SharpSpring, Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Good afternoon. Welcome to SharpSpring's Fourth Quarter and Full-Year 2019 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and CFO, Michael Power. Following their remarks, we will open up 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 Web site at investors.sharpspring.com.I'd now like to turn the call over to SharpSpring's CEO, Rick Carlson. Sir, please proceed.

[Rick Carlson:]

Welcome everyone, and thank you for joining us for the call today. After the market closed, we issued a press release announcing our results for the fourth quarter and full-year ended December 31, 2019. A copy of the press release is available in the Investor Relations section of our Web site.Looking back on the past year, 2019 was another period of steady growth for our company, as we continued to build on our leading position as the premier agency-focused marketing automation solution in the market today. Financially, we generated our 11th consecutive quarter of record revenue in Q4 at over $6 million during the period. We finished the year at $22.7 million in total revenue. During Q4, we also generated sequentially improved new customer wins and agency partner sales. At the end of 2019, we counted approximately 2,000 digital marketing agencies and over 500 direct customers as SharpSpring customers.Crossing the 2,000 agency mark might just be another number to some, but to us it represents much more. First, it speaks to our ability to consistently drive new customer wins over an extended period. As I just mentioned, we are an agency first organization. Our rapid rise as one of the top solution providers in the agency vertical underlies this core focus, which makes us unique in the market, defensible from competition and increasingly valuable to our core customers over time. Further to that last point, reaching 2,000 agency milestone in just a few years clearly shows our immense value is being appreciated, both in price and feature set by our customers, agency, and direct alike. For agencies as they stay with us longer, our lifetime values generated from this group will drive greater market-leading economics, ultimately making us an irreplaceable part of their business.All that said we believe there's still plenty of room for us to improve in several key areas. Meeting that challenge is what will ultimately allow us to generate significant returns over the multi-year period ahead. In recognition of our maturing business dynamics, we made a decision last year that 2019 would need to be a time of serious investment, investment in our processes, in our technology, and in our people. To that end, in the latter-half of 2019, we made a number of key strategic moves with a focus on positioning our business for long-term growth.I plan on speaking more fully on three of these areas of focus later on in this call, however, before I do, I'd like to formally introduce our new CFO, Michael Power. Michael started with us in December, and has already hit the ground running. He and his team have been hard at work strengthening the existing foundation of our financial processes. He brings with him over three decades of financial and accounting experience in several senior leadership roles. We're very fortunate to have someone like Michael step into our CFO role. He's an experienced finance veteran and very well-versed in the SaaS industry, having previously come from a 1,000 person team and leading a successful acquisition of ConnectWise. As we look to take SharpSpring forward and mature our organization for long-term growth and sustainability, Michael is exactly the guy we want on our team.At this point, I'll now turn it over to Michael, who will run -- excuse me, who will walk us through our financial results for both the quarter and year. Michael?

[Michael Power:]

