Participants

David Moradi; Chief Executive Officer, Director; AudioEye Inc

Kelly Georgevich; Chief Financial Officer; AudioEye Inc

Joshua Reilly; Senior Analyst; Needham & Company LLC

George Sutton; Analyst; Craig-Hallum Capital Group LLC

Richard Baldry; Analyst; Roth Capital Partners, LLC

Zach Cummins; Analyst; B. Riley Securities.

Presentation

Operator

Good afternoon, and welcome to AudioEye's first 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 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 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 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'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 Chief Executive Officer, Mr. David Moradi. Sir, please proceed.

David Moradi

Thank you, operator, and welcome to everyone joining us today. Several developments have occurred since the last earnings call about six weeks ago, and we will discuss them today. We continue executing, including expanding our product features realizing our 37 straight quarter of record revenue and achieving the Rule of 40 for the first quarter of 2025 with 20% year-over-year revenue growth and 20% adjusted EBITDA margins.
Our financial discipline and business momentum has positioned us well in an uncertain and challenging economic environment. The macro has not been easy for some time. SaaS has been in a challenging market environment since 2022. However, we have significantly increased revenues and cash flow during this time. We expect our revenue and operating leverage to improve even more in the second half of the year.
On the direct enterprise side, the investment in our product and our go-to-market strategy is generating strong results. Our pipeline is building in both the US and Europe. We are seeing record leads and strong deal progression at all stages, giving us confidence in a notable increase in ARR in the second quarter and the remainder of the year.
We are quickly approaching the deadline for the European Accessibility Act at the end of June. We continue building the sales engine and expanding the European sales team to capture this demand. The pipeline in the EU is strengthening and several deals have already been won in April.
As discussed before, we expect strong contributions from our reseller business in the second half with expanded go-to-market with Finalsite and CivicPlus. As we've previously discussed, the digital accessibility market has been plagued with false and misleading marketing about what AI automation can do.
At AudioEye, we analyze legal data when discussing our platform and results. The data shows that when combining automation and human-assisted technology, AudioEye provides 300% to 400% more protection against valid legal claims than our competitors. Building on our leadership position, we are launching additional features on our platform to increase the value delivered to our customers. The new features will help customers better understand our industry-leading protection rates and how to improve further. We expect these new features to be available to our customers in the next few weeks as we migrate to the upgraded platform.
We are excited to provide both existing and new customers with these additional insights.
Moving on to guidance. We expect quarterly revenues and ARR growth to accelerate in the second quarter of 2025. For the second quarter, we are guiding revenue between $9.85 million and $10 million. We also expect to generate adjusted EBITDA between $1.9 million and $2 million and adjusted EPS between $0.15 and $0.16. We are reiterating our 2025 full year revenue guidance of between $41 million and $42 million and reconfirming our adjusted EBITDA guidance of between $9 million and $10 million, with adjusted EPS between $0.70 and $0.80 per share.
We expect our adjusted EBITDA margin to continue increasing into the upper 20s as we exit the year. This implies that free cash flow, defined as EBITDA minus CapEx will approach $3 million in the fourth quarter, a nearly $1 per share run rate growing over 40% year-over-year. We also expect operating leverage and free cash flow to continue growing in 2026.
I'll now turn the call over to AudioEye's CFO, Kelly, for further financial insights.

