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Edited Transcript of SHSP.OQ earnings conference call or presentation 10-Nov-20 9:30pm GMT

·36 min read

Q3 2020 SharpSpring Inc Earnings Call Cambridge Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of SharpSpring Inc earnings conference call or presentation Tuesday, November 10, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aaron David Jackson SharpSpring, Inc. - Interim CFO & Corporate Controller * Richard Alan Carlson SharpSpring, Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Chad Michael Bennett Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * David E. Hynes Canaccord Genuity Corp., Research Division - Analyst * Eric Martinuzzi Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon. Welcome to SharpSpring's Third Quarter 2020 Earnings Conference Call. Joining us today are SharpSpring's CEO, Rick Carlson; and Interim CFO, Aaron Jackson. Following their remarks, we will open the call for your 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 will be 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. Sir, please proceed. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [2] -------------------------------------------------------------------------------- Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2020. A copy of the press release is available on the Investor Relations section of our website. Q3 was an extremely strong quarter from an operations perspective. In nearly every meaningful way, we saw strong performance and a very strong recovery from what was a COVID-impacted second quarter. To begin with, our sales team landed over 20% more new MRR in Q3 than it did in the same year-ago period and 9% more versus the sales performance we saw just last quarter. Specifically, we landed $176,000 of new MRR this quarter compared with $146,000 in Q3 of 2019 and $162,000 last quarter. By this measure, sales have completely rebounded from the pressure we saw earlier this year. While we continue to see some pressure on unit sales, this strong new MRR performance is largely the result of our ability to land larger deals as we build our brand and increase the quality and functionality of our platform. And we achieved these results while lowering our customer acquisition costs to just $7,900, a 29% decrease over last quarter. Building upon this momentum, we saw our agencies begin to expand as well by adding more of their clients to the platform on a net basis. This was a welcome sight after a Q2 where we saw agency clients contract a bit at the onset of the pandemic. Finally, we saw logo attrition return to pre-COVID levels as well after a market spike we saw in March and April time frame as the economy contracted rapidly. The bottom line is that our core business bounced back very well from the onset of COVID and returned to the growth patterns we've come to expect. One area where we did not perform as well as we'd hoped was with our Perfect Audience digital advertising business. Speaking frankly, we're still getting to know this business a bit, having completed the purchase less than a year ago and experiencing the effects of the pandemic just a few months later. Like a lot of advertising businesses, Perfect Audience has been under pressure as advertisers cut back on their ad spends in an effort to preserve cash during uncertain economic conditions. Our hope entering Q3 was that the improvements we are making to the platform, specifically the improved -- the introduction of improved lookalike audience targeting would allow this business to expand even during these tough times. However, the economic environment proved to be the stronger factor during the period and Perfect Audience contracted a bit during the quarter instead. While disappointing, Perfect Audience remains noncore, and we believe these headwinds to be only temporary. We continue to add new customers to the Perfect Audience platform and believe we'll be well positioned when the economy improves and ad spending recovers. Further, we are completing the last step in our integration of Perfect Audience into the SharpSpring platform, and this should allow us to realize the benefits of cross-selling into our user base in a meaningful way over the long term. Operationally, we remain focused on driving new sales, marketing and product initiatives that are designed to have a long-term positive impact on the business. Our Agency Acceleration Series, led by the top digital marketing experts, including Neil Patel, Seth Godin and Shama Hyder has been effective in driving inbound leads in the short term, and we believe it is helping us build our overall brand recognition over the long-term as well. We've also made significant improvements to our onboarding program, reduced the turnaround time on platform integration and are introducing new tools such as our upcoming in-app engagement to a SpringBoard. I plan to discuss all of these items in more detail shortly, but before I do, I have a few announcements: first, I would like to make everyone on this call aware that we'll be holding an additional call this coming Monday, November 16. The point of this call is to provide, for the first time, a comprehensive overview of our business, including a series of updates on our operations and outlook. Included in this call will be a deep dive into SharpSpring's cohort maturation, profitability metrics and growth trajectory. As part of that call, we'll also be unveiling a brand-new investor presentation. I'm excited about both this call and our new investor deck. We've spent a lot of time distilling the business to help investors understand -- and analysts really see SharpSpring the way we do internally, and this event will be the culmination of those efforts. Without burying the leads, let me just say that my hope is that our new deck will clearly illustrate why, with very few leaps of faith, we