AudioEye, Inc. Aktie

Good afternoon, and welcome to AudioEye's First Quarter 2026 Earnings Conference Call. Joining us for today's call are AudioEye CEO and CFO, Ms. Kelly Georgevich; and Executive Chairman and Chief Product Officer, Mr. David Moradi. [Operator Instructions] I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.audioeye.com.

Before I turn the call over to AudioEye's Executive Chairman, the company would like to remind all participants that statements made by AudioEye management during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, confident, will and other similar statements of expectation identify forward-looking statements.

These statements are predictions, projections or other statements about future events that are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's press release and the comments made during this conference call and in the Risk Factors section of the company's annual report on Form 10-K, its 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 [indiscernible] on these forward-looking statements, which reflect management's belief only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements. Further, management's remarks today will include certain non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures 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 Executive Chairman and Chief Product Officer, Mr. David Moradi.

Thank you, operator, and good afternoon, everyone. The first quarter marks the 41st consecutive quarter of record revenue, a significant achievement. Over a decade ago, I began my journey with AudioEye as an investor, leading a few rounds of financing for the company. Back then, the company had virtually no revenue and limited technology. Today is a different story. We have the leading product on the market and more than 127,000 customers, to our knowledge, more than any other company in the industry.

In 2019, I joined AudioEye first as a consultant, then as a Board member and became the Chair of the Strategic Operating Committee of the Board of Directors, tasked with improving product, go-to-market, margins and scale. Since then, revenues have nearly quadrupled and adjusted EBITDA margins have improved from approximately negative 70% and are expected to be in the high 20% range this year.

Revenue per employee has improved from approximately $100,000 per employee in 2019 to over $400,000 per employee, around a 400% increase. Kelly has been instrumental in helping us achieve these top-tier results since joining AudioEye in 2021. I've worked closely with Kelly for almost 5 years, and I'm highly confident that as CEO, she will lead the company through our next phase of growth and continued operating margin improvement. This was a well-planned evolution that reflects the strength of what we have built and the Board of Directors and my confidence in Kelly's ability to lead us going forward. She brings operational discipline, relationships and credibility to sustain the momentum we have.

My focus going forward will be on what I love doing most, long-term strategy and product innovation, including AI initiatives now possible with recent LLM improvements. I've served as Head of Products since the second half of 2023 during a period of significant innovation, including our next-gen platform, which combines custom fixes with our industry-leading AI, giving customers a complete view of their risk profile, which no competitor can do today. Also, we have continued to improve our industry-leading legal protection rates and the highest levels of automatic detection available.

But we are not done. A recent WebAIM study shows that the Internet is becoming less accessible, while litigation trends are reaching all-time highs. The need to solve digital accessibility at scale has never been greater. We continue to build on our industry-leading proprietary data set, which was developed over 10 years on over 100,000 websites and millions of data points using our unique approach of combining AI automation with custom fixes. And we are very excited about upcoming agentic product releases.

As we enter this next phase of growth in AudioEye's journey, I want to thank our team for all their hard work and determination in getting us here and in delivering an incredible product for our customers. After today's call, I may be less visible to shareholders, but I will be hard at work in the background. I'm leaving you in good hands with your new CEO.

With that, I'll hand it over to Kelly.

Thank you, David. Good afternoon, everyone. It's an honor to be speaking to you today in my new role as CEO, and I want to echo David's gratitude to our team and to David for the incredible work he has done transforming AudioEye into an industry leader in digital accessibility. I look forward to building on the foundation that David and the team have created. I've spent 5 years working with David and driving change, and I'm excited about what the next phase looks like, both from an operational standpoint and from a product and market opportunity standpoint.

I'll now cover a few other business developments, Q1 2026 financial results and our updated financial outlook for Q2 and the full year 2026. The market environment continues to reinforce the need for solutions with accuracy and scale. Agentic coding solutions are driving faster web development but are making the web less accessible. As David mentioned, the 2026 WebAIM Million report found 95.9% of the top 1 million home pages had detectable WCAG failures, averaging 56.1 errors per page, a 10% increase over the prior year.

That reversed 6 consecutive years of gradual improvement. WebAIM attributes the decline to broader shifts in web development, including increased reliance on third-party frameworks and AI-assisted coding. This is driving accessibility-related litigation to reach all-time highs. This environment positions AudioEye as a leader. With over a decade of proprietary data and billions of data points, we have the depth, expertise and scale to address accessibility challenges and to help customers manage the legal risk they face in a way no other solution can currently match.

We continue to see strong feedback and engagement with our next-generation platform introduced earlier this year. We built this platform to give customers full visibility into the thousands of fixes AudioEye completes on their behalf through our automation and custom remediation. The response has validated what we believed. When customers see the depth of our work, the gap between AudioEye and any other solution in the market becomes clear.

On the regulatory front, in April 2026, the DOJ published an interim final rule extending Title II Web Accessibility Compliance Guidelines by 1 year for state and local governments with enforcement now slated to begin in April 2027. We view this as an affirmation of the federal commitment to digital accessibility and a recognition that meaningful compliance requires a robust solution like AudioEye. The rule makes clear that covered entities have an ongoing obligation to ensure their web content and mobile apps are accessible to individuals with disabilities under Title II of the ADA.

The additional year gives AudioEye and our channel partners a broader runway to engage state and local government entities and ensure they are positioned for compliance well ahead of a new April 2027 enforcement date. In the European Union, we continue to build pipeline and see steady positive early signs as enforcement time lines take shape. We are being disciplined with our investments there, positioning ourselves to capture the meaningful uptick in demand that will occur as enforcement occurs while building awareness of accessibility requirements now in place.

Turning to our Q1 2026 financial results. Revenue for the first quarter of 2026 was $10.6 million, representing an 8% increase from the comparable period of the prior year. This marks our 41st consecutive period of record revenue, a streak we are unaware of any current public software company matching. Annual recurring revenue, or ARR, was $41.2 million as of March 31, 2026, up from $40 million as of December 31, 2025, reflecting 12% annualized sequential ARR growth. Year-over-year, ARR grew 11%.

