SharpSpring, Inc. (NASDAQ:SHSP) Q4 2017 Earnings Conference Call March 6, 2018 4:30 PM ET
Rick Carlson - Chief Executive Officer
Ed Lawton - Chief Financial Officer
Eric Martinuzzi - Lake Street Capital
Mike Malouf - Craig-Hallum Capital
Bynum Hunter - Fisher Park Capital
Good afternoon. Welcome to SharpSpring’s Fourth Quarter and Full Year 2017 Earnings Conference Call. Joining us for today’s call are SharpSpring’s CEO, Rick Carlson; and CFO, Ed Lawton. Following their remarks, we will open up the call 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 now like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the Company’s Web site at investors.sharpspring.com.
Now, I would like to turn the call over to SharpSpring’s CEO, Rick Carlson. Sir, please proceed.
Welcome, everyone, and thank you for joining us today. After the market close, we issued a press release announcing our results for the fourth quarter and full year ending December 31, 2017. A copy of the press release is available in the Investor Relations section of our Web site. The fourth quarter represented the culmination of a strong 2017, highlighted by increased investment in our business resulting in accelerated growth of our new customer wins. In Q4 specifically, we had our second consecutive new sales record and grew our revenues by more than 32%, all while improving our margins for the fourth consecutive quarter.
These positive results for both the quarter and full year were driven by the continued strength of our flagship marketing automation platform whose topline grew over 40% during the year, leading to more than 1,400 agency customers and over 6,700 businesses now using our solution. Going forward, we are looking to continue our significant growth into the new year. Our targeted marketing campaigns, new business development initiatives, and bolstered R&D have all collectively worked to not only enhance our sales execution, but also improve the overall experience for our customers.
I plan to dive into more detail on all of these topics shortly. But before I go any further, I’m going to turn the call over to our CFO, Ed Lawton, who will provide our financial results for the quarter and year. After that, I’ll jump back on to give you a more detailed recap of 2017 as well as provide color on some of our more current developments and finish with a look into the present quarter and outlook for the rest of 2018.
And with that, I’ll turn it over to Ed. Ed?
Think you, Rick. Turning to our financial results for the fourth quarter and full year ended December 31, 2017. Our overall revenue in the fourth quarter increased 32% to $3.8 million from $2.9 million in Q4 of last year. Our flagship SharpSpring marketing automation solution grew by 36% to $3.6 million compared to $2.7 million last year. Flagship product revenues were 96% of total revenues, an improvement from 93% in the same period a year ago. With this quarter’s revenue results, we have now surpassed $15 million annualized revenue run rate on a consolidated basis.
For the full year 2017, our overall revenue increased 17% to $13.4 million from $11.5 million in 2016. Our flagship marketing automation solution grew by 41% to a record $12.8 million compared to $9.1 million last year. As a percentage of total revenue, our flagship product was 95% for the full year 2017 compared to 79% in 2016. Our gross margin for the fourth quarter of 2017 increased to 68% from 59% last year and 65% last quarter. In dollar terms, gross profit increased 50% to $2.5 million from $1.7 million in Q4 of last year.
For the full year 2017, gross profit increased 19% to $8.5 million or 63% of total revenue from $7.1 million or 61% of total revenue in 2016. Over the past few years , we have invested in our hosting infrastructure and support organization to reinforce the current and future growth of our product. Now as we continue to add more and more revenues onto the platform, we are seeing some leverage in our operating model through improved gross margins. Over the past four quarters, our gross margins have been 58%, 60%, 65% and 68% sequentially.
Although, we have some planned expenses in Q1 related to things such as GDPR compliance, consulting and the hiring of the new COO, which will suppress margins in the short-term, we expect our margins to continue the progress we saw in Q3 and Q4 and expand gradually in the near future to reach 70% by the end of 2018. Turning to our operating expenses. For the fourth quarter of 2017, our operating expenses decreased 13% to $4.3 million from $4.9 million in Q4 of last year. Excluding an intangible asset impairment in Q4 of last year, operating expenses increased 23% from Q4 of last year due primarily to increased investments in sales and marketing initiatives this year.
