SharpSpring, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good afternoon, and welcome to SharpSpring's Third Quarter 2017 Earnings Conference Call. Joining us for today's call are SharpSpring's CEO, Rick Carlson; and CFO, 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 CEO, Rick Carlson. Sir, please proceed.

[Rick Carlson:]

Thank you. Welcome, everyone, and thank you for joining us today. Earlier today, we issued a press release announcing our results for the third quarter ending September 30, 2017. A copy of the press release is available on the Investor Relations section of our website. The third quarter represented a significant step forward in new sales for SharpSpring. Speaking plainly, it was the best sales quarter in the history of our company. We added a record 258 new customers in Q3, which was an increase of 24% over the prior quarter. At quarter-end, we will have more than 1,327 agency partners and over 6,400 businesses using our platform. As anticipated in our last earnings call, we begun to see the positive effects of our increased sales and marketing initiatives and are reaping the benefits from the robust customer pipeline that we built up over the first half of this year. To be perfectly clear, the groundwork we laid at the beginning of the year is the direct cause of these results. And our Q3 results are actually, actually came in slightly ahead of our internal expectations and the expectations we set in our last earnings call. Clearly, this was a solid and productive quarter across the board for us, including expanded marketing initiatives, a continuation of excellent sales execution, decreased logo attrition and significant product enhancements. I plan to dive into more detail on all of these topics shortly. But before I do, I'm going to turn the call over to our CFO, Ed Lawton, who will walk us through the financials for the quarter. Ed?

[Ed Lawton:]

Think you, Rick. Turning to our financial results for the third quarter. Our overall revenue in the third quarter increased 13% to $3.4 million from $3 million in Q3 of last year. Our overall year-over-year revenue growth percentage has been significantly impacted by the legacy GraphicMail pride revenues, which were in decline throughout 2016. Our flagship marketing automation solution grew by 29% to $3.2 million compared to $2.5 million last year. Flagship pride revenues are now 95% of total revenues. In this upcoming fourth quarter, we'll reflect the first period in which our overall growth rate is not significantly impacted by GraphicMail. Our gross profit for the third quarter of 2017 increased to 65% in Q3 from 58% last year and 60% last quarter. In dollar terms, gross margin increased 26% to $2.2 million from $1.7 million in Q3 of last year. We were able to leverage our support and technology infrastructure during the quarter to expand our gross margins. Over the past few quarters, we have invested in our hosting infrastructure and support organization to reinforce the current and future growth of our core product. Now as we add more and more revenues onto the platform, we expect our margins to continue to progress, to continue the progress we saw in Q3 and expand gradually in the future. Turning to our operating expenses. For the third quarter of 2017, our operating expenses increased 11% to $4 million from $3.6 million in Q3 of last year. The increase was primarily due to investments in 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 third quarter totaled $1.7 million or $0.20 per share. This compares to a GAAP net loss from continuing operations of $1.2 million or $0.15 per share in Q3 of 2016. On the balance sheet, we had $6.3 million in cash at the end of the quarter compared to $7.2 million at the end of the prior quarter. We continue to expect our cash on hand and available credit facility to remain an adequate source of funds for our operations through 2018. Looking at some of our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we defined as earnings before interest, taxes, depreciation, amortization, non-cash stock-based compensation, restructuring expenses and acquisition-related charges, totaled $1.3 million. This compares to an adjusted EBITDA loss of $1 million in the same year-ago period. Our core net loss, which excludes amortization, acquisition related costs, restructuring expenses and stock-based compensation expenses while adjusting for taxes, for the third quarter of 2017 totaled $1.3 million or $0.16 core net loss per share. This compares to core net loss of $693,000 or $0.08 core net loss per share in Q3 of last year. During Q3, our customer acquisition costs decreased to less than $6,200 per customer. As a reminder, this is our all-in sales of marketing costs from Q2 divided by the new wins from Q3. Using the prior quarter cost provides a better estimate for our customer acquisition costs to account for the average sales and marketing time line we experience. This is still an imperfect measure because marketing spend in 1 quarter impacts the deals we win in many future quarters. But this quarter's low customer acquisition cost shows that we can consistently acquire customers at attractive all-in rates that will deliver a significant life time value for the business in the future. Based on our historical customer data set, we expect the lifetime value of these new customers to be over $50,000 for agency customers and approximately $40,000 for all customers on a blended basis. These values reflect the benefit to the company on a discounted basis after reducing for gross margin costs to support the customers on the platform. Based on these figures, our expected lifetime value to customer acquisition cost ratio continues to be exceptional at 8

