AudioEye, Inc. Stock

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.

[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 CEO, the company would like to remind all participants that statements made by audio in 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 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 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 its website at www.audioeye.com.

Now I'd 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'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 2 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 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 at 95.9% at top homepages had detectable wait [indiscernible] failures averaging 56.1 errors per page, up 10% year-over-year, the first increase after 6 years of steady improvement. WebAIM points to third-party framework and AI assistant 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 averaged 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 Hurricane 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 we'll discuss in more detail when I walk through where EAA enforcement stands. Both findings point the same thing. The risk is living where most companies aren't focused. -- in web pages with less traffic or across the whole region still catching up with the 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. site 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 have escalated those efforts throughout this year. Germany has seen a wave of warning letters targeting noncompliant e-commerce operators. Most notably, French court 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 6 months under the threat of daily penalties.

These cases are important signals of future enforcement. We're seeing early new 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 $235,000 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, and adjusted EBITDA of $3.5 million less 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 Matt 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 30, 2026, up from $41.2 million as of March 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 129,000 customers, up 9,000 from June 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 2 channels. AudioEye 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 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 noncash 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.

Our total R&D spend in Q2 was approximately $1.2 million, which includes approximately $400,000 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 $0.9 million or $0.07 per share compared to breakeven or $0 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% of 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 plus $400,000 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 June 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 0.6. With that, I'll turn the call back to the operator to open the line for questions. Operator?

[Operator Instructions]

And your first question comes from Joshua Reilly with Needham & Company.

Great. 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 in that region? 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?

Yes. We're definitely watching it closely and keeping an eye on all countries and developments. We are being strategic in investments in the EU. We do have resources in the EU and are investing in a multichannel approach. So I think we're ready when we've said -- we still view it as early innings, but at some point, it will hit an inflection point, and we're ready to capitalize that and making inroads now to do that.

Got it. And then I guess a couple of items on AI. First of all, what are you seeing, I guess, in the direct channel with the larger customers in terms of their willingness to spend given the AI-driven concern software spend 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 there relative to your expectations?

Yes. Yes, good question. Right now, we're not seeing any notable impacts besides adding more value to customers on the AI front. As we mentioned previously, AI coding tools are trained on the internet, that's not built with accessibility. So we're not seeing any impact from competitors coming in. One of the unique things about us is that we have the best automation in the industry, the [indiscernible] study has our automation of 89% to 300% more than competitors, and we've also taken that unique approach to accessibility of custom fixes and no one has that proprietary data set. I'd also say, I think the other thing to keep in mind is that we do provide litigation protection at the end of the day. So on the enterprise customer front, they see us as protection, and it's not something that they're -- don't see as an opportunity on the cost-cutting front.

On your second point, we're really -- everything we're doing is starting with the proprietary debt that we have. We have millions of human reviews and billions of real road fixes and no one else has that data. And so we're using it currently to make reporting easier for clients to understand to make fixes easier, to make sure that we're seamlessly with our -- for people who are in dev environment and want to make source fixes, but we're also making sure we utilize that proprietary debt in new and exciting ways, and I think more to come on that front in the next handful of months.

Got it. One last question for me is on the partner versus direct channel revenue growth rate. I believe you mentioned that there was a couple of moving parts on the direct side there. Could you just -- in terms of the year-over-year revenue growth, could you just give a little more color on what you saw in terms of the year-over-year growth rate between partner and direct channels.

Yes. On the -- if you look to your revenue year-over-year, the direct revenue year-over-year growth was impacted by -- I think we've mentioned this before, that shift from nonrecurring revenues to recurring revenue. If you look at ARR growth in enterprise, it was pretty notable, both sequentially and year-over-year, and we really think you're focusing on that ARR growth is way to look there. And on the partner marketplace side, we continue to see good results from our existing partners and continue to see that span, so good growth on both the revenue side and the ARR side in that channel.

Your next question comes from George Sutton with Craig-Hallum.

Thank you, and I'd like to welcome Matt to the call. So Kelly, I'm particularly enthused to see the partner strength in front of the mandates actually going into effect. Can you just give us a little picture on sort of the focus, and I know you've got a couple of key partners, and I know they've had specific salespeople dedicated to this. I assume they're seeing some impact as a result.