We expect ARR growth to continue in future quarters and that compounding ARR should generate notable sequential growth rates in revenue in the third and fourth quarter of this year. As of March 31, 2026, AudioEye had approximately 127,000 customers, up 8,000 from March 31, 2025. The 4,000 customer decrease from December 31, 2025, was driven by one partner's realignment of their own customer base. The partner continues to support thousands of AudioEye customers and the underlying business activity and partnership were not affected and had no material impact on revenue or ARR.

Going deeper into revenue by our 2 channels. AudioEye's enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites who generally engage directly with AudioEye sales personnel for pricing and solutions. Our enterprise channel continued to perform well in Q1 with steady new business activity and healthy expansion among existing accounts.

In Q1 2026, the enterprise channel grew 9% year-over-year. As of March 31, 2026, the enterprise channel represented approximately 41% of ARR. Our Partner and Marketplace channel includes all revenue from our SMB-focused marketplace products as well as partners to deploy these products for their SMB customers. In the first quarter of 2026, the Partner and Marketplace channel grew 8% year-over-year and accounted for approximately 59% of ARR as of March 31, 2026.

Our Partner and Marketplace channel also contributed meaningfully to ARR growth in the quarter. We saw solid expansion from our state and local government partners specifically in the first quarter of 2026. In our recent conversations with these partners, the Title II delay has not slowed their go-to-market activity or changed how they talk to customers. They are moving forward with the same urgency. Gross profit for the first quarter was $8.3 million or approximately 78% of revenue compared to $7.7 million or 80% of revenue in Q1 of 2025.

Adjusted gross margin, defined as gross margin adjusted for noncash items in our cost of revenue, such as amortization and capitalized software development costs and stock compensation expense was 84% in Q1 2026 compared to 85% in the prior year comparable period. In the first quarter of 2026, operating expenses were $10.1 million compared to $8.7 million in Q1 2025. Net loss in the first quarter of 2026 was $2.1 million or $0.17 per share compared to a net loss of $1.5 million or $0.12 per share in the same year ago period.

The year-over-year increase in operating expenses and net loss was driven by higher litigation expenses, depreciation and amortization expenses as well as additional investments in sales and marketing. Our total R&D spend in Q1 was approximately $1.6 million, with approximately $500,000 recorded as software development costs in the investing section of the cash flow statement, similar to Q1 2025 levels.

Total R&D spend was around 15% of Q1 2026 revenue, down from 17% in Q1 2025, demonstrating our continued progress in operating leverage. In the first quarter of 2026, we achieved adjusted EBITDA of approximately $2.4 million or $0.18 per share and an adjusted EBITDA margin of 22%. This compared to Q1 2025 adjusted EBITDA of $1.9 million or $0.15 per share and 20% of adjusted EBITDA margin. The $500,000 increase in adjusted EBITDA over the comparable period of the prior year was driven by a $500,000 year-over-year increase in gross profit.

In the first quarter, we generated $1.9 million of free cash flow calculated as adjusted EBITDA of $2.4 million plus $500,000 in software development costs, an improvement of $500,000 in the first quarter of 2025. We further strengthened our balance sheet in the first quarter of 2026 by drawing down the remaining $3.6 million of our delayed draw term loan, which would otherwise have expired on March 31. We ended the quarter with $8.6 million in cash and $3 million available under our revolving line of credit. As of March 31, 2026, our net debt, defined as total debt less cash was $8.4 million and our net debt to adjusted EBITDA ratio using our 2026 adjusted EBITDA guidance is approximately 0.7x.

Now turning to guidance. For the second quarter of 2026, we expect revenue of between $10.65 million and $10.75 million and adjusted EBITDA of between $2.6 million and $2.7 million, representing an adjusted EBITDA margin of approximately 25% at the midpoint and adjusted EPS of between $0.21 and $0.22 per share. For the full year 2026, we are refining our revenue guidance to between $43.25 million and $44.25 million. We now expect full year 2026 adjusted EBITDA to be at least $12 million, representing a nearly 27% adjusted EBITDA margin at the midpoint of revenue guidance and adjusted EPS of at least $0.96.

This would suggest at least 33% growth in adjusted EBITDA and adjusted EPS from 2025. With compounding ARR expected to drive notable sequential growth rates in the third and fourth quarter of 2026 and expanding operating leverage throughout 2026, we continue to target a $15 million run rate adjusted EBITDA by the end of 2026.

With that, I'll turn the call back to the operator to open the line for questions. Operator?

[Operator Instructions] Our first question comes from George Sutton with Craig-Hallum.

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

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

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

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

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

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

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

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

Yes. I don't -- I hope my stay wasn't over welcome here. I've been here quite a long time, a lot longer than I ever thought I would be. But look, things are jumping really well right now. So I think this is a great time to do it. As you recall, the Board asked me to do this back in 2019 to help turn the company around. And that's really what we've done.

We put up 41 straight quarters of record revenue. We have 127,000 customers. We're approaching a 30% adjusted EBITDA margin, and that was kind of like negative 70% when I joined the Board back in '19, and we're poIsed to generate significant cash. And also, the product really improved. We can do things that no one else in the industry can do. So I think it's a great time. Kelly has been a strong leader for over 5 years. She knows the company better than anyone, and it's just going to allow me to focus on product, AI, long-term strategy. I'm very excited about what we're going to be able to do here.

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

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

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

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

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

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

Yes, absolutely. I think we view it that way. There's -- we still have plenty to penetrate on our 2 key partners in the space and just across the board. I think there's still a lot of people who need a solution. So it gives us additional runway ahead of that April 2027 new deadline.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good afternoon, and welcome to AudioEye's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining us for today's call are AudioEye 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'd 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 differ materially 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 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 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 the 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.

Thank you, operator, and good afternoon, everyone. I'm pleased to report our results for 2025, highlighted by our 40th consecutive quarter of record revenue growth, a remarkable achievement. We are not aware of any other SaaS company in the public markets, which have grown sequentially for 40 straight quarters or more. In addition to 40 sequential quarters of revenue growth, we also demonstrated strong operating cash flow in recent years. In 2025, adjusted EBITDA grew by approximately 35% to a record $9.1 million with a record margin of 22%. For the full year 2025, AudioEye achieved record revenue which was even more impressive given that our performance includes our previously noted accelerated customer migrations last year.

