SharpSpring, Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Good afternoon. Welcome to SharpSpring's Second Quarter 2020 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and Interim CFO, Aaron Jackson. Following their remarks, we will open the call for your questions. Then before we conclude, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. 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 investors.sharpspring.com. I would now like to turn the call over to SharpSpring's CEO, Rick Carlson. Please proceed, sir.

[Rick Carlson:]

Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2020. A copy of the press release is available in the Investor Relations section of our website. In the second quarter of 2020, we built on our strong start to the year and continued to generate consistent results, both in new customer wins and in many of our key operating metrics. Financially, we achieved our 13th straight period of record revenue, demonstrating the resiliency of our operating model in a challenging marketing – market environment. Additionally, thanks to our increasing operating leverage, as well as our ongoing cost reduction measures implemented as part of our comprehensive COVID-19 response plan, we drove healthy improvements in our margins and overall profitability. The 276 new customer wins we secured during the period represents approximately $2.2 million in annual recurring revenue. This represents a healthy improvement over Q2 of last year. While the new customer count represents solid performance in a quarter marked by the onset of COVID, the improved ARR reflects the fact that we began to land larger customers during the period as well. I'll explain more on that in just a minute. To date, SharpSpring now counts approximately 2,000 agency customers and over 500 direct customers and over 8,500 total businesses using our platform. As always, we have a lot going on. I'm excited to share more about the corporate and where we're headed. However, before I do that, I'm going to hand the call over to a new voice, our Interim CFO, Aaron Jackson. Many of you on today's call will be aware that last month we announced the departure of our former CFO, Michael Power. On behalf of the SharpSpring leadership team, I want to extend a sincere thanks to Michael for his service to our organization. Although his time with us was limited, Michael made an impact on many of us personally as well as professionally. Out of respect for his privacy, I'll just share that Michael’s departure was for personal and family related reasons, indirectly associated with the ongoing COVID-19 pandemic. While disappointing, we recognized that we're in the middle of a once in a generation health crisis, which has impacted us all in different ways. We wish him and his family continued health and wellness as we all continue to adapt to the new normal. That said, we're in very capable and stable hands with Aaron, taking over in Michael's absence. In his more than three years at SharpSpring, Aaron has been a rising star in our organization and I look forward to seeing him step up to the duties of the role. Well, I'm quite confident in Aaron’s ability to take on this new position. We're making sure that we leave no stone unturned and are fulfilling our fiduciary obligations to shareholders. To that end, we've actively engaged with an executive search firm to identify the right candidate who embodies both mix of operational skills and corporate finance experience to support our long-term growth plans. We'll continue to keep you apprised of our decision making process in the coming weeks. And with that, I'll turn it over to our Interim CFO, Aaron Jackson. Aaron?

[Aaron Jackson:]

