Edited Transcript of AEYE earnings conference call or presentation 23-Mar-20 8:30pm GMT

Heath has also held roles at various other organizations, including IBM, Internet Security Systems, American Systems Corp and Attachmate. Finally, Heath also previously ran Thoughtmill Corporation, an information technology and services company, which he founded and bootstrapped, growing it to 200 employees and $20 million in revenue within 3 years. Heath has an MS in Information and Computer Science from Georgia Tech, and a BA in Mathematics and Computer Science from Emory University.

When we began our CEO search process, we identified the key characteristics we would need in a leader to help us to continue succeed in our current strategy but also effectively packet new market opportunities and digital accessibility formats. We knew we would need someone with a proven product background as well as executive management experience in driving organizations to grow that scale.

As you just heard from me, Heath has a decorated past in leading technology and specifically SaaS businesses. We believe we found a leader who possesses the skills that we are looking for to execute on AudioEye’s long-term growth plans. This is Heath’s first day. We’re excited to have him here, but we’re going to give him a bit more time to get up to speed before having him lead these calls. I’m looking forward to more formally introducing Heath on our next quarterly conference call, if not, sooner.

I’ll now begin, as we always do, with an overview of our business. This takes us a little time, but once we finish there, I’ll discuss some of our major highlights from the quarter before getting into operational updates within our various sales channels. Then I’ll turn it over to our CFO, Sach, who will discuss our financial results for the period. Finally, I’ll come back on the line to discuss our outlook and provide some closing remarks before Q&A.

So first, a bit of background. For those of you that listened to our last call, some of the information I’m going to give you today is a bit redundant, but we’ve had a lot of changes going on in the past few months, and we want to make sure everyone has a proper understanding of how we got to where we are today. So here we go.

AudioEye is a leading provider of SaaS-based digital content accessibility solutions. Our mission, bold: to 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 also 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 American with Disabilities Act or ADA and the latest Web Content Accessibility Guidelines or WCAG 2.1.

Because many of the remediation capabilities we provide are automated, our customers more quickly gain compliance with accessibility standards, regulations and laws. For our managed product, these automated processes are coupled with manual testing and remediation by subject matter experts. The result is that we provide our clients with the best solution to make their websites and digital content more accessible; we keep their content more accessible through continuous monitoring and remediation; and we provide our trusted certification of conformity with standards. Further, for our private sector clients, we also give them a product with an opportunity to gain an ROI from their investment in and commitment to this enormous population of individuals with disabilities.

All that said, just a few months ago, we made an announcement, which we believe greatly enhances our ability to meet our mission of eradicating all barriers to digital accessibility. On November 6, we officially launched the AudioEye Digital Marketplace, a machine learning power platform that, at its core, is designed to enable companies of all sizes to easily and affordably accelerate their path to accessibility and legal protection. The solution for all price points is the main reason why we’re so excited about the potential of what our business can now achieve.

If you’ve been following our story for a while, then you know AudioEye has run a SaaS operating model since just 2015. At that time, our solution was targeted at the enterprise market mostly because of cost and a lack of scale. Over the past few years, we have also amassed a library of millions of remediation fixes, increasing the level of automation we provide in our service and building up additional subject matter expertise along the way. Eventually, we were able to bring digital accessibility to a wider market, one for small- to medium-sized businesses commonly referred to as SMBs. This led to the creation of what we are calling our indirect channel or our vertical partner channel, which we introduced in 2017 and we’ve discussed a lot on prior calls.

Through this new go-to-market approach, we began working closely with industry vertical content management systems or CMS providers. These CMS providers generally offer websites, hosting services and other digital solutions mostly for SMB customers focused on a vertical, for example the automotive or credit union or small regional local banks. In terms of how we get this done profitably at scale, most of these vertical CMS website providers use a small number of templates for their clients.

