Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to live persons first quarter 2020 earnings conference call. My name is Ian. I will be your conference operator today. At this time all participants are in a listen only mode after the prepared remarks. The management from Life Person will conduct a question and answer session and conference participants will be given instructions at that time to give everyone the opportunity to participate. Please limit yourself to asking one question and one follow up. As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Matthew Kempler the company's Senior Vice President of Investor Relations. Please go ahead sir.

Thanks very much Ian. Joining me on the call today is Robert Castillo life business founder and CEO. And John Collins our Chief Financial Officer. Please note that during today's call we will make forward looking statements which are predictions projections and other statements about future results. These statements are based on our current expectations and assumptions as of today and are subject to risk 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 this conference call. And in 10 case 10 Qs and the reports we filed from time to time with the FCC we assume no obligation to update any forward looking statements. So 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. Both this press release and supplemental slides, which include highlights for the quarter, are available in the Investor Relations section of LivePerson's website. With that, I will turn the call over to Rob.

Thanks, Matt, and thank you for joining LivePerson's Q1 2020 Earnings Call. LivePerson delivered strong first quarter results and will continue with strong results into Q2. Despite macro uncertainties that emerged starting in the first quarter, revenue was in the top half of our guidance range and increased 18% year-over-year to $78.1 million. Our adjusted EBITDA loss of $4.6 million was $2.8 million better than guidance, and LivePerson ended March with $171 million in cash, a decrease of only $5 million over the past quarter. As we highlighted on the last quarter's call, one of the key reasons we promoted John to CFO was the ability to leverage automation, increase productivity and capture cost savings. I'm glad to see that John has really hit the ground running. We started off very strong. I'm really proud of the strong execution of my team, especially in a world that we're dealing with today over the past few weeks and all the changes, obviously, to protect the health of our employees, restricted travel and we brought all of our employees into a work-from-home situation. Although the new normal work-from-home has required some adaptation, being a digital business that runs in the cloud meant that we had very few changes in how we operate on a daily basis. I'm also very proud of the fact that we were chosen by Fast Company as the third most innovative AI company in the world. Also, Forrester placed us in the upper right quadrant as a leading company in its new report on the New Wave; Digital-First Customer Service Solutions. This just solidifies the great work that our product teams have been doing an extending LivePerson not only having the best messaging platform, but also being one of the leading AI companies now in the world. We've…

Thanks, Rob. As Rob shared, LivePerson had a strong first quarter and is executing well in this new environment. We are tightly managing the bottom line while actively positioning our product development and go-to-market organizations to support customers during the crisis. Combined, these dynamics are accelerating the adoption of our platform and our path to profitability. My commentary will center on a review of the first quarter, how the coronavirus is factoring into our revenue growth outlook and our strong execution on initiatives to enhance productivity, profitability and cash generation. Starting with the first quarter, revenue increased 18% year-over-year to $78.1 million. We were pleased to land in the upper half of our guidance range despite the difficult environment. B2B revenue increased 18%, and consumer grew 15%. Within B2B, hosted software grew 18%, while services grew 14%. The U.S. grew 26% year-over-year and accounted for 62% of revenue. International grew 6% year-over-year and accounted for 38% of revenue. We signed two seven-figure deals in the first quarter, and 130 deals in total, an increase of 10% year-over-year. Existing customer deal counts increased 42%, while new deal counts fell 15%. Deal counts reflect several stalled sales cycles in March, particularly for new logos, as contact centers went into crisis mode and focus on triaging operations rather than deploying platforms. However, we have already closed several of these delayed deals in addition to a 7-figure upsell in the first weeks of April. As Rob detailed, our platform can bring immediate benefit to brands struggling to respond to the crisis with a virtual workforce. In order to maintain business continuity with remote agents and address broken call queues, leading brands are rapidly adding new messaging endpoints, shifting agents to LiveEngage, expanding use cases and widely embracing automation. In turn, conversation volumes surged 20%…

[Operator Instructions] Our first question is from the line of Raimo Lenschow with Barclays. Your line is open.