Thanks for the introduction, Rick, and good afternoon to everyone joining our call. Before I turn to our financial results, I'd like to thank Rick and our Board of Directors for allowing me this great opportunity during this time of transition. I'm looking forward to continue helping Rick and the rest of the SharpSpring leadership team grow the company. Turning now to our financial results for the second quarter ended June 30, 2020. Our total revenue in the second quarter increased 32% to a record $7.3 million, up from $5.5 million in the second quarter of last year. Our margins for the second quarter of 2020 increased to 74% from 71% last year. In dollar terms, gross profit increased 39% to $5.4 million from $3.9 million in the second quarter of last year. Turning to our operating expenses. For the second quarter of 2020, our operating expenses increased 3% to $6.3 million from $6.1 million in Q2 of last year. The modest increase was primarily due to increases in research and development, general and administrative costs to support our future growth needs, along with increase in intangible asset amortization related to our acquisition of Perfect Audience in November of 2019. Our GAAP net loss for the second quarter totaled $970,000 or $0.08 per share, which was a significant improvement compared to GAAP net loss of $4.2 million or $0.41 per share in Q2 of 2019. On the balance sheet, we had $15.3 million in cash at the end of the quarter compared to $11.9 million at December 31, 2019. In June, we also renewed our existing $2.5 million line of credit. Going forward we remained confident in our cash position to support our growth needs for the foreseeable future. Looking at our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we reconciled in our earnings release, totaled $122,000. This represented a significant improvement from an adjusted EBITDA loss of $1.7 million in the same period last year. Our core net loss for the second quarter, which is also reconciled in our earnings release, totaled $381,000 or $0.03 core net loss per share compared to a core net loss of $1.9 million or $0.19 core net loss per share in Q2 of last year. For more details on our adjusted EBITDA and core net income metrics, please see the reconciliation to GAAP terms included in the supplementary tables of today's earnings release. Moving to some of our other metrics. During Q2, our cost to acquire a customer was approximately $10,900, which was a sequential increase from $9,800 recorded during the first quarter of 2020. We calculate customer acquisition costs as the sum of our all in sales and marketing costs from the prior quarter, in this case, Q1, divided by the dollar value of new wins recorded in the subsequent period, in this case, Q2. It bears mentioning that this quarter’s CAC calculation artificially reflects a pre-COVID-19 sales and marketing spend as a numerator, and a COVID-19 adjusted new deal closing as the denominator. In the current quarter, we are already seeing reduction in our CAC estimate as our spend is reflective of the current economic environment. With this in mind, we remain confident in our ability to consistently acquire customers at our historically attractive all in rate that will deliver significantly life – significant lifetime value for the business in the future. Turning to our financial outlook. For fiscal year ending December 31, 2020, the company expects total revenues between $29.5 million and $30.5 million, which would represent an increase of approximately 32% compared to the prior year. This range of total revenue is driven in large part by our Perfect Audience revenue through the second half of the year. The company's guidance is based on recurring revenue from its current customer base and performance results tracked through July of this year. These expectations also include an anticipated impact from the COVID-19 global pandemic based on information available as of the date of this report. This completes my financial summary. I'd like to turn the call back over to Rick for additional insights into the operational progress in Q2 as well as our outlook for the remainder of 2020. Rick?

[Rick Carlson:]