We're seeing [indiscernible] go on the partner side for -- and we know that [indiscernible] was pushed back to 2027, but we're seeing still really good results from those partners. And I think everyone is now just 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've been at least looking for a while. I know some of the challenges have been prices expected by the sellers. Where do things stand on the M&A side as you're thinking of cash deployment?

Yes. As I mentioned, we do expect to generate significant free cash flow as we go into second half of the year and into 2027, and that just opens up a number of different possibilities, and M&A would be one of those. We always, kind of, are evaluating M&A. It's got to be the right fit, it's got to be at the right price. But I do think it could be an opportunity for the future.

And your next question comes from Erik Suppiger with B. Riley Securities.

Congrats on the good quarter. On the AI features that you've been adding to your platform, are you seeing -- is there opportunity for that to drive pricing higher. And conversely, how difficult will it be for large language models or for coding -- for AI coding to develop accessibility capabilities? I understand you have proprietary data for that. But are they able to chip away at that?

Yes. I'll answer the first question first. Yes, I think with AI capabilities, there's opportunity to introduce supplemental products. And so over time, I think as like an ASP per customer, it could grow up because of that. But I think big opportunities ahead in general. We've commented on this a bit. But as I might have already said this in the comments, but WebAIM supports it, that websites are just getting more accessible. LLMs weren't trained on accessible websites, so they're actually creating more inaccessible sites. And the thing that makes us really unique that no one else has is our proprietary data set. So we've been doing human fixes for 10 years, and no one has been doing that. And all of that data really lends itself to building out something really interesting in the AI space that LLMs or other competitors don't have access to in terms of data.

Okay. And then lastly, on litigation, can we assume that that's going to stay at lower levels for the foreseeable future? Or what are your thoughts in terms of that?

Yes. As I mentioned, Q2 was about 40% of -- or came down 40% from Q1, and we do expect it to ramp down in the second half of 2026. We can't comment any further on active litigation, but I think you can expect a significant additional cash generation with the [indiscernible] trending down in the second half of 2026.

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

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. 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.

Awesome. Good afternoon, everyone. Thanks for joining us here today. My name is Jash Patwa. I'm a member of the automotive equity research team here at JPMorgan. It's my pleasure to be joined by Matt Fisch, Chairman and CEO of AEye as well as Conor Tierney, Chief Financial Officer. It's always great to have you at the conference. So thanks for being a supporter. Just to kick things off, I'll hand it over to Matt to walk us through a few slides, and then we'll get into Q&A and take questions from the audience. Thanks, Matt.

Okay. Great. Well, yes, good to be here, fourth year for me. And no hurricane coming or anything like that. So a nice relaxing time. We have a few slides to go through in the presentation. We have a little bit of a product introduction that we share here and then save most of the time for Q&A. So the question since I've been here last year, key question is, is lidar still essential? Is it still central to autonomy? And I love this recent quote from Rivian. It's not the only one, but still fits nicely between that spot. It's complementary and especially in automotive autonomy between radar and camera. It sees very far like radar can, but it sees a lot sharper and a lot resolution.

And when you see the comments here about Level 4, so we have Don here on the stage earlier, I think that's an important factor of how the direction for the tech stack gets influenced moving forward. A quick picture of our -- this is our car that we work on jointly with the University of Toronto. It's their WINDR driving program. Lidar is still the only sensor that can see into direct sunlight. Rain is practically invisible to our sensors or driving in bad weather. Lidar is still really a key piece to the puzzle in the tech stack. One of the things we learned since we were here last year about the OEM needs, especially on the automotive side, I'd say when I was standing here on stage last year, there was this notion of having a lidar in a passenger vehicle.

And I think that's changed quite a bit. It's -- I call it monolithic lidar. It's one size fits all that takes on many tasks inside the vehicle. And I think what we're seeing now is a much more specialized set of use cases, which play well to the architecture that we have. We'll get into that in a second here. Supply chain resiliency. We're an American company. We manufacture in America. And this has become a front and center topic when talking with purchasing departments in OEMs regardless of whether it's passenger vehicle, robotaxi and trucking. In Western Europe and the U.S., it's table stakes at this point to have a very resilient supply chain. And well, good thing, Don's not here, but no intention to support any particular trucking manufacturer.

