SharpSpring, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Good afternoon. Welcome to SharpSpring's Second Quarter 2017 Earnings conference Call. Joining us for today's call are SharpSpring's Chief Executive Officer, Rick Carlson; and Chief Financial Officer, Ed Lawton. Following their remarks, we will open up the call for your questions. Then, before we conclude today's call, 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 would like to turn the call over to SharpSpring's Chief Executive Officer, Rick Carlson. Sir, please proceed.

[Rick Carlson:]

Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2017, a copy of which is available in the Investor Relations section of our website. Our second quarter results were according to plan and consistent with last quarter, helping us to build increasing momentum as we head into the second half of the year. In addition to achieving double-digit top line growth, we also saw healthy increases in our flagship marketing automation platform. At the end of the quarter, we had over 1,250 agency partners and approximately 6,100 businesses using our platform. And as we continue to develop our approach with new sales and marketing initiatives, our lead flow has, in turn, been increasingly strengthened. We expect the results from these initiatives to materialize with a return to growth in new sales starting in Q3 and accelerated growth in subsequent quarters. Adding on to the steady progress in our core business, this quarter also brought a number of exciting developments to our company. We made two key additions to our board, elected a new Chairman and made a number of significant product enhancements and integrations, all of which I'm excited to discuss later on in this call. However, before I go any further on our operations and initiatives for this quarter as well as our outlook for the balance of 2017, I'm going to turn the call over to our CFO, Ed Lawton, who will walk us through the financials for the second quarter. Ed?

[Ed Lawton:]

Thank you, Rick. Turning to our financial results for the second quarter ended June 30, 2017. Revenue in the second quarter increased 12% to $3.2 million from $2.9 million in the same year-ago period. The 12% growth we experienced in the quarter was weighed down by a reduction from the old GraphicMail legacy customer base. However, our flagship marketing automation solution grew by 48% to $3.1 million compared to $2.1 million last year. Our gross profit for the second quarter of 2017 increased 4% to $2 million or 60% of total revenue from $1.9 million or 65% of total revenue in Q2 last year. The decrease in gross margin reflects the lower gross margin for our higher-growth SharpSpring product as we have continued our investment in our hosting infrastructure and support organization to support the current and future growth of our core product. Although some of these investments are behind us, like any high-growth SaaS company, we will continue to experience some margin pressure as we build our customer base. Turning to our operating expenses. For the second quarter of 2017, our operating expenses increased 15% to $3.7 million from $3.2 million in Q2 of last year. The increase was primarily due to investments and marketing initiatives, along with increases in R&D and G&A to support the expansion of our business. Our GAAP net loss from continuing operations for the quarter totaled $1.3 million or $0.16 per share. This compares to a GAAP net loss from continuing operations of $669,000 or $0.09 per share in Q2 of 2016. Turning to some of our non-GAAP measures. Our adjusted EBITDA loss from continuing operations for the quarter, which we define as earnings before interest, taxes, depreciation, amortization, non-cash stock-based compensation and acquisition-related charges, totaled $1.3 million. This compares to an adjusted EBITDA loss from continuing operations of $653,000 in the same year-ago period. Our core net loss, which excludes amortization, acquisition-related costs and stock compensation costs, while adjusting for taxes, for the second quarter of 2017 totaled $1.1 million or $0.13 core net loss per share. This compares to core net loss of $315,000 or $0.04 core net loss per share in Q2 of last year. During Q2, our customer acquisition costs increased to approximately $7,800 per customer, which was expected and discussed on last quarter's call. The increase reflects timing differences between ramping up new marketing initiatives and the sales generated from those initiatives that come in over time. Further to this, we expect our customer acquisition costs to decrease next quarter as we realize the value from more of these marketing efforts in Q3. Based on our latest customer dataset analysis, we expect lifetime value of these new customers to be over $53,000 per customer for agency customers and over $41,000 for all customers on a blended basis. These values reflect the benefit to the company on a discounted basis after reducing for gross margin cost to support the customers on the platform. On a blended basis, our expected LTV-to-CAC ratio for the second quarter is 5

[Rick Carlson:]

