SharpSpring, Inc.
Q1 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Greetings and welcome to the SMTP first quarter 2015 earnings conference call. [Operator Instructions] It is now my pleasure to introduce SMTP's CFO, Mr. Edward Lawton. Thank you, sir. You may begin.

[Edward Lawton:]

Thank you, Adam. Good morning, everyone, and thank you for joining SMTP's first quarter 2015 earnings conference call. Jon and I are excited to discuss the quarter with everyone. Before I hand it over to Jon, I would like to remind you that the information provided during this call may contain statements that constitute forward-looking statements. 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 Annual Report on Form 10-K that may cause actual results, performance or achievements to be materially different from any future results, performances or achievements anticipated or implied by those forward-looking statements. The company does not undertake 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 measure presented as supplementary 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. With that, it is my pleasure to turn the call over to our CEO, Jon Strimling. Jon, the floor is yours.

[Jonathan Strimling:]

Thank you, Ed, and thank you everyone for joining our conference call today. Before we provide you a briefing on our first quarter financials, I'd like to highlight some of our critical business achievements and significant milestones from the past quarter. One of the analysts covering our stock commented recently, something big has changed. That comment resonated with me, because it is in fact true, something big has changed. What we have seen this past quarter is a successful integration of SharpSpring and GraphicMail with our core delivery services into a single entity, an entity that offers compelling solutions. We've been transformed from a company addressing a narrow niche of the email market to a company that is delivering a comprehensive and affordable digital marketing tool kit to customers around the world. We've gone from a company that few investors were watching or had even heard of to a company covered several respected analysts that is starting to be recognized as an up and coming challenger to better known names like Marketo and HubSpot. Our recent acquisitions already started to bear fruit in Q1, which is only our first full quarter as an integrated company, and literally opened a new world of opportunity for SMTP. In Q1 we began to see the fulfillment of the vision that drove SMTP to acquire SharpSpring and GraphicMail in 2014. We successfully demonstrated meaningful traction and continue to believe that these acquisitions will be the catalyst that will power our growth in the future. Thanks to the coalition of the three companies, we have the proof, that we can compete and win against the biggest names in marketing automation and email marketing services. Even in our first quarter of combined operations, we are doing so on a global basis. SharpSpring, our marketing automation solution was immediately able to leverage the early investments we made in that business during Q4 to demonstrate strong growth in Q1. SharpSpring added 149 new customers in Q1, which represents more than $1 million in annualized recurring revenue or ARR. The rate of adding new ARR in Q1 was 45% higher than Q4 2014, and more than twice the rate when we acquired SharpSpring in Q3 2014. We believe that recent investments in sales and marketing as well as wider awareness of the SharpSpring solution in the market drove the accelerating growth in Q1. The rise of marketing automation solutions has changed the way companies market themselves online. This transformative development has drawn innovators as well as large companies into the mix in an attempt to capitalize on this evolution. The market as a whole is expanding rapidly, creating a range of growth opportunities. Companies like Marketo and Hubspot are helping to propel that growth, as they spent $100 million and $80 million in 2014 on sales and marketing, respectively. While some might worry that the spending by our competitors could be a threat, we see it as an opportunity. We have a great deal of respect for Marketo and Hubspot, as industry pioneers, and their spending is educating the market and fueling tremendous industry-wide growth. There is plenty of business out there and more than enough opportunity for us all to continue to grow. Their spending and higher prices are creating market demand for a flexible, capable and affordable alternative, which is exactly what SharpSpring provides. So for that reason as well, we remain bullish both on the market overall and on our SharpSpring product in particular. While our competitors are spending heavily to drive growth, we continue to find cost-effective ways to grow rapidly. SharpSpring was only introduced to the market in 2014 and is already in use by more than 1,000 end-users, where we have spent less than $1 million on sales and marketing to do so. That kind of traction would not be possible without an outstanding product that wows users. We specifically target customers that are using our competitors' technology, and nearly all compare our offerings with HubSpot, Marketo, Act-On and Pardot, before purchasing SharpSpring. In the face of competition that has outspent us by as much as 100 to 1, SharpSpring wins customers because of its flexibility, its easy-of-use and its affordability. First, our customers can use any CRM they may currently be utilizing or one suppliable SharpSpring itself. Secondly, our customers can use any content management system, form creation and/or landing page creation tools they may choose. Finally, we are substantially more affordable than our competitors, while offering compelling ease-of-use and expansive range of product features. While, still a relative newcomer to the space, we are fortunate to have a high demo to close ratio, which provides us with a low cost of customer acquisition. In addition, SharpSpring already leveraged its relationship with over 400 marketing agencies to drive end-user adoption. Finally, in Q1, we noticed an increase in inbound leads