But one of the things we saw in the first half of the year is an enormous amount of capital coming into the Level 4 players, particularly autonomous trucking, Uber sponsored a lot of cash for that. This L4 mindset that you saw early at the beginning of the presentation is starting to influence and strengthen our position about lidar being essential in this space. One of the things that also ties back to what I mentioned earlier about moving away from monolithic lidar, we talked a lot about cost and integration cost of a new sensor last year. And there's a couple of things. One is just the BOM cost about adding hardware to a vehicle, be it a truck or a passenger vehicle. But the other piece is just the overall integration cost.

Don mentioned it earlier here when he was on stage about you need to train sensors, there's software integration and compatibility that needs to happen. And this is one of the areas that AEye with our Apollo sensor and what I'm going to be talking about next, SDV, software-defined vehicle, we are the SDV of lidar. And imagine a sensor, we talked last year, we have a kilometer of range in our sensor. And think about that as a checkbook. Where do you take all that horsepower and performance? Does a car need to see a kilometer ahead? Maybe not. But we can do other things with it and be super flexible. It's a new industry. The -- that was great. The understanding of what exactly the sensor needs to do is evolving month-to-month and year-on-year.

We're super flexible in that regard. And we can sort of -- here's a case where the red is we're spending a lot of our budget in the sensor and the cooler colors so we're spending less. We can rebudget this depending on a particular OEM, passenger vehicle versus truck. And we're seeing this becoming a very important factor as we're moving forward. I mentioned supply chain resiliency. Same as last year, we're partnered with experienced Tier 1 automotive supplier. Our footprint is global and flexible, but most importantly, today, we're able to do manufacturing in North America. And again, this is a check box, you walk into an OEM purchasing department today. If you're not able to check this box, it's see you later.

Capital light, this is a value we've clung to at the company. And because our assembly and supply chain process is so very modular, we're able to scale up and scale down manufacturing as needed. Really what drives the cost for us is the working capital and the components, not the initial investment of the line itself. And we're ready to scale. The current line that we announced late last year is ready to ramp up to 60,000 units a year. Again, this is a check box when you're walking into a purchasing department at an OEM is, okay, can you produce thousands of these things to support our first vehicle line. I know there was a question that came in the pre-notes about NVIDIA. Integration cost, that's really what everybody needs to think about and what we're thinking about here. It's not just how much does the hardware cost, but it's also how much software integration and training work that you have to do to integrate a new sensor into the self-driving stack.

And NVIDIA has really been a great partner for us in this place. And they've got their hardware, at least they've stated in 35-plus OEMs. And it's really powerful to be able to walk into an OEM and be prequalified and very compatible with that platform. It's in essence, making the statement about the maturity of the product and the integration cost. And they've been such a great partner, not only just about pushing us on the representative automotive sensing requirements, but also the automotive grade piece. We're a tech company. Automotive reliability is something that is evolving and developing for a tech company like us. NVIDIA has been a great partner in helping make sure that we're hardened and robust by being a part of their Halos safety lab.

So we got smaller since last year, and I'm happy to show here, this is our Stratos sensor, fits nicely in the palm of my hand. We had a 1-kilometer sensor last year called Apollo, and this is now 1.5 kilometers, essentially double the budget, double the checkbook size of performance. And you'll see it tucked neatly under the rearview mirror in a vehicle application. That's actually a slightly larger. That's the Apollo sensor, slightly larger. And this is just really an output of that learning, meaning monolithic sensors not required. That was keeping the cost of lidars in general higher. Imagine, for example, an OEM who would use a long-range sensor, be up above the mirror and then 2 shorter range sensors in the side view mirrors or the headlights, that's actually a cheaper solution than one single monolithic sensor.

And this has allowed us to really take out some of the overengineering that's been done for this well. This one lidar has to do the entire work for the passenger vehicle and allowed us to increase and place performance where the OEM needs it most and also drive down the cost of the product and make it smaller at the same time. Last but not least, so now we -- when we were here last year, we talked about autonomy as the market, and that has expanded since then to more generally what we call physical AI. And lidar has certainly had a place in the broader market of physical AI, and that's where the thinking part of the machine interacts with the physical world. And I'll tell you, defense has been a very hot topic for us. There's been a lot of inbound for us with unmanned ground vehicles in high-risk situations, drones in-flight and also manned vehicles.

