Audioeye Inc (AEYE) Q3 2026 Earnings Call Transcript

Good afternoon, and welcome to AudioEye's third quarter, 2026 earnings conference call. Joining us for today's call are AudioEye's Chief Executive Officer, Ms. Kelly Georgievich, and Chief Financial Officer, Mr. Matthew Duhlmeyer. 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 in the Investor Relations section of the company's website at www.audioeye.com. Before I turn the call over to AudioEye's CEO, the company would like to remind all participants that statements made by AudioEye management during the course of this conference call that are not historical facts are considered to be forward-licking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-licking statements. The words believe, expect, anticipate, estimate, confident, will, and other similar statements of expectation identify for 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 risk and uncertainties. Actual results could materially differ because of factors discussed in today's press release in the comments made during this conference call And in the risk factors section of the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and in its other reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forelicking statements, which reflect management's belief only as of the date hereof. AudioEye does not undertake any duty to update or correct any forelicking 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 an investor relations section of its website at www.audioi.com. Now, I'd like to turn the call over to Audio Eye's CEO, Ms. Kelly Georgievich.

Thank you, Operator. We had a great quarter, generating record revenue, record adjusted EBITDA, strong free cash flow, and positive GAAP net income, driven by efficiencies and increased AI use across the company. We are also excited to discuss accelerating revenue growth in Q4 with continued operating leverage. In 2025, we introduced an aspirational goal of 30% to 40% growth in adjusted EBITDA and adjusted EPS per year over the following three years. We are pleased to report that we continue to deliver against this aspirational target and now expect approximately 50% growth in adjusted EBITDA in 2026. We also expect a Q4 adjusted EBITDA annualized run rate of over $17 million, up from previous expectations of $15 million. This translates into an annualized run rate for adjusted EPS of around $1.30 in Q4. Rose margin improved over 550 basis points year-over-year, with adjusted gross margins of 88% in Q3, driven by efficiency and increased use of AI. Adjusted EBITDA in Q3 was $3.9 million of 58% year-over-year. The adjusted EBITDA margin was 35% in Q3. As we anticipated and as indicated last quarter, litigation expense decreased in Q3. We expect a further reduction in Q4 and believe litigation expense will continue to trend down. We expect meaningful free cash flow generation in Q4 and into 2027, and we recently announced a $15 million stock repurchase program that runs through October 2027. This represents approximately 15% of the outstanding shares at current prices. It's worth noting that our revenue has nearly doubled over the last five years, while our outstanding shares have increased by approximately 10% in this time frame. We also had a strong quarter in terms of GAAP profitability. In Q3, GAAP net income was $1 $1 million, or $0.08 per share, compared to a net loss of $600,000 and $0.04 per share loss last year. Revenue was approximately $11 million, representing our 43rd consecutive quarter of record revenue. ARR grew $1 million sequentially to $43.3 million at September 30, 2026, 12% over the prior year. On October 8th, we launched two new products, Agenic Audits and our SDK MCP. Both are built on what we call AudioEye Intelligence, our proprietary data set created from more than 1 million human accessibility reviews across more than 100,000 sites over 10 years. Our SDK MCP brings AudioEye Intelligence into AI coding tools developers already use so they can catch and fix issues while coding is being created. Our organic audits use an AI agent powered by a proprietary data set to move through a site the way a real user would, opening menus, filling out forms, and going through checkout. They can find up to 50% more high-severity issues than automation alone, and most results come back within an hour. Our solution already delivers three to four times the legal protection of others. These new products add to that protection, helping developers ship more compliant code from the start and helping companies catch high-risk issues as their sites change. These products represent exciting upsell opportunities. In September, we released a study on how well AI coding tools build accessible websites. We asked AI agents to create 15 sites that comply with WCAG 2.2 AA standards. We found that even when explicitly instructed to make the site accessible, it could not. The AI-generated sites averaged 55 issues per page, compared to 62 on a typical site, and AI-generated e-commerce sites had three times as many issues as other e-commerce sites. Because AI models have been trained on an inaccessible web, they repeat the same accessibility failures. Digital accessibility has become a critical part of AI readiness as well as compliance. As more agents complete tasks for humans, they increasingly rely on a web accessibility tree to navigate the site. To illustrate how important the accessibility tree has become, we've published research on how AI agents perform on inaccessible websites. We ran AI agents through everyday tasks on six sites, with and without AudioEyes fixes. We found that on the least accessible site, AI agents completed only 31% of their tasks. With ADIWISE fixes, that rose to 96%. AI agents navigate through a site's accessibility tree, so when it's broken, they can't complete paths like making a purchase or booking. This means an accessible site now serves two audiences, people with disabilities and the AI agents acting on behalf of customers. On the regulatory side, in September, the European standards bodies published an updated accessibility standard that adopts WCAG 2.2, which raises the bar for companies covered by the European Accessibility Act. State side, Hawaii signed a new law in July, Act 257. Act 257 is the first state law to require all private businesses to conform to WCAG 2.1, Level A and AA, through rules the state is now finalizing. This will have significant implications for the travel and hospitality industry. We believe other states may follow Hawaii's lead. The new law took effect July 14, 2026, with compliance deadlines 24 to 36 months after the rules are final. Turning to guidance. For the fourth quarter of 2026, we expect revenue between $11.4 and $11.6 million, a sequential increase For the full year of 2026, we are narrowing the revenue range to between $43.6 and $43.8 million. For the fourth quarter of 2026, we expect adjusted EBITDA of between $4.2 and $4.4 million, A 56% increase over the fourth quarter of 2025 at the midpoint, and an adjusted EBITDA margin of approximately 37%. We expect adjusted EPS of between $0.32 and $0.33 per share for the fourth quarter of 2026. For the full year 2026, we are increasing adjusted EBITDA guidance from at least 12.7 million to between $13.4 and $13.6 million, representing approximately 50% year-over-year growth. As mentioned earlier, Q4 Adjusted EBITDA guidance represents an annualized run rate of over $17 million, and we expect cash generation to ramp significantly in Q4 in 2027. In the fourth quarter at the midpoint of guidance, an adjusted EBITDA of $4.3 million, less around $400,000 Thank you, Kelly.

