Audioeye (AE) is a Software-as-a-Service (SaaS) company founded in 2005 by Sean Bradley and his brother in in Phoenix. The company helps businesses (SMB, Enterprises and Government organizations) make their websites, PDF files (new in 2020) and mobile websites accessible to individuals with disabilities. There are about 40M people with disabilities of some form in the US alone.
Audioeye claims to provide 3 capabilities to solve the problem of poor accessibility:
a) testing of your website to look for accessibility problems,
b) remediation (how to automatically fix the problems it found) and
c) monitoring (ensure that those problems were fixed) for your website.
The company listed in the NASDAQ stock market on August 26, 2020. Before that they were on the OTC. It is priced at $24.96 (12/18/2020) and the market cap is $231M.
In Q3 2020, the company reported $5.3M in revenue (+92%) with MRR (Monthly Recurring Revenue) of $1.7M (+67%). It has a Gross Margin of 71% and a net loss of $1.1M ($0.12 per share). They have $10+M in cash and have 25K customers, with a 90% renewal rate (Q3 2020 conference call transcript).
They pre released earnings for Q4 on Dec 16th 2002, and guided up Q4 revenue to $5.4 – $5.6M, full year 2020 revenue at $20.3M – $20.5M and expect to have 32K customers .
For 2021, the company guided revenue in the range of $30 million to $32 million (+56%)and reiterates its expectation to grow MRR and become cash flow positive.
The company was ranked 122 on Deliotte 500’s fastest growing companies in 2019, growing at over 983% YoY.
What is the customer problem?
There are over 1.4 websites with over 1000 visitors / day worldwide. Companies building websites have to conform to Web Content Accessibility Guidelines (WCAG) to make their content easy to consume by individuals with disabilities (e.g. blind – support for read aloud, deaf – video content needs to have captions, color blind – dark contrast, primary colors, etc.).
Most companies dont do this. When mid-sized, large companies and government organizations do not make their website accessible to the disabled they get sued.
In February 2006, a student at the University of California-Berkeley sued Target because its website was inaccessible to the blind. Target settled for $6 million with Bruce Sexton Jr., the student at UC Berkeley, and the National Federation of the Blind, which filed the lawsuit jointly with Sexton.
In 2019, there were 11K lawsuits and average cost of litigation was $50K – $100K. Below are some common accessibility errors. Images may not have ALT-text, color contrast may not be sufficient.
There are several regulations (ADA compliance) that you need to adhere to as a large company (e.g. Target) so this is a big driver for customers. A customer sales presentation from AE shows all accessibility problems they solve.
How big is the market?
The market for accessibility software currently is about $350M – $450M growing at 4% and AE revenue is $20M annual. This is not a very large market, but AE can see a path to $50 – $100M in revenue (2021E is $30-$32M) and take advantage of adjacent markets (TAM over $1B) for mobile apps accessibility, etc.
They could also make the market larger <if> governments decide this is important for their disabled citizens.
Most companies a) use consultants to find and fix accessibility issues manually, b) outsource the accessibility issues to external contractors or c) ignore the problem.
The biggest direct competition for AE is a company called AccessiBe, but the real competitors are many small companies that provide accessibility testing solution (over 20) or manual outsourced consultants.
What technology does AE have and what are their differentiators?
Audioeye has 8 patents they have applied for and some have been granted, in the area of assessment and remediation. I have reviewed the patents, and they are valid submissions but only partially relevant to the remediation problem. You can view the patents and understand their technology moat. The patents are in the areas of Modular systems and methods for selectively enabling cloud-based assistive technologies, with patent numbers 10867120, 10866691, 10860173, 10845946 and few others. I read one of the patent documents – it is interesting but not earth shattering, which tells me the patents are there purely to claim they have patents. 4 have been granted and 4 have been filed in Aug 2020.
What is the customer experience?
When a user comes to the customers website, a small AE icon shows up on the bottom right corner of the website allowing visitors to view accessibility options. See below for examples.
Does it really automate and solve the problem of accessibility remediation?
Having been a CTO before I dont think you can remediate in an automated fashion. 20-25% of the accessibility issues can be identified and < 5% can be automatically remediated.
The best option is for developers and Product managers to build accessibility into their plans upfront, but that is the last thing on their mind and it delays website launch if they choose to do that.
There are some customers I visited (example Mohawk below – visit their website to experience for yourself and notice a small icon on the bottom right) which provide a simple way for accessibility to be solved for < 10% of the disabled audience.
See the right navigation for controls in screenshot 2
See bottom navigation for audio in screenshot 3
What is their moat?
There are 3 moats that they are building, and need to continue to build.
- Proprietary algorithms for remediation – <if> this works, it can be a game changer. Customer growth is strong for just the simple testing product. Remediation is the “cure cancer” offering, as opposed to testing which is “diagnose that this is cancer”.
- Partnership channels are going to drive growth – they target WordPress (content websites), Shopify (eCommerce websites) and media sites using partners. No partner likes to sign up with multiple providers.
What is the go to market model for Audioeye?