Thank you, Rick. I appreciate the kind words. Good afternoon to everyone on the call. Before I begin, I would like to take a moment and say how excited I am to be part of the SharpSpring team. All right, now let's turn to the financial results for the fourth quarter and full-year ended December 31, 2019.Our total revenue in Q4 2019 increased 19% to a record $6.1 million from $5.2 million in Q4 2018. For the full-year 2019, our total revenue increased 22% to $22.7 million from $18.7 million in 2018. Our gross margin for Q4 2019 decreased to 65% from 72% in Q4 2018. In dollar terms, gross profit increased 7% to $4.0 million from $33.7 million in Q4 2018. For the full-year of 2019, gross margins held steady at 69% both this year and in 2018. In dollar terms, gross profit increased 21% to $15.6 million from $12.9 million in 2018.As mentioned on previous calls, over the past few years, we have invested significantly in resources in our hosting infrastructure, account management teams, and support organizations to reinforce the current and future growth of our product. As we continue to layer on revenues on to the platform, we will create greater operational leverage in our model. We've done a nice job of scaling and leveraging our infrastructure, which has allowed us to maintain gross margins of nearly 70% for the year-end, even in the face of some strong short-term headwinds.In more detail during the quarter, we did experienced margin compression due to a few factors. First, of course, we had to deal with a few integration items related to Perfect Audience acquisition. Second, we made further investments in key areas that will support our growing customer base as we optimize our process for bringing on additional customers with special focus on customer support and onboarding. Third, with our account management team fully staffed, the additional costs associated with this headcount also played a factor. Going forward, we plan on realizing significant benefits from these investments that will help generate positive long-term margin expansion. As it relates to Perfect Audience, we believe this business on its own will be a higher margin product after we finalize the integration process, which we expect to happen later this year.In performing our due diligence, we realized that the previous go-to-market strategy had actually created friction between the customer and retargeting ad buy. In response, we've implemented a new buying process that includes a subscription feature that incentivizes continued usage. On a more macro level, we also expect to benefit from our cross-selling efforts into our current SharpSpring customer, and vice versa. As it relates to account management, we are seeing continued signs of progress for this effort, and we continue to maintain our long-term thesis that understanding and helping our customers become more successful on our platform will ultimately translate into a greater lifetime value. While we're on the topic of gross margin, we continue to believe that our long-term gross margin could be in excess of 80%.Turning to our operating expenses, for the Q4 2019, our operating expenses increased 11% to $6.7 million from $6.1 million in Q4 2018. For the year 2019, our operating expenses increased 19% to $25.8 million from $21.7 million in 2018. The quarterly an annual increase, due primarily to investments in sales and marketing initiatives and to accelerate our future growth, additional investment in our R&D organization to accelerate roadmap items and increase to our G&A, we continue to bring on additional employees to support our future growth needs and increase our inventory cost.On a GAAP net loss basis for Q4 2019 totaled $2.7 million or $0.24 per share compared to a GAAP net loss of $2.3 million or $0.26 per share in Q4 2018. For the full-year 2019, our debt net loss totaled $12.4 million or $1 20 per share, compared to a net loss of $9.5 million or 111 per share in 2018. On the balance sheet, we had $11.9 million in cash at the end of the quarter, compared to $13.8 million at the end of the prior quarter and $9.3 million at the December 31, 2018. Looking at our non-GAAP measures, on adjusted EBITDA loss for the quarter, which we reconciled in our earnings release, totaled $1.9 million. This was an improvement over last quarter. And there's an increase from our additional EBITDA loss of $1.6 million in the same period a year ago.For the full-year 2019, our adjusted EBITDA loss totaled $7.4 million, compared to $6.2 million in 2018. Our core net loss for the quarter, which is also reconciled in our earnings release totaled $2.1 million or $0.19 core net loss per share, compared to our core net loss of $1.7 million or $0.19 core net loss per share in Q4 of last year. For the full-year 2019, our core net loss totaled $8.2 million or $0.79 core net loss per share compared to our core net loss of $7.0 million or $0.82 core net loss per share in 2018. For more details on the adjusted EBITDA in a core net income metrics, please see our reconciliation of the GAAP terms included in our supplemental tables of today's earnings release.Moving to some of our other metrics, during Q4, our cost to acquire customers was approximately $9,900, which was impacted; increased sales and marketing spend in prior quarters. As a reminder, we calculate customer acquisition costs as the sum of our all-in sales and marketing costs for Q3 2019 divided by new wins from Q4 2019. It is important to mention that our tax calculation is imperfect because it does not take into account the marketing spend in one quarter, and has a long tail continue to impact deals that we win in future quarters. As a cohort basis, we see lower tax than what was reported and these numbers reflect. So we do experience fluctuations in this metric quarter-to-quarter, we are confident that we continue to consistently acquire customers at our historical attractive all-in rates that will deliver significant lifetime value for the business in the future.Our lifetime value calculation which are long-term and include estimates for future performance, continue to indicate that our agency customers could be worth approximately 40 to 50,000 on a business on average. The long term value reflects the benefits of the company on a fully discounted basis after reducing for estimate gross margins costs to support the customers on a platform based on these figures are expected lifetime value of our customers acquisition cost ratio continues to be compelling, and we are working to make it even better.Moving to the capital markets activities, Perfect Audience financing as Rick elaborates shortly in December, we announced the acquisition of a Perfect Audience from Marin Software for a net consideration of $4.6 million, at the same time, we entered into - it is an of agreement to sell 555,506 shares of our common stock in a private placement existing institution shareholders for a company for an aggregate purchase price of $5 million. As a result of these transactions, our net cash position was largely unaffected.As a bit of a commentary, we feel that the leveraging inside participation to fund this acquisition was multi-level outcome for the company. Most obviously, your long-term outlook with respect to cash usage can remain unchanged. We also believe that continued support for the major holders in the company's speaks to the compelling opportunity and price point this couple million acquisition provides.2020 guidance, turning to our financial outlook, the financial year ending December 31, 2020, we expect total revenue range between $30 million to $31 million with we represents approximately 32% to 36% respectively compared to the prior year. The company's guidance is based on recurring revenue from our current customers based on early performance resolving were recording in the first quarter and the material positive impact from the recent price increase we enacted, which Rick will expand on in a few minutes.With the coronavirus situation developing quickly, we believe it's important to be transparent about how SharpSpring is responding to the outbreak. Our philosophy as a business is to approach the situation with empathy and urgency. As a top priority is the health and safety of our employees, and of our community we serve, including our customers, partners, prospects, and entities. Given the rapid outbreak is evolving we expect that we are prepared to reevaluate our approach on a regular basis to ensure the health and safety of our employees and communities. We will be proactive and make necessary changes to our activities and spend to ensure we meet our critical objectives for 2020. We will update our plans around the virus accordingly in respect to the fundamental changes to our situation.This completes our financial summary. I'd now like to turn the call back over to Rick for additional insights on the operating progress in Q4 as well as the outlook for 2020.

