LivePerson, Inc. (LPSN) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson's Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. On the call today are LivePerson's Founder and CEO, Rob LoCascio; and CFO Dan Murphy. You may begin.

Thanks very much. Before we begin, please note that we will make forward-looking statements during today's call, which are predictions, projections or other statements about future results. These statements are based on our current expectations and assumptions as of today and are subject to risks and uncertainties. Actual results may differ materially due to various factors, including those described in today's earnings press release, in the comments made during the conference call, and in 10-Ks, 10-Qs and other reports we file from time to time with the SEC. We assume no obligation to update any forward-looking statements. Also, during this call we will discuss certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release which is available in the Investor Relations section of our website. I will turn the meeting over to Robert LoCascio, CEO and Founder of LivePerson.

Thanks Dan. Thank you for joining LivePerson's fourth quarter 2016 conference call. 2016 was a pivotal year for our company. It was the year we validated our vision at LiveEngage our new business messaging platform will help the world's largest brands reinvent customer care. It is also the year we celebrate our migration to LiveEngage setting us up in 2017 with a very clear picture of our future. Barring any unforeseen changes we expect to end with approximately 95% of our revenue on LiveEngage by the third quarter. 93% of the customer base is already in the migration funnel representing almost 60% of revenue. When including our migration funnel which represents the remaining revenue from brands who have already started moving on to LiveEngage we have visibility into 84% of recurring software revenue today. As we discussed last year, there would be a group of customers not likely to come along for the journey as end of life nears for our legacy offering. Today we have identified that risk approximately $15 million of revenue will not migrate to LiveEngage as associated with customers that are not aligned to a digital strategy. These contracts will not renew and will start taking the revenue impact primarily in Q1. We have been able to offset this impact by targeting between $16 and $19 million of savings in 2017 excluding onetime restructuring and noncash expenses. Eliminating the migration overhang enables us to fast forward the winding down of the legacy infrastructure in order to gain meaningful operational efficiencies and strategic focus. In the third quarter we'll be left with around $10 million of revenues that will remain on the legacy platform. These are mostly midmarket customers and a few enterprises that are digitally aligned, but not appropriate to move to LiveEngage in the first half of 2017 because of the timing of the features that are not on the near term roadmap. We've executed a strategy that maximizes the profitability of these customers on minimizing their ongoing support and technology costs and this is tied to the savings of $16 million to $19 million. We hope to retain and even convert them to porting them into the LiveEngage platform and on to being active revenue. We can now focus the company on growth and selling. We're in a strong position to become the dominant player in transforming relationships that a brand has digitally with the consumers over messaging. LiveEngage will support that vision and allows to do something even greater than we did in the past. Let me tell you about the new chapter the one we were focused on signing 100s of the world's leading brands into messaging deals over the next 24 months, one where we take aim at a multibillion dollar market opportunity and transform customer care, all at LivePerson is now focused on this chapter. Our strategy is clear. Across the globe we are targeting a small group of brands many of them already customers that hold the power to change the face of customer care. These enterprises have thousands of agents in their contact centers and connect with billions of consumers each year. Over the next few years we expect virtually every one of them to begin shifting voice agents and even store based employees to messaging. What's exciting is how clearly we can validate LivePerson's unique position within the marketplace. A year ago we were talking about the early signs of LiveEngage to deliver on our vision. Today, we have the proof points. We exited 2016 as a clear frontrunner in enterprise messaging with a large reference brand at scale and LiveEngage in each region of the globe. We turned on T-Mobile in North America in the second quarter. LiveEngage messaging is already on millions of their devices and we are still scaling. We turned on another major telco in Asia in the third quarter and the fourth quarter leading brand in the NeoNet live. We have leveraged our unique position these past few months by holding a series of high touch summits across the United States, Europe, APAC and in Israel. Our own customers are the highlight of the events presenting the case for messaging and LivePerson. Through these summits we have engaged with senior leaders and our targeted enterprise brands. Our strategy is working as we are seeing powerful customer momentum around our vision. In Telstra, the largest telco in Australia expanded and extended its contract with us in the fourth quarter. Telstra signed a five-year, eight figure deal to deploy LiveEngage across their entire enterprise. Messaging is in the next twelve months in their