SharpSpring, Inc.
Q3 2014 Earnings Call Transcript

Published: 14 Nov 2014

[Operator:]

Welcome to the SMTP Third Quarter 2014 Earnings Conference Call. All participants are in listen-only mode. Following management’s formal remarks, instructions will be given for the question and answer session. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to turn the call over to Jeffrey Goldberger of KCSA Strategic Communications.

[Jeffrey Goldberger:]

Thank you, operator. Good morning everyone and thank you for joining SMTP’s third quarter 2014 earnings conference call. Representing the Company today are Jon Strimling, Chief Executive Officer and Ed Lawton, Chief Financial Officer. Before beginning, 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 these 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 management will make reference to Adjusted EBITDA, which is a non-GAAP financial measure, presented as a supplemental measure of the Company’s performance. A reconciliation of net income (loss) to Adjusted EBITDA is included for your reference in the financial section of the Q3 2014 earnings press release and made available on our website. With that, I’ll turn the call over to Jon Strimling. Jon, the floor is yours.

[Jon Strimling:]

Thank you Jeffrey and welcome everyone. Before turning the call over to Ed to discuss our financial results, I’ll provide a review of our overall operations as well as give an update on the acquisitions and integration of GraphicMail and SharpSpring. I am pleased to report that during the third quarter we executed well against our long term growth strategy. Since being named CEO roughly 15 months ago, it’s been my stated goal for SMTP to grow both organically and via strategic acquisitions. Successfully completing the acquisitions of SharpSpring and GraphicMail has been a real game-changer for SMTP. These acquisitions have transformed the Company from a niche player in email delivery into a fully integrated global provider of a range of email solutions. GraphicMail and SharpSpring allow us to address a much larger portion of the market and to effectively compete against the largest competitors in the industry. While delivery is a critical aspect of any email program, less than 5% of the market buys the type of stand-alone email delivery services SMTP historically provided. In contrast, with the addition of SharpSpring and GraphicMail, we now have solutions that address the needs of more than 90% of the companies that send email – providing a range of comprehensive solutions including campaign management, marketing automation and analytics, all supported by SMTP’s robust email delivery capabilities. Before providing an update on our integration activities, let me provide a quick overview of GraphicMail and SharpSpring. GraphicMail, which we closed in October, has historically provided cloud-based email marketing solutions to small and medium-sized businesses, generating roughly $4 million in annual revenue. GraphicMail has a history of profitability and we expect it to be immediately accretive to SMTP. In addition to a strong product, what sets GraphicMail apart and what we expect to capitalize on is the global reach of its distribution channels, which currently includes 14 countries and 12 languages. Having boots on the ground in these geographies gives SMTP a critical competitive advantage. In addition, coupling SMTP’s core email delivery platform with GraphicMail’s robust front-end customer interface will allow us to target larger and more profitable customers on a global basis. Switching gears, SharpSpring just this year launched one of the most advanced, next-generation marketing automation solutions available. The SharpSpring product is the first marketing automation solution to provide fully integrated CRM and call tracking functionality. Although the product has been on the market less than 12 months, VentureBeat and Datazyne recently reported SharpSpring is now in the top 10 in terms of installations, #8 in new customer additions in October, and had the lowest rate of attrition of any major marketing automation provider. We continue to steadily win customers from competitors like Hubspot, Marketo, and Act-On. While SharpSpring’s historic revenue base is largely domestic, we are currently in the process of launching SharpSpring rapidly and globally through our GraphicMail international sales network with local sales representation in 14 countries. SharpSpring represents a tremendous opportunity to accelerate our growth and has the ability to take market share from major players like Marketo and HubSpot. Based on SharpSpring’s current growth rate, it is on pace to enroll customers representing more than $5 million in recurring annual revenue by the end of 2015. Needless to say, we have aggressive growth plans for SharpSpring and will be investing additional capital in this unit. As I mentioned on the last earnings call, through these acquisitions, we have dramatically expanded our sales team. Historically, SMTP had just four local sales and support people in the US. We now have approximately 55 people spanning global markets, complemented by a similar number of sales and support personnel that are selling our products but are employed by our country network partners. Now that we’ve closed both deals and are taking initial steps to integrate the firms, we are even more convinced of the benefits of the combination. We have begun training our country partners on the different products to create cross selling opportunities. In fact, we are already realizing sales from cross-referrals across the business units today. We are excited by the initial progress from these activities and will provide updates during future communications. In terms of investments, we will focus on bolstering our sales team across all three businesses, with a particular focus on capitalizing on the opportunity we see for rapid growth at SharpSpring. At the same time, we have identified areas of redundancy, where we have and will continue to remove costs. For example, we recently closed one of our two Florida offices and we are also phasing out several roles in the combined company, although net additions to drive growth will offset these reductions. One question we get asked is whether we expect to run into any challenges in terms of technical integration. Since completing the acquisitions of GraphicMail and SharpSpring, we have made rapid progress in this area. Specifically, GraphicMail has already started migrating their customers over to SMTP’s relay services and SharpSpring will be doing the same in Q4. SMTP’s robust platform will allow SharpSpring and GraphicMail to target higher volume, higher value customers, while eliminating third-party and internal costs that both companies had previously incurred. Before I turn the call over to Ed, allow me to add a few comments on the impact of acquisition integration efforts on our short-term earnings. Earnings were depressed in Q3 due to our M&A activities and we expect that earnings will be further reduced in Q4 due to the investment we are making in SharpSpring’s sales and marketing, the closing of the GraphicMail acquisition and our continued integration efforts. Purchase accounting considerations will also affect Q4 earnings on a non-cash basis, and Ed will cover these aspects of our operations in greater detail. But for broad context, these are prudent investments which are dramatically improving the short-term and long-term growth prospects of our business. We had previously indicated that with the addition of SharpSpring and GraphicMail, our company would be transformed from a niche, $6M annual revenue company growing at 8% to an $11M player with a much broader range of solutions and growing at about 25% annually. These figures were based on the combined revenues and growth run rates from the three firms separately, prior to closing. They represent a rapid doubling in revenues and a tripling of growth rates for SMTP. With the opportunities for cross-sales between the firms that we are now starting to realize, we expect that we can continue our strong growth trajectory and we remain bullish on the investments in both SharpSpring and GraphicMail. With this for context, while our short-term profitability will be below with historic levels, we are committed to our plan to pursue profitable growth. Each of these businesses was a lean operation prior to acquisition and we are already moving forward to realize synergies and reduce costs. Before handing the call over to Ed, I want to follow up on a comment that I have consistently made in prior calls and presentations

