SharpSpring, Inc.
Q2 2014 Earnings Call Transcript

Published: 15 Aug 2014

[Operator:]

Greeting and welcome to the SMTP Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is been recorded. I would now like to turn the conference over to your host Rob Fink of KCSA Strategic Communications. Mr. Fink, you may begin.

[Rob Fink:]

Thank you. And thank you all for joining us today for the SMTP second quarter 2014 earnings call. Hosting the call are Jon Strimling, Chief Executive Officer, Kevin Marcelo of Rivers & Moorehead, who has provided oversight on the Company’s financial reporting as it sought out a full time CFO and Todd Donahue, an experienced CFO who has been helping the company with its acquisition strategy on a contract basis. Before beginning, we 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 these forward-looking statements. The Company does not undertake to revise any forward-looking statements to reflect future events or circumstances. With that, I’ll now turn the call over to Jon. Jon, the call is yours.

[Jon Strimling:]

Jon

[Kevin Marcelo:]

Thank you, Jon and thank you everyone for joining us on today's call. For the second quarter of 2014, SMTP recorded revenue of $1.48 million, a year-over-year increase of 6% from $1.4 million in the second quarter of 2013. We continued to drive positive results with existing customers while signing new customers onto our platform. Operating expenses for the quarter totaled $893,000; net income was $150,000 and earnings per share were $0.03. Net income and earnings per share declined year-over-year as expenses increased as a result of initiatives related to the recently announced acquisitions. As Jon mentioned earlier, many of these expenses were one-time costs, while others will be offset from increased sales as a result of the M&A activity. Cash and cash equivalents were $11.5 million at June 30, 2014, compared to $11.8 million at March 31, 2014. With that I would like to turn the call back to Jon. Jon?

[Jon Strimling:]

Thank you. While our goal is to continue to drive organic growth, our belief is that the large majority of our growth in the coming years will come through our acquisition strategy. We believe that by continuing to identify accretive acquisitions that give us access to new channels and markets and carefully blending in a small number of strategic acquisitions, we can grow to be one of the largest and most powerful players at email marketing on a global basis. With the acquisitions of GraphicMail and SharpSpring, we now offer a more robust, comprehensive suite of affordable marketing tools and delivery. We will leverage our robust delivery and support, SharpSpring’s industry-leading technology and GraphicMail’s worldwide distribution to build our business. We will continue to operate all of our operations with an eye to both cost and growth and we’ll continue to take care of the customer first. We had previously announced we were looking to fill our CFO role and yesterday, we announced that Edward Lawton will become the new Chief Financial Officer of SMTP, starting on September 3rd. Ed has over 10 years' experience at NASDAQ-listed companies, most recently including BottomLine Technologies, where he was a Senior Finance Director. In his role, he was responsible for integrating over 20 acquisitions, including multiple international and technology acquisitions. Previously, Ed served as Corporate Controller at Trico Marine Services where he was responsible for their worldwide accounting functions. Ed is a CPA and brings 15 years of public company financial reporting, along with proven expertise, helping companies achieve accelerated levels of financial success via acquisitions. We feel fortunate to have him joining our team. And finally, I would like to comment about the future of our dividend policy. SMTP had historically paid a substantial majority of its earnings in the form of a dividend. After the Company completed its $11.5 million secondary offering in the first quarter, our dividend grew by about 50%, resulting in dividends rising above free cash flow from the business. Simultaneously, we felt the best strategy for the business was to invest in the resources to support the aggressive M&A activities we have described today and that has decreased earnings per share in the near term. As we move forward with the business, we see continued opportunities for both accretive acquisitions and profitable growth. In light of this, we have chosen to continue the current dividend, despite it exceeding cash from operations in the near term. In closing, I want to note that SMTP is following through on its commitments to its shareholders. In Q1 of this year, we told investors we wanted to raise capital and pursue a strategy of making strategic acquisitions that broadened our product line and made financial sense. The recent agreements with GraphicMail and SharpSpring represent tremendous progress in pursuing that strategy in just two quarters’ time. More recently we let you know we would be moving forward to bring on board a CFO with strong public company financial reporting and M&A experience. We’ll have Ed Lawton joining us in that role shortly and as I mentioned previously, his experience is very well suited to execute on our intended and previously announced strategy. Our strategy is unchanged and is fundamentally as viable as the day I started with SMTP, which coincidentally happens to be one year ago today. We will continue to pursue this balanced approach of strategic and accretive growth. We will continue to leverage our robust capabilities in delivery and customer support. But with the acquisitions of GraphicMail and SharpSpring, we can do more. We will challenge some of the largest players in the industry on user interfaces and features, while still providing the world-class delivery on which we have built our business. We will do this on a global basis via local sales offices and independent distributors spanning 14 countries while still providing a level of service and support that earned us our positive reputation in the industry. After announcing these events to the teams of GraphicMail, SharpSpring and SMTP, I can tell you that there is an incredible air of excitement among the team. The synergies that make sense to you as investors also make sense to the team at an everyday operating level -- and maybe most importantly, they make sense to our customers and our partners, too. This has been our first earnings call and we’re looking forward to sharing additional positive news on future calls as we move forward. Operator, you may now open the call for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Alex Silverman with Special Situations Fund. Please proceed.