roadmap and is the focus of that deal. Foxtel, Australia's largest pay-TV provider attended the messaging summit. Last month we launched their app with LiveEngage messaging in it. Messaging is the only human assisted channel now they are providing in their app. There is no voice or email offered anymore. In EMEA, a leading financial services firm expanded their contract with us. They have signed an eight figure, three-year contract with plans to deploy messaging in 2017. We also signed a high six digit expansion with a major telco in EMEA to deploy messaging in early 2017. North America a leader in maritime communications software chose to embed LiveEngage into their platform and we're now integrating into one of the largest CRM platforms in the market. They will now be a reseller of our technology. And also in North America one of the leading automotive portal went live with messaging instantly turning on thousands of dealerships with SMS. I want to share two anecdotes that demonstrate how our vision resonates. One relates to a prospect that was a former customer. This prospect actually canceled about 24 months ago on the old platform after concluding the chat was not right for their organization. We are now engaged in a seven-figure sales deal which is strategic to their organization. This I think is a really interesting customer, it’s a very large customer and once again they embraced messaging and the same decision-maker who looked to chat as maybe not strategic went ahead and embraced messaging and is going to scale with that as the strategy for care. We're just getting started and we have more wins to share in future quarters. The shift to LiveEngage marks the most important product launch in our history as it pivots us to be the lead player in what will be, what I believe is the third wave of digital, which is digitizing the relationships between brands and consumers. The first wave was digitizing the world's information and the second was social, but really the relationship today that a brand has with the consumers is predominantly still analog voice and the e-commerce accounts for less than 10% unless you are Amazon of course. And the third wave, you know, consumers, they won't be forced anymore to call the 800 number, to be put on hold and have a terrible experience. Instead consumers can be connected to their favorite brands the way they are connected to their friends and family or carry those brands in their pocket and they want to have a relationship that is convenient and on their time. This is a game-changing opportunity for LivePerson and by our estimate the total adjustable market for LiveEngage solely among our base today is approaching about 2 billion. Not only do we have multiple offerings to sell including messaging, mobile chat, content, analytics, services, but our open architecture because we've built our platform on the latest technologies. It is an open platform that allows partners and even our customers to take a rich set of APIs implementing them integrations. For example, there's a lot going on right now on our platform around blogs. We just actually put up a blog yesterday a customer in Japan put one up and is now using it on top of LiveEngage. It's very easy and especially on the blog side of the technique will become more and we'll talk more about it in future calls. The open APIs allow richness to that type of self service artificial intelligence. Our field org is now focused on capturing this opportunity. What's also exciting is that we've already seen great results on LiveEngage even before the impact of messaging materializes and even before every single LivePerson employee shifts focus to driving renewed growth which is happening today as we are finishing the migrations. Brands are embracing the platform and we're seeing strong mobile adoption out of the gate accounting for 30% of total interactions of LiveEngage in the fourth quarter versus less than 10% than what we had on our legacy system. So it is not just mobile messaging or chat, brands are adopting multiple interaction types including profiles, content and a very powerful analytics package that comes with the product. In fact 25% of our customers use more than just the top chat in the fourth quarter versus less than 10% historically. Year-over-year same customer usage growth exceeded 10% in the fourth quarter, that is the beauty of LiveEngage and brands can quickly and easily adopt additional capabilities. Steady usage growth should ultimately translate into revenue and up sells and although it is still a small sample set for year-over-year comparison we are seeing indications of that trend within our existing customer base. Dollar retention on LiveEngage in 2016 was greater than 100%. For the customers that are on LiveEngage the revenue impact is greater than 100% on renewals. The path towards translating our vision into a new growth and higher profitability is clear. In 2007 our entire organization is seeking to capitalize on the momentum we are building around LiveEngage and messaging. LivePerson has once again captured the pole positioning of pioneering industry. It will leverage the unique position we have built around our prudent platform, let principal customer base and a rich history of digital transformation. We expect to exit 2017 with a revenue run rate that points us toward renewed growth in 2018 and as messaging adoption spreads through our customer base we will be in a position to accelerate upsell to capture the multibillion dollar market opportunity that is in front of us. With that, I'll turn the call over to Dan, who will discuss our second quarter results and outlook in more detail.