Thanks, Ed. Going off script just a bit here. We're experiencing a Florida rainstorm, and so I hope everyone can hear us clearly. Quite loud on the roof here in our office. As many of you know, we launched SharpSpring into the market just about 3.5 years ago. Since that time, we've added customers month after month such that, today, the average age of the customer base is just over 13 months old. Because of this agency growth pattern, in our last earnings call, we discussed that we were only just beginning to see the long-term behavior of our agency partners. We were pleased to see that as agencies matured beyond their first year with us, they were performing very well in terms of both strong expansion revenue and very low attrition rates as they standardized on our platform. These two factors led us to the conclusion that our agency partners have an estimated lifetime value well over $50,000. Over Q2, we continued to see this dynamic develop with some very positive and steady improvements to our net revenue attrition. Net revenue attrition is the total value of revenue retained from our base of customers each month, including the expansion revenue from these customers minus the revenue lost from customers that attrit over the period. We have seen this metric steadily improve over time as more and more of our agency partners have matured, generating significant increases in expansion revenues while simultaneously attriting at very low rates. While our customer or logo attrition for Q2 was approximately 3% during the quarter, our net revenue attrition for agency customers during Q2 was just 0.2% or one fifth of 1%. Put simply, this means that our agency partners that we retain each month expand license fees they pay to us by adding more clients onto the platform and are almost completely offsetting the revenue loss from the few agencies that attrit each month. Further, as more of our agency partners reach this mature status, we expect this trend to continue to improve over time such that we will eventually achieve negative net revenue attrition. To be clear, this means that our expansion revenue from our retained and maturing agencies will more than offset the revenue loss from attriting agencies as time goes on. As a result of this compelling performance demonstrated by our agency partners and our confidence that we could continue to acquire more of these agencies at very reasonable customer acquisition costs, in our Q1 earnings call, we announced our intention to expand our sales and marketing efforts in Q2, and we began doing so in June. As we forecast on our Q1 call, we expected Q2 to be roughly flat with our previous two quarters from a new sales perspective as this new level of spend that we began in June will only begin to affect Q3 sales and will have a more meaningful impact in Q4 and beyond. I'm pleased to report that our Q2 results came in as expected and that our early results of our Q2 marketing spend are encouraging. As a result of our increased spend in June, we were able to see a 25% increase in the number of attended demos in June on a cohort basis over the previous three-month average of cohort attended demos. This increase was achieved while maintaining the same cost per attended demo as the prior period. So while we were experimenting with some new initiatives, we did not see a significant loss in marketing efficiency at our new levels of spend in June. Throughout last quarter and into this quarter, we've been able to generate top of the funnel leads, which continues to be a solid initial step, but there are a few items to consider when presenting this favorable uptick. First, as some of you may remember from our last call, the time it takes for a lead to go through the entire sales cycle is in the neighborhood of 16 to 24 weeks on average with many sales taking 4 to 12 months to close after they initially begin to talk to us. It will continue to take time to nurture these leads, but again, we're seeing some very encouraging progress at the top of the funnel and now at the middle of the funnel, where we've been able to achieve demos at very attractive cost per attended demo rates that should translate into a gradual increase in sales over the coming quarters at attractive customer acquisition costs. Finally, as we've said before, our business model is very different than other players in the marketing automation space. By making an investment in agencies, we are planting seeds for very large expansion revenue opportunities in the coming years as these agencies mature and increase the monthly recurring revenue to us through effectively reselling our solution to their client base. As a result of this unique model, nearly 450 new businesses adopted SharpSpring as their marketing automation platform in Q2. As Ed mentioned, we're still very excited about our continued customer acquisition and LTV metrics, and we are focused on the long-term value that we can create by winning new customers and expanding our relationships with them over time. These metrics will fluctuate a little from time to time, particularly during quarters when we ramp up or decrease spending, but we continue to think our SaaS metrics, acquiring agencies and direct customers worth a blended average of $41,000 for a $6,500 to $7,500 cost as a solid foundation on which to build. Shifting to our board. The single most important part of any business is its people, and this quarter, we made some key additions to our team that we're very excited about. Improving our corporate governance with a more representative and unified board is an initiative we've had for some time, and we're happy to have finalized this process. To that end, we further solidified our board with the appointments of technology veterans, Marietta Davis and Roy Olivier, and recently named Steve Huey as our Non-Executive Chairman. And Marietta and Roy, we were looking for directors with proven track records in creating significant long-term shareholder value for their respective companies. We're both excited and thankful to have such high caliber and well-respected industry leaders involved in our strategic decision-making. With Steve, we're equally as excited about the opportunity for him to take on a more active role in SharpSpring as our new Chairman. And as we enter an upcoming critical period of our growth, we've got the right people to guide us into the next phase of SharpSpring. Moving on to product. The single biggest reason for the success of SharpSpring to date has been the competitiveness of our product. The value that the market sees in our product affects both our initial sales and our long-term attrition rates. New product features and increased integrations that we added in Q2 have made us more competitive than ever. First, as many of you may remember, we announced our integration with Shutterstock back in March, providing SharpSpring customers with access to Shutterstock's full collection of over 125 million images. This quarter marked the successful release of this enhanced offering, and it's been incredibly well received so far. We also recently introduced new enhancements to our platform. The first is a Visual Workflow Builder, which will empower our users to more easily visualize their marketing processes through user-friendly, flowchart style layouts and an intuitive point-and-click interface. New SharpSpring users can conceptualize and build the automation for a prospect's entire journey in a single process from the top of the funnel all the way to a sale with a simple bird's eye view of even the most in-depth workflows. This feature is more state of the art than our prior Workflow editor and will serve as a selling point for our sales team during product demos, and a solid value for our current customers. The Visual Workflow Builder is one of the most significant product enhancements we've released in 2017, and customer feedback has been exceptional. Another enhancement during the quarter was to improve e-mail editing capabilities with an in-line e-mail editor in SharpSpring. This new feature gives SharpSpring users the ability to edit their e-mails and marketing material with greater ease, enabling them to work more efficiently than ever. And finally, we improved our reporting for web traffic with some new Traffic Source Reports. These reports as well as the other platform improvements made during the quarter allow users to be more effective in their marketing communications and lead generation efforts and should make the product stickier over time, helping to further reduce attrition. Finally, as many of you may have seen, we filed an 8-K back in May disclosing the initiation of a process to explore and evaluate strategic alternatives to further enhance shareholder value. The SharpSpring board has not set a definitive timetable for completion of this process, and while we cannot predict whether this process will result in a transaction or other strategic alternative of any kind, we are committed to reaching a resolution of this process in a timely manner. While we will update you when we deem appropriate or required, we will not be providing any additional update to that process on this call. In summary, in Q2, we strengthened and unified our board and added some of the most significant product features of the year-to-date. We continued to see excellent performance from our agency partners that leads us to believe the lifetime value of each is worth well north of $50,000. These agency partners are now within striking distance of completely offsetting the attrition we see from agencies that attrit each month, and we expect this trend to improve from here as our agencies continue to mature and expand with us. Our Q2 net revenue attrition from agencies was just 0.2% and was just 1.3% overall when blended with our direct customer base. In the middle of the quarter, we began a new level of marketing spend that we expect to begin to produce modest sales results growth in Q3 and more substantial growth in Q4. The early indicators of the performance of the spend can best be measured by our cost per attended demo that we expect from that cohort. In June, we increased our spend and saw a 25% increase in our expected demos attended rate, while keeping our cost per attended demo roughly the same as prior quarters. As the coming quarters play out, we expect to see a gradual increase in sales as a result of these demos. Moving forward, we'll continue to seek to capitalize on excellent CAC and LTV ratios and expand upon the nearly 50% year-over-year revenue growth that we saw in our core marketing automation business in Q2. And with that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator:]

