LivePerson, Inc. (LPSN) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Sheka and I will be your conference operator today. At this time I would like to welcome everyone to the LivePerson's Third Quarter Earnings Conference Call. [Operator Instructions]. On today conference call from LivePerson we have Mr. Robert LoCascio, CEO, and Mr. Dan Murphy, CFO. Mr. Dan Murphy, you may begin.

Thanks very much. Before we begin I would like to remind listeners that during this conference 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 and 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. The results that we report today should not be considered as an indication of future performance. Changes in economics, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied or the projections or forward-looking statements made today. For more detailed information about these factors and other risk, 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. With that I will turn the call over to Rob LoCascio .

Thank you for joining LivePerson's third quarter 2015 conference call. We're pleased to report adjusted EBITDA above the high end of our guidance range and our 53rd consecutive periods of year-over-year revenue growth. Third quarter revenue increased 22% in constant currency. The Company made solid progress in the third quarter on advancing LiveEngage into the market and transforming customer care. We signed a record amount of new business in the quarter. We continue to win the majority of enterprise deals for real-time engagement a key reason we maintain our dominant position is because LivePerson shares a common vision with the leading brands about how to deliver a more connected and effective customer experience one that also address the spiraling cost of voice calls. Our vision is for brands to never put customers on hold again. To give consumers the power to message their favorite brands just like they message their friends and family each day. That choice is not available to most consumers today and brands are still forcing customers to use technology that's 50, 100 years old which is voice and the 800 number. There are nearly 270 billion calls made each year to those 800 numbers at an average cost of $6 per call. That is more than 1 trillion spent on a technology that brings dissatisfaction instead of connection. 85% of callers are put on hold, 67 hang up and roughly half of all calls go unresolved. The LiveEngage platform in its uniquely scalable and securable messaging capabilities can help bridge the gap between brands and consumers. We can give brands a connection with consumers that is always on that requires no time wasted on hold and is carried around in the consumer's pocket. By leveraging LiveEngage to execute on our vision of killing the 800 number we now have the act to touch every single one of our brands' customers. The market we are now addressing of [indiscernible] solely web chat. Our initial target is to move 27 billion or about 10% of all 800 calls onto our platform achieving this goal would expand the interactions on our platform 90 fold. Not only does LivePerson have the platform to attack this market we have the industry experience and expertise. We're already the leader in web and messaging between brands and consumers powering more than 300 million interaction per year. Our customer base includes more than one quarter of Forbes Top 50 most valuable brands, more than half of the Fortune 500 telecommunications company and half of Fortune 500 commercial banks. No competitor comes close to matching our penetration, expertise, capabilities or our scalability and security. We held our Aspire conference two weeks ago where we had opportunity to meet more than 100 of our top brands to line on vision and discuss our product roadmap. We shared customer success stories on LiveEngage and provided demonstration of how mobile creates meaningful connections. The feedback was unequivocal. Our customers understand that the time is now for brands to catch up on with how consumers connect in everyday life and offer them the choice to message rather than force them to call. After seeing demonstration on how LiveEngage could bridge that disconnect our customer from one of our top global banks stated that this was a wakeup call that her industry needs to change. The feedback we’re receiving is more than just talk, LivePerson saw record demand in the third quarter. We signed three, seven figure transactions compared to four in total for the preceding 12 months. The strategy that is put in place is creating opportunities that are larger longer term and more strategic in nature. We're being invited into conversations that we would have never had in the past. Great explain is a seven figure three year LiveEngage contract we signed with a new multinational teleco which represents the largest signed initial contract in our history. LivePerson competed in an RP against nine other vendors to replace an incumbent chat solution that failed to meet their goals and expectations. We ultimately won the deal because of our shared vision for consumer experience and our unique platform to deliver on this vision. Decision makers also cited our broad offering strong enterprise references and scalability as clear differentiators. We anticipate expanding this relationship into other regions with this customer in the coming year. We also signed a three year 7 figure expansion with the global telecommunications customer that includes an upgrade to LiveEngage and then choose to double their commitment with LivePerson because of tremendous value we delivered to their business and they are blown away by the capabilities of the new platform and see our vision around messaging as a game-changer for their business and marketing strategy. Across the board we are seeing solid validation of LiveEngage roughly one year after its launch 34% of our customer base is on the platform and adoption is accelerating. The number of customers on the platform increased by 2 percentage point in the first quarter of 