from positive word of mouth, whereas we were essentially an unknown brand at the time of the acquisition. Collectively, these factors allowed SharpSpring to acquire new end-users at nearly half the rate of Marketo during the first quarter, according to statistics compiled by third-party market research group Datanyze. More importantly, SharpSpring did so with approximately 1% of Marketo sales and marketing spend. Even as we boost investment in sales and marketing around the world, this combination of exceptional technology, high-close ratios and smart spending will guide us to a strong market position that is prudently achieved. We began training and fully integrating our new international sales force in Q1 2015. While the large majority of SharpSpring's Q1 growth was domestic, we are already reporting international SharpSpring sales closed as a result of training our global sales force. Worldwide our sales professionals now have the ability to sell a portfolio of leading digital marketing products and not just a point solution for email marketing. This global boost has created a major expansion in the addressable market for the SharpSpring product and a higher potential average deal size than our historic U.S. sales. Our growth is being led by SharpSpring, but is not solely dependent upon that product. With a full spectrum of cloud-based online marketing solutions and an international team, we can now sell into a truly global market. Now, that both SharpSpring and GraphicMail are leveraging our highly scalable email delivery platform, we have gained the ability to reach higher value customers that bring the potential for greater annual recurring revenue. To date, the company sold high volume solutions to customers buying combined product solutions that are expected to represent over $250,000 in annual recurring revenues. This total includes high volume GraphicMail accounts, powered by our relay delivery platform; high volume SharpSpring accounts, powered by the same platform; and our customers buying a combination of all three products. These figures include only high volume sales and do not include customers that could have served by SharpSpring or GraphicMail without our robust email delivery platform. Notably, these high volume sales average over $25,000 in annual recurring revenue per customer, which is far higher than SMTP's historic average customer size of $1,000; GraphicMail's historic average customer size of $150 and SharpSpring's average of $7,000, with all these figures representing annualized recurring revenues. For us it is clear where we should be focusing our investments at this point in time. We are pursuing an incredibly promising growth trajectory and we are realizing an extremely high rate of return on our investments. As an illustration, the $400,000 investment we made in sales and marketing in Q1 at SharpSpring resulted in adding customers representing over $1 million in annual recurring revenue. We expect these customers to provide over $2.7 million in lifetime value to our business after variable expenses providing better than a 7 to 1 return on investment. At this point, I'd like to shift focus to talk about the company from a Wall Street perspective. Until recently, the very little analyst coverage and had difficulty getting our story heard and understood; however, over the last 90 days we've seen new coverage initiated by several respected analysts, which can provide investors with a variety of perspectives into our business. For that reason, I'd like to take this opportunity to welcome any new analysts that are joining this call today. It's gratifying to see such fresh attention paid to the SMTP story by analysts and investors, who have an uncovered SMTP as an up and coming player in the digital marketing industry. Our growth expectations are high and we anticipate strong interest in the SMTP story, as investors hear about the company and more customers migrate to our digital marketing platforms. We will continue to invest in the company and to spread our message worldwide. However, we will do so with an eye towards adding business that can be profitable for the long-term and maintain the fiscal responsibility that has always guided our decisions at SMTP. We think that SMTP represents a smart way for investors to participate in the rapidly growing marketing automation sector, without facing the risks inherent and competitors trading at higher multiples or driving growth by spending far beyond the revenue base. So in only our first complete quarter, we have seen positive proof that our bold acquisition strategy is paying off. We can now reach across the globe with a full compliment of integrated cloud-based marketing solutions that are within reach of a new generation of marketers. We are reaching new higher value customers and building deeper relationships with our existing customers. We are rapidly winning new customers at a tiny fraction of the spending of our competitors next to our strong products and our disciplined approach to spending. The vision we set out to achieve in 2014 has come fully into focus, during this first quarter of 2015. Our growth trajectory is clear, and we have confidence in our ability to continue to execute on our plan. In moments I will reintroduce Ed Lawton, SMTP's Chief Financial Officer, who will take us through a recap of the financial results from the first quarter. But before I do, I want to thank all of our company's employees for an extraordinary level of commitment, as we work through this complex integration. In particular, I want to thank the leadership of SharpSpring and the GraphicMail teams for helping to shape our collective vision of where we wanted to go as a company, and for working earnestly with us to promote effective integration. With a very lean team, we rapidly and successfully merged three separate businesses into one. We achieve strong growth, while concurrently running at about breakeven on an adjusted EBITDA basis. So in closing, I just want to publicly thank all of our team members, and all of our country partners globally for allowing us to report out these strong results today. Ed, the call is yours.

