SharpSpring, Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good afternoon. Welcome to SharpSpring's Third Quarter 2018 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and CFO, Ed Lawton. Following their remarks, we'll 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. Now, I'd 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 today. After the market close, we issued a press release announcing our results for the third quarter ended September 30, 2018. A copy of the press release is available on the Investor Relations section of our website. The third quarter was a really solid quarter and an extension of the solid and consistent performance we've demonstrated for quite some time now. Throughout 2018, and even into the end of last year, we have continued to generate improved results, driven by increased sales of our flagship marketing automation solution. Financially, we grew our top line core revenue by 48% and our overall top line by 43%, achieving another quarter of record revenue. Due to the inherent leverage in our operating model, our success has also led to an additional positive downstream effect, most notably through our expanded gross margins, which equaled 70% in the quarter. Operationally, we secured a record 346 new customer – SharpSpring customers marking a new high point in quarterly sales for the company. At quarter-end, SharpSpring had 1605 agency customers and over 7000 businesses using our platform. This consistent and accelerating growth remains driven by our ongoing efforts geared towards our sales and marketing engine, which continue to fire on all cylinders. On today's call, I have a longer than normal update before turning the call over to Ed for a review of our financial performance, because I'd like to speak about some significant changes and enhancements in our management team. First, as many of you have seen from our press release today, Ed will be stepping down as CFO in December. Ed, who lives with his wife and children in New England has been commuting down to our Gainesville office on a regular basis for over three years now. As the company has grown, so too has the need for the CFO role to be based out of our Gainesville headquarters, because of Ed's desire to continue living in New England and the company's desire to have a CFO in the Gainesville office, full-time, we've mutually agreed to this transition. To be honest, this is a bittersweet announcement for me, as I'm sure a lot of you know that Ed has been an instrumental figure in SharpSpring's history. We've been through a lot together and Ed has been a steady and loyal partner through some turbulent times early on in our company's history. I'm incredibly grateful for Ed his service and dedication, and needless to say, wish him nothing but the best in his future endeavors. In conjunction with Ed's departure, we're announcing a couple of other additions and changes to our management team. I should start by saying that I'm excited to announce that for the first time, we have a completely built-out senior management team based in Gainesville, that will help us grow to the next level. First, with Ed's departure, I'd like to announce that Brad Stanczak will be appointed as the company's next CFO, when he joins the company in mid-December. Brad brings a wealth of experience in the position, most recently as VP of Finance and Accounting for Resonate, a SaaS based omni-channel insights and engagement platform. Additionally, he has held prior financial and accounting roles with Rosetta Stone, Office Depot, Starwood Vacation Ownership and Apollo Group. Brad is an operationally focused executive and is well-positioned to put his skills to work when he moves down to the Gainesville office next month. In addition, I'd like to announce the addition of Thomas Duffaut to our management team. Thomas will assume the role of COO, and comes to us from Sandvik Hyperion, an international mining and construction company, where he was employed for 16 years, most recently as the head of global purchasing, sourcing and procurement. Thomas is a process and analytically-focused executive and has already made a huge impact in our organization in the short time he's been with us. With the addition of Thomas, Jeff Imm and our current COO will be taking over as our Chief Revenue Officer. Jeff started with this early this year and has been instrumental in helping us achieve solid performance numbers since he arrived. The move to CRO is more reflective of the work has been conducting since he's been here, and more indicative of the sales management skills and experience that he brings to the table. As CRO, Jeff will manage all of the sales functions from initial contact to post-sale account management. Finally, Kim Jamerson will be taking a more senior role as our head of marketing. Kim has been with us for 3.5 years, where she has continually led our marketing team, first as director and then as VP. Her new role is reflective of her increased value and focus to us on the strategic end of our marketing efforts. I want to reiterate that for the first time in our company's history, we have a complete senior management team to help us execute and that entire team is located in our Gainesville, Florida offices. Despite the record sales, margin improvements and record revenues that you'll hear about on today's call, I have to say that I'm most happy with the progress we've made on our senior management team as it positions us well for our future and continued growth and solid performance and allows us to better capitalize on the wealth of affordable junior and mid-level talent that is so plentiful in Gainesville. As we've discussed with many of you in the past, we believe that our – that the wealth of affordable, educated and energetic talent that Gainesville, the home of the University of Florida, brings to us – is a source of long-term strategic advantage over our Boston and West Coast based competitors with more expensive resources. The completion of our Gainesville based senior management team further solidifies that advantage for us. And with that, I'll now turn it over to my good friend Ed to walk us through the numbers one last time. Afterwards, I'll come back on to provide some of the major updates related to our business as well as give you some insight into our progress in the current quarter and our outlook for the remainder of the year. Ed?