[Alex Silverman:]

Can you walk us through what’s necessary to get GraphicMail closed by yearned? What’s between here and there?

[Jon Strimling:]

So we’ve signed a definitive agreement to acquire GraphicMail and the parties are working together to execute on the closing. There are a number of new moving pieces. GraphicMail historically has actually been a number of separate entities operating in different parts of the world in terms of the legal structure. So the legal structure somewhat complex and we want to make we’ve addressed all the issues, we’re fully compliant with all the local laws as we move to integrate the firms.

[Alex Silverman:]

Okay and the stock based portion of GraphicMail and the potential stock base portion of SharpSpring earn out, what are those prices pegged to it at this point?

[Jon Strimling:]

Those prices are tied to the stock price of the time of issuance of the stock. So when we close GraphicMail that will be at the time -- I think I believe it’s 20 days prior to close, it's defined in the definitive agreement, but I believe it’s an average of 20 days prior to close and for SharpSpring it would be the price at the time that earn out is issued typically which will be first quarter of 2016.

[Alex Silverman:]

Okay and are there bands around that in upper or lower limit?

[Jon Strimling:]

No. On the Sharp -- let me clarify, actually in the SharpSpring one, it can’t be higher than I think 120% of the stock price over the six months prior to issuance, which would be the fourth quarter of 2015 and first quarter of 2016.

[Alex Silverman:]

Okay, that’s helpful. I believe you said GraphicMail is profitable at this point?

[Jon Strimling:]

GraphicMail is profitable at this point.

[Alex Silverman:]

Okay, and how much is SharpSpring burning at this point?

[Jon Strimling:]

SharpSpring is approximately breakeven on a cash basis and slightly negative on a GAAP basis.

[Alex Silverman:]

I assume cash flow because folks are paying upfront for a subscription.

[Jon Strimling:]

That’s correct.

[Alex Silverman:]

Okay and what is there -- roughly what is the monthly or quarterly expenses just, so we have an idea of what the nod [ph] is they have to cover?

[Jon Strimling:]

So the Company is at about -- in terms of -- if you took the last month and you looked at revenues, it's just over $1 million in revenues and just over $1 million in expenses, just to sort of put it in prospective on an annualized basis.

[Alex Silverman:]

Okay that’s helpful. And then, what was spent on your side in terms of legal and M&A and all that kind of stuff in this prior quarter?

[Jon Strimling:]

So to some extent, that’s included in the queue although I don’t think that all of the expenses get fully captured on the defined line items. For example my time is not broken out separately. I'm going to refer you to the footnotes in the management discussion on the Q1 for the specifics because I don’t want to speak here.

[Alex Silverman:]

Fair enough, great. Last question, it appears that the U.S. portion of GraphicMail was based in Florida and similarly SharpSpring is in Florida. Do you plan on either moving the Company there or consolidating someplace else? Or do I have my information wrong?

[Jon Strimling:]

You are correct both SharpSpring and GraphicMail do have significant operations, particularly sales operations in Florida. The companies will continue to operate as independent units in terms of their path to market in maintaining the existing teams. There will be some synergies between the firms and we’re still exploring how to best take advantage of those synergies.

[Alex Silverman:]

If nothing they’ll share space right?