Our GAAP net loss from continuing operations for the fourth quarter totaled $504,000 or $0.06 per share. This was an improvement from a GAAP net loss from continuing operations of $2.2 million or $0.26 per share in Q4 of 2016. For the full year 2017, GAAP net loss from continuing operations totaled $5 million or $0.59 per share, an improvement from GAAP net loss from continuing operations of $5.7 million or $0.72 per share in 2016. On the balance sheet, we have $5.4 million in cash at the end of the quarter compared to $6.3 million at the end of the prior quarter. Additionally, based on our current assessment, we are expecting a cash tax refund relating to the use of NOL carrybacks in the amount of $1.7 million during the middle of 2018.
Looking at our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we define as earnings before interest, taxes, depreciation, amortization, non-cash stock-based compensation, restructuring expenses, acquisition-related charges, and intangible impairments totaled $1.3 million. This compares to an adjusted EBITDA loss of $1.2 million in the same year ago period. For the full year 2017, our adjusted EBITDA loss totaled $5.6 million. We expect our EBITDA loss to increase somewhat in Q1 2018 as we continue to invest in new sales and marketing programs to drive additional growth and incur some additional expenses in Q1 related to our audit. Those types of expenses are expensed in the period in which the services are performed.
Our core net loss, which excludes amortization, acquisition related costs, restructuring expenses and stock compensation expenses while adjusting for taxes for the fourth quarter of 2017, totaled $386,000 or $0.05 core net loss per share, an improvement from a core net loss of $851,000 or $0.10 core net loss per share in Q4 of last year. For the full year, core net loss totaled $4 million or $0.48 core net loss per share compared to core net loss of $2.5 million or $0.31 core net loss per share in 2016.
During Q4, our customer acquisition costs were very consistent with prior periods at $6,700 per customer. As a reminder, this is our all-in sales and marketing costs from Q3 divided by the new wins from Q4. Using the prior quarter cost provides a better estimate of our customer acquisition cost to account for the average sales and marketing timeline we experienced. However, this is still an imperfect measure, because marketing spending in one quarter impacts the deals we win in many future quarters.
Our continued low customer acquisition cost shows that we can consistently acquire customers at attractive all-in rates that will deliver significant lifetime value for the business in the future. Based on our historical customer dataset, we expect the lifetime value of these new customers to be approximately $50,000 per agency customers and approximately $40,000 for all customers on a blended basis. These values reflect the benefit to the company on a discounted basis after reducing for gross margin costs to support the customers on a platform.
Based on these figures, our expected lifetime value to customer acquisition cost ratio continues to exceptional. These LTV to CAC ratios continue to be extremely compelling and serve as an argument to raise capital to grow faster. For these reasons, we will continue to monitor the capital markets as we move forward in an effort to assess the best long term value and growth opportunities for our shareholders. For more details on our adjusted EBITDA and core net income metrics, please see the reconciliation to GAAP terms included in the supplementary tables of today's earnings release.
And one final note before I hand the call back over to Rick. We filed a shelf registration statement last month, which replaces the prior shelf registration statement that expired this past January. We believe having a shelf on file is an example of good corporate practice, and will allow us to act more expeditiously in the future should certain opportunities arise.
This completes my financial summary. I'd like to now turn the call back over to Rick for additional insights into our operational progress in Q4 and all of 2017, as well as our outlook for 2018. Rick?
Thanks, Ed. As I said in my opening remarks, 2017 was a very solid year for our company with the last two quarters in particular yielding results from the initiatives we began at the start of the year. We accomplished the goals we set out ourselves in 2017 and did exactly what we said we were going to do; accelerate new growth with increased investment in sales and marketing and align a 100% of our focus on our core marketing automation business. After getting through some corporate distractions and major business shifts in 2016, we started 2017 as a unified, leaner and more focus organization. We’ve talked enough about this in past calls but the activities in 2016 set us on the path to achieving our goals for 2017. So that we can spend the year focus on what was really going to drive our business forward.