AE has a sales team for enterprise customers (20+ sales and partner reps) and a partnership model with channel partners who sell AE as a bundled solution. Companies get to know about AE through Google SEO, search ads or partner promotions.
AE offers a freemium SaaS model – meaning customers can sign up for free to find problems in their website and they offer some paid plans.
A $39/mo plan allows them basic remediation, $99/mo plan allows for advanced and if you are an enterprise that wants a “managed” i.e. outsourced solution they offer that as well.
AE does not disclose # of customers by plan.
|Quarter||# customers||QoQ Growth|
Are their customers real? What about Mariner research’s claim that the product does not have any AI/ML?
The report by Mariner on Seeking Alpha made me dig deeper into their customers and I visited 20+ customer websites to confirm that they actually have them on.
You can also see a sample of a website accessibility testing report from AE with a snapshot below.
Builtwith also confirms that the usage of their script is growing. They had a big drop in 2018, but after that they have been getting installed at a rapid clip. It does show that over 95% of their customers are in the United States.
How is employee morale given all these management changes?
AE has 100+ employees in Atlanta, Phoenix and Portland. Reviews of CEO (100%) 7 reviews and Company (75% positive) are good, but the sample size is too small. It is hard to say.
The numbers seem to indicate the sales and marketing teams are getting the job done. The product will likely go through several “build for scale” changes, but I dont see too many concerns.
When you have a mission such as AE’s I think it attracts a certain kind of individual (who wants to make the world better).
How good is the management team?
This is one of the biggest issues I have with AE. There has been constant management change. The current website lists some strong names, and I am reaching out to them on LinkedIn to confirm.
- CEO David is interim – full time investor at Sero Capital. The previous CEO left after 8 months on board in Aug 2020.
- CFO Sach joined 18 months ago from D&B.
- President & CTO Dominic has been on board for 7 months from a consulting position before.
- CPO Joel is part-time AE and is 1 year into the job
- CMO Bryan has been there for 3 months and was at Tile before
- CRO Russell was at Shipstation and BigCommerce before and has been at AE for 2 months
- CBO Rob was at Pinterest and FB as a mid level manager and has been at AE for 1 month
What are the risks?
- There have been constant management changes with3 CEO’s in 3 years. They have an interim CEO now (who was their board member) after their CEO hired in March 2020 stepped down. They named a new CMO, CRO in Feb 2020 and replaced them both again in Dec 2020. Risk – management continuity does not exist.
- They have moved their technical development team to Portland from Atlanta and hired a new President there who will build a new technical team there – Risk have to rebuild their tech stack / architecture which could distract from customer growth
- Lawsuits – they have filed a lawsuit against their #1 competitor – AccessiBe for patent infringement on Sep 2020 and that is still being litigated. AccessiBe has raised $10M+ in funding, so this will be a long battle
- They dont have great reviews on many review sites, but customer growth is increasing dramatically and churn is moderate (90% retention – which is poor given most good SaaS companies have negative churn
- They don’t report traditional SaaS company metrics such as CAC, DBNER, etc. which gives no visibility into their revenue quality
- The company has amended and reclassified historical financials (and at one point restated 97% of its revenue) likely enabled or caused by material weaknesses in internal controls. A long piece by research firm Mariner (link below) says their accounting is suspect, product does not actually work and AI/ML is just marketing.
So what is Mariner missing?
At the core of Mariner’s research is 5 issues:
- Poor internal financial controls: Agree: AE reporting is so poor and has only 1 analyst covering them (who is from their banker B Riley) that this needs to be viewed more closely because they have reinstated revenue and earnings before. I also learned from others that this is “turnaround play” – they should be even more clear with investors and transparent.
- CEO connections to “Pharma bro Martin S”: Not material but agree: Being “connected” to Martin and making them guilty by association is bad form from Mariner.
- The founder’s other companies are suspect or have been barred from NASDAQ. Not material but agree: They have since left the company or have been relegated to lower positions for continuity.
Even though I agree all of their points are “valid”, however, the product does some basic things. It is usual in the software world and in Silicon Valley in particular to “pitch the vision” and deliver” the current version”.
If the company is given AI/ML valuations, (which everyone wants) that is a valuation problem and poor communication from AE.
That’s what the company is doing, I believe, but I would like verification of the SaaS metrics reported by other companies to confirm.
Would I recommend this stock?
I was introduced to this stock by my friends on Twitter, and while there is a lot to not like – it is risky, it has many challenges and the marketing seems off – I believe those are the main reasons they have brought on fresh talent.
The quarterly numbers are amazing (given their growth) because they are starting from a small base. I would be willing to give them a quarter or two of runway to clean up the issues mentioned an move forward. During this time I want more reporting on standard SaaS metrics, such as DBNER, churn, CAC, etc. I also think they should ask their new President to outline their product strategy and execution plan.
Since this is a very risky play I would time the entry (I am not a stock chart price-action expert), keep a short stop loss (and keep a stop loss in permanent, instead of just for the day), and put <2% or a small amount of portfolio to see the performance for 1-2 quarters.
Links for more reading
Errors and Omissions
Please do not take this as investment advice.
As I notice errors and issues, I will update this document and also highlight the errors in this section. Please check this area frequently