[Ed Lawton:]

Thank you, Jon and thank you everyone for joining us on today's call. I am excited to join SMTP during this important growth phase and look forward contributing to the long-term success of the Company. Turning to our results, for the third quarter of 2014, SMTP recorded net revenue of $1.63 million, a year over year increase of 11% compared to $1.47 million in the third quarter of 2013. The increase in net revenue was primarily attributable incremental contributions from SharpSpring which we acquired in the middle of the quarter. As Jon mentioned, SharpSpring was launched early in 2014, but is already seeing strong growth in customer acquisition. During the third quarter, SharpSpring continued to add customers at a rate consistent with reaching its target of an annualized revenue run rate of $5,000,000 by the end of 2015. Because of the recurring revenue model, the deals signed this quarter had a minimal impact on the quarter, but will contribute nicely to future revenues. During the quarter, we also saw costs increase from prior periods. The major contributors to this increase were the addition of SharpSpring and one-time legal and accounting costs related to our acquisitions. In addition, we also strengthened our management team and invested in new resources to support the future growth of the business. As Jon mentioned, many of these expenses were one-time costs, while others will be offset by increased sales of our combined offering in the future. For the third quarter 2014, SMTP recorded a GAAP loss of $98,000 or a loss of $0.02 per diluted share, compared to net income of approximately $320,000 or $0.10 per diluted share last year. Looking forward, we expect additional one-time costs in the fourth quarter related to completing the GraphicMail acquisition and integrations. We also expect to have some purchase accounting impact on acquired deferred revenue, which will have the effect of lowering GraphicMail revenue in Q4 below normal levels. We expect our G&A costs to normalize in 2015 as both SharpSpring and GraphicMail are integrated into SMTP. While we have made some reductions in costs related to the elimination of certain operational redundancies, at the same time we will continue to invest in the Company, as Jon discussed earlier. For the third quarter 2014, SMTP had Adjusted EBITDA of $360,000, compared to $708,000 for the corresponding period in 2013. Adjusted EBITDA adds back stock compensation expenses of $166,000 and acquisition-related expenses of $367,000, in addition to depreciation and amortization of $57,000. As a growth company, we believe that Adjusted EBITDA provides additional information for investors to better understand our results. Cash was $5.9 million at September 30, 2014, compared to $11.5 million at June 30, 2014. The reduction primarily relates to the cash component of the SharpSpring acquisition in August. Additionally, we used approximately $2.5 million of cash after the quarter end in October to fund the cash portion of the GraphicMail acquisition. Looking forward, Jon and I remain very optimistic about the future prospects for the business and confident that we can capitalize on the growth opportunity in front of us. That concludes our prepared remarks. Operator, would you please open the call to questions.