I'm happy to report that the integration of these acquired customers is now substantially complete, which should drive meaningful ARR acceleration in 2026 with business momentum in the U.S. and EU. In 2026, we expect adjusted EBITDA to grow by at least 30%, implying adjusted EBITDA of at least $11.8 million for the year.

Looking at a couple of quarters ahead, we expect to generate a run rate adjusted EBITDA of $15 million by year-end, driven by AI efficiency across our products and operations. This implies an accelerating rate of cash flow growth into 2027, potentially higher than the 30% we are guiding for this year. As we survey today's technology landscape, while AI coding has been top of mind in 2026, the tangible impacts on people with disabilities are largely being overlooked. AI is accelerating how businesses build digital experiences, but it is also accelerating the pace at which accessibility failures compound.

Since LLM's draw data that is not accessible to begin with, digital accessibility on the Internet is not improving and may even be getting worse. With this backdrop, we are seeing increased rates of litigation utilizing AI to detect accessibility issues. We believe 2026 will be the highest year of digital accessibility lawsuit on record.

Yesterday, we released our next-generation platform to address these market needs. The next-gen platform unifies AI detection, expert audits and custom fixes in a single platform that delivers unmatched transparency, ease of use and 3 to 4 times of legal protection and other solutions. The platform also utilizes years of proprietary data from detecting and fixing accessibility issues across hundreds of thousands of sites and billions of unique visits.

Additionally, we are unaware of any other accessibility solution that delivers custom fixes directly within the platform, which gives customers a complete picture of their accessibility compliance.

Other solutions may make claims of custom fixes, but cannot back them up. In prior years, on these conference calls, we called out similar claims from the same vendors that automation couldn't fix 100% of accessibility issues, which proved accurate. The next-gen platform use our proprietary data engine to power its results. In February, an independent study conducted by audience found that AudioEye detected between 89% and 253% more WCAG issues than competitive products. AudioEye was the only solution that identified issues at all WCAG levels, including single A, AA, AAA across every website analyzed.

Combining our proprietary data set, with newly released agentic models, creates opportunities to solve digital accessibility in ways that were not possible before. Our pace of innovation, which is leveraging our proprietary data is rapidly accelerating, and we look forward to sharing more updates with you soon.

As we enter 2026, we see meaningful opportunities ahead. The EAA is expanding the market globally. The DOJ rule under Title II is increasing regulatory requirements. Record litigation is driving demand. And businesses increasingly recognize that accessibility is not just about compliance, it's about reaching the broadest possible audience, including AI agents that scan a website's accessibility tree instead of the [indiscernible].

Based on our momentum and the market dynamics we're seeing, we are providing the following guidance for 2026: For the first quarter of 2026, we expect revenue of between $10.5 million to $10.6 million, adjusted EBITDA of $2.2 million to $2.3 million and adjusted EPS of $0.17 to $0.18. We typically see lower cash flow in the first quarter as we pay social security taxes and legal and administrative fees associated with the proxy. And this year, we are attending an industry event during the quarter.

For the full year 2026, we expect revenue of between $43 million and $44.5 million, and we expect the rate of ARR growth to outpace the rate of revenue growth as we focus less on nonrecurring revenue. We expect adjusted EBITDA will grow by at least 30%, reaching $11.8 million representing a 27% margin at the revenue midpoint. I'll now turn the call over to AudioEye's CFO, Kelly, to review our results in detail. Kelly?

Thank you, David, and good afternoon, everyone. Revenue again reached record levels with Q4 2025 revenue at $10.5 million, an 8% increase from Q4 2024 and a 10% annualized increase sequentially from Q3 2025. On a full year basis, our revenue grew 15% to $40.3 million from $35.2 million in 2024. Breaking this down by channel, our partner and marketplace channel includes all revenue from our SMB-focused marketplace products and revenues from partners who deploy these same products for their SMB customers. For the fourth quarter of 2025, this channel grew 8% year-over-year and represented approximately 59% of ARR. For the full year 2025, this channel's revenue grew 10% from $20.2 million in 2024 to $22.2 million.

We continue to see expansion of existing customers and new partners engaging with AudioEye contributing to this channel's group. AudioEye's enterprise channel consists of our larger customers and organizations, including those with non-platform custom websites who generally engage directly with AudioEye sales personnel for pricing and solutions.

In Q4 2025, the enterprise channel grew 8% from the comparable period of the prior year. And for the full year 2025, it grew 21% to $18.1 million from $15 million. This growth was driven in part by our expansion into the EU in 2025, which we expect to continue to grow in future periods. The enterprise channel represents approximately 41% of ARR as of December 31, 2025. Annual recurring revenue, or ARR, at the end of the fourth quarter of 2025 was $40 million, a 9% increase over ARR at the end of the fourth quarter of 2024 and an increase of $1.3 million sequentially. Gross profit for the fourth quarter was $8.3 million or approximately 79% of revenue compared to $7.8 million or 80% of revenue in Q4 of 2024. For the full year 2025, our gross margin was approximately 78% with gross profit increasing from $27.9 million in 2024 to $31.6 million in 2025.

Going forward, we will be reporting adjusted gross margin, a SaaS industry non-GAAP metric that provides insights in the underlying profitability of our core operations by excluding stock-based compensation and depreciation and amortization included in our cost of revenue. Adjusted gross margin was 85% in Q4 2025 compared to 86% in the prior comparable period. Adjusted gross margin was 84% for the full year 2025 compared to 85% in the prior year comparable period.

Even with an 8% increase in revenue, operating expenses in the fourth quarter of 2025 remain consistent with the same quarter last year. On a full year basis, with revenue increasing 15% over the prior year, operating expenses increased 7% or approximately $2 million to $33.4 million, driven primarily by increases in sales and marketing expense. Increase in items such as stock compensation expense, depreciation and amortization and litigation expense were mostly offset by savings in noncash valuation adjustments to liabilities and lower business combination expenses year-over-year. Our total R&D spend in Q4 was approximately $1.6 million, with approximately $450,000 reflected the software development costs in the investing section of the cash flow statement, a decrease from $1.8 million in the fourth quarter of 2024.

