SharpSpring, Inc.
Q2 2015 Earnings Call Transcript

Published: 3 Aug 2015

[Operator:]

Greetings and welcome to the SMTP Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce SMTP's CFO, Mr. Edward Lawton. Thank you, sir. You may begin.

[Edward Lawton:]

Thank you, Jessie. Good morning, everyone, and thank you for joining SMTP's second quarter 2015 earnings conference call. Jon and I are excited to discuss the quarter today and today’s press release 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 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 we may make reference to adjusted EBITDA, core net income or loss and core net income or loss per share, which are non-GAAP financial measures presented as supplemental measures of the company's performance. A reconciliation of non-GAAP income or a 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. Thank you everyone for joining our conference call today. Before I turn the call back over to Ed to review the first quarter financials, I'd like to highlight some of our critical business achievements and highlights from the past quarter. When we announced our plan to pursue acquisitions in 2014, we indicated we intended to select firms that could expand our technology base, broaden our channels to market, and accelerate our growth. Today, we are pleased to report that as we approach one-year from the date of our SharpSpring and GraphicMail acquisitions, we have successfully and irrefutably achieved all three goals. We are also pleased to report that in Q2 we return to profitability on an adjustment EBITDA basis. This achievement is a strong evidence of the efficacy of the acquisition strategy we undertook a year-ago. Particularly, considering the challenges had concurrently integrated three companies while launching new products and services on a global basis. The results from this quarter as well as Q1, a firm I believe that our cloud-based marketing technologies can meaningfully penetrate the multibillion dollar markets in which we operate all over the world. As we have described previously, our flagship SharpSpring marketing automation product has become the primary contributor to our growth. At the time we acquired SharpSpring less than a year ago, SharpSpring had $1 million of annual recurring revenue under contract. Today, that figure has quadrupled to more than $4 million of annual recurring revenue under contract easily putting us on pace to exceed our same target of $5 million by the end of the year. Furthermore, the rate at which we are adding new revenues has also increased. A year ago, SharpSpring was adding about $0.5 million in annual recurring revenue every quarter. Today, we are pleased to report that we landed new sales representing a $1.3 million in annual recurring revenue in Q2 alone. Since acquiring SharpSpring approximately a year ago, we’ve added more than $3 million in new annual recurring revenues with two-thirds of the additional sales or more than $2 million occurring in the last six months. SharpSpring recently reached another important milestone. SharpSpring has now find on 500 marketing agency partners and it has accomplished the fee in an extraordinarily short period since its launch in early 2014. By comparison HubSpot has signed on 2,300 agency partners since its founding in 2006 according to the most recent earnings call. We are gratified by the fast-paced of acceptance of SharpSpring among marketing agencies, who are leveraging the performance of our world class marketing automation to deliver a meaningful financial returns for other clients businesses. As the marketing automation market continues to expand, we believe that these agencies relationships add strategic value to our long-term growth at approximately $1.2 billion and 60% annual growth. The market for marketing automation is expanding rapidly and agencies are key part of driving that growth. Today’s marketing technology is evolving so rapidly that many businesses are having trouble keeping up with the latest best practices and are increasingly turning to agencies for their expertise and recommendations. So as the number of agencies working with marketing automation tools continues to expand, we want to be part of this mix. These agencies have become a critical channel for us as we move forward. We offer agencies a great product and more attractive deals than our competitors and an entirely different structure for the relationship. In particular, when we sell to agencies we sell them licenses which they can resell on their own terms to their own customers. This is different from how HubSpot market will act on work with agencies and the three agencies as a sales channel and offer agencies only a commission on sales. As evidenced by our recent growth, agencies all over world are lacking on to our products and business model and in return they are driving widespread, user adoption on our behalf. Our focus on marketing agencies and the myriad benefits of leveraging that network, have also kept our customer acquisition cost well below those of our peers. SharpSpring’s customer acquisition costs in the second quarter were $3,300 well below those published to our competitors and less than half of our average revenue per count of approximately $7,000. To emphasize this point, this means that we are recovering our investments in SharpSpring sales and marketing and as little as six month. This is a significant part of the reason that company was able to return to profitability so quickly on an adjusted EBITDA basis even in the ways of integrating two acquisitions in while launching new products and services globally. On the topic of international operations and important driver of our growth this quarter during this year has been the rank attraction with the gains in the international markets. As Ed will detail shortly, our international sales restructuring doubled in Q2 when compared to Q1. This performance was made possible by contributions from both our international direct sales team and our reseller network, which together it’s been 