Thanks Rob. 2016 was a year of significant accomplishments for LivePerson. We accelerated the migration to LiveEngage and are now on target to have 95% of our revenue on the platform by the third quarter. We are excited to end our transition in 2017 and start our new chapter with a strong profitable base of revenue to build upon as we complete the migration, drive messaging adoption, and refill the field organization on growth. The early data points some LiveEngage verify the potential of the platform. We had a greater than 100% dollar retention rate from full service customers on LiveEngage in 2016, same customer usage on LiveEngage exceeded 10% year-over-year growth in the fourth quarter and LiveEngage customers are embracing mobile as mobile accounted for approximately 30% of interactions in the fourth quarter. Equally important, as we are able to fast-forward plans to operationalize cost savings prior to moving brands off legacy and realigning our go-to-market strategy around LiveEngage. Excluding onetime restructuring and non-cash charges we are now targeting $16 million to $19 million of savings in 2017 following a nearly $15 million of savings realized in 2016. A breakdown of the 2017 [indiscernible] is as follows. An approximate $7 million to $8 million reduction in cost of goods sold as we were able to fast-forward the winding down of our legacy operations, gross margin was [indiscernible] in the fourth quarter of 2015, 73.4% in the fourth quarter of 2016 and projected at approximately 75% in the fourth quarter of 2017. An approximate $9 million to $10 million reduction in sales and marketing, we are running a leaner, more nimble field organization as they approach the LiveEngage is to target the world's largest brands. We also have got the potential to change the face of customer care. An approximate $1 million to $2 million reduction in general and administrative expenses as we leverage system investments made over the past few years to operate more efficiently. Conversely we were increasing R&D investment by approximately $1 million in 2017 as we focus resources on extending our lead with LiveEngage in messaging. I will now review our fourth quarter operating results and then discuss our 2017 financial guidance. Total revenue of $56.1 million was within our guidance range and consisted of DVD revenue of $51.9 million and consumer revenue of $4.2 million. Trailing 12-month average revenue per enterprise at midmarket customer was just over $200,000 in the fourth-quarter in line with prior periods in 2016. We signed 93 deals in the fourth quarter of 2016 as compared to 83 in the third quarter of 2016 and 122 in the fourth quarter of 2015. As we have guided, in 2016 LivePerson focused on migration instead of upsell for the existing customers. The trailing 12-month customer renewal rate held at 83% through 2016 for all of LivePerson although we expect it to rebound to our 90% plus target once all brands are online again. The B2B revenue breakdown by industry was retail 24%, financial services of 26%, telecommunications 15%, technology 9% and other at 26%. International operations accounted for approximately 37% of total revenue in the fourth quarter. As I mentioned earlier, we were able to move more quickly to operationalize savings target wind down our legacy offering and a realignment of our field organization. We recorded $7.2 million or 13% per share of charges in the fourth quarter. These charges were comprised of $2.8 million of write down of costs related to shutting down our legacy platform and aligning around our LiveEngage strategy, a $2.6 million write off relating to our previous investment and $1.8 million in litigation fees. Gross margin in the fourth quarter increased 350 basis points year-over-year to 73.4%. This improvement primarily has led to diminishing of costs of our legacy operations and lower production costs for LiveEngage as the platform matures at the enterprise level. Fourth quarter GAAP net loss per share of $0.17 was below previously issues guidance due to restructuring and onetime charges. Excluding these charges we would have been in line with our previous guidance. Adjusted net loss per share of $0.04 was below previously issued guidance due primarily to non-cash tax effect on non-GAAP bad debts which I will discuss in more detail. Diluted adjusted EBITDA per share of $0.09 was within our guidance range. The company held $54.9 million or approximately $1 per share of cash including restricted cash at the end of the fourth quarter which was in line at the year ago period. LivePerson generated cash from operations of $24.6 million in 2016 as compared to $21.8 million in 2015. Cash flow continues to benefit from our lower cost structure and our ability to move customers to cash payments in advance on annual billings. Deferred revenue nearly