LivePerson, Inc. (LPSN) Q2 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson Q2 2014 Financial Results Conference Call. [Operator Instructions] On the call today, we have Dan Murphy, Chief Financial Officer; and Robert LoCascio, Chief Executive Officer. I will now turn the call over to Mr. Murphy.

Thanks very much. Before we begin, I would like to remind listeners that during this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission. Also, please note that on the call today, we will discuss some non-GAAP financial measures in talking about the company's financial performance. We report our GAAP results, as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website. We will start the call with a review of the financial and operational highlights, and then Rob will discuss the go-forward vision for LivePerson. For the second quarter of 2014, revenue exceeded our guidance range. In addition, our GAAP, EPS, adjusted EBITDA and adjusted net income were all at the high end of our guidance range. Our sales team delivered on our largest bookings quarter in the company's history. Bookings were $10.8 million which is 53% growth over Q2 of 2013. Second quarter revenue was $51.1 million, an 18% growth over the same quarter in 2013. B2B revenue was $46.5 million, and revenue from our consumer segment was $4.5 million. Revenue from our enterprise and mid-market segment, which excludes small business, grew 23% over the second quarter of 2013. Based on our strong bookings and revenue results for the first half of 2014, we are increasing our annual revenue guidance for this year to $204 million to $207 million from previous guidance of $199 million to $204 million. In Q2, approximately 69% of our bookings came from existing customers and 31% came from new customers. Our trend of selling larger-dollar value deals to new and existing customers continued in Q2. Our average deal size was $82,000 for all deals. In addition, in the second quarter, we signed 7 deals greater than $500,000, of which 1 was for more than $1 million annually and several were multi-year commitments. We included in our booking metrics new or incremental contractual commitments for the first year of the contractual relationship in either new or existing customers for recurring subscription-based fees. That excludes from such amount nonrecurring fees, such as one-time implementation costs or one-time consulting fees. The bookings metric generally does not include or represent usage-based and/or Pay for Performance-based contracts, month-to-month contracts, transaction-based services or subsequent years of multi-year contractual agreements. As in the past few quarters, during Q2, we continued to expand relationships with new and existing customers. In the second quarter of 2014, we had 51 customers spending more than $500,000 on an annualized basis. This is up from 40 in Q2 of 2013. In addition, we have 27 customers spending more than $1 million annually, up from 23 in Q2 of 2013. We signed 132 deals during the quarter, including 37 new enterprise and mid-market clients. The average deal size for new customers was $91,000, while the average for existing customers signing up for an upsell or expanded business was $78,000. Customer attrition for enterprise and mid-market accounts averaged 0.8% per month compared to 1.1% in Q2 of 2013. Small business attrition rates averaged 1.8% per month compared to 2.1% in Q2 of 2013. Paper components generated approximately 14% of total enterprise revenue and 8% of total revenue. The revenue breakdown by industry verticals was consistent with prior quarters. Telecommunications made up approximately 30%; financial services, approximately 25%; retail, approximately 15%; technology, 15%; and other, approximately 14%. Revenue coming from outside the U.S. is approximately 34% of total revenue, with U.K. representing our largest concentration outside the U.S. We ended the quarter with a cash balance of approximately $71 million, which compares to $79 million at the end of the first quarter. We had approximately $2.9 million in capital expenditures for the quarter related to servers, computers and the build out of office space. We also used cash for the acquisition of Synchronite, and spent approximately $4.3 million repurchasing stock in the second quarter. Year-to-date in 2014, we have repurchased approximately 1.2 million shares, and over the last 18 months, we have purchased approximately 3.6 million shares or approximately 6% of our outstanding shares. We recently authorized an additional 10 million for the purpose of repurchasing stock. Second quarter accounts receivable came in at $33.9 million and our DSO metric for the second quarter was 60 days. The increase in DSO is related to upselling larger deals in addition to the increased in payment terms for some of our largest customers. The second quarter tax rate was 16%. From a bottomline perspective, our second quarter adjusted net income per share was $0.06, GAAP loss per share was $0.02, and adjusted EBITDA per share was $0.09, all of which were at the high end of our guidance range. That covers the highlights for the quarter. Now we'd like to discuss the financial expectations for the third quarter and full year of 2014. As we discussed on our last call, during 2014, we will continue to invest in the business in the rollout of our LiveEngage platform. Our current expectations for Q3 2014 are as follows: Revenue of $52 million to $53 million; adjusted EBITDA of $0.09 to $0.11 per share; adjusted net income of $0.05 to $0.07 per share; and GAAP EPS loss of $0.05 to $0.03 per share, with a fully diluted share count of approximately 55.4 million. Current expectations for the full year 2014 are: Increasing our revenue guidance to $204 million to $207 million from previous guidance of $199 million to $204 million; adjusted EBITDA of $0.37 to $0.41 per share; adjusted net income of $0.21 to $0.25 per share; and a GAAP EPS loss of $0.11 to $0.07, with a fully diluted share count of approximately 55.6 million. Other full year assumptions include: The increasing amortization of tangibles to approximately $5 million related to the 2 acquisitions completed in the first half of the year; stock compensation expense of approximately $14 million; depreciation expense of approximately $10 million; and an effective tax rate of approximately 20%; capital expenditures of approximately $11 million; and we expect gross margin on a GAAP basis to be approximately 75%. As a reminder, our cost of goods sold continues to be sensitive to foreign currency fluctuation. Furthermore, as a percent of revenue for the year, we continue to invest in the business and we anticipate sales and marketing to be approximately 38%; G&A at approximately 20%; and R&D to be approximately 20%. That covers all the operational and revenue highlights. Now I'd like to turn the call over to Rob, who will provide his insights surrounding the market and LivePerson's strategic direction.