18 countries and allowed SharpSpring rapidly to reach new international markets. Additionally for direct sales of organization we established in the United Kingdom in Q1 has come online very quickly in closing sales in an impressive rate already. Our ability to move so quickly internationally is evidence of the successful integration of GraphicMail, the second acquisition we made in late 2014. Further on this international sales fund, we announced during the quarter the SharpSpring is now available in nine language, Spanish, French, Italy, Germen, Dutch, Portuguese, Romanian, Turkish, and English. SharpSpring is unique among marketing automation solutions in that it not only provides product, but also provides customer support in these languages. These multi-lingual capabilities have opened new markets and new revenues opportunities that will fuel our global growth as we move forward. In the context to describing have start seen global success is helping to fuel our growth we made an important announcement Friday regarding Rick Carlson. Rick, is the founder of SharpSpring has served as it President and has maintained his un-warranting progress on growth since the acquisition last year. He has proven to us that he is not only a product visionary, but has the capabilities in the commitments required to build a strong team to the whole people accountable for measurable goals and to consistently deliver ever accelerating performance. While the earn-out was being earned SMTP sustains to support SharpSprings growth, but we were not at liberty to fully utilize Rick’s talent across the SMTP organization as a whole. But during Q2 the situation changed, first it became August to everyone involved that SharpSpring was going to achieve its full earn-out. And then we were able to workout an arrangement with Rick and SharpSprings former shareholders that allow them to exchange $3 million of future earn-out payments or stock in company’s today. This exchange of value not only strengthened SMTP’s balance sheet it also fully aligned our interest. With that for context we are now pleased announce that Rick is stepping to the role of President of SMTP where his talents will help us accelerate growth across our entire business. He will continue to play a major role and driving SMTP’s growth and we continue to expect that SharpSpring will provide the dominant portion of our revenue growth in the foreseeable future, but we also recognize that this change we will continue to faster [tighter] corporations and integration of the business overall. As a management team we are excited about having Rick take on the expanded role and we are confidence that will help us continue to accelerate our growth. I should add that our Chief Technology Officer, Travis Whitton who joined us through the SharpSpring acquisition has also stepped into an expanded role in the organization. He is now leading the technology development across all the products and services and Nick Eckert, who joined us to be the GraphicMail acquisition he is now leading international and sales and operations across all our products and services. Rick and Travis will drive continued innovation of product enhancements has evidence by the recent launch of SharpSpring Social Assistant and our mobile CRM and these two were closely with Nick to all these products are globally in our eight new languages. So we are extremely excited about how this emerge team is working out. And we all see the potential to disrupt the large and growing market for marketing technologies on a global basis. Coming back to our recent product announcements for moments, SharpSpring mobile CRM allows the users to manage their marketing pipeline and opportunities from their favorite mobile device. Now mobile marketers and sales supplement are never out of reach with the current deal flow and have the latest customer and prospect inflow have written the test. With SharpSpring Social Assistant, SharpSpring users to use Google Chrome to now see the full profile information of all their needs and contacts, while they serve in the browser on Gmail, Twitter, FaceBook and LinkedIn with Social Assistant SharpSpring users can edit and have contacts and lease directly from Gmail, Twitter, FaceBook and LinkedIn. They can take notes on a contact from these pages and they can create an opportunity directly from a lead on these pages while still in their Chrome browser. We are extremely excited about offering these new services out to our customers and they are already being well received. Shifting gears to the numbers now. The company is dedicated to using all of the tools that is disposal to pragmatically achieve the vision we setout to achieve in 2014. At that time we told investors we wanted to move from being a slow growing $6 million company to become a much larger fast growing company, which we believe would also enhance liquidity for our investors. In roughly 18 months we have more than doubled our revenues and we have more than quadrupled the rate at which we are adding new revenues. We remain committed to building both scale in the business and improving its liquidity for our investors with the goal growing SMTP the $50 million to $100 million in the revenues in the coming years. We have not put forward specific guidance that our recent performance does provide ample evidence of our team’s commitment to growing the scale of the business and improving liquidity for our investors. With regard to liquidity during this quarter we secured a $5 million round of financing led by the company’s two largest institutional investors Special Situations Fund and Bard Associates. The original owners of SharpSpring, which we acquired in 2014 also participated in the round by exchanging $3 million in anticipated future cash payments for the Company’s stock. Whereas the original deal was [indiscernible] called out before earn-out that was $6 million in cash and $4 million in stock. As a result of this transaction SharpSpring’s former shareholders have accepted earn-out payments that will total $7 