[Operator:]

[Operator Instructions]. Thank you. Our first question is from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

[Lisa Thompson:]

Good morning.

[Jon Strimling:]

Good morning, Lisa.

[Lisa Thompson:]

Happy to see everything is on track and going according to plan. Let me just clarify your non-GAAP EPS, I take out the stock based compensation and the acquisition cost and it’s really $0.90 non-GAAP, is that right?

[Jon Strimling:]

Ed, why don’t you take this?

[Ed Lawton:]

That’s correct, yes.

[Lisa Thompson:]

So, all the acquisition cost that you quoted are one-time?

[Ed Lawton:]

Yes, correct.

[Lisa Thompson:]

Okay. Do you have an estimate of what that number is going to be in the fourth quarter?

[Ed Lawton:]

We don’t have that estimate precisely, no data at this point. It should be less than the Q3 numbers, because the Q3 numbers include business of both acquisitions and Q4 would just be GraphicMail.

[Lisa Thompson:]

Okay. And that’s the most relievable cost or there is the office closing, what’s in there?

[Ed Lawton:]

We would have some reorganization cost in Q4 that – as we put the integration plans and process in Q4. In Q3 those costs were mainly legal and accounting related costs. In Q4, we would have legal accounting and some of the reorganization cost.

[Lisa Thompson:]

Okay, great. And as far as revenues, the fourth quarter has 100% of both acquisitions now?

[Ed Lawton:]

We closed GraphicMail on October 17, so it would have a partial quarter of the GraphicMail acquisition and then a full quarter of SMTP in SharpSpring.

[Lisa Thompson:]

Okay, great. Okay, sounds great. Can you talk a little bit about maybe some new business that you won or the activity in car selling, just give us a few examples of things that are going on, I think it’s very exciting to hear about this all?

[Jon Strimling:]

Sure. So, GraphicMail has been in the market of selling e-mail services for years. But they’ve historically been constrained on the top-end of the market by being unable to deliver high volumes of customers. Lay it [ph] actually quick pursuing some of the larger accounts that had approached them. These are corporations that may have significant e-mail unless they want to get e-mails out to larger list fairly promptly. With a combination with SMTP would enable them to do this and go back to those customers and also the prospect for new customers. So, with their corporate operations as well as with their country partner and efforts around the world, there are a number of opportunities that were merged that we’re now pursuing for larger volume customers, some of which have already closed. In addition, we’ve bought the GraphicMail country partner network through a demonstration of the SharpSpring product. We and our country partners around the world feel that that often is competitive with anything in the world. And they are quite enthusiastic about having the opportunity to carry this to the local markets. So, we are in the process of creating and bringing the country partners up to speed. Some are already going out and moving forward to put the products in front of customers to run demos and they are getting interest. So, our hope and our belief is that we will be quite successful in launching SharpSpring through that network as well. Finally, the SMTP services also can benefit from the GraphicMail sales network in addition to the two front-end systems, the GraphicMail and the SharpSpring, the e-mail infrastructure services and marketing deliveries that SMTP provides are also interesting to other customers and country partners. You can think of the three products as a toolbox. And any e-mail sender may need one of those three tools but almost every sender needs one of those three tools.

[Lisa Thompson:]

Okay.

[Jon Strimling:]

So, we see – yes, overall we remain very, very optimistic about the combination how that will work out.

[Lisa Thompson:]

Okay. Are you going to have to do some language translation in SharpSpring?

[Jon Strimling:]

So, we’ve actually been through that analysis, we’ve been through the country partner network. And we can hit a very, very substantial fraction of the country partner network with SharpSpring in English as it is today. At the same time, on the technical front we are actually moving forward to modify SharpSpring so that can be offered in most of the languages and we’re looking forward to doing that as well.