[Rick Carlson:]

Thanks, Ed. As I mentioned earlier, in Q3, we began to see the meaningful effects of the pipeline that we began building at the beginning of this year. For the sake of continuity, I took some time last call to talk about our sales cycle and explain the timing and process of how a lead becomes a customer for SharpSpring. As a brief reminder, we rely heavily on what is referred to as an inbound or content marketing strategy. In this type of process, sales that occur in any given month are the result of lead generation activity, activities that have taken place over a wide range of preceding months with some sales coming from leads that were generated the prior month and some sales coming from the leads that we generated more than a year earlier. Once generated, the leads have been nurtured to the point in which they attend a demo and, ultimately, convert to a sale over a more consistent time frame and with a highly predictable demo to close rate. We owe a lot of our success this quarter to the fact that we've been successful at generating top-of-the-funnel leads during the first half of 2017. Generating these leads and working these leads through our marketing funnel is the first step in our overall sales cycle. We reported in Q1 and Q2 that we were successful in generating more leads for the business, but those leads hadn't translated to sales yet due to our sales and marketing process time line. More specifically, the time it takes for a prospect or lead to go through the marketing phase of our funnel, which ends at them attending a demo, is much more variable but it takes 75 days on average. Some of these leads converted demos almost immediately, while same need to be nurtured for a year longer before they convert. This variability is simply a matter of timing between our lead generation activities driven by content marketing and the needs and purchase time line of our prospects. Put simply, we either cash them at a good time or we don't. But once the demo is attended, we consider the lead to be in our sales cycle, which is less variable and takes about 50 days on average for this, for the lead to convert to a sale. Taking the sum of the average time spent in both the marketing and sales funnels, the sales generated in any given month or quarter come from leads that we generated 16 to 24 weeks prior, with many sales taking up to a year or more to close after the initial lead was generated. During Q3, as expected, we saw many of the leads we generated in Q1 and Q2 convert to sales. Even with these conversions, our pipeline remains strong. During Q3, we continued to generate top-of-the-funnel leads at a solid pace, which is consistent with our sales and marketing spend levels that we've applied during 2017. We expect future quarters to benefit from these leads and attended demos in a similar fashion as we saw in Q3, setting aside minor adjustments for seasonality. As we work those new leads through the sales and marketing funnel, we practice continue improvement process and look for new ways to improve and optimize our marketing expense. We constantly experiment with new marketing campaigns, optimize existing campaigns and find new ways to target digital marketing agencies. But once we demo our product for the agency and show them the value they can achieve by using SharpSpring we experienced a consistently high demo-to-sale close rate. So the name of the game is really generating more leads and more demos. It's worth noting that we acquire these new customers at below $6,200 per customer, which, as Ed noted earlier, is very attractive when you factor in our average expected lifetime value for agency customers of over $50,000. Like all SaaS companies, our reported customer acquisition costs bounce around a bit from quarter-to-quarter. For example, we reported CAC of $7,800 of last quarter as marketing spend in 1 quarter really affects sales that take place over the next several quarters, rather than only affecting the very next quarter as the calculation implies. While this phenomena causes some variability in the quarterly CAC reporting, the company has consistently produced CAC in the range of $6,000 to $7,000 or below as measured on a monthly cohort basis, month-after-month, quarter-after-quarter for more than two years. All this means that we have an incredibly stable and predictable model for obtaining new customers. In addition to the excitement we feel about our continued CAC and LTV metrics related to obtaining new customers, we are equally excited about and focused on the long-term value that we create by expanding our relationships with our existing customers over time. Indeed, this is the main driver of our overall business and revenue model. By targeting agencies as customers, we've engineered our business model with very large expansion revenue opportunities. The more time an agency spends on the platform, the more clients they end up adding and the more MRR we get from that relationship. By building our business around agencies, which is very different than the other players in the marketing automation space, we've created a unique model that shows up in much higher expansion revenue opportunities and much higher lifetime value for these agency customers. Also, increasing the LTV of these customers, Q3 saw us take another step forward with a reduction in overall logo churn. Further, we continue to believe we are on a long-term path to achieve overall negative net revenue attrition as expansion revenue surpasses revenue lost from attriting customers consistently each month. Moving on to product. This quarter, we also introduced several exciting new enhancements and integrations to our platform. For customers using SharpSpring, the platform sits as the central hub of all of their sales and marketing efforts and serves as the central repository of nearly all of the company's sales and marketing data. It is really both the database of record, and it becomes the core technology of which other platforms work and connect. We