million in stock and $3 million in cash. This is an exceptionally strong growth of confidence we now combine business and the opportunities we see before us. Further this growth of confidence was echoedby key institutional holders who also participated in this financing by collectively investing $2 million. Today we are announcing an additional stock offering details of which are included in today’s news release and which Ed will also outline. The company is planning a $9 million underwritten public offering of this $4.4 million will be stock issued by the company and the remainder will come from the sale of stock by our Chairman, Semyon Dukach. Together these efforts will continue towards capital for the company’s growth and liquidity for the benefits of all shareholders. We wanted to strengthen our balance sheet because we have earn-out with the both SharpSpring and GraphicMail that will come due next April. While we have sufficient funds today to cover both commitments we believe that made sense to provide reserves to allow the company flexibility to make more aggressive investments in marketing SharpSpring and to allow room for tuck-in acquisition that may further accelerate SharpSpring growth. With regard to the potential uses of the funds the better than 5 to 1 recurrence we are achieving on our current marketing efforts with SharpSpring are hard to match. We mentioned that we had lower customer acquisition cost and our peers of $3,300. To put this in contacts and based on an average expected four year retention period, this means that our $3,300 investment in acquiring customer will provide approximately $28,000 in revenue over the lifetime of that customer and more than $20,000 in gross margin after tax variable costs that’s a 5 to 1 return on investment. While we choose to breakeven on an adjusted EBITDA basis we had nonetheless than able to accelerate growth strongly through the integration period. With that said the exceptional returns we are realizing with our investments in SharpSpring sales and marketing. Our driving is considered to what extends we may want to further accelerate growth. As part of that process we recently begin running a serious of marketing trials to develop new methods of cost effectively acquiring customers. The early results of these trials encouraging and that has been part of our acceleration in revenue growth at SharpSpring. As we gain confidence in our ability to predictably drive revenue growth we made step on the gas further and accelerate spending on marketing but only $0.06 we are measurably accelerating sales and driving favorable long-term cash flow into the business. As I mentioned the other potential use of funding would be tuck-in acquisitions, while we may consider this a cost ability we are unlikely defined any acquisition with kind of returns we are achieving with our internal investments. So we are not seeking the kind of transformative acquisitions the GraphicMail and SharpSpring provided a year ago. Instead we may consider technologies that complement our product offering and would allow us to accelerate SharpSpring’s growth. While we believe it is prudent to maintain reserves with right opportunity were it present itself, our focus will remain squarely on accelerating the growth of our proven business. While SharpSpring’s marketing automation versus now our flagship product and it’s driving the lion share of our growth. It is important to note that we continue to make process in other areas of the business as well. The rest of the business was comprised of our original email delivery business and our GraphicMail product. These product sales have historically grown more slowly and tent to be stronger seasonally in Q3 and Q4. Sales in the second quarter these products were roughly flat in part because of currency changes and in part because we had really focused the team’s attention first on accelerating SharpSpring sales. With that said, we’ve dramatically strengthened our global marketing team in Q2 which will allow us to help support not only SharpSpring, but also these other products and services will move forward. Overall, we are pleased to be able to report out on the considerable process we’ve made this quarter. From a product development standpoint, SharpSpring’s latest language social and mobile capabilities make our marketing automations solutions even more compelling. Our intense focus on serving marketing agency partners while treating them as a true partners will remain a key difference here. Globally, our multi-lingual offerings and customer service are unmatched and bring the power cost effective marketing automations to bigger audiences around the globe. We will continue to build our direct sales and reseller distribution channels worldwide and we are right now stepping into a broader role and continuing to be supported by an extraordinary global team, we believe that we are poised to challenge the biggest players in the industry and continue to win share. In a moment, I will reintroduce Ed Lawton, SMTP’s CFO, who will take us through a recap of the financial results from the second quarter. But before I do, I want to thank all of our company's employees for their enthusiasm and for their creativity in helping us to drive the growth that we have achieved and for helping us to regularly find new synergies on an international level. We have taken three separate companies operating all over the world and build one world-class organization working as a team. We are seeing SMTP deliver on the promise of the strategy we initiated last year and that progress is directly attributable to the personal and professional investments made by our team members all over the world. So thanks to everyone in all our offices globally and I want to say thank you as well to our country partners and agency partners. We wouldn’t be here without all of your help and support. I’ll now turn the call over to SMTP Incorporated, Chief Financial Officer Ed Lawton to report out on the company’s financial performance. Ed, the call is yours.