[Rick Carlson:]

Thanks, Michael. As I mentioned in my opening remarks, 2019 was a year of investment that we expect to translate into benefits for us over a multi-year period. While our efforts remain ongoing, we've seen strong signals that the choices we've made over the last year were the right ones. To recap, 2019 was about investment in processes, technology and people. I'll tackle those items in the order just listed starting with our processes. One of the most important metrics we track internally to gauge our success is lifetime value, hand-in-hand with that metric is net revenue retention. While reducing our logo attrition is something we're always trying to improve. What ultimately drives greater lifetime value for us is net revenue retention.Put another way, retaining a top customer and helping them significantly grow their customer base on our platform, far outweighs the benefit of maintaining logo retention with smaller contributing customers that do not expand, if this philosophy that informs our agency go-to-market approach, and it's the same thinking that led us to switch direct customers to an annual billing model earlier this year. As we've discussed in the past, we know that as customers get older, they generally become stickier. And by creating a force function within the direct customer group that has historically yielded higher attrition rates, we feel good about the long-term prospects once we get them in the door.Further to that point in the fourth quarter, we signed 60 new direct customers, which was up 40% from the 43 direct customers we signed in Q3, which is an encouraging sign that our direct sales teams have begun to adjust to the selling of annual contracts. Another area where we've been laser-focused is in our effort to reduce customer acquisition costs through the reprogrammed effort of our BDR team. As a reminder, this is the mid funnel team that creates demos for our sales team to close the leads that our marketing team brings to the top of the funnel.As I mentioned on our last call, the difficulties we previously saw on our BDR team were both structural and leadership focused. Regarding the ladder, I'll speak to that in a minute. Regarding the former, during the second half of the year, we added new managers, adjusted BDR compensation, and revisited the BDR team's processes by working to optimize their activities using our then new feature sales optimizer that automatically schedules and enforces and optimized process designed to maximize, sales productivity and conversion. Throughout this process, our logic has remained the same. More demos means more sales overall. For this reason, I'm happy to report that as a result of these efforts and changes in Q4, we saw record demos scheduled for our sales team value.Turning to our value proposition, we've continued to make substantial improvements and add additional features to our platform, such that today our customers are increasingly benefiting from a more premium experience. Put simply, the differences between our platform and much more expensive platforms offered by HubSpot and Marketo, for example, are almost non-existent. In just the past few months alone, we've added several valuable features including direct billing, chatbot functionality, custom reporting, and the aforementioned sales automation, and we've also added our meetings feature which has been widely adopted by our customers.Our new chatbot functionality, for example, which launched in beta a couple of weeks ago, and which will go to general release next week, gives our marketing agencies yet another strong lead generation and nurturing tool that they can bring to their clients. Similar chatbots from point solution companies like drift and intercom costs between tens and hundreds of dollars per month, and do not have the benefit of being tightly integrated into the technology stack, like SharpSpring's fully auto graded -- fully integrated chatbot. We've chosen to include this powerful feature without additional charge with every standard license of SharpSpring and our agencies can't wait to get their hands on it.Shifting gears, the value we've added to the platform over the last two years, and our continued focus on driving investor value led us to be significant pricing decision at the beginning of the year. In January, we instituted a modest price increase, which applied to a targeted segment of our agency customers, and which will be incrementally rolled out across the entire agency base over the next year. Under our updated pricing agency, customers who have been with SharpSpring for over a year at the time of the price increase are now being billed an additional $75 per month per active license.Going forward, all agencies who are currently within a year of sign up will be transitioned to the new pricing at their one-year anniversary day. We feel this timeframe allows enough time for agencies and even our direct customers to become fully on boarded onto the platform and begin experiencing the benefits that marketing automation brings to their sales and marketing processes. We have strong data to support the stickiness within our mature agency user base, as they've made Sharp Spring an integral part of their business. Early signs are positive that this price increase has not had a meaningful impact on our attrition rates within the group. We believe this is a direct reflection of the value we've added to the platform, as well as the fact that we remain significantly below the price points of the other industry players with whom we compete, because of this price increase -- because this price increase was instituted early in the new year. Its effects will only partially be felt in Q1 and did not impact results for the end of the year.In Q4, quarterly net revenue retention across the entire customer base was approximately 97% compared to 96% last quarter. We've said publicly that we believe we can get to a 100% plus net dollar retention with our total customer base as our customers age and we are left with a larger base of dedicated customers. For clarity, quarterly net dollar retention compares Q4 revenue to Q3 revenue from cohorts that were at least three months old in Q3.Moving to technology, I'll now spend some time talking about our biggest event from the quarter, our acquisition of perfect audience for Marin Software. In November, we announced that we would be acquiring the digital advertising platform Perfect Audience for a net cash consideration of $4.6 million. As a bit of product background, Perfect Audience is a cloud-based platform