AudioEye 2021 Report Points To A Strong Future (NASDAQ:AEYE)

Stock Market


Accessibility computer icon stock photo

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On Dec. 13th of last year, I initiated coverage on AudioEye (NASDAQ:AEYE), a leader in the web accessibility internet subsector. Trading at $7.60 at the time, I considered this SaaS company as a great way to have exposure to a niche estimated to be worth $350 billion. My bottom line was that as a front-runner in the space with a superior product, it would need to grow revenues by 15% annually over the next five years in order to have earnings that would justify a stock price that, when discounted back to the present, would give me my 12% required rate of return. I considered this well within reach, and re-iterated my stance on Jan. 6 in an article where I shared my top stocks for 2022. The stock price has since gone down considerably.

With full year 2021 results now published and a string of press releases announcing significant events, we have greater visibility into the future. My intent with this article is to review what has happened, share my opinion, and re-address valuation. Bottom line up front: AEYE has made important acquisitions that strengthen its product offering and broaden its reach. With literally millions more websites to put its product under now directly available to them via partnerships, the revenue growth necessary to bring about profitability on both a cash flow and GAAP basis in just a few years is very achievable.

Brief Industry Overview

I go into greater detail in my other AEYE article about the market particulars for website accessibility. The short of it is two-fold:

1) Various laws and regulations regarding accommodations for disabled people have been interpreted to apply to digital properties in addition to physical locations. The same laws that require handicapped parking spaces, wheelchair ramps, large bathroom stalls, etc., are requiring that websites are designed so that those with disabilities can still navigate and access them. For example, websites must have specific functionality coded into their pages such that visually challenged people using screen readers can still navigate things effectively. Or, videos must have captioning to accommodate those who are hearing impaired. These among other matters. Lawsuits in this realm are becoming increasingly common, with companies getting sued for not having a website that is accessible for the disabled. In 2021, these types of lawsuits averaged 11 A DAY:

A bar graph showing the trend of cases since 2018. 2018 had 2314 cases; 2019 had 2890 cases; 2020 had 3503 cases, and 2021 has 4055 as of December 2021. A gray courthouse is behind the bar graph.

usablenet.com

In other words, it is getting mighty costly for websites to NOT have an accessibility solution. Further stats from a UsableNet year-end 2021 report:

412 of the Internet Retailer Top 500 list received an ADA-based digital lawsuit related to one of their brands in the last 4 years.

The choice for business is becoming rather binary: either incur reasonable and predictable costs to get websites in compliance or risk getting sued and incur significant legal and penalty fees if found guilty, with the obvious collateral damage to reputation and having to then-after spend money on a compliance solution anyway. This is the boon of the AEYE business model.

For a local example, contributing authors on Seeking Alpha have surely noticed the recent requirement to include with each image a “non-visible description”, which allows the blind to get a sense of graphics used on a webpage. This is possibly reflective of Seeking Alpha working to ensure compliance with existing accessibility laws and guidelines, a perfect case in point.

2) Having an accessible website increases the potential customer base. Of the 67 million disabled people in the U.S., 35% are of working age. They have jobs and are likely receiving supplemental benefits related to their disability. The spending power of this group is not insignificant. Total disposable income is in the realm of $490 billion, and discretionary income after essentials is $21 billion. Accommodating this group of spenders is obviously in the best interest of most companies. People with disabilities want to and increasingly can use every single product or service that non-disabled folks can. This has become especially true as the digital age collided with the Coronavirus lockdown world. Using websites rather than physical locations is becoming the norm.

Catering to the disabled population is a must, both as a moral imperative and a savvy business decision.

Acquisitions

Back in February, AEYE announced that it had completed the acquisition of Square ADA, the accessibility offering used specifically for websites launched using the Squarespace (SQSP) platform. Squarespace is used by approximately 1751 different companies, many of which have several different pages. The roster includes Accenture, HBO, and Avocode. AudioEye now has easy inroads to market its product to all these entities, and paid almost nothing for that opportunity. Purchase price consisted of an upfront payment of $53,000, with contingent considerations of $134,000. This tiny bolt-on acquisition sounded much more like an agreement between friends than it does a traditional M&A. The founder of Square ADA, Tyler Puckett, had this to say about the sale of his company:

I started Square ADA with the goal of making websites more accessible for people with disabilities, while also helping business owners protect themselves from non-compliance lawsuits. But as Square ADA continued to grow, I knew that our service would never fully scale. Our custom-tailored solutions weren’t making a big enough dent toward the broader goal of web accessibility, which is what truly matters.

When I discovered AudioEye, I was delighted to learn how their values so closely align with what I’ve tried to build through Square ADA. AudioEye’s mission is to use technology to transparently eradicate every barrier to digital access. But unlike fully automated solutions, AudioEye recognizes the need for empathy and expertise that technology has not yet evolved into. It’s this combination that allows for the best of both worlds and makes a perfect partner for our clients and their dynamic websites.”

In similar news, while not an acquisition, news broke with the 4th quarter earnings press release that…

WP Engine has selected AudioEye as a digital accessibility technology and services partner, which will help owners of more than 1.5 million WordPress sites provide accessible digital experiences to all their users.

Again, thousands more customers are now on AudioEye’s doorstep.

Also announced with year-end 2021 results was the acquisition of the Bureau of Internet Accessibility, or BoIA. This buyout bolsters the Enterprise or large customer reporting segment of AEYE, with BoIA boasting the likes of Chipotle, Godiva, Deckers, Dillard’s, Rydell and Harvard University as patrons. AEYE purchased BoIA to deepen their product offering, as BoIA primarily works with companies at the outset of website construction to integrate accessibility into their pages. Up to this point, AEYE primarily used their product and services to solve accessibility issues within already existing sites.