doubled to $27.1 million in the fourth quarter from $13.9 million a year ago. Capital expenditures totaled $12.3 million in 2016 and the company also spent approximately $10 to repurchase 1.5 million shares of its commons stock in 2016 an additional 20 million remained available under the share repurchase authorization. For 2017 we anticipate starting the year at a low run rate of revenue reflecting the last stages of our transition from legacy to LiveEngage. We are projecting the first quarter 2017 $50 million to $51 million as compared to $56.1 million of revenue generated in the fourth quarter 2016. The guidance incorporates the $15 million of annualized attrition while we are recognizing starting primarily in the first quarter tied to the transition of the LiveEngage from legacy. Also recall that due to our focus on migration versus upselling to existing customers in 2016 we exited the year at a lower recurring revenue run rate than when we started. Finally, the guidance incorporates the typical seasonality recognized in our variable revenue streams by the move from the fourth quarter to the first quarter. We are targeting the second half 2017 revenue higher than the first half. This will be business from renewal from 2018. Our successful leveraging of LiveEngage recent growth with use of attrition post migration and starting messaging adoption of this upside run rate in 2018. We intend to maintain if not improve our non-GAAP margins in 2017 lower to the 2016 and position LivePerson as a leaner and more nimble footprint as we prepare for growth in the years ahead. I will now review our detailed fourth quarter 2017 and full year 2017 expectations with the exception of GAAP earnings guidance excludes the following estimated restructuring and onetime charges for 2017. Estimated charges were $400,000 to $600,000 or $0.01 per share in the first quarter and $2.3 million to $2.5 million or $0.04 per share in the third quarter related primarily to the further cost reductions of our legacy platform. Estimate of onetime legal expense is $6 million to $6.5 million or $0.11 per share tied to litigation. For the first quarter of 2017 we expect revenue of $50 million to $51 million, GAAP net loss per share of $0.12 to $0.10. Adjusted net income per share of $0.00 to $0.02, adjusted EBITDA of $2.9 million to $3.9 million or $0.05 to $0.07 per share. For the full year 2017 our expectations are as follows. Revenue of $201 million to $209 million, revenue guidance includes negative foreign currency impact of $3 million, a GAAP net loss per share of $0.30 to $0.31, adjusted net income per share of $0.07 to $0.12 and adjusted EBITDA of $17.3 million to $21.3 million or $0.30 to $0.37 per share. Furthermore the percent of revenue for the year excluding onetime charges we anticipate gross profit to be approximately 73.5%, share of the market in the 38.5%, G&A of 16.5% and R&D to be 20%. Also note that we have updated methodology of calculating adjusted net profit per share. While we truly achieve incorporated the GAAP tax rate into our calculation, we now start with GAAP pretax profit, add back restructuring onetime and non-cash expenses and then apply to standardized 35% tax rate. The [indiscernible] calculation is driven with the volatility of GAAP tax rate fluctuations and the more closely aligned non-GAAP taxes with cash taxes. Before my completion of 2016 adjusted EPS on a historical and updated methodology is available on the supplemental fourth quarter earnings presentation that you may find on the investor relations section of the company's website. In addition to preferred to LivePerson's earnings release issued earlier today for details on our full year 2017 assumptions. We have also published a supplemental presentation in the investor relations page of our website we reviewed key points from the earnings call. I'll close with what I view as a summary of our key takeaways. With the migration ending in 2017 we now have the visibility to target the bottom in revenue for LivePerson's transition. Our forecast for $201 million to $209 million in revenue in 2017 provides a solid base to build upon in future periods. We have successfully protected cash flow and our target to share approximately $16 million and $19 million in 2017 expenses. This is in addition to the $15 million in 2016 when excluding onetime restructuring and non-cash costs. By Q4 2017 we expect to have increased our gross margin by 500 basis points to 75% as compared to Q4 of 2015. This $55 million and nearly $1 per share in cash and no debt we have a healthy capital structure in place to execute on our vision. Deferred revenue nearly doubled to $27.1 million in 2016 and although early we are seeing greater than 100% dollar transform on LiveEngage with first service customers. With that, I'll open the call to questions. Operator?