[Operator Instructions] Our first question is from Eric Martinuzzi of Lake Street Capital Markets. Please go ahead.

[Eric Martinuzzi:]

Thanks and congratulations. Good retention numbers there in Q2. Just curious to know, I know you haven't given formal guidance here, but given that retention, as far as the revenue for the third quarter, would you expect revenue to increase versus Q2?

[Rick Carlson:]

I'm sorry. You kind of blended that question with attrition, so I'm not fully – I'm not quite sure I'm grasping the question to be honest with you. Could you repeat it?

[Eric Martinuzzi:]

Does revenue rise sequentially in the third quarter?

[Ed Lawton:]

Yes, it does, Eric. Sorry, I didn't understand your question there either. But yes, it will rise sequentially. Marketing automation revenues would take a step forward and SharpSpring Mail+ revenues will probably decline slightly quarter-over-quarter, but overall, we're expecting to take a step forward in Q3 from Q2 levels.

[Eric Martinuzzi:]

I assume that $100,000 delta between SharpSpring marketing automation and the total revenue, I assume that was Mail+ in the second quarter.

[Ed Lawton:]

That's right.

[Eric Martinuzzi:]

And then on the EBITDA, given you are ramping up the spend there, if I look back a year ago, your EBITDA actually declined, so it was a greater loss, EBITDA loss Q3 versus Q2. Are you expecting – what's the EBITDA trend expectation here given the backdrop of the increased sales and marketing spend versus the $1.3 million loss that you just printed in Q2?

[Ed Lawton:]

Yes, we would expect the EBITDA loss to increase quarter-over-quarter. You know, I mentioned growing sales and marketing spend by about $300,000 to $400,000 quarter-over-quarter. The revenue increase would offset some of that, and then the rest would pretty much drop to the EBITDA loss.

[Eric Martinuzzi:]

Understand. Okay. And then the last question from me, you've talked about getting back to historical new logo sign-up rates, and those have been 250 and above. We've now had a couple of quarters here much closer to 200, how long do you think it takes before we get back to those historical levels on new logo sign-ups?

[Rick Carlson:]

Yes, as we – just as a refresher, as we talked about we projected this quarter being – how it came in around the 200 mark, and we recognize that we've been there for a couple of quarters now. We've also talked about that being a product of the marketing spend that we were spending last year. We've since ramped that spending up now in June. We've talked – we've kind of given some pretty clear guidance in terms of how the sales and marketing process works and the delays associated with those. We definitely would expect to see an improvement in Q3, and I would imagine we would return to those levels in Q4 and look to build from there. So just to kind of put that out there, I would say, Q4, we would expect to return to the same levels that we saw earlier and then, hopefully, build from there next year.

[Eric Martinuzzi:]

Understand. Thanks for taking my questions.

[Rick Carlson:]

As always Eric. Appreciate it.

[Operator:]

Thank you. And with that, I would like to turn the conference back over to Mr. Carlson for closing remarks.

[Rick Carlson:]

Well, I just want to thank everybody for joining us on today's call. I especially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call. Operator?

[Operator:]

Thank you. 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 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 Investors section of the company's website. Thank you for joining us today for SharpSpring's second quarter 2017 earnings conference call. You may now disconnect, and have a wonderful day.