As I mentioned at the top of the call and I repeated a couple of times, our mission is to eradicate all barriers to digital accessibility. We want AudioEye solution to be used to make the digital world as accessible as we can to the widest number of people possible. We are still targeting the large enterprises, where there are thousands of potential customers, and we will continue to sign up vertical platform partners where there are hundreds of thousands of SMBs. We will also continue to use our AudioEye Digital Marketplace to target tens of millions of websites. This makes the eradicating digital accessibility issues tangible for us.

Within the AudioEye Digital Marketplace, we now have a full suite of products through differentiated offerings. Going forward, we continue to invest in a number of key areas to support our initiatives, including continued product design refinements, machine learning, user experience, marketing and customer experience. Additionally, we’ll continue to invest to make sure we have the right people and processes and infrastructure to support further growth and maximize scalability on the platform over time.

Our current plans are continuing to plan for hyper growth, and we are confident in our ability to gain and retain customers. With that said, let’s deal with the current reality. It is hard to predict the full impact of COVID-19 as businesses slow down or shut down. Like everyone, it may impact our business as well. That said, we also believe that in the current environment, e-commerce could become more dominant and access to digital content for everyone could become more important. We are determined to be that solution of choice for those seeking to make their content more accessible and usable.

We are pleased to announce that this morning we launched a campaign through our marketplace and via selected partners to offer AudioEye Pro for free to new clients for 90 days. We believe this will encourage adoption of AudioEye, benefit our customers and their clients and AudioEye’s business growth over the longer term.

In addition, we’ve taken steps to protect ourselves as a business and for our key stakeholders. In the interest of safety of our employees, we quickly adopted a work-from-home policy. Prior to this virus, we had remote worker infrastructure in place and we already offered flex days to many employees. In short, we will continue to follow best practices in terms of work-from-home policies and will manage and hopefully even improve productivity.

Given how rapidly the situation is evolving, we are going to closely monitor the situation through all available information channels, including the latest news reports as well as updates from the CDC, the World Health Organization and other regulatory authorities.

With that overview completed, I get to move on to our business update. Sach’s going to get into a little more details later, but if you’ve seen our press release, it’s pretty clear, we had a very strong fourth quarter. Monthly recurring revenue, or MRR, continues to grow quarter-over-quarter. We had our 16th record revenue quarter. Bookings increased 90% and revenue by 100% over the fourth quarter of last year. Deferred revenue continues to rise, and the non-GAAP measure of contracts in excess of revenue and deferred revenue also grew significantly to $17.3 million, representing 128% growth for the same period last year. Gross profits have expanded, and we continue to retain customers in the 90th percentile.

We also nearly doubled our customer count sequentially for the second straight quarter, finishing the year with more than 6,800 customers. As of today’s call, we now count over 10,500 AudioEye customers, not including our marketplace customers, which speaks to both the massively untapped market we have just within our own customer base as well as our combined sales team’s execution within their respective channels. On a year-over-year basis, current customer count has grown nearly 10x what it was at the end of 2018. As we continue to refine and enhance our approach with respect to vertical partnerships, platform partnerships and our digital marketplace, we expect this number to grow precipitously.

With that high-level overview completed, I’ll move on to our channel-specific updates. Beginning with our enterprise, commonly referred to as the direct channel, we continue to drive consistent growth and we welcomed a number of new sizable brand names to the AudioEye accessibility platform. Many of these wins came from our target verticals including retail, government, hospitality, media and the automotive space among others. As I made mention on our last few calls, our expectation in the fourth quarter was that we have seen seasonally strong growth across the board but also significant renewals, especially from key enterprise customers. I’m pleased to report that our expectations with both items were accurate. We drove both strong book of new business, and we successfully re-signed and extended contracts for some of the most significant names in our customer base, a few who have already been with AudioEye for years.

