SharpSpring, Inc. (NASDAQ:SHSP) Q1 2019 Earnings Conference Call May 9, 2019 4:30 PM ET
Richard Carlson - CEO
Bradley Stanczak - CFO
Conference Call Participants
David Hynes - Canaccord Genuity
Eric Martinuzzi - Lake Street Capital
Michael Malouf - Craig-Hallum Capital
Good afternoon. Welcome to SharpSpring's First Quarter 2019 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and CFO, Brad Stanczak. Following their remarks, we will open up the call for questions. Then before we conclude, 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 is being recorded and made available for replay via a link available in the Investor Relations section of the company's website at investors.sharpspring.com.
Now, I would like to turn the call over to SharpSpring's CEO, Rick Carlson. Please go ahead.
Welcome, everyone, and thank you for joining us today. Especially given the Uber announcement, we really appreciate you guys spending some time with us. After the market close, we issued a press release announcing our results for the first quarter ended March 31, 2019. A copy of the press release is available in the Investor Relations section of our website.
Our first quarter was a great start to the year and another record for new customer wins as well as top line revenue. In fact, Q1 2019 marks the first time we've ever added over 300 new customers in a Q1 period. In total, we now have over 1,800 agency customers and over 7,700 businesses using SharpSpring to improve their sales and marketing efforts, drive new leads and help their businesses grow.
With the capital provided by our recent financing in March, we have the resources to increase investment in our already proven sales and marketing strategy to accelerate customer acquisition and revenue expansion for the foreseeable future. At the same time, we're also continuing to place a significant emphasis on maximizing the success of our existing agency customers on the platform, which should lead to a number of positive downstream benefits in the latter half of the year and beyond.
Now before I speak further about these major initiatives, I'm going to turn the call over to our CFO, Brad Stanczak, who will walk us through our financial results for the quarter. Brad?
Thanks, Rick. Good afternoon to everyone on the call today. Turning to our financial results for the first quarter ended March 31, 2019. Our total revenue on the first quarter increased 27% to $5.3 million from $4.2 million in Q1 of last year. The SharpSpring marketing automation platform grew 29% to a record $5.3 million compared to $4.1 million last year. Our gross margin for the first quarter of 2019 increased to 71% from 67% last year. In dollar terms, gross profit increased 36% to $3.8 million from $2.8 million in Q1 of last year.
As we've mentioned on previous calls, over the past few years, we've invested significant resources in our hosting infrastructure and support organization to reinforce the current and future growth of our product. As we continue to layer more revenues under the platform, we will create more and more operating leverage on our model as evidenced by our year-on-year improvement in gross margin.
Beginning with this quarter and going forward for the next couple of quarters, we expect our margins to decline slightly due to investments in several initiatives meant to drive future revenue expansion from our installed customer base. As the year progresses, the leverage we get from new revenues on the platform will return margins to recent levels. Rick will provide more detail on these investment items in a moment.
Turning to our operating expenses; for the first quarter of 2019, our operating expenses increased 36% to $6.6 million from $4.9 million in Q1 of last year. The quarterly increase was primarily due to investments in sales and marketing initiatives to accelerate our future growth and, to a lesser extent, additional investments in our R&D organization to accelerate road map items.
Our GAAP net loss for the first quarter totaled $2.9 million or $0.33 per share compared to a GAAP net loss of $2.1 million or $0.24 per share in Q1 2018. On the balance sheet, we have $17.8 million in cash at the end of the quarter compared to $9.3 million at December 31, 2018.
Looking at our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we reconcile in our earnings release, totaled $1.8 million, which is an increase from an adjusted EBITDA loss of $1.7 million in the same year ago period. The higher adjusted EBITDA loss was the result of our continued investment in new sales and marketing programs as well as our development team. Going forward, we expect our adjusted EBITDA to be flat to down in the second quarter and then improve sequentially each quarter.
Our core net loss for the first quarter, which is also reconciled in our earnings release, totaled $2.1 million or $0.23 core net loss per share compared to a core net loss of $1.7 million or $0.20 core net loss per share in Q1 of last year. For more details on our adjusted EBITDA and core net income metrics, please see the reconciliation of GAAP terms included in the supplementary tables in today's earnings release.
Moving to some of our other metrics. During Q1, our cost to acquire a customer was approximately $8,200, which was impacted by factors related to seasonality. Our sales cycle tends to run around three to four months on average, and during the holiday season, we tend to see fewer demos attended, which manifests itself as lower new sales in Q1.
