SharpSpring, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Please standby, we’re about to begin. Good morning, welcome to the SMPT Third Quarter 2015 Earnings Conference Call. My name is Elizabeth and I will be your operator today. Joining us for today’s presentation is SMTP’s CEO, Rick Carlson; and CFO, Edward Lawton. Following the remarks, we will open the call up for your questions. Then before we conclude today’s call, I’ll provide the necessary cautions regarding the forward-looking statements made by management during this call. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Sections of the company’s website. Now, I would like to turn the call over to SMTP’s Chief Executive Officer, Mr. Rick Carlson. Sir, please proceed.

[Rick Carlson:]

Thank you, Elizabeth, and thank you all for joining us today for our third quarter 2015 earnings conference call. Needless to say, it’s a pleasure to leave today’s call as SMTP’s newly appointed CEO. I’m excited to share a few prepared comments concerning some of our future plans and ideas about the direction of our business over the next few quarters. My appointment to this role is indicative of the company’s continued and renewed focus on marketing automation as we continue winning business from the industries largest players. When SMTP acquired SharpSpring a little over one year ago, SharpSpring was the smallest piece of the company in terms of revenue. During that short time span, SharpSpring has grown more than fivefold into a company with over $5 million in annual revenue under contract and is on the cusp of representing the largest segment of SMTP’s overall revenues. We see no ends to this aggressive growth and are excited about capitalizing on our unique position versus our marketing automation competitors. As an additional sign of our commitment to the marketing automation segment, today we’re announcing that we’re turning over a new page in the company’s history. While we are transitioning in form, we will also be transitioning in name. On December 1, our corporate name will become SharpSpring and we will begin using the ticker symbol SHSP, which we have reserved with the NASDAQ. We are now squarely focused on marketing automation and changing our corporate name further reflects our commitment to this market as our future growth path. We believe our focus on marketing automation represents the very best opportunity for us to create maximum shareholder value. The marketing automation space is seeing exclusive growth, yet sales and marketing tools in the automation tools in the SMB segment, while growing significantly remain a largely untapped opportunity. Moreover, we believe our position in this high growth market is truly disruptive. Obviously, disruptive is an overused term these days, so let me explain exactly what I mean. Our technology platform now competes and wins against the most well recognized organizations in the industry, yet we offer our solution at a small fraction of the price of these competitive solutions. To be clear, we’re not 10% or even 20% less than these competitors instead, we offer – we are seeing costs as little as one tenth of what our competitors must charge. As first movers, our competitors have large revenue basis that they need to preserve and cost structures was preclude them from dropping price to compete with SharpSpring. With revenues to protect and prohibitive cost structures, we see no reply from these incumbents. We also see significant barriers to entry from new entrance in the market because of the large technical hurdles and time to market needed to develop new and stable marketing automation solution. The barriers for new solutions are substantial with the factors such as third party integration, scalability, security and an ever increasing feature set all are necessary to launch a new solution in the marketing automation space. This is what we mean when we say we are disruptive. The market continues to respond to our product offering. During Q3, which is a seasonally weaker quarter in our industry in general, we added a 188 SharpSpring marketing automation customers that are expected to generate over $1.3 million of annual recurring revenues going forward. We have seen some positive results already on our increased levels of sales and marketing spend to date. And we feel confident that with continued investment in sales and marketing, we will continue to capture more customers and grow SharpSpring at a solid pace moving forward. It is for that reason that we are planning additional expenses over the next quarters and capture more – to capture more business and create long-term shareholder value. In addition, we are making decisions today to align our brands and focus on our high growth SharpSpring product. As most of you know, our GraphicMail product provides customers with basic email management functionality at a competitive price point. Customers have historically relied on GraphicMail and other email providers as an effective way to reach customers and grow their business in a cost effective manner. However, little by little the world is changing. Customers want more functionality. They want to not only send email to customers and prospects, but they to be able to communicate with the right customers and prospects with exactly the right message at the right time. And the marking automation is the tool that allows them to do so. These changes in customer needs have led to slower growth in the email market and muted expectations for future growth of this sector overall. The recent acquisition announcement by Constant Contact had a relatively low multiple indicative of the pressures on the traditional email market and stands and striking contrast of the high multiples enjoyed by marketing automation comparables. In light of the shifting customer interest towards marketing automation, we are announcing today that in Q1 and Q2 of 2016, we plan to migrate GraphicMail customers to our SharpSpring marketing automation platform. The migration will be a seamless transition offered via and in application upgrade and will include advanced marketing automation features such as visitor ID, automation tasks and behavioral based segmentation of the current graphic mail customer base did not yet enjoy. We will discontinue the GraphicMail brand concurrent with the migration of GraphicMail customer base to the SharpSpring marketing automation platform. As with any product transition, we expect the potential for significant attrition during this period. We expect the bulk of this attrition to be centralized on GraphicMail’s consumer and micro business segments that are not the primary target customer for marketing automation services nor are they are company’s focus moving forward. In contrast, we expect GraphicMail’s larger business clients to be far better served by SharpSpring’s marketing automation functionality and ultimately this change will lead to a longer and more profitable relationships with these clients and an increased growth rate for SharpSpring overall. We believe this as well as the significant operating synergies by – we will enjoy by focusing with our currently two separate development teams on to one code based clearly make this transition the right long-term move. In short, we are prepared to accept some short term attritions in the consumer and micro business segments of GraphicMail and a change for higher long-term growth, significantly increased operating efficiency and higher long-term profitability. Once completed the migration of GraphicMail customers on to the SharpSpring platform will leaves the company with two distinct business units that each play a role in creating shareholder value. SharpSpring’s marketing automation platform represents the high revenue growth opportunity in a high growth and expanding market while SMTP provides core email delivery, which is both a strategic differentiator for our marketing automation business and a highly profitable and stable revenue stream to help fund our operation. Before I hand it over to Ed, I would like to make a comment about our SMTP email delivery product, which has been the backbone of the company for the past decade. The SMTP products and brand names are not pulling away. In addition to serving a key niche in the email space and providing a stable cash flow to the organization, our SMTP delivery technology has been integrated with our marketing automation platform to bring critical component of our service in-house. We feel this is a competitive advantage in the marketing automation market that we can develop over time to our advantage. In short, I am excited about – excited to lead the company through this critical time in our history and look forward to realizing the growth potential that are focused on marketing automation and disruptive positioning presents to us. Before we enter the Q&A phase, I would like to turn the call over to our CFO, Ed Lawton, to take us through the financial details for the quarter. Ed?