[Lisa Thompson:]

Okay. So, what portion of GraphicMail can you address with just English?

[Jon Strimling:]

So, English has become the lingual front of business globally actually. So we estimate we can have 90% of the market and serve it with English and that given the competition the fact that the competition worldwide is largely in English as well. We really don’t suffer for that in the immediate term. At the same time we think we can get a leg up by localizing it and we intend to do so.

[Lisa Thompson:]

Great, that sounds great. All right, I had one other question I forgot what it was. So, have you gotten any better inside as to things like tax rate or anything for next year? Are you pretty sure it’s still going to low 30s?

[Jon Strimling:]

We are looking at that. I’m going to let Ed respond to that question more specifically.

[Ed Lawton:]

Yes, I think that’s a good estimate for now Lisa. We’re doing a number of things and looking at a number of things right now that should impact that tax rate favorably for the company as we move forward. We are looking at how we structure and how we – which entities have the operations to kind of enhance our tax rate [ph] overall.

[Lisa Thompson:]

Okay, great. Thanks. Well, keep up the good work. Looking good so far.

[Ed Lawton:]

Thank you.

[Jon Strimling:]

Thank you, Lisa.

[Operator:]

[Operator Instructions]. The next question comes from the line of Craig Beresin with Kalman Kushnir Capital. Please go ahead with your question.

[Craig Beresin:]

Good morning and congratulations on everything you’ve achieved, fantastic.

[Jon Strimling:]

Thank you, Craig.

[Craig Beresin:]

Can you just remind us as we – as commission stands today and as we get ready for next year. How many sales people, commission sales people are now selling today and going forward versus where we were previous of these acquisitions? Can we just go over that real quick?

[Jon Strimling:]

Sure. There is a significant overlap between sales and support roles within the company. We have dedicated support, which I’m separating out but co-located sales and support personnel in the U.S. before SMTP prior to the acquisition represented four people. With the combination with GraphicMail and SharpSpring, we took that from four to 55 people. A significant fraction of those are in the U.S. and the balance are in are distributed around the world. We also have additional commission sales people that are not SMTP employees but are working for our country partner network. And that’s actually a similar number of people that are in fact commission sales and support people but they’re in separate entities that are largely dedicated to selling GraphicMail SMTP in our shared free services.

[Craig Beresin:]

That’s great. And so, just a flavor for some of the reaction of the sales people in having additional things to sell, whatever it is great, I don’t care. I just like what I’m doing. Like, would you give us a flavor for what the reaction has been of the sales force to these opportunities?

[Jon Strimling:]

Well, it’s been fantastic. So, the most positive side is country partners choosing to hire additional sales people to go help us on SharpSpring and that’s happening. I think that what we – any salesman likes to have more in his bag to sell. And what’s interesting about GraphicMail is that it’s mid-market product in the sense that they sometimes run into customers that are looking for a higher end more sophisticated solution like SharpSpring. And other times they run into customers that have been looking for a high-volume lower cost delivery system like SMTPs. So, they’ve been in this market and they’ve had two primary objections if they didn’t have the right product for the market. Either they needed – somebody needed a marketing automation solution or somebody needed an SMTP relay delivery service. Now we can answer both of those objections with products which are highly competitive and which are supported by the same local native language speaking support that may exist in the country. So for customers in France that was looking for marketing automation solution being able to get that local support from somebody they know and trust and came to in the first place is a real asset to the customer. And for us on the sales front, obviously any salesman that has an opportunity to sell more will do that. And I think notably, it’s important to mention that when GraphicMail started, it had to payout a fairly significant portion of its – of the end-customer revenues to the country partners. We’re also realizing efficiencies and distribution in the sense that as we add products to the existing distribution channels, we are paying out a lower rate of commission and a little bit of a lower revenue share with our country partners which is also getting us some, efficiencies and some opportunities to grow our top-line sales and margins for that matter. So, it’s overall, it’s very, very positive and it’s a greatly accelerated opportunity for sales.

[Craig Beresin:]

Fantastic. Thank you. Love it.

[Jon Strimling:]

Thank you.

[Operator:]

Thank you. At this I will turn the floor back to Mr. Jeffrey Goldberg for closing comments.

[Jeffrey Goldberg:]

Thank you very much. And thank you everybody for participating in the third quarter call with management. And we look forward to speaking with you for full year results.