[Edward Lawton:]

Thanks, Jon. I am pleased to report on our results for the second quarter. During Q2, we recorded revenue of $3.6 million, a year-over-year increase of a 143% compared to $1.5 million in the second quarter of 2014. Revenues grew approximately $300,000 organically from our first quarter, which is 9% sequential quarter growth. Continuing on the momentum from the past few quarters, we saw strong growth from our SharpSpring product during the quarter. We had another record quarter in terms of new SharpSpring sales both in terms of deals during the quarter and new annual recurring revenues signed up. During the second quarter, SharpSpring increased the rate of which we added new customers by 22% compared to Q1, which resulted in signing 182 new accounts during the quarter worth approximately $1.3 million in new annual recurring revenues. On note, we signed up 37 new accounts through our international network of subsidiaries and resellers. This represents and almost doubling of deals from Q1 the quarter that we launched this international efforts. These international sales of SharpSpring represent a major integration win for us as these sales would not have occurred without a combined effort across our whole organization. Over the past three quarters, we have signed up approximately $3 million in new annual recurring revenues for SharpSpring. These new customer signings contributed some revenues during the quarter they are signed, but contributes more meaningfully to revenues in future quarters after signing achieving pretty much a full run rate in the next quarter after signing. As of the end of Q2, we had over 550 SharpSpring customers about 90% of which are marketing agencies. We continue to target marketing agencies as our primary distribution channel for the SharpSpring automation solutions. Agencies love SharpSpring because we have designed the products specifically for them allowing them to access client accounts and manage the client relationship directly in the platform. SharpSpring provides the agencies with a steady revenue stream that they can build a business around. Agencies are also familiar with marketing automation technology which reduces the cost require to educate and sell our product. In fact, our customer acquisition costs are dramatically lower than those of HubSpot and Marketo partly because of our focus on the agency vertical. This quarter we are also breaking out our GAAP revenues associated with our SharpSpring product. We are happy to announce that we had $1 million of GAAP revenues for SharpSpring in the second quarter and major milestone for the product that was just launched in 2014. SharpSpring’s GAAP revenues are up $300,000 from last quarter. If you remember when we acquired SharpSpring at August 2014, we set a target of achieving at $5 million of revenue under contract as of December 2015. After reaching $1 million of GAAP revenue in the second quarter and over $4 million of revenue on our contract plus the new sales signed during the quarter, we should easily exceed this target by the end of 2015. With the disability of these new sales we are providing to us and with the revenue already other contract we choose to take actions during Q2 to clear out part of the earn out liabilities associated with the SharpSpring acquisition. The original deal terms called for potential $10 million earn out liabilities, $6 million of which was paid in cash and the remaining $4 million will be paid in stock if SharpSpring reach its revenue targets. During Q2, we settled $5 million of the $6 million cash earn out liability by paying the former SharpSpring owner $2 million in cash which we raised from two of our largest shareholders and $3 million in stock. It is not [indiscernible] the former owners of an acquired company buyback into the company that acquired them, but that is exactly what happened in this case when the SharpSpring team shows to accept more stock and little of cash. We were excited to execute this transaction with the former SharpSpring owners which included a large contingency of current executives and employees. We also just announced that we intend to offer $4.5 million of new shares in an underwritten public offering subject to market and other conditions. The net proceeds will be used for working capital and general corporate purposes as John discussed. Turning back to our results for the quarter, we have spilt out SharpSpring revenues which had a separate sales prices from our other products. We have merged sales teams for our SMTP relay product and our GraphicMail email campaign management solution and we are selling those prices combined in some cases making this split out more difficult and less relevant. It is our expectation to continue to report our revenues for SharpSpring product since both sales are discreet in most cases. During Q2, combined revenues from our GraphicMail and SMTP relay product was $2.6 million. Our international revenues continued to be impacted by foreign currency rates which had about $100,000 impact compared to the same quarter last year and a small negative impact compared to last quarter. All though we are pleased with these levels after considering foreign exchange impact we are also taking steps in the second half of the year to help grow these revenues faster. However, due to the nature of our recurring revenue model any impact from these tactics will