AudioEye, Inc. Q2 FY2025 earnings call

• Second quarter was a record quarter with $9.9 million revenue, 38 consecutive quarters of growth. Sequential ARR growth was $1.1 million. - European Accessibility Act (EAA) went into effect, with revenue contribution in Q2 and acceleration expected in Q3/Q4. - U.S. Title II under DOJ will impact partners in government adjacent space, with growth expected to accelerate in H2 2025 and 2026. - Accelerating integration of recent acquisitions, which led to slight reduction in full-year 2025 guidance but expects strong sequential revenue and cash flow growth in H2. - R&D spend in Q2 2025 was $1.7 million, representing 17% of revenue, consistent with Q1 2025 levels.

For the second quarter of 2025, AudioEye achieved $9.9 million in revenue, marking 38 consecutive quarters of growth. The enterprise channel contributed around 45% of revenue and ARR, while the partner and marketplace channels contributed around 55%. Gross profit for the second quarter was $7.6 million, or about 77% of revenue. Operating expenses were $7.4 million, and net loss was nearly $0, a significant improvement from the prior year.

• Q3 2025 revenue guidance: $10.2 million to $10.4 million, with adjusted EBITDA $2.2 million to $2.4 million and adjusted EPS $0.17 to $0.19. - 2025 full-year revenue guidance updated to $40.3 million to $40.7 million due to phaseout of certain acquisition-related customers. Adjusted EBITDA guidance reduced slightly to $8.9 million to $9.1 million, with adjusted EPS $0.71 to $0.73. - Adjusted EBITDA margins expected to increase into the upper 20s in Q4 2025, with run rate adjusted EPS in the mid-$0.80s annually by year-end.

• Non-compliance with EU's European Accessibility Act can result in fines up to EUR 3 million and legal risk. - Integration of acquisitions may continue to impact revenue and guidance. - Impact of U.S. Title II implementation on partners could introduce uncertainties.

Q: Maybe just starting off on the customers being phased out. Can you give us some sense of how much this impacted the numbers in the first half of this year relative to what you expect the impact to ARR and revenue for the second half of the year just to kind of give us some context? And then how does that affect the year-over-year comparisons maybe as well in terms of when did this kind of process start last year?

A: Yes. I can take that one. Acquisition churn is the driver for the reduction in revenue. We did see customers churn out in Q2 related to that migration and kind of the forced migration to AudioEye products and services. We do think this will still have some impact going into Q3 and Q4 of 2025. We think kind of overall ARR will probably be about $1 million to $1.5 million of churn for acquisition-related customers, which includes some culling of old BoIA customers, which we acquired in 2022. We do expect most of that -- the large majority of those customers to be phased out by the end of 2025. So it's really a 2025 impact.

Q: Some of the industry data that we've seen highlights that the digital accessibility lawsuits are up 20% year-over-year, year-to-date. Is that what you're hearing in the marketplace? And how much has that been a catalyst for you on a year-to-date basis that the lawsuits just continue to increase?

A: It's hard to really know that because you're probably getting federal and you're missing some of the states. We do think it's up. It may be up 20%, maybe up 10%. Obviously, we're growing and we're outgrowing the market. So that's a good thing. And now we have the EU coming online as well.

Q: What type of visibility do you have into the pipeline now for the balance of the year relative to a quarter ago or 2 quarters ago? Some of the other areas that I cover with these type of regulatory items, there's a surge of orders once the law or implementation takes effect. So I'm just curious what's the sequential change in the pipeline there?

A: The pipeline is definitely growing. I'd say if I had to hazard a guess from the second quarter to the third quarter in terms of total pipe, what I'm seeing right now, it's probably tripled. So it's definitely moving in the right direction. Those are from smaller numbers, though, but it's moving in the right direction. And I think it's going to be even more into next year. I think the thing is really going to take off.

Q: Just a clarification on your 3x pipeline growth. Is that referring specifically to Europe?

A: Yes, for the EU business.