Total R&D spend was around 15% in Q4 2025 revenue versus 18% in Q4 2024. For the full year, R&D spend was 16% of 2025 revenue versus 19% in 2024 and 29% for 2023, demonstrating our continued progress in operating leverage. Net loss in the fourth quarter of 2025 was $1.1 million or $0.08 per share compared to a net loss of $1.5 million or $0.12 per share in the same year ago period. On a full year basis, net loss for 2025 was $3.1 million or $0.25 per share compared to a net loss of $4.3 million or $0.36 per share in 2024, an improvement of $1.2 million.

In the fourth quarter of 2025, we achieved adjusted EBITDA of approximately $2.8 million or $0.22 per share compared to an adjusted EBITDA of $2.3 million or $0.18 per share in the same year ago period. On a full year basis, we produced adjusted EBITDA of approximately $9.1 million or $0.72 per share compared to $6.7 million or $0.55 per share in 2024. This 35% increase in adjusted EBITDA was driven by $5.1 million of revenue growth, a $3.9 million increase in adjusted gross profit and approximately $1 million in savings in adjusted R&D and G&A expenses, partially offset by additional investments in sales and marketing.

In the fourth quarter, we repurchased approximately $1 million worth of shares. During the full year 2025, we repurchased approximately $4.6 million worth of shares. The successful refinancing of our debt facility with Western Alliance Bank in Q1 2025 strengthened our balance sheet and reduce our interest expense, positioning us for continued growth with greater financial flexibility. Our balance sheet remains well capitalized with $5.3 million in cash as of December 31, 2025, and an additional $6.6 million in debt facilities available.

As of December 31, 2025, our net debt, defined as total debt less cash was $8.1 million, and our net debt to adjusted EBITDA ratio was approximately 0.7x. In the fourth quarter, we generated $2.3 million of free cash flow, calculated as adjusted EBITDA of $2.8 million less $500,000 of software development costs, an improvement of $400,000 from the fourth quarter of 2024. For the full year 2025, adjusted free cash flow was $7.2 million versus $4.9 million in 2024. With that, I'll turn the call back to the operator to open the line for questions. Operator?

[Operator Instructions]

Our first question today is coming from Joshua Reilly from Needham & Company.

All right. Great. Maybe just starting off, just kind of on the platform updates here. A big piece of what you've done historically is the custom human fixes combined with the automated fixes. And I guess I'm just curious, how much human involvement do you see going forward in the custom fixes relative to what AI can do and how that might drive greater automation in the platform and efficiencies for you.

Yes, the tools aren't really that good at accessible content because the internet wasn't coded with accessibility in mind. And as you know, the amount of sites and content are exploding on the Internet. We're seeing an all-time high in litigation. We think lawyers are using AI to the tech issues and draft all these complaints with more websites even to choose from. So I'm not sure when it's going to get there. It's very far away from that now. It's actually getting worse. And the problem hasn't been solved in 25 years. The issue is when you push code, even if the code was coded with accessibility, someone else touches it and it's not accessible anymore. And this is especially true for sites like e-com that are constantly changing. So it's very far off to answer your question in my opinion.

Got it. And then -- so along with that, how does the changes you made to the platform along with that concept that you do need to keep the human involvement going, maybe further your differentiation versus some of the competitors.

No one has it right in the platform for the custom fixes. So that's the difference and we're using more and more agents with that as well to streamline it further.

Got you. Okay. That's helpful. And then if we look at the initial revenue guidance for 2026, maybe you can just kind of help us understand what are the puts and takes investors should be considering including visibility to that revenue guidance relative to the ARR exit rate of about $40 million for Q4 and kind of the growth trends that you saw in 2025 relative to what you're assuming in 2026.

Yes. We're being pretty conservative. The major factor is we expect less nonrecurring revenue as we focus more on ARR and some of the acquired customers initially have nonrecurring revenue that we phased out. Kelly can get into this, what this means from a financial standpoint, but we're very bullish about the opportunities in front of us more than ever. We're in a unique position with massive amounts of data from 10 years of these custom and automated fixes and seen all these edge cases over the years. It's a treasure trove of information to drive the agents in the future. But I'll let Kelly answer the rest of that question.

Yes. Just getting into a little bit further. If you look at the guidance for the year, it implies revenue growth of nearly 10%, and that's assuming lower nonrecurring revenue. We do anticipate higher ARR growth in this, so kind of low to mid-teens on the ARR side. Nonrecurring is a small percent of our revenue, about 5% overall, but we're aiming to reduce this even further to focus on ARR this year, and that's impacting that guidance somewhat.

Next question is from George Sutton from Craig-Hallum.

So relative to EAA. I'm just wondering if you could give us an update on the investments you're making there, some of the opportunities that you're seeing, for example, we have been seeing some hires in Netherlands as an example. But I know you've signed some nice partners. Just any update on Europe and sort of the opportunity you're seeing there?

Yes, sure. As expected, the EU tends to move a bit slower than the U.S. It's a bit bureaucratic, as you know. GDPR took a while to force and then the adoption followed over the next few years, but we are seeing pipeline building nicely, big deals in the pipeline, closed the big one in the fourth quarter and we expect to continue ramping up the EU as the year goes on. But if enforcement happens, which it will at some point, all bets are off. Demand is going to ramp very, very quickly.

Got you. And just as my follow-up on the AI side, I was intrigued by your thought that the failures are more pronounced when AI is involved relative to disability. You mentioned internet wasn't necessarily built with disability involved, and I'm going to assume AI hasn't been either. Can you just walk through what would potential partnerships be relative to AI. Could you ultimately be partnering with some of the LLMs, for example, or folks that are building out agents? Just curious your thoughts there.

No, we have very unique data. You can do a lot with that. I don't want to give away strategies on this call, but this data unlocks a lot of potential. Those with data own the gold.

