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Good afternoon and welcome to AudioEye's Second Quarter 2026 Earnings Conference Call. Joining us for today's call are AudioEye's Chief Executive Officer Ms. Kelly Georgevich and Chief Financial Officer Mr. Matthew Domeyer. Following their remarks, we will open the call for questions from the company's public 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 site 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-looking statements. The Private Securities Litigation Reform Act of 2000 provides a safe harbor for such forward-looking statements. Words such as believe, expect, anticipate, estimate, confident, will, and other similar statements of expectation identify forward-looking statements. These statements are predictions, projections and 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, comments made during the conference call and in the Risk Factors section of the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its other reports and filings with the Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements which reflect management's beliefs only as of the date hereof. AudioEye does not undertake any duty to update or correct any forward-looking statements. Further, management's remarks today will include certain non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures is available in the company's earnings release or otherwise posted in the Investor Relations section of its website at www.audioeye.com. Now I would like to turn the call over to AudioEye's CEO, Ms. Kelly Georgevich.
Thank you, operator, and good afternoon, everyone. Q2 marked our 42nd consecutive quarter of sequential revenue growth, and we are excited about the continued momentum throughout the business. Revenue came in at $10.7 million and ARR grew $1.1 million sequentially to $42.3 million. This reflects low double-digit year-over-year ARR growth. Adjusted EBITDA and free cash flow have reached a pivotal point, and we are raising our full year adjusted EBITDA guidance. Adjusted EBITDA has grown at a CAGR of 42% over the last two years and we now expect to achieve over $15 million run-rate adjusted EBITDA in the fourth quarter of 2026. We also expect meaningful free cash flow generation in the second half of 2026 as we expect litigation expense to trend down. We are currently evaluating options to deploy excess cash including potential share buybacks and dividends. In the second quarter, adjusted EBITDA reached $3 million, representing a 28% adjusted EBITDA margin, over $600 thousand higher than Q1 2026 and $1.1 million higher than Q2 2025, representing a 54% increase from the prior year quarter. As ARR scales, a growing share of incremental revenue is flowing to the bottom line. We expect that trend to continue and accelerate in the second half of 2026. We have proven that our operating model is highly scalable and expect continued growth of cash flow in 2027 and beyond. The Internet continues to be highly inaccessible, and we believe it is becoming more inaccessible as AI coding becomes more prevalent. Large language models were not built with accessibility in mind which is contributing to the problem. WebAIM's latest study found that 95.9% of top homepages had detectable WCAG failures averaging 56.1 errors per page, up 10% year-over-year, the first increase after six years of steady improvement. WebAIM points to third-party frameworks and AI assistant code as key drivers. In June, we released the third annual Digital Accessibility Index covering more than 165 thousand pages across 6.1 thousand domains in the U.S. and Europe. Two findings stood out most in this report. First, many organizations focus their accessibility efforts primarily on the homepage and typical user flows, but interior pages now carry more risk. They average 10% more issues than homepages and accounted for roughly 60% of accessibility claims filed last year. As the use of LLMs increasingly exposes pages that have not been prioritized for accessibility, this is contributing to increased litigation. Second, despite the European Accessibility Act having been in place for over a year, EU websites on average still carry roughly 25% more accessibility issues per page than comparable U.S. sites, a gap I will discuss in more detail when I walk through where EAA enforcement stands. Both findings point to the same thing: the risk is living where most companies are not focused — on web pages with less traffic, across the whole region, still catching up with the new law. That is where our solution is built to scale. AudioEye's automation signs and fixes far more issues than any other solution on the market, automatically in real time across every page a customer has. Our custom fixes handle the majority of remaining issues in a scalable, cost-effective way. The 25% accessibility gap between EU and U.S. sites I just mentioned aligns with the current state of EAA enforcement. The European Accessibility Act is beginning to shift from a compliance deadline to active enforcement; we still call it early innings, not yet an inflection point. Sweden and the Netherlands both began market surveillance and reporting requirements in late 2025 and escalated those efforts throughout this year. Germany has seen a wave of warning letters targeting non-compliant e-commerce operators. Most notably, French courts issued a ruling in June against a major retailer rejecting the argument that partial compliance — in that case roughly 71% conformance — satisfies the law. The court held that digital accessibility is an obligation of results, meaning sites must be fully accessible, not mostly accessible, and ordered full remediation within six months under the threat of daily penalties. These cases are important signals of future enforcement. We are seeing early EU momentum building with Q2 marking our strongest EU contribution to ARR growth to date. We continue to take a strategic multichannel approach in the EU, positioning ourselves to capitalize on the inflection point when it arrives. Now turning to guidance. For the third quarter of 2026, we expect revenue between $10.85 million and $11.05 million, a sequential quarterly increase of approximately $235 thousand at the midpoint. We expect further acceleration of sequential revenues in Q4. For the full year 2026, we are maintaining the midpoint of our revenue guidance while tightening the range to between $43.5 million and $44 million. For the third quarter of 2026, we expect adjusted EBITDA between $3.4 million and $3.6 million representing an adjusted EBITDA margin of approximately 32% at the midpoint, and adjusted EPS of between $0.26 and $0.28 per share. For the full year 2026, we are increasing adjusted EBITDA guidance from at least $12 million to $12.7 million. This represents a 29% adjusted EBITDA margin at the midpoint of revenue guidance and 40% year-over-year growth. We also expect adjusted EPS of at least $0.98 for 2026 and a run-rate adjusted EBITDA of over $15 million by the end of 2026. We expect cash flow to ramp significantly. In the third quarter, at the midpoint of guidance, adjusted EBITDA of $3.5 million plus around $400 thousand of software development costs implies $3.1 million of adjusted free cash flow. We expect adjusted free cash flow to accelerate further in Q4. Additionally, we expect litigation expense to come down in the second half resulting in substantial cash generation. Lastly, I want to formally welcome Matthew Domeyer, who joined us as CFO in July. Matthew brings nearly 20 years of finance experience including public company and operational finance background making him a strong partner as we scale. I am looking forward to working closely with him in this next phase of growth. With that, I will hand it over to Matthew to cover our financial results in more detail.