[Jon Strimling:]

Yes. Well, the two in Florida actually, one is in Miami the other one is in [indiscernible]. So there’s geographic distance and I don’t think we'd want to combine those offices.

[Operator:]

Thank you. Our next question comes from Craig Beresin with Kalman Capital. Please proceed.

[Craig Beresin:]

Two questions. One, could you just tell us a little bit more about how you’re going to operate the two acquisitions and how customer interaction is going to be handled and what that’s going to look like?

[Jon Strimling:]

Sure. I think it may be helpful context to understand that in the email market, there’s really three distinct functions that the Company serve. SMTP.com provides an SMTP relay service, GraphicMail provides what’s referred to an industry as an ESP and email service provider. They provide basic tools for sending newsletters and communicating with customers. And then SharpSpring provides advance communication technologies, including triggering emails and sophisticated analytics. So they are three different segments of the email market. We have teams in each of the three companies that are dedicated to supporting the appropriate functions. And the intent is to continue to operate them in terms of the customer facing portion of the interaction independently. So the teams that have experience, [indiscernible] been working with the marketing automation, continue to work marketing automation. The more significant exception that is GraphicMail. GraphicMail because of its international distribution reach, we expect to use to leverage to promote sales of SMTP relay services and at SharpSpring marketing automation services. So they are already in email markets around the world. We’re going to broaden their product offering and allow them to bring a broader suite of services to customers. Notably in terms of price point, the GraphicMail product is priced in between SMTP services on the low end and marketing automation services on the high end. So already it was not unusual for GraphicMail to run into a competitive situation in a sales goal, where they would find that the customer was either migrating up to a marketing automation solution or migrating down to an SMTP solution. In those cases, that team now has a competitive offering they can offer to the customer and more importantly they actually have a full suite that they can offer to customers in those various markets. So the beauty of these acquisitions from an integration perspective is that they're independent teams. They can stand on their own two feet and aren’t huge integration risk. In terms of the back -- sort of the back office operations and the technology behind us, SMTP's delivering capability is already set up to serve customers like SharpSpring and GraphicMail. So when we take over the delivery operations, that’s what we do every day for other customers and that’s seamless to the end customer, who won’t even see that, except that they will get the benefit, if they have a problem with delivery being able to call into SMTP.com’s 24x7 delivery support center to get support they were not able to get in the past. So that’s how the firm work together from a customer perspective.

[Craig Beresin:]

So as far [ph] from the international effectively. So to me that sounds like the close rate -- so if 10 [ph] leads internationally, is this -- do you think this is going to materially enhance the close rate of how many leads are in the customers?

[Jon Strimling:]

Yes. In fact, when we spoke to GraphicMail and I personally travel to speak to some of the distribution partners, it is not uncommon for them to have lost business, either as I said for customers migrating up to a more sophisticated solution or migrating down to an SMTP service. So they were trying to figure how to bridge those gaps. They also have lost a significant amount of business because they didn’t have the capability historically -- GraphicMail did not historically have the capability to deliver high volumes of email at the kinds of rates that SMTP.com delivers every day. And so because they were limited they were actually using a mail delivery system that really couldn’t scale with where they wanted to take the business. Our ability provide delivery of scale and support that goes with it is actually -- if nothing else they just use us as a supplier would make a material difference in their revenues.

[Craig Beresin:]

Secondly, can you just elaborate a little bit more about the management, is now a combined firm and what that’s going to look like and how it's going to work?

[Jon Strimling:]