2015, 5 percentage point in the second quarter and 9 percentage point in the third quarter. We expect to have nearly 40% of our customers converted to LiveEngage by the end of 2015 and to complete the migration in 2016. Interactions are rising rapidly as customers shift to the platform and take advantage of its intuitive features and our cutting-edge predictive intelligence. LiveEngage interactions doubled quarter-over-quarter continuing the strong traction we saw in the first half of 2015. We expect continued rapid growth in LiveEngage interaction as we add evergreen brands and migrate existing customers. Most encouraging of the usage trends for brands that my migrate to LiveEngage from our legacy offering. After the initial period of four to six months post migration interactions on average are more than 10% higher and in months 7 to 9 brands interaction are increasing by an average of more than 20%. While this initial data set includes a small contingent of mid-market enterprise brands it is solid early information affirmation that LiveEngage is feeling stronger usage with our customers. We're making great progress, positioning our business to penetrate in addressable market that is many multiples of our historic opportunity. We are increasingly confident that LivePerson is nearing an inflection point where brands across the world will align with our vision are creating meaningful connections through mobile messaging. The record demand in Q3 LiveEngage interaction and increasing strategic relations also support this view and we expect solid customer activity in fourth quarter as well. Strong demand we are seeing in is [indiscernible] power is being mitigated by incremental foreign exchange headwinds and some weakness in our plan for contact at once. Due to these factors we reduced our 2015 revenue guidance by about 2% to a range of $239 million to $240 million from previously issued guidance of $243 million to $247 million. Our revised range implies approximately 19% constant currency revenue growth in 2015. However, offsetting the topline changes is the leverage we are seeing on the bottom line. As I mentioned on our last call, we're committed to improving our operating leverage. Our third quarter adjusted EBITDA doubled quarter-over-quarter for the second half of 2015 and we anticipate increasing our adjusted EBITDA margin 320 basis points to 10.2% from our first half of 2015 margin of 7. We expect adjusted EBITDA margins to continue improving in 2016 and beyond as we bring more customers onto the LiveEngage platform and leverage the significant investments made during the past few years in a scalable infrastructure. LiveEngage also requires fewer implementations services and less customer support than a legacy offering further reducing our operating costs. Although 2015 has been a bit of a windy road, I really like where the business is headed right now for a few key reasons. Our largest deals this quarter are coming from customers buying off on the vision and our LiveEngage platform. These deals are at least three times the size of our core chat [indiscernible]. We are able to go after these deals because our platform is working and working well and provides a ton of value even today. We also have over 34% of customers on LiveEngage even mid markets and enterprise now. The investment we made in building a whole new platform over the past three years are starting to bear fruit. This is a major, major, accomplishment and this provides us a technology platform for us to continue to grow for many years to come. We originally said that LiveEngage was built for scale and ease-of-use which we believe will drive better operational leverage. This is starting to show up as we are on track to improve our second half 2015 adjusted EBITDA margins by 320 basis points as compared to the first half. We will continue to see better operating margins going into 2016 as we more customers over to LiveEngage. This too is a major, major accomplishment. I'm celebrating my 20th year of running LivePerson and I personally have been through two message pivots in our business over the past 20 years. Some of you today who are shareholders went through this with me. Pivoting a business and going after the next big thing is hard and it takes a lot of focus and perseverance. You lose a lot of sleep as you do it because although our destination is clear the road to get there is not simple. However, we are on the final mile and going into 2016 we will finish the upgrades to LiveEngage continuing to sell new customers on the vision and we are clearly committed to finish what we started three years ago. I would normally say the words we will kill the 800 number, but I can now say we are killing it. In three years or so, what we are doing is pervasive and you now longer have to dial a phone, be put on hold and wait for some brand to help you when you simply message back and forth everyone on this call is going to say we were part of making that happen. We will finally bring brands and consumer actions into the digital age which I see as the final frontier of customer care that is ripe for disruption. I believe this because it's not only us thinking about this but also companies like Facebook. The windy road at times provides inconsistent results and room for doubt but I see something very different, the windy road is what makes our company an extraordinary people work here better. It allows us to learn and the thing I am most proud of is it allows us to say we are leaders. There is a stark difference between a leader and a follower in this situation. A leader creates the tough situation by going into the woods and pioneering something new and taking that windy road to success. A follower in the end is just the road. We are on that road with our clear vision, our powerful LiveEngage platform and our plan to enhance and execute on delivering that vision in 2016 and beyond. And with that I will now turn the call over to Dan who will review our third quarter 2015 results and outlook in more detail. Dan?