Our next question is coming from Zach Cummins from B. Riley.

David, can you give us an update on potentially a ramp-up in enforcement on the DOJ Title II side. I mean we have the initial compliance date that's coming up here in a little over a month. So just curious, any update on that and progress you're seeing with some of your major partners on the federal side.

Yes, the DOJ's requirements are going to go into effect next month, as you said. We haven't heard anything to the contrary. We continue to see momentum on the reseller and even direct channels from states. We're seeing strong momentum from both partners, Finalsite, CivicPlus, and I think there's a huge opportunity to unlock those and really penetrate the customer bases over the next 2, 3 years.

Understood. And one follow-up question is for Kelly. How should we be thinking about gross margin on, I guess, an adjusted basis now that you're giving out that metric? I know a little bit of a headwind as you did the final migration work with some of those customers to the new platform. But how are you thinking about gross margin as we go through 2026?

Yes. The gross margin and adjusted gross margin, I think we expect to see relatively consistent to what we've seen. So on a gross margin basis, kind of mid- to high 70s as we pay for more AI compute, but we could see higher margins over the next couple of quarters and then adjusted gross margin, we did want to introduce because I think a lot of other SaaS companies use it, and it just is a little bit lucky with stock compensation and depreciation and amortization in there. But I think we expect both to kind of be at similar levels and with opportunities to see further growth in both of those different levers.

Best of luck with the rest of the quarter.

[Operator Instructions]

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

Not sure if I missed this, but the 8,000 customer adds looks to me like the strongest in about 2 years. Sort of curious what do you think the drivers were under -- underneath that, whether they look sustainable or extensible heading forward?

Yes. That was a large reseller in the EU, the deal we signed in the fourth quarter that made up a lot of that. We're still in the early innings in the EU, as you know and expect to see a lot more momentum.

And then if I look at the spending side, the G&A and R&D has been basically flattish for about 2 years, but the sales and marketing has been rising. So could you maybe talk about how you view your current level of sales productivity, how much more do you think you want to invest in that going ahead in fiscal '26 in particular?

Yes. We're always pretty strategic with investments in sales and marketing. I think we'll continue to invest in sales and marketing as long as we keep seeing that ROI, and we do expect to continue to invest in the EU as well.

And we're looking for 30% growth in cash flow this year. So tons of leverage dropping to the bottom line.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

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

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Good afternoon, and welcome to AudioEye's Third 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 and provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, confident, will and other similar statements of expectation identify forward-looking statements.

These statements are predictions, projections or other statements about future events, that are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could 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 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.

Thank you, operator. I want to begin by highlighting our record third quarter results. We have achieved 39 straight quarters of record revenue with $10.2 million in revenue. In the third quarter of 2025, we also achieved a record $2.5 million in adjusted EBITDA, up from $1.9 million sequentially. The adjusted EBITDA margin was a record 24%. We expect a significant increase in fourth quarter ARR revenue adjusted EBITDA and adjusted EBITDA margin.

As you may recall, we have made significant R&D and go-to-market investments in our Enterprise channel. And we are now seeing the rewards. In the third quarter, we had one of the best quarters in new business in our history, including contributions from the EU. This momentum has continued into the fourth quarter with many deals already closed in the EU and U.S. We currently have several late-stage deals with ARR over $100,000, and in EU and the U.S., which would imply a record quarter in new business ARR based on historical close rates.

Our partner and marketplace channel also continues to ramp in anticipation of the DOJ Title II rule, which begins to take effect in May 2026. Our biggest partners in the government and government adjacent spaces contributed significantly to partner ARR growth this quarter. We believe there is significant additional runway for these partners to further expand in 2026.

As discussed last quarter, we opted to migrate customers acquired from small acquisitions to eliminate duplicate systems and processes, which should further improve margins in the fourth quarter and into next year. The integration of these customers into the AudioEye Core platform is on track to be completed this quarter. As we finalize attrition from customer integrations this quarter, we expect our reported results to reflect ARR acceleration in our core direct business and growth in our reseller revenue. There have been significant recent advancements in AI which we are very excited about.

One recent advancement is the combination of the open source Playwright framework with the Model Context Protocol or MCP. Using Playwright MCP enables large language models to integrate with websites and for AI agents to perform tasks like humans. Things like interacting with buttons, billing in forms, scrolling, et cetera. Instead of analyzing code statically, an AI agent using Playwright MCP would navigate using the accessibility tree, the same structured data that screen readers for people with disabilities use. The key change is that it uses a site accessibility tree rather than the Document Object Model or DOM. Since Playwright MCP uses the accessibility treat, an AI agent using this framework should be more efficient when factoring in compute and LLM token usage, especially at scale.

We also see significant potential for Playwright MCP and our product and expect to further improve our industry-leading detection and accuracy. Based on an analysis of 1,500 legal claims, our solution is already 300% to 400% more effective than competitors. We are excited to further improve the detection accuracy and scale of our software with Playwright MCP. These product advancements should drive further margin expansion and cash flow as we head into next year.

As we generate more cash, we believe that in addition to M&A, stock buybacks can be an attractive way to deploy cash. In the third quarter, we repurchased approximately 154,000 shares, bringing our total to roughly 300,000 shares in 2025.

Moving on to guidance. For the fourth quarter, we are guiding revenue between $10.45 million and $10.6 million. For the fourth quarter, we also expect to generate a record adjusted EBITDA of $2.7 million to $2.8 million and adjusted EPS of $0.21 to $0.23. We are narrowing our 2025 full year revenue guidance to $40.3 million to $40.4 million and refining our profitability guidance towards the top end of the range with adjusted EBITDA of $9 million to $9.1 million and adjusted EPS of $0.72 to $0.73 per share.

Based on our expectation of adjusted EBITDA margins in the upper 20s in the fourth quarter, we expect to generate an annualized adjusted EPS of nearly $0.90. We are very excited about ARR growing significantly and the operating leverage in our model. We continue to have an aspirational goal of increasing adjusted EBITDA and adjusted EPS by 30% to 40% annually for the next 3 years. I'll now turn the call over to AudioEye's CFO, Kelly.