know we're building both a high-growth and high-margin business with a model that supports an 80%-plus gross margin and total revenues in excess of $100 million at scale. I'll stop there for now. As I -- as a further heads-up, we plan on issuing a press release tomorrow morning with the important information and call details included, so stay tuned for that. I'd now like to turn the call over to Aaron to discuss the financial results for the quarter. Aaron? -------------------------------------------------------------------------------- Aaron David Jackson, SharpSpring, Inc. - Interim CFO & Corporate Controller [3] -------------------------------------------------------------------------------- Thanks, Rick, and good afternoon to everyone joining our call. Turning now to our financial results for the third quarter ended September 30, 2020. Our total revenue in the quarter increased 28% to a record $7.3 million, up from $5.7 million in Q3 of last year. Our gross margins for the third quarter of 2020 increased to 74% from 68% last year. In dollar terms, gross profit increased 40% to $5.4 million from $3.9 million in the third quarter of last year. Turning to our operating expenses. For the third quarter of 2020, our operating expenses increased 5% to $6.7 million from $6.4 million in Q3 of last year. Our GAAP net loss for the third quarter totaled $1.5 million or $0.13 per share, which was a significant improvement compared to a GAAP net loss of $2.5 million or $0.23 per share in Q3 of 2019. On the balance sheet, we had $15 million in cash at the end of the quarter compared to $11.9 million at the end of December 2019. Going forward, we remain confident in our cash position to support our growth needs for foreseeable future. Looking at our non-GAAP measures. Our adjusted EBITDA loss for the quarter, which we reconciled in our earnings release, totaled $468,000. This represented a significant improvement from an adjusted EBITDA loss of $2 million in the same period last year. Our core net loss for the third quarter, which is also reconciled in our earnings release, totaled $735,000 or $0.06 core net loss per share compared to a core net loss of $2.1 million or $0.20 core net loss per share in Q3 of last year. During the period, we also recorded a onetime expense of $256,000 related to contingent sales tax liability accruals spanning over multiple years in 9 different states. We're in the process of rolling out sales tax to be charged to our partners on a go-forward basis. While we are proactively accruing for this, we feel this may ultimately need to be paid depending on the results of any future sales tax examination and in the event we expect this charge to be onetime in nature. As a result, this item has been excluded from our adjusted EBITDA as well as our core net loss calculations. Again, for more details on our adjusted EBITDA and core net loss metrics, please see the full reconciliation to GAAP terms included in the supplementary tables of today's earnings release. Moving to some of our other core metrics. During Q3, our cost to acquire customers was approximately $7,900, which was sequentially decreased 29% from $11,100 recorded during the second quarter of 2020 and a 26% decrease compared to the third quarter of 2019. Historically, we have calculated customer acquisition cost as the sum of all-in sales and marketing costs from the prior quarter, in this case, Q2, divided by the new wins recorded in the subsequent period, in this case, Q3. An important distinction for this period and going forward, we are now classifying new customers as those that have been activated, meaning their SharpSpring account is fully set up and they've paid their onboarding fee. We feel this updated definition more conservatively classifies our new customer cohorts. Additionally, this new method did not materially impact calculation of our new customer results or relatedly, our customer acquisition costs for the third quarter. It bears mentioning that this quarter's CAC represents a material improvement over just last quarter as well as a return to the performance we demonstrated pre-COVID-19. Cash has declined substantially as a result of our changes in Q2 to improve the efficiencies of our marketing campaigns as well as our plan to redirect resources to an outbound sales program. Going forward, while this metric may fluctuate on a quarterly basis, we expect to keep CAC under the $10,000 range during COVID, with a return to historical averages near $7,500 as the economy improves. With this in mind, we remain confident in our ability to consistently acquire customers at our historically attractive all-in rates that will drive significant lifetime value for the business in the future. Turning to our financial outlook. For the fiscal year ending December 31, 2020, we now expect total revenues to range between approximately $29 million and $29.4 million, which would represent an increase of 28% to 30% compared to the prior year. As a reminder, our guidance is based on several factors, including recurring revenue from our current customer base and performance results tracked through September of this year. The performance of our core business remains strong. The updated guidance range primarily reflects the uncertainty of the digital advertising revenues from Perfect Audience in the fourth quarter of this year, which Rick explained -- will explain in more detail shortly. Perfect Audience and the online advertising industry at large continues to be particularly impacted by the pandemic, which we expect to continue through the rest of this year. As a result, we conservatively modeled our updated guidance to reflect these headwinds. We remain exceedingly bullish on the marketing automation and digital advertising industry over the long-term, and we'll provide updated projections for subsequent periods when we can confidently and reliably forecast performance. This completes my financial summary. I'd now like to turn the call back over to Rick for additional insights into our operational progress in Q3 as well as our outlook for the remainder of 2020. Rick? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [4] -------------------------------------------------------------------------------- Thanks, Aaron. As I've already mentioned, Q3 was a very strong quarter in terms of our operational performance. In many ways, this quarter has provided a lens into the resiliency of our core business. On a general level, a lot of the uphill battles we faced during the second quarter as the pandemic took hold, particularly the blip we saw in logo attrition and agency expansion in early Q2, ultimately had a lagging impact on our results in Q3. And while those events occurred in the prior quarter, with the way our business works, we actually experienced most of the impact from these issues in subsequent quarters as MRR loss is not fully realized until the following period. As discussed earlier, our Perfect Audience and the digital ad industry as a whole continues to be challenged by a weaker economic environment. In spite of these hurdles, we produced another quarter of record results, and our core business rebounded fully in Q3. We recorded a net positive number of agency client adds for the first time since COVID hit, and year-over-year net revenue retention remains above 90%, while logo churn decreased significantly in Q3, all of which are positive early indicators for a favorable Q4 and beyond. During the quarter, we also saw very promising increased usage and adoption of our platform features. For example, the usage of our CRM, as measured by visits to our contact manager, are up nearly 20% since April. We saw a near 5x increase in the usage of our meetings feature, which we launched last year, and perhaps most impressive, our customers have built over 3,700 chatbots since we launched this feature in March of this year. Switching to sales. In Q3, we activated 265 new SharpSpring customers. Together, they represented approximately 160 -- excuse me, $176,000 in MRR or $2.1 million in ARR. While the customer count is nominally in line with the prior period, the total contract value substantially surpassed the additions in Q3 of last year by 21% and last quarter by 9%. Said in another way, with the introduction of new and larger price points, the raw new deal number no longer adequately reflects our sales performance on a quarterly basis. In recognition of these dynamics -- excuse me, in recognition of these dynamically changing factors as well as the fact that we intend to offer a greater selection of price points in the future, we have decided to discontinue the practice of announcing the quarterly new customer unit sales in favor of communicating new MRR landed during the quarter, which is inclusive of both the new units landed as well as the contract size of each. Our intention is to provide investors with the most accurate representation of our business performance; and at this time, we believe monthly recurring revenue to be more acceptable -- the more acceptable industry standard and also the best way to convey that information as a True North for our performance. I'd now like to take some time talking -- to talk about Perfect Audience. While our core business continues to perform according to plan, we did experience difficulties in our Perfect Audience retargeting business during Q3. While we believe marketing automation to be core and central to our partners' businesses, the online advertising business tends to be more susceptible to fluctuations. To put it bluntly, when the economy is bad, many customers are going to spend less on ads. Our hope was that with the improvements we've been making to the platform, we'd be able to outstrip those pressures, but it remained an ongoing headwind during the quarter. Specifically, we introduced a new smart audience lookalike -- excuse me, a smart audience lookalike audience feature to help us -- help more than 1,000 advertisers more effectively spend their advertising dollars. However, the good work our team is doing on the back end is still being blunted by macroeconomic forces. As Aaron noted earlier, we've made additional refinements to our annual guidance target, which is reflective of the muted advertising market we're seeing. This expectation implies an essentially flat quarter from Perfect Audience in Q4, which we clearly do not believe is the long-term indicator for the trajectory of the business. In the meantime, we're continuing to make updates and improvements to our platform that we expect to attract even more customers and ad spend. One of those updates is SharpSpring ads, which we'll be introducing late next quarter in time to help us with 2021. SharpSpring ads brings the Perfect Audience interface directly into the SharpSpring platform so that our customers can take advantage of digital advertising and retargeting alongside their current marketing processes in a much more seamless fashion. This full integration has been one of the main directives since the acquisition, and we believe it will pay dividends in the future by more easily facilitating the cross-selling of advertising as a super seamless and natural extension of SharpSpring's other lead-nurturing capabilities. Put simply, customers will be able to individually add leads and even entire list of prospects to retargeting campaigns as easily as they currently add them to e-mail drip campaigns and automation workflows within the SharpSpring platform. In addition -- excuse me, in short, we remain encouraged by the progress we've made thus far integrating SharpSpring and Perfect Audience, and believe quite strongly in the relationship between these 2 businesses and especially as the economic conditions improve. Moving to product. I spoke to you