Thanks, Aaron. Well done. As we've continued to mention quite frequently since the initial onset of the pandemic earlier this year, we believe strongly that SharpSpring is strategically positioned in a number of ways that will allow us to be resilient in the face of a challenging economic environment. Put plainly, our performance in Q2 has borne that thesis out. Our platform provides tremendous value in terms of its category and value proposition. We are an essential tool aiding sales and marketing teams at a time when execution in those functions is needed most. In more difficult financial climates, businesses are depending on their sales and marketing more than ever, and we’re the solution they use to operate more efficiently and effectively. Finally, as the low cost provider in the space, we are also insulated from companies seeking to lower costs by switching to more cost effective solutions. With that backdrop, I’d like to speak briefly on some of our key performance indicators and how our results were impacted during the quarter. Beginning first with net revenue retention, on a year-over-year basis, Q2 2020 net revenue retention was 91.6%. On a monthly basis, second quarter 2020 average net revenue retention was 97.6%. The first point I'd like to make here is that our revenue retention has always been considerably better than our logo attrition. And this is because we are very good at keeping our larger agencies that have figured out how to sell and support their customers. Second, I consider these numbers to be relatively steady when considering the current market and economic environment. While COVID has certainly impacted our business in the short-term, we firmly believe that we will see a point in our relatively near future where we hit a 100% revenue retention. As a proactive measure, last quarter we deliberately reduced our expense budget based by nearly 20%, which is expected to create significant cost savings for the remainder of 2020, and should also allow us to meet our target cash and usage for the year of approximately $4.8 million. As the economy in our sales and marketing environment continued to show signs of recovery, we'll continue to evaluate our approach to spending here, but we feel as though we've taken appropriate actions to support our business right now. During the first half of the year, we spent approximately $3.5 million of our $4.8 million 2020 full year projection. During the second half of the year, we will continue – we continue to expect to move towards breakeven. As a highlight worth noting, in Q2, we also experienced continued gross margin growth to a record 74%. This operating leverage was largely driven by our expense reduction and increased efficiencies within our support organization and hosting arrangements, particularly within Perfect Audience. In our core SharpSpring business margins were 76% in Q2, which represents a significant improvement from Q2 last year. Since the end of March, Perfect Audience margins have also increased following the expiration of a shared-services contract that was previously in place as we transitioned the business from Marin and integrated it into our operations. With the scale that we're now achieving, we remain confident in our ability to achieve margins north of 80% in our long-term operating model. In the uncertain environment we find ourselves in, our goal is to be even more deliberate with our spend and more directly with our approach to sales and marketing. To that end, we've been focusing our efforts in recent quarters on making SharpSpring a primarily sales-oriented business, which has already led to a more efficient and effective lead conversion process. As part of this process, we've eliminated a number of costs in our marketing channels that were marginally performing prior to COVID and that we knew would not perform well during pandemic. In all we expect to save hundreds of thousands of dollars a month and have replaced that spend with more cost effective outbound sales processes that allows us to be one of the few companies hiring in this market. As Aaron mentioned earlier, our marketing spend went down considerably in Q2, but we're still expecting to see similar sales levels going forward, which should lead to significantly lower tax in next quarter and beyond. Also related to sales in Q2, we introduced a new pricing option for larger agencies that allows new customers to buy more licenses upfront at a nominal discount and exchange for an annual commitment. During the period, we saw strong interest in this new option from larger agencies and sold a total of 10 bundled, $1,500, 10 pack licenses, one of which was actually a 40 pack. Sales units were largely in line with last year despite the COVID environment. Further, our new agency customers were actually up year-over-year in the second quarter. The larger deals resulted in a 10% increase in ARR from 2.8 million in Q2 of 2019 to 2.2 million in Q2 of 2020. Separately, we've also continued to improve our sales of annual contracts to direct customers is another positive sign. Longer-term, we're doing everything in our power to get quality long-term customers that can really get value from our platform. We see the heaviest attrition taking place in year one and are focusing on executing within that year timeframe to become a more sticky platform. We also want to sign up a customer that is committed to us and committed to working on the platform integrating it into their systems. We have a mindset of building your business around SharpSpring and are incentivizing new customers to commit the time, resources and effort into learning, how to implement the platform and sell it to their customers, which brings me to the subject of new features. Coming soon, one of our newest releases that I'm excited to introduce will be our new engagement platform, which we're calling Springboard. It’s bit of an exposition, pretty much every major software tool in the market suffers from the same core challenge, which is that they are underutilized by their customers. The products have become so powerful that most customers only use 20% or 25% of the entire toolset. To combat this industry-wide problem, we are proactively building an in-app engagement tool called Springboard that is designed to provide a customized plan to a user, enabling an agency or their client to know precisely what to do, why they do it and when to do it. We view Springboard as a mashup between expert system and onboarding wizard and long-term engagement tool. We think it's going to be something that every business can leverage for the entire time that they're using the platform to get the most value as the robust feature set that's included in SharpSpring. Springboard’s unique value proposition is that it doesn't just teach a user how to use the platform that acts as a business’s own strategy consultant advising you on how to extract the most value from the platform. Companies will receive customized stats to show a promise land if you will of full implementation and will also receive concrete tailored-guidance on how to get there. We've even gamified the process to track progress and unlock certification and merchandise rewards, which shall help to create further customer loyalty. We have very high hopes for this and then something that we are really encourage – we think will really encourage adoption of a greater set of features on average and therefore lead to lower attrition, higher customer lifetime values and in the case of our agencies more expansion revenues over time. As we've continued to build out our platform, we're also beginning to see greater industry recognition for the quality of value of our product offering. To maximize efforts in this area and others, in June, we announced that SaaS industry veteran Chip House would be joining SharpSpring as our new Chief Marketing Officer. Chip brings a wealth of marketing experience to SharpSpring and his credentials at high growth SaaS operations making it a perfect fit for our organization. Chip was the first marketing executive at ExactTarget an SaaS pioneer. Where he held several key leadership roles in marketing and services through Salesforce’s acquisition of ExactTarget for 2.5 billion in 2013. Earlier in his career Chip also led marketing efforts for eCommerce provider Digital River prior to its 2000 – 1998 public offering. We're excited to have Chip on board and believe he'll be able to really take our marketing and brand awareness to the next level. The prime example of this new emphasis is our agency acceleration series which was just launched last week. The 14 part program will feature a episodic content from top digital marketing experts and superstar industry influencers like Neil Patel, Shama Hyder, Rand Fishkin, Ann Handley, and Seth Godin. The series includes a mix of live 45 minutes deep-dive Q&A sessions and 15 minute quick getting strategy sessions followed by a live Q&A covering a broad range of topics to accelerate agency growth and client satisfaction. The pandemic has changed the calculus for how to do B2B marketing, how to do a B2B marketing of that. In response, we decided to focus on getting very high-quality speakers and, and industry experts in digital marketing to keynote our webinars series. And focus our entire business around agencies and constantly see a need for content with actionable takeaways agencies can use to ignite and manage their growth. We're excited to be able to give marketing agencies access to some of the preeminent names in digital marketing. The speaker series is just one of the ways we believe we can improve not only our brand awareness with agencies across the world, but also show our credibility and offering the most advanced cost effective and innovative marketing automation platform available. I will finish with a brief note on Perfect Audience. As a reminder, we acquired Perfect Audience back in November from Marin Software. As a business focused entirely on retargeting in digital advertising, we believe Perfect Audience is a great compliment to our core SharpSpring marketing automation solution. In the first half of the year, our focus has really been about making significant changes to the customer acquisition process and working to increase lifetime value by helping customers better spend their budget who look alike audiences. So far Perfect Audience has performed well in the face of strong economic headwinds that the pandemic has created, while we remain well within our range of initial expectations. While we're seeing advertising budgets compress the business in the second quarter, we recorded a 38% increase in the number of paid advertisers compared to the first quarter of 2020. Ad impressions are increasingly significant or excuse me – the ad impressions are increasing significantly and June was the single highest revenue month since the acquisition. This improving performance is something we're quite proud of given how many other players in the space are experiencing major drops in advertising revenue. We believe that much of our stability can be attributed to the improvements that we've been making to the platform as the economic conditions. And as the economic conditions improve, we'll see a greater acceleration on the business. As I mentioned in our last call, Perfect Audience experiences a much quicker cash turn than our core SharpSpring business. Processing, higher-volume, lower-fee transactions we're able to expedite the learning curve as well as we continue to align our two businesses. Right now, we estimate that the lifetime value of a Perfect Audience customer would be around $1,500 and because of the improvements we've made to the funnel, we believe we're acquiring customers for about $475. Importantly, the payback period on those dollars is just a couple of months, which allows us to recycle those invested dollars at very high-velocity. We'll continue to retarget – we continue to be retargeting as the low hanging fruit on the internet and are encouraged by our initial progress to-date. Our integration remains largely on track and we look forward to bringing the business closer together during the rest of the year and into 2021. Heading into the back half of the year, we remain confident in our ability to drive incrementally improved performance and are well-positioned to benefit from the ongoing shift to more digital remote work. In the first half of the year, despite the pandemic and economic headwinds, we've taken huge steps forward in terms of our revenue retention, EBITDA, cash burn and gross margins. And we've done this while only beginning to scale the business and benefiting from the operational leverage that is built into our business model. Of course, we're still a growth business and as we continue to improve acquisition costs, we'll continue to invest to support that growth. With that, we hope you and your families remain safe and healthy during this challenging time. We're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Chad Bennett at Craig-Hallum. Please proceed.