Thank you, David. As David discussed, revenue again hit record levels with Q3 2025 revenue at $10.2 million, up 15% over the comparable period of prior year, and an increase of $370,000 over the second quarter of 2025. The third quarter marked our 39th quarter of record revenue. Annual Recurring Revenue, or ARR, at the end of the third quarter of 2025 was $38.7 million, a $2.5 million increase over the end of the third quarter of the prior year and a $500,000 increase from the end of the second quarter of 2025.

Our two revenue channels are continuing to generate strong results with high year-over-year and annualized sequential growth. Overall, the enterprise channel grew around 26% over the comparable period of the prior year, and the partner and marketplace channel grew around 7% over the same period. In the third quarter, the enterprise channel contributed around 45% of revenue and 42% of ARR and the Partner and Marketplace channel contributed around 55% of revenue and 58% of ARR.

The Partner and Marketplace channel includes all revenue from our SMB-focused marketplace products as well as revenue from partners to deploy those products for their SMB customers. We saw solid ARR growth in this channel in the third quarter of 2025, driven by additional partner penetration, which will soon be affected by the DOJ Title II rule. We continue to see strong retention rates in this channel.

We opted to migrate customers acquired some small acquisitions to eliminate duplicate systems and processes. While the ongoing integration will impact the fourth quarter, we expect ARR growth to reaccelerate Customer integration will be substantially complete in the fourth quarter.

On September 30, 2025, our customer count was approximately 123,000 and a sequential increase of 3,000 from June 30, 2025. Customer accounts decreased approximately 3,000 from September 30, 2024, due to one partner renegotiation in Q1 2025.

Gross profit for the third quarter was $7.9 million or around 77% of revenue compared to $7.1 million or 80% of revenue in the third quarter of last year. As we highlighted on the last earnings call, with customer migration to the upgraded platform, we expected margins in the second and third quarter of 2025 to temporarily decrease. We are pleased with the margins remain in the high 70s in the third quarter, and we expect gross margin to be up approximately 1 percentage sequentially in Q4 as the migration to the upgraded platform complete.

While revenue increased 15% over the comparable period of prior year. On a GAAP basis, operating expenses increased only 2% or around $150,000 to $8.2 million with additional investments in sales and marketing, offset by savings and other departments. Our total R&D spend in Q3 2025 was approximately $1.6 million with approximately $450,000 reflects the software development cost in the investing section of the cash flow statement. This was consistent with Q3 2024 R&D investment. The total R&D spend was about 15% of our revenue this quarter versus 18% in the comparable period of prior year and 17% in the second quarter of 2025. We see increased efficiencies with AI tools and our product development team.

Net loss in the third quarter of 2025 was $600,000 or $0.04 per share compared to a net loss of $1.2 million or $0.10 per share in the same year ago period. The decrease was primarily driven by additional revenue, partially offset by increases in sales and marketing expense. Our Q3 2025 adjusted EBITDA was a record $2.5 million, and our adjusted EPS was $0.19 per share. The primary adjustments to GAAP earnings and EPS for Q3 2025 for noncash share-based compensation, depreciation, amortization, interest expense and litigation expense.

In the third quarter, we repurchased approximately $1.8 million of shares at an average price of $11.86. During 2025 and through September 30, 2025, we have repurchased approximately 3.6 million worth of shares at an average price of $12.05. Our balance sheet remains well capitalized with $4.6 million in cash as of September 30, 2025 and an additional $6.6 million in debt facilities available. As of September 30, our net debt defined as total debt less cash was $8.9 million, and our net debt to adjusted EBITDA ratio was 0.9x.

Free cash flow, defined as $2.5 million of adjusted EBITDA plus $450,000 of software development cost was $2 million in the third quarter. We expect this to continue increasing in the fourth quarter. We will now open the call up for questions. Operator, please give instructions.

[Operator Instructions] Your first question comes from Zach Cummins with B. Riley Securities.

This is Ethan Widell calling in for Zach Cummins. To start, it sounds like you're getting some nice traction in the EU. And you've highlighted your partnerships with [ Creode mobility ]. Can you maybe speak a little bit more to the momentum that you're seeing there?

Yes. I think we had some deals closed in the third quarter. We have some large deals active in the late-stage pipeline today. And this is before any real enforcement. We expect a substantial pickup once the fines are issued, similar to what happened with GDP.

Got it. And then it sounds like you're on track for your platform migration. Can you maybe speak to where you're at as of right now?

Sure. Yes, the migration is going well. Most customers are going to be on the new platform this quarter. So we're happy to see that. It's going really well. Yes.

Great. And then maybe if I can squeeze the third one in. Just with regard to Title II of the ADA. Have you seen any impact to the rate of compliance adoption there from the government shutdown?

No, we're not seeing anything there.

Your next question comes from George Sutton with Craig Hallum.

We have Logan on here for George. It obviously sounds like Europe is contributing nicely here. I'm just curious if you can give us anything on how the pipeline has developed over the past quarter. And kind of beyond that, is there anything you can say about close rates or conversion rates kind of relative to expectations or maybe the business historically?

It's too early to tell on the close rates. It's going very well in the EU at the moment. Kelly, anything to add on that?

No. I think just that pipeline is also growing in the EU, and we're seeing some good opportunities come up.

Okay. Got it. Kind of staying on the same note, one of the things that we picked up is that potentially in Europe under the EAA, there's a bit more emphasis on documentation of accessibility and usability statements, things of that nature. Just curious if you're seeing that also. And does that change anything competitively? Or how does that play into your product offering?

That's true. We've adopted accordingly with that. We have all the statements for each member state. .

Your next question comes from Scott Buck with HC Wainwright.

David, could you remind us what average deal size looks like in Europe versus the U.S.?

It's a bit higher. It's running I would say about 50% higher than the average field in the U.S., it's more enterprise deals that we're seeing there in upper mid-market.

And what percentage of total revenue in the quarter is coming out of Europe versus the U.S.?

In the third quarter or fourth quarter?