Thanks for taking my question and congrats on a really solid quarter. So my first question It's Mohit Gogia for Raimo. Congrats on a really solid quarter. So my first question is for Rob. Rob, just continuing on the sort of like the market opportunity here, right? So you guys are obviously eventualizing this opportunity. It's getting more recognition among the industry analysts. We can all see that. But I'm just wondering, so in this world, in this sort of like unseen world where people are working from home, where you alluded to that messaging volumes are going up just because contact centers are realizing voice is not the ideal medium. I'm just wondering as to how do you see the sort of the market, sort of like get more traction among the customers. So you talk about shorter deal cycles, sort of like one proof point that alludes so that now, A, it's getting more and more mind shift. But I'm just wondering as to, if you can talk about the longevity and also sort of like the phase of market evolution that this pandemic might provide you. And then I have a follow-up question for John.

Guys, can you hear me? Can you hear me now? Hello? Perfect.

Okay. The work-from-home conference call so the demand in our platform, the 20% growth month-over-month, I think, tells a massive story about the need for our platform, and that would have taken us a couple of years to do. If you annualize that, that will take a couple of years to get the type of growth on our platform. We didn't have to add more agents. We didn't have to do anything. It's just the demand for the platform. And that comes in two places. One is messaging is the delivery for automation. It's the best way to deliver an automation with AI. So we first had that demand because they couldn't fulfill voice, and then they went into our platform. And then right away, the amount of activity in automations, the building of automations was pretty extraordinary. So I think it just says when all of this is over, and I don't believe we're ever getting back to fixed contact centers. And even if that doesn't happen next six months, our brands are looking at how can they create now a different way to engage. And that was like I was talking about the telco over in Australia. I mean they're all in, and many brands are following that. So I think now short term, medium term and even when we get through this, we're going to be on the other side of capturing a lot of the demand in the market today. And we're not a voice platform. It's not about a voice platform in the cloud. Once again, there's a lot of challenges taking that home. It's about being having a digital connection with your consumers and automating that connection at scale. So I think we're in a great place right now.

Understood. And my follow-up question is for John. So John, if you can just help us bridge. So the higher guide on profitability is welcome, but if you can just drill in a bit as to what is driving that? So you mentioned about the high end, like $16 million sort of like reduced expenses. But last quarter, I think you guys also mentioned an incremental $16 million investment in this messaging payments platform. So if you can just help us reconcile as to compared to the of what we heard on the fourth quarter earnings call as to are those investments are still on track? Are they still baked into the new guidance? And then sort of like the sort of layers of that $16 million reduced expenses, if you can give us any more granularity than what you discussed.

So with regard to the expense savings, I'll reiterate what I said in the prepared remarks that the expense reductions we're targeting for this year are primarily a function of one, T&E and reduced marketing; and two, lower planned head count, again, stemming from slowed recruiting in G&A, deferred innovation spend, which I'll let Rob speak to in a moment and consolidation of overlapping teams in marketing and professional services. In addition, automations that we've delivered have helped us to make the lives of our reps and other members of the organization easier. You build a machine to solve a problem. There may be a little more upfront costs than putting a person on that problem, but once solved, you never have to revisit it.

And our next question is from the line of Siti Panigrahi with Mizuho. Your line is open.

Rob, I just want to ask, how does your go-to-market motion change in this environment? You are expecting some kind of increase in productivity of sales reps that you hired late last year. How does that impact the sales productivity in your product areas in this environment?

The good thing is there wasn't much change to our go-to-market or even product, obviously. We're just executing on what we put up in Q4. We're focused on partners. I mean obviously, our base is very active. So our current customer base is like very, very active, and they need a lot. And then our partners base also needs a lot, so we're seeing some good activity in the base of those partners. We talked about in Q4, we're going to start focusing on partners, but not much has changed on the go-to market. Obviously, we're not doing face-to-face marketing events. There's some those are the savings that John talked about bringing in. But the rest of it is sort of we're just focused on the base. There's enough, I think, business right now on the base here to just take us beyond this year. And so we're just trying to keep pace with what our customers demand from us right now and our partners.

Okay. And follow-up to John. First of all, congratulation of your first three months as the CFO. I'm wondering how is the experience there. And of course, you are not expecting COVID-19, this pandemic, but some of the improvement you talked about. But also, what's your expectation now for 2021 that you guys talked about last quarter?