[Edward Lawton:]

Thanks, Rick. I am pleased to report on our results for the third quarter. During Q3 we recorded revenue of $3.74 million, a year-over-year increase of 129% compared to $1.63 million in the third quarter of 2014. Revenues grew approximately $150,000 organically from our second quarter, which is 4% sequential quarter growth. While summer is traditionally a slower season for both email and B2B business overall, our SharpSpring product continued to grow nicely during the quarter, reporting record sales of 188 new accounts during Q3. And that was up from 182 new accounts in Q2 and 149 new accounts in Q1. These new accounts signed in Q3 are expected to generate over $1.3 million in new and/or recurring revenues. We are also pleased to have signed up 46 new accounts through our international network of subsidiaries and resellers. This represents solid growth after launching this international effort under nine months ago. As of the end of the Q3, we had over 675 SharpSpring customers about 85% of which are marketing agencies. We have focused our marketing efforts solely on these to drill marketing agencies, who then resell our solution to their customer base in addition to using SharpSpring to grow their own business. As of quarter end, we had approximately 2500 total companies using the SharpSpring platform, including resller accounts, agencies and direct end-users. This quarter, we are excited to announce that we had $1.25 million of GAAP revenues for SharpSpring in the third quarter. During the quarter, SharpSpring hit another key milestone and that it also exceeded our initial business target of having $5 million of annualized revenue under contract by the end of 2015. It is quickly reached parity with the other products in terms of revenue and we expect SharpSpring will continue to drive business growth as we move forward. As Rick mentioned, it is for these reasons that we’re aligning out of the SharpSpring brand and changing the name of the company and ticker on December 1. Turning to the other products, combined revenues for our GraphicMail and SMTP relay products was $2.5 million during the quarter. Our international revenues continue to be impacted by foreign currency rates which had a $100,000 impact compared to the same quarter last year and a $25,000 impact compared to last quarter. In addition to foreign exchange rates, we also saw the impact of summer slowness in Europe and [indiscernible] a higher than usual level of GraphicMail customers due to pores and quality, something that company has always monitoring to ensure our sending reputation remains strong in the email community. Gross profit for Q3 was 73% of revenues, which is down one percentage point sequentially from Q2. During Q3 our network operating costs and support cost, both increased slightly as we brought on more staffs to facilitate business growth. On the operating cost side, we saw our sales and marketing expense increased about $215,000 from Q2 levels as we added staffs and increased marketing programs during the second half for the quarter. We are expecting sales and marketing costs to continue to rise in Q4 as we see the full impact of the new hires we made during Q3 and as we add to our marketing spend for programs and events. This increased spending will have a negative impact on short-term EBITDA, but we will create positive long-term ROI for the business. Our development spend was consistent with the last quarter at about $530,000 during Q3. We expect development costs to increase slightly during the remainder of the year in dollar terms and remain relatively flat as a percent of revenue during Q4. The G&A line in our P&L includes some restructuring costs that we have pulled out of our adjusted EBITDA and core net income figures. Those charters totaled about $460,000 and are mostly related to the separation of our former CEO. In addition, our facilities constant headcount related costs increased due to general business growth. Our GAAP P&L reflects acquisition related costs. These costs are related to the earn-outs of our 2014 acquisitions of both SharpSpring and GraphicMail, which we are required to revalue each quarter and record the change in the value to our income statement. The change in present value of these liabilities which is mainly due to updated estimates and the passage of time as we get closer to the ultimate payment date will be reflected in our P&L each quarter until the payment date of April 2016. As of the end of the quarter, we had a liability of $5.3 million on the books with roughly $550,000 of potential remaining GAAP expenses that will come in over the next three quarters. We recorded a GAAP loss of $1.3 million or a loss of $0.19 per share during Q3. Adjusted EBITDA was a loss of $223,000 in the third quarter, which reflects increased investments in sales and marketing and support costs for SharpSpring. Adjusted EBITDA adds back stock compensation expenses of $222,000, acquisition related expenses of $270,000, restructuring charges of $459,000 in addition to depreciation and amortization of $429,000. Core net loss for the third quarter was $261,000 or core net loss of $0.04 per share. Core net loss adds back stock compensation, acquisition related charges, restructuring costs 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 $4.5 million on September 30, compared to $1.8 million on June 30. During the quarter, we raised $3.4 million net of expenses in a secondary offering. In addition to the negative adjusted EBITDA during Q3, our cash was reduced for restructuring charges and other charges including $109,000 of CapEx. As we discussed on our last call, we have decided to invest more aggressively in SharpSpring’s sales and marketing efforts and we think we are in a position to capitalize on this increased spend to materially strengthen our position in the industry and grow our market share to build long-term shareholder value. We are now even more convinced of this and we are planning to ramp-up spending even further. Our updated plan calls for increased short-term spending over the next two or three quarters with adjusted EBITDA ranging from a loss of $500,000 to $600,000 in Q4, followed by a loss of between $750,000 and $1 million in Q1 2016. After that we expect EBITDA to improve substantially as we begin to leverage operating synergies across the business. In short, we are investing in a business that we firmly believe will generate profit within two years and will yield long-term returns for our shareholders. That concludes our prepared remarks. Elizabeth, would you please open the call to questions.