These are not sort of the hobby level drones, but larger drones that need to avoid things like power lines. Like we have in the picture there, we're incredibly good due to the tech stack to see power lines that are 3 centimeters in thickness at hundreds of meters away. So that power of long-distance sensing we brought into the automotive space is now paying off in defense. These guys fly low altitude missions, power line is a big hazard. These are very expensive drones. They are not disposable. And for example, we've been able to add a key technology there. And last but not least, counter-UAS, that's the swarm size drones because of our long range and ability to focus energy out far and ability to see very small objects. We've been very busy in this space.

In fact, it's been making up the largest chunk of our revenue here in the first half of the year. So as physical AI ramps, we feel like we're in a solid position. We continue to have strong differentiation, the ability to point performance in the way that an OEM or other markets need it. They have a big budget. We give them a large budget and they can spend it how they want. If you followed our earnings, this is the recent commercial announcement that's been -- that was the underpinning. We had competition there that was fierce. Our ability to put the performance into a high frame rate allowed us to be unmatched in that particular market. Manufacturing North America and that high flexibility as we continue to learn, physical AI market continues to develop.

Our balance sheet is solid. We have a clean balance sheet. Thank you, Conor, and a strong cash position with a large customer pipeline, 25 customers paying revenue today, and we have the balance sheet to bridge that gap, we believe, to that sweeter spot in revenue. Ecosystem is diverse. NVIDIA is leading the pack here. Our relationship with them has been great. Again, integration costs being key there. And then we've expanded our partnership since we were last year that help us provide solutions for other markets like defense, data center security and other places. That's it. With that being said, I love -- here's an example of an airport security application we have. You can see sort of -- this is how a machine sees, not how a person sees, but we're very proud of the detail and consistency of the data that's coming into the machine in this case. We believe the sensors are world-class in that regard.

Awesome. Thanks for all the great color.

Great. Thanks for having us.

Great. Maybe before we get started in a specific direction, just a question around the long range. Is that a function of the lidar being SDV? Like the fact that it's software defined, does that make it long range? Or is it more a hardware element or hardware design choice that leads to...

The range, and as I like to talk about it, it's the photon budget because lidar is all about sending light photons out and collecting them back. The bigger budget you have, the more things you can do with range. For example, because of our wavelength and because of the unique architecture we have here, we have this bistatic architecture where the transmit and receive are different. This allows us to have a much larger photon budget than the rest of the market, we believe. And so typically, we've channeled that into range, but there's other ways like, for example, in the commercial win we have with Alive3D, we've taken that range, brought it in shorter and hit 60 hertz frame rate, which nobody else can do, and that's why we won that business.

Understood. And that's more like the flexibility in terms of the photon budget that's enabled by the software approach that you've...

That's right. So we can crank it out to a kilometer for a high-speed drone that's flying and trade off some other things. And then we can also bring it up close and give incredible resolution like you saw with that plane behind me.

Got it. I appreciate that. And you touched on different adjacencies or other sectors outside of automotive that the lidars are addressing today. But maybe while we stick to automotive, is range the gating factor or where you see the most conversations with automakers shifting towards? Or are there other factors that come up in conversations more often?

I think in -- I would say, just in general, the theme that we see is the range and the fact that we have something that we can uniquely advertise and that's 1 kilometer or greater, that's bringing people in the door, both in the automotive space and the nonautomotive. As you see in the picture that I had a few slides ago, we can put this up behind the windshield above the mirror. And that when you shine a laser through glass, you lose a lot of range.

But we have so much headroom in that case that we can meet the 85-mile-per-hour driving spec that we see in the automotive space and give the OEM a packaging differentiation. They don't need the taxi sign on top of the roof. So we've created that range for the ability to punch through glass so to speak. And in the case of Alive3D, for example, a nonautomotive market, we brought it in up close and given them 60 hertz so they can track high speed. Sports option, range brings them in the door, the ability to customize the sensor to their use case is what's sealing the deal.