most likely impact next years revenue more than 2015. On the cost side, we saw our sales and marketing expenses remain relatively flat with Q1 levels. We are spending at about $1.3 million in Q2. We kept headcount relatively flat during the quarter for our sales and marketing team. Commission expenses increased in relation to the increased SharpSpring sales and we saw higher marketing programs spend during Q2. These increases were relatively minor and we are offsetting large part with lower partner fees and [travel] cost. Our development spend increased about $60,000 from last quarter to just over $500,000 during Q2. Headcount related cost drove most of the increase from last quarter as we increased the number of resources to on the development team during the second half of Q2. We expect development cost to continue to increase during the reminder of the year in dollar terms and trend up slightly as a percent of revenue during the second half of 2015 as we bring on more staff to support of the SharpSpring platform growth. Although costs were trending up, we continue to be divided with the team’s productions, during the second quarter the team rolled out multi-lingual capabilities for SharpSpring launched mobile CRM app and announce the availability of SharpSpring Social Assistant which is competitive products HubSpot signals. Similar to last quarter we incurred significant acquisition related costs, these costs were related to the earn outs for the 2014 acquisitions of SharpSpring and GraphicMail which we are required to revalue each quarter and record the change in value in our income statement. With our May 2015 financing and prepayment of $5 million with the SharpSpring earn out, we had even more expense in Q2 to bring the earn-out liability up to the amount paid this quarter. We recorded $1.7 million of expenses especially with these earn-outs during Q2. Even though we have agreed to pay the remaining SharpSpring earn-out liability in full, we are still required to increase the value of the earn-out liability up over time because the liability value is discounted to present value each balance sheet date. So as we progress throughout the rest of the year we will see the earn-out liability increase over time fairly due to the passage of time as we get closer to the ultimate remaining payment date of April 2016. As of June 30, we had a liability for $5.1 million on the books with roughly $800,000 of potential remaining GAAP expense that would come in over the next four quarters until the ultimate payment date in April 2016. With these acquisition-related charges, including increased amortization of intangible assets, we recorded a GAAP loss of $1.9 million or net loss of $0.32 per share during Q2, which replace higher earn-out expenses offset somewhat by higher gross profit earned from the business during the quarter. We recorded adjusted EBITDA to be slightly positive in Q2 compared to slightly negative in the past few quarters. We recorded adjusted EBITDA of $36,000 in the second quarter which was up about a $140 compared to Q1. Adjusted EBITDA adds back stock compensation expenses of $233,000, acquisition-related expenses of $1.7 million, restructuring charges of $15,000, in addition to depreciation and amortization of $428,000. Core net loss for the first quarter was $20,000 or core loss of $0.00 per share. Core net loss adds back stock compensation, 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. Our core metrics are reconciled and available on our website and in our press release. Cash was $1.8 million on June 30, 2015, compared to $2.1 million on March 31. Although adjusted EBITDA was slightly positive we incurred higher than normal CapEx during the quarter which was $222,000. These expenditures related to infrastructure and software purchase during the quarter as well as fiscal assets for expanding our office in Gainesville, Florida were SharpSpring is based. We also saw some timing difference on our payables and receivables that led to some movements in cash during the quarter. As I said earlier we intend to launch to a capital offering this week which effects to add cash to our balance sheet and provide more funds for working capital and general corporate purposes. With these additional funds we point to invest more heavily in this growth of our SharpSpring platform by adding new sales and marketing and development resources to the business. We are seeing a 5 to 1 return on our investment in SharpSpring sales and marketing efforts and we think we are in a critical point in time in the industry. We believe we can capitalize on this increase spend to materially strengthen our position in the industry and grow our market share. While we did this we plan to run modestly negative on EBITDA over that time period as we invest in growth but plan to hold EBITDA within a few $100,000 of breakeven over the next two or three quarters. We will continue to monitor our ROI on a new sales and marketing efforts as we go forward. If we continue to see the same 5 to 1 return we are achieving today we may choose to invest more heavily in future quarter. In summary, we are pleased we’ll have the business performed in the second quarter we posted positive adjusted EBITDA while growing the number of SharpSpring agency partners and end users to new levels. That concludes our prepared remarks. Operator, would you please open the call to questions.