[Operator:]

Yes, sir. [Operator Instructions] We’ll take our first question today from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead, sir.

[Eric Martinuzzi:]

Thanks. I want to discuss new branding. First of all, I completely agree I think SharpSpring is the brand to go with. Just wondering, you talked about the wind down a little bit of the GraphicMail business and brand. What is the dollar impact of that wind down of the consumer and kind of micro business? Can you size that up for us?

[Rick Carlson:]

Well, I’ll take that Ed. Obviously we’re going to do everything that we can to minimize the impact. I think what we’re – our plan is actually to rollout our technology in a rolled out fashion, so that we can test and adopt. We expect the attrition rate could be as high as a couple of million dollars just to put a number out there. We expected that that those customers are not the customers that that represent the past moving forward for us as a marketing automation company. We also think there is a real possibility that the numbers could be better than that, but we want to – our main concern in this area is simply a matter of changing people’s habits as consumers down at the low-end and presenting them with the brand new interface. Ultimately, the products that they will be presented with will be far more advanced in terms of features and functionality. And so the vast majority of business customers should actually be very, very happy with that transition. In addition, the type of product that is marketing automation represents a stickier application if you will one that ultimately leads to longer lifetime value at less attrition. And so, we’ll be consciously including features in the new product set that are some of our stickiest features that integrate with people’s websites to provide tracking and behavioral based technologies, forms and so forth that are just not either included in the platform that they’re currently using with GraphicMail or used as well by these particular clients.

[Eric Martinuzzi:]

Okay. And then as far as the gross profit goes, you did talk about there were a couple of actions you took in Q3, may be there is a question more for Ed. You talked about some network operating cost, you talked about some support. Are those – is that 73% number, is that the right number to use as we model kind of Q4 2016? What’s the right way to think about the gross margins now?

[Edward Lawton:]

It’s been right around the same range. Last quarter it was 74%. It’s probably with the SaaS model we are building our scalability. We’re building our support teams going forward. Obviously that comes with a little bit of upfront cost. I would expect it to be in the same kind of 70 to 75 range going forward. So we’re actually too much I think in the near term, the next couple of quarters. It will tick down slightly from where we’re today. So probably in the lower little bit lower 70s, but still kind of remain in that band for the future and then we’d be able to leverage the team and the operating synergies going forward to get it backup into the middle 70s.

[Eric Martinuzzi:]

Okay. And then just a housekeeping item, the share count that we should be using for Q4, I think you guys issued around 800,000 shares, but it was I think it was in the month of September, what given that we finished out here, in Q3 with the share count of diluted share count of $6.9 million, what’s the right share count to use for Q4.

[Edward Lawton:]

$7.2 million to $7.3 million would be a good range to use for Q4.

[Eric Martinuzzi:]

Okay. All right, thanks for taking my questions.

[Rick Carlson:]

Thanks, [indiscernible]

[Edward Lawton:]

Thank you.

[Operator:]

Our next question will come from Louie Toma with Craig-Hallum Capital Group. Please go ahead.

[Louie Toma:]

Hi guys, I just had a couple of quick questions. What the 188 new SharpSpring customers you added, can you give us a breakdown of U.S. versus international.

[Edward Lawton:]

Sure. We announced that there is a 46 of those are international. So that ticked up compared to last quarter. I believe last quarter December it was in the mid-30s.

[Louie Toma:]

And when you talk about seasonality in Q3 and look at it from U.S. versus international or specifically Europe comp is there a difference in the way the two regions have seasonality impact.