As the digital accessibility marketplace becomes more crowded, we’re proud of the fact that we’re continuing to keep customers and even expand the scope of our relationships. We remain focused on providing the most comprehensive offering in the marketplace today. Put another way, as we see more would-be competitors entering the space, the digital accessibility industry itself is becoming further validated. Our belief is that as tide continues to rise, we will remain head and shoulders above any other solution that’s out there. As a matter of focus, I will now want to add and because of the relative market size, we are deemphasizing the kiosk space, but with good news, the PDF business also continues to grow for us.

Moving to our vertical partner channel or previously known as the indirect channel. During the quarter, we continued to drive increased penetration rates within each and every one of our vertical partner relationships. The banking and automotive sectors are still leading that charge, but we’re seeing increased adoption in additional verticals and expect the contribution mix to continue to diversify over time. Additionally, some of our newer partners, even those announced in just the last quarter, are showing strong initial traction, and we’re looking forward to building from their successful starting point.

During the quarter, our vertical partner count remained at 20. And while we’re always evaluating potential new partnerships to expand our TAM within the partner subset, what we remain focused on first and foremost is quality of partners. Our ability to continue driving increased penetration within our existing vertical partner space speaks to our strong relationship and affirms the commitment we receive from partners who choose to work with AudioEye as their digital accessibility provider.

We have previously announced that AudioEye would be entering into its first-ever platform partnership with Duda. For those of you who are unfamiliar, Duda is one of the leading web design platforms for companies who offered web design services to small businesses. AudioEye is now 1 of 5 site-enhancing tools and the only digital accessibility solution integrated into the newly launched Duda App Store. This is a new channel and new partnership with huge upside and one that we will continue to refine and support.

We also have previously announced a broader initiative for Team AudioEye, which is our vision for a new community of advocates as well as a comprehensive certification program for digital professionals. Through Team AudioEye, we’re looking to even further accelerate digital accessibility by helping developers and web designers create accessible experiences for the web and through our affiliate program. We also already have a number of affiliates in our program.

Finally, a brief update on our digital marketplace. As I mentioned on our last call the launch of the digital marketplace, we believe this product is truly a digital, self-serve product that lends itself perfectly to easy self-purchase and self-installation. It’s still pretty early for this channel, but for now what I can say is that we remain incredibly bullish on the long-term opportunity presented here and we are working diligently on growing within this massive market.

Now before I turn it over to Sach to give you more detail on numbers, I’d like to provide an update with respect to our guidance. We’ve historically provided year ahead annual bookings and revenue guidance. Going forward, our focus will be on growing monthly recurring revenue or MRR. I’m pleased to report that we crossed the $1 million milestone in the fourth quarter, and MRR was $1.2 million as of December 31, 2019, up 20% sequentially. We expect to grow MRR at a very healthy rate throughout 2020. This update is reflective of the fact that our company’s go-to-market strategy is expanding beyond its historical segments. It’s our expectation that over the next 2-plus years, an increasing amount of our — both our bookings and revenue growth will be coming from newer lines of businesses, such as our platform partnerships with Duda and others as well as our digital marketplace and affiliates. These segments have different profiles in terms of the time from bookings to revenue and the impact even on deferred revenue.

For example, in contrast to the enterprise business or the typical vertical partner, in some cases, in our new lines of business there is no deferred revenue and revenue and bookings occur concurrently. I want to be clear on this point. We remain incredibly confident in our long-term growth prospects as well as the opportunities in the digital accessibility industry as a whole. We expect to continue growing substantially both in 2020 and beyond. And additionally, as you may have noticed in the press release, if you saw it, I’m pleased to report publicly for the first time that it is our expectation to be cash flow positive in 2021.

Of course, with the various macroeconomic factors at play, including potential market-wide slowdowns from the COVID-19 pandemic and other related impacts, this forecast could change. However, in the current circumstances, we feel confident in the prediction.

With that overview completed, I’m going to turn the call over to our CFO, Sach, who can walk us through the rest of our financial results for the quarter. Sach?