Thanks, Rob. I will begin with a review of our third quarter 2015 operational and financial highlights and finish with an update to our guidance. We have much to celebrate even as we work through our migration to the LiveEngage platform. In the third quarter LivePerson reported record revenue and closed a record amount of new business, generated record international demand, signed its largest ever international customer contract, signed an agreement to upgrade its first existing large enterprise customer to LiveEngage and doubled the brands' usage, accelerated the pace of LiveEngage deployments and began scaling its operating model positioning the Company to deliver stronger margins in 2016. After a slow start to the year we are generating an increased productivity from our sales organization and making solid strides towards delivering our vision of killing the 800 number and transforming customer care. We are also strengthening our profitability by holding expenses in line as the natural scalability of our operating model and recent investments begin to materialize. Turning your attention to our third quarter 2015 operating results total revenue increased 15% year-over-year to $60.8 million leading our guidance range excluding an approximate $3.4 million or roughly 7% drag from foreign currency exchange total revenue would have increased 22%. Foreign currency exchange impacts are double edged sword of successful international growth. Excluding the impact of foreign exchange international revenue increased 32% year-over-year. We had a record quarter in the international markets which included significant customer expansions and gained in new geographies such as Germany, France and Italy. Sales coming from outside the U.S. were approximately 34% of total revenue in the third quarter. However, as our global footprint increases so too does our exposure to foreign currencies. B2B revenue advanced 17% to $57.1 million or 23% year-over-year in constant currency and consumer revenue declined 8% to $3.7 million. We signed 126 customer contracts in the third quarter and 27 of those were with new enterprise or mid-market brands. The Company reported an 88% trailing 12 months customer renewal rate in the third quarter consistent with our second quarter results. Trailing 12 month average revenue for enterprise and mid-market customer increased 4% sequentially in the third quarter of 2015 to 187,000 from 180,000 in the second quarter of 2015. The enterprise remains our sweet spot and LivePerson has more than 50 customers that generate greater than $500,000 of annualized revenue. The trailing 12 month revenue figures are pro forma to exclude contributions from a previously disclosed customer contract that ended in the second quarter of 2015. The B2B revenue breakdown by industry was financial services 21%, retail 20%, telecom 19%, technology 13%, and other 27%. Third quarter per share adjusted EBITDA of $0.11 and GAAP net income of $0.03 both exceeded our guidance ranges adjusted net income of $0.04 met guidance. The third quarter of 2015 GAAP profit included a net benefit of $3.1 million or $0.04 per share primarily tied to the contingent earn-out adjustment for Contact at Once. The third quarter gross margin was ahead of expectations at 72% but in line with our guidance for 70% excluding the contingent earn-out adjustments. The Company's cash balance increased to 46.2 million at the end of the third quarter of 2015 from 42.5 million at the end of the second quarter. LivePerson generated solid can cash flow from operating activities of $10.5 million in the third quarter of 2015. Capital expenditures for the third quarter totaled $2.6 million and the Company also repurchased approximately 200,000 shares of stock for $1.7 million. Turning your attention