank our employees, customers and investors for their support, and we look forward to providing an update on the next quarter. Thanks.

Before we conclude today's call, I that a recording of today's call will be available for replay via a link available in the Investor Relations section of the company's website. Thank you for joining us today for AudioEye's first quarter 2026 earnings conference call. You may now disconnect.