Kelly Georgevich

Thank you. As David mentioned, revenue again hit record levels with Q1 2025 revenue at $9.7 million, marking our 37 consecutive quarter of record revenue. At the end of the first quarter of 2025, annual recurring revenue, or ARR, was $37.1 million, a $500,000 increase from the end of the fourth quarter of 2024. As David mentioned, with the US and EU pipeline building, we expect ARR growth to increase significantly in the second quarter of 2025.
Retention remained strong in the quarter with current AudioEye customers. The gross retention of acquired customers before moving to AudioEye products is typically lower than AudioEye's core gross retention. Our overall gross retention was impacted by higher churn and lower tier customers acquired through ADA site compliance and a few remaining Bureau of Internet Accessibility customers migrating to our platform.
Our primary goal when acquiring companies is to improve their NRR through conversion to our more comprehensive product offering, thereby generating synergistic cash flow. These goals remain on track and will contribute to adjusted EBITDA increases going forward as reflected in our adjusted EBITDA guidance in the second half.
Moving to channel performance. Both our revenue channels continued to deliver strong results. As a reminder, the partner and marketplace channel includes all revenue from our SMB-focused marketplace products and from various partners deploying the same products for their SMB customers. In the first quarter of 2025, this revenue channel grew 17% year-over-year and represents 57% of revenue and around 58% of ARR. We continue to see an expansion of existing and new partners engaging with AudioEye driving growth.
AudioEye's enterprise channel consists of our larger customers and organizations, including those with non-platform websites who generally engage directly with AudioEye's sales personnel for pricing and solutions. The enterprise channel grew 26% year-over-year. In the first quarter, it contributed 43% of revenue and around 42% of ARR.
On March 31, 2025, our customer count was approximately 119,000, an increase from 112,000 customers on March 31, 2024. Customer counts decreased sequentially, primarily due to a contract renegotiation with an existing partner, which allowed the partner to consolidate licenses previously billed individually. Altogether, customer growth in both the partner and marketplace channel as well as the enterprise channel remains strong.
Our gross profit for the first quarter was $7.7 million or about 80% of revenue compared to $6.3 million and 78% of revenue in Q1 of last year. As David mentioned, with customer migration to the upgraded platform, we expect margins in the second quarter of 2025 to decrease approximately 3 percentage points to 4 percentage points, but return to the high 70s in the second half of the year.
Operating expenses increased approximately 25% or $1.7 million to $8.7 million. The increase was primarily due to non-GAAP items, including additional litigation expenses and higher depreciation and amortization as well as additional investments in sales and marketing. Our total R&D spend in Q1 2025 was $1.6 million with approximately $500,000 reflected to software development costs in the investing section of the cash flow statement. We continue to gain efficiencies in R&D. R&D represented 17% of revenue for Q1 2025 versus 22% in the first quarter of 2024. The current investment in R&D is appropriate for 2025.
Net loss in the first quarter of 2025 was $1.5 million or $0.12 per share compared to $800,000 or $0.07 per share in the same year ago period. Total net loss increased approximately $700,000 from the prior year's comparable period, primarily due to non-GAAP items just discussed, including additional litigation expense and higher depreciation and amortization and expenses related to the extinguishment of debt, which were partially offset by the $1.4 million increase in gross profit.
Our Q1 2025 adjusted EBITDA was $1.9 million or $0.15 per share, a $1 million improvement year-over-year. The primary adjustments to GAAP earnings and EPS for Q1 2025 were noncash share-based compensation, litigation, depreciation and amortization, debt extinguishment, interest expense and other nonrecurring items.
On March 31, we refinanced our existing debt for a $20 million facility, which includes a $12 million term loan, a $3 million revolver and a $5 million delayed draw term loan. The initial $12 million term loan fully repaid AudioEye's existing term loans. The refinancing further strengthens the company's cash position and decreases our net interest expense with a reduction in interest rates from 14% previously to approximately 7.5% today.
Our balance sheet is now in an even stronger position with $8.3 million in cash as of March 31, 2025. The $3 million revolver and the $5 million delayed draw term loan are also available. Adjusted free cash flow calculated as $1.9 million of adjusted EBITDA with $500,000 of software development costs was $1.4 million in the first quarter.
We expect to generate positive adjusted free cash flow throughout 2025, with adjusted free cash flow approaching $3 million in the fourth quarter or nearly $1 of run rate adjusted free cash flow per share which is over 40% year-over-year growth.
With that, we open up the call for questions. Operator, please give instructions.

Question and Answer Session

Operator

(Operator Instructions) Joshua Reilly, Needham & Company.

Joshua Reilly

All right. A nice job on the quarter here in a tough operating environment for everybody. So you mentioned in the press release that the pipeline is pretty strong in the US and Europe. Maybe we can just start with some more color on what you're seeing between the direct sales channel and the partner channel in terms of the pipeline?
And is there one particular area of your business where you're seeing more of a macro impact versus another?

David Moradi

Yes, we're seeing strong deal progression at all stages, as we go through the qualification steps of each deal. Deals are moving deeper in stages. It's what you want to see to give you confidence that they're going to close. And that's happening in the EU and in the US Direct momentum is picking up on the US
as well.

Joshua Reilly

Got it. You mentioned, obviously, we know now with the refinancing, you have some more financial flexibility. How are you thinking about the pace of sales hires and maybe M&A in the current macro? Do you wait for some of these deals to close before making incremental investments? Or how are you kind of thinking about the dynamics there?

Kelly Georgevich

Yes. The addition of the new term loan does strengthen our balance sheet. I think from the sales and marketing front, we've been strategic in investing in sales and marketing. We've created some of the best leads to date. And as David alluded to, we're seeing really positive indications there.
And so I think there's an opportunity to keep investing in sales and marketing as long as we keep hitting that ROI. There are other avenues as well. We do think that there's a stock buyback out there that might be an attractive way to deploy capital. We explore, keep our eye open for acquisitions. But I think just balancing the investments with the right ROI that's how we're thinking about it.

Joshua Reilly

Got it. Last question for me on the new products. Can you just give us a hint of how they may or may not be using or implementing AI in some of the go-forward workflows that you're trying to automate?

David Moradi

Yes. We're building AI into everything we do from testing to remediating, which obviously could improve margins over time and costs in the future. Internal tests show that AI is pretty good at solving specific common accessibility issues, but not great at more contextual understanding, but it is getting incrementally better.

Operator

George Sutton, Craig-Hallum.