[Operator:]

Absolutely [Operator Instructions] Thank you. Our first question is coming from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

[Eric Martinuzzi:]

Thanks, congratulations on a strong quarter gentlemen.

[Jonathan Strimling:]

Thank you.

[Eric Martinuzzi:]

Just curious to know that the traction you are getting with SharpSpring I know part has been driven by finally getting a little bit of international footprint part of it’s driven by the agency is kind of waking up to the product to the service. Could you kind of stack rank those and talk a little bit and kind of peel back a layer on both of them?

[Jonathan Strimling:]

Sure. So we’ve seen – we’re just at the beginning of our international launch still, we trained our – we acquired revenue before we trained the international sales team in Q1, we did begin to get some sales in Q1 and then we doubled it again in Q2. But also on the domestic side, we’ve actually dramatically strengthened our marketing team over the last two quarters. So I sat down with the marketing team just about a month ago and as I looked around probably 70% of the team was new in the last six months. So we’ve really increased the scope and the capability of our team that team is now better organized and that’s also part of what’s driving growth. The lion share of our sales are still domestic, in the USA we are going to work to accelerate those, but in parallel we now have the team that supporting not only the SharpSpring, but better supporting the growth of other products and services on a global basis as we move forward. Ed, do you have any further comments on that?

[Edward Lawton:]

No, nothing too much to add. I think we grew both domestically and internationally with the 60 to 90-day kind of sales cycle for SharpSpring. We do expect the international side to continue to ramp up in future quarters and we are taking new tax sales and new approaches to domestic market too as Jon said.

[Eric Martinuzzi:]

Yes, I think you talked a little bit about the kind of average revenue per customer also growing, where do you see that getting to and how quickly do you reach that target?