[Edward Lawton:]

Thank you, Jon, and thank you everyone for joining us on today's call. I'm pleased to report on our financial results for the first quarter. During Q1 we recorded revenue of $3.3 million, a year-over-year increase of 120% compared to $1.5 million in the first quarter of 2014. Revenues grew approximately $400,000 or 13% from last quarter. There are a number of factors leading to the company's quarter-over-quarter growth. First, and most importantly, we saw strong growth from SharpSpring product during the quarter. During the first quarter SharpSpring accelerated the rate at which it added new customers by 45% compared to Q4, which resulted in signing new account representing over $1 million in annual recurring revenues during the quarter. These new customer signings will contribute meaningfully to revenues during the remainder of the year. With the visibility of these new sales providers, we now feel comfortable saying that the company is on pace to exceed its goal of having $5 million in annualized recurring revenues for SharpSpring by the end of 2015. Future SharpSpring growth will be driven by new direct sales, new international sales channels that were added in Q1 and growth generated through roughly 400 agencies already using SharpSpring as they add clients to the platform. So drive new direct sales, we are investing in our sales and marketing organization. We have effectively doubled our sales and marketing spend, focused on SharpSpring, over the past few quarters, and we plan to increase spending levels in the future to support the growth of the product It is important to note that not all of the spend is incremental to the consolidated group, as a portion of the spend and resource focus has been reallocated from other areas of the business. We see SharpSpring as our primary growth engine in the near future, and we are aligning our resources behind that effort accordingly. In addition to the strong organic sequential growth from SharpSpring sales, we also experienced a small benefit from owning GraphicMail for the entire quarter. As a reminder, GraphicMail was acquired in mid-October, so we didn't quite have a full quarter in Q4. Turning to other factors impacting revenues, we faced a couple of headwinds in the first quarter as well. Q1 is a seasonally weaker quarter for both GraphicMail and our relay business. Retailers generally pull back under our email marketing programs after the holiday season is over, which typically impacts our revenues generated in the first quarter of each year. Since most of our pricing plans are similar to your cell phone bills, with volume overages charged, if you exceed the limits of your plan, we have higher volume based revenues in the fourth quarter as well. Additionally, our GraphicMail business has a large portion of our revenues denominated in foreign currencies. During Q1, we saw some dramatic changes through exchange rates, which led to a decrease in GraphicMail revenues when translated into U.S. dollars. This impacted revenues by about $50,000 sequentially compared to Q4 exchange rates. Despite those headwinds, we are pleased with our revenues performance during the quarter. On the cost side, we saw our sales and marketing expense increased by about $300,000 from Q4 levels. The majority of that increase is related to additional headcount and marketing-related spend for our SharpSpring product. One area of spend in Q1 was focused on launching SharpSpring into the international distribution network that GraphicMail had cultivated over the last 10 years. Through this network of subsidiaries and third-party country partners, GraphicMail effectively and efficiently distributed their product over 14 countries around the globe. We hosted the majority of those country partners at a summit in January to formally launch the SharpSpring product into those international markets. I am happy to report that we are already seeing some traction in those new markets during Q1, even though SharpSpring's typical sales cycle is 60 to 90 days. The pipeline continues to grow for these new markets as well, and we feel like this could eventually be a powerful growth engine for the company. In addition to increase SharpSpring sales and marketing costs, there was also a cost increase related to having the GraphicMail team onboard for the whole quarter in Q1. And some sequential costs increases related to our annual audit fee, which we expensed during the quarter, in which the services are rendered, which is primarily Q1. During the last quarter we incurred significant acquisition-related cost, primarily related to the increase of the SharpSpring earn-out liability by just over $700,000. As I said earlier, we are confident that SharpSpring is on pace to reach its business targets and earn the full value of the earn-out liability. Even though we are confident the earn-out will be made in full, we are required to reflect the time value of money and the calculation of the earn-out liability that is on our balance sheet for each reporting cycle. So as we progressed throughout the rest of the year, we will see the earn-out liability increase over time, purely due to the passage of time, as we get closer to the ultimate payment date of April 2016. We now have $8.4 million on the books as liability as of the end of Q1, and we expect the remaining $1.6 million to impact our GAAP expenses over the next four quarters, with roughly $400,000 per quarter of expense through Q1 2016. We will need to continue to evaluate the earn-out over time until the ultimate payment date. With these acquisition-related charges, including increased amortization of intangible assets, we recorded a GAAP loss of $1.2 million or a loss of $0.21 per share during Q1, which was similar to last quarter. We recorded adjusted EBITDA of negative $106,000 in the first quarter, which was down slightly sequentially from negative $52,000 in the fourth quarter. Adjusted EBITDA adds back stock compensation expenses of $202,000, acquisition-related expenses of $752,000, restriction charges of $31,000, in addition to depreciation and amortization of $425,000. Core net loss for the first quarter was $151,000 or core net loss of $0.03 per share. Core net loss adds back stock comp expense, acquisition-related charges, restructuring cost and amortization of intangible assets and is presented with a tax impact reflecting a consistent overall rate with our GAAP financials. Cash was $2.2 million on March 31, 2015, compared to $2.8 million on December 31. In addition to our slightly negative EBITDA and cash paid per CapEx, restructuring and other activities, we also saw some timing differences on our payables and receivables that led to some movements in cash during the quarter. We have mentioned on the previous call, we expect to be near breakeven EBITDA during early 2015, with a goal to show some slight improvements over the course of the year. We also recognized that there maybe opportunities in the future to increase our investments more dramatically to capitalized on the full growth potential of the business. We will continue to evaluate those opportunities, as they arise over time, but currently remain committed to sensibly investing in the company without running large losses. We expect to remain close to breakeven EBITDA during the next few quarters with modest improvement expected in Q2. In summary, this was a very successful quarter for us, and to be highlighted by strong SharpSpring growth and an international product launch that was truly a collaborative effort across the company. Finally, Jon and I will be attending select investor conferences over the next several weeks, and we look forward to speaking with some of you at those events. Please check our website or download our IRF for more information on those upcoming events. That concludes our prepared remarks. Adam, would you please open the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Louie Toma with Craig-Hallum Capital Group.