[Chad Bennett:]

Great. Thanks for taking my questions. Nice job guys executing in a challenging environment to say the least.

[Rick Carlson:]

Thank you.

[Chad Bennett:]

Yes. So Rick, it sounds like you – kind of things progressively improved by month throughout the quarter into June. Can you just give us an update for July? And if you have data midway through August here, kind of from a net retention, churn, net add standpoint, kind of where we are at least tracking to date?

[Rick Carlson:]

So the question was about churn during those periods? We’re really seeing a pattern that looks like the second half of Q2. So sort of more of the same here. We did not see the logo attrition that we expected. We didn’t – certainly, we were affected, but we did not see the heavy logo attrition that everyone feared. Look as a company that’s been 6.5 years to market, we didn’t know what to expect like a lot of companies when the virus struck and have been pleasantly surprised by our performance. And so look, if anything, we feel like maybe we washed out some weaker customers, internally, we grade our agency partners, by the way, based on their usage, we sort of give them a score. And what we saw was not surprisingly that the customers that weren’t getting value out of the platform, weren’t using it, we’re the ones that sort of washed out. So look, I would just tell you that what we’re seeing so far this quarter looks like more of the same. Where we’re, I think, affected most. We’ve seen agency client expansion slow down. And so that’s a factor that’s affecting net revenue attrition. We think that’s obvious. We’re not seeing agency clients – the really great thing that we’re seeing is we’re not seeing agency clients leave agencies very much at all. Those dynamics have not been markedly different than before the pandemic. But we’re seeing agencies that maybe were adding a client every month or every other month or whatever the pace would be that has slowed down. People aren’t hiring brand-new agencies right now. So there’s a little bit of pressure on net revenue retention in the short-term, but that seems to be what the largest effect of – and a little bit of pressure on new sales. You didn’t ask about that in terms of units, but that seems to be the effects we’re experiencing as far as COVID is concerned.