to our outlook, we have encouraged by LivePerson's strengthening activity in the second half of 2015. The Company is signing larger more strategic deals, generating greater ARPU and making solid progress with our migration to LiveEngage. Revenue however is tracking roughly 2% below the mid-point of our previous annual guidance due primarily to $3 million of incremental foreign exchange impact and a $2.5 million shortfall versus our plan for Contact at Once. Foreign exchange impacts are now expected to total nearly $10 million for 2015 versus our prior forecast for more than $6 million. This represent an approximate 5% drag on our growth rate in 2015. Foreign exchange is nearly $2 million impact in Q4 in addition to approximately $1 million incremental impact in Q3 of 2015. We also planned on a stronger contribution from Contact at Once in the second half particularly in the new real estate vertical. Contact at Once is on tractor mid-teen revenue growth in 2015 and has shown strong progress with planned international opportunities. Contact at Once is retail automobile vertical revenue is on target to grow by approximately 50% in 2015 and in third quarter [indiscernible] into Australia signing our first handful of automotive dealerships. The real estate vertical, however, is ramping slower than planned due to one of the leading industry aggregators having recently completed a merger. LivePerson's adjusted EBITDA on the other hand is tracking toward the upper half of our previously issued ranges as the Company is capturing planned leverage from our operating model and previous investments. At the mid-point of our revised guidance range we project that adjusted EBITDA in the second half of 2015 climbed nearly 50% to approximately $12 million from $8.3 million in the first half of 2015. We are adjusting our financial expectations to account for these trends. For the fourth quarter of 2015 we expect revenue of $59 million to $60 million which includes a negative foreign currency impact of nearly $2 million, adjusted EBITDA of 5.5 million to 6.1 million or $0.10 to $0.11 per share. Adjusted net income of $0.03 to $0.04 per share and a GAAP net loss per share of $0.04 to $0.03. The fully diluted share count of approximately 57.3 million shares. For the full year of 2015 our expectations are as follows. Revenue of $239 million, to $250 million, previous guidance of $243 million to $247 million. Revenue guidance includes negative foreign currency impact of nearly $10 million from previous guidance of more than $6 million. Adjusted EBITDA of $20.4 million to $20 million, $21 million or $0.36 to $0.37 per share from previous guidance of $19.5 million to $22 million or $0.34 to $0.38 per share. Adjusted net income per share of $0.12 to $0.13 from previous guidance of $0.12 to $0.15 and a GAAP net loss per share of $0.14 to $0.13 including the $0.04 benefit were contingent earn out adjustments from previous guidance for a net loss per share of $0.26 to $0.23. A fully diluted share count of approximately of 57.2 million for year 2015. Furthermore, as a percent of revenue for the year we anticipate gross profit to be approximately 71%, sales and marketing 41%, SG&A 16%, and R&D 17%. Please refer to LivePerson's earnings release issued today for details on our other full year 2015 assumptions. LivePerson delivered solid performance in the third quarter and we anticipate closing the year by delivering 10% constant currency organic growth in the fourth quarter excluding the loss of a large customer in the second quarter of 2015. Even as we work through our transition to LiveEngage platform we are setting new records as a Company and setting the stage for increasing profitability in 2016 and beyond. With that I will open the call to questions. Operator?