Thank you. For 2021, we certainly, from an expense standpoint, we'd expect to see some continuation of T&E and marketing spend like we had in 2019, although at a more efficient levels, given the strength of our partner network. In terms of our path to profitability and cash generation, I mean, that's the core reason why I was brought on board and elevated to this position. We are focused on generating cash in the business, and automations is a key factor on that mission.

And our next question is from the line of Arjun Bhatia with William Blair. Your line is open.

Congrats on the quarter. So first one, maybe for John. It's good to hear that your messaging volumes are increasing and kind of the adoption rate is accelerating. But can you walk us through how and when this increased usage might show up in the financials, given how your contracts are structured? Meaning, is there an opportunity to upsell or expand contracts mid contract? Or is that something that you'll have to wait for until renewal to capture that upsell?

Yes. Certainly, it's worth noting that the surge in volume that we highlighted in the prepared remarks does not immediately translate to revenue across our entire customer base. Obviously, we have a usage-based model where that would be true and also long-term contracts, including ELAs, where that would not be true on an immediate basis. However, it is a very strong indicator of future increased business, especially in the base with regard to renewals and upsells.

Got it. And then a quick follow-up. It's Rob, you touched on this in your prepared remarks, but the inflexibility of this voice-based call center model is really showing up in this environment. I would imagine that new customer interest is increasing from those that don't have any messaging adopted right now. What can you tell us about how that pipeline is changing, what you're seeing from new customers, potential new customers, and what you're seeing from customers that are on live chat that have not yet adopted live this year?

Yes. So we some indicators, we did a we're doing business continuity workshops now. It's interesting. I think voice is not about messaging being transformational anymore. It's about business continuity and risk. If you have a voice contact center, you can see it, you've got a risk and you've got staying connected to your consumers. So I think part of that, we did a call, a virtual conference, I think about a week ago and we had close to 1,000 people show up about business continuity in the contact center, and how do you maintain that now in the new world order. So I think that's showing up quite well. Chat is has decreased as a volume in the platform. It's down around, I think, about 40-or-something percent from 50%, and it's now more and more shifting into messaging. So we should see more and more of that shift over from legacy chat into the messaging platforms with everything that's going on right now. Part of it is that in order to deliver an automation, you need to have the synchronous capabilities on messaging, and that's what's driving and fueling a lot of the even movement from the brands that didn't make the movement yet to messaging.

And our next question is from the line of Samad Samana with Jefferies. Your line is open.

Glad to see the solid business performance and hope likewise, you and your families are doing well during this time as well. So maybe the first question. I know last quarter, the company gave exposure by vertical, and you gave some color on this call as well. But with consumer and retail accounting for like a quarter of revenue and then some other vertical exposure, I'm curious, I get the trends through March, but as things have gotten a little bit worse in terms of employment, what are you seeing in different verticals through April? And how should we think about the rise in some verticals with more usage, but some of the more prolonged impact like airlines? And to retail, how are you seeing volumes in those end markets now that we're in late April, May as a trend line?

Good to speak with you again. With regard to travel and hospitality, volumes were up. However, it is one of the areas we see potential risk in the future. However, I would note that from an exposure standpoint, it was only about 5% of our 2019 revenue. With regard to retail, especially brick-and-mortar retail, that's a key strength right now. And in the usage-based platform, we're seeing a lot of upside there.

Great. And then maybe in terms of, again, after hearing the commentary around new business bookings, etc, but if you think about new deals being deal count falling 15% in the first quarter. As I think about the new activity through April, are you seeing outside of the deals that slipped, are you seeing an increase or kind of pipeline building faster than you did this time last year? Maybe just some kind of comparative commentary around what the pipeline what's been closed in April and what the pipeline looks like going forward.

Sure. So we did have a few stalled deals in the first quarter, as I highlighted in the prepared remarks, that did close in the first weeks of April, including some seven-figure upsell and another large deal in the usage-based model. With regard to the pipeline generally, we feel it's a very strong pipeline for the second quarter, even relative to last year.

And our next questions are from the line of Sterling Auty with JPMorgan. Your line is open.

You partially answered this, but I want to put a finer point. How have you evolved your go-to-market motion, specifically around marketing and pipeline development, given that you don't have the in-person summits to rely on? And what are you seeing in terms of the pace on which deals are moving through the phases of the sales pipeline?