[Edward Lawton:]

I think it’s a little bit off shore in Europe in terms of the seasonality impact that we saw especially this last quarter. So I think there is more vacations being had over there, compared to over there, but people are in general on both size of the pond. Generally send fewer e-mails and that does impact some of the volume related charges that we have during the quarter. So we saw it on sides, but it was probably a little bit heavier of an impact on the Europe side. And then on top of that like I mentioned foreign exchange rates have decreased for us, especially in the regions that we’re operating in compared to the U.S. dollar translations had a pretty good impact on revenues reported in U.S. dollars as well.

[Louie Toma:]

Okay. And then lastly, the when you talk about the attrition from the graphic mail transition, it sounds like you are losing to smaller customers, when you look at it as a whole, are you in essence losing the lower profitable customer. So at the end of the day, half the transitions done, you are going to lose customers but your profitability for that business is actually going to increase, is that the right way to think about it.

[Rick Carlson:]

I definitely think that’s the right way. I do want to make a correction, that we’re – that a it is not fore gone conclusion that we lose these customers. We do want to openly discuss that possibility here on this call. But as we transition, but we’re obviously going to be working very hard to preserve the revenue that we can out of that customer base, however on having said that, the company is firmly focused on providing a solution of marketing automation solution competing in that space and in our customer segment in that space is SMB customer. And graphics main has a set of consumer and what I would refer to as micro businesses. That may not be ready for marketing automation. We’re pretty confident that our user interface is very, very ease of use. And so we may not suffer the attrition, the numbers that I spoke about earlier in the call. However, all of those customers because they are less sophisticated, because their micro business is they do often require some handle and when it comes to tax supported. That sort of thing, so yes, I would think of these as potentially less profitable customers. And we’d really expect to see the synergy between the teams. So at this point in our business, we have two development teams working on two different products that have very similar functionality for example, they both have what’s referred to as [indiscernible] import and export tools, this building so on and so forth. We can now bring those teams together and accelerate our development on the short sprint platform. So we will without a doubt be significantly more efficient moving forward with the transition.

[Louie Toma:]

Okay, thank you.

[Rick Carlson:]

Thanks, Louie

[Operator:]

Our next question comes from the Alex Silverman with Special Situations Fund. Please go ahead.

[Alex Silverman:]

Hi, good morning.

[Rick Carlson:]

Hi.

[Alex Silverman:]

I apologies, I missed the first [indiscernible] to the call. How would you help us through the spend in Q4 and Q1, the incremental spend sort of what kind of return on investment you expect from the incremental sales effort.

[Edward Lawton:]

Yes, sure. So we’re expecting the bulk of that spend to be in sales and marketing. What we do see is that the in quarter cost to acquire customers is trending down, sorry, the cost require customer is trending up a little bit as that spend is incurred essentially the quarter before those sales really if you come into the business. So we’ve got typically about 60 days to 90 days sales process, sales cycle. Part of that leads to a higher customer acquisition cost, when you just look at the quarters financial metrics versus the customers that are signed in the quarter. So but we do expect to still receive healthy ROI levels. Our customer acquisition cost are expected to go up somewhat, but not in any dramatic fashion that would make this business unprofitable [indiscernible] for the long-term profitability.

[Alex Silverman:]

Understanding, there is a one or two quarter lag between spend and realizing, how should we think through a dollar of spend versus a dollar of ARR.

[Edward Lawton:]

So we would continue to target under a one to one relationship between those two. So our customer acquisition costs are expected to stay under one times in a recurring revenue values, which is something that we know is little bit of a relationship that’s experienced by some of our competitors like HubSpot market or so. We would target customer acquisitions cost overall one times in our recurring revenues in the future.

[Alex Silverman:]

Okay.

[Rick Carlson:]

That’s right. We – our competitors as mentioned are typically spending their first year of ARR acquiring customers where trending to be a little over half of a first years expected ARR. So we’ve got – so we’ve been today quite a bit more efficient. We want to be more aggressive and capitalize and yet, we feel like a lot of the marketing factors that we’re using given our price point and some of the differentiators we’ve had, which are leading to pretty high conversation rates or insulate us from really increasing that customer acquisition cost significantly above where it has been in the third quarter, which we – I think we said those $4,500 per customer, on a customer base of around $7,000. So the customer ARR of around – $7,500 somewhere in that range.

[Alex Silverman:]

Got it. That’s helpful. Thank you, guys.

[Rick Carlson:]

Thank you.

[Operator:]

Our next question comes from Scott Billeadeau with Walrus Partners. Please go ahead.

[Scott Billeadeau:]

Hi guys, could you I guess a couple of questions. One would be on the again, you talked a little bit of on the spend and ARR could you talk on graphic mails to come up with potential two million of as again, that’s going to actually maybe one of the worst case. You talk about what the revenue for that entity is and there is most of us going to come from, are you price increasing, are you what is that, that’s going to cause that disruption to that client base it’s just as simple change of user interface or are you going to ramp up pricing to because you are providing them a much more feature rich product.