As a reminder, we calculate customer acquisition cost as the sum of our all-in sales and marketing costs from Q4 2018 divided by the new wins in Q1 of 2019. That means that marketing activity and, more specifically, demo attendance in Q4 drive Q1 sales. While this is an increase on customer acquisition cost from Q4, it is primarily due to timing differences between when sales and marketing dollars are spent and when the customers are acquired.
While using the prior quarter costs provides a better estimate of our customer acquisition cost to account for the average sales and marketing cycle we experience, this measurement is imperfect because marketing spend in one quarter impacts the deals we win in future quarters. Though we do experience fluctuations in this metric quarter-to-quarter, we're confident that we can continue to consistently acquire customers at our historically attractive all-in rates that will deliver significant lifetime value for the business in the future.
Our lifetime value calculations, which are long term and include estimates for future performance, continue to indicate that agency customers could be worth approximately $50,000 to the business on average. This long-term value reflects the benefits of the company on a discounted basis after reducing for estimated gross margin cost to support the customers on the platform. Based on these figures, our expected lifetime value-to-customer acquisition cost ratio continues to be compelling.
Before turning the call back over to Rick, I'll now take a minute to discuss our capital market activity and plans going forward. In early March, we completed a public offering of 770,000 shares of our common stock which is priced at $13 per share. After a full exercise of the overallotment, we received gross proceeds of approximately $10.7 million.
We plan to use the proceeds from this transaction in the following ways: continue to win new customers; implement account management to reduce attrition and to drive cross-sell and upsell opportunities; and to develop new products that will drive additional revenue streams. We feel that the current cash we now have on hand provides us with a significant runway to achieve our business goals for the foreseeable future.
Today, as part of our press release, we also announced the conversion or retirement of our $8 million unsecured convertible promissory note. Under the terms of the agreement, total shares to be issued are 1,241,635, which is 119,732 shares less than the fully allotted amount that was previously expected to be issued upon the optional early conversion of the note by the company or the previously scheduled maturity of the note in March of 2023. Total settled principal and interest will equal $9.31 million. This transaction further strengthens our balance sheet and leaves us with no debt on our balance sheet.
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 Q1 as well as our outlook for the rest of 2019. Rick?
Thanks, Brad. I sincerely hope Siri doesn't interrupt me like she did you. There's too many devices to turn off apparently, so there we go.
Getting back to it, as I mentioned earlier, we had a great start to the year. When compared to the same period in 2018, we drove nearly a 50% increase in new customers, which is a testament to our proven sales process as well as the rise in market awareness of the SharpSpring platform and marketing automation in general. Even without considering the typical seasonality associated with this period and our decision to forgo an annual price increase this year, we grew revenue sequentially and 27% year-over-year. With this quarter's results, we have now achieved seven consecutive quarters of year-on-year new customer growth.
Moreover, we are able to maintain gross margins above 70% in Q1, which includes the addition of several account managers added during the quarter that impacted our cost of sales. In the near term, we are duly focused on two initiatives: getting new customers; and improving our attrition. The rest of my remarks for today will be geared towards our effort in these areas.
Starting first with winning new customers. One of the best ways to attract new customers other than marketing to them is to provide additional meaningful services that can help a potential customer identify a new and relevant use for our product. In addition to making our platform better for our existing users, we're also focused on creating additional feature sets to interest or attract certain potential customers who might be on the edge of switching over to marketing automation.
To support these efforts, we've recently released a number of new features that we think make SharpSpring more functional and powerful for more people. First, we introduced what we call the Activity Feed, which will allow a user to view a live stream of how all leads within their system are interacting with their brand in real time. One of the immediate benefits of this function is that it empowers users to engage with interested leads at the most opportune times, ideally when they're already on the site or interacting with a user's brand content in real time.
This is an example of functionality that is only possible with a platform that includes both comprehensive marketing automation and a truly integrated CRM. And of the major players in our space, only SharpSpring and HubSpot have this combined solution. We also recently introduced a Task Manager, which is designed to enable users to stay on top of their daily to-do lists, with a streamlined view of their tasks.
Also in the way of automation, we have begun to release a broad set of features that fall under the umbrella of sales automation. Already released, we now have a function that allows a user to create automation rules for opportunities and accounts, which will allow for further functionality in a wide variety of scenarios by applying the same type of automation we previously only apply to lead records to both opportunities and account records.