Thanks, Dan, and thanks, everyone, for joining us on the call. We had another strong quarter as we achieved our 48th consecutive quarter of growth, and I want to thank the team for their hard work and commitment to our strategy and execution on the vision. Over the past 24 months, I've been talking about how there's been a real change between consumer and brand in the digital world, and the consumer is definitely in-charge. And the consumers' voice is a massive voice, and it could be either very positive or very negative as an impact on companies. Now I remember my first job and my boss said to me, "If you don't do good for a customer and they're unhappy, they can tell 10 of their friends." And I remember, wow, that's a big number. But when you look at today, if the customer is unhappy, they can tell millions of people instantly, and there's a great case study of this. Only 2 or 3 weeks ago, if you were following, a Comcast customer, decided that he was going to take an 8-minute call that he was having with customer support. He's trying to cancel his service. And I won't go into the details. You should really Google it. There's actually like tens of thousands of things written about it right now. It was a terrible call. The customer support rep wouldn't let him cancel. Borderline unfunny, but the result was this: In a matter of days, 5 million people listened to that recording. And instantly, every network picked it up, played it, CNBC, CNN, and even, like, Forbes wrote an article entitled Comcast PR Nightmare Can Befall Midsized Companies: Your Company Could Be next. So when you think about digital, it presents a great challenge and opportunity for brand. But the consumer, as I've said in the last couple of quarters, the consumer, they can communicate with their friends and family instantly, and they can connect through messaging and through social and mobile. But yet, when it comes to connecting with a company, we're back in the stone ages. They still have to dial-up an 800 number. They feel -- they start to sit in a queue, and they still feel disconnected. Our mission at LivePerson is to create meaningful connections in the world. This was something we designed 2.5 years ago. And it's what the consumer expects from the brand. And if Comcast was using our platform, which they're not today, but hopefully in the future they will, I believe the situation would have been very differently, and I'll go through how that would be different on the LiveEngage platform. First of all, as this consumer would have been chatting and interacting and -- with the agent, we would see that there was negativity in the conversation, and that conversation could be flagged instantly to a customer manager, and that manager could intercede into that chat and help and guide that conversation instead of what happened, which was this was a customer support rep on their own. And even if that wasn't caught and the consumer posted to Twitter like this consumer did, we would see that instantly. The brand can go ahead and see what's going on in social through the platform and instantly retweet back and say, "Look, wow, you've had a real issue. Chat with me now. I'm here for you. I want to help you." And then after all of that would have taken place, even if -- we could have proactively engaged the consumer through mobile. Maybe they've got a Comcast app on their mobile device. We could have engaged them through that if we miss them on Twitter. And let's say we got them. Well, what would happen eventually is we'd saved all that data, we'd save all those conversations and all of that goes through a process that becomes learnings for the company. So brands are understanding now that the consumer is in charge, and that's what's changed for the opportunity at LivePerson. We're becoming much more strategic to our customers in shaping their digital strategy because of one simple fact: 19 years ago, we started the company, and the vision has always been about connecting people in the digital world. We're not a call center company trying to go digital or 800-number company trying to move into the digital space. We started here, and we understand it, and our customers know that, and they want to work with us. And what's really changed is the real understanding from the CEOs. I've been out meeting with our largest customers, and what I hear now in the last 6 to 12 months is that our CEO at our company has decided that what's important is our connection with the customers. And I've got 3 great examples of this. There a -- one of our customers in Asia, they are a very large telco there, if you look at the CEO's compensation, it's public, 20% to 30% of his compensation is tied to what they call the Net Promoter Score. Now the Net Promoter Score is a score that basically is the happiness of his customer base. And he literally is getting 20% to 30% of his salary based on this. There's another great story I heard. I was out with one large retail customers who sells home improvement products, and they were talking about their CEO in front of thousands of the managers. Every year, he brings in his managers from the stores, talks to them, and he opened it up by reading a chat transcript, a chat transcript that was generated on our platform. And people, they've said, were in tears and there was a big emotion about it, because it showed the relationship between the customer in need and the contact center person who was helping him through it, and they actually delivered an item to the home of this relative who is sick, and he read that with pride. And so when you think of the CEO and what we're doing, and we've had some good starts with the strategy. We have -- one of the largest banks of the U.K., in which we've been working with them strategically, we've been implementing a strategy of digital engagement, and what we've seen is some great