[Operator Instructions]. And your first question comes from the line of Rick Baldry from ROTH Capital.

I am just wondering if you can go through the Contact at Once impact a little more in a little more detail. Presumably they well understood the acquisition process they were undergoing so I am just curious as to why that would have had such a disproportionate impact on a single quarter in Q4? Thanks.

So for Contact at Once on the real estate vertical if you remember on the last quarterly call we had talked about one of the aggregators that they signed in the real estate vertical. Our expectation along with Contact at Once of course was that it would ramp faster than we originally anticipated in the back half of the year, but due to the merger that this [indiscernible] going through plans have slowed down on the real estate vertical for Contact at Once.

And could you talk about, aside from the acquisition impact it seems like the expectation would have been for that to grow very significantly in a very short period of time. So do we think about that now that that's the significant short-term boost as we enter 2016? Sort of how do we think about that vertical as it comes online once that acquisition gets absorbed?

Yes. I mean we had mid-teens growth in 2015. I don't have guidance for 2016 but we would expect Contact at Once to continue to grow as we move into 2016. But obviously we will update you with guidance on the Q4 call.

And your next question comes from the line of Kyle Chen. Mr. Kyle your line is open.

I guess Rob just a quick question for you to kick it off. Recently the Chief Product Officer at Facebook at an industry conference talked about expanding the mobile messaging [indiscernible] as a form of business communications with companies and brands. I guess in your view could this be somewhat competitive to what you're trying to do with LiveEngage or an endorsement for your strategy to the extent that if it's the latter how do you tactically position LivePerson to benefit from the secular trend?

Yes. We’re actually, we did a joint call with them last week actually from their headquarters and we invited -- there was about 80 LivePerson customers on that call because we are going to power the back end for some of that messaging so we are now looking on setting up our first customers that are LivePerson measures so that consumers from Facebook can use messenger and then they come through LiveEngage. So we will be the back end for those interactions. So we are just starting that. We actually showed it at Aspire to everybody and then we did a follow up call with Facebook. So I see them as a partner right now because they don't have the back-end towards communication that the businesses they have got unless you're a small business you want to do one-on-one connection but for an enterprise they need the back ends that we have. So we're excited about it. I don't want to, you know, until we get it going and everything but it's a great first start and they seem like a great partner.

Yes. That's actually really exciting news. Just to dig into that a little bit I guess what would the economics of agreement like that look like? Would it just be -- or I guess would it be more on the mature acquisition and from a funnel perspective?

Yes. I mean we would align it to our economics on the usage so it drives usage and I can't comment on how Facebook wants to price on their side. It's obviously exciting. They have taken the messenger business it's very much an autonomous focused event and they really believe that messenger can power interactions with brands and they need the back ends to do that so we were approached by them a while ago and then we just worked through it. So like I said last week we did a joint conference call and we had a lot of customers there and a lot of excitement for it and once it gets fits to our strategy. We have our own messenger that's coming out with aggregated brands we have an [indiscernible] that allows the brands to put the messenger into their own apps. So I see different flavors but there's got to be a back end for the brand to manage -- if that message comes off of Facebook it's got to get routed, it's got to get reported on, it's got to hit a queue and a skill, it's got to have all of the things of security that a normal messenger doesn’t have and we provide. So that's the stuff that we come with, the enterprise readiness of making messenger a reality.

I guess, Dan, just real quick. You know, can you update us on what percentage of the customer pace is currently on the CPI based pricing and then as LivePerson increases the number of customers on LiveEngage and as interactions increase I guess how should we think about ASP and ARPU uplift going forward?

So I will answer the last part first. From an ARPU perspective we have reported on a regular basis and it's been moving in the right direction a 4% increase quarter-over-quarter sequentially. You know, as far as the CPI model, it's about 60% to 70% of our customer base are on a usage based model and of course as you know, Kyle, that includes them paying a fixed-price for a certain amount of interactions but about 60%, 70% of our customer base.

And your next question comes from the line of Mike Latimore from Northland Capital.

Rob, you mentioned customers have been on LiveEngage 4 to 6 months, interaction is up 10% and then after that 20%. What type of interaction, what type of incremental interactions are you seeing? Is it mostly chat or is it mobile chat or what are you seeing that incremental amount?