[Rick Carlson:]

Yes, sure. I’m happy to take that. Ed, it sounded like you wanted to add something as well. So feel free, I’m – the first thing I want to make sure that we’re really clear about is we are moving these customers to SharpSpring marketing automation platform. So those customers will be converted and become marketing automation customers. That presents to them an entire new – an entirely new feature set and a lot of those features provide a lot more value than what I would call a traditional ESP like a constant contact or in this case GraphicMail, if I use our own – if I use our own product, as an example. The simple reality is though, when you are talking about the very less to the market. To talking the case where you provide more features and those features can be confusing to a customer reference features are not used by the customer. And ultimately end up quettering [ph] a user interface. I’m getting very kind of down in the week here in terms of product, but whenever you change a user interface, people are to used to using thing – using an interface in one way and we transition into another, you suffer attrition. We’re also not going to chase every last customer in this market and distract our development team from the task in hand, which is to go out and beat the large incumbent players, who I refuse to name on this call in the marketing automation space. So that’s what we’re doing, that’s what we’re focused on, and we’re absolutely fine not being distracted and drilling after those very, very small customers. So ultimately, that did the last thing, I’ll say about, this will be a seamless transition, the what I will mean by that is the lists that are built into the GraphicMail platform that the customers are using right now. All of their email templates, all of those things will essentially transfer over they’ll wake-up in the morning and have an entirely new interface in front of them and of course will tutorials and all of that step builds into smooth over the transition. It’s possible that the transition doesn’t lead to as much attrition as we have alluded to here, but we want to make sure that we can convey to you, exactly what’s going on our rational for it. And the fact that it’s a – this is a long-term growth play.

[Scott Billeadeau:]

And is that essentially just retiring the old GraphicMail systemic idea that at some point was that during 2016, where that just ceases to exist and everyone’s on the SharpSpring marketing automation platform is that the goal.

[Rick Carlson:]

Now, that’s right. That’s right. That’s exactly right, we feel like the platform offers more features, more lifetime value from our perspective for each customer, because there is more stickiness and we’ll have essentially a tremendous number of operating efficiencies built into this move. Because we got we now have our developers all working on of the tool base. So overtime, that tool base will go away. That we’re going to just to signal, we’re going to do this as quickly, as it make sense to do it. And so it will be the couple of phases to it. And it will be monitoring those phase is making adjustments along the way, to capture opportunities to, if we just added this one little thing and it doesn’t take us very long, we capture a whole set of customers. So we’ll be monitoring that and doing making some common sense decisions there to make it happen. When we come through the other side of this, we’re going to have higher growth rate with SharpSpring ultimately and all of the customers are in the marketing automation platform tool base.

[Scott Billeadeau:]

Just one followup, is there, as you – as the new the SharpSpring platform in terms of what you’re selling now. Is there when you go up against betters is there a feature or function or something that you don’t have that you need, is there any holes in that and when will that hole be filled.

[Rick Carlson:]

Sure. Fantastic question. Listen to our industry is constantly evolving our competitors are fantastic and continue to create new features, we have great ideas. If I answered you – we’ve been very successful selling around this concept. But, we are the one of the marketing automation platforms, one of the only marketing automation platforms that does not include a landing page builder. That when we talked about agencies is fine with agencies and frankly the CMS systems the content management systems that are out there now allow people to really build landing pages in a much more user friendly way. Our agencies like the idea that they just use the content management system. But we’d love to have a landing page builder in our platform and so you can imagine us addressing that concern some time, sometime soon.

[Scott Billeadeau:]

Is that a function the agencies like because that’s incremental to them with their end customer as a service they can provide with something, I can – and I built it for you, for an little incremental fee concerned about cutting that piece business off for them.

[Rick Carlson:]

No, no, no, no, absolutely I think that really – absolutely not our entire tool actually, is it’s a benefit of our entire tool the agencies that provides them more opportunities to charge for service revenue, so just to paint that picture for everyone. Gone are the days when a marketing agency would build a website and then once a month put an untargeted news letter to everybody in the customer base. Now it’s about pretty amazing behavioral based and demographic based customer segmentation on the fly treating every customers essentially if an individual based on their buying behaviours and so forth. The landing page builder again we’ve been there, as you know by the numbers very successful on selling around that feature because it exists in another areas if we were to include a landing page builder in the SharpSpring platform as an example, we would be providing a convenient way for an agency to provide that service much in the same way as we do with our built-in email, vis-a-vis we get in and other tools.

[Scott Billeadeau:]

Okay. Great, thanks.

[Rick Carlson:]

I hope that made good sense

[Scott Billeadeau:]

Yes.

[Rick Carlson:]

Appreciate it. I think we have a few more question.

[Operator:]

[Operator Instructions] We’ll go next to Tom Shaughnessy with SecretCaps. Please go ahead.

[Tom Shaughnessy:]

Hey Rick and Ed, congrats on the quarter.

[Rick Carlson:]

Thank you, thanks a lot.

[Tom Shaughnessy:]

Four questions for you. If you guys really spend the agency numbers for the quarter?

[Rick Carlson:]

Ed, you want to take that.

[Edward Lawton:]

In terms of the agency accounts Tom, or.

[Tom Shaughnessy:]

Yes. Any growth in the agency capital that’s a big focus for you guys.

[Edward Lawton:]

In my remarks I believe I said that we had over 575 agencies that are currently on the platform.

[Tom Shaughnessy:]

Okay, [indiscernible]

[Edward Lawton:]

I’m sorry say that again.

[Tom Shaughnessy:]

So around 75 agencies came on.