[Louie Toma:]

I had a couple of questions. Can you give us the GraphicMail revenue number for the quarter and for the last quarter, just to kind of get some comparable numbers for the year ago and then this quarter?

[Edward Lawton:]

So we're not going to split out the segmented revenues by product going forward. What we did say was that Q4 revenue balance was around $1.1 million. And obviously, we talked about some of the headwinds in terms of currency and seasonality that we experience in Q1. We did take a step forward. We're not going to split out exact numbers on those product revenues, because there is certain amount of migration that's going on between the products and cross-selling, that Jon was referring to in his call notes. But incrementally, we took a step forward, specifically related to owning GraphicMail for the full quarter, and then some of that growth was offset by some of the headwinds in currency and seasonality.

[Louie Toma:]

And you did mention some SharpSpring revenues in the international market, can you quantify that?

[Edward Lawton:]

We experienced some sales during the quarter. The revenues through that international distribution channel were minimal during the quarter. SharpSpring traditionally has had a U.S. based sales force, and from time-to-time they would sell into international markets. But simply the new sales channel that we launched in Q1 didn't generate any meaningful revenues, although they are starting to see some sales come in later in the quarter.

[Louie Toma:]

And since the end of the quarter, how is April and May going?

[Jonathan Strimling:]

So Louie, to comment further on your last question, I think the important thing is we had a significant amount of annual recurring revenue, and we had issued a couple of releases that includes some statistics on that in terms of what it should may meet going forward. And obviously we have it reported out on April and May, yes, but the annual recurring revenue in terms of sales that we closed in Q1 is obviously carrying forward in this coming Q2 from an international sales perspective.

[Louie Toma:]

And from an integration perspective, I know you mentioned that you have integrated the email delivery system in your other piece of your business. Can you give us a sense for your roadmap to get to a fully integrated product or where you are along that process where you have email marketing, email delivery and marketing automation as one combined product or how should we think about that?

[Jonathan Strimling:]

So customers typically think of it first in terms of the front-end interface that they interact with. So a customer that's looking for marketing automation solution is looking for SharpSpring. But if they send a high volume, they actually need a robust delivery pipeline on the backend to make that happen. So what we have done and what we completed in the beginning of the end of Q4, and the beginning of Q1, was to fully integrate our SMTP relay backend with both the SharpSpring marketing automation front-end and the GraphicMail email services front end. So what that does for a customer is, if there is a customer who is interested in marketing automation they can get all the tools and the functionality that SharpSpring provides and they can now get it on this high volume base. This allows us to go up market and to challenge market leaders for much larger accounts than SharpSpring could previously pursue. So historically, and even through Q4 and most of Q1, the majority of SharpSpring sales have been to small businesses. However, we are increasingly seeing high-value accounts, gaining interest in the platform. And one of the reasons is, because we can now deliver for these high volume accounts. So previously, I mean, just to put the numbers around, previously SharpSpring could deliver for customers up to maybe a 100,000 emails a month, prior to the acquisition. Since the full integration our backend with their front-end, the SMTP services are capable of delivering for customers up to 100 million emails a month, which is literally three orders of magnitude higher volume. So it allows us to go after much higher volume accounts. So that technical integration is done with SharpSpring, the technical integration is done with GraphicMail. Now, those two products are separate and distinct, because the interfaces the customers expect and want to work with are different, but we are now able with both products do after much higher volume, higher value accounts. Is that clear?

