AudioEye, Inc. Common Stock 2026 Q2 Earnings Call

Thank you, operator, and good afternoon, everyone. Q2 marked our 42nd consecutive quarter of sequential revenue growth, and we're 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're 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 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 a record $3 million, representing 28% adjusted EBITDA margin, over $600,000 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. The Internet continues to be highly inaccessible, and we believe it is becoming more inaccessible as AI coding becomes more prevalent. LLMs 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-assisted code as key drivers. In June, we released the third annual Digital Accessibility Index, covering more than 165,000 pages across 6,100 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 haven't been prioritized for accessibility, 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'll 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 aren't focused, in web pages with less traffic or across a whole region still catching up with a new law. That's where our solution is built to scale. AudioEye's automation finds 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 current state of EAA enforcement.

The European Accessibility Act is beginning to shift from a compliance deadline to active enforcement, though 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 have 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 result, 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're seeing early EU momentum building, with Q2 marking our strongest EU contribution to ARR growth to date.

We continue to take a strategic, multi-channel 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 $235,000 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 at least $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, an adjusted EBITDA of $3.5 million, plus around $400,000 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. Matt brings nearly 20 years of finance experience, including public company and operational finance background, making him a strong partner as we scale.

I'm looking forward to working closely with him in this next phase of growth. With that, I'll hand it over to Matt 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 June 30th, 2026, up from $41.2 million as of March 31st, 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 30th, 2026, AudioEye had approximately 129,000 customers, up 9,000 from June 30th, 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 non-recurring 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 June 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 June 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, which did not recur in the current period.