[Operator Instructions] And your first question comes from the line of Richard Baldry from Roth Capital. Your line is open.

Thanks. Can you talk a bit about the difference in the go-to-market between customers you know you're targeting up front for messaging opportunities versus ones that are more applicable across the LiveEngage platform if you have different people going after those very narrow messaging types of opportunities those everyone is selling across the board?

It's everyone selling across the board although the target there is a big focus on a very small group of customers that have very large contacts centers. We have about 23% of the total target that we're going after right now because that's where we think we can have the greatest impact and we're seeing with like the T-Mobile, the impact we can have on these large enterprises and the scale of it is what the platform is all about. With that said, we have small business and midmarket customers that have gone live also on messaging. We've done also done messaging in Google and Facebook and as front end some in app but we're very targeted on the enterprises which allows us to focus and have a very, very small enterprise team going after this group of customers.

And can you talk a little bit about the deployments and how the revenues are recognized in the fields when you think about either large six-figure or low seven-figure deals do they ramp pretty quickly and the revenue is recognized ratably do the revenues come in sort of in a hockey-stick as they deploy, but it takes a while to get it out into the customers get it there is the set of users?

Yes, so from a method in perspective although it is still early on, on the deals that we sold we expect it to increase over time. So from the initial contract date there is an implementation period of time and that's a little bit longer than just your normal LiveEngage piece but not much and then over time we recognize a little bit more revenues they will allow to their business.

And we’re deploying both care and sales, so and we're obviously getting integrations into their backend and into their apps, so there's a little bit of an integration piece that’s a little sticker than even in chat.

With the sort of customers identified that you think you’re going to maintain on the platform versus the stub customers that you don't think are going to come, how much of your sales time now, your sales bandwidth can be reallocated to growth, is it really now at a 100% they can focus or is there still certain amount of hand holding the sales force has to do as they finish that migration through Q3?

It's pretty much it is almost 100% of their time now can be focused on selling. We did as you can see we started, took our, there is a large, there is a impact on revenue about $15 million of those customers that won't convert for many reasons, some strategic, some product gaps some things, but we just wanted to move on and now we as a company can be out there focused on selling. I know so my time we're spending 90% of my time out with customers talking about messaging and focused on supporting the sales team as they go to market. So, we’re getting back that capacity in the R&D we're about I'd say 50% to 60% is focused on features that are not related to the legacy, but we’re still finishing up some for the customers that are going live right now or migrating to LiveEngage. So, but the organization is, we’re shifted and we want to sort to start the year with that shift and as a company we can focus on growing and executing on our plan.

Last thing will be, could you talk in the messaging space specifically in the larger deals who do think is our last vendor to standing competitively and why do you think you win, when you do go head to head? Thanks.

There is a host, it's a hot space. There is a handful of start-ups that are out there. Salesforce bought a small start up, starts been around for a while and just kind of tucked it into the service cloud. So a couple of perspectives on it. First, our focus on the enterprise and what we do at scale is very unique and we've done that with chat. We have the security, the scalability just handling payments through messaging and securing a payment is actually a very hard thing to do, but we do it and so, and we can handle thousands of agents and our uptime is you know like enterprise grade obviously. When it comes to Salesforce they have a small acquisition, I think it’s like chat, it’s a feature in service cloud. We know something now that this is a platform and it’s a platform for creating a digital connection with consumers and we treat it as a platform. So right now we are just executing and having a proposition and I think the most important part is we now have a handful of enterprise customers that are alive that are reference able for scale. And being the first to go out and we announced T-mobile last time on this call and that’s a great lead for us and shows the capabilities of our platform. So that's really the game we're after today and we put three years of development into it. Obviously, you know what we took to get here and everything we are doing is really focused on that scale and that’s rebuilt.

Thanks.

Your next question comes from the line of Brian Schwartz from Oppenheimer. Your line is open.

Oh hi, this is Koji Ekada [ph] sitting in for Brian Schwartz and I thank you for taking my question. Just one quick one from me on the cost savings in 2017, break out there on the breakdown of the potential cost savings, but and I think I have a pretty good idea of how to think about the legacy wind down, but I was just wondering if you could give a little bit more color about how we should be thinking about the cadence of the other cost savings and other light items, I mean is it a first half, is it more in the first half or more in the second half or is it more of a linear type savings environment in 2017? Thanks.

Yes, that’s a good question. So we are aggressive an as we talked about this before we are aggressive in our migrations in getting customers off the legacy platform onto LiveEngage and as we came through the end of the fourth quarter, we were actually able to fast forward some of those savings. So that is one of the reasons that you see the charge being taken in fourth quarter of 2016, we were actually able to shutdown some of our legacy operations or operations related to our Legacy platform. So we are able to actually fast forward on that and I talked a little bit about in the calls we will have another charge in Q1 primarily related to the legacy platform between $400,000 to $600,000 and then we will have another charge in Q3. So what I would expect Koji [ph] is that we will start off the year with decent cost savings, but they will continue to grow as we finish off the migration and take some of those changes. So we saved about $15 million during the year in 2016 and we are targeting $16 million to $19 million in 2017. So give or take $30 million to $35 million over a two-year period and that's related to the focus on LiveEngage which we have always talked about and having our resources focused on one platform and our vision for opportunity messaging and growth. So that is kind of one aspect and the second aspect is, we know that the LiveEngage platform is cheaper for us to support than the Legacy one. So we are starting to see some of those benefits and as you think about going into 2017 and the $15 million worth of customers that aren’t going to migrate traded off with $16 million and $19 million of savings thus a pretty good trade off and pretty good opportunity as we move into 2017 and beyond.