Thank you, Kelly. Revenue for the second quarter of 2026 was $10.7 million representing a 9% increase from the comparable prior year quarter. As Kelly mentioned, this marks our 42nd consecutive period of record revenue. Annual recurring revenue was $42.3 million as of 6/30/2026, up from $41.2 million as of 3/31/2026, reflecting 11% annualized sequential ARR growth. ARR also grew 11% compared to the prior year comparable period. We continue to expect ARR growth in future quarters and that the compounding impact of sequential ARR growth will generate notable growth rates in revenue in the third and fourth quarters of this year. As of June 30, 2026, AudioEye had approximately 129 thousand customers, up 9 thousand from 6/30/2025. The increase is primarily in our partner and marketplace channel driven by further expansion with existing partners. Going deeper into revenue by our two channels, AudioEye's enterprise channel consists of our large customers and organizations, including those with non-platform custom websites, who generally engage directly with AudioEye sales personnel for pricing and solutions. In Q2 2026, enterprise revenue was flat year over year with lower nonrecurring revenue offset by increased recurring revenue. Enterprise ARR grew 5% over the comparable period of the prior year and sequential annualized enterprise ARR growth was 17%. As of 6/30/2026, 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 second quarter of 2026, partner and marketplace channel revenue grew 16% year-over-year and contributed meaningfully to ARR growth in the quarter. As of 6/30/2026, our partner and marketplace channel accounted for approximately 59% of ARR. We continue to see solid expansion from our state and local government partners specifically in the second quarter of 2026. Gross profit for the second quarter was $8.4 million or approximately 79% of revenue, compared to $7.6 million or 77% of revenue in Q2 of 2025. Adjusted gross margin, defined as gross margin adjusted for non-cash items in our cost of revenue such as amortization of capitalized software development costs and stock compensation expense, was 84% in Q2 2026 compared to 83% in the prior year comparable period. In the second quarter of 2026, operating expenses were $9 million compared to $7.4 million in Q2 2025. The year-over-year increase in total operating expenses was primarily due to a $1.4 million benefit from the revaluation of contingent consideration in the prior year's comparable quarter that did not recur in the current period. Our total R&D spend in Q2 was approximately $1.2 million, which includes approximately $400 thousand capitalized as software development costs and recorded in the investing section of the cash flow statement. Total R&D spend was around 12% of Q2 2026 revenue, down from 17% in Q2 2025 primarily due to reduced headcount resulting from efficiencies realized through the implementation of AI tools and automation. Net loss in the second quarter of 2026 was $900 thousand or $0.07 per share, compared to breakeven or $0.00 per share in the same year-ago period. Excluding the impact of the $1.4 million revaluation of contingent consideration in the comparable period of the prior year, net loss improved mainly due to higher gross profit. In the second quarter of 2026, we achieved adjusted EBITDA of approximately $3 million or $0.23 per share and an adjusted EBITDA margin of 28%. This compares to Q2 2025 adjusted EBITDA of $1.9 million or $0.15 per share and 20% adjusted EBITDA margin. The $1.1 million increase in adjusted EBITDA over the comparable period of the prior year was primarily driven by an increase in gross profit. In the second quarter, we generated $2.6 million of adjusted free cash flow, calculated as adjusted EBITDA of $3 million less $400 thousand of software development costs, an improvement of $1.2 million from the second quarter of 2025. Turning to the balance sheet, we ended the quarter with $8.7 million in cash and $3 million available under our revolving line of credit. As of 6/30/2026, our net debt, defined as total debt less cash, was $8.1 million and our net debt to adjusted EBITDA ratio using our 2026 adjusted EBITDA guidance is approximately 0.6x. With that, I will turn the call back to the operator to open the line for questions.