Q: Can you be a little more specific how you're expanding your presence in Europe?

A: Sure. Yes, without going into too much detail, we have all types of competitors that listen to these calls. We're adding salespeople, increasing marketing budgets in the EU, becoming just a lot more active in the area. It's a really big focus for us. And over the long haul, I think it's going to be a huge growth driver for the company.

Q: You mentioned that international sellers are also implicated in this in the EU. I'm curious, is that driving any opportunities in the U.S., in particular, for international sellers selling in Europe that start to make some changes to the U.S. practice as well?

A: Not yet. I think when we see enforcement, we're going to start to see that as they target other companies based abroad.

Q: David, you laid out your 30% aspirational goal for EPS. Can you just give us a little bit more of a picture of what you see driving that?

A: Yes. It's really the record levels, near record levels of enterprise growth we're seeing with the EU beginning to contribute. The continued strong expansion of the partners, good core GRR metrics, really in the upper 80s, low 90s, acquisitions, just more of those type of things with scale of the business that Kelly can get into, if you want.

Q: The product or the customers that have been forced migrated. Can you explain what the product is that you're moving away from? And does this directly relate to the earn-out that was reversed?

A: Yes. I'd say the products that they've migrated away from our consulting or onetime audit. And we want them to move over to our products and services, which we like automation, we like custom fixes and our audit. So that is the move we're pushing clients to make that are on these legacy services. It is directly related higher churn than expected is directly tied to that reversal of contingent liability that is played to earn out, yes.

Q: David, I wanted to ask about your partnership strategy in the EU. What's kind of the ideal partner for AudioEye to be targeting to most effectively kind of get the coverage that you want and really drive adoption on that front?

A: Yes. There's a lot of agencies over there. We're probably targeting around 300 to 500 agencies that make websites for clients. So those are the ideal partners over there.

Q: Understood. And are there any particular member states within the EU where you're seeing more traction out the gate versus others, just given the strict penalties?

A: It's been all over. We've seen it in France, Germany, Italy, U.K., that's from top of mind, what I'm seeing right now, the bigger countries. So that's where I'm seeing it.

Q: Final question for me is just around Title II at the DOJ. I know you have some pretty big partners in place that have been building out a practice with. Just curious if you can give any sort of update around that? It sounds like you're expecting a pickup here in the second half and maybe even accelerating in 2026. So any additional color on that front would be great.

A: Yes. They're focusing on investing resources, obviously, to capture the opportunity in front of them. And when I say they, that's [ SignalSight, Civic Plus, ] they both implemented very aggressive go-to-market plans and their pipelines are building nicely. We are working with them on a few initiatives and expecting some pretty good momentum as we get into the second half year and next year.

Q: I joined late, so, I'm sorry if you've already covered this, but more and more of the companies I talked to talking about AI more internally than necessarily externally because they're finding they can get some pretty tremendous efficiencies on mostly development productivity right now, but I think across the board. Can you talk how much you feel like that's already starting to impact sort of your internal ability to? And where you think that matters the most? And does it move the dial on long-term profitability or not in your model?

A: Yes, that's a good question. Look, we're building AI into everything we do from testing, remediation. We think that's going to improve the accuracy and margins over time. Our internal tests show that AI is very good at solving specific common accessibility issues, but not great at issues requiring contextual understanding, but we are continuing to experiment with AI for issue detection. We're already the best out there for that. We're also integrating to your point, AI and our development workflow within our own CI/CD pipeline and we're using AI with our accessibility experts when writing out custom fixes. So I think it's a long-term driver of margin and scale.

Q: When you look at the mandates that are coming into play, how much do you think the clients will be early adopters to avoid or to be compliant versus wait and try to understand what the penalties would be and how severe, how common enforcement will be. What's your sort of sense on that? And does that change sort of between sort of the enterprise players versus rest of the business? How do we think about that?

A: I think it's going to take a while there over the next 5 years is what I've said before, similar to how GDPR was opted and the big players will adopt first in my view.