The accelerated in the growth we saw in the latter half of the year was possible because of the initial foundation we laid in the first half of the year combined with the predictability and consistency of our customer acquisition process. Put another way, we know that when we spend money on marketing activities those dollars generate leads in consistent ways. We also know that we can convert or consistent portion of those leads and to demos. And we know that our sales team is highly incented to close those prospects after the demo process and that the close rate has remained consistently high since the inception of the company.
All of these factors allow us to believe in the predictability of our process and provide confidence in our decision to align and focus our SharpSpring marketing automation brand and our increased deployment of funds on sales and marketing. Returning to our most recent quarter. In addition to being another consecutive new sales record for SharpSpring, Q4 reinforce the effectiveness of our increased sales and marketing outreach, building on the positive results we began seeing in Q3. This improving performance has been driven by an increasingly robust customer pipeline, strong sales execution and our improved product offering.
From a product perspective, we continue to introduce powerful features and integrations over the course of 2017. In the last year, our advanced Visual Workflow Builder, as well as our integrations to Shutterstock and PieSync have all contributed to the strengthening of our flagship offering and have entrenched to us even further with our growth and customer based. As a result, our current operating has never been more competitive than it is today. Building on these strengths, we recently introduced additional exciting new features centered around social media management that I’d like to spend some time on now.
As you might have seen from our press release in December, we officially launched two new significant product features, SharpSpring social and an integrated content calendar. Even SharpSpring users are comprehensive solutions to centrally manage their entire digital marketing strategy. With these new social features, our customers will be able to grow their businesses by giving them powerful conversion tools that turn social interactions into opportunities to generate sales. Put another way, by fully integrating social media management with marketing automation SharpSpring social empowers marketers to increased brand awareness, generate needs and boost prospect and customer engagement in ways that standalone social tools cannot.
Users can identify hot prospects by adjusting lead scores based on social engagement, trigger sales notifications, e-mails and other automation based on social activity and measure the end-to-end ROI of their social marketing strategies. SharpSpring social also offers other popular social media management capabilities, such as social publishing and social listening. Customers can schedule and published post to Facebook and Twitter directly from SharpSpring and social listening allows users to follow conversations with hashtags, keywords, competitive profiles and more.
SharpSpring's integrated content calendar not only allows customers to create and publish social content right from the calendar, but the interactive interface also offers a comprehensive view of all scheduled marketing content including emails, blogpost and social content.
On a strategic level, SharpSpring Social and the Content Calendar also give our agency partners an additional opportunity to expand digital marketing services that they provide to their clients. Incorporating tools and features around social in our opinion, represents the closing of the last major gap in our platform when compared to competing solutions. We're extremely excited about closing this last gap and think it's going to be huge for SharpSpring moving forward.
As I've said before, we believe quality SMB software does not need to be prohibitively expensive. And what that means for our customers is that we will continue to build upon our brand's reputation as the very best value in the industry and the clear choice for digital marketing agencies. What it means for us is that we will remain focused on refining and improving strategies to attract and win new customers more efficiently and profitably. On that note, we talked a lot of SharpSpring's LTV to CAC ratio. It's an important metric that underlies our ability to make our solution so affordable.
And looking at it another way, it also gives us an opportunity and room to further invest in our growth. As you've heard from Ed, with the solid ratios, we have the ability to invest even more in our sales process to acquire more customers. And with that increased efficiency gained from recent experience, we're inclined to consider that pat of increased spending.
Marketing and automation remains a multi-billion dollar opportunity in front us and we put ourselves in a great position to take advantage of that opportunity. Shifting gears as we look to Q1 of 2018, we'd like to remind listeners that this is period has historically been characterized by some mild seasonality. January in particular is typically a slower month for SharpSpring sales. This is typical for our business. This January, we also instituted a price increase which caused a number of customers to sign up in December to take advantage of grandfather pricing. For this reason, we expect -- sales to be in the 230 range.