Yes. I mean the it's just that the change in the macro environment and the idea of business continuity and then automation is now driving a different conversation. Like I said a remark ago, we did this online conference, had close to 1,000 people show up because everybody is trying to figure out how do I get back to connecting with my consumers. So I think that this the market conditions alone, they're looking for platforms where not only do they get to have the agents at home. But as I said, let's say, what I've seen right now with our large enterprises and our BPO partners, it feels about 50% of the agents never got back to work. I don't believe we should bring them back to work. And so there, what we should do is automate those use cases in those intents. So that's where our strength is in our platform. And so part of the go-to-market is also allowing them to get on the platform and sort of try it, create automations and then scale. So that's kind of what we're seeing today and then working with our partners. So, so far, we have a pipeline that was already there that we're working through. Then there's been as big interest on how do we transform the connection with our customers with everything around business continuity and automation.

Got it. And then one follow-up. You talked about the improvement in DSOs. One of the things we're consistently hearing out there because of COVID-19 is request for flexibility on payment terms. What did you experience in -- so throughout April in terms of what your where your customers are around the payment side?

We're not really seeing a large amount of request for deferred payments. We see that there may be some risk in small business and travel and hospitality, although again, those are small percentages of our revenue in general. So exposure there is pretty limited.

Next, we have a question from the line of Koji Ikeda with Oppenheimer. Your line is open.

Congrats on a good first quarter. First question here is for John, I think. I just wanted to dig in on the cost savings initiative that's going on this year a little bit more. So the seven and I just want to be absolutely clear on this so I understand it. The additional $7.5 million to $16.5 million in cost savings you announced today, it sounds like a lot of that is attributable to a pivot to a virtual environment and how to deal with, with the coronavirus and all that disruption that's going on right now. Is that the right way to think about it? And then thinking about the in the first quarter, you announced $26 million to $32 million in cost-saving efficiencies. Is that mainly attributable to the internal automation and AI efficiency gains that you were talking about? And if that's the case, how far along are you in that process of realizing those $26 million to $32 million in cost savings? And then I have one follow-up.

So on the first, it's only about 1/3. So I wouldn't say it's the bulk of it. Again, T&E and reduced marketing due to the COVID environment is about 1/3 of the expense savings that we highlighted. With regard to the other 2/3, much of that is playing out now as planned. Again, we slowed recruiting in nongrowth areas like G&A. The deferred innovation spend was marginal, and the consolidation of overlapping marketing and professional services teams makes up the balance along with the automations that we're deploying today.

Okay. And just one quick housekeeping question. I don't know if you've given this metric before, but I'm going to ask it anyway. What is your thinking about the revenue mix? What is the overall exposure SMBs?

That's about 15% in total.

Next, we have a question from the line of Ryan MacDonald with Needham. Your line is open.

First question is really around the portion of the savings around deferred innovation spend. Can you just give an update on sort of the progress you're making on building out the payments functionality? And does the deferred innovation spend mean that you're pushing out sort of some of the spend related to that, and so we should expect maybe the product launch is more of a 2021 than the late 2020?

No. Those innovations are on the payment side but is still on track, so we're not we're going to deliver that this year. And it was only a small portion of savings that we were able to save on the innovation side, so it's not as much as the other savings that John talked about.

Got it. And then a quick follow-up. In terms of international, it sounds like that business in terms of the growth is decelerating a bit from last year. And it sounds like you made a change or an addition to the team there. Can you just talk about what you're seeing internationally? Or is there a greater impact from a macro perspective or perhaps not as strong as execution as you were seeing three, six months ago?

Yes. When it comes to I mean Asia is doing very well right now. We just opened South America where we expect some good growth on the heels of things like WhatsApp. It's a big market down there, and we're doing a lot of work around that area. We just want to see more performance out of EMEA, and we hired a new leader who ran the service cloud business for Salesforce. So we just felt there's still a lot of opportunity there and especially now. And so we just wanted to put some more some new leadership to give some new energy to that market. And obviously, North America is doing quite well. And the same leadership is running that and growing that.

And our next question is from the line of Steve Enders with KeyBanc. Your line is open.