results. First is if you use our platform and you use all the parts of it, we see things like, in their case, customer satisfaction is at 90%. With email, let's say, it's 70%, with call, it's like 80%. But when they went through a digitally engaged environment, customer satisfaction was 90%. We're also targeting to take 0.5 million 1-800 calls out of the system by the end of the year. And that's tens and hundreds of millions of dollars of cost that we can take out of the system. And finally, even self-service. People just went on to the website and try to fill out a mortgage application on the bank account because they could see that there was someone there to help them if they would have an issue. They increased conversion rates by 4%. This bank and the CEO defining this, it isn't about being the largest bank in the U.K. He wants them to be the #1 bank in customer service because he realized that's what matters. So as we become more strategic with our large customers, the net effect in what we're seeing right now is our deal size are getting larger. Our opportunity is larger. And what are we targeting, it's voice. The 1-800 number and all of those calls that are happening in the world and 90% interactions at a contact center still, through the old way, are moving to us, and our platform is ready for it. Now the platform is about scale. We built LiveEngage because we wanted a better way to scale our -- the ability to work with our customers. So with the enterprise, they can add new interactions, they can add content, they can add mobile instantly, and they can also go after small and medium-sized businesses. We recently launched, if you go to our website, a whole new website in which anyone can go, put a credit card in, and they can start using LiveEngage within minutes. So what we look at the opportunity there is that if you're buying keywords, and there's millions of companies there buying keywords on Google, let's say, they're going to want a way to interact with their consumers, and that's the opportunity with LiveEngage on the small and mid-sized businesses. When we look also at the platform, it's going to allow us to really also do integrations for distribution, like web hosting companies. We want LiveEngage integrated into when you set up a website, one click, you can interact with your consumers. As a matter of fact, during the quarter, we did one of our largest distribution deal, a 3-year deal, with a company that has on a online banking platform for small and medium-sized businesses, and they're giving access to these thousands of small banks the ability to interact with their customers through their platform using the LiveEngage technology. So on one side, there's everything about the business and our customers, and we talk a lot about that. On the other side is the consumer. When the consumer comes, they're interacting through our technology, primarily through chat today. And when you look at that, about 22 million consumers a month are interacting through LiveEngage. So what we want to do is really enhance that experience. And we recently, as a matter of fact, bought a German-based company called Synchronite, which is a co-browsing solution. And what that really is about is about the agent, when they're chatting or they're doing video or they're even doing voice on the platform, can have a shared experience like filling out a form online or putting something into a shopping cart or helping someone with technical support. So it's a way to really create a hand-in-hand connection between the agent and the consumer. And this will also be applied to mobile. The shift in mobile is happening. We all know that. We've seen it with advertising platforms, with overall commerce, and it's happening with us, too. A couple of years ago, we've got very focused on it. We bought a company in this space, we've invested heavily in it, and some of the results we're seeing are fantastic. This quarter, we grew mobile interactions by 116% quarter-over-quarter. We had 100% growth in the previous quarter-over-quarter, and we expect to surpass 1 million mobile interactions by Q4. Q4 of last year, we had very few interactions. So we'll actually go from normal 0 to 1 million interactions in 12 months. So there's a big focus on our side. We think mobile and an engagement with a consumer is at the heart of our strategy, and we'll continue to invest in it. In October, in New York City, we'll have our customer conference call, Aspire. It's going to be a great conference. We're going to really show how do you digitally engage the consumer. And more importantly, we will show LiveEngage and all the new things we're doing. There's a new version that just came out. And we'll sort of take the covers off and show it to the customer base in a way that I think will be really fun and extraordinary. So I hope many of you who are on the phone will take the opportunity to come here to New York and join us at the conference. So with that, we're seeing great, obviously, momentum in the business. Our Enterprise business alone, which is really the core of our strategy of growing strategically with our customers, grew at 23%. So we're in a very big marker segment. We've just started. As I said, the 800 number is our enemy. It's the things that is basically consuming most of the call centers today, and we want to move that over to us, and the consumers want it. And so I think, we -- today, we are sitting with a platform that we started to develop 2.5 years ago, that fits right into what our customers want today. We built a team of people over the last 2.5 years that I think can really deliver and execute on those results. And we have a culture and our value of creating meaningful connections that's authentic. We believe in this, and I believe that's what going to give us the [indiscernible] [Audio Gap] on the call. Thank you.