Sure. Thank you for asking that question. In any -- in the growth of any company you need three things. You need a great team, you need capital and you need technology sometimes. With regard to team, it's really the foundation of how you build the business and we’re excited to welcome the GraphicMail and the SharpSpring teams to our organization. What’s interesting is they’re still and it’s not by action -- this was part of our acquisition and strategy -- they filled key functional capabilities that we’re trying to address within our organization. Historically if I look at SMTP.com and I'm being candid, we were very good at this delivery technology, we’re very good at customer support around it, but we were not stellar at product development in developing customer facing product with the kind of interfaces that GraphicMail and SharpSpring both bring to the table. So they bring great experience in product development and pulling sort of use needs into a technical product that goes out to the market and has sophisticated user interactions. In addition we didn’t have -- while we had international sales, most of our international sales were via the web. So what we didn’t have is within the firm we didn’t have that international experience which is the life blood of GraphicMail and which from the day they started that business they’ve been very focused on having a global presence and figuring out how to support it. So we bring really some strength in technology, we bring some strength in international operations and we bring real entrepreneurial spirit from both of these firms that have been very scrappy, scrappy SharpSpring startup, GraphicMail has been an ongoing business growing organically but they’ve manage to figure out how to grow with very, very small budgets, but doing it very, very cost effectively in the markets and making tremendous progress. So we're excited to welcome these teams to our team and we're looking forward to working with them as they go forward and I will say it seems to be mutual. Rick Carlson who runs SharpSpring and Nick Eckert who runs GraphicMail couldn’t be more excited about having access to resources, the delivery capabilities and the synergies that we’re talking about with you today.

[Craig Beresin:]

Excellent. One more, just to help me think about looking further out with the addition of these two companies, how I think about your long-term acquisition strategy and how this now new larger SMTP, ESPs are coming. How does that affect that? If you could tell us a little bit more about that that would be great?

[Jon Strimling:]

Thank you, Craig, that’s a great question. One of the reasons that we picked these two targets out of a suite of possibilities we looked at from an acquisition perspective is that these two were synergistic with many other companies that we looked at acquiring but chose to acquire -- chose not to acquire that way. Two was enough to buy off in a quarter. So what we found is the fact that we now cover the full -- we cover the three segments of the email marketing industry, we cover marketing automation, we cover being an email service provider, we cover SMTP service, means we're reasonably well positioned to understand each of those segments in the industry and potentially make additional acquisitions that would fit in. Additionally on a global basis, GraphicMail’s global footprint gives us the opportunity to look at any Company in the world and to fairly readily integrate it into our operations. So not only from a team and a capability standpoint in regards to your last question but also as we move forward with regards to geographic location, we're now positioned to buy really any business in the email market to support it well with robust delivery, to support it well with local support in the nearby country and to have the technology foundation. And one of the great things about both of these companies, they bring a foundation in product development and technology as well to integrate and to manage those integrations in a way that we couldn’t have done previously without these acquisitions.

[Craig Beresin:]

A follow up. So my takeaway from your answer is that once these -- you’ve integrated these two firms and you’ve become the larger entity, future acquisitions and pertaining [ph] to what you just said and explained is that to me future acquisitions would be much more accretive or more accretive financially and operationally. Is that the right take away from what you just explained?

[Jon Strimling:]

Yes, certainly I hope. I think and that would be our intent. What’s beautiful is we're now in a position where we can look at an acquisition and really anywhere in the email space, anywhere in the world, and we're close enough to it that we could look at it seriously and integrate it fairly seamlessly into our offering. And the ability to look at that large number of potential acquisitions is what allows you to pick out a small number that will be particularly accretive.

[Craig Beresin:]

It’s fantastic, it’s amazing, congratulations. And looking forward to everything in the future. Great job guys.

[Operator:]

Thank you. Our next question comes from Lisa Thompson with Zacks Investment Research. Please proceed.

[Lisa Thompson:]

I just have a few questions about the transaction and the competition. My first question is what will be your share count when these deals close?

[Jon Strimling:]

We have -- this answer is going to approximate. I'm going to refer you to our filings for the specifics. We have approximately 5 million shares outstanding with about 6 million on a fully diluted basis, if you include everything in our stock options plan which has not been issued yet. The acquisition of SharpSpring is for cash in the near term and will not have an immediate impact on share count. In approximately a year and half after the first -- after our 2015 earnings are recorded at the end of the first quarter of 2016, we will issue up to -- assuming that they would hit their earn out target, we will issue $4 million in stock priced at the price of the market at that point. So the number of shares that would be issues is indeterminate and is a function of the share price at the time. With regard to GraphicMail, we will be issuing -- we will be making that acquisition in the near term for $2.6 million in cash and $2.6 million in stock. The stock will be priced at the market on an average of a short period before the close. It might be 10 or 20 days if I remember. We expect that to close in few months and the share count there will be a function of the market price at the time.

[Lisa Thompson:]

Okay. So just using a napkin, it looks like your Company will double revenues next year? Does that seem to be ballpark?