Got it. Understood. That's clear. We discussed the software-defined nature of the lidar sensor. You mentioned there are different use cases of flexibility in terms of what you can do. You showed us one, but wondering if you could spend a few minutes just discussing some of the key use cases and how they could address different applications like maybe personal autonomous vehicles versus robotaxis, how does that flexibility help you in that regard?

Yes. I think, look, one of the things if we start just from the automotive space, we're seeing that each OEM is doing things slightly differently. Certainly, a robotaxi has many lidars on it, for example. And as they may transition to highway driving, they need to start seeing further ahead, higher speeds, longer distance, but still it doesn't -- when it's navigating the city, they still need to see very great detail around them. That's a different vehicle architecture than, say, a passenger vehicle that can't have or can't afford to have 10 sensors on it and uses lidar, for example, to enable highway at-speed driving. It's a different vehicle architecture.

And in each of those 2 cases, even within the passenger vehicle space, and let's take trucking since Don was here earlier, they're using lidar because the braking distances are incredibly great. So they're going to go after that long-range narrower field of view. And just from a financial perspective, that allows us just to ship one piece of hardware and service those different vehicle lines or each of those 3 different markets. A drone case flying at 400 kilometers per hour, they just need to see very, very far ahead.

Now we're back to a kilometer, and they can see a very narrow field of view because they're just looking at avoiding a crash into something directly in front of it and do that last minute maneuver around them. You saw a picture up there earlier. We have a product called OPTIS, which is a combination of our sensor plus NVIDIA's Jetson platform that's sitting at an intersection in Detroit. And we also have one in the Bay Area. That one wants to see wide because 2 intersections coming together, by the way, it replaces the need to have multiple cameras at that intersection. That needs to see kind of medium distance like 200 kilometers out and very wide. So there, you have 3 or 4 different use cases that just need to see things drastically different. See the world in a drastically different way. And when you have -- so we'll call it that old school lidar with a spinning mirror on it, you don't have that flexibility without adjusting and redoing the hardware.

Makes sense. I appreciate that. And just like while we're on the technology and the hardware element, I was curious if you could talk about the resilience against that. It seems like that's been a factor that comes up every now and then with some of your peers that have talked about their experience with being onboarded onto automotive platforms. I'm wondering how the Apollo is differentiated in that sense.

Yes. So I think, look, in this day and age with the technology that's out there, if you want to have long range, you need some mechanical element. So you may have heard about VCSEL SPAD lidars, for example, they have much shorter range. That's the one lidar that doesn't need a mechanical spinning device in it. As soon as you throw that in there, your reliability and resilience is going to take a step down. And so this is where we're very unique is that we have that ultra-long range without having to project the laser beam through some kind of spinning or a prism device.

For example, we're just wrapping up a very deep discussion right now in testing with a customer that required us to have 1,000G shock resilience. And 1,000Gs is not something that a spinning mirror is likely to survive long term. So that again, this MEMS architecture that we have, which is the only moving part in the system is only a 1 millimeter smaller than a pencil eraser is really giving us that extreme reliability and durability.

Let's look at this from another perspective, the fact that you can put this behind the windshield in a car allows you to use 100-plus-year-old cleaning solution to keep the viewpoint clear. We're not on a surface, by and large, in those types of vehicles. If you go into aerospace and defense, typically, this is going to be in some other kind of disclosure. I think you asked a question about, hey, is lidar going to have a self-cleaning solution built into it. In the vast majority of applications, we've seen we don't need it. And we have resiliency that's unique for long-range lidar.

Understood. And how do you -- like organizationally, how are you balancing between Apollo and Stratos? Like which of those sensors are directed towards which applications and platforms?

Not to give away too many secrets, but basically, from a hardware perspective, you can think of this as a manufacturing SKU versus a redesign. There is really no redesign between this and Apollo. Two things. One is that we can actually remove logic when the game is seeing far and seeing more narrow. And our optics, it's like an eyeglass prescription. We can swap in and out different lenses that give us optimal characteristics. These are things we handle at manufacturing time. It doesn't trigger new design engineering cycles, except for maybe the case that goes around it. Very, very minimal work that Stratos brings up. So I'd say like more than 90% of the work, which is mostly software, is shared between the 2 on the solution.

That's very encouraging. I think that's a good segue into pricing. Maybe like just a state of the union on where ASPs sit, how you think about the longer-term trend line for ASPs and gross margins?