[Operator Instructions] Your first question is from Shyam Patil with Wedbush Securities.

Over the past -- it seems like over the past few quarters, you guys have done a good job of winning larger deals. And just curious, kind of going forward, how you're pipeline looks for the million-plus dollars deals. And is that something that you view as being important for the overall growth trajectory? And when you look at the platform, is the platform helping you increase the average deal sizes as you're able to sell it to larger enterprises?

That's a good question. Thanks, Shyam. Thank you. So from a deal perspective, we've invested in the sales organization, and our goals has been for them to get more strategic selling, and we're seeing some of the benefits of that happened over the last couple of quarters. We do want our sales guys to go out and look for those larger deals and get those larger opportunities out of the gate, and our customers are willing to sign up those deals. And from a platform perspective, it absolutely helps in talking about the direction that we're going, and from an engagement perspective and digital adoption. So it definitely helps from a selling perspective.

Great. And in the past, you talked about new leadership for the small business segment. How do you think about -- or how should we think about the timing for improvement for the small business group? It seems like the mid-market enterprise group is growing really nicely. The small business group could probably see some improvement. How do you guys just think about the timing for that?

Okay. We're very focused on it right now. When we see the business, you'll see it as, really, 2 segments. One is what we call full service or strategic, and that's the plus-million dollars. And the rest, we call self-service, which was previously small business. So it's important to the strategy. Obviously, we just changed the website, and that's important. It's going to be like an e-commerce play for us. Buy marketing. Get people to put their credit cards in. Get them from a trial to conversion into a full-time client. So it's starting. We're just kind of looking at the funnels, looking how the consumers are going through the new website, but it's starting right now. So I would say we should expect growth coming up. But like I said, we just started launching the website and just started to get some information on it, but it's important to us. Very important.

Great. And this is my last question. Rob, you mentioned Comcast not being a customer. If you could just talk about who they are using and what's been the hurdle there in winning that business.

Yes, I mean, obviously, it's on our target list and -- but they're predominantly a voice shop today. I don't know what they're using on the digital side. But the majority is still going through voice. So obviously, it's -- we've got a lot of the cable companies today, a lot of the telcos, but we're focused on it.

Your next question is a from Richard Baldry with Roth Capital Partners.

Can you talk a little bit about the sequential growth? It's I think the best number I can recall, and it was sharply above what we've seen you do before on a dollar basis. Was there anything unusual in that? Anything you feel is more one-time oriented? Or do you feel like sort of breaking through deployment backlog? Sort of any breakdown on that, just kind of gauge how sustainable it is as a new growth level.

