AEYE - AudioEye Grows Sales Leads But Sees Lengthening Sales Cycles

2023-03-07 01:15:57 ET

Summary

• AudioEye reported its Q3 financial results in November and is set to report Q4 on March 9.
• The firm provides website accessibility monitoring and related compliance capabilities.
• Its revenue growth shows promise but sales cycles are elongating and the management needs to convert its leads into further revenue growth.
• Until its cash and cash flow metrics improve and it reaches operating breakeven, I'm on Hold for AEYE.

A Quick Take On AudioEye

AudioEye ( AEYE ) reported its Q3 2022 financial results on November 10, 2022, missing revenue but beating EPS consensus estimates.

The company operates a SaaS platform for website accessibility monitoring and related compliance requirements.

Although prospective investors may view AEYE’s EV/Revenue multiple of 2.5x as a potential buying opportunity, until the firm reaches operating breakeven, improves its cash and cash flow metrics and reports normal sales cycle times, I’m on Hold for AEYE stock.

AudioEye Overview

Tucson, Arizona-based AudioEye was founded in 2005 to provide accessibility monitoring and related compliance information for agencies, websites on the open web and on specific platforms.

The firm is headed by Chief Executive Officer David Moradi, who was previously CEO of Anthion Management, a technology venture fund and prior to that was a portfolio manager at Pequot Capital Management.

The company’s primary offerings include:

• Website accessibility checker

• Color contrast checker

• Accessibility training

The firm acquires customers through its in-house sales and business development efforts as well as through channel partners.

AudioEye’s Market & Competition

According to a 2021 market research report by Mordor Intelligence, the global market for web analytics was an estimated $3 billion in 2020 and is forecast to exceed $7 billion by 2026.

This represents a forecast very strong CAGR of 15.2% from 2021 to 2026.

The main drivers for this expected growth are a continued rise in the automation of online marketing and growth in online shopping by consumers and businesses.

Also, the COVID-19 pandemic will likely provide a significant boost to web analytics providers as businesses demand more information about their online properties to cater to more customers performing buying activities online.

North America is forecast to continue to provide the highest demand of any region worldwide, although the Asia Pacific is expected to grow demand at the fastest rate through 2025 as the chart shows below:

Within AudioEye’s specific market, the global market for website accessibility software was an estimated $386 million in 2021 and is forecast to reach $796 million by 2028, according to a research report by Market Research Guru.

This represents a forecast CAGR of 10.9% from 2022 to 2028.

Key companies in this space include:

• Google

• Siteimprove

• DYNO Mapper

• Deque

• Crownpeak

• Level Access

• DubBot

• Monsido

• Silktide

AudioEye’s Recent Financial Results

• Total revenue by quarter has grown according to the following chart:

• Gross profit margin by quarter increased slightly year-over-year:

• Selling, G&A expenses as a percentage of total revenue by quarter have dropped materially in recent quarters:

• Operating income by quarter has remained negative though with some improvement recently:

• Earnings per share (Diluted) have also come off their worst lows in late 2021:

(All data in the above charts is GAAP)

In the past 12 months, AEYE’s stock price has risen 18.2% vs. that of the Nasdaq 100 Index’s drop of 7.3%, as the chart indicates below:

In its last earnings call (Source - Seeking Alpha), covering Q3 2022’s results, management highlighted the quarter’s positive revenue growth for the 27th straight quarter, ‘despite some macroeconomic headwinds.’

Revenue growth was due to gains in its various partner and marketplace and enterprise channels.

Management noted the progress it has made since the beginning of 2022 in driving down costs, which indeed it has, but the firm still has a road ahead to achieve operating breakeven.

As to its financial results, total revenue rose 24.2% year-over-year while ARR (Annual Recurring Revenue) grew by 19%.

Management did not disclose any company or customer retention rate metrics, other than to characterize them as ‘high’ without further elaboration.

AEYE ended the quarter with approximately 81,000 total customers, up from 80,000 a year prior.

For the balance sheet, the company finished Q3 2022 with $7.8 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was $7.1 million, of which capital expenditures accounted for $100,000. The company paid a hefty $5.7 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For AudioEye

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

AEYE’s most recent GAAP Rule of 40 calculation was negative (10.3%) as of Q3 2022, so the firm is in need of substantial improvement in this regard, despite recent better results, per the table below:

(Source - Seeking Alpha)

Future Prospects For AudioEye

Looking ahead, management has scheduled its Q4 and full year 2022 conference call for March 9, 2023.

Leadership is focused on a recurring revenue model going forward and the Q3 results of a growth of ARR of 22% during Q3 2022 versus 2021 is a promising start.

However, the company's financial position suggests it may need to obtain more capital given its low cash position relative to its recent historical cash use. This may take the form of an equity offering, diluting shareholders in the process, or incurring debt.

Also, while the firm is seeing ‘record leads’ for new business, it is also experiencing some lengthening of sales cycles, which is consistent with what I’ve been seeing other software-centric companies experience.

Regarding valuation, the market is valuing AEYE at an EV/Sales multiple of around 2.5x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:

So, by comparison, AEYE is currently valued by the market at a significant discount to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.

The primary risk to the company’s outlook is a continued macroeconomic slowdown, which may accelerate new customer discounting, is already producing slower sales cycles and can reduce its revenue growth trajectory.

With major tech companies continuing to lay off employees after hiring too many during the pandemic, I’m not optimistic about AEYE’s near-term prospects.

Although prospective investors may view AEYE’s EV/Revenue multiple of 2.5x as a potential buying opportunity, until the firm reaches operating breakeven and reports normal sales cycle times, I’m on Hold for AEYE.

For further details see: