SharpSpring, Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good afternoon. Welcome to SharpSpring's First Quarter 2019 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and CFO, Brad Stanczak. Following their remarks, we will open up the call for 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 is being recorded and made available for replay via a link available in the Investor Relations section of the company's website at investors.sharpspring.com. Now, I would like to turn the call over to SharpSpring's CEO, Rick Carlson. Please go ahead.

[Richard Carlson:]

Welcome, everyone, and thank you for joining us today. Especially given the Uber announcement, we really appreciate you guys spending some time with us. After the market close, we issued a press release announcing our results for the first quarter ended March 31, 2019. A copy of the press release is available in the Investor Relations section of our website. Our first quarter was a great start to the year and another record for new customer wins as well as top line revenue. In fact, Q1 2019 marks the first time we've ever added over 300 new customers in a Q1 period. In total, we now have over 1,800 agency customers and over 7,700 businesses using SharpSpring to improve their sales and marketing efforts, drive new leads and help their businesses grow. With the capital provided by our recent financing in March, we have the resources to increase investment in our already proven sales and marketing strategy to accelerate customer acquisition and revenue expansion for the foreseeable future. At the same time, we're also continuing to place a significant emphasis on maximizing the success of our existing agency customers on the platform, which should lead to a number of positive downstream benefits in the latter half of the year and beyond. Now before I speak further about these major initiatives, I'm going to turn the call over to our CFO, Brad Stanczak, who will walk us through our financial results for the quarter. Brad?

[Bradley Stanczak:]

Thanks, Rick. Good afternoon to everyone on the call today. Turning to our financial results for the first quarter ended March 31, 2019. Our total revenue on the first quarter increased 27% to $5.3 million from $4.2 million in Q1 of last year. The SharpSpring marketing automation platform grew 29% to a record $5.3 million compared to $4.1 million last year. Our gross margin for the first quarter of 2019 increased to 71% from 67% last year. In dollar terms, gross profit increased 36% to $3.8 million from $2.8 million in Q1 of last year. As we've mentioned on previous calls, over the past few years, we've invested significant resources in our hosting infrastructure and support organization to reinforce the current and future growth of our product. As we continue to layer more revenues under the platform, we will create more and more operating leverage on our model as evidenced by our year-on-year improvement in gross margin. Beginning with this quarter and going forward for the next couple of quarters, we expect our margins to decline slightly due to investments in several initiatives meant to drive future revenue expansion from our installed customer base. As the year progresses, the leverage we get from new revenues on the platform will return margins to recent levels. Rick will provide more detail on these investment items in a moment. Turning to our operating expenses; for the first quarter of 2019, our operating expenses increased 36% to $6.6 million from $4.9 million in Q1 of last year. The quarterly increase was primarily due to investments in sales and marketing initiatives to accelerate our future growth and, to a lesser extent, additional investments in our R&D organization to accelerate road map items. Our GAAP net loss for the first quarter totaled $2.9 million or $0.33 per share compared to a GAAP net loss of $2.1 million or $0.24 per share in Q1 2018. On the balance sheet, we have $17.8 million in cash at the end of the quarter compared to $9.3 million at December 31, 2018. Looking at our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we reconcile in our earnings release, totaled $1.8 million, which is an increase from an adjusted EBITDA loss of $1.7 million in the same year ago period. The higher adjusted EBITDA loss was the result of our continued investment in new sales and marketing programs as well as our development team. Going forward, we expect our adjusted EBITDA to be flat to down in the second quarter and then improve sequentially each quarter. Our core net loss for the first quarter, which is also reconciled in our earnings release, totaled $2.1 million or $0.23 core net loss per share compared to a core net loss of $1.7 million or $0.20 core net loss per share in Q1 of last year. For more details on our adjusted EBITDA and core net income metrics, please see the reconciliation of GAAP terms included in the supplementary tables in today's earnings release. Moving to some of our other metrics. During Q1, our cost to acquire a customer was approximately $8,200, which was impacted by factors related to seasonality. Our sales cycle tends to run around three to four months on average, and during the holiday season, we tend to see fewer demos attended, which manifests itself as lower new sales in Q1. As a reminder, we calculate customer acquisition cost as the sum of our all-in sales and marketing costs from Q4 2018 divided by the new wins in Q1 of 2019. That means that marketing activity and, more specifically, demo attendance in Q4 drive Q1 sales. While this is an increase on customer acquisition cost from Q4, it is primarily due to timing differences between when sales and marketing dollars are spent and when the customers are acquired. While using the prior quarter costs provides a better estimate of our customer acquisition cost to account for the average sales and marketing cycle we experience, this measurement is imperfect because marketing spend in one quarter impacts the deals we win in future quarters. Though we do experience fluctuations in this metric quarter-to-quarter, we're confident that we can continue to consistently acquire customers at our historically attractive all-in rates that will deliver significant lifetime value for the business in the future. Our lifetime value calculations, which are long term and include estimates for future performance, continue to indicate that agency customers could be worth approximately $50,000 to the business on average. This long-term value reflects the benefits of the company on a discounted basis after reducing for estimated gross margin cost to support the customers on the platform. Based on these figures, our expected lifetime value-to-customer acquisition cost ratio continues to be compelling. Before turning the call back over to Rick, I'll now take a minute to discuss our capital market activity and plans going forward. In early March, we completed a public offering of 770,000 shares of our common stock which is priced at $13 per share. After a full exercise of the overallotment, we received gross proceeds of approximately $10.7 million. We plan to use the proceeds from this transaction in the following ways

[Richard Carlson:]

Thanks, Brad. I sincerely hope Siri doesn't interrupt me like she did you. There's too many devices to turn off apparently, so there we go. Getting back to it, as I mentioned earlier, we had a great start to the year. When compared to the same period in 2018, we drove nearly a 50% increase in new customers, which is a testament to our proven sales process as well as the rise in market awareness of the SharpSpring platform and marketing automation in general. Even without considering the typical seasonality associated with this period and our decision to forgo an annual price increase this year, we grew revenue sequentially and 27% year-over-year. With this quarter's results, we have now achieved seven consecutive quarters of year-on-year new customer growth. Moreover, we are able to maintain gross margins above 70% in Q1, which includes the addition of several account managers added during the quarter that impacted our cost of sales. In the near term, we are duly focused on two initiatives

[Operator:]

Thank you. We will now be conduction a question-and-answer session. [Operator Instructions] Our first question comes from David Hynes with Canaccord Genuity. Please go ahead.

[David Hynes:]

Thanks for all the color. It sounds like you're having some nice success with the account manager executions that have been worked there.

[Richard Carlson:]

Thanks.

[David Hynes:]

I was curious, you mentioned starting to introduce some functions that fall under sales automation. And maybe that's kind of broadly the category you're thinking about for paid-for solutions. As you kind of look across your agency customer base, right, 1,800 customers, is there any sense for kind of what percent or how broadly adopted sales automation tools may be across that base? I'm just trying to figure out kind of where your agency customer base is in terms of being able to utilize those tools.

[Richard Carlson:]

Yes. So first, I think it's a great question, and welcome aboard, DJ, so good to hear your voice. I think, first, it's important to note that SharpSpring includes a CRM. And so many of the agency clients that are brought on board by the agency are using our platform not only for the marketing automation aspects of it, but for the integrated CRM. And not all those customers, to be clear, are using our CRM functionality. But it numbers in the thousands that use the CRM functionality, and a subset of those would be players for the sales automation functionality. And I described some of that functionality that was out, but hopefully, that gives you an idea of scale in terms of the offering.

[David Hynes:]

Yes. It sounds pretty broadly applicable then. And then maybe one for Brad, which is tied to the retirement of the promissory note that you've announced today. Just kind of two questions there in terms of kind of what happens from here going forward? So that stock that's issued, is that, a, is that freely tradable stock today? Or just what happens from here? And then, b, can you help me think about kind of a fully diluted share count? Because there's a bunch of moving parts now with the secondary and the stock with the convert unwinding. So maybe like a share count for Q2, Q3 or anything you'd have?

[Bradley Stanczak:]

Yes. So functionally, those shares will need to be registered. So they will be issued to the debtholders but will not yet be registered. So that is a process that will still have to happen. With respect to where I have outstanding shares with that issuance, I am at roughly -- give me one second, please. I'm at roughly 10.9 million shares outstanding now.

[David Hynes:]

And that's a basic number?

[Bradley Stanczak:]

Correct, basic.

[David Hynes:]

Does that include these 1.24...

[Bradley Stanczak:]

That would include the shares that we issued related to the retirement of the note.

[David Hynes:]

Okay. Got it. Okay. Very good. Thanks a lot, guys. Thank you.

[Bradley Stanczak:]

Thanks, DJ.

[Richard Carlson:]

Thanks so much, DJ.

[Operator:]

Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

[Eric Martinuzzi:]

Thanks. I have a question regarding the contract length that you have with your different customers. One of the things that you can do, you talked about not raising prices on people here in 2019, but you also have contract terms that have historically been pretty flexible. I think, if I'm correct, that it's a month-to-month relationship. Have you thought about reevaluating those? And if so, are there any changes being considered?

[Richard Carlson:]

Yes. Thanks for the question. Nice to hear from you, Eric. Yes. The -- good question. We're committed to a month-to-month contract for our agency partners. Agencies have monthly relationships with their clients. And therefore, it's been a strong selling point for us to have a monthly relationship with them. We may, in the future, consider offering some sort of price lock-in or what-have-you for extended contracts. My feeling generally about this is that these are small businesses, and this has been something that has helped us get people in the doors. We are one of the smaller companies that are out there. But that's changing over time, and we will look at it. I will say that we've made one change, just really we're in transition. So people who were in our pipeline previously, we're honoring our old policy, but moving forward for the direct customers that we get each month, as anybody who follows the company knows, we land a certain percentage of direct customers as well that are sort of caught in our marketing web although the company has been focused on agencies since we started. We've now moved to an annual contract for those end customers. And so we think that's appropriate, and we started that this month actually. But again, maybe only a certain percentage of customers that we sign up this month will have -- will be on annual contracts because many of those customers will have already been in our pipeline, and we're going to honor what we were talking about with them when they first joined our sales cycle. But yes, we're -- and that's a lot of detail, but we're moving to an annual contract with our end customers. And we've been committed to a monthly contract with our agencies, but we may look at ways to entice customers into annual contracts as well on the agency side.