[Louie Toma:]

And just to follow-up on April and May, so you're saying that you're seeing the same momentum that you had in Q1 carry into the last couple of months?

[Jonathan Strimling:]

Obviously, we haven't put out any numbers around Q2 yet, but we continue to be very positive on the business. Certainly, the accounts that we've landed in Q1, and we have announced adding certainly -- those would be additive in terms of revenue in Q2 as we move forward. And we look forward to continuing to work to accelerate international sales to continue to accelerate the growth of SharpSpring domestically, and then to take both of those solutions up market to higher value customers. And we see strong evidence that we can and we will be successful in each of those strategic moves to grow the business.

[Operator:]

Our next question comes from the line of Eric Martinuzzi with Lake Street Capital.

[Eric Martinuzzi:]

I wanted to take a deeper dive on the additional 149 customers that you brought on in Q1. If we could get just kind of -- if you could compare it maybe, because I think you closed on SharpSpring back on August. So just if you have maybe a six month view of how those new customers that you're bringing on are different or maybe how they're exactly the same as the people that you're adding at the end of last summer? And I'm looking specifically, the geography of who you're adding, the size of the accounts that you're adding, maybe contract wins things like that?

[Jonathan Strimling:]

So first of all there is significantly more accounts. So as we described we have more than doubled the rate of adding annual recurring revenue per quarter from Q3 of 2014 when we made the acquisition to now. So first of all in terms of the rate of adding revenues, that's definitely accelerated significantly, it's more than doubled. In terms of the mix, we are seeing a higher proportion. In fact, we're seeing a higher proportion of high-value accounts, and we're also seeing a higher proportion of international accounts. Although, we really were just starting international sales in Q1, and we really didn't kick that off until that meeting with country partners hosted at the end of January, and there is a 69 day close cycle, so we expect that to further accelerate. But in Q3 when we made the acquisition there were essentially no high-volume account, in fact the platform wasn't capable of handing them. So when we completed that integration, that tactical integration I just referenced at the beginning of this quarter, it enabled us to take on higher volume accounts. And we found that the high value accounts are representing a more significant fraction of our overall business. In addition, international sales have grown. It was true that SharpSpring would make some international sales from its U.S. direct sales force previously, but the presence of country partners around the world helping to drive those sales is now accelerating that international growth. Ed, do you have any further comments on that?

[Edward Lawton:]

Just a couple of things, small things to add. So one item that I would also point to is at the time of the acquisition, we were selling SharpSpring essentially with a slight discount on the first year and we've eliminated that discount, so we've essentially had a price increase for the majority of the domestic U.S. customers that would have bought SharpSpring. And then as we launch internationally, the price point is higher internationally as well. We've been pretty consistent in terms of the length of the contract and things like that, which is essentially month-to-month on the vast majority of the SharpSpring deals.

[Eric Martinuzzi:]

That's interesting, because I was actually curious to know what kind of competitive response you're getting. I understand, the Marketo's and HubSpot to the world, maybe focus a little bit up market, but they have to be noticing, in their own analysis of their own pipelines when they're not winning, and your name starts to show more frequently? Has there been any competitive response from those two players?

[Jonathan Strimling:]

Yes, they are certainly aware of us and they've written a defensive playbook, if you will, in terms of how to trade and win customers that we're also going after. And we actually hear about this from customers that we land, so they are certainly aware of us. And I think that's a testament to the strength of our product and the traction we're achieving in the market. It is true that we are particularly strong in the agency market, so from marketing agencies that work with multiple technologies, SharpSpring is often the choice. They may also support some customers with HubSpot, they may also support some customers with Marketo, but more and more they're turning to SharpSpring for new customers and to put new customers on our platform and that certainly has got us attention of the industry. And for us, it's a great channel. They help us with support. They help us get our message out there. And they help us get our product out there. So we've had a particularly strong presence in the agency market. That was an early focus of the company. We remained consistent with that and we intend to continue to play a pretty aggressive role in the agency market, because we see it as a strategic opportunity for our business.

[Eric Martinuzzi:]

And then lastly, on the gross margins. Good strong gross margins here in Q1. Pretty similar to what was in Q4. Is there any shift to be expected there going forward?

[Edward Lawton:]

No, we expect it to be pretty consistent going forward as well. And as we add revenues, we will add some variable costs like the content management resources and things like that, and an additional hosting capacity, but it should be pretty consistent going forward.