For example, if a certain activity takes place within an opportunity, such as a field change, users now have the ability to assign a specific automation event to be triggered by that change. As you can imagine, there are a lot of different scenarios where automation rules can be helpful and improve processes. We think our customers are going to love working with this new tool, and we're looking forward to seeing the creative ways in which they'll be using it.
Finally, we've made some improvements to our landing pages, specifically on mobile, of which have also been well-received. Overall, we're continuing to add significant improvements to the platform that already includes a full marketing automation feature set.
Regarding pricing, as SharpSpring continues to become a greater value all the time, we will, of course, reevaluate opportunities to increase pricing. However, we remain committed to providing the highest quality product to our customers at a small fraction of the price of our competitors.
All that considered, these functions -- these are functions beyond what we currently provide that will empower customers to take their operations to the next level. To that end, we've been working with our agency partners and have identified certain features that we plan to offer later this year on an additional paid-for basis.
While these tools will allow our agencies to become even more efficient for their clients, we also believe these products will provide strong support to our push to drive expansion revenues. Our existing customers can opt to continue using our service exactly as it is, or they will have the option to price in for these new features. While I cannot share any specifics right now, I look forward to providing updates in the not-too-distant future.
Additionally, as part of our ongoing efforts to become better integrated with our customers, we're now offering a direct support option, which allows agencies to pass their client support obligations to us for an additional fee per client. Based on our best-in-class support and scalable team, we see this as a profitable offering and a tool that will help us stave off attrition at both the agency and agency client level.
Looking to our more direct efforts at lead gen and sales conversion, another area where we've historically had success in bringing on new customers has been through events. We left this strategy for a while due to resource constraints we faced when we were a smaller company than we are today, but we picked it up again this year and have done so with positive results. The reason why we love putting on these city events is that they serve multiple functions for us. Not only is it a highly efficient tool for prospecting, it's also an opportunity to engage with our existing partners who come to these functions as evangelists for our brand.
In each city, half the day is dedicated to building and improving our relationships with our current customers, and the other half is dedicated to new prospects. Additionally, the partner-oriented portion of the day allows us to gain valuable in-person feedback from our customers, which ensures their voice is heard and helps us better understand their needs so we can help them better pitch the SharpSpring platform to their customers and prospects.
Last quarter, I explained a new initiative to bring account managers to focus on both reducing attrition and increasing expansion revenues. As of today, we have eight account managers and have also invested in a director-level position to oversee the team as well. We are very encouraged by the opportunity here, but given that we're still very much in the implementation and ramping phase, it's too early to make any pronouncements on the initial returns of the program.
As we think about logo attrition, it's important to understand that the effect that our record new sales has on this metric as we continue to bring on greater numbers of brand-new customers with each passing quarter, which is clearly a good thing on its own, these new customers will continue to apply pressure on logo attrition -- upward pressure on logo attrition in the short term because attrition is highest when a new customer -- when a customer is new and in the early stages of its relationship with us.
We tend to see the highest attrition in the first 12 to 18 months of a customer relationship, some of which is just part of dealing with smaller businesses and some of which is due to our failure to get these customers fully engaged with our platform. So as we continue to add new customers at ever increasing rates, it will also tend to delay a drop in reported monthly logo attrition. This is natural for a SaaS business like SharpSpring and a consequence of the increase of our new customer sales velocity.
As we focus on attrition, we also track certain indicators of attrition that play a key part in certain customers not lasting over the long term. Two main indicators are lower-than-normal platform engagement and not having what we call an anchor client, which is basically a stable agency client customer for the agency that helps them offset the cost of our platform. If an agency has even one of these so-called anchor clients, then we know they have a much reduced chance of attritting. Needless to say, our account managers and our on-boarders are charged with working on these two key metrics as a means of reducing attrition from their group of accounts.
With the plan and structure we currently have in place, we're confident that our account managers will ultimately yield solid results for us. As an example, even in the way that we've thought about our compensation, we've structured increased pay to be specifically valued on driving improvement on both logo and net revenue attrition. More specifically, account managers will be judged and compensated based on the number of paid agency clients they serve -- they service, helping agencies to secure anchor clients to the platform, thereby, making them stickier as well as their ability to reduce attrition within the group.