As always, we're focused on long term growth and not seasonal fluctuation that occurred during the normal cadence of our business. We’ll continue to invest in our sales and marketing as well as other resources that will support our growth trajectory for years to come. Along that line, during February, we added to our leadership team with the appointment of Jeff [indiscernible] as our new Chief Operating Officer. Jeff brings a wealth of operations expertise to our company, honed by more than two decades of experience and operations in sales for successful SaaS companies. We're excited that Jeff join the team and look forward to the impact he’ll have on our operations.
In summary, through the hard work of many people in the business, we achieved the goals we set out for ourselves at the beginning of 2017 to significantly grow our top-line to expand our customer base and to increase our market share within the multi-billion dollar marketing automation industry. At the beginning of the year, we made a conscious choice to bet on ourselves, our people and our product and company. That decisiveness both in 2016 and in this year have been rewarded with a solid 2017 in our rear view and a solid foundation to build up, we are as motivated as ever been to keep our foot on the gas pedal.
We’re dedicated to making SharpSpring better, more function or easier to use while remaining priced at a fraction of the costs of our competitors. We believe this commitment, combined with our ongoing initiatives to judiciously allocate resources towards sales and marketing, will lead to long-term growth and ultimately value for our shareholders.
And with that, we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.
Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Eric Martinuzzi from Lake Street Capital. Please proceed with your question.
Congratulations on the successful finish to good strong year 266 new customer adds. It’s really exciting to see. You did give a little color on the Q1 new customer ads, it will be around 230. Am I right to compare that to a year ago at 211 new customers, Rick?
Yes, I think so. That’s right. We typically in January -- we’ve only been doing this for about four years. But it’s one of the consistent seasonal effects that we’ve been able identify January for whatever reason people just getting back from the holidays and so forth, it’s just a matter of days and the month where people are active. And so we have a -- we always seem to be a little slow out of the gates in January, and compounding that effect this year we did a price increase. We now for new agency partners are at $600, starting price of $600 for three licenses, and that’s up from $500 for three licenses for a new agency joining us. And because of that, somewhere between a dozen and two dozen deals have -- were probably brought forward into January that might have more naturally closed in January were brought forward to December. So we wanted to just make people aware of that as you all are doing your projections.
So as far as translating that into a revenue number, I know there is definitely some distance in between the billings, the new customer ads, and the revenue, but as far as that, you guys just printed a quarter with $3.8 million, I think the consensus number is $3.8 million for next quarter, but would you expect to be sequentially up as opposed to sequentially flat in Q1 revenue wise?
We’ve got new customers in Q4, the 266 new customers that we signed up in Q4, we’ll see the full quarter impact of those plus the new customers that we sign-up in Q1 here partial quarter for that group. And we do have still a little bit of headwind on the SharpSpring Mail+ side. I would expect that to go down to around 100,000, but aside from that slight headwind, we are expecting definitely to grow quarter-over-quarter.
And then on the product side, you did dive into it a little bit, Rick, the addition of social, the addition the calendar. I’m curious to know is that, I’m sure the answer -- it’s helping customer retention on the one side, but it’s also helping new customer acquisition. Where is it kind of helping the most between those two buckets?
I don't even know how to answer that without sounding evasive, it's just really -- it's a game changer for us in terms of really filling out the platform and extending the power of marketing automation for everybody. For new customers or new prospects looking at SharpSpring, it puts us on even footing and actually, because of some of the sub-features within that section of the app, I think puts us ahead of our competitors, and so it certainly should give us more yes’s on the sales side over the long term.
As we touched on in our remarks for current agency partners, it gives them a whole new revenue opportunity and allows them to deliver better results for their clients, so it's huge in that. It really extends the value for our current customers, and so really hard to pick and choose between those two items, but we're really excited about it, I'll just say that. It really helps across the board both new wins and existing customers.