[Ed Lawton:]

Thank you, Rick. I appreciate the comments. I'd like to add that I'm extremely proud to have been an integral part of SharpSpring's development into the high-growth business it is today. I especially want to thank Rick and the board for supporting my decision. The company is in the best position it's ever been and I am confident in the leadership team's ability to guide SharpSpring through many additional years of success and prosperity. All right. Now let's turn to our financial results for the third quarter, ended September 30, 2018. Our total revenue in the third quarter increased 43% to $4.9 million from $3.4 million in Q3 of last year. Our flagship SharpSpring marketing automation solution grew 48% to a record $4.8 million compared to $3.2 million last year. Our gross margin for the third quarter of 2018 increased to 70% from 64.5% last year. In dollar terms, gross profit increased 54% to $3.4 million from $2.2 million in Q3 of last year. Over the past few years, we have 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 on more revenues on the platform, we will create more and more operating leverage in our model as evidenced by our year-over-year improvement in gross margins. Going forward, we expect our margins to be relatively consistent with current levels in the 68% to 70% range for the next few quarters. As the leverage we get from new revenues on the platform is expected to be offset by investments in several initiatives meant to drive future expansion, future revenue expansion from our installed customer base. Turning to our operating expenses. For the third quarter of 2018, our operating expenses increased 51% to $5.9 million from $3.9 million in Q3 of last year. The increase was due primarily 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. Also during the quarter, we issued 36,000 shares to a service provider to satisfy a performance-based contractual arrangement, which was agreed to several years ago and triggered by the stock's performance during the quarter. We recorded a one-time expense of approximately $509,000 associated with this issuance, which is reflected as a separate line item in the income statement provided in the earnings release we issued this afternoon. Our GAAP net loss for the third quarter totaled $2.7 million or $0.32 per share compared to GAAP net loss of $1.6 million or $0.19 per share in the Q3 2017. On the balance sheet, we had $11.2 million in cash at the end of the quarter compared to $12.5 million at the end of the prior quarter. Looking at our non-GAAP measures, our adjusted EBITDA loss for the quarter, which we reconcile in our earnings release totaled $1.5 million. This was consistent with last quarter and compares to an adjusted EBITDA loss of $1.25 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. We expect our adjusted EBITDA to remain relatively consistent with current levels in Q4 of 2018. In Q1 2019, we expect our loss to increase slightly with increases to revenue being offset by investments in the future – in future growth initiatives and due to cyclical expenses associated our audit and other year-end activities. Additionally, we will experience additional costs over the next few months related to the CFO transition that may add to our loss. Our core net loss for the third quarter, which is also reconciled in our earnings release, totaled $1.9 million or $0.22 core net loss per share. This was an increase from core net loss of $1.2 million or $0.15 core net loss per share in Q3 of last year. For more details of 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 Q3, our customer acquisition costs decreased from Q2 due primarily to timing differences between when sales and marketing dollars are spent and when the customers are acquired. As a reminder, we calculate customer acquisition costs as the sum of our all-in sales and marketing costs from Q2 2018, divided by the new wins from Q3 2018, resulting in a customer acquisition cost of $6,750 on average for Q3. Using the prior quarter cost provides a better estimate of our customer acquisition costs to account for the average sales and marketing cycle we experience. However, this measurement is still imperfect because marketing spend in one quarter impacts the deals we win in many future quarters. While we do experience fluctuations in this metric quarter-to-quarter, we are 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 benefit to the company on a discounted basis after reducing for estimated gross margin costs to support the customers on the platform. Based on these figures, our expected lifetime value to our customer acquisition cost ratio continues to be compelling. This concludes my financial summary. I'd now like to turn the call back over to Rick for additional insights into our operational progress in Q3 as well as our outlook for the rest of 2018. Rick?