Great, thanks for that color. Thank you very much.

Your next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.

Hi good afternoon. The statistic on the percent in the migration fall 84%, it's nice to see that tick up, but did you give us maybe I missed it, did you give us a timeframe on when do you expect, I think in the past you said 80% converted by 2Q 2017 is that 84% now to that same date or is it?

So the 84% we are just talking about is that we have a line of sight and we are clearly outlining there will be 95% of the revenue will be on LiveEngage by the end of Q2, Q3 of 2017 and there will be about $10 million sitting on legacy that we have optimized from a cost perspective and some would be a risk and some will have the opportunity to move over as we continue to develop on the LiveEngage platform and those customers are ready to move over. Some of those customers had same as in their business around their strategy or direction that they were going but they needed a little bit more time. So it is about $10 million sitting on the legacy, but 95% will be over by the third quarter of 2017 which is Glenn where you see the charge that we're taking for the next big chunk of writing down the legacy platform.

Okay. And maybe just a little color on the sales force now that it seems that they've shifted towards being able to sell new again as opposed to conversion? Is there kind of an enthusiasm there in general in sales force and what is the headcount there and just some general color on the tone in the sales organization?

Yes there is – we sort of have those sales team now split into two areas, one is focusing on the enterprise and new sales and then we got a good depth doing because if you're on LiveEngage, you have a lot to use on LiveEngage including messaging. There is a lot of what we call green space on it, so we had a good business focused on making sure that the customers understand all the new things they can get on the platform. And then the other guys are basically focused on hunting the very large enterprises, we have a target list. We are doing a lot of marketing to drive interest being thought leaders actually and we can do some good events and bringing our customers together to talk about this to meet with the customers that are live. So that is how we are sort of going to market right now, but they are enthusiastic because they've got the other shiny new object called LiveEngage, it is working really well, you got referenceable customers on it. So that is what we've been waiting for and their focus is not telling someone why it's good to get on LiveEngage, but the focus is you're on LiveEngage now you can do these 10 great things plus get to vision and messaging. So that gives a lot of excitement on it.

Okay great. Thanks for the color.

About 45 people quota-carrying in the direct – in that direct sales headcount today.

Okay, thanks again.

Your next question comes from the line of Jeff Van Rhee from Craig Hallum. Your line is open.

Hi guys. Good evening, this is Ryan sitting in for Jeff.

Hi Jeff.

On the big renewals you saw in the quarter, can you just go over and give us a little more color on the renewals, what happened there, what was the incremental piece of revenue, what did they take just any other color and explanation here will be great.

I'm sorry I'm having a little bit trouble hearing you, you said something about renewal.

Yes on the two big renewals that you mentioned a eight figure multi-year deals, can you just go over that in a little bit more in-depth and kind of describe what was the incremental piece of revenue there, is it largely due because they were taking more or going broader or just a longer duration, what drove that?

So the one in Australia, the big part of it is messaging, that is actually the - and they are actually on a legacy voice platform and they had chat on that voice platform from that legacy provider and they actually want to get off of it and so we're focused on messaging and that is the deal today. So that is what we are focused on in that one. All of them are messaging driven today, so all those deals are driven by messaging and going live in app and transforming the voice platforms to reduce those voice calls.

Great thanks, and then just on the 10% or exceeding 10% same-store usage increase, what is your confidence that that will ultimately drive ARPU uplift and current timeline for that?

Yes so, I mean we're excited about the 10% and we've got programs in place to continue to drive it, but if you remember in the early, the one step that I referred to is just the dollar retention rate is greater than 100% for customers that have been on LiveEngage, so now granular to small population, but as we go throughout the year in 2017, that implies that usages continue to increase and revenues continue to increase from those existing customers. So we are pretty confident that usage will turn into upsells and more usage of the platform.