Do you have between them the new product and the new price point, did you see any change in retention of the installed base as you -- it's still early days here, but at least for January and February, anything out of the ordinary there?
Well, we announced those price changes in Q4. So we actually we try not to surprise our agency partners. And so we gave them 60 days notice and we really saw no impact. Certainly, nobody is excited about price increases, but at the same time, by and large our agency partners really understood the value that the new features brought to the table. And I think just as importantly, it's not as though these agencies or their customers who were not using another solution for social, now it's built into SharpSpring, those features can be rolled into SharpSpring and the payments that were maybe going to another provider can go to SharpSpring on what amounts to an integrated solution that's got a lot more power to it, because it belongs as part of a marketing automation solution. So the short answer is no. We're not -- our agency partners are by and large very, very happy with the rollout of social and we’ve gotten nothing but really positive feedback from the rollout.
Our next question comes from the line of Mike Malouf from Craig-Hallum Capital. Please proceed with your question.
So if we could just talk a little bit more on pricing, I know that you raised the price from 500 to 600 for a new agency. What was the pricing increase for an existing client?
We've increased pricing roughly $25 I believe, Ed correct me if I'm wrong, for existing users. And that affected about 70% of the agency clients utilizing the platform of the businesses, I should say, utilizing the platform. We rolled out the social features as part of the license rather than nickel and diming our agency partners and making a confusing pricing model where with committed to having a one price for the entire solution type of pricing model. So we roll that out, it’s about $25. So depending on when an agency joined us, we always like to be respectful of agencies with the first adopters and those who joined us in 2016 and ’17. At each point along the way, there were slightly different pricing. And so we bump that up of what amounts to a modest amount of $29 a month when we included social.
And then I’m curious about your comments about accelerating growth. Right now, I think you’re spending and in the last quarter you spend about 54% of your revenues SGM on marketing. And that’s pretty similar to what HubSpot and actually they grew right in line with you last quarter, if you look at the first quarter. But if you rewind HubSpot a while in 2010 and 2011 and they were about the same size as you, they were growing at almost 100%, but their SG&A was also -- sales and marketing was also adds about 100% of the revenue. So I’m just wondering how much will you go you think?
So we’re constantly evaluating it. I think the underlying principals for us, so that we believe that we’re in a multi-billion dollar market. And so as long as we feel like we can acquire customers at similar efficiency, we’re committed to acquiring customers in an efficient manner as not the first movers in the space. We recognize that. It’s very important to us continue to be an efficient company and maintain really attractive CAC to LTV ratios and SaaS metrics overall.
And so as long as -- the governance factor for us is knowing that the market is out there for us, it’s really limited by our confidence in acquiring customers at very efficient rates. And so we’ll -- and through the history of the company, we’ll take a step up for several months, test the waters, make sure that we’re continuing to be efficient and then repeat the process. And we’ll continue to -- that’s served us well and I think we’ll continue to pursue that strategy.
And then as you look at gross margins over the next two years, you’ve done a great job of marching them up. And I think Ed you said 70% for ’18 or maybe you can clarify that with us, 70% by the end of ’18 but as you look out -- again to looking at HubSpot’s gross margins at 85%. Where do you think those can go to scale up over the next few years?
Just to clarify, I believe, I said either 70% by the end of this year. So I don’t know it would be Q4 target number for us to get back up to with a slight dip here in Q1 and then gradual increase back up to that level in Q4 of 2018. I think we’ve done some analysis and we think right now today, we're acquiring new customers. Every time we put a new customer, the incremental gross margin for those new customers is around 85% or could be even a little higher than that. And so we're still small but as we grow and we add more customers to the platform, we'll start seeing that gross margin tick up and up into the future. And I do think 85% is a realistic target for us within let's say four or five years on an overall basis.
[Operator Instructions] Our next question comes from the line of Bynum Hunter from Fisher Park Capital. Please proceed with your questions.