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Sachin Barot, AudioEye, Inc. – CFO [3]

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Thank you, Carr. Before I begin, I would also like to extend a warm welcome to our new CEO, Heath Thompson. We are all very much looking forward to benefiting from his relevant knowledge and experience as we expand our leadership position in the digital accessibility industry.

Let me now jump right into our Q4 and full year results. Starting with bookings. As a reminder, we define bookings as the contracted amount a customer commits to spend with us, which would be over multiple years.

For the quarter, bookings totaled $6.6 million, which was an increase of 90% from $3.5 million in the same period last year. For the full year, bookings totaled $23 million, which was an increase of 99% compared to $11.5 million in 2018. The increase in bookings was primarily driven by strength in both our enterprise and vertical partner channels as a result of strong execution against our sales pipeline.

Revenue in Q4 was $3.6 million, reflecting a 100% increase from $1.8 million over the same period last year. The increase in revenue was driven by better penetration with our vertical partner channel and new customer acquisition as well as solid retention in our enterprise channel. Revenue for the full year increased 90% to a record $10.8 million from $5.7 million in 2018. The increase in full year revenue was primarily due to the benefit of our growing MRR through expanding vertical partnerships and from both new bookings and deferred revenue coming in from prior years.

Gross profit for the fourth quarter was $2.4 million or 66% of revenue, which was 127% increase from $1 million or 58% of total revenue last year. This improvement was driven by enhanced efficiencies as we automate more remediations as we grow our top line. This also reflects the mix of products that we deliver during a particular quarter.

For the full year, gross profit increased 110% to $6.4 million, which was 59% of total revenue or $3 million or 54% of total revenue in 2018. As we shared with you during prior calls, we are in the midst of investing in several key areas to drive long-term growth and profitability. We strongly believe that these investments will provide the best long-term return for our business and shareholders.

Moving to operating expenses. In Q4, OpEx was $3.9 million, which was an increase of 3% from $3.8 million in Q3 and an increase of 92% from $2.1 million in 2018. The increase in total operating expenses year-over-year was due to increases in both our sales and marketing as well as G&A costs. For the full year, total operating expenses increased 87% to $14.2 million from $7.6 million last year. The increase in total operating expenses was primarily due to increases in some variable costs, addition of key personnel, our investments in product development, increased marketing, AI, machine learning and infrastructure improvements. Sales and marketing cost increases were driven by expansion of sales teams, and it also reflects investments in marketing to drive better digital experience and further enhance lead gen. On the G&A front, the increases were driven by personnel costs, costs for building infrastructure, consulting and legal expenses.

Turning towards the bottom line. Net loss available to common stockholders for the fourth quarter of 2019 totaled $1.4 million or a loss of $0.16 per share. This compares to a net loss of $1.4 million or a loss of $0.19 per share last year. For the full year, net loss available to common stockholders was $7.8 million or loss of $0.97 per share compared to $5.1 million or loss of $0.74 per share in 2018. The greater net loss was primarily due to investments that we expect will give top line returns in the future.

Now to some additional non-GAAP metrics. Moving to contracts in excess of recognized revenue and deferred revenue. As you know, this metric is the remaining amount of bookings that have not yet been recognized as revenue or booked as deferred revenue. This measure represents contractually agreed upon amount that is mostly remaining to be billed and that we expect to recognize in future periods. In Q4, contracts in excess of revenue recognized and deferred revenue increased 128% to $17.3 million from $7.6 million in the same period last year.

Moving to monthly recurring revenue or MRR. At the end of fourth quarter, MRR totaled approximately $1.2 million, which was an increase of 20% compared to $997,000 at the end of Q3 and a very healthy increase on a year-over-year basis.

Some balance sheet items, beginning first with deferred revenue. As a reminder, any funds received for services not yet provided or invoiced amounts for noncancelable contracts, where we have not yet owned revenue are in deferred revenue. In the fourth quarter, deferred revenue was $5.5 million or 28%, sequentially up from $4.3 million in Q3 and up 82% from $3 million last year. This reflects the continued strength in our bookings.