[Rick Carlson:]

Thanks, Ed. As I briefly mentioned earlier and as you've just heard in our results, the third quarter was yet another strong performance for SharpSpring. We continue to post record revenues on a consistent basis, we're accelerating our win count, and we're taking advantage of the leverage in our operating model to improve our gross margins. At the same time, we've continued to make ongoing improvements to our flagship platform making SharpSpring an even more valuable tool for our agencies and SMB customers while still remaining a fraction of the price of the competition. Further to the last point, the overall value and quality of our product has also been getting recognized in the marketplace as well. This past quarter, we were the recipient of multiple awards selected by industry experts. First at the end of August, we were recognized as the 2018 Q3 top marketing automation software provider by GetApp, a Gartner subsidiary and business software review platform. GetApp's quarterly ranking of Marketing Automation Category Leaders identifies the top 15 marketing automation providers and scores them based on user reviews, integrations, mobile app availability, functionality and security. Our top ranking distinguishes SharpSpring as one of the most competitive marketing automation solutions on the market today. Second, also at the end of August, SharpSpring was recognized by WSI, the world's largest network of digital marketing consultants, as a 2018 Top Rated Supplier. SharpSpring competed with more than 50 other digital marketing platforms in the WSI e-Marketplace for this coveted award, and the winner was voted on by WSI's global network of digital consultants, many of whom are current SharpSpring customers. Of course, while it's nice to be recognized for the work you're doing, our main focus has always been on the customer. Our goal has been and continues to be to make a robust marketing automation solution that's accessible to a greater number of agencies and businesses, who may not have been able to afford the more expensive platforms out there. We want to help small businesses grow, and to do that, we provide the tools that allow them to attract more customers by reaching a greater number of people more effectively than they could otherwise. Moving on, this quarter, as we do every quarter, we made a number of significant additions and enhancements to the SharpSpring marketing automation platform, which are intended to not only make it more effective and useful, but also simpler and easier to use. I'd now like to take a minute to highlight a few specific improvements we've made recently that we're most excited about sharing. We made some improvements related to e-mail functionality that we think customers are going to love, starting with e-mail sync. E-mail Syncing is a powerful tool that allows you to connect your e-mail in-box directly to SharpSpring. Our latest enhancement allows any e-mail you send to or receive from a prospect in a customer SharpSpring database to be recorded and becomes actionable in SharpSpring. Sales and marketing teams can now more intelligently keep track of any correspondence with a prospect or leads and have that correspondence show up in the life of lead inside of SharpSpring, creating a more complete profile of all interaction points with each prospect. Building on e-mail sync, we've also continued to make significant improvements to Smart Mail. Smart Mail is another e-mail tool that enables you to send e-mails directly to leads in SharpSpring, but through a user's own personal e-mail server, which increases delivery rates of 1

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Frank Takkinen from Lake Street Capital. Please proceed with your question.

[Frank Takkinen:]

Hey, guys. Thanks for taking my question. For the first thing, I want to drill down on your investments in sales and marketing. Kind of a competitive landscape question, if you'd give me a little bit more color of what you guys feel you're doing that the competitors are not yet doing to win more accounts at a faster rate?

[Rick Carlson:]

Well, sure. I think we're unique in the market with our approach of using agencies and not really thinking of agencies as our resellers, but thinking of them as our end customer to some degree. Of course, agencies act a lot like resellers in that their relationship grows as they add more and more – with us, as they're – as they add more and more of their clients to the platform. But it – what we've tried to do at SharpSpring is provide holistic approach to this market. So I think it touches on the way we approach agency partners with our business model, and with all the agency focused features around the platform. I think where we've long since moved into the number two position, I think tripling our – every other competitor out there with the exception of HubSpot, who's had about a 10-year head start on us, and now we've been closing the gap with those guys with each passing quarter. And I really believe that it's not through sleight-of-hand and clever marketing, but it's really a matter of having a better platform for the market we've chosen to serve, specifically agency customers, as we alluded to with our improvements to our agency console and a whole host of new improvements coming in the next couple of quarters that we'll be excited to be talk to you about on the next calls. I think that just stretches that lead in this particular area out of it.

[Frank Takkinen:]

Okay, that makes a lot of sense. Next, you guys mentioned your – right at the beginning when you were talking about gross margins, the inherent leverage in that area of the business. I was wondering if you could give me a little bit of a picture around how you guys view sales and marketing a little bit longer term? Kind of trying to figure out what a more normalized growth in that area would looks like and how that would result in leverage below the gross profit line?