Going forward, we are also focused on making these account managers a consultative trusted adviser to each of their customers. Through an additional certification process, we aim for these people to be thought leaders who can handle any and all problems our agencies may have as it relates to our platform.
Taking a step back, we've also rethought how we measure our on-boarding team with the main focus now being on getting new clients integrated and each agency through our certification process.
Looking to our current quarter, our top priorities remain bringing on quality new customers and reducing net revenue churn. We expect to have 10 full-time account managers on board by the end of the quarter, which should be the total amount of new hires we'll need to service our existing customer base. Of course, this number will grow as we grow.
As I mentioned earlier, we're also working diligently to finalize and bring to market certain paid product features that will support expansion revenue as well. Put together, SharpSpring continues to evolve from the inside as well as out and is well positioned for continued growth with its best days ahead.
And, with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
Thank you. We will now be conduction a question-and-answer session. [Operator Instructions] Our first question comes from David Hynes with Canaccord Genuity. Please go ahead.
Thanks for all the color. It sounds like you're having some nice success with the account manager executions that have been worked there.
I was curious, you mentioned starting to introduce some functions that fall under sales automation. And maybe that's kind of broadly the category you're thinking about for paid-for solutions. As you kind of look across your agency customer base, right, 1,800 customers, is there any sense for kind of what percent or how broadly adopted sales automation tools may be across that base? I'm just trying to figure out kind of where your agency customer base is in terms of being able to utilize those tools.
Yes. So first, I think it's a great question, and welcome aboard, DJ, so good to hear your voice. I think, first, it's important to note that SharpSpring includes a CRM. And so many of the agency clients that are brought on board by the agency are using our platform not only for the marketing automation aspects of it, but for the integrated CRM. And not all those customers, to be clear, are using our CRM functionality. But it numbers in the thousands that use the CRM functionality, and a subset of those would be players for the sales automation functionality. And I described some of that functionality that was out, but hopefully, that gives you an idea of scale in terms of the offering.
Yes. It sounds pretty broadly applicable then. And then maybe one for Brad, which is tied to the retirement of the promissory note that you've announced today. Just kind of two questions there in terms of kind of what happens from here going forward? So that stock that's issued, is that, a, is that freely tradable stock today? Or just what happens from here? And then, b, can you help me think about kind of a fully diluted share count? Because there's a bunch of moving parts now with the secondary and the stock with the convert unwinding. So maybe like a share count for Q2, Q3 or anything you'd have?
Yes. So functionally, those shares will need to be registered. So they will be issued to the debtholders but will not yet be registered. So that is a process that will still have to happen. With respect to where I have outstanding shares with that issuance, I am at roughly -- give me one second, please. I'm at roughly 10.9 million shares outstanding now.
And that's a basic number?
Does that include these 1.24...
That would include the shares that we issued related to the retirement of the note.
Okay. Got it. Okay. Very good. Thanks a lot, guys. Thank you.
Thanks so much, DJ.
Our next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.
Thanks. I have a question regarding the contract length that you have with your different customers. One of the things that you can do, you talked about not raising prices on people here in 2019, but you also have contract terms that have historically been pretty flexible. I think, if I'm correct, that it's a month-to-month relationship. Have you thought about reevaluating those? And if so, are there any changes being considered?
Yes. Thanks for the question. Nice to hear from you, Eric. Yes. The -- good question. We're committed to a month-to-month contract for our agency partners. Agencies have monthly relationships with their clients. And therefore, it's been a strong selling point for us to have a monthly relationship with them. We may, in the future, consider offering some sort of price lock-in or what-have-you for extended contracts. My feeling generally about this is that these are small businesses, and this has been something that has helped us get people in the doors. We are one of the smaller companies that are out there. But that's changing over time, and we will look at it.
I will say that we've made one change, just really we're in transition. So people who were in our pipeline previously, we're honoring our old policy, but moving forward for the direct customers that we get each month, as anybody who follows the company knows, we land a certain percentage of direct customers as well that are sort of caught in our marketing web although the company has been focused on agencies since we started. We've now moved to an annual contract for those end customers. And so we think that's appropriate, and we started that this month actually.
But again, maybe only a certain percentage of customers that we sign up this month will have -- will be on annual contracts because many of those customers will have already been in our pipeline, and we're going to honor what we were talking about with them when they first joined our sales cycle. But yes, we're -- and that's a lot of detail, but we're moving to an annual contract with our end customers. And we've been committed to a monthly contract with our agencies, but we may look at ways to entice customers into annual contracts as well on the agency side.