Our accounts receivable balance at the end of Q4 was $3.1 million compared to $1.4 million at the end of Q3 this year. This quarter-over-quarter increase was driven by our overall sales growth and the mix within that growth that we’re experiencing. As we increase penetration rates with our vertical and platform partnerships, we anticipate additional jumps in AR due to the month-to-month nature of some of these contracts. Additionally, from our enterprise channel, invoice contracts that are noncancelable are growing as well. The overall timing of the contract date and that of invoicing impacts our AR balance as well as the case with one enterprise customer that contributed to higher AR and shift in timing of collections.

Our accounts payable balance was $251,000, which is sequentially lower by [42%] over Q3. We ended the year with about $2 million in cash and cash equivalents.

Before turning the call back over to Carr, I will now provide a few updates with respect to our capital needs. First, during the quarter, we did not draw on our existing $2 million line of credit. As a reminder, we have access to that line of credit through August of this year. Additionally, we intend to file a shelf registration statement on Form S-3 with the SEC around our upcoming 10-K filing. We feel that having an effective shelf on file is in accordance with good corporate financial practice and will provide us with capital raising flexibility should we need it in the future. At this time, we do not have any plans to draw upon our shelf. However, should the Board choose to deploy additional capital in exchange for growth, we want to make sure we have the flexibility to access capital with the registered shares.

Under our current plan and growth expectations, which do not include any potential unforeseen impacts from a general economic slowdown, we are comfortable with our available capital, and we believe we have adequate funds as well as the margin of safety provided by our line of credit to run our business. It bears repeating Carr’s commentary from earlier that we expect to become cash flow positive in 2021. Put another way, we expect to generate continued top line leverage on a go-forward basis. While our burn rates will fluctuate over the next few quarters subject to timing, on the whole, we expect cash burn to decrease substantially over the next few quarters. In unforeseen future, if we need capital, we believe we will continue to have access to it.

While we continue to opportunistically evaluate the best use of capital, we remain focused on doing everything we can to gain market share within the mass market opportunity that we have now entered. As it relates to our ongoing plans to allocate funds in the key strategic areas that will drive growth and help us gain market share, we plan to spend in the following key areas: technology enhancements, machine learning, AI, onboarding additional personnel in critical areas, product development, increased PR and marketing efforts, and continuous infrastructure improvements. Over the next several months, we expect to make further technology enhancements that will not only benefit our end users and customers, but we also believe that it will continue to lower our marginal cost of delivery over time as well as strengthen our IP portfolio in key areas.

This completes my prepared remarks. I will now turn the call over back to Carr. Carr?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [4]

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Okay. Thanks, Sach. I’ll now update you on a few final items before turning it over to Q&A, and thanks, everyone, for your patience to allow us to get through this update. It’s been exciting.

As of today, we are more than halfway through the first quarter of 2020, and we continue to execute on our strategic road map and on growing MRR. Our enterprise channel remains a stalwart contributor to growth. Our vertical partner channel continues to increase our overall customer count and revenue at a healthy rate. Our new platform partnership provides another avenue to expand our total addressable market. Through our affiliate marketing program and digital marketplace, we expect to drive increasing adoption of the AudioEye solution.

Looking outwardly. The digital accessibility legal landscape remains a major driving force behind the decision to provide accessible website solutions. Based on AudioEye’s tracking, we saw the number of lawsuits increase from 815 in 2017 to 2,250 in 2018 to 2,446 in 2019, of which 2,345 were aimed at commercial organizations. I want to also note that litigation, if anything, has picked up in the month of March over January and February so far looking at the first 2 weeks of March. Additionally, with the Supreme Court’s refusal to hear Domino’s Pizza’s appeal earlier in the year, we see no signs of legal action slowing.