[Jonathan Strimling:]

Sure, we haven’t put out specific guidance on revenue acceleration per customer, but it is the fact that we have – we put over 500 agencies on to our platform. With that said, more than a half of those have been added in the last six months. As we add agencies, we actually sell them a pack of licenses so we’ll sell them a 5 pack of licenses initially, it’s only when they add that sixth customer to our platform that we’ll see an uptick in revenues from that agency, when they buy another pack of licenses. So we do have agencies, we are working with that have 25 or more of their customers on our platform now and over time we expect more and more agencies to ramp that. But because the product was just so recently launched and because so much of our customer acquisition has been very recent and because the scalability of the platform and the ability to take on larger customers as really just didn’t put in place from the last six months. It’s still a little bit early to predictably call exactly what those metrics are going to be.

[Eric Martinuzzi:]

Okay. And then looking at the gross margin line, I see a sequential decline here, but I’m not sure what to make it and just because it’s a GAAP gross margin I am looking at, is there way to appeal back maybe on a non-GAAP basis, the gross margin and then what you expect that to be for next quarter?

[Edward Lawton:]

Eric, we had about a 1% decline quarter-over-quarter on a core basis as well, if you back out, it’s primarily stock comp that would be backed out of that line. So we did take a slight drop quarter-over-quarter, it’s something that we have add resources to support customers, essentially on day-one of the customer relationship even before those revenue is kind of come in, we have to train up a resource to make sure that they are up to speed on supporting the customer base. So in some ways, we’ve had to add a few costs in advance of the revenues actually hitting the books. We also incurred some infrastructures updates this quarter as well as we improved the horizontal scalability of the product. So I would say those two things kind of attributed to the slight drop quarter-over-quarter. We do expect to be in a 75 plus range going forward.

[Jonathan Strimling:]

We don’t expect that’s a trend, we expect that just a result of the rapid scale we are doing right now.

[Eric Martinuzzi:]

Understand. All right, thanks for taking my questions.

[Operator:]

Thank you. The next question is coming from the line of [indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

Hi, guys. Good quarter. Maybe you could walk through as you sell to agencies, what’s – how much visibility do you guys get to the end customer? Just kind of understand how that kind of two part sales process worked and as they get a five pack of licenses to me, as they go through campaigns, I mean that’s something that they can reuse a license for someone, pull it back, use it for some else or maybe kind of walk through how that works?

[Jonathan Strimling:]

Sure, so we typically will provide an agency was a five pack of licenses they can use for their clients. In this system there is obviously full visibility to all end user activities in the sense of the system supports the mobile, we really leave that customer relationship to the agency. There is some benefit of that, the agency has some benefits that’s us. For the agency that helps them preserve the relationship and remember that an agency makes most of this money on services not on reselling software. So that direct relationship helps the agency to maintain a service relationship with the customer. On our part, from our perspective it means the agency supporting customer and we are not trying to support every end user. One of the benefits of that as it is allowed us to keep our support costs and support team relatively leading for lot of [indiscernible] as well. Finally, I think it’s important to understand that while the agency does support the end user, the end users websites and campaigns are alluding to platform its fairly sticky, it’s possible that end user might leave, if an end users leaves it is possible for that agency to use that – reuse that license with another end user, but one of the great things about this models. If an agency has five customers on our platform and one of them leaves, we are just the agency leaving our platform actually very well because as long as they have one customer the platform will likely stick with us and overall this platform has been exceptionally sticky not only with end users, but with agency supports.

[Unidentified Analyst:]

Great. And then you are looking forward as 6 to 7 is it similar pricing I mean when someone uses the backup 5 I mean and they go to 6 would have the ASP for that 6 similar to ASP for the first 5 or do they buy another pack of licenses. What is kind I know you are early on here, but….

[Jonathan Strimling:]

Sure, yes I model correctly if you buy another pack of licenses.

[Unidentified Analyst:]

Yes, okay.

[Edward Lawton:]

Yes, our revenue essentially doubles with that 6 customers, our monthly revenues go from roughly $500 per month to $1000 per month.

[Unidentified Analyst:]

Great.

[Jonathan Strimling:]

I’ll also add that since we integrated the SMTP really backend our customers and end users - our agency customers as well as the end user customers as well as the agencies end users can I send much higher volumes email then they could previously when we acquired the business customer are limit to about 100,000 emails a month, we have customers sending millions of emails a month and they do pay extra when they reach that kind of volume and not also contributes to revenue growth for account.