Third quarter. But if you want to give fourth quarter, that's fine, too.

Do see contribution still mostly U.S. and it's picking up into the third quarter or fourth quarter.

Okay. Perfect. I appreciate that. And then I wanted to ask about the aspirational goal you laid out in the release and the early comments in the call. How do we think of that in terms of what's coming from revenue growth versus gross margin expansion versus ongoing cost discipline. I mean, how do we kind of piece that out? To get to that 30% to 40% on the adjusted EBITDA line.

Yes. I think they're all coming into play. To reach that aspiration all we do need revenue to continue to increase. We see good opportunities with you, resellers, U.S. business demand. So that is obviously a factor, but there is also the gross margin opportunity. And then what we've proven is with revenue scaling, we can still be efficient with costs. So all three of those things are contributing to that aspirational goal.

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

Thank you for joining us today. 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.

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 website. Thank you for joining us today for AudioEye's Third Quarter 2025 Earnings Conference Call. You may now disconnect, and have a wonderful rest of your day.

Good afternoon, and welcome to AudioEye's Second 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 [ articulated ] to be forward-looking statements.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words belief, 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 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 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 forward-looking statements, which reflect management's belief only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements. Further, management's remarks today will include certain non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures 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.

Thank you, operator, and welcome to everyone joining us today. The second quarter was another record quarter for AudioEye. We achieved $9.9 million of revenue, representing 38 sequential quarters of growth or nearly 10 years of consistent growth, a remarkable achievement. Sequential ARR growth was $1.1 million in the second quarter.

We expect accelerating ARR and sequential revenue growth in the third and fourth quarters driven by anticipated strong demand for enterprise business in the U.S. and EU and further growth in our partner and marketplace business. For the third and fourth quarters, we expect annualized sequential revenue growth to be in the high teens, accelerating sequential revenue growth, coupled with prudent expense management is expected to result in record adjusted EBITDA margins in the high 20s by the fourth quarter of this year.

With continued operating leverage, we expect to generate strong free cash flow in the second half and beyond. We've proven that our business model is highly scalable with high gross and adjusted EBITDA margins. As we look forward to the next 3 years, we expect continued positive variable margin contribution and have an aspirational goal of growing adjusted EPS by 30% to 40% annually.

As we generate more cash, we believe that in addition to M&A, stock buybacks can be an attractive way to use cash. And in the second quarter, we repurchased approximately 144,000 shares. Next, I'd like to discuss the driver of the adjustment to our revenue outlook as I am optimistic on our go-forward prospects and want to make sure these intentional integration efforts are understood.

As previously discussed, we analyze and buy companies on a synergistic cash flow basis and structure the deals accordingly. Over the past few years, we have completed a few small acquisitions of accessibility companies that are accretive and a good fit for AudioEye's products and services.

Successfully integrating these acquisitions has contributed to our strong cash flow performance. At times, this has meant discontinuing legacy services that customers were receiving from the acquired company. To that end, we are currently accelerating the integration of recent acquisitions by standardizing our offering to avoid duplicate systems, eliminate tech debt and focus on synergistic cash flow, resulting in slight reductions in our full year 2025 guidance.

Even with the phaseout of this lower margin revenue, we expect a substantial acceleration of sequential revenue and cash flow growth in the second half of the year, and we are excited to put this integration behind us heading into 2026. In late June, the European Accessibility Act, or EAA, officially went into effect. The EAA applies to any company operating in the EU with more than 10 employees or with annual revenue of EUR 2 million or more, including international businesses selling to EU customers.

It covers a wide range of digital touch points, including websites and mobile apps. Noncompliance can result in fines of up to EUR 3 million depending on the membership and may also expose brands to additional legal risk. Under the EAA, each of the 27 EU member states is required to adopt and implement its enforcement mechanisms. We are beginning to see legal action in France for inaccessible digital platforms.

We are expanding our presence in Europe to take advantage of what we believe will be significant demand. We are off to a good start with revenue contribution in the second quarter, an acceleration expected in the third and fourth quarters. We are also less than a year away in the U.S. from the first effective date of Title II under the DOJ.

As discussed previously, this rule will have a significant impact on some of our biggest partners in the government adjacent space. We are seeing strong growth from the go-to-market initiatives with these partners and expect penetration and growth to accelerate in the second half of 2025 and into 2026.

Moving on to guidance. We expect quarterly revenues and ARR growth to continue to accelerate in the third and fourth quarters of 2025 from what we saw in the first half. For the third quarter, we are guiding revenue between $10.22 million and $10.4 million, a sequential annualized growth rate of 18% at the midpoint. For the third quarter, we also expect to generate adjusted EBITDA between $2.2 million and $2.4 million and adjusted EPS between $0.17 and $0.19.

We are updating our 2025 full year revenue guidance to between $40.3 million to $40.7 million to account for the phaseout of certain acquisition-related customers. We are reducing our adjusted EBITDA guidance to between $8.9 million and $9.1 million around the bottom end of the previous range.

With adjusted EPS between $0.71 and $0.73 per share within the previous range of $0.70 to $0.80. With our adjusted EBITDA margins expected to increase into the [indiscernible] 20s in the fourth quarter, we expect to generate a run rate adjusted EPS in the mid-$0.80s range on an annual basis as we exit the year. I'll now turn the call over to AudioEyes' CFO, Kelly.

Thank you, David. For the 38th consecutive quarter, we achieved record revenue with Q2 2025 revenue at $9.9 million, up 16% over the comparable period of prior year. ARR increased $1.1 million sequentially and $4.9 million over the same period of prior year to $38.2 million.

We continue to see contribution to our ARR revenue growth from both our enterprise and partner and marketplace channels. Diving into revenue and ARR more detail. Changes ARR and revenue are primarily driven by 3 factors: one, our ability to close new enterprise deals; two, expansion with our existing partners and engaging with new partners; and three, retention of existing customers. The enterprise channel, which is defined by large customers and organizations, including those with non-platform websites, has continued to see solid and growing lead volumes.