that enables multi-channel retargeting to known leads plus targeted advertising to new prospects via look-alike audience functionality. It empowers marketers to create, manage, and optimize their ad campaigns across thousands of sites using Google, Facebook, Instagram, and all the leading ad exchanges and partner networks simultaneously. Now that Perfect Audience is a part of SharpSpring, we intend to extend its functionality beyond retargeting, and into a more broadly focused digital ad platform. SharpSpring user base of digital marketing agencies and our clients -- and their clients offers an exciting strategic fit between the SMB focused, Perfect Audience platform.Perfect Audience ads powerful lead generation functionality that fuels the top of the funnel lead generation efforts, plus additional lead nurturing capabilities to maximize middle of the funnel conversion. These features compliment SharpSpring's core feature set designed to attract nurture and convert leads into sales. From a strategic viewpoint, this new offering pairs purchase perfectly with our brand promise to help our agency partners grow their businesses and deliver better results to their clients. We believe nearly every business should be leveraging retargeting because it enhances the effectiveness of all their other marketing efforts. The acquisition also introduces an entirely new suite of tools and revenue stream for sharp spring agency partners, and is therefore a highly complementary transaction for our company.We now have another related product to sell into our existing roughly 2000 agency customer base. To that -- to the extent we are successful, this represents an opportunity to -- for us to expand within each agency, increasing both revenue and margin and increasing the average lifetime value of each agency relationship. Put simply combining a powerful, SMB focused digital ad platform with marketing automation creates a combined product offering unlike anything on the market.Since the acquisition, we've completed both single sign on and unified billing between SharpSpring and Perfect Audience for our agency partners, providing a seamless experience to our agency partners and their clients. In Q2, we're intending to add automatic campaign attribution and other integrated marketing automation features that are only possible with this combined product offering. Also notable, the acquisition allows SharpSpring to become an official Facebook marketing partner, which allows us to pursue adding Instagram to our existing social media management tool, which will fulfill a popular customer request.Moving to our final area of 2019 investment, during the fourth quarter, we made a few strategic hires which we believe will collectively have a major impact on the health efficacy and growth prospects for SharpSpring. First, as I mentioned, my opening remarks, we've now got Michael Power onboard as our new CFO, he brings an impeccable and directly applicable track record with him.Furthermore, he has the exact experience leading companies at scale that we need as we continue to mature as an organization. Also, as I alluded to earlier, in December, we hired 25-year sales veteran, [Olivier Coibion] [Ph], to head our up that division. In the short time Olivier has been with us, he's already made incredible progress. On the hiring side, he's been instrumental in identifying and bringing strong talent, and he's also developed improved processes for mentoring and existing team to drive better performance. On the operational side, I mentioned earlier that the efforts Olivier has made to drastically improve the efficiency and effectiveness within all steps of our sales funnel. We've also reconfigured our compensation for the sales and business development team focusing on both inbound and outbound. Our goal is to create a culture of performance, and we're reorganizing our team's processes, and even our compensation models to ensure this happens.Looking at our current quarter, we're seeing improved sales growth through our first two months of the year, which continues to validate our efforts to improve all areas of our sales and marketing funnel. As I mentioned in my opening remarks, 2019 was a year of investment for our organization. This year was about laying the groundwork for something bigger. Of course, we're focused on consistent growth, but we also have a long-term mindset. We believe we are at the beginning of the adoption of marketing automation, and our success was -- as well as our success within that market, and we're making decisions based on that outlook.With a number of newly optimized internal processes that continued focus on improving our technology and an aggressively built out leadership team. We're expecting healthy new customer growth, further improvement to our net revenue retention and continued cementing of our position as the leading affordable marketing automation solution provider in the market.Shifting gears, as Michael mentioned earlier, the coronavirus situation is developing quickly, and we believe it's important to be transparent about how SharpSpring is responding to the outbreak. From a business perspective, we believe we have several factors going in our favor should we have to weather a coronavirus-induced economic storm. For one our technology is critical to the success of our customers. Put simply, it is more of a must have technology rather than a nice to have or optional technology. The fact is, we allow businesses to operate more efficiently and this only becomes more essential during tough economic times. Second, we are the low cost alternative and represent a huge value to customers. Here we expect that customers looking to save costs associated with far more expensive solutions will continue to turn to SharpSpring.Finally, our customer base is highly diversified. We have approximately 2,000 agencies we count as customers, and none represent more than a single percentage of our revenues, most only fractions of a percentage point. Further to that, each of these agencies has their own customers using SharpSpring underneath them, adding a second layer of revenue diversification for us. In short, like all companies we're paying close attention to the developing Coronavirus issues, and while we feel confident we are well positioned, we'll take the necessary steps to continue to grow the value of our product and our business for the benefit of our investors, employees and customers.And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] We'll go first to Darren Aftahi at ROTH Capital Partners.