[Rick Carlson:]

Sure. So when we pick up an agency partner, they start out with a pack of licenses for their first three clients, and it takes them a little bit of time to work through those first three packs. You can think of a license as a company license that they would give to one of their clients. And so they really hit expansion revenue, generally speaking, many months after they sign up with us. And we pick up margin in our business because those agency partners that all start out signed up for – I'll just tell you, $600 a month as their first starting price, turn into clients that – agencies that some of them are paying us tens of thousands of dollars, many others just thousands of dollars a month. And so we get increasing revenue from these agency partners that stick with us over time as they add more and more clients to the platform. But the interesting thing there is that they provide Tier 1 to their clients, Tier 1 support, and really the highest obligation for us in terms of support obligations to an agency partner is when the first sign up with us and are learning to use the platform and getting it installed on their first couple of clients. After that, they become pros using our platform, they've seen it and done it. And there – at the same time as their revenues are growing with us, their support obligation is actually remaining the same or even decreasing. And for those reasons, we kind of think that we can settle in, in the 80-plus percent gross margin area over the longer term. It's really a matter of revenues outstripping our support obligations in terms of our long-term margins.

[Ed Lawton:]

And then Frank, integral to the question, I think, is the leverage that we get out of our actual sales and marketing costs. And I think that is, we see that really as a function of our customer acquisition costs, our CAC, which has been relatively consistent so we think the way we monitor our programs very precisely. We use our own software, we know what's working, we know what to pull back on and things like that. We think we can get – we can remain in the same range for our CAC moving forward and then it's just a matter of how much you want to invest to get that new business coming in the door. So we see the sales and marketing line kind of specifically as a matter – as a function of CAC and kind of vice versa. But it really depends on the level of investment and that will drive future sales of the business.

[Frank Takkinen:]

Okay, that makes a lot of sense. And then lastly, I'm just kind of looking for little bit of an update around your product pricing increase at the beginning of the year, end of last year. Now that you guys have had another quarter to kind of see how that's panned out, do you guys have any puts and takes regarding that matter?

[Rick Carlson:]

No. I think we successfully built in a price increase last year, that was absorbed well by our agency partners. We did that after adding a significant, significant amount of value to the platform, a whole host of features around the platform. As you know, we continue to do that on a daily, and weekly, and monthly basis, but back then we had launched our social media tools and we certainly had a small amount of attrition. And I'm thinking a handful of agency partners that may have cited that as a reason, but an insignificant amount of attrition as it related to the price increase. That said, I want to be clear that we don't believe that, that is the way to drive revenues here at SharpSpring on a regular basis. Our agency partners count on us and really build their business around our platform, and we are respectful of that and appreciative of that partnership. And what we really see as the leverage point is an agency getting comfortable with our solution, and our support, and our business model, and adding more of their clients to our platform. And so we're really focused on a share of wallet kind of strategy – jointly with our agency partners, rather than seeing price increases as a way to build our business.

[Frank Takkinen:]

Perfect, that’s very helpful. That’s all from me. Thanks and congrats on another great quarter.

[Rick Carlson:]

Thanks so much, Frank. Appreciate the questions.

[Ed Lawton:]

Thank you.

[Operator:]

Our next question comes from the line of Mike Malouf from Craig-Hallum Capital Group. Please proceed with your question.

[Eric des Lauriers:]

Hi, guys. This is Eric des Lauriers on for Mike. Congrats on a good quarter and thanks for taking my questions.

[Rick Carlson:]

Thanks Eric.

[Eric des Lauriers:]

I would like to piggyback on that first question, if I could, to see if you guys could delve in a little bit deeper on some of the competitive trends that you're seeing and if there's been any changes recently? And specifically noting – while you guys obviously had real solid growth, [indiscernible] 5% this quarter so just kind of wondering your thoughts on the overall competitive landscape and how that's shaking out?