[Eric Martinuzzi:]

Okay. Now looking out to next quarter, I know you guys aren't giving guidance here, but Street consensus is $5.6 million for revs and then adjusted EBITDA loss of around $2 million. On the adjusted EBITDA loss, that does sound like you would be in line with your color regarding flat to down on the adjusted EBITDA loss. The revenue, historically, you guys have grown sequentially in that $200,000 to $300,000 range. So if you -- I'd just like to get your comfort level, I guess, with where The Street is for Q2. And if you aren't comfortable, could you pass the question along to Siri?

[Richard Carlson:]

You beat me to it. I was waiting to pass something to Siri.

[Bradley Stanczak:]

So you are accurate that we have -- are not planning to give guidance on this call, but it's certainly something that we are considering and I may embark upon in Q3. So thank you for that. Your assessment of the sequential growth, I think, is accurate. And I would expect not dissimilar results. And my comments earlier probably gets you to -- so I would say I'm reasonably comfortable with that EBITDA level that The Street is expecting.

[Eric Martinuzzi:]

And then you talked about TrustRadius, I mean this is probably a long shot here, but getting that award, you've got your own customer acquisition costs that I'm sure you keep a tight watch on. But just anecdotally, do you feel like there has been any increase in the inbound traffic, the organic traffic as far as driving new leads for your business since you guys got that award?

[Richard Carlson:]

No. I don't think so. It's -- I don't -- speaking honestly, I don't think there would be a lift coming from that award. We'd made use of that. I think it's a great -- it's a respected award, and I think that helps us during our sales process as people are evaluating ourselves against HubSpot and other companies that are out there. And so that's really where we see the impact of that award that we talked about in the last quarter.

[Eric Martinuzzi:]

Got you. Okay. Thanks for taking my questions.

[Bradley Stanczak:]

Thank you.

[Operator:]

Our next question comes from Mike Malouf with Craig-Hallum. Please go ahead.

[Michael Malouf:]

Great. Thanks for taking my questions. A question on the average revenue per customer and maybe just kind of an offshoot question. As you look at the agency's usage and the expansion into their customer base, one would think that pretty soon you'll start going up in the levels and increasing that average revenue per user number. And I'm just wondering if you could comment a little bit on that because I saw that it was down this quarter sequentially and lower than even the third quarter.

[Bradley Stanczak:]

We have -- or continues to capture a certain amount of direct customers, and they tend to have a little bit lower average revenue per customer. Also, as we continue to layer new customers on, remember that they start out with a three pack of license that takes them a little bit of time to fill. And so they are not yet at that point where we would typically expect them to hit expansion revenue. And so only until they have that anchor clients that we work feverishly to get them, partner with them and then they fill in the two additional clients, they're not going to be adding on a fourth client that is where the payment actually happens. So I think what you're seeing is a manifestation of the record level of customers that we've been able to acquire over the last few quarters and the fact that it takes a bit of time for them to hit expansion revenue.

[Richard Carlson:]

I think that's right. And I also think this is something that we're working on actively. We have -- we alluded to it in our last two calls, but we've got four products that we are looking to have brought online. We also just announced this direct support feature that we're seeing our agency partners take advantage of. We think that's actually a solid margin offering for us, by the way, I should just address that. But it's also an additional revenue stream. And as Brad pointed out, that is actually a revenue stream that could be added to somebody who's a brand-new partner working through their initial pack. And so we just launched that, and it's just -- we're just building awareness for that offer within our own user base. But we've got a number of things coming down the pipe that in addition to working on expansion revenue via added agency clients, we've got these products that will serve to increase the average price per license from each of those agency clients as well. So we really wanted those things out by now, just to be perfectly frank. And like a lot of development, these things take 60 days or 90 days longer than I would like them to take seemingly every time. But we're excited about those things coming online here pretty soon and the long-term effect that we think those offerings will have.

[Michael Malouf:]

Great. Thanks for the help. I appreciate it.

[Richard Carlson:]

I appreciate it, Mike. Good to hearing from you.

[Bradley Stanczak:]

Take care.

[Operator:]

At this time, this concludes our question-and-answer session. I'd now like to turn the call over to Mr. Carlson for closing comments.

[Richard Carlson:]

I just want to thank Siri and our customers and all of you that are out there, our investors, supporting the company. Thank you very much for joining us today, and have a good rest of your week.

[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 latest 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 provide any forward-looking statements to reflect future events or circumstances. Also note that during this conference call, we made reference to adjusted EBITDA, core net income or loss and core net income or loss per share, which are non-GAAP financial measures presented as supplemental measures of the company's performance. A reconciliation of net income or loss to non-GAAP measures is included for your reference in the financials 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 a link available in the Investors section of the company's website. Thank you for joining us today for SharpSpring's First Quarter 2019 Earnings Conference Call. You may now disconnect.