[Edward Lawton:]

Yes, we had announced 500 number I think it was on our last earnings call and I believe that when we announced it was as of that date, so early August, we had about 500 and then we believe we’ve added about 80 since then throughout the rest of the quarter. Just put in rough numbers.

[Rick Carlson:]

We also said we added 188, sorry I was stepping on each other a little bit I apologize, we also said we added 188 new customers in Q3 with SharpSpring and we’ve suggested and right now that are customer base typically is geared about 85% to 90% agencies and that we don’t see that changing we kind of pickup we don’t spend the dollar to market to anybody but agencies but we pick up the award of amounts and other effects, we picked up some end users strategically that really essentially come to us. So when we talk about customers, you can pretty much count on 85% to even 90% of those being agencies in any given quarter.

[Tom Shaughnessy:]

Okay, it sounds good, and just a bit more rebate question. I know one of the reasons for GraphicMail is to leverage the international presence to upsell SharpSpring through has that already been capitalized on or will that be stunted with any change?

[Rick Carlson:]

I’d like to answer that. I talk a little bit about – I'm a product guy, so I get excited about having extra developers to work on our problem. I think that that makes us a – I'm excited about that opportunity. We also have an international sales organization via the GraphicMail acquisition that is currently having to learn and sell and market two different – entirely different products. There is a lot of overlap between what the GraphicMail product does as we talk about as an email service, but they are different products. They do have different codes and features and so forth. And we’re actually excited about the opportunity to get our country partners and our international sales team selling one product and focused on the proper way to sell that product. So I think just as we see benefits on the technology side by having the company focused on one code based, I believe will be similar benefits with our sales and marketing processes and I believe that extends through to our country partners as well as we give them one line to focus on and one sales process to follow.

[Tom Shaughnessy:]

Excellent, thanks again Rick and Ed. It’s great to be laser focused on SharpSpring.

[Edward Lawton:]

Thanks, Tom.

[Rick Carlson:]

Thank you so much. I appreciate that.

[Operator:]

Our next question will come from Sean Marconi, a Private Investor.

[Edward Lawton:]

Hi, Sean.

[Sean Marconi:]

Hi. How are you doing?

[Edward Lawton:]

Good.

[Sean Marconi:]

I have had a couple of questions geared towards your product. What are you currently pricing SharpSpring for to selling through different marketing agencies? And what price of those marketing agencies selling your product for?

[Rick Carlson:]

Sure. Excellent question. We don’t put it on the – we don’t put our agency pricing model out there on web. What I’d like to tell you is that we are – our agencies typically pay well less than one-tenth of the cost that they might pay for competing solution in order to bring marketing automation to one of their clients. So our agency pricing model is pretty much unheard of. In fact we’re often asked are you leaving money on the table. We could have that discussion as well. But our strategy with that is really enabling the marketing agency to bring our product to every one of their customers. So let me compare and contrast that with a company like HubSpot. If we were to look at the HubSpot pricing page right now, we’re very comparable to their enterprise solution, which for I believe 10,000 contacts in the system runs $2,400 a month. We can provide that same type of technology for an agency to bring to their end-users for – actually well less than 10% of that cost. The agency can decide whether to charge or even give away the product will give the agency it’s not a reseller relationship with the agency. We allow the agency to control their customer then we really view the agency as our end customer relation from the platform to do with it what they will. What's important to note is that the agency is much more interested in the service-based revenue. So as they’ve got a great client that is [indiscernible] $5,000 monthly retainer, the agency can use SharpSpring to solidify that relationship because we become integrated with the customers’ business operations. We provide a tremendous amount of value. And all of that functionality, all the emails that are created, all the workflows, and automation tasks, and analytics, and I could go on, are billable hours for the agency. And so whether they choose the market up or not, it’s really done on at the agency level and even on a case by case basis. But typically I would say an agency marks our product up, keeps a big chunk of that markup for themselves because they can market up and make really healthy margins, but ultimately…

[Sean Marconi:]

Well that’s…

[Rick Carlson:]

Go ahead sure.

[Sean Marconi:]

Sorry, can I stop you a real quick…

[Rick Carlson:]

You guess…

[Sean Marconi:]

I just got one more question.

[Rick Carlson:]

Sure.

[Sean Marconi:]

So one of the things that I'm really trying to understand, you guys are doing a really nice job of growing the sales. But one of my concerns is that the increase in expenses and when I was doing an initial research on this, I always thought SharpSpring will be the growth driver of the company, but it was always interesting to me to understand the pricing model. And when I actually went through a sales demo with SharpSpring, it’s interesting to learn how SharpSpring charges their customers and are going after the marketing agencies. And then it was also interesting to learn to see what the price of these marketing agencies are selling or selling to their clients because SharpSpring features and functionality work very well. So, I’ve always been concerned personally that you guys were under pricing the product. So I'm just trying to understand, how does it compare to the competition and how can you guys generate more sales from your customers?