[Chad Bennett:]

Got it. I appreciate the color. And then maybe a follow-up possibly for Aaron. So the gross margin improvement is remarkable. Sequentially, I think it was roughly 800 bps sequentially. I guess, I know all the reasons or you gave all the reasons for that improvement. But considering where we are in June, is this level now sustainable? And do we have the potential to improve on that 74% in the back half of the year?

[Aaron Jackson:]

So I think going forward, we can definitely sustain it as long as there’s no – nothing crazy happening with COVID, a resurgence there or anything like that. But I think we can sustain this going forward. I know our long-term hope is to get up into that 80%. We’re obviously not there yet. But I think for the rest of the year, we can certainly sustain this level.

[Chad Bennett:]

Got it.

[Rick Carlson:]

I want to add to that answer a bit. We put some austerity measures for lack of a better term in place as the pandemic hit. Most of the changes that we put in place, we believe, to be permanent changes. We talked a lot about sort of lucky for us, I guess, getting a little bit smarter about our sales and marketing processes just as the pandemic hit. And that allowed us to perform pretty well. And so we’re clearly happy about that. So most of those changes are what we would think of as permanent or semi-permanent changes. Then we did do a salary reduction. And in Q4, our hope is that we feel sufficiently confident about not only our operations, but also the economy that we can unwind some – we gave – we asked people to take a 10% reduction in salary, as an example, and we’d like to get our staff back to full compensation. In Q4, as long as we’re maintaining our sales levels and forecast and obviously, attrition dynamics and the rest, and as long as we feel like the economy is holding together as well. So there’s several benchmarks we feel like we’ve got to meet that would maybe give us a couple of percentage points off in Q4 from the 76% we did on the core business, just to be thorough with that answer.

[Chad Bennett:]

Yes. Got it. And then maybe one final one for me. So the new pricing and packaging and the 15 packs and that impact on ARR, which I think you said was up 11% year-over-year. I assume it’s still fairly early to know the kind of long-term lift there. But I mean do we think this could be a pretty meaningful net new ARR tailwind, 10% plus for at least the next few quarters?

[Rick Carlson:]

Well, I would – so first off, those customers that we signed up, in addition to signing up at a much higher initial MRR point from, typically what is a $600 sign up starting out at $1,500, in addition to that, they are on an annual contract. So these are customers that are not only paying us more MRR, but are more stable customers and more committed to putting a lot of clients on the platform. Those customers – these are larger customers that believe that their 10 pack is just the start. We will look forward to that being true. We’re taking a wait-and-see approach with how their expansion takes off after that. But what I can tell you is we plan on continuing to offer this 10 pack as an option, and we see sort of – we’d like to think we can get better at selling it, actually. But right now, we’re forecasting sort of more of the same. So with each month, a few customers that we sell take the 10 pack. And so we think we’re – that 10%, 11% MRR increase that you get from the same number of units, we think is a permanent feature.

[Chad Bennett:]

Got it .All right. Thanks so much. Nice job.

[Rick Carlson:]

Hey, thanks so much. Great hearing you. Thanks, Chad.

[Operator:]

We’ll go next to Darren Aftahi at ROTH Capital Partners.

[Rick Carlson:]

Hey, Darren.

[Darren Aftahi:]

Hi, guys. Hey, Rick, how are you? Thanks for taking my questions. I hope you guys are well. Nice job on the quarter. Can I follow-up on the landing of the large customers? So I’m kind of curious on that a $2.2 million number. So a couple of kind of questions embedded in this. First, like, what is the mix of those customers as a percentage of that $2.2 million in the quarter?

[Rick Carlson:]

When you say mix, are you talking agency versus direct?

[Darren Aftahi:]

Yes.