[Darren Aftahi:]

Hey, guys. Thanks for taking my questions. Good afternoon. Two if I may, so just on your 2020 guidance, can you kind of give us a little bit of understanding what is contemplated sort of, one, adding new customers and the price increase versus maybe any kind of new traction product, some of the stuff you've launched in the last 36 months? Second question, it would be great to get an understanding of maybe strategically with account management kind of fully up and running now, what your initiatives are for kind of gaining wallet share within some of these more mature agencies? And then last question, and appreciate the commentary on the coronavirus, so -- and this may be a little bit difficult question to answer, but if this was to get to a point where sort of the U.S. was shutdown, is your own business able to function completely virtually, meaning, is there a bit of work from home sales, business development, et cetera? Would that have any kind of hiccup to your business or any kind of risk points would be insightful to hear from? Thank you.

[Rick Carlson:]

That's great. I invite you to put me back on track if I don't answer your all three parts to your -- or all three of your questions. With regard to the revenue, the 2020 guidance, the plan that we have set forth is not dependent on large revenue streams, or adoption, or unproven adoption of new products. This is a plan that includes the effects of our price increase and sales levels that we believe that we can achieve handily, and so, we feel very good about the guidance that we're providing there. The simplest way to say that, we don't see very large -- and I would also add the maturity of our agency customer base, and them adding clients to the platform. And so, they're not large leaps or of faith there that aren't based on at least trends that we've seen historically, and here I have coronavirus in the front of my mind as I say these words.The second question, could you mind -- oh, you were asking about expansion revenue within the agencies and account management and so forth. Yes, we continue to work on that. As you know, 2019, we invested in account management. Our account managers that were hired on a staggered basis throughout the year began to build relationships with their agency, with the agencies that they manage. We have a number of tools, start materials, and so forth to begin helping our agency sell to their clients. Many of our agencies, they're marketing agencies, not software, sellers of software, and so, we recognize that, and have worked on programs to help them sell, and of course, we continue to add value to the platform, when the platform continues to be powerful, I'm sure everyone on this call regularly interacts with chatbots. That is now on Web sites. That is now critical functionality that is included in our platform. All of these things increase adoption, and so, really it's a multi-pronged approach to try to get expansion revenue from our agency partners.With regard to coronavirus, interestingly, we as a company had made a call a couple of months ago to work based on a performance-based, what we refer to as a performance-based work week. Here, a lot of that groundwork has prepared us well for the potential to have people working from home if needed. I could talk a long, long time, but there's a number of questions behind yours, but what I would tell you is that everything, our entire service, and every technology that we use is cloud-based. So, there is zero sort of problems within the global Internet structure, and let us all just hope that that's not what we're talking about. Sort of things like that, we are 100% insulated in terms of our infrastructure and our ability to keep doing business, and so, we feel well-positioned, AND we are actually looking at what we might do for employees here without decisions having been made in that regard. So, hopefully I got all your questions. Thanks for them, I appreciate it, Darren.

[Darren Aftahi:]

Appreciate it, thanks.

[Operator:]

We'll go next to Eric Martinuzzi of Lake Street Capital.

[Eric Martinuzzi:]

Hey, congrats on the 2,000 agency milestone. That's a nice accomplishment for the team.

[Rick Carlson:]

Thanks, Eric.

[Eric Martinuzzi:]

Yes. Wanted to tease apart the guidance in 2020, I understand we're talking about $30 million to $31 million, but I also understand you guys just picked up Perfect Audience. I think at the time you acquired them, you said that they were doing about $3 million, and if I back that $3 million off of the 2020 guide, I'm coming up with roughly a $27.5 million midpoint, or about 21% for organic growth. Can you help either confirm that or help me do the math?

[Rick Carlson:]

Well, we've included the Perfect Audience revenue in the guidance, and while we feel very, very bullish on the guidance that we've given, we felt it made sense. I think the guidance that we are providing is with the unfolding coronavirus situation taken into consideration, and so, we did not feel it made sense to throw a much higher number out there with everything that is literally happening today in real-time. So, there was much discussion internally about that, but I think, you know, your numbers are right, I do feel confident that we're closer to the $30 million-$31 million range, and we feel we've given ourselves quite a haircut, given everything that's unfolding.

[Eric Martinuzzi:]

As I was asking the question, I realized there was some Perfect Audience in Q4. Can you quantify that dollar amount, Michael?

[Michael Power:]

$300,000 approximately.

[Eric Martinuzzi:]

Got you. Okay. Now, the price increase rolling that out, you talked about, hey, we're not seeing any negative impacts from the price increase, we've got a robust platform, still a substantial discount versus peers. Is there -- if you were to see impact, would you see it, you know, would you see it first on the direct sales side, would you see it first on the agency side? When would you see it as far as the impact to the retention, or the sales cycle?

[Rick Carlson:]

Well, I think I mentioned the multi-layers of -- I would think that people have already digested in large part the price increase, and passed it on to their customers or absorbed it, and so, I don't -- while over Q1, I think is where you would see any additional attrition, and I'm giving you sort of up-to-the-minute information and telling you we've not seen significant attrition. I think setting aside coronaviruses and the like we've already passed through that period, by and large.