[Rick Carlson:]

Sure. The trends – just fill that down into something. So with our – when we’re talking about our agency customers, which again is the bulk of our revenues, our agencies are now in a position – we actually say that our best prospect is an agency that has been educated by HubSpot or Marketo or one of our competitor that are out there. We actually target these agencies because they know about marketing automation. Our growth strategy with these agencies is that, if they’ve got five customers on HubSpot, it had 50 conversations with other customers. And those customers either did not want a pony up for the many thousands of dollars per month that those solutions cost or the agency did not want to see a large chunk in terms of percentage of their agencies retainer leads the business and go to marketing automation provider. So when we sign up an agency, who might have two or three marketing automation customers on another platform, what we see is they immediately switch to SharpSpring for all of their next customers. We do not have to ask them to switch providers. And we’re happy to be one of a couple of solutions because what we see is that the agency simply puts all of the customers on to the SharpSpring platform moving forward. So we’re – HubSpot or Marketo could go in and maybe get two or three clients from an agency. We may go in and get 10 or 15 and we have clients that have 40 customers on or agencies that have 40 clients on our platform as well. So the way we grow in that scenario is – is because we have more clients on the platform per agency I think than a typical competitor of ours. And we grow with our agencies. You can imagine as well that that creates a tremendous over the long-term a stickiness factor with the agency, right. They essentially build their business around our platform.

[Sean Marconi:]

Absolutely. So do you kind of get paid per user fee or do you guys charge a fixed rate fee on a monthly basis to an agency?

[Edward Lawton:]

We let…

[Rick Carlson:]

We license the agency – go ahead, Ed.

[Edward Lawton:]

No, it’s okay. Go ahead.

[Rick Carlson:]

Sure. We license the agency, the platform for a monthly fee. For that fee, which is just a few hundred dollars, less than $1,000, the agency can place up to five clients on the platform. They also give a license for their agency for free because we want them using our platform and then get up to five clients on the platform, as they graduate...

[Sean Marconi:]

Okay.

[Rick Carlson:]

With our six clients, the fee increases on our side.

[Sean Marconi:]

Okay. So let’s just use the term of – you said $200, $300, $400 a month. What's the use of $500 a month, they are charging an agency?

[Rick Carlson:]

Sure.

[Sean Marconi:]

So that’s basically $6,000 a year in revenue from that agency. Correct?

[Rick Carlson:]

To start, that’s right.

[Sean Marconi:]

Okay. And how does it grow from there?

[Rick Carlson:]

Yes, just as I alluded to – as the agency adds their six clients in that five user packs an area that we’re talking about the agency pays more beyond that platform. So again, we have clients, we have agencies that have 40 clients on the platform. So they are no longer paying in your scenario $500 a month they are paying many thousands of dollars a month because they have more clients on the platform.

[Sean Marconi:]

Okay, I think the conference…

[Rick Carlson:]

I’d like to make sure you listen to the other question, Edward love to talk to you.

[Sean Marconi:]

Okay.

[Edward Lawton:]

Yes, exactly. There are mechanics where our price goes up as the deal, as the number of users on the platform goes up, there is also other charges for email volumes, or call tracking phone line charges and things like that. So our average selling prices actually a little over $7,000 per customer, per paying customer of the annual recurring revenue value and just say you know.

[Sean Marconi:]

Okay. Thanks a lot. I’ll jump back in the queue.

[Edward Lawton:]

Thank you so much.

[Operator:]

Our next question comes from Jason Revland with Blueprint Capital.

[Rick Carlson:]

Hi, Jason.

[Edward Lawton:]

Hi, Jason.

[Operator:]

And your line is open.

[Jason Revland:]

Good morning. Thanks for taking the question. Yes. Good morning, thanks for taking the question. Just a question around the industry demand for marketing automation given all the money that’s being spent on building awareness by a larger competitors. What can you say about the dynamic of how the agencies that you are selling to in terms of the speed which they are making a decision or whether it might be coming to you just the understanding of your sales cycle is my first question.

[Rick Carlson:]

Sure. Well, our sales cycle is as Ed earlier said, 60 days to 90 days, precisely what our sales cycle is one of the things that starts bring to us and we use our own product to grow our business by the way. So our typical sales cycles 12 weeks to 14 weeks. So I say excuse to that 90-day number that, Ed throughout earlier. I think the second part of your question was asking essentially about the growth in the marketing automations and the agency sector or the awareness in the agency sector about marketing automation. If that’s not your question, you can follow-up and make sure I get your question answered. But here is what I would say about that, we estimate that there are 50,000 to 100,000 depending on how you measure those agencies and how small you get digital marketing agencies. So these are people who build websites manage, search engine optimization, pay per click, marketing automation campaign, these are focus digital marketing agencies. That market is growing as the world gets more sophisticated, they are doing all the things I talked about as well as managing social and new networks and all kinds of stock. So business is can’t do the stuff by themselves. And so they hire a marketing automation or digital marketing agencies and the market itself is growing. At the same time, as much money has been spent on this particular market and educating the market overall about marketing automation. We talk to agencies everyday who are just becoming aware of the power of marketing automation. I alluded to our best customer, our best prospect as already being keyed in on marketing automation and even coming from a competitor. But we talk to agencies all of the time that are just becoming aware of that. So I like in the marketing automation industry to the CRM industry, or even in email marketing industry itself, which used to say, a multibillion dollar industry, one that would be it here for decade. The differences I think this is the third generation I think we talked about, we saw CRM, which is today is still growing and the – I think I’m going to say third decade right. Started in the 1990s with tools like gold mine and those tools, then moved into email and now we’re in the marketing automation phase which comparatively speaking as brand new and I think just as a large and to some degree an evolution of those other two markets. So I hope I’m answering your question, I’ll pass here to see if I was on the right track.