分析師問答
Thank you. We will now take questions from the company's public analysts. At this time, your first question comes from Joshua Reilly with Needham and Company. Please state your question.
All right, great. Thanks for taking my questions. Nice job on the quarter here. So if you look at these warning letters that are now being sent out in Europe, how do you think about potentially accelerating sales investments there and how quickly can you scale up sales support there if demand really takes off over the next few quarters? And does it make sense to maybe add additional sales partnerships in Europe?
We are definitely watching developments closely in the countries and keeping an eye on progress. We are being strategic in investments in the EU. We do have resources in the EU and are investing in a multichannel approach. We view it as early innings, but at some point it will hit an inflection point, and we are ready to capitalize on that. We are making inroads now to be prepared to scale.
Got it. And then I guess, a couple of items on AI. First, what are you seeing in the direct channel with the larger customers in terms of their willingness to spend given the AI-driven cost environment right now? And then along with the AI angle, second part to the question is, how are you doing in terms of implementing AI internally for R&D and customer service? And how is that efficiency trending relative to your expectations?
Right now, we are not seeing any notable impacts on willingness to spend; AI is adding more value to customers. AI coding tools are trained on the Internet that was not built with accessibility, so we are not seeing an influx of competitors that meaningfully changes the market. One unique thing about us is that we have the best automation in the industry; our automation addresses 89% to 300% more issues than competitors. We have also taken a unique approach to accessibility with custom fixes and a proprietary dataset no one else has. On the enterprise front, customers see us as protection against litigation and not as a cost-cutting opportunity. On your second point, everything we are doing starts with our proprietary data: millions of human reviews and billions of real-world fixes. No one else has that data. We are using it to make reporting easier for clients, to make fixes easier, and to ensure our tools work seamlessly with developers who want to make source fixes, and we are utilizing that proprietary data in new ways. More to come on that in the next handful of months.
Got it. One last question for me is on the partner versus direct channel revenue growth rate. Could you give a little more color on what you saw in terms of the year-over-year growth rate between partner and direct channels?
If you look at revenue year over year, direct revenue growth was impacted by the shift from nonrecurring revenues to recurring revenue. If you look at ARR growth in enterprise, it was notable both sequentially and year over year. We think ARR growth is the right metric to focus on. On the partner marketplace side, we continue to see good results from our existing partners and continued expansion. So there is good growth on both the revenue side and the ARR side in that channel.
Awesome. Thank you, guys.
Your next question comes from George Sutton with Craig-Hallum. Please state your question.
Thank you. And I would like to welcome Matthew to the call. I am particularly enthused to see the partner strengths in front of the mandates actually going into effect. Can you give us a little picture on focus? I know you have a couple key partners, and I know they have had specific salespeople dedicated to this. I assume they are seeing some impact as a result? We are seeing all systems go on the partner side, and we know the date was pushed back to 2027, but we are seeing still really good results from those partners. I think everyone's all eyes on 2027 and further penetration into their customer base before that deadline. So just on the cash deployment theme, obviously M&A has been one area that you have been looking at for a while. I know some of the challenges have been prices expected by sellers. Where do things stand on the M&A side as you are thinking of cash deployment?
As I mentioned earlier, we do expect to generate significant free cash flow as we go into the second half of the year and into 2027, and that opens up a number of different possibilities including M&A. We are always evaluating M&A — it has to be the right fit and at the right price — but I do think it could be an opportunity for the future.
Alright, that is it for me. Thank you.
Your next question comes from Zachary Cummins with B. Riley Securities. Please state your question.
Yes. Thanks and congrats on a good quarter. On the AI features that you have been adding, are you seeing an opportunity for that to drive pricing higher? And conversely, how difficult will it be for large language models or for AI coding to develop accessibility capabilities? I understand you have proprietary data for that, but are they able to chip away at that?
I will answer the first question first. Yes, with AI capabilities there is opportunity to introduce supplemental products, and over time ASP per customer could grow because of that. We see big opportunities ahead. As mentioned, LLMs were not trained on accessible websites and are actually creating more inaccessible sites, which raises demand for our solutions. Our proprietary dataset — millions of human fixes over ten years and billions of real-world fixes — is something no one else has, and it lends itself to building interesting AI capabilities that LLMs or other competitors do not currently have access to.
And then lastly, on litigation, can we assume that litigation expense will stay at lowered levels for the foreseeable future, or what are your thoughts in terms of that?
As I mentioned, Q2 litigation expense came down about 40% from Q1. We do expect it to trend down in the second half of 2026. We cannot comment further on active litigation, but you can expect significant additional cash generation with litigation trending down in the second half of 2026.
At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Ms. Kelly Georgevich for her closing remarks.
I would like to thank our employees, customers and investors for their support. We look forward to providing an update on the next quarter. 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 Investor Relations section of the company's website. Thank you for joining us today for AudioEye's Second Quarter 2026 Earnings Conference Call. You may now disconnect.