[Rick Carlson:]

Yes. Thank you. I – this is a topic I actually love to talk about. So first, the first thing I would say is, we're in a massive market that's not going anywhere. This – the marketing automation space and MarTech in general is an analogous to the CRM space for sales, but more focused on marketing and as we've discussed in our product strategy and then in other calls we view these two markets as essentially merging together. So there's no ticking time bomb on our market. And yet, I would tell you that the barriers to entry in terms of creating a marketing automation solution are massive. It's probably too much to go into on this call. But you have to be experts at e-mail delivery, at artificial intelligence at this point – we've created an amazing rule engine that allows marketers to do really complex workflows and automatically trigger tasks based on every webpage impression, from every visitor, on every site of one of our customers. So you have got to be able to do that at scale. So there's huge barriers to entry, I'll leave it at that for now. At the same time, we feel very well insulated from our – the incumbent competitors out there, the HubSpots, the Marketos, the Act-On and Pardot – in that we are essentially a hugely disruptive, I'll say even as little as 1/10 the cost of those competing solutions. And we've built SharpSpring to be with cost structures to defend that price point. It is both – our competitors who were first movers have built their cost structures and business models that are little bit different. We believe we've got some of the lowest, if not the very lowest CAC in the industry, at least among those competitors. And so we feel like we're in a really nice spot, in terms of being able to fend off the incumbents and continue to grow and somewhat insulated from new entrants into the space. And so – and going back to my very first point, this is still an emerging market and will be for – and an evolving market for many, many years to come. And so there's enough space in this market for HubSpot to continue to be extraordinarily successful as they have been – and congratulations to them. And there's also plenty of space for SharpSpring to make our mark as well – and Marketo and Act-On and Pardot as well. It's really a handful of companies that have gotten to this place and SharpSpring has broken into that pack a little bit where we don't see any headwinds in the coming years.

[Eric des Lauriers:]

That makes sense; that's helpful. And then last question from me. Just wondering if you have any – if you've seen any lingering impacts from GDPR or other privacy concern to this point?

[Rick Carlson:]

Yes, no. GDPR, I don't mean to make light of it. It was a – it was, and is, a serious piece of legislation that everybody is looking at. But it felt a lot like the Y2K scenario where everybody was really working very, very hard to get prepared for that and then it kind of came and went. We certainly had to build a number of tools in to allow our customers to comply with GDPR and really just – it's a good – it's a good set of rules on which marketers should base their marketing tactics anyway. So this is all good stuff. In fact what I would say about GDPR is, it is yet another barrier to entry. I really am shortcutting the conversation about everything that you need to do to be a modern marketing automation platform and complying with these regulations and not just GDPR, but CAN-SPAM and the CASL laws up in Canada and what's going on in California and so forth. These are all things that modern marketers need to deal with, and the platforms that they use need to deal with them as well. So it just adds barriers to entries as far as we're concerned.

[Eric des Lauriers:]

That makes sense. And then there's no other noticeable pickup in concerns from your agency customers or direct customers regarding privacy?

[Rick Carlson:]

No, not at all. Not at all. We think we've absorbed this or – there's a learning curve – the compliance tools that we've added to SharpSpring make management of these things fairly easy for our agency customers. One of the interesting things about a marketing automation platform is that it provides what I would call – what's the term in the legal – a chain of custody, if you will, for when a lead is collected, the source, whether it be from one of our SharpSpring forums, through the website. We've got a complete record because it's an integrated platform of where we – where a lead created. And that helps with things like GDPR compliance. And know our agency partners are better served by using a platform like SharpSpring, when it comes to these things. And that's what we – that's the feedback we've received from our agency partners.

[Eric des Lauriers:]

All right, good to hear. Congrats again on a good quarter and congrats to Rick and Ed.

[Rick Carlson:]

Yes, thanks Eric.

[Operator:]

[Operator Instructions] There are no more questions at this time. And I'd like to turn the call back over to Mr. Carlson for his closing remarks.

[Rick Carlson:]

All right, I just want to thank everybody for taking the time on the call to listen to our update. We will see you next quarter, after the holiday. So let me be the first to wish you all happy holidays. I really do want to thank Ed for the time he spent with the company and thank all of you and our employees, partners and investors for their continued support. We'll look forward to updating you on the next call. Thanks so much. Take care. Operator?

[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, performances 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 make reference to an 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 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 a link available in the Investor section of the company's website. Thank you for joining us today for SharpSpring's Third Quarter 2018 Earnings Conference Call. You may now disconnect.