I hope everyone is staying safe and healthy. I just want to get a better sense of the rep activity. You've been through a big investment last year, and they're just now expected to be closing deals, and it's a tough environment for that. But just wondering what you're seeing from those reps today and their ability to execute and close.

Right now it's very strong. Once again, the real focus is in the base. There's just a lot of demand. I mean we're all working really hard right now even from our homes, whether in sales or implementation, marketing because we have this demand. And most of it has a tremendous amount in the base. There's a bunch of new logos that are already in pipe that we've been working on, and then we're ramping our partners. As we said in Q4, even before everything was happening, we felt that it was time to sort of put the partner strategy in place, and the great thing about that is they have a base. So we're working with these big BPOs or integrators. They already have a base, so we're working with them on their base. I think we can all understand that the base will be an easier place to sell because we have contracts and relationships, and then we'll see what the new news are going to be, and that's coming up in a few quarters. But right now we have a lot of momentum with those sales reps focused in on the base and partners.

Okay. That's great. And I just want to get a better sense of I know you're saying strong usage, I think you call it 20% in March. And I know it's tough for some of those contracts to know when they're coming due. But with that strong usage, do you think that the prior outlook for 2021 of a 25% growth is still on the table?

Yes. I would consider that's still on the table. And once again, we widened our range, but we kept the top end of our range even this year. So it's going to get interesting. I mean it's definitely like what I said is when you grow 20% month-over-month, even maintaining that capacity on our clouds globally, I mean, to handle that volume, it's been extraordinary. And it's just it's a perspective into the future value of the company. And we don't see it coming down. It's sort of now up at a peak. And now it just continues, and then we'll see we see it continuing to grow. Again, we'll see it grow in April. So I think it just talks to the short-term revenue was gain share, and that's up 50% year-over-year for the month of March. That's massive, too. So all those models, usage models, you can see it flowing through. And then the rest of it really is a predictor of our future and how we come through this thing.

And our next question from the line of Zach Cummins with B. Riley FBR. Your line is open.

It's really nice to see the strong messaging volumes here, especially the 20% year-over-year growth in March. But when I'm thinking about professional services, I know it's not a huge portion of total revenue, but have you seen any impact to that organization? Or are there any services that require being on site to complete them?

No. I mean we work in the cloud. We're digital, so we're implementing bots. We're doing a lot of bot building, so we're implementing that. We're taking customers live, taking division lives. We're training new agents. Even how we're bringing employees into the company, we have a huge remote employee base as it goes. So it really hasn't disrupted any of that yet. So our customers just need us like they do like to have a shop face-to-face in the previous world, but they just need us right now and we've got to deliver on the things they need to handle the volume that they're getting through the platform.

Got it. That's helpful. And then I guess, with about 15% of your revenue being geared towards SMB customers, are there any concerns with churn towards that lower end of the market, given the potential economic implications from COVID-19?

I mean I don't our SMB can be pretty big logos. They just don't usually have a lot of contact center reps. They could be some retailers and stuff like that. So so far, even for Q2, they look pretty good. I think the auto business in the dealership side is a little soft but yet, we're on the OEM side, we're seeing some real activity because the OEM, the manufacturers are looking at, we got to sell cars. How do we sell those cars? How do we create that connection with the consumer? But I think auto dealer, which is very small businesses and people aren't going to dealerships for, say, for selling maybe although there are a lot of sales happening. And the service business and the dealers is happening still, but that's the only place. The rest of it looks pretty good.

And next we have a question from the line of Michael Latimore with Northland Capital Markets. Your line is open.

Great. You touched on gain share pay for performance. What was that as a percent of the first quarter revenue there?

It just reached double digits in the first quarter.

Okay. Got it. Got it. And then in terms of the sales headcount, I believe you were at 100 at the end of last year. Is that roughly where you are today?

In enterprise, we've kept the quota carriers the same as where we ended in fourth quarter.

And our next question is from the line of Brett Knoblauch with Berenberg Capital. Your line is open.

The first is just curious for an update on the payment-related investments and if you're executing that on schedule or I guess just ultimately where we are with that?

Yes. We're still on schedule for the end of the year. And right now obviously, we built it because we said the commerce will happen on our platform, and we can see it even today. But obviously, with the increase in volume, there's even more demand for a payment platform happening within our platform. So yes, we're still on track, and we're still investing in it and building it.