[Rick Carlson:]

Okay. You threw me a softball there. I wanted to point this out, and we may have mentioned it in the comments. Look, we were within – as a company, we’re pretty proud of the fact that we were within a few units of last year’s unit number in a quarter that obviously was a crazy quarter for everybody, right? And yet we actually sold, I want to say the number is two or three more agency partners than we did last year. We’ve been focusing on our marketing on landing our core customers, which are agencies. And so we actually sold a couple more agencies this year in Q2 than we did last year. That exact percentage is north of 80%. I don’t have the exact percentage, but I believe it was about 80% of the businesses that we sold in Q2 were agencies and then that, of course, is where the 10 packs came from. We’re seeing our brand improve a little bit in terms of brand awareness. Anybody who’s interested in sort of learning about SharpSpring, if you go to any one of these software review sites, which are effectively the analyst for SMBs, right? SMBs don’t really go to Gartner. But they do go to Capterra, which is a Gartner site and look for reviews. And our ratings there and the number of ratings and the brand awareness has really started to pick up a little bit and we’re included in more bake-offs, and we’re attracting a little bit larger agency, which is sort of exciting for us.

[Darren Aftahi:]

Great. Then on the larger customers, so when they take the initial call, whatever their 10 pack or multiples of that is, if you go in for wallet share expansion, are your contracts written such that the additional business is all annual in nature, meaning it’s sort of a master service agreement, but it’s all annual?

[Rick Carlson:]

I’m not quite sure I’m understanding the question, Darren.

[Darren Aftahi:]

Meaning, if you’re selling to one of these larger clients that takes a 10 pack and you’re getting the $1,500 kind of as it is. If they expand over time, is that additional business annual nature or month to month?

[Rick Carlson:]

Got you. Licenses – it’s a good point. I understand you now. The additional licenses would – can be turned on and turned off without an annual contract. So we’re – we would then be charging for expansion licenses I believe it’s $275 million for an additional license after the 10 pack. And that particular customer could stay on the platform or leave in a month or two.

[Darren Aftahi:]

Got it. And then just last one for me. In terms of your commentary about spend, and I think last quarter, you talked about some measures you were taking, which – the call was in May. Kind of in the midst of maybe the worst parts of COVID in terms of when people’s businesses were impacted. As you normalize out, I’m curious and I appreciate the comments about spending in the quarter and then seeing the benefit of the customers in the next quarter. But is your efficiency on LTV attack actually improving? Meaning, said another way, how sustainable even if you were to step up spending to a more normalized rate in the fourth quarter? It sounds like you’re marketing savings or efficiency is sort of here to stay. Is that a correct statement?

[Rick Carlson:]

Well, so I – so you – multipart question that you asked there, and there are arrows pointing in different directions. So I’m going to try to not be long-winded, but I’ll give you an answer as best as I can. First, on the CAC side, yes, we think that the number, the $10.9 million was obviously a pre-COVID marketing spend against a COVID quarter results. Actually, if you do – if you take into account the 11% ARR inflation, it’s almost like dividing about 300 and some odd sales composite sales, if you take my point. So the CAC even for this period was pretty good. But yes, we’re spending less on marketing and put a new sales process in place, and we definitely believe that we are going to have lower CAC next quarter, significantly lower CAC next quarter than we reported this quarter. And we think that, that’s a permanent feature of the business. We’ve been talking about this, and we took a – prior to COVID in Q1, we took a step down. I think it was $8,800, something like that. We think we’ll be below that. Now if we accelerate our sales, you can sometimes get different channels. So nothing is permanent, but we think it largely is a semi-permanent feature of the business for the next several quarters anyway. With regard to LTV, we’ve got arrows pointing – we did a price increase at the beginning of the year. We didn’t see expansion – excuse me, we didn’t see a lot of logo attrition as a result of that price increase. That is a significant upward influence on the right time value. So we’re excited about that. On the less positive side, during COVID we’ve seen the most significant pressure on our business with agencies not being able to add new clients. So if you were looking at our customer accounts, we didn’t add a lot of net new customers just to deal with that issue squarely. Obviously, we think that’s a temporary feature of the economy, and we’re looking forward to a vaccine and everybody getting back to work and the economy rearing back up again. But right now, that’s where we’ve seen the most pressure of our business. So that would bring lifetime value down, at least in the short term, as I described. So where we all end up, yes I believe that we've probably seen some expansion in the LTV to CAC ratio when all things considered. But as you know, LTV is in an estimate and we're not thinking that way internally, we're trying to remain disciplined on our CAC. So hopefully that sheds some light on our thinking.

[Darren Aftahi:]

That was very helpful. Thanks again.

[Aaron Jackson:]

Thanks for the questions and appreciate it.