As Kelly mentioned, revenue for the third quarter was a record $11 million, representing our Our 43rd consecutive period of record revenue. Annual recurring revenue was $43.3 million as of September 30th, 2026, up from $42.3 million as of June 30th, 2026. Year-over-year, ARR grew 12%, driven by double-digit growth in both our Partner and Marketplace and Enterprise channels. As of September 30th, 2026, AudioEye had approximately 130,000 customers, up 7,000, or 6%, from approximately 123,000 customers as of September 30th, 2025, and up approximately 1,000 from June 30th, 2026. The increase was driven primarily by our partner and marketplace channel, with enterprise customers also increasing. Both of our two revenue channels continue to deliver strong results. AudioEye's enterprise channel consists of our larger customers and organizations that generally engage directly with AudioEye sales personnel for pricing and solutions. As we have previously discussed, in 2026, we have reduced our emphasis on nonrecurring revenue to focus on growing ARR. In the third quarter of 2026, enterprise revenue was relatively flat year-over-year, with lower nonrecurring revenue being offset by increases in recurring revenue. Our focus on Enterprise ARR is showing results, and it increased 10% over the comparable prior year period as we continue to deliver some of our strongest new and expansion business to date. As of September 30, 2026, Enterprise ARR represented approximately 41% of total ARR. Our Partner and Marketplace channel includes all revenue from our SMB-focused Marketplace products, as well as from partners who deploy these products for their SMB customers. In the third quarter of 2026, the Partner and Marketplace channel revenue increased 14% year-over-year. We again saw strong expansion from our state and local government partners in the quarter. Partner and Marketplace ARR grew by 14% compared to the prior year quarter and represented approximately 59% of total ARR as of September 30, 2026. Growth margin for the third quarter expanded over 550 basis points to 83%, compared to 77% in the third quarter of 2025. Growth profit grew 15% to $9.1 million, compared to $7.9 million in the prior year period. While revenue grew 7%, cost of revenue declined 19%, resulting in 160% conversion of incremental revenue to gross profit. The reduction in cost of revenue came primarily from AI-driven efficiencies in engineering and service delivery. Adjusted gross margin was 88% in Q3 2026, compared to 83% in the prior year comparable period. The increase in adjusted gross margin is consistent with the gap change. In the third quarter of 2026, operating expenses decreased 5%, or $400,000, to $7.8 million. The decrease in operating expenses was driven primarily by lower R&D and sales and marketing spent. Our total R&D spend in Q3 was approximately $1.3 million, including approximately $400,000 recorded as capitalized software development costs. Total R&D spend decreased 17% year-over-year and was around 12% of Q3 2026 revenue, down from 15% in Q3 2025, driven by increased AI usage. Net income in the third quarter of 2026 was $1 million, or $0.08 per diluted share, Compared to a net loss of $0.6 million or 4 cents per share in the same year-ago period, driven by higher gross profit and lower operating expenses noted previously. In the third quarter of 2026, we achieved record adjusted EBITDA of approximately $3.9 million or adjusted EPS of 30 cents per diluted share, and an adjusted EBITDA margin of 35%. This compares to Q3 2025, which had an adjusted EBITDA of $2.5 million, or adjusted EPS of 19 cents per share, and an adjusted EBITDA margin of 24%. The $1.4 million, or 58% increase in adjusted EBITDA over the comparable period of the prior year was primarily driven by increases in gross profit and AI efficiencies. In the third quarter, we generated $3.5 million of free cash flow, calculated as adjusted EBITDA of $3.9 million, plus $400,000 of capitalized software development costs, and improvement of $1.5 million from the third quarter of 2025. Turning to the balance sheet, we ended the quarter with $9.3 million in cash, an increase of $600,000 from June 30, 2026, and $3 million available under our revolving line of credit. As of September 30, 2026, our net debt, defined as total debt less cash, was $7.2 million. Net debt has declined approximately $1 million year-to-date, and our net debt to adjusted The adjusted EBITDA ratio, using the midpoint of our updated 2026 adjusted EBITDA guidance, is approximately 0.5. With that, I'll turn the call back to the operator to open the line for questions. Operator?