Longer term, we continue to believe that tide is continuing to shift one of inclusion and proactive accommodation. It’s the right thing to do both financially and morally. We also believe that COVID-19 pandemic has the potential to even accentuate the need for digital accessibility. In the meantime, we remain focused on providing the most comprehensive set of accessible digital solutions for the largest number of users regardless of impairment or disability.

With that, I’ll turn the call over for questions. Operator, please provide the appropriate instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [2]

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Congrats on a really strong Q4. Just starting off in terms of Q4 results, I mean can you speak to the areas that drove the strong performance? It sounds like you continue to get some strong penetration within the automotive and banking sectors within that indirect channel. But anything else that you can call out in terms of driving the strength and adoption that you’re seeing?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [3]

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We — it was both direct and indirect in the fourth quarter, Zach. By the way, thanks for your question. So we made progress in both of those channels actually. And you called out a couple of the areas, but it’s — we’re happy to see some of the strength of our growth broadening as well beyond just the automotive that you mentioned in others.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [4]

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Got it. That’s helpful. And then in terms of the cash burn rate, I mean down to $2 million in cash at the end of this year. I mean can you give any sort of update? It sounds like the cash burn rate is supposed to be improving here in Q1 and Q2. But can you give kind of an update as to how are you feeling about the balance sheet right now? And really, what’s the approach to capital needs here as you’re thinking about scaling this business over the next couple of years?

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Sachin Barot, AudioEye, Inc. – CFO [5]

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So Zach, this is Sach. So yes, the burn rate in Q4, look, it’s a factor of the timing of collections and payables, right? As I mentioned in my prepared remarks, there was one contract that shifted and it was reflected in our AR. We have since collected that. It was a significant amount for us, and that’s reflected in the burn rate for Q4. If I were to adjust for that, the burn rate in Q4 would have been somewhere around in the neighborhood of 1.1-ish, and we continue to see positive trends starting this year on the overall burn rate.

So from capital perspective, as I said before, we have enough runway. We have our plans, and under normal circumstances, of course, we do expect to continue to get better as we go through the year on cash burn. And obviously, the goal is to be cash positive in 2021.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [6]

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Got it. That’s helpful. And then in terms of — now that you’re speaking to potential disruption of the business, I mean, have you seen anything here in the near-term from COVID-19 that’s caused any sort of disruption, whether that be through maybe delays in sales cycles or anything of that like?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [7]

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Not yet, Zach. I think there’s — what we want to do is take the opportunity to point out to folks that COVID-19 means more need for digital accessibility. We’re going to be very thoughtful and aggressive in working with our partners. That’s reflected in the program that we launched, as I mentioned earlier today. We think there’s an opportunity here to showcase the importance of this, and we think a lot of our partners feel the same way. But will there be impacts to the business? We’re waiting to see exactly how it unfolds. There’s a lot of uncertainty as there is for everyone in the business probably today. We don’t really know how to measure the impact yet. It’s too early. But there are some — yes, we just don’t — we haven’t seen the impact yet. We don’t know exactly how it will impact us.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [8]

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Got it. Got it. That’s helpful. And then now that you’re moving away from your historical approach to guidance and shifting more towards this MRR metric, I mean, $1.2 million at the end of this year, starting to see some nice momentum. I mean can you speak to where that metric is really trending here in Q1 and kind of how we should be thinking about this, I guess, for more of a qualitative standpoint as we move and progress through 2020?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [9]

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Yes, Zach, we haven’t published our progress on MRR yet this quarter. We will be sure to keep you guys up-to-date through quarter-by-quarter results. But we’re continuing to see, and we should expect there to be healthy growth in MRR, remembering we also have a pretty significant backlog here, but we’re expecting a healthy growth rate to continue.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [10]