are always looking for new ways to make our product, not only more powerful but also expand the integration possibilities. And therefore, overall utility of our platform to our clients, which is why at the start of this quarter, we announced the launch of our native in-app integration with PieSync. For those of you who don't know PieSync, PieSync is a B2B cloud integration platform that uses intelligent, two-way syncing to match and synchronize customer context across many different cloud-based applications. This newly expanded integration provide SharpSpring customers with direct access to PieSync's point-and-click interface to easily build bidirectional integrations and synchronizations with more than 80 cloud-based platforms. Anything from Google context, QuickBooks, Zendesk and Pie Drive to Microsoft dynamics 365 can now be integrated into our platform without the need for a developer. The automatic contract syncing eliminates the need for manual imports and exports, which helps reduce duplicate contacts and errors, but more importantly, allows for the real time sharing and synchronization of vital data between systems, allowing each platform to benefit from the data stored in the others. The new in-app interface makes it simple for SharpSpring marketing automation customers to build their marketing technology stack via point-and-click mapping. But the most special thing about this integration is that it's a native to SharpSpring. That means it works right out of the box without a need for setting up separate accounts with PieSync or taking any other necessary -- unnecessary steps. SharpSpring just works with all the most popular platforms that our customers are using. We're really excited about this update, and the initial feedback we've been receiving has been very, very positive. Another exciting enhancement we made during Q3 was to launch our visual workflow builder. This feature improvement allows SharpSpring -- users of SharpSpring to create workflows in a flowchart style editor, which allows marketers to visualize the process of a campaign while they are editing the automation in real time. This is a fundamental shift in the way marketers interact with SharpSpring. To further put this in perspective, a user of SharpSpring can create automated tasks that are triggered upon certain sections. Now, when setting up those automated tasks can design a workflow in a visual manner using point-and-click functionality to modify and update the tasks at a bird's eye view of their -- with a bird's eye view of their complete marketing process. Our agencies are particularly delighted with this feature enhancement because it allows them to show up their work in an easier -- easy-to-understand way for their clients to consume. In addition to those feature enhancements, we're working on some new exciting social media features that we expect to launch in Q4. Social represents the very last major feature set that has historically separated us from our largest competitor, and we're extremely excited about closing this last gap. So we'll look forward to talking about it more in subsequent calls. Switching gears, as most of you know, back in May, our Board of Directors initiated the process of -- to explore and evaluate strategic alternatives to further enhance shareholder value for our company. This decision was made when the Board was composed differently than it is today and without the benefit of two additional Board members that we added in subsequent months. And as some of you may have seen from our 8-K filed a few minutes ago, the current Board has now completed that process and decided that no transaction or strategic alternative will be pursued at this time. That said, we performed a very comprehensive evaluation of possible strategic alternatives before coming to this conclusion; more than anything, this process reaffirms the Board's belief that the best strategy to maintain shareholder value is to continue focusing on the abundant growth opportunities ahead of us. Of course, as a high growth technology company, it is possible that we may receive unsolicited offers in the future and we will evaluate them as they arise. Looking ahead, we remain focused on our sales and marketing efforts as we refine and improve those strategies to attract and win new customers in an efficient manner. Based on our current marketing spend, we expect to acquire roughly 240 to 250 new customers on average for the next few quarters with some seasonality from quarter-to-quarter, which is roughly the same as what we did in Q3. As we look forward, we expect our CAC and LTV stats to remain consistent as well, which would mean acquiring customers for $6,000 to $7,000 that are worth more than $40,000 on a blended basis after discounting and applying gross margins. Obviously, with these ratios, we can make a clear case to invest more in our sales process to acquire more customers. But in the near term, we are focused on taking steps towards profitability. Overall, the third quarter was another very encouraging step in the right direction for our company. These results now have SharpSpring position right where we want to be. Coming off a record number of customer wins in Q3, along with an increased, increasing pipeline and ever improving and robust technology platform, the company is in the best and most competitive position than it has ever been in. Overall, we believe we are increasingly well-positioned to expand our marketing, our market share in this multibillion dollar marketing automation space and drive substantial long-term shareholder value. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

[Eric Martinuzzi:]

Congratulations on the good sign upstair in Q3. I had a question about the strategic alternatives process. Obviously, you guys spent six months here during a pretty comprehensive process. Just wondering, how much the reconstitution of the board played into the decision to kind of step away from pursuing any transaction versus the recovery in the fundamentals?