I think one of the unknowns is that it's like a new, it's absolutely we have a strategy behind the platform because we don’t think but there is a lot of – there is an unknown about and it's an exciting unknown which is we got this new platform that is using a piece that is usually there in on chat and there is a whole range of things they can do want to know and obviously and get the messaging. So I don’t think we don’t know yet, we also built the platform to be self-service. If you remember if you get one back three years ago and read some of the transcripts on what we're speaking about is we are building the platform that as we scaled, we could see in the old platform is cost where we needed PS. So people are setting themselves up on stuff like we will spend in marketing campaign, there is something cool on the platform for you and then we see a reaction where they implement. People have gone live by themselves on messaging without even talking to us, so we don’t know, we don’t know yet because we built the platform in self-service, we are seeing those early indicators that they're using it and then we obviously focus on marketing the capabilities. Like I said we've got a lot of green space and the most important thing is just allowing the organization to be free to focus on the opportunity and no longer it's - the hardest things is focusing on customers that we know maybe won't come and won't transfer to the new platform. We spend a lot of time with them, we may have to do features, we don’t want to build and we kind of said enough is enough, it is starting to move on and pour some revenue trade in the cost savings of winding that platform down, we said it's time now and now it frees us to expand. So we are kind of getting going with the new car here.

Got it, great. And then just lastly from me, any thoughts on cash and cash flow, free cash flow going through 2017, how we should think about that?

Yes, I mean from our perspective in operating cash flow we generated about $25 million this year and expect to do roughly the same if not slightly better as we are going into the next year.

Great, thanks.

[Operator Instructions] And your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Hey guys, this is Nick Altmann on for Mike. Thanks for taking my questions. Just in regards to relationship with T-Mobile, do you guys have any idea how many T-Mobile subscribers are using their mobile app?

Yes. I can’t tell you but yes we do. Yes, so we know exactly we have all the metrics because so we know what the opportunity is, right now or add about I would say 20% of what we could penetrate.

Okay and then I guess if you could, can you kind of talk about what would be the next steps there in terms of adding more subscribers?

It’s just, it’s a function of time. We are just do the function of time, you scale at a certain pace with the certain amount of labor. Their sales and their service used cases that are on the platform, so it’s just a function of time. We moved very quickly where we started to where we are today and it continues to grow obviously their dynamic organization and they're growing, they are also growing and it’s great to having them as a customer so it’s just the function of time.

Got it, got it. Okay. Thanks.

Your next question comes from the line of Mark Schapp from Benchmark. Your line is open.

Hi, good evening. Robert for you in your prepared remarks, you know that there may be revenue LiveEngage platform by the end of the third quarter here. I just wonder if you could get just clarify or comments around those customers and are those customers planning to eventually get off the legacy platform, and if so what kind of timeframe are you looking for?

Yes, those customers, there is actually one or two enterprises that timing wise for specific reasons we are not kind of forcing them that they want to go. They are digitally aligned with us, they’re citing about messaging, but there's some timing issues on their side and then there's the mid market customers and a partner on their or two that needs beyond the feature capability in the platform that we're aligning with messaging that we don’t have right now in the platform because there is so much we're doing, we just hand over the messaging demand we have. So those are sort of the, I already stated two big flavors of customers that are on there. Obviously there is always a risk with revenue not migrating off the platform and we feel like we can migrate that revenue. I except there is a risk that something happens because they’re on the old platform but its manageable now, it’s $10 million of a $200 million P&L which is the risk, risk in our business now. And so and I know we can get a portion of that it’s not all that on back to the LiveEngage platform.

Okay, great thanks and then Dan, I was wondering if you could just repeat your gross margin expectations for Q1 and for next year?

Sure, just give me a second. So for Q4 we showed would be a 75% gross margin, Q4, 2017, I don’t think I gave margin expectation for year, the gross margin expectation for the year is 73.5% and the expectation in Q4 is to be at 75% gross margin and for Q4 of 2016 we're at about 73.5%. So, for Q1 I would expect to be in that neighbourhood of 73.5% if not slightly better margin in Q1 and then expected to be roughly flat in the Q2 and then growing on the back half of Q3 and Q4 as we finalize the migration.

Great, thank you. That’s all from me.

Great, thank you.

And there are currently no other questions in the queue at this time. I will now turn the call back over to the presenters.

Thank you and we will see you on the Q1 call. Thank you. Thanks everybody.

This concludes today’s conference call. You may now disconnect.