Perfect. And then maybe just you guys talked about a new relationship with a top 10 digital consultancy. Can you walk us through how this relationship works and in terms of showing up in the financials? Is this more or less outsourcing maybe some professional services, and then you kind of just offset that revenue recognized in more higher-margin kind of cloud-based revenues?

Yes. So it's a new deal just signed. I think, again, it's part of our broader partner strategy to get more leverage on the model. There's obviously as with reps, there's a ramp phase. And so given the strong results we're seeing with our existing arrangements with partners, we would expect to see the same take place here. It's a little early to say right now that though.

And our next question is from the line of Jeff Van Rhee with Craig-Hallum Capital. Your line is open.

A couple for me. I guess just maybe starting with the guide, if you look at the high to low end of the range, talk about the variability, sort of the top one or two key unknowns and how you think about best case, worst case there to sort of come up with the bounds that you set? And then I have one other question.

Jeff, this is Matt. So when we think about the guidance range, obviously, as we talked about, we're on a good trajectory, through the first half of this year. And so the high end assumes that trajectory continues where we're seeing good traction with usage, existing customer demand and ramping partners. But we've caveated it because we know there's a lot of uncertainties out there tied to the macroeconomic environment, and that's why we've reduced the low end of the guidance range to $340 million. It's just the uncertainty that we don't know about. We're just only a few weeks into what's happening in the COVID pandemic.

And maybe if I could just to put a finer point on it, when you look at that lower end of the range, what is the most unpredictable factor? Is it bankruptcies out of customers? Is it the spike in usage and how sustainable it is? Is it do we close new deals? Like is there anything you can talk about on that low end that is the key set of unknowns?

It's the economy. I mean we're all so far, usage is, like I said, tremendous in the business, and we see a lot of demand. I think among 30 million Americans and around the world, there's another tens of millions of people are unemployed. We just don't know the impact. So we'd rather just widen out. And like I said, we feel good about the business, but we just don't know what those impacts will be. Right now it looks like we're a benefactor of this beneficiary of this, but we'll see how it plays out.

Yes. That's great to see the volumes. And then just one last one, I guess, for me. As it relates to the restructuring in the quarter, I think you had a little over $3 million in restructuring charges. Just talk about, I guess, maybe two things. Just from a headcount and departmental level, what changes did you make? What are the key underpinnings of that restructuring? And then if it's not already part of the answer, maybe just talk about sales and any tweaks you have made within the structure there.

Jeff, we haven't really touched the sales organization, at least in terms of quota carriers. As mentioned previously, we did consolidate some overlapping teams, particularly within marketing and professional services.

At this time, I'm showing that we have no further questions over the phone lines. I would like to turn it over to Rob LoCascio for any closing remarks.

Thank you, operator. I'd like to end the call with reemphasizing just a few key points. The coronavirus has created a new normal for contact centers and brands that relied on legacy voice tech for far too long, and they were unprepared to handle the surge in volumes and shift to remote work. And so LivePerson is really helping them stop gap right now in the current crisis and to transform their operations, so they'll be ready for the next one and have a long-term view on how to service their consumers. The investments we've made in our conversational platform over the past really 24 months have uniquely positioned us to help brands navigate the current environment because we can power every conversation consumer has with the brand across care, sales, social, marketing and a greater efficiency to voice. And we have the ability to deploy those automations, which is really, I think, going to be filling the gap of the supply of the capacity that won't come back. And they meet with those consumers still are going to want to converse, but I don't believe though the agents will be the ones doing those conversations. So we have experience in managing through financial crisis before, the dot-com. And as a company, you can see, we're very focused on growth. We're still a growth company, and we're going for high growth. But I've been through this before, and we've seen this, is that the best thing we can do also is get very efficient in our spend. And we started this even entering the year and before all this happened. So we're already on a path, as you can see, to get more leverage in the bottom line. And I think that shows just maturity of how we run the business in our future. So we're very excited, looking forward to next quarter coming up. And thank you for your time and for everybody, like always, stay safe. Thank you.

Ladies and gentlemen, we thank you for joining us for LivePerson's first quarter 2020 earnings conference call. This does conclude today's call. You may now disconnect.