[Jon Strimling:]

Yes.

[Lisa Thompson:]

Okay. And now with these two companies adding to your product portfolio, who are your current competitors and who will they be in the future as your capabilities change?

[Jon Strimling:]

Sure. So today our competitors tend to be people in the SMTP relay business that span from transactional senders such as SMTP2Go, SendGrid, Amazon, SES that typically provide a more automated transaction for sending relays and less of a customer service approach than we tend to focus on and they tend to work in the transactional space, which tends to be password resets and order confirmation as opposed to the marketing email space where we've typically provided those SMTP relay services. Now we’re in a much -- let me be actually clear -- that segment, the SMTP relay segment is a very small fraction of the overall market. More than 95% of the market is using integrated solutions that provide campaign management, such as the solutions that GraphicMail and SharpSpring provide. To provide a view of the overall market for email, the largest portion of the market is served by email service providers that fall into the category that GraphicMail serves. The second largest and I would argue, fastest growing segment from a revenue growth standpoint is actually the marketing automation market, which has been growing fairly rapidly. And then the SMTP relay services as a distinct category are actually a small fraction of the overall market because most customers are going for these more integrated solutions. So it greatly expands the addressable market and there really isn’t a customer -- there aren’t many customers in the email market that we couldn’t target with one of these three offerings.

[Lisa Thompson:]

So what are the names of the companies that you think you'll be going up against?

[Jon Strimling:]

So GraphicMail is in the same segment that is served by some of the big names in the industry that you would know might include MailChimp or Constant Contact. And on the high end, we think we can actually pick off in terms of the functionality that GraphicMail already has. We think we can actually start picking up customers from ExactTarget and other higher end solutions and the email service provider market. In terms of the marketing automation market, SharpSpring is competing with companies such as Marketo, Eloqua, HubSpot, Act-On. These are all companies that have offerings that have been growing strongly. The market for marketing automation is growing strongly and SharpSpring has found that it can go into customers of these existing solutions and go head-to-head on with them and win on features and on the value that they provide.

[Lisa Thompson:]

Great. So to do this, what do you might have to change in your sales and marketing methods? Are you going to need to hire or change just distribution channels, what’s your thinking?

[Jon Strimling:]

I think the first and foremost think is cross-training. So we want to make sure that the sales team, in particular of the international sales team of GraphicMail is trained in our SMTP services, our SMTP relay services I should say as well as the SharpSpring marketing automation technology. Certainly, we hope to grow our sales force as we grow our revenues, but we’re going to start by training and cross-training the different teams so that we’re aware of the full range of offerings we can provide to customers and we’ll try -- and then as we find that we’re trying traction in particular markets, the best thing in the world is to scale sales in response to market demand.

[Lisa Thompson:]

Okay, so what is the sales force count at the three entities right now?

[Jon Strimling:]

Sure. I'm glad you asked that question Lisa, and one of the most compelling reasons for buying GraphicMail is the answer to that question. So historically when I joined SMTP.com a year ago, we had two people in sales and we had nobody in marketing. Today we have four people in sales and two people in marketing. As after the closing of these transactions, with GraphicMail alone, GraphicMail has about -- GraphicMail sales force is in two components, it has an internal sales force and then it has an external network of country partners that are typically independent firms that have been on the street in different countries, which are largely dedicated to selling the GraphicMail products and services. So in terms of their internal team, there is some crossover between sales and support personnel, but you’re talking on the order about 10 people in sales functions internally. Well I actually [indiscernible] 10 to 20 people depending on how you count in the GraphicMail team and the division between sales and support. As you get to your external country partners, there's roughly another 50 people spread all over the world working to drive sales of these products and services. And then if you look at SharpSpring, there is another sales team there of about five. So when you look at this, we’re going from a sales team of four to a sales team of more than that of those numbers, figure out how large it is, but it's certainly more than 60 or 70 people that are out there all over the world selling our products.

[Lisa Thompson:]

Well, that sounds like a huge plus.

[Jon Strimling:]

Absolutely.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Jon Strimling for closing comments. Jon Strimling Thank you. I would like to thank our team members around the world for enabling strong financial performance, the acquisition team for helping execute on these M&A activities and I want to thank everybody who attended our call today. We look forward to keeping you updated on our progress.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.