[Operator:]

[Operator Instructions] We will go next to Eric Martinuzzi at Lake Street, please proceed.

[Eric Martinuzzi:]

Hey Rick and Aaron, first wanted to understand the Delta and the guide of the $0.5 million midpoint. So the old range was, the midpoint was $30.5 million and new midpoint is $30 million even. Is that entirely related to Perfect Audience or is that a mix of the both sides?

[Rick Carlson:]

I think it's mostly related to Perfect Audience where we've got some – we've been doing well with Perfect Audience thus far and to describe our expectations for the business in the second half of the year as a hockey stick would be an overstatement. But from a budget perspective, we obviously showed month-over-month growth and we’re sort of looking around at the COVID environment. I know everybody on this call understands that the ad tech businesses have been hit pretty hard with shrinking budgets and so forth. And so we wanted to be conservative there with our assumptions about how – while Perfect Audience is doing pretty well versus budgets to-date we want it to be hopefully sufficiently conservative given the environment on how it might perform in the future. As I already alluded to, the area where we're really seeing the most pressure on the core SharpSpring business is just with agency client ads. As you guys saw, we added 276, I believe customers and 80% of those are our agencies, but the agencies themselves, I think are having a tough time adding that next customer. They're doing a great job of keeping the customers. So we haven't seen a bunch of people drop out there, which is super encouraging, but you add those things up and we felt like it made sense to as you put it lower the midpoint to the bottom of our former guidance.

[Eric Martinuzzi:]

Okay. And you actually went to where I was headed next, which is the new customers. Historically, you guys run about 90 to a 100 new customers per month on the signup side. Given, we had 264 in Q3 a year ago, but you are tending towards or at least in the most recent quarter you tended towards signing up bigger customer. So how should we think about new customer signups versus a year ago or versus Q2? Should we be thinking about a smaller than a year ago, but ARR equal to or better?

[Aaron Jackson:]

I haven't and maybe I should have, but I haven't compared our expectations. We think the current sales levels are what you should expect for the rest of the year. And, we're hoping for higher, we built in expectations that the sales levels you saw in Q2, I mean everybody on the call understands what we're facing, we don't know what winter's going to look like and all, but we're pretty comfortable thinking that with our processes that we have in place, we can perform similarly in Q3 and Q4. And hopefully better compared to as we did in Q2. So that's what we're thinking. And I think that's true in both units as well as the percentage of larger customers that have taken the 10-pack and so forth. So with what we've done, we feel in terms of our sales and marketing process, when things get back to normal we really feel like we can light some things out here. But we're being cautious with our expectations given everything that's going on and it's difficult to tell whether this is going to settle in deeper in terms of the economy or not.

[Eric Martinuzzi:]

And I certainly want to recognize the Q2 results. The hardest thing people have to do in any environment is bringing on a new customer and certainly the COVID, April, a lot of people were still figuring out how to work from home. So the fact that you guys were able to add as many as you did in the second quarter is terrific.

[Aaron Jackson:]

Yes. Thank you.

[Eric Martinuzzi:]

Yes. Last question for me is on the OpEx, we had operating expenses of 6.3 million in Q2, were there any either one-offs in Q2 or things that we should be anticipating for Q3 on the OpEx, Aaron?

[Aaron Jackson:]

No, I don’t think there are any got you in there anything like that I think as Rick mentioned earlier, as we go into Q4, we're going to be looking at bringing our salaries back to full salary. I think that's the big one on the horizon that we might see some adjustments in the OpEx against how we did in Q2.

[Eric Martinuzzi:]

Got it. Okay. Thanks for taking my questions.

[Rick Carlson:]

Hey, thanks. Always great to hearing from your Eric.

[Operator:]

We'll take our next question from Alex Silverman, AWM Investments. Please proceed.

[Alex Silverman:]

Hey, hello. Good evening. So most of my questions had been asked and answered. I would like to ask though the 10-packs and the 40-pack, are you using a different approach to selling these clients and therefore have a subset of your sales group targeting larger agencies? Walk me through how this came about.