We have built a strong marketing and sales organization that has delivered on our goals and is also producing new and expansion revenue at near record levels. We are also excited about the initial contributions that EU is making to our results and expect to see this accelerate in the second half and in 2026.

New and expansion business from the partner and marketplace channel defined as revenue from our SMB-focused marketplace products and for partners deploying AudioEye products for their SMB customers, also have consistently delivered each quarter and did so again in the second quarter. There is a notable opportunity for further material partner expansion in the EU as well as further expansion of our current partners in anticipation of the DOJ Title II rule, which begins to go into effect May 2026.

The Retention remained strong in the quarter with current AudioEye enterprise customers and partners. As mentioned, in the second quarter, we chose not to migrate certain covers and discontinue legacy services of acquired companies. Our overall enterprise gross attention was impacted by customers acquired through recent acquisitions and a few remaining Bureau of Internet accessibility customers who we are telling.

This will continue to have some impact on ARR and revenue numbers for the rest of 2025 when conversion to AudioEye's platform should be substantially complete. As we have previously discussed, our primary goal when acquiring companies is to generate synergistic cash flow. The cash flow goals and overall returns for these acquisitions remain on track.

Overall, the enterprise channel grew 25% over the comparable period of prior year, and the partner and marketplace channel grew around 10% over the same period. In the second quarter, the enterprise channel contributed around 45% of revenue and ARR and the partner and marketplace channels contributed around 55% of revenue in ARR. On June 30, 2025, our customers count was with approximately $120,000, relatively consistent with June 30, 2024, customer count, despite the decrease in customers from one partner's customer consolidation in Q1 2025.

Customer count increased sequentially by approximately 1,000 with both the enterprise and partner marketplace customers growing. Gross profit for the second quarter was $7.6 million or about 77% of revenue compared to $6.7 million or 79% of revenue in Q2 of last year.

As we highlighted in last earnings call, with customer migration to the upgraded platform, we expected margins in the second quarter of 2025 to temporarily decrease. We expect Q3 to have a similar gross margin and as we continue the migration of customers to the new platform, so we expect to return to the high 70s by the fourth quarter of 2025 and beyond.

Operating expenses increased approximately 2% or $200,000 over the comparable period of prior year to $7.4 million. The increase in operating expenses was primarily due to additional selling and marketing expense of $800,000, additional stock compensation expense of $500,000 and additional amortization of intangibles related to acquisitions of $400,000 partially offset by a $1.4 million reversal of Congent liability related to earn-outs on acquisitions.

Our total R&D spend in Q2 2025 was $1.7 million with approximately $500,000 reflected of software development costs in the investing section of the cash flow statement. R&D represented 17% of revenue for Q2 2025 versus 20% in the second quarter of 2024. The current 17% is consistent with our Q1 2025 investment levels we continue to believe the current level of investment in R&D is appropriate for 2025.

Net loss in the second quarter of 2025 was nearly $0.00 per share compared to a net loss of $700,000 or $0.06 per share in the same year ago period. The decrease in net loss was primarily due to the increase in gross profit of $900,000, partially offset by the [indiscernible] increase in operating expenses just discussed.

Our Q2 2025 adjusted EBITDA was $1.9 million or $0.15 per share, increasing 31% or approximately $0.5 million year-over-year. The primary adjustment to GAAP earnings and EPS for Q2 2025 were changes in fair value of contingent consideration, noncash share-based compensation expense, litigation expense, depreciation and amortization, interest expense and other minor nonrecurring items.

Adjusted free cash flow, calculated as $1.9 million of adjusted EBITDA less $500,000 in software development costs was $1.4 million in the second quarter. We expect to generate positive adjusted free cash flow throughout 2025. In the second quarter, we repurchased approximately $1.8 million of shares at an average price of $12.26.

We remain well capitalized with $6.9 million of cash as of June 30, 2025, $2.6 million of debt facilities available. At June 30, our net debt was $6.5 million, and our ratio of net debt to adjusted EBITDA was 0.7x. With that, we open up the call for questions. Operator, please give instructions.

[Operator Instructions] And we'll take our first question from Joshua Reilly from Needham.

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?

Yes. I can take that one. Acquisition sharing is the driver for further reduction in revenue. We did see customers churn out in Q2 related to that migration and then forced migration to auto products and services. We do think this will still have some impact going into Q3 and Q4 of 2025.

We think kind of overall AR probably be about $1 million to $1.5 million of churn for acquisition-related customers, which includes some culling of old BoA 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.

Got it. And then -- Okay. That's helpful. Maybe moving on to some business-related questions. 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?

It's hard to really know that because you're probably getting federal and you're missing some of the states. We do it 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.

5 Got it. And then on the EU stuff, I guess, 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?

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.

And we'll take our next question from George Sutton from Craig Hallum.

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

Yes, for the EU business.

Okay. And you had mentioned that you were expanding your presence in Europe. Can you be a little more specific how you're expanding your presence?

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.

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?

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

So 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?

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 or GRR metrics, really 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.

Let me just ask finally on the -- I'm curious, 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?

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 customs [indiscernible] . And our -- so that is who we're pushing clients to make that are on these legacy services. It is directly related higher churn expected is directly tied to that reversal of content liability that is played to earn out, yes.

The lower margin revenue customers. That's who we're really phasing out that don't want to pay more money for a better platform.

And we'll take our next question from Zach Cummings from B. Riley Securities.

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?

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.

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? I know it can marry from member states to number state, but just because if there's any light you can set on that.

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.

Got it. And 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.

Yes. They're focusing on investing resources, obviously, to capture the opportunity in front of them. And when I say day, that's final science 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.

We'll take our question from Richard Baldry from Roth Capital.

[indiscernible] , 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 develop a 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?

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.

Also integrating to your point, AI and our development workflow within our own CIDD pipeline and using AI with our accessibility experts when writing custom fix. So I think it's a long-term driver of margin and scale.

Again, I don't know if you've already addressed this, so I apologize if you have. But 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?

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.

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

Yes. Thank you for joining us today. 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.

Thank you. 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 Second Quarter 2025 Earnings Conference Call. You may now disconnect, and have a great day.