[Unidentified Analyst:]

My next question how much through the – have do you got some visibility in the cycle of being able to bring in the email delivery and stuff or is that already part of the service offering with the agency already and you are bringing this maybe you talk about which is – it seems like you are going to lead with this and maybe drag along other services.

[Jonathan Strimling:]

For customers buying SharpSpring we are absolutely leading with SharpSpring and the broad functionality and power of that platform. At the same time we do emphasis it backs by the deliverability of SMTP and the scalability of SMTP and help grow the sales, but products are fully integrated to both the SharpSpring products and the GraphicMail products are utilizing the SMTP backend and that’s been the case. So I also want to just caution that due to our schedule that we probably get few more minutes maybe time for one more question.

[Unidentified Analyst:]

Thanks.

[Jonathan Strimling:]

Thank you very much. Thank you for your questions joining us today.

[Edward Lawton:]

Thank you.

[Operator:]

Thank you. The next question is coming from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

[Lisa Thompson:]

Hi good morning. Okay, I’ll comment just quick, so that earn out accrual you said in result in less and take that and divide it by three in the next three quarters, is that how works?

[Edward Lawton:]

Yes, it will be roughly a couple hundred thousand dollars, $250,000-ish over the next three quarters roughly if everything else hold consistent a little bit in Q2 of next year.

[Lisa Thompson:]

All right. And taxes stay at 20% or 25%?

[Edward Lawton:]

Yes, I would expect it to be pretty consistent with the last couple of quarters.

[Lisa Thompson:]

Okay. And now the share count from what I’m trying to figure out it looks like it’s about $6.4 million at the end of this quarter?

[Edward Lawton:]

Correct, yes, $6.4 roughly as of the end of the quarter.

[Lisa Thompson:]

And then Ed, another from the $4.5 million in the following quarter right?

[Edward Lawton:]

Yes, we would be issuing – the intent is to issue $4.5 million of new shares this quarter. Yes.

[Lisa Thompson:]

Right, so half in this quarter and half next quarter, okay. So and then just maybe if you could briefly talk about product going forward are you now pretty much on par with HubSpot and Marketo as far as features and are you now actually adding things they don’t have what’s the current status and thinking of those product close out?

[Jonathan Strimling:]

Sure, sure. Yes I will talk about so I would say for most users of marketing automation, most companies utilizing marketing automation any of the three platforms probably will serve their needs in terms having the basic functions. I would say that HubSpot is actually a bit stronger, a little bit stronger than us in the top of the funnel functionality in terms of content, creation and landing pages, which is a function we have not offered with in SharpSpring itself but we integrate with the variety of third-party solutions seamlessly. On the flip side SharpSpring is actually stronger in the bottom of the funnel because of or built in CRM and our call tracking functionality when it comes to actually closing sales interaction SharpSpring has some features, functionality, integration that helps a lot dozen. If we compare us to Marketo, I think where Marketo is differentiated is for the real large enterprise scale client if you are talking 14, 15 businesses. Marketo has a bunch of functionality and controls that at this point SharpSpring does not have and that’s not the market we’ve targeted but the estimate is that 90% or 95% of the marketing automation market customers are actually below that scale and in an area were SharpSpring can aggressive.

[Lisa Thompson:]

Okay, great. Thank you very much.

[Edward Lawton:]

Thanks Lisa.

[Jonathan Strimling:]

Thank you, Lisa. End of Q&A

[Operator:]

Thank you. If there are no additional questions at this time, I would like to inform back over to management for any additional concluding comments.

[Jonathan Strimling:]

Okay, we would like to thank you for joining us today on our earnings call and we will look forward to continue keep new products of our business results as we move forward.

[Edward Lawton:]

Thank you everyone.

[Jonathan Strimling:]

Thank you and good bye.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. And you may disconnect your lines at this time.