We’re seeing obviously, which happen at the mobile side we're seeing obviously an increase in that area and that's the part that we're focused on. So that's what we are seeing a lot of action right now.

And then pay for performance as a percent of revenue today where does that stand?.

Pay for performance in the third quarter was about 11% of total revenue and Mike as you know that's a bit of a usage base revenue stream so it's about 11% in the quarter in the third quarter.

And then you said 34% of customers are on LiveEngage. Do you roughly what percent of revenue is running on a Live Engage platform?

The last part was what percent of what-?

What percent of revenue is on LiveEngage?

Since most of those customers are relatively small but we do have some marketing enterprise it's still a small percentage of our revenue but growing month to month and as Rob talked about our expectation is to have about 40% of the customers over on the LiveEngage platform in 2015 and then focus on getting the rest of the customers over in 2016. The fourth quarter is a tough quarter, we move customers over from a seasonality perspective and closing down their -- putting [indiscernible] in place but the focus in 2016 is to move all our customers over.

[Operator Instructions]. And your next question comes the line of Brian Schwartz with Oppenheimer.

This is [indiscernible] for Brian Schwartz. I just on are wanted to say congrats on that record number that 7 figure deal number and I wanted to dig into that metric a little bit more. Is that 7 figure is that an annual contract value number or is that total contract value number?

That's an annual contract value number.

And then I was wondering what percentage of the enterprise has been market deals the new deals were on the LiveEngage platform and maybe you could talk a little bit about for the customers that didn't choose a LiveEngage platform what were some of the reasons why they did not? Was it a feature set gap or was it something else?

It's pretty much the majority of the deals are on LiveEngage, so we're not really selling the enterprise so it's now the majority of the deals. So maybe one that would come in on that one but last quarter was pretty much everyone is on LiveEngage.

And then I was wondering if you can give us an update on how your try and buy strategy is resonating with the small business segment, are you still running this promotion and I know its still maybe early but if you could maybe give some color on maybe some of the conversion rates that you had to the buy options and how it's been trending over time?

It's a little early because we started I think last quarter was there's a lot of tries so we are seeing a lot of tries and it's thousands and so we're now looking at what the conversion rates -- what will happen. I think you got to wait a little base because they tag, they go live they starts using it so I think by next quarter we can have some more clarity around how we're doing on the conversion rates, but right now it's a little preliminary.

And then just one last one for me and I apologize if you said this during your prepared comments, but I was wondering about you could provide the revenue contribution in the quarter from Contact at Once and given the $2.5 million shortfall expectation I recall that you most recently said that your Contact at Once revenue contribution target for the year was about $31 million. So I was just taking that shortfall into account the total year expectation should be about $20.5 million. Is that the right way of thinking about that?

That's the right way of thinking about it. We don't do contribution of act at once quarter-over-quarter and as we continue to rollout the LiveEngage platform in our strategy in 2016 is in those new verticals for Contact at Once to use the Live Engage platform so it's going to get harder and harder to break this out, but your math at the end 31, down to 28.5 is a reasonable way to look at it.

And your next question comes from the line of Jeff Van Rhee.

This is Ryan sitting in for Jeff. Just one quick one, can you provide any sort of update on bookings in the quarter and how your sales organization is doing following the kickoff that you did earlier in the year I believe it was Q1 and Q2?

Yes. So the Q3 bookings was the highest bookings in the history of the Company and Q4 looks very strong also. So we don't give a number any more but it was the highest so far. And so the stuff that we did in Q1, Q2 which as you remember softer bookings quarters is obviously showing up in Q3 and Q4 now and obviously into next year. So we feel very good about it and they have got the messaging, they got the platform so they have the tools they need to sell the vision.

[Operator Instructions]. And there are no audio questions at this time.

Thank you for joining us on the Q3 2015 call and we'll see you on the next quarter. Thank you.

Thank you for your participation in today's conference call. You may now disconnect.