I have a question about the shelf. You yourselves are not looking to sale shares. Is that correct?
No, you're probably referring to listing and myself and Travis Whitton our CTO. That is a contractual we were listed on the shelf based on the fulfillment of the agreement of the sale of SharpSpring LLC to what is now SharpSpring Inc. back in 2015. I can't speak for Travis. I don't believe that he has any immediate plans to sale significant shares. And I can tell you that I don't have plans to sale significant shares either with -- the S3 was filed as a result of really fulfilling those contract obligations from the sale of the company that we started to what was then SMTP and is now SharpSpring Inc. So I hope that answers your question.
And my next question just looking back to when SMTP acquired the company. Did you guys take a bunch of stock or was it cash or exactly how the deal structured?
It was a little bit of both. It’s little bit of ancient history here but we took some cash and some stock and actually we ended up converting I believe an extra $4 million. Ed, correct me if I'm wrong. But I believe we converted an extra $4 million in the stock that we were going to take as cash. Hopefully that speaks to the belief that both Travis and I had in the company and continue to have today. So am I right down that Ed?
Yes, that's right. It was $4 million conversion midway through the earn-out process that we converted a cash payment into an equity payment. At the end of the day, it ended up being $8 million in cash and $7 million in shares of company stock.
And then under your current incentive plan, what are targets and goals for your incentive plan as it stands today?
Well, I believe we've got those listed in recent 8-K, but we are certainly incentivized with stock options. And as owners of the business, of course we’re highly incentivized to grow the business as well but we’re based on revenue and EBITDA targets as well. So hopefully I am answering your question, I’m not sure, if you’re looking for something more specific than that. But our goals are to grow the business and to grow the business efficiently, I mean that’s our bonus plans reflect that.
And then just a business specific question. I was just looking through your deck and you talk about the potential of acquiring more standalone businesses as customers as opposed to just agencies. Is there any opportunity to simplify the product for businesses. And would you say that there is any with the complexity of the current product, is that a barrier at all for adoption among just individual standalone businesses?
You asked for multi-part question there and all parts that were good. The first thing I want to say is we’re focused on agencies. We believe that the agency market is sufficiently large for us to compute in and win. We are in just four years of being around have moved probably into the number two position, HubSpot had and something like in eight or 10 year head start on us and we seem to be closing in on those guys in terms of being the choice of for marketing automation and digital agencies. And that’s what our entire company is focused on. There is no inherent limitation of our platform to be perfect for businesses all the way up to enterprise. But we view those as future markets.
The businesses that land on SharpSpring today are the business is that find us to word of mouth and understand what a great platform it is. We feel like we’re simpler to use than most platforms that are out there. They’re just a nice segue into the second part of your question. The entire industry, these are really powerful tools, and the entire industry I think suffers from under utilization of the power of the platforms that are out there. And so we work very hard to make our platform easy. We can always do better at that and we strive to do that not just for businesses but for agencies. We want to make our platform the easiest to use for everybody that uses it.
And so while we feel like we do fairly well there, there is always opportunity for us to do better in terms of making the platform easier to use as well. But I want to be very clear that we’re very excited about the agency market. We think the agency market has tens of thousands of agencies that have yet to adopt marketing automation and are still on that journey trying to decide on who they’re going to utilize and we think we’re well positioned to compete and win in that market and that’s our major focus right now.
Well, thank you all for joining us on today’s call. As always, I especially want to thank our employees, our partners and investors for your continued support. We look forward to updating you on our next call. Operator?
Before we conclude today's call, I would like to provide SharpSpring's Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. During today's call, there were forward-looking statements made regarding future events, including SharpSpring's future financial performance. 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 latest annual report on Form 10-K and quarterly reports on Form 10-Q 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 any responsibility to revise any forward-looking statements to reflect future events or circumstances.
Also note that during the 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 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 Web site.
Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the Company's Web site. Thank you for joining us today for SharpSpring's fourth quarter and full year 2017 earnings conference call. You may now disconnect.