George Sutton

David, I wondered if you can give a little bit more detail in terms of what you're seeing in Europe, and you did mention adding to the sales force there. I'm curious if you're also working with any new partners as the time frames are getting pretty short now for the rule to go into effect?

David Moradi

Yes, obviously, a huge opportunity. It's not often that you're going to get a mandate for digital accessibility on an entire continent. We've already started winning deals with the team we have there because of that. We're going to add some more folks and maybe more folks after that even. So far, the deal sizes are a little bigger than the US, and we are working with a few partners already.

George Sutton

So there was a Minnesota ruling that basically said websites fell into the Title III of the ADA. I'm just curious if that had any influence or will have any influence on the speed of people to want to go to work with you in the US.

David Moradi

There's a lot of different rulings held over the place. So I wouldn't read too much into any 1 of those. The demand is about the same as it's been historically.

George Sutton

Got you. And then just so we're clear, I mean, obviously, we talk a lot about the Finalsite and CivicPlus, but are there any other kind of key new partners that you would point out -- or because you had referenced some additional new partners?

David Moradi

Not in the US and the EU. We're working with some new partners now?

Operator

Richard Baldry, ROTH Capital Partners LLC.

Richard Baldry

So year-over-year, you over doubled adjusted EBITDA, but you still grew sales and marketing over 20%. Can you dig in a little bit to where those incremental spend dollars and sales and marketing are going? How much of that is sort of more recent hires that aren't yet sort of on their productivity ramp and how much capacity that kind of adds to your quota capabilities?

Kelly Georgevich

Yes. We've kind of invested in sales and marketing across the board. So additional -- paid additional headcounts and we are adding head count, both in the US and EU, and we're continuing to see that kind of expand and ramp. I'd say, both in the US and then the expansion into the EU is driving that sales and marketing number up year-over-year.

David Moradi

You touched on ramping up off of quota now. So they're at all stages there, but there's a lot of new folks in the door right now. So you don't see those numbers yet in the direct sales.

Richard Baldry

Got it. You talked a little bit about the misperceptions of what AI can do today. Do you feel like how -- or how do you feel like that's impacting sort of prospect evaluations? Do you think there's -- that the worst of that headwind is kind of easing? Are people coming to understand that it's not sort of a magic bullet? Or do you think that you're still sort of piercing through those clouds right now?

David Moradi

I don't know it's evolving. It's a good question. We focus on free cash flow and things we can control, and we're looking at run rate $1 -- near $1 of free cash flow by the fourth quarter, and we think that's going up into next year with the operating leverage we have. So I don't know too much on the AI side, it's getting a little better, but it's not the Holy Grail.

Richard Baldry

Got it. And last for me, when you look in the European prospects and if there's any way to know this, but there seems to be some perception that there's antagonism between US and Europeans at a very macro level. Do you think you're seeing any sort of reticence to deal with American-based companies yourself? Or is it just too anecdotal right now?

David Moradi

I haven't seen anything so far.

Operator

Zach Cummins, B. Riley Securities.

Zach Cummins

David, I was just curious if you could walk us through some of the key assumptions that give you the confidence in the acceleration in ARR kind of in Q2 and into the second half of the year versus maybe some of the incremental macro headwinds. It sounds like positive momentum in both channels, but just curious if you could unpack that a little bit.

David Moradi

Yes. We had a really strong quarter on the direct enterprise side and expect that to get even better in the second quarter into the second half. Same with EU heating up. We had a decent quarter on the reseller side and expect that to pick up in the second half with Finalsite and CivicPlus. So it's going pretty well, and that gives us the confidence.

Zach Cummins

Got it. That's helpful. And then one question towards Kelly. Can you talk about the near-term margin impact? I think you talked about a little bit in your script that we should see in with the customer migration over to the new platform and kind of how should we think about that reverting back to more normalized levels in the coming quarters?

Kelly Georgevich

Yes. With the migration to upgraded platform, there is a push in Q2 for additional audits to show new features as quickly as possible, which is driving up the cost of revenue in the second quarter, but we do expect it to return to the high 70s in the second half of the year. So kind of a onetime impact to the second quarter of 2025 on the gross margin front.

Zach Cummins

Understood. And final question for me. David, can you talk about just the early traction maybe you're seeing in the public sector, I mean, with the DOJ rule on Title II. I know the first major deadline is not until kind of early part of next year, but just curious of how some of those customers are approaching that here in kind of the coming quarters into 2025?

David Moradi

Yes. We're really focused on Finalsite and CivicPlus. They both implemented aggressive go-to-market plans and their pipelines are building really nicely. So we're working with them closely, looking for a great second half with them. We are seeing some other leads come in on state and local as well.

Operator

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

David Moradi

Thank you. 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.

Operator

Before we conclude today's call, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website.
Thank you for joining us today for AudioEye's first quarter 2025 earnings conference call. You may now disconnect.