Okay. Now looking out to next quarter, I know you guys aren't giving guidance here, but Street consensus is $5.6 million for revs and then adjusted EBITDA loss of around $2 million. On the adjusted EBITDA loss, that does sound like you would be in line with your color regarding flat to down on the adjusted EBITDA loss. The revenue, historically, you guys have grown sequentially in that $200,000 to $300,000 range. So if you -- I'd just like to get your comfort level, I guess, with where The Street is for Q2. And if you aren't comfortable, could you pass the question along to Siri?
You beat me to it. I was waiting to pass something to Siri.
So you are accurate that we have -- are not planning to give guidance on this call, but it's certainly something that we are considering and I may embark upon in Q3. So thank you for that. Your assessment of the sequential growth, I think, is accurate. And I would expect not dissimilar results. And my comments earlier probably gets you to -- so I would say I'm reasonably comfortable with that EBITDA level that The Street is expecting.
And then you talked about TrustRadius, I mean this is probably a long shot here, but getting that award, you've got your own customer acquisition costs that I'm sure you keep a tight watch on. But just anecdotally, do you feel like there has been any increase in the inbound traffic, the organic traffic as far as driving new leads for your business since you guys got that award?
No. I don't think so. It's -- I don't -- speaking honestly, I don't think there would be a lift coming from that award. We'd made use of that. I think it's a great -- it's a respected award, and I think that helps us during our sales process as people are evaluating ourselves against HubSpot and other companies that are out there. And so that's really where we see the impact of that award that we talked about in the last quarter.
Got you. Okay. Thanks for taking my questions.
Our next question comes from Mike Malouf with Craig-Hallum. Please go ahead.
Great. Thanks for taking my questions. A question on the average revenue per customer and maybe just kind of an offshoot question. As you look at the agency's usage and the expansion into their customer base, one would think that pretty soon you'll start going up in the levels and increasing that average revenue per user number. And I'm just wondering if you could comment a little bit on that because I saw that it was down this quarter sequentially and lower than even the third quarter.
We have -- or continues to capture a certain amount of direct customers, and they tend to have a little bit lower average revenue per customer. Also, as we continue to layer new customers on, remember that they start out with a three pack of license that takes them a little bit of time to fill. And so they are not yet at that point where we would typically expect them to hit expansion revenue. And so only until they have that anchor clients that we work feverishly to get them, partner with them and then they fill in the two additional clients, they're not going to be adding on a fourth client that is where the payment actually happens. So I think what you're seeing is a manifestation of the record level of customers that we've been able to acquire over the last few quarters and the fact that it takes a bit of time for them to hit expansion revenue.
I think that's right. And I also think this is something that we're working on actively. We have -- we alluded to it in our last two calls, but we've got four products that we are looking to have brought online. We also just announced this direct support feature that we're seeing our agency partners take advantage of. We think that's actually a solid margin offering for us, by the way, I should just address that. But it's also an additional revenue stream. And as Brad pointed out, that is actually a revenue stream that could be added to somebody who's a brand-new partner working through their initial pack. And so we just launched that, and it's just -- we're just building awareness for that offer within our own user base. But we've got a number of things coming down the pipe that in addition to working on expansion revenue via added agency clients, we've got these products that will serve to increase the average price per license from each of those agency clients as well. So we really wanted those things out by now, just to be perfectly frank. And like a lot of development, these things take 60 days or 90 days longer than I would like them to take seemingly every time. But we're excited about those things coming online here pretty soon and the long-term effect that we think those offerings will have.
Great. Thanks for the help. I appreciate it.
I appreciate it, Mike. Good to hearing from you.
At this time, this concludes our question-and-answer session. I'd now like to turn the call over to Mr. Carlson for closing comments.
I just want to thank Siri and our customers and all of you that are out there, our investors, supporting the company. Thank you very much for joining us today, and have a good rest of your week.
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, performance or achievements anticipated or implied by these forward-looking statements. The company does not undertake any responsibility to provide any forward-looking statements to reflect future events or circumstances.
Also note that during this conference call, we made 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 financials section of the earnings press release and made available on the company's website.
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 website.
Thank you for joining us today for SharpSpring's First Quarter 2019 Earnings Conference Call. You may now disconnect.