The purchase price was $5,000,000, and BoIA had 2021 revenue of $3,000,000, fetching a low price to sales multiple. However, there are undisclosed earnout considerations for BoIA hitting revenue growth targets in 2022 and 2023. Nonetheless, AEYE expects BoIA to generate cash immediately. In other words, it is tacking on an already profitable business.

The founder and owner of BoIA had very positive things to say about AEYE and the pending business combination:

We are excited to bring AudioEye’s technology and expertise to our customers, which range from Fortune 500 to mid-level companies across different industries, including retail, food and restaurant, transportation, and energy. I started BoIA 21 years ago and have seen many different types of approaches to accessibility. During that time, I hadn’t come across one that could simultaneously handle two critical angles necessary to make a true impact on the world. The first is helping brands deliver authentic accessible and inclusive experiences, addressing the needs of the community they intend to serve. The second is being able to do so consistently and at a true scale – across all digital properties and through ongoing website changes. AudioEye’s unique approach meets both criteria, and their continuous investment in research and development keeps them ahead of the curve.”

This quote brings up a vital topic that strengthens the investment thesis. Most accessibility solution companies primarily use an overlay or widget as their product offering. This tool alleges to “automatically” detect and fix common accessibility issues. Everything happens behind the scenes and is AI based. While this might sound great on the surface, it has become obvious over-time that such a “quick-fix” isn’t good enough in spite of these offerings promising “compliance” with various laws, codes, and guidelines, “in up to 48 hours”. That promise simply isn’t real. But AudioEye is of a different breed, not promising what can’t be delivered. From the 10-K:

We offer greater transparency in marketing our offerings. We believe there is no fully automated solution on the market that can provide 100% compliance. Our offerings provide automated remediation and a transparent compliance score with additional manually driven enhancements. We think that as the industry develops, opaque products with unsubstantiated claims will ultimately fail.

And those failures are well documented. In fact, AEYE knows this from personal experience. It was party to a lawsuit originally filed in September of 2020 wherein a company who was using the AudioEye automated overlay got sued for that company’s software not being usable by the visually challenged. The suit was settled out of court, but the point is that widgets aren’t enough. There is no “fully automated” solution, at least not yet. AEYE learned its lesson and has since invested heavily in personnel, R&D, and acquisitions to offer an approach that is both broad and deep, marrying automation with a personal touch and expertise. The settlement of the case ultimately concluded:

For the purpose of this Agreement, “overlay” solutions such as those currently provided by companies such as AudioEye and AccessiBe will not suffice to achieve Accessibility.

An article from UsableNet further states:

The promise to prevent ADA lawsuits by using an accessibility widget or overlays isn’t real. Many lawsuits in 2021 list widgets and overlay features as a barrier to equal access in addition to other inaccessible aspects of the website. This means these approaches give plaintiffs more claims to add to a lawsuit, not less.

Over 400 companies who have an accessibility widget or overlay on their website have been sued. (emphasis added)

Clearly, a fully automated response falls short. The value proposition of AudioEye’s combined approach to accessibility will outpace competitors over time, and it will be there to soak up the supply void.

Valuation

My prior article concluded that revenue would have to grow at a rate of 15% annually at AEYE in order to produce enough EPS in five years to support a stock price of $13.10, given an earnings multiple of 18 (and assuming a gross margin of 70%, operating expenses of $25 million, and shares outstanding of 12.7 million). From then trading levels at $7.43, that would have provided a 12% return annualized, my required rate of return. Running the same exercise, where shares have recently traded around ~$7.00, a stock price of $12.33 would be required to generate a 12% return. Therefore (given an expanded 75% gross margin {due to recent financial results and management comments} but the same operating expenses, shares outstanding, and the multiple of 18), revenue would need to grow by 13% annually for the next five years to produce the required EPS. Considering its historical growth rates and the ripe future outlook, I believe 13% annual growth in sales is very achievable.

Risk Factors

I think the biggest risk facing AEYE is that of regulatory risk. If the legal landscape softens and things like the “Americans With Disabilities Act” is decreasingly interpreted to include digital properties, then the AEYE business model doesn’t have legs to stand on. On the flip side, laws could be stiffened such that the entire suite of AEYE products and services is deemed inadequate, in which case it would have to ramp up investment spending in order to put together something that comes in accordance with laws and guidelines. That would greatly lengthen the time frame for eventual net income. In the first case, revenue is threatened. In the second case, it is profitability.

On that note, it is important to point out that AEYE has yet to generate profits. It had a single quarter, March of 2021, where it was cash flow positive. But it was soon then-after that AEYE recognized how vital R&D is to any SaaS business and it ramped up spend in that regard. SG&A expense has similarly sky-rocketed as it invests in the people, advertising, and infrastructure to support its potential growth. Net losses have widened to record levels. If revenue growth doesn’t materialize from these investments, it will never reach a scale that will allow for profitability.

That being said, it is important to note that gross margin has consistently expanded and is now at extremely high levels:

Table of gross margins, 2017-2021

10K’s

If it can achieve robust revenue growth, profitability and an expansion of the operating margin should follow.

Conclusion

Between the lower share price and the acquisitions and updates subsequent to my initial article, the investment case for AEYE has become much more compelling. With a large addressable market, a deeper product/service offering, new partnerships, and a couple reasonably priced acquisitions, AEYE is a better business now than what it was just a few months ago. With no debt on the books, no plans to raise additional capital in the near term, and a share price 8% lower than my mid-December article, shares offer great value. I believe that it will be cash flow positive in 2023. The runway for growth is exceptionally long. I am very bullish on AEYE.



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