[Eric Martinuzzi:]

Okay. So, people pretty much they got the letter, they digested this in the first-half of January, and we've got some history under our belt, is that fair?

[Rick Carlson:]

Yes, I think that's mostly fair. That's correct. As we spoke about, there are agencies that were with us for less than a year that we did not feel it made sense to give them a price increase having been with us for such a short period of time, and that would happen for them on the anniversary of their joining SharpSpring, and so, there'll be trickling effects of both the price increase and potentially any associated attrition. Again, we've seen very little.

[Eric Martinuzzi:]

Okay. Then the last question for me, if I look at the cash flow statement for 2019, you guys had a cash used in operation was about $8 million. Obviously, given the price increase, given the incremental revenue from Perfect Audience, what's the expectation as far as cash usage in 2020?

[Rick Carlson:]

No, less than -- for 2020, we believe we will be less than -- setting aside issues, I would say between five and six, potentially closer to five.

[Eric Martinuzzi:]

Okay, thanks for taking my questions, and congrats on the quarter.

[Rick Carlson:]

Thank you.

[Operator:]

[Operator Instructions] We'll move next to David Hynes at Canaccord.

[David Hynes:]

Hi, thanks, guys, congrats on the results. Rick, I just want to make sure I'm understanding the price increase right, you said $75 increase on a $200 end-user client license, is that right?

[Rick Carlson:]

Well, the $75 is correct. As a point of fact, depending on when you joined us, you may be paying $200. That was the latest pricing that we had prior to the price increase. Early agencies might have been paying less, but everybody got a $75 price increase to their license on active licenses, and so long as the agency was older than a year.

[David Hynes:]

So, I mean, that's a significant raise of 37%-38% price increase, and just kind of reconciling that with low 20% organic growth guidance for next year. It tells me, (a), you guys are just being super conservative, or (b), you maybe factoring in some heightened attrition. I mean, any -- obviously, the price increase takes some time to kind of flow through the base, but anything to help kind of reconcile that?

[Rick Carlson:]

Yes, I think in light of what's going on today, we opted to be very, very conservative.

[David Hynes:]

Yes, perfect.

[Rick Carlson:]

I think you should look at this as a coronavirus-adjusted forecast.

[David Hynes:]

Makes sense to do in this environment. I want to follow-up on the cost of acquisition, right, I mean, obviously, we've seen a step up. You addressed that. With some of the changes in the BDR team, it sounds like you're seeing some decent results moving forward, I know Q4 was a good quarter. Should we use Q4 sales and marketing spend as kind of a decent run rate for 2020? Just help us think about kind of how that plays out?

[Rick Carlson:]

Sure. From a CAC perspective?

[David Hynes:]

Well, just from -- I was thinking more like sales and marketing spend, right, you spent 28…

[Rick Carlson:]

Yes.

[David Hynes:]

In the quarter, it was down from what you spent in Q3. However, you want to comment on it, CAC or spend, just any kind of framework for '20 would be helpful?

[Rick Carlson:]

Sure. Listen, I'll give you an honest answer. I don't mean to be cagey about it. We've got a number of things pointing us in the direction of improved efficiency. So we're executing better in the middle of the funnel. We are executing better closing. As you saw, we identified some things in Q3 that we felt like we are not working, and we eliminated those things in Q4. We think those are permanent changes. So I think Q4, but at the same time, potentially the board has changed here for us and every other company, and so, if I -- maybe the easiest way to answer that prior to the last couple of weeks, we were quite confident that we could lower CAC significantly down into the 7,500 range, we still hope to be able to do that. One of the things that, but we still hope to be able to do that, but clearly if people are taking a step back it, we could benefit from this, as we discussed in our remarks the low cost leader, but what I can say with clarity is prior to the board shifting as it has underneath us, we were quite confident that we could get back to 7500 CAC.

[David Hynes:]

Okay. Have you seen demo activity materially slow over the last couple weeks?

[Rick Carlson:]

Not at all, not at all thankfully.

[David Hynes:]

Okay.

[Rick Carlson:]

We have not.