[Ed Lawton:]

Well, I certainly wouldn't want to comment on internal board discussions and rationales there. So I think, I guess that would be part of the answer. We've always really believed strongly in the business, and so I also wouldn't put the category in terms of recovery. I think, ultimately, this is something that it makes sense for a company to do from time to time. We took those steps. We looked around. Again, we feel like the company has got so much upside potential with our 6.5 to 1 CAC to LTV ratios or 8 to 1 CAC to LTV ratios with agencies that it makes sense to look around and see what's available. So that's really the spirit in which we took a look at alternatives, but have ultimately decided to wind down that process.

[Eric Martinuzzi:]

And then as you guys look at, given the signs that you had in Q3, I know you didn't give specific guidance for Q4, but a year ago, if we look at how the business progressed throughout the calendar year, there was a step up between Q3 and Q4 on the marketing automation side of the house. I think it was a couple hundred thousand dollars last year. Is there any reason to believe that, that we don’t see a similar step up here between Q3 and Q4?

[Ed Lawton:]

No, I think that's a reasonable assumption, Eric. We're constantly adding new customers to the platform winning new business. And that will -- they are out of top of the base of revenues that we're -- we have been coming out to Q3.

[Eric Martinuzzi:]

And then on the gross margin side, last quarter you guys thought you'd be in the low 60s. You had some outperformance there, it was actually 64.5%. Is there anomalies there, was there some one-time things to be good or what should we be thinking about as far as gross margins for the business going forward?

[Ed Lawton:]

We expect to essentially maintain this rate and improve it gradually over time. We did do a little bit of [pruning], I guess, early in Q3 kind of coming out of Q2. And that had a little bit of benefit. It kind of jump started the gross margin as you pointed out in Q3. Basically, we can leverage the infrastructure that we have and layer on more and more revenues on top of what we've already built up with some minimal costs added in the future.

[Eric Martinuzzi:]

Okay. And then you've talked about kind of broad strokes about pursuing both growth as well as the path to profitability. Is there an assumption? Or are you working towards to pick, at some point in 2018, maybe posting a quarter where you get to an EBITDA profit? Or is that not something you're comfortable commenting on at this time?

[Ed Lawton:]

Well, I think we're certainly moving. We're on a path to move in that direction with -- substantially. At the same time, we see our investment opportunities as being pretty robust, again with really very, very exciting CAC-to-LTV ratios that we feel at this point are highly predictable. As I pointed out over a long period of time, over two years, we've been creating on a cohort basis, we've been acquiring customers less than $6,000 or $7,000, and we now realize that these customers are worth north of $40,000 or $50,000, $40,000 on a blended basis, $50,000 as agency. So really what we are doing is looking at the markets. We're seeing what our opportunities are and balancing our growth with our ability to raise capital. So I'd say we're, at this point, planning on pursuing the strategy, which the company certainly does not need any money. We could move forward and be substantially close to breakeven in 2018 towards the end. But who knows what'll happen between now and then as we look at what the markets will provide for us.

[Operator:]

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

[Mike Malouf:]

If I could just focus a little bit on the logo attrition, I know that in this quarter it was kind of an all time low, I think around 5.6%. As you look out over the next several quarters, where do you think you can target that and where you're comfortable with that logo attrition rate?