We're going to give Conor a chance to jump in.

Yes. So what I would say is, look, Matt brought it up earlier, but you think about the versatility of the sensor, right? And we don't need many different product variants because we can change a lot of things through the software. And what that does for us, it allows us to compete in many different verticals. And I think one area where we can command a lot of pricing power is in the high-performance verticals. So I think about aerospace and defense, anywhere where you have a customer that's willing to pay a premium for the value proposition.

And that's where we have a lot of opportunities to really lean in, improve our margins. And it's not unusual in those sectors, especially to get margins north of 60%, right? I would say in automotive, margins are going to be more compressed, especially when you're selling directly to the OEMs. So that's certainly an area where we need to be a little bit more competitive. But that said, I think we have a lot of leverage in terms of how we design the product. Also, we have what's called our capital-light business model, which makes us leaner than the competition, and we kind of live and breathe that in our DNA.

Got it. No, I think that's a great segue into the -- just talking about the capital-light business model. But maybe on automotive, specifically on the ASPs, is there like a specific price point which automakers are looking to get lidar sensors under to be -- to embrace them more meaningfully? Is it like $500, $600?

Yes. I mean it depends, right? I think certainly, at volumes, you're talking probably less than $1,000 for automotive. That's for sure. That's what we're hearing. Obviously, at lower volumes, when you're talking about sampling, you can command a higher price point. And then in nonautomotive, it's a completely different picture, right? You're talking sometimes about tens of thousands of dollars, right? When you think about just the hardware and then the software that goes on top of that and then services and everything like that. So to a certain extent, our pricing model is still evolving. And there's things that we can do on the customization side that we haven't really even leaned into. So there's lots of opportunity there to drive improved margin and obviously, more favorable pricing there, too.

I think I'd just add one thing to that. Just think about defense and aerospace for a moment and lidar sensors that can see a kilometer or more. These guys are accustomed to paying hundreds of thousands of dollars for that kind of, we'll call it, military-grade sensor, we're eating into that performance range. So as Conor said, it's -- we're learning a lot, but there's a lot of room to work with.

Understood. Now, we'll touch on defense. We have roughly 10 minutes left. So maybe just double-clicking on the capital-light business model. Could you just talk about the licensing aspect of that? What do you see as the most distinctive about how you structured it? And who do you envision as the natural licensees of that technology over time?

Yes. I mean I think that's probably more a longer-term play. Right now, we're selling probably directly to the end customer. And I would say with automotive, when you're talking about higher volumes, millions of units, you're probably going to lean in more with the Tier 1s. At that point in time, you pivot more to a licensing model. And I think the great thing about a licensing model is we can really lean into that capital model, capital-light partnership model that we're known for, while at the same time, commanding higher margins, right, because you don't need the same amount of headcount, your overall cost structure is going to be a lot lower.

Understood. Just wanted to pause and check if there were any questions in the room.

All right. I'll go on. Maybe just switching gears to the defense segment. Lots of engagement and white space opportunity there. Could you maybe talk about whether lidar solutions are replacing existing solutions? Are they creating a new market that was like -- that is for new applications? And why do lidar sensors -- why are lidar sensors better positioned for these applications?

Yes. Look, I think it's a combination of both. Let's -- I think we talked 2 earnings calls ago and in the most recent earnings call as well about power line detection, again, back to that high-speed drone, low altitude missions, very expensive. It crashes into something. There's really nothing that can see a power line that far away today. Again, we're talking about something if you're 500 meters out, imagine trying to see something about the thickness of a golf ball. It's invisible to radar, and it's certainly out of the range of a camera flying at that speed. So there's a case where lidar is enabling, we'll call it, a new TCO reduction. Let's talk about counter drones. For example, I think as we understand, a lot of these systems work today by listening.

They may listen from a microphone. They're tuned to the sound and then they point a radar in a direction and see if they can see drones coming in. Radars in this space to keep the cost reasonable again, so they're not billions of dollars worth of radar, can see about 200 meters. But it can't distinguish a drone from a flock of ducks, for example. And this is where lidar is complementing an existing set of sensors that say, you know what, because we have that finer resolution versus radar, we can actually see, by the way, a little bit further than a radar can, and we can eliminate those false negative type of scenarios. So there is an example of where it complements the existing set of sensors.