last quarter about an exciting upgrade, which is scheduled to launch in Q4 called SpringBoard. SpringBoard is an in-app engagement tool designed to help users learn how to maximize the value they get from our platform. And while SpringBoard will be helpful to all SharpSpring customers, the real value-add is going to be in the onboarding process. What we've learned over the years is that when you implement marketing automation, you need to have a strong onboarding process. Without the customers' data uploaded and until they import their leads and other information, the platform doesn't provide a ton of value. With SpringBoard, we're hoping to create a more repeatable process to get new customers seeing the platform's value as early as they can, thereby reducing the potential for attrition down the road. Our launch of SpringBoard also comes with another major and related update and that is the introduction of free trials into our sales process, which will begin to be -- will begin to begin offering at the beginning of the year. We believe offering free trials to prospective customers will allow us to land more leads and reduce friction in our customer acquisition process. Up until now, a prospective customer has been required to engage with our sales team and get a demo to learn more about our product. The reasons for this have been many. For a long time, we were playing catch up with our features and functionality. Yet today, we have one of the most well-regarded award-winning platforms on the market. Another challenge has been that these platforms require customer data and a level of commitment and engagement with the platform and guidance in order to get the most out of them. As such, we felt that marketing automation platforms haven't played well -- excuse me, haven't been well suited to perform well in a limited trial setting. However, we've seen more of our competitors begin to offer trials. As we've seen this shift in the marketplace, we think there are many potential leads that we may be missing by not offering trials. From a customer perspective, if you're not going to give me a free trial that your competitors do, then I may just cross you off the list in favor of beginning a trial with one of your competitors, and I may ultimately stay with them after having gone through the trouble of getting set up already. But as we introduce our new in-app engagement tool SpringBoard, we feel we are well positioned to overcome the engagement during trial hurdle as well. SpringBoard tells, both a new customer and even a trial user, exactly what to do, when to do it and why they should do it to get the results they are after. In short, with the introduction of SpringBoard in Q4, we believe now is the right time for us to begin offering trials as a way to land new customers in 2021 and beyond, and we're excited about what this means for our future growth. From a people perspective, I'd like to provide you with 2 important updates. First, given the continued strong performance in our core business, we've been able to meet a previously stated year-end goal of ours, which was to restore employee salaries and bonus plans to pre-COVID levels. The restoration became effective this month and will remain in place unless or until there's another material change in our business or the global economic outlook. While this will have a mild impact on our short-term profitability, we're focused on doing the right -- we're doing right by all of our stakeholders, especially our employees who've continued to work tirelessly and execute through a truly challenging time. Second, earlier in the quarter, we announced an addition to our Board of Directors through the appointment of Savneet Singh. Savneet is an award-winning software investor and currently the CEO of PAR Technology, a New York Stock exchange-listed public company. Simply put, we're energized to have someone of his caliber and talent added to our leadership team. Savneet has direct operating experience in managing a public company -- public emerging growth technology business and building it for scale, which is directly aligned with our mission at SharpSpring, while we look forward to leveraging his many talents to execute on our near-term operating objectives and more effectively communicate our value proposition to the investment community. As we look to close out the year, we believe the strong performance we saw in Q3 should continue in Q4. We saw nearly every metric return to or even exceed pre-COVID levels: new MRR, logo attrition and agency expansion all improved considerably, even as customer acquisition costs improved to just $7,900. From here, we're excited about the introduction of SpringBoard in free trials to both our onboarding and customer acquisition processes. And we're excited about the inclusion of Perfect Audience into the SharpSpring platform in the form of SharpSpring ads as well as what we hope will be improving economic conditions as the year winds down and we begin 2021 with all of these improvements in place. Finally, before I turn the call over to the operator, I'd like to again invite you to join us next Monday for our investor presentation unveiling long-term business outlook. I assure you it will be a very helpful and informative update that you won't want to miss. And with that, we're ready to open the call for questions. Operator, please provide the appropriate instructions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question will come from David Hynes with Canaccord. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [2] -------------------------------------------------------------------------------- So Rick, we're clearly seeing a slowdown in the number of new customer acquisition, right? And I realize you're adding some larger agency customers, but if there's a slowdown in adds, it's 1 of 2 things, right? It's a deterioration in the number of demos that are coming into the business or the conversion of those. So I guess I'm curious kind of what you're seeing on that front. And I guess, in either case, what the remedy might be? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. So I think that what we're seeing is that -- I'm making sure I'm not on mute, yes, I think what we're seeing is that smaller agent -- first off, it's 100% not a TAM issue. We have worked very hard to identify digital marketing agencies. And depending on how you classify those digital marketing agencies, they're between 60,000 and 100,000 English-speaking digital marketing agencies in North America and Europe and in Australia. So if you combined our couple of thousand agencies and HubSpot's a couple of thousand and everybody else has got a few hundred, there's plenty of addressable market out there. So we don't see that. What we see is that the smaller agencies remain very, very optimistic, but also very cautious right now with the -- with purchasing new technologies and so forth. So we're seeing our pipeline continue to grow, and we're seeing smaller agencies that are more hesitant to pull the trigger right now. And hopefully, as things settle with the election and as the economy improves, we'll see those guys start to pull the trigger. So again, what we're seeing from a deal-flow perspective, we rate every demo, the salespeople actually give us a couple of different ratings about the demos that they provide, they measure whether it will close and in what time frame. And what we're seeing is the demo quality is solid, but that people, again, are cautiously -- or the smaller agencies are more cautious about pulling the trigger, but remain in the pipeline. So with any luck, there'll be some pent-up demand as the economy improves. Again, I think the stronger point, the dollars are where it's at. And we outperformed Q3 last year by over 21% because the larger agencies are stepping up and are becoming aware of SharpSpring and are buying our product. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [4] -------------------------------------------------------------------------------- Yes. Okay. And then the free trials, how long will a free trial run? And then I guess the follow up to that would be how long does it typically take for one of your agency customers to get their end users up and running? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. So let me be clear. Those 2 questions are not related. Let me explain. The free trials that we're offering, we have given our agency partners the ability to start any one of their licenses with free trials. What we've not done ourselves, and they can do that inside of the platform and the net result is that they're not able to charge their client nor do we charge them when they offer one of their clients a free trial, which is 30 days. So some of the agencies take advantage of that, and some of them don't because they want to charge their customers more quickly. What we're introducing here at the end of Q4 with our free trials is the ability for a customer that is not working with SharpSpring in any form, meaning a new agency or even a new direct customer to, straight from the website begin a trial of SharpSpring without necessarily having to schedule a time or an hour of their time to talk to a salesperson. And increasingly, customers don't want to talk to salespeople right off the bat. They want to try out software. So that's what we're implementing. We have the flexibility to offer trials in different lengths. We think we're going to settle in between 15- and 30-day trials, it tends to be the norm there. And we're excited about it. As I commented on in my comments, the -- we feel like we may be missing out at this point on leads that might otherwise give SharpSpring a shot when they come to our website and don't see a free trial offered. So we're excited about that. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [6] -------------------------------------------------------------------------------- Yes. That makes sense. One more quick one, if I can, maybe for Aaron? Can you quantify the size of Perfect Audience today and maybe what that looked like 1 year ago? -------------------------------------------------------------------------------- Aaron David Jackson, SharpSpring, Inc. - Interim CFO & Corporate Controller [7] -------------------------------------------------------------------------------- Yes. So it's more or less been flat throughout the year. So it's doing in the ballpark of about $600,000 a quarter across the board, a little up and down here or there, But really, since we brought it on, it's been mostly flat. We brought it in -- on at the end of Q4 last year. We're really getting our feet under us during the transition from Marin. And then Q1 got started, and right there at the end of Q1, we got hit with COVID and really just haven't been able to grow it from there. And as I commented, yes, that's really been the reason for our adjustment to our projected revenues for the year. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [8] -------------------------------------------------------------------------------- Sure. Okay. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [9] -------------------------------------------------------------------------------- Sure. One more comment on that. Under the hood, we've been doing some pretty good work in terms of adding new customers to the platform. And so what's been happening at the same time as customer budgets have been shrinking during, again, these economic times, these are small businesses that are advertising on the Perfect Audience platform. So once that dynamic changes, I think it will become apparent, all the good work that we're doing to add more clients on a monthly basis to that platform. And that's separate from the comments I was making about integrating SharpSpring -- or excuse me, Perfect Audience into SharpSpring in the form of SharpSpring ads, which we think will further open up the ability for us to cross-sell to our existing customer base of whatever it is, 8,500 clients there. So we're excited about that for next year. Thanks, DJ. Appreciate the questions. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Next, we go to the line of Chad Bennett with Craig-Hallum. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11] -------------------------------------------------------------------------------- So just trying to kind of connect the dots between the kind of KPIs you gave on the rebound of the core business, but net retention, which I think you indicated in the press release was around 90%, it actually looks like it ticked down a bit, but it's still far off the high 90s that you were quarters ago. Kind of how do I read into that? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [12] -------------------------------------------------------------------------------- Yes. Hopefully, no reading is necessary. Let me explain. In Q2, we saw -- at the beginning of the COVID scenario, we saw a blip in logo attrition in April. We saw a significant bump in April in logo attrition. And then it sort of returned to -- it was still higher in May and June, but it returned to sort of reasonable levels. But in April, we saw a significant sort of balance in logo attrition at the beginning of Q2. We similarly saw agencies stop adding new clients to the platform. We were pleased, frankly, that we didn't see a bunch of agency clients leaving the platform. But what we normally see is expansion quarter-after-quarter, month-after-month, and we saw that stop during the quarter. So those 2 things happened at the beginning of Q2, as I just got done discussing, everything sort of returned to normal in Q3, which is pretty fantastic, how quickly it recovered. But those customers that we lost in April are gone. And so when we look at Q3 and we look at year-over-year net revenue retention, we are comparing that to the customers that are -- were around in Q3 of 2019, and those customers we lost in April are still gone as we look at Q3 2020. And so that has led us to, I think, a 90.5% revenue retention in Q3 versus Q2. But the results would have been higher, needless to say, had COVID not happened. Hopefully, that's a pretty clear explanation of what took place there. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- And I guess, what's implied in the current quarter guidance in terms of net retention in your mind, Rick? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [14] -------------------------------------------------------------------------------- Well, in Q -- so just as in Q -- so the effects of -- since we're looking at a year-over-year revenue retention metric, the effects will last -- of what happened in April will last a year and -- from April, they won't wash through. So I would expect similar revenue retention next quarter. And then as we get to April 2021 or beyond April 2021, all other things being equal, I would expect revenue retention to recover, if that makes sense? It's funny, we almost included a month-over-month revenue retention, where we -- to sort of show that the current month's the retention is back in a good place, but we thought it might confuse the issue more, so we didn't include that. Hope I'm making sense to you? -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15] -------------------------------------------------------------------------------- Yes, absolutely. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [16] -------------------------------------------------------------------------------- Fantastic. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) And next, we go to the line of Eric Martinuzzi with Lake Street. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [18] -------------------------------------------------------------------------------- I wanted to dive into the Q4 outlook. Just based on the midpoint of the full year revenue guide, we're looking at roughly $7.6 million for Q4. And I wanted to just parse that out based on the color you gave on Perfect Audience. Are we assuming Perfect Audience flat Q4 versus your color that you gave earlier and that the sequential... -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [19] -------------------------------------------------------------------------------- Yes. We are. We're just -- there's the potential that Perfect Audience does a little better with that. We see usually -- or historically, the ad business -- again, I want to remind everybody we've had this business for less than a year. So there's not much history as part of SharpSpring. But what we see is that Q4 with the holidays sometimes can have an uptick in some ad spend, but needless to say, this holiday season is like no other, and we didn't want to count on that. So we took Perfect Audience and sort of forecast it as completely flat with Q3. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [20] -------------------------------------------------------------------------------- Okay. And I wanted to march down the P&L here, if I could? Assuming that revenue number, is there any reason the gross margin changes much here in Q4? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [21] -------------------------------------------------------------------------------- The one factor there is some slight -- well, I'm going to let Aaron talk about this, but the one factor there is that we've returned our employees beginning November 1 back to full compensation. As you know, we took some austerity measures as the virus hit, and we're pleased that our performance allowed us to bring those folks back. So Aaron, you want to add to that answer? -------------------------------------------------------------------------------- Aaron David Jackson, SharpSpring, Inc. - Interim CFO & Corporate Controller [22] -------------------------------------------------------------------------------- Yes, I think that's exactly right. The big change there will be on the salary side of things. But we're going to be layering on more revenue there. So the hope there is to keep it in the same ballpark. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [23] -------------------------------------------------------------------------------- Okay. And then, as I said, marching down the P&L here. We -- I've got operating expenses of $7 million here, including the 4 different buckets, which includes the $153,000 of intangibles amortization. But given the increases in 2/3 of a quarter's worth of higher salaries for the sales and marketing, R&D and G&A., where do you expect OpEx to be for Q4? -------------------------------------------------------------------------------- Aaron David Jackson, SharpSpring, Inc. - Interim CFO & Corporate Controller [24] -------------------------------------------------------------------------------- So I think the -- it's going to be an incremental increase on the salaries. As we said, we took the 10% pay cut mostly across the board there. So that will kind of apply through on the OpEx side and then -- but that's only 2/3 of the quarter since we only brought it back starting in November. So that's going to be the big driver. The other thing there, and I kind of mentioned it in my section of the call was that we do have that $256,000 for the sales tax onetime number. It is in that OpEx section, but it's got taken out of the EBITDA section. So that would be the other thing I would point out there. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [25] -------------------------------------------------------------------------------- I think the salaries -- just to put a number on it. I think the salaries are roughly $300,000, $350,000 for the partial quarter as far as an effect on Q4, if that helps, Eric? -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [26] -------------------------------------------------------------------------------- Yes, that's perfect. And then lastly, the recovery in the net positive agency client adds, just -- I know you're working with hundreds of agencies here. And I just -- what are you hearing from them, anecdotally? Maybe a window into Q4, hearing anything October versus Q3? -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [27] -------------------------------------------------------------------------------- Yes. I mean, listen, here's -- we think that the -- setting aside, -- let us all just pretend that I made all the obvious caveats about not understanding what's going to happen with COVID and the rest, we believe that by all indications, the worst are behind us, but -- and really -- and they were behind us in -- based on our Q3 performance, for the most part, they were behind us in Q2. We saw everyone take a pause for several months in Q2, especially in April, when we saw agencies had a tough time landing clients or getting them to adopt new technologies and so forth. Again, we were very pleased to see that our customer -- our agencies on a net basis did not lose a lot of clients. We didn't shrink at all during that time and the way our platform works, there's certainly every bit of flexibility for them to do so. But what we missed was the agency expansion that we've grown accustomed to saying in each quarter, that returned in Q3, and we have no reason to think that we're going to be going backwards so long as the economic conditions of the pandemic or the combination thereof doesn't get worse. What we're seeing is that people have acclimated that our platform is, just as we described, very core to their businesses. And in fact, maybe there's even a greater emphasis on operating efficiently and effectively, and so we were pleased to see that, on a net basis, agencies begin to add clients back to the platform in a positive way. The short answer, we see no reason that doesn't continue. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [28] -------------------------------------------------------------------------------- Okay. That covers it from me and I look forward to the deep dive on the 16th. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [29] -------------------------------------------------------------------------------- Thanks. Looking forward to having you there. It will be fun. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Carlson for his closing remarks. -------------------------------------------------------------------------------- Richard Alan Carlson, SharpSpring, Inc. - CEO, President & Director [31] -------------------------------------------------------------------------------- All right. Thank you. Once again, I want to remind everybody, we think that this event that we're going to have next week is an important one. We're excited about giving all of you some real visibility into our cohort performance. So I encourage you all. And what that means for our business over the long-term as well as cost structures, gross margin and the rest, it should be a great event. So please show up for that. With that final plug in place for that call, I want to thank you all for joining us today. And I especially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call in just a few days. Operator? -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Before we conclude today's call, I'd 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 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 to non-GAAP measures is included for your reference in the financial section of the earnings press release and made available on the company's website. Finally, I'd 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 Third Quarter 2020 Earnings Conference Call. You may now disconnect.