[Rick Carlson:]

Well, the first thing we did is we started offering it. So we realized, hey, there are customers that come in and have aspirations and right out of the gate, a lot of those guys nothing comes – that nothing comes of it, they buy up a three pack for $600 and they get the four and five, right. And so it's difficult to tell, but we've had enough of those customers over the years that we said, hey and it seemed like maybe an increase was happening in terms of frequency that we said, hey, let's offer this – let's offer this pack. And so as we said, thankfully, those we've got some folks that are taking us up on it. In terms of changing processes and all, we have a page on our website that is enterprise focused and we've taken those people that are filling out those, and we get businesses of all shapes and sizes that fill out a form on that site. And we have historically run those through a separate – the same sales process. We have started internally, we've separated out a team that works just with those opportunities. And so we have been uncovering some, some larger deals and those are really the two steps that we've taken parsing out a separate group to deal with the larger opportunities which we have, as we build our brand and we think will only increase, I don't know how quickly in frequency it'll increase, but I might afford everybody on the call, but we talked a little bit about some of the stuff we're doing with our – with these key influencers. Those names might not mean anything to the folks on the call, but it's a big deal from a company perspective and so we're hoping that to increase the frequency of those larger customers signing up with us. And so we're offering it and we're running it through a separate team.

[Alex Silverman:]

Okay. And then were any of them current HubSpot users and looking to save money, but keep the same feature set or are these folks new or what's that – help us there, if you could.

[Rick Carlson:]

Yes, sure. I'm going to answer the question more generally, not related to just the larger customers. Because I don't think there was anything related to the larger customers that's different from what normally goes on. Look, in any given month or quarter, it feels like about 50% of the folks that we sell where their first entry point – their first offering of marketing automation. So, these are guys that are before marketing automation, trying to cobble together point solutions and are losing battle too long in discussion to talk about why, but they're turning the marketing automation and they're turning to us as their first vendor. The other half though is coming from another vendor and you know, at the top of that list is HubSpot. So there we sign up HubSpot agencies all the time. Those agencies are – our goal is not to get them to switch clients. These platforms HubSpot's, SharpSprings all the rest of the marketing automation platforms are they're sticky. And we've talked a lot about that on our comments. They integrate them with their website, chat bots and automation events and landing pages and forms, all your deal and contact records are in the CRM or you've integrated it with something else. And so the name of the game for us is to sign up a competitive agency and really we get the rest of their business moving-forward. Our goal is not to get them to switch their customers, their current customers to HubSpot, because it's probably not serving that customer very well, making them switch over. Although there is an incentive, it's a lot of work, financial incentives. There's a lot of work for both the agency and the client. But what happens is we get all the new business from that agency because the math on the next customer is always the same. Do I want to pay SharpSpring a few hundred bucks for a license per month or do I want to pay a competitor, thousands of dollars that eats into my agency's margin, on my agency's a retainer and that answer's always the same. I want them to be on SharpSpring. So softball, Alex.

[Alex Silverman:]

Got it. That's not – that's really helpful. Thanks. That's all I got.

[Rick Carlson:]

Alright, fantastic. Thanks Alex. At this time, this concludes our question-and-answer session. I’d now like to turn the conference back over to Mr. Carlson for his closing remarks.

[Rick Carlson:]

Now I just want to thank everybody. Appreciate the kind words on the call today. I want to really thank our team for a fantastic quarter for their continued support of our company and our goals and our investors. Needless to say, I want to thank all of you that are following SharpSpring and especially our investors. And I want to thank our new interim-CFO, Aaron who survived his first earnings call. Thanks everyone. Stay safe and healthy.

[Operator:]

Before we conclude today's call. I would like to provide SharpSpring’s Safe-Harbor statement that includes important cautions regarding forward-looking statements made during this call. During today's call, there were forward-looking statements made regarding future events, including SharpSpring’s future financial performance. These statements reflect the company's current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading risk factors and elsewhere in the company's annual report on Form 10-K and quarterly reports on Form 10-Q, that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements anticipated or implied by these forward-looking statements. The company does not undertake any responsibility to revise any forward-looking statements to reflect future events or circumstances. Also note that during this conference call, we may referenced to adjusted EBITDA, core net income or loss, in core net income per compare loss per share, which are non-GAAP financial measures presented as a supplemental measures of the company's performance. A reconciliation of net income or loss to non-GAAP measures is included with reference in the financial section of the earnings press release and made available on the company's website. Finally, I would like to remind everyone that a recording of today's call will be available for replay via link available in the investor section of the company's website. Thank you for joining us today for SharpSpring’s Second quarter 2020 earnings conference call. You may now disconnect.