I have a question for Matt. So I saw that one that is O-P-T-I-S, OPTIS, the one you hold.

Yes, this is -- we call this one Stratos.

Okay. Do we need to charge it? So when you put it in the drone?

Yes. So remember, this sensor weighs about 1 kilogram. So this would typically operate in a larger drone that is probably running off of -- it's a jet engine, not necessarily an EV type application. So that type of drone generates its own power. And so again, this isn't sized or fitted for like an Amazon package delivery drone, for example. It's a much larger fighter drone. This only takes about 15 to 18 watts of power. So it could run for many hours off of a battery. But generally, when you put it on a drone type vehicle, it has a combustion engine that is generating its own electric power because it's a larger combat or surveillance drone.

May I know how much of it?

How much is the?

Cost.

Yes, the cost -- I think Conor mentioned this earlier, in the automotive space, because volumes are much higher, they're expecting prices in the hundreds of dollars. Of course, they want as cheap as possible, but it needs to be in the hundreds, somewhere between $500 to $1,000. And in the defense space, it can be thousands of dollars, if not over $10,000 in that case.

One more question. So when the business model, you're going to do, B2B to retail?

Retail?

No. I mean -- so how to sell this? Are you going to partner with like a joint company or you...

It's definitely a B2B product, just to be clear about it. Typically, our partners are the -- either the OEM directly or a system integrator, which would be the equivalent of a Tier 1, for example, in the automotive industry or in the defense space, for example, the primes, if that term makes sense. It could be both in the automotive and trucking. It tends to be more with the OEM themselves. In other markets, it's with an integrator, a defense prime or similar. So the model varies.

Great. I know we have a few minutes. So just on defense, just rounding out that discussion. Have you seen any signs of compression in that -- pricing compression in that segment as some of your peers have also increasingly focused in that domain?

I think I suspect that's going to vary based on the use case. But when -- in the markets and the solutions that we're competing in where, say, 1 kilometer is important, high frame rates are important, high resolution is important. We're enjoying a distinction of differentiation in that product. So not yet, but we have some very unique product characteristics. So we enjoy that differentiation for now. So the answer is no.

I don't think pricing is a factor either, especially with a lot of these customers. They're more focused on the problem and how to solve that problem and they're willing to pay a premium to do that.

Okay. So obviously, impressive technology. Have you seen any interest from like a sensor fusion type application for security cameras?

Absolutely. And by the way, we may have -- when we go do our earnings, I think we bucket border security, for example, into our defense application. This falls into our OPTIS solution generally where we're combining the perception. We have a partner, for example, in this area called Flasheye, and they have created a perception application that works really well, for example, for data center inside the data center security where you watch people, hey, are they going some place they're not supposed to be going or perimeter. State-of-the-art today for perimeter security tends to be, well, you cross a laser beam and you break it and it triggers an alarm. We can actually, with this partner, for example, identify animals versus humans versus bushes, seeing things in actual 3D, eliminate those false alarms and lower the TCO. So absolutely.

There's other -- I think, especially for security, if you think about existing sensing solutions as well, things like radar. If you're looking at a chain-link fence, there's a lot of splattering. But with something like lidar, you can go right through the fence and you can see behind it. So there's unique things to do with the technology that makes it very competitive vis-a-vis other sensing modalities.

So we may spot the object because we can see in the dark and then may, in some cases, hand it off to a camera that zooms in. Yes.

Awesome. I think we have time for one more. So maybe just in terms of -- you've helpfully pointed to a liquidity runway into 2028. How should we think about capital needs in a scenario where a big contract win requires a step-up in investment? And how do you balance preserving the balance sheet against funding that kind of growth?

Well, look, I don't think we're going to change our business model. We've always believed in a capital-light model, and that's really how we operate the business. What I would say is if there's a growth opportunity or there's a growth catalyst, for sure, we would evaluate that, and we would do what's in the best interest of our shareholders and also what we think is in the best interest of the company. So that's probably how we would position it.

Great. I think that's a great place to end. Thanks, Matt and Conor, and thanks, everyone.

Thanks for having us.

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.