[David Hynes:]

And then one last quick one, if I can, just on Perfect Audience, is that revenue variable or is that contractually committed, right? I think some of these ad spend models. There can be some swings. Just help me understand kind of the business model there?

[Rick Carlson:]

Yes, sure. It is variable. Yes, that's right. So agencies and their customers decide on an ad budget and spend. What we're excited about with that business is broadening its functionality to being more of a full digital advertising platform. And so, that gives more opportunities for customers to spend dollars as well.

[David Hynes:]

Okay, great. I'll pass the line. Thank you.

[Rick Carlson:]

Thank you so much.

[Operator:]

We will move next to Michael Malouf of Craig-Hallum.

[Michael Malouf:]

Great. Thanks for taking my questions. How are you doing? I just want to maybe draw a little bit more into this price increase. Can you give us a sense of how much say we look at Q2 for example, how much of that price increase you think that you'll end up realizing in Q2 after you sort of you ramp in Q1? And then I know that there is obviously a pretty large percentage that are still under that one year, can you give us a sense of how that plays out over the next 12 to 15 months?

[Rick Carlson:]

Yes, we will get most of the impact in Q1 of the price increase that we got for customers that were more than a year old. We started this close enough to the beginning of the quarter to call it a full quarter. I know our comments -- we were being more factual, but it was -- customers a few days late in January. I think we're going to be adding about another -- I'm going to say 10% or so of customers in each subsequent quarter will sort of be eligible for the price increase as sort of rough math. So, you'll be seeing that those layering on with each passing quarter and other, you know, if 70% of our customers were affected by the price increase, then you'll get the other 30% throughout the year.

[Michael Malouf:]

So, in effect on the second quarter, we probably have close to 80% of your clients getting that 37.5% price increase?

[Rick Carlson:]

Yes, that's rough math, but that's about right.

[Michael Malouf:]

And so, just minus later attrition that's the impact on the revenue?

[Rick Carlson:]

Correct.

[Michael Malouf:]

Okay. And then, just another question with regards to, you guys instituted a partner program fee reimbursement for HubSpot. I'm just kind of wondering how that's going and just get an update on that.

[Rick Carlson:]

Yes, I didn't expect that question. You're paying close attention. Yes, we did something that was pretty, I think novel. We've offered to pay for those on the call that aren't familiar with Mike's question, we offered to pay HubSpot partner pricing fees for anybody who was thinking about joining HubSpot's partner program, which they're literally charging people for the right to join their partner program. We thought that was a little aggressive, and so, we've offered to pay for those fees. We have had a healthy number of customers, somewhere between 50 and 100. I said customer's prospects. I would say that have responded to that campaign and are somewhere in our funnel, at this point, closed a few prospects, and it's our belief that when people see what we have to offer, they sign up with us, and so, the name of the game is to get their attention, and that is why we ran that little program. So, yes, somewhere between 50 and 100 prospects responded.

[Michael Malouf:]

Okay, great. Thanks for the help. I appreciate it.

[Rick Carlson:]

Thanks a bunch, I appreciate it.

[Operator:]

With no other questions holding, I'll turn the conference back to Mr. Carlson for his closing remark.

[Rick Carlson:]

Well, I want to thank everybody for joining the call today. We clearly are living in interesting times. I wish you all the very best with your health, and investments, and the rest. Thank you, guys for supporting SharpSpring. We will continue to do what is necessary to create value for each of you, and our company, and our employees, and most of all our customers and partners. Thank you all. I appreciate it. Be safe.

[Operator:]

Thank you, Mr. Carlson. 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 no 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, performances or achievements anticipated or implied by these forward-looking statements.The company does not take any responsibility to revise any forward-looking statements to reflect future events or circumstances. Also note that, during this conference call, we may make reference to adjusted EBITDA, core net income or loss or 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 financial section of the earnings press release and made available on the company's Web site.Finally, I would like to remind everyone, that a recording of today's call will be available for replay via link available in the Investors Section of the company's Web site. Thank you for joining us today for SharpSpring's Fourth Quarter and Full-Year 2019 Earnings Conference Call. You may now disconnect and please have a great day.