Thank you. We will now take questions from the company's publishing analysts. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question comes from the line of Joshua Rearley with Needham & Company. Please proceed with your question.

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

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

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

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

Thank you very much.

Up next, in the queue, we have George Sutton with Craig Hallam Capital Group. You may proceed with your question.

Hey, guys. Logan on for George here. First one for me, I wonder if you could just unpack, step down the cost of goods sold this quarter a bit more, and maybe just talk in any more detail about where the AI efficiencies are coming into play. And I guess, you know, is there more room for margin improvement here, or should we think about this as sort of a one-time step function improvement?

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

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

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

Okay, I'll leave it there. Thanks.

Thank you. Up next in the queue, we have Richard Baldry with Roth Capital Partners. You may proceed with your question.

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

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

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

Yeah, we definitely still find that you need the manual aspect of an audit. What we like about these new products and what they can do is they can find on the agentic audit significantly more issues than our automation, about 50% more of those high severity issues. So they're nice little fill-ins after a website redesign or between audits. And same on the SDK MCP is while you're creating code, if you can solve a number of the issues that you would have to wait for an audit to find, I think that's pretty powerful.

Is there another way to think about sort of how much you've had significant improvements in OpEx and on your cost of goods line? You know, how deep into the process of automating, you know, your own operating side of the table and your go-to-market cog side do you think you're at? How much incremental profitability do you think you could do even off the same revenue base with further automation?

Yeah, yeah. We've been able to ramp revenue without ramping expenses for a number of years, and I think AI has just given us that extra kind of milestone where we've been able to implement AI and be very efficient across all departments. I think we expect to see that to continue. So as revenues increase, I don't think we'll need to ramp expenses significantly. But, you know, we're still focusing on finding further efficiencies as well.

And last for me, maybe more sort of top of the funnel, if you look at your sales overall, sort of the pipelines, can you talk about the degree to which they're expanding, either in sort of geographies where the regulatory environment's pushing it, outside of those, you know, how do you feel about those entering or heading toward fiscal 27th?

Yeah, I think we're seeing, you know, some of our best lead volume to date still, and as I mentioned, some of our best new business and expansion are to date. Litigation is still growing at record level, so that's definitely a factor that we're continuing to see. And so regulation is helping, but I think demand overall is growing, and that litigation, private litigation is driving demand as well. As EU ramps enforcement, we expect to see additional demand, and I do think there is a possibility for additional demand with the AR readiness and link to accessibility.

Maybe one last one to squeeze in. Your cash hit a multi-year high in the quarter. I'm sort of curious, what do you think a comfortable level of cash for operations is, which your EBITDA scaling the way it is, sort of against a backdrop of how much you'd be willing to use the on-hand cash for buyback versus use it out of quarterly cash flow from ops? Thanks.

Yeah. I mean, I think we have the $3 In the $1 million line of credit, I think we're pretty comfortable at levels that we've been at over the last handful of quarters. I do think that there's a key aspect of a significant cash generation in Q4 and into 2027, which allows us to do a lot with that extra cash. So I think we feel pretty comfortable with where it's at now.

Great. Thanks. Congrats on the quarter.

Thank you.

Thank you. And our last question comes from the line of Scott Buck with Titan Partners. You may proceed with your question.

Hi, good afternoon, guys. Appreciate the time. Kelly, on the new Agentic products, how are they priced? Are they standalone SKUs, or are they bundled with, you know, kind of existing products?

You can purchase them as either. So you can purchase them as standalone. And so like an add-on to your current line items on your contract or certain products, one of the two you can buy as a standalone product.

Okay, perfect. And then customer accounts rose about 6%. ARR grew 12%. Is ARR growing because of mix pricing? And upsells, help kind of bridge me there.

Yeah, really across the board. So we've got double-digit ARR growth in both our enterprise, which is kind of new and expansion business, both kind of approaching record numbers, and the partner sign as well. So kind of operating and performing on all cylinders.

Okay. And then last one on capital allocation and the announced buyback, you know, how quickly do you expect to execute on the buyback? And is that constrained by the credit agreement?

I mean, your stock is trading at six times you need adjusted EBITDA and growing 50% over a year, so we do think it's an attractive time to buy in a good way to deploy excess cash for shareholders. We have a good relationship with our debt provider and don't see any issues Okay, perfect.

I appreciate the added color. Thank you, Scott.

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

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

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 in the Investor Relations section of the company's website. Thank you for joining us today for AudioEye's third quarter 2026 earnings conference call. You may now disconnect.