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Got it. Got it. And then just final question for me around kind of the AudioEye Digital Marketplace offering. It sounds like you’re going to be offering 90-day free trials for your AudioEye Pro solution starting here pretty soon. I mean I know it’s still pretty early. But can you give any sense of the feedback you’ve received from customers so far that have been using the AudioEye Digital Marketing Place (sic) [AudioEye Digital Marketplace]?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [11]

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Yes. So look, we’ve taken — we’ve had some good early success. We’ve taken a lot of feedback, and as always, we’ll continue to refine exactly the way it’s delivered to them to make it as consumable and easy for them to adopt as possible. And that’s true with the feedback we receive directly from the marketplace customers as well as our partner channels. And we’re very, very excited the way that product is evolving and the progress that we’re making there with that product, and we’re very excited about it. And it will take some time for that to — for us to be able to measure the types of results and provide the report on the results that ultimately will show up, of course, in MRR. But the free offering is a bold move by us to make sure that we’re showing a response to sort of COVID-19 and to attract customers to our solution. Once they’re there, we believe, as we’ve demonstrated, there’ll be sticky customers and we’ll benefit from that long term.

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Zachary Cummins, B. Riley FBR, Inc., Research Division – Analyst [12]

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Got it. That’s helpful. Well, congrats again on the strong business momentum you’re seeing in Q4 and through the early parts of Q1 and best of luck through 2020.

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Operator [13]

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Our next question is from Allen Klee with National Securities.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [14]

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Your gross margin improved significantly however you want to look at it. I was trying to understand, I guess, you’re getting more efficiencies using automation and maybe some other reasons. Could you talk about that a little and if you think it’s kind of sustainable? Or was there anything onetime that affected what the margin was this quarter?

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Sachin Barot, AudioEye, Inc. – CFO [15]

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This is Sach. Glad you asked. So yes, we showed improvement. And if you recall, our target is to continue to improve gross margins as we scale, and that’s where we are making all the investments.

And also, just to remind you, the gross margin may be a little choppy as we deliver different products. Some products have more upfront cost as we deliver, for example, our PDF documents. But as we continue to scale, automate and find efficiencies with our platform and vertical partners, we do expect it to continue to get better over time.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [16]

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Oh, so you think there’s opportunity to improve over time from what you did this quarter?

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Sachin Barot, AudioEye, Inc. – CFO [17]

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Yes. Over the next year to 2 years as we not only grow but also as we add more revenues from our vertical partners as well as platform partners, that’s the expectation. And also, that expectation is what gives us confidence to get cash flow positive in 2021 as well.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [18]

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Okay. That’s great. Then when I was looking at your operating expenses, a couple of things jumped out. The first one was the drop in your sales and marketing expense in the quarter. Compared to the prior quarter and also year-over-year and also, if you just look at it as a percent of sales, could you talk about it? What was behind that? Is there anything onetime? Is that kind of a new run rate and maybe how to think about the growth rate of that versus revenue qualitatively for ’20?

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Sachin Barot, AudioEye, Inc. – CFO [19]

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Yes. So this was a reflection of the type of campaigns we run and how we launch our campaigns. The cost will — may bounce a little bit here quarter-to-quarter, but from an overall perspective, we don’t expect sales and — sorry, our marketing cost to go down because we want to continue to ensure that our brand is out there, we are reaching most potential customers. And as we launch new products, we’ll continue to support that launch with our marketing campaigns. So overall, roughly the same cost as we had in 2019 for the — approximately, that’s what we expect.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [20]

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Oh, so roughly flattish sales and marketing costs. How about G&A? Is that somewhat — should we think that, that would grow also at like a slower rate than revenues more modestly?