[Jonathan Strimling:]

And just to come back to that first question you asked about the mix of sales, when we commented we had an $1 million in annual recurring revenue in Q1. And we mentioned that we had the international sales component through the GraphicMail network. We estimate that that network added about a $125,000 of that $1 million in Q1. And those sales were larger sales that were done overseas. And we're finding that quite frankly the overseas markets aren't quite as competitive as the domestic market. They're a little bit less mature. They're more of a greenfield. We can go in with people that speak the local language that have been selling emails services in those markets for some times through the GraphicMail network. And we're seeing very immediate traction. I mean, considering we've literally met with these teams at the end of January, we reported $125,000 in sales in Q1, that's a pretty remarkable feat. And we're looking forward to seeing that grow as we move forward.

[Operator:]

Our next question comes from the line of Lisa Thompson of Zacks Investment Research.

[Lisa Thompson:]

I would like to go back a little bit more to SharpSpring and competition, and just how the whole business is evolving. Can you talk a little bit about where are most of the sales coming from? Is it SMTP going out and finding customers? Is SharpSpring doing it themselves? Is it SMTP customers being aware of your new products? Where does it come from? And then the second part would be, I know when you first launched SharpSpring you had a lot of competitive advantages. Has competition caught up to any features that make you less competitive or how is that evolving?

[Jonathan Strimling:]

So first of all, most of our growth is being driven by the SharpSpring products, so most of the sales are of the SharpSpring product. And while, we do see customers of GraphicMail and SMTP that migrate up to the SharpSpring platform, that's not been the majority driver of those sales. We've been directly targeting prospects. Often companies that were using HubSpot or Marketo with the SharpSpring solution, and putting that it in front of them, we have actually very, very high close rate, once we get somebody to a demo. And the reason is, in terms of features most of these solutions are pretty comparable in terms of the marketing automation space. They do have some features we don't have, but we also have some features they don't have. And essentially from most of the markets needs, the feature set is reasonably comparable. The flexibility of the SharpSpring platform is definitely a selling point, the fact that they can work with whatever other systems and tools are in place, is definitely a selling point for SharpSpring and that has not changed. In addition, SharpSpring is more affordable. And we think that being positioned as the company that is both more affordable, we're selling at a lower price. But we're actually doing in terms of the overall operation of our company. We're actually roughly at breakeven, we're selling it against the higher price solutions sold by competitors who are marketing has extremely extensively and spending a lot of money on their sales and marketing, we think it's hard to for them to come down in pricing to match our price, and we think we're in a very stable situation where we can continue to grow very, very aggressively at near breakeven margins.

[Lisa Thompson:]

So you still are the only ones that let you use, like sales force and the other CRM products, or there's other anybody else open that up?

[Jonathan Strimling:]

Well, certainly other companies have integrations, and so you can certainly find ways to work with other solutions and with sales force. What I would say is our architecture is very flexible and we are the only one that offers the choice of using the built-in CRM over these interfaces. HubSpot is in beta with the CRM. We were first to market with the CRM solution. HubSpot does offer a CRM solution, now to customers as well now. And they're also finding -- I think that substantiates the value of the solution and the path that we were on. They don't offer call tracking, we do offer call tracking. And so there are features we offer and they don't. There are also some features that they offer that we don't. But at the end of the day, most of these packages will do what the customer requires, and it's a matter of how easy it is adopt, how easy it is to use, and frankly what the cost are, and the support that goes behind it.

[Lisa Thompson:]

So is there any plans you have for the next 12 months or whatever in changing marketing, or adding to sales? What's the plan?

[Jonathan Strimling:]

We've certainly doubled down and we've increased the level of investments on SharpSpring sales and marketing. And we've seen an immediate return on that investment. So when things work that way, you tend to continue doing them. So to the extent that we can continue to invest in SharpSpring and to funnel available investment resources within the company to pursue that, we're going to do that. And we expect to continue to accelerate growth and momentum.

[Lisa Thompson:]

Does that include hiring more staff in marketing?

[Jonathan Strimling:]

So we have hired more staff in marketing, more staff in sales. We have actually built out a pretty strong marketing team over the last quarter. Most of our marketing team in fact has come aboard during Q1. We have a quarter now that has locked in on a third -- I should say, locking in on a strategy that's working for us and we just need to replicate it. So we won't do as much hiring in marketing. With regard to sales, we did hire some folks in sales as we scale the business. We hired a direct sales person to launch services for us in England. That's going very, very well. Having a single person on the ground is making significant difference in our sales traction in that market and we plan to replicate that in a couple of other direct sales markets, in addition to our country partner network. But again these are relatively modest investments with a very, very quick payback. So to the extent, we can continue to do that, and we'll obviously continue to do that.