[Rick Carlson:]

Well, first, it is true that we had lower logo attrition this quarter than last. We would have to do the math to see if that number you stated is exactly right or not. I think it's actually the less important factor to consider. Logo attrition, the reason is because we lose the low value customers. So if you think about our business model as an agency adds more and more clients, which makes them more valuable to us, obviously. It also means that they are less and less likely to attrit. So our logo attrition comes from typically newer agencies or agencies that have failed to expand. Again, we, the technology is such that once it becomes, once the client becomes engaged with the platform, we become central to their business processes. So to answer your question about logo attrition, we see logo attrition generally declining as our user base, month-after-month as our user base gets older essentially. So it becomes larger and the existing customers have more time on the platform. So we're absolutely seeing that trend. But we're also seeing a trend where net revenue attrition we hope will surpass, will become negative such that, again, will be, our expansion revenues will outpace our lost revenue from attrition. And we really feel like the net revenue attrition is the best way to look at the business for those reasons. To put simply the customers that we lose are just not worth anywhere near as much as the larger agencies that stick around. That makes sense?

[Michael Malouf:]

That's helpful, I appreciate that. And then just a follow-up. I'm wondering if you could talk, obviously, your customer acquisition cost to your lifetime value very attractive, it's very nice that you pointed that out. I'm wondering if you can talk a little bit about competitive vibes. I know you've probably done some research on how the Marketos and HubSpots of the world sort of stack up on that. I'm just wondering if you can help us sort of frame where you stand in that. And then maybe just a comment on how the competitive environment has changed over the last 12 months? And where you see it kind of going over the next 12 months?

[Ed Lawton:]

Sure. I have got a lot to say on that topic. I think the first thing I would say is, we still view the total addressable market as largely untapped. Even when we're looking at agency partners, which are the more sophisticated group of users compared to kind of a general marketer at an SMB, when you add up all the agencies that HubSpot and SharpSpring Marketo and so forth have, it's even not accounting for the overlap between those agencies that might be using different platforms. It really appears that less than 20% of agencies have adopted marketing automation. They're still trying to cobble together WordPress with the constant contact and salesforce, our Sugar CRM and a bunch of other technologies. And they're becoming aware of marketing automation and adopting. So we think there's a very, very large market there that's, generally speaking, way out and ahead of us. As far as SharpSpring is concerned, we've never been more competitive. I'm really, I almost put in some conversation about our social feature into this earnings call because I'm very excited to talk about it. But we'll talk about it more next call. However, it represents the very last large gap in our platform when compared to competing solutions that are out there. In fact, some of the companies you’ve mentioned don't have social. I don't believe Marketo has social management in the way that we're building it for example. Don't quote me on that but I believe that's correct. So when we add this to our platform, we think it's going to be really just kind of revolutionary for our company. But even without that, as we obviously haven't had that, we don't have it today, we're just tremendously, tremendously competitive because we're able to build the platform that does 80%, 90% of what all the other platforms out there via very large incumbent players, the HubSpots, the Marketos, Eliquis and then Pardot is an example. We do what those guys do already and yet we're a tiny fraction of the cost. And we have some really unique differentiators, especially when it comes to working with agencies. And that's why -- that's really what's been responsible for our access -- our success and I don't see that. Not only don't I see it changing in any way to the negative, I see us become stronger and stronger in that space. The last thing I'll point out as kind of a third part to this answer is that we just -- at this point it's hard to conceptualize new entrants coming into our market. We have not seen that happen really at all since the company has been in the market in the last 3.5 years. We still consider HubSpot and Pardot and Act-On and those competitors, the ones that had been here doing this for a decade as our major competitors. But we just don't compete with anybody else really on a daily basis. And the reason for that is the barriers to entry to this market are so incredibly high. At this point, marketing automation solution includes a pretty complex rules engine that is really, really difficult to build, that has to process billions of discrete transactions in a day across thousands and thousands of companies as you track each page impression from every visitor on these companies -- from these companies websites. You've got to be able to deliver e-mail, you've got to run -- got to be able to track all the stuff and do analytics. You have to have hundreds and hundreds of integrations as we talked about today. So today SharpSpring integrates with literally hundreds of applications. And I could go on and on and on, but it really -- this is not the kind of software platform that you get 20 or 50 developers together and build in a year. It's not that kind of thing. So I know I'm giving a long-winded answer here, but, hopefully, my excitement comes true about where we're positioned in the market and the overall market itself.

[Operator:]

[Operator Instructions] At this time, this concludes our question-and-answer session. I'd like to turn the call back over to Mr. Carlson for any closing remarks.

[Rick Carlson:]

Well, thank you all for joining us today. And especially as always want to thank our employees, our partners and investors for their continued support. We look forward to updating you on our next call. 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 the conference call, we 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 third quarter 2017 earnings conference call. You may now disconnect.