[Jason Revland:]

Yes. That’s a good color. And just as a follow-up I think we’re all curious to see how effective your agency partners are at reselling the product to their end customers, once they’ve had some hear to time to adjust the learning curve on that field. You can provide any metrics around that now or in the future I think that would be helpful to understand maybe this sort of implied exponential growth opportunity that we – I think [indiscernible].

[Rick Carlson:]

Let me give you one that’s great, let me give you one right now. Just for fun, so we launched in January of last year. I just to want to remind everybody of that, we launched in January of last year, so today feel the majority of our agency have been with us for less than a year as we’ve accelerated HubSpot, don’t looking on any of this, but I believe, they claim to have somewhere around 2,000 agencies and about 1,500 customers that have entered coming upon a decade in business. I think they’ve been around for about eight years. So in the last year and a half or so with SharpSpring, we are approaching 600 agencies, those agencies have put in the neighborhood of 25, the numbers are moving targets but in the neighborhood of 2,500 to 3,000 clients on the platform. And we’ve done so with almost know, marketing dollars by comparison to competitors that are out there. So we see a pretty significant trajectory, not only in terms of our agency sales, but also in terms of their customer adoption and what we’re doing right now is creating significant brand awareness. You guys said we – we’re moving up on 15% of our revenues are coming from customer that we don’t spend a dollar to fund. So we think we’re making the right moves here. We think our agency partners are very clearly, putting clients on the platform then building our businesses around marketing automation and SharpSpring specifically.

[Jason Revland:]

Okay, thanks, guys.

[Rick Carlson:]

Thanks so much.

[Edward Lawton:]

Thanks.

[Operator:]

And we have time for one more question. That will come for Scott Billeadeau with Walrus Partners.

[Edward Lawton:]

Hi, Scott.

[Scott Billeadeau:]

Thanks for taking the question. One of my follow-up, just maybe you could give us the little idea of the five pack that’s kind of peer to stay you kind of analyzed in the five pack is the right number for that. And when you talk about your 600 agencies versus HubSpots number, as they are different in the size of the agency – how do you attract that and when you look at your sales level. What you know do you guys looking at the same type of agency that dropping and that’s going into that funnel.

[Edward Lawton:]

Sure. The first thing I would say as we are looking at – we’re always looking like a lot of companies of our size, like different pricing options and running experiments and that sort of thing. So the five pack whether it’s here to stay or not I just what put that out there is a written in stones. Do we have plans to change that right, no we don’t. The second question is which I think is the HubSpot agency comparable to a SharpSpring agency or vice versa. I’d say largely the answer to that is yes. If I’m going to speak very if actually the early customers that we received did huge towards the smaller, earlier adopt to our customers and that are willing to take a chance on the brands that at that time. They never heard up, that’s quickly changing now, and what we’re finding is that our competitors know who we are. I’ve heard good things about us and we are able to attract customers from our competitors more easily as each day passes. The other thing I would say is we – by definition based on our pricing, are able to bring agencies into the affordable, into marketing automation that the HubSpot and Marketo and Act-On and Pardot simply can’t. They’re charging two or three times for one license what our five pack might cost. And so by definition, we’re bringing in customer and a new market that they’re not currently addressing. And we think we’ll have a difficult time addressing. For that reason alone I’d have to believe that our agent, our typical agency on average sques [ph] smaller than a HubSpot agency, because we’re simply able to address that market. At the same time we see ourselves making significant inroads to the larger, more established agencies as SharpSpring itself becomes more established and we’re getting that and we’re recognized as a brand that’s here to stay sort of that is [indiscernible] answer.

[Scott Billeadeau:]

Yes, I appreciate it guys. Thanks so much.

[Edward Lawton:]

Thanks, Scott. At this time this concludes our question-and-answer session. I’d now like to turn the call back over to Mr. Rick Carlson for his closing remarks.

[Rick Carlson:]

Well, I don’t have a lot of closing remarks. I appreciate all of the questions. Super-excited about where we are, very excited about changing the name, focusing on marketing automation and what that decision is, what we think is that’s been a due for our Company moving forward. So want to thank everybody for joining the call today. Lastly, if we weren’t able to address any questions, please feel free to reach out to us or contact our investor relations firm Liolios Group, which we would be happy to answer the questions or forward them on to us. So thank you so much, I look forward to speaking to you all very soon. Take care.

[Operator:]

Ladies and gentlemen before we conclude today’s call, I would like to provide SMTP Safe Harbor statements that includes important cautions regarding forward-looking statements made during this call. Certain statements in this call 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, our 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 net income or loss in non-GAAP measures is included for your reference in the financial section of the earnings press release and made available on the Company's website. Finally I’d like to remain everyone that the recording of today’s call will be available for replay immediately after the call and through November 25, 2015. Please refer to the Company’s Investor website www.smtp.com. for dial-in instructions. Thank you for joining us today for our presentation. You may now disconnect.