[Operator:]

Our next question comes from the line of Mark Tobin with Digital Offering.

[Mark Tobin:]

On SharpSpring, I noticed certainly the language is more positive, where you shifted to from meet to exceed, the target at the end of the year to exceed. Can you give us a sense of the annual revenue run rate at the end of the quarter, just so we can get a sense of how much ground there is to cover? I get the sense that it's really a question now of how much are you going to exceed the target by versus whether you're going to hit it?

[Edward Lawton:]

So we're not going to breakout the different revenue components separately going forward. We will continue to report on SharpSpring sales, because we think that that's an important metric and that the community needs to know and understand that information. It's still our smallest component of the business in terms of the three kinds of product groups right now, but based on the strong sales in the last few quarters and the growth trajectory of the business, we feel comfortable now saying that we were going to exceed that $5 million annual run rate. We're not at that run rate now obviously, but with the growth trajectory the business is on and the acquisition rates that we're seeing, we feel comfortable saying that we're going to exceed that target.

[Mark Tobin:]

And going back to the topic of the international aspect, can you walk through or provide some insight into as that mix of international builds up, is there a noticeable difference in the economics of international business versus domestic business.

[Jonathan Strimling:]

So yes, there are some different -- Ed, do you want to take this one or should I take this?

[Edward Lawton:]

You can go ahead.

[Jonathan Strimling:]

So there is a couple of dynamics we're already observing. The pricing overseas is not as competitive, so the average price for a similar installation is typically priced in terms of U.S. dollar, in terms on the order of 25% to 30% higher overseas. We do also pay a portion of our revenues back to our country partner who is selling through a country partner network, that's not present if we're selling directly, and there are some markets where we go directly, so others where we go through country partner. So the net back to us is actually reasonably comparable to what we're seeing in the U.S. for similarly sized installations. However, what we are seeing is a significant interest from larger companies overseas. So it turns out that the overseas markets are a little bit less mature in terms of the adoption of marketing automation, which means that larger companies tend to be the first movers, the average account size tends to be larger, and that tends to be larger revenues for us per user, significantly higher overseas. So that's a positive trend. In the U.S., certainly the market has migrated down to smaller business that had historically been buying our SharpSpring product. Again, even in the U.S., we want to migrate up market to some larger customers now that we have that capability as well. So does that answer your question?

[Mark Tobin:]

That does. And just to understand how the payback to the country partner works, does that hit cost of goods sold?

[Edward Lawton:]

In this case, it will be a sales and marketing expense, because they're not providing support to that customer base. In the case of GraphicMail, when we go through the resellers, a portion of the fees, it does sit up in constant sales, because they're providing first level support to the end customers.

[Mark Tobin:]

And looking at operating expenses during the quarter, basically just as you discussed in investments and growth, were there any anomalies in sales and marketing or G&A during the quarter that won't continue going forward?

[Edward Lawton:]

Jon, just to touch on a couple of things. There were a couple of things that hit in Q1 that are not going to essentially recur every quarter. And just to highlight those too, in my call notes I was talking about the international product launch that we did in January through the country partners hosting the summit. That was some incremental costs in Q1 that wouldn't recur each quarter. And then the other item was higher G&A professional services, as we incurred the bulk of our audit fee during Q1, and obviously that's an annual event, so that won't happen every quarter either.

[Operator:]

Our next question comes from the line of Jason Revland with Blueprint Capital.

[Jason Revland:]

With respect to SharpSpring, as you are targeting marketing agencies as your customers there, the traction you've shown in about a year is fairly impressive, which I think speaks the value proposition you're offering there. Am I to better understand the opportunity set with agencies as far as the size of the market, whatever is the penetration rate you think they are at, with respect to adopting these types of solutions? And specifically, are these marketing agencies switching current competitors or are they trying out marketing automation with SharpSpring as a first time opportunity?

[Jonathan Strimling:]

Well, I'll take that one. So across the country there are probably, on the order of 30,000 digital marketing agencies that are working with the small businesses all over the country, and the number of business they work with is orders of magnitude higher, and when we're talking about agencies that have multiple employees, not single sort of sole proprietorships, then there might be higher numbers if you included all of those. But many of them have actually, are aware about marketing automation solutions. Most of them are certainly aware of marketing automation solutions. Some of them are using a competitors' solution, and they may have 20 customers at their agency services, of which maybe two or three are using competitive marketing automation solutions, such as HubSpot or Marketo, but what we would like to do is capture the balance of their end-user business. So what SharpSpring does is it offers them an affordable way to bring new users under market automation platform, it also allows them to sell other agency products and services along with the automation product. So we give them an opportunity to grow. Quite often we don't -- if they have a customer that's already on HubSpot, we might not win that customer from them. And we don't say to the agency, you have to migrate a customer that's on HubSpot to us, if you come work with us. What we do is we give an alternative to land the next customer and more and more agencies are looking at the SharpSpring solution, saying it provides, what the customers needs, it's more affordable than these alternatives, and so they're driving more of their new business to SharpSpring. So when a new end-user comes to agencies, these agencies may have been familiar with marketing automation before, in fact more often than now they are, and we have better success selling through agencies that have used the competitive product. But when they try ours, they likely find it's very easy to implement and very easy to work with, and allows them to bring on a whole new class of customers. Is that helpful?