Yes. I mean, so from a sequential perspective, it was a strong sequential quarter growth. We did -- we talked to a few -- a little bit about some of the larger deals we did in Q1, and those went live in Q2. So it had follow-on impact for Q2. Overall, our confidence level is shown by us increasing the guidance to $204 million to $207 million, up from $199 million to $204 million. So were comfortable with the increase in the guidance, and that was good quarter, second quarter. And we look forward to continue in Q3 and Q4.

And any on the expense side, if we look at R&D, G&A, if you look year-over-year, they're pretty flat numbers. So your allocation into sales and marketing has certainly gone up significantly. Can you talk about how sustainable sort of those levels of spending in R&D and G&A are? How leverageable you're seeing there? Any sort of maybe currency benefits that are helping that?

So the currency benefits our small, but from a sustainability perspective, what we expect is G&A to level out, if not start to go down over time. We did have some investments to make from an infrastructure perspective. And then R&D, we've been investing in the platform over the last couple of years. And as we start to roll out the platform, we'll get more feedback, and I expect R&D to be at the levels that it is today, if not slightly higher.

And then last one. The -- given the success that you saw with large deals, can you talk about how well you think the sales force has ramped now. If you did some significant changes there? How you feel about the productivity there? How much productivity gain do you think is left? And how much of the growth is in our sales force? How increase will come from headcount versus productivity over the rest of the year, maybe into '15?

Yes, there's a lot of productivity I still think we can get into the current sales force. We've started the process of obviously working with our customers with a different conversation, a different offering. So I think there's a lot of productivity in there, and that's where we're focused on, taking the current team we have. But they're doing a really great job. We set out on a strategy 2 years ago, and made changes in the sales team and the current leadership. And everyone who's in that team is doing a great job in working with our customers and getting the platform out into the market.

Your next question is a from Mike Latimore with Northland Capital Markets.

I guess the strong sequential growth, is that partly attributable to just improving deployment timelines as well? Or had those relatively constant for a couple of quarters now?

Yes. So Mike, great question. We did have some improvement in our deployment timelines. It was an issue back in early 2013, in the first quarter of 2013, but our team is focused on it. And obviously, with the rollout of the LiveEngage platform, our expectation is to reduce as much friction in the deployment as possible. And what we're seeing on the small business side is a matter of hours or minutes of people being able to deploy that campaign or take their first chats. So we did have some improvement in our deployment timelines.

And can you just update us on LiveEngage 2.0 for your enterprise market? What's the timeline there for getting it more widely penetrated in your current customer base, let's say?

Yes, we're looking at -- towards the end of the year after the Aspire conference is really where we're going to show the number, obviously were out showing them the new platform there. They're using the older platform of LiveEngage, but we were out there showing it to them. They're excited. And then at Aspire is when we'll really showcase some of the stuff we're doing on the enterprise side.

And the -- so you're landing, obviously, big deals before this next version comes out. I mean, do the customers ask about how to convert over to the next version? And kind of what's your comment around that?

Yes, like -- as I've said in the past, it's not hard to convert. In our practice, some PCs you can use to make an upgrade into the next version of the platform. And so some people are going to start using the reporting system that's in there, some are going to use the Agent Console. So the way we designed it is so that we wouldn't have these hard cutoffs, but there are some features that are in it that they want, they can move over when they want to move over. It doesn't -- as you can see in the numbers, it doesn't reduce our ability to, obviously, sell, and we're selling used cases. Increasing sales, decreasing cost, we can do with each platform. So when they're ready, we'll move them. But obviously, they have a reason to move because it's got a lot more in it.

Yes. And then the consumer business, it's kind of the first real uptick in a while. Can you just give a little more detail around that?

Yes. It's -- we are focused on some other categories, especially in the education and tutoring side. They've done a very good job with that business. And it's just they're starting to expand. There's some great mobile plays going on over there. So they've got a mobile play that they're getting some very good traction in. So we're really happy with that. And as I've -- it's 7 years ago we bought them, but -- that company, originally, but they've done a very good job recently. And they've got people running it and doing a great job in bringing it to the next level.

Thank you for joining today's conference call. You may now disconnect.