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Sachin Barot, AudioEye, Inc. – CFO [21]

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Well, G&A costs will go up before it stabilizes, right, because we are adding key personnel in certain areas and we are also adding some executives. So over the first 3 quarters, we will see it go up continuously and then it should start plateauing.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [22]

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Okay. Is there a way to think of kind of the incremental margins, kind of EBITDA margins of your business as you scale? Is there a way to think of like what that number might be, that percentage?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [23]

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Allen, thanks for the question. I’ll just say I think it’s too early for us to benchmark that with a great deal of confidence. Remember, as Sach said, it depends on the mix. Also, we invest early in some areas that the margins show up later. So it depends on the rate of new things that we’re doing versus the increase in revenue that comes through the deferred revenues that we already have and the contracts in excess of revenue and deferred revenue. So that rate, there’s a balance between those 2 things. So like Sach said, there’ll be some movement around gross margin over time, but the long-term trend line, we feel very, very good about being continued to improve.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [24]

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Okay, great. And then when you say that you hope to get to cash flow positive next year, how do you define cash flow?

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Sachin Barot, AudioEye, Inc. – CFO [25]

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Cash flow is just cash flow from operations less D&A. You can think of — also to keep it simple, also you can think of net cash burn during the quarter. Our expectation is that ensures cash burn will be generating cash in 2021.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [26]

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Okay. And then the biggest challenge is trying to figure out kind of how the revenue grows, and we have been driving revenue off of bookings and assumptions on retention rates and average contract size. It sounds like that might not be the best way to do it in the future as your business mix changes. Can you give us some help of like, just in general, of maybe where analysts are in terms of revenue for ’20 if you think there’s a reasonableness to that number or that there’s something that we need to think of in tweaking it?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [27]

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Okay. So I think that we’re going to really rely on MRR right now to communicate what we’re doing and how we’re doing as a business. We’re not uncomfortable with the way you guys are approaching it in terms of thinking about revenue guidance for the year. So if that’s any help, but we’re going to just continue to put up MRR and let you get really comfortable with that as the year unfolds. But hopefully, that helps.

Yes, I think you guys have put out — I think both of you are in — both you and Zach’s reports are — have been thoughtfully constructed thus far, and we’ll continue to put out MRR and get you to reorient your benchmarks to MRR over time.

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Allen Robert Klee, National Securities Corporation, Research Division – Research Analyst [28]

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Okay. And then my last question is just I think it’s great that — I mean I have a feeling that this quarter from you guys is going to be the best of any company I see in a long — quite a while. So congrats on that. I’m trying to understand like how do — like also the fact that like you’re coming up with businesses that can be self — the customer can close a deal without a salesperson having to really be involved. Is there a way to think of kind of to what degree the sales force might be impacted by what’s going on or that ways that they can sort of — I don’t know what the right word is — just to adapt to the current environment?

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Carr Bettis, AudioEye, Inc. – Executive Chairman [29]

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Yes, look, we’re being very thoughtful about the way in which we parse the customers out so that the enterprise customers land in the enterprise space for enterprise salespeople who can temporally talk about enterprise contract levels with them. So the increased emphasis over time, as you’ll see I think unfold, especially later in the year in 2021, the increased emphasis on the adoption through more cost-effective ways of acquiring customers is something we’re excited about. But there’s a real enterprise business with real enterprise needs that require us to deliver enterprise-level contracts and services that are expected by these enterprise customers that we will continue to do and hopefully do very, very well. Again, our enterprise business has been continuing to be strong.

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Operator [30]

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At this time, this concludes our question-and-answer session. I would like to turn the call back over to Dr. Bettis for closing remarks.

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Carr Bettis, AudioEye, Inc. – Executive Chairman [31]

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Thank you very much, everyone, for joining us today. I especially want to thank our employees, partners and investors for their continued support, and we look forward to updating you on our next call and introducing you to Heath. Thanks, everyone. Good evening.

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Operator [32]

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Before we conclude today’s call, I would like to remind everybody that a recording of today’s call will be available for replay via the link available in the Investor section of the company’s website. Thank you for joining us today for AudioEye’s Fourth Quarter and Full Year 2019 Earnings Conference Call. You may now disconnect.