[Jason Revland:]

Very helpful. So is it a fair takeaway that marketing agencies have been potentially use both SharpSpring and a larger competitor, as a way of completely segmenting or attacking the market as far as providing services to their larger customers as well as their smaller customers, who might have previously kind of been unable to pay for automation solution?

[Jonathan Strimling:]

That's absolutely true. And I think in terms of penetration, you can see in terms of the growth as the marketing automation industry overall, there is still plenty of room for growth for the industry overall. We're a small sliver of the industry in total, and we work for a company that's only been around for a year. We're certainly creating a name for ourselves and a presence. But despite a room for us to grow within that market, the market as a whole is growing. And if you talk to those agencies, within their customer base, there is actually plenty of room for additional penetration of marketing automation. And I guess I'll just add to that, Jason, just to make one more comment. We're probably anywhere depending on where you go in the world, we're anywhere from one to four years ahead of the rest of world in this area. So when you look at other countries internationally, England's actually quite advanced, and probably on par with the U.S. But with that exception, most of the rest of world is couple of years behind in terms of penetration, which means there is more of a greenfield and there is even greater opportunities for rapid penetration in market share.

[Operator:]

Our next question is a follow-up from the line of Louie Toma with Craig-Hallum Capital Group.

[Louie Toma:]

Just one quick follow-up. So I'm trying to come up with a pro forma number, and I know you're probably going to disclose it in your 10-Q. But can you give us what the GraphicMail revenues for Q1 '14 was?

[Edward Lawton:]

We're not going to disclose those revenues by product separately. We have had some migration between the products, so it gets to be a little bit of a gray area in terms of products. When you look at the actual product revenue quarter-over-quarter, we're seeing some blended sales, as John talked about in his call now. So there is a few factors why we're not going to do it. But we're not going to break them out separately. What we talked about was, in Q4 we gave out the GraphicMail revenue of about $1.1 million --

[Louie Toma:]

No, I'm not talking about this quarter, I'm talking about the year-ago quarter, so we can get a sense for the combined company versus your core business and your GraphicMail business from what GraphicMail was a year ago. And this is [multiple speakers] number which you had probably disclosed in your Q, right?

[Edward Lawton:]

So that's actually a little bit of a tricky answer as well. GraphicMail had different accounting policies than we did, specifically related to the reseller revenues, and how they recorded the revenue on the arrangements that they sold through their reseller, country partners. So in a lot of ways that's actually an apples to oranges comparison as well. And I don't have that number at hand at the moment here.

[Jonathan Strimling:]

I think it's important to understand that one of the dynamics, which we're actually to promote within the company is migration in up-sell across products. So when we have SMTP customers that have an interest in front-end, we're actively migrating them up to GraphicMail. When we have GraphicMail customers that have an interest in marketing automation, we're actively migrating them up to SharpSpring. And some customers are actually buying multiple solutions, where they might buy, they may actually pay for each services or pay for relay services that are embedded in the charges that they're being built for the GraphicMail services or for the SharpSpring services. So the whole distinction between the products is getting a little bit grayer in terms of how we sell, how we support sales. Certainly on the cost side, it's very much a blended team that's making this all happen. But even on the revenue side, there is a little bit of trickiness in terms of how this account for, and it's one of the reasons we're not trying to break this out in great detail for everybody.

[Louie Toma:]

I know you're not going to break out now and that's because you're integrating that. But if we knew what GraphicMail was a year ago, then we could get a sense for what the synergy revenues contributions are. And the other thing that you guys are doing that are driving revenue growth, we can have an apples to apples year-over-year comparison number. That's all. I'm sure it will be in the Q, so I can just follow up that.

[Jonathan Strimling:]

Okay.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for closing remarks. End of Q&A

[Jonathan Strimling:]

Well, we just want to thank everybody for joining the call today. It's been a pleasure to speak with you, to be able to answer your questions. We're pleased to be able to report out on the results of the quarter, and we look forward to continue dialogue with all of you.

[Edward Lawton:]

Thank you very much.

[Operator:]

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.