Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson’s Second Quarter 2021 Earnings Conference Call. My name is Victor and I will be your operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from LivePerson 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 one question and one follow-up only. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Alan Katz, Vice President of Investor Relations.

Thank you. Joining me on the call today is Rob LoCascio, LivePerson’s Founder and CEO and John Collins, Chief Financial Officer. Please note that during today’s call, we will make forward-looking statements which are predictions, projections and other statements on our future results. These statements are based on our current expectations and assumptions as of today, August 3, 2021 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 and in the comments made during this conference call as well in 10-Ks, 10-Qs and other reports we filed 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. 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, Alan. Thank you all for joining our second quarter earnings call today. The past few years have been proving our clear leadership in conversational AI and now conversational commerce. Q2 continued that trend as LivePerson once again delivered another very strong quarter. Revenue grew by 30.6% year-over-year, exceeding the top end of our guidance range. Overall, volume on the conversational cloud increased by 15% and conversations with AI-based automations also grew by 40% compared with Q2 of 2020. Our results reflect the conversational AI market continuing its strong momentum as we’re crossing into a wide adoption phase. Brands are looking at conversational commerce as the next big opportunity in digital commerce as they recognize that conversational AI is the key to creating scaled, personalized, unique digital experiences. 5 years ago, we made a big bet to go after this space, and our first-mover advantage puts us in a unique position to drive even greater growth. We’re now looking to expand our go-to-market investments to capitalize on the massive opportunity we see ahead of us. Part of that investment is bringing on leaders that can drive the next phase of our growth. Tony Owens, one of the most senior sales leaders in the cloud software space, recently joined LivePerson as President of Worldwide Field Operations. Tony has a proven track record of leading sales at some of the largest high-growth enterprise software companies in the world. He most recently led the field operations for Salesforce in the Americas, its largest territory. With Tony on board, we expect to ramp capacity to meet the next level of demand by aiming to more than double our quota-carrying reps and other go-to-market resources over the next 6 months. We believe that these investments will give us the capacity to capture an even greater…

Thanks, Rob. Impressive execution translated to another quarter of revenue and adjusted EBITDA significantly exceeding the top end of our guidance range. In the second quarter, we also strategically built on the foundation required to continue accelerating growth. First, we continued signing new logos and expansions within fast-growing verticals, such as healthcare and blockchain. Second, we extended our care and commerce capabilities through integrations with Google and Adobe, the latter of which leverages our AI solutions to deliver personalized consumer experiences at scale. We also rapidly delivered end-to-end messaging services to manage voice operations and messaging operations through our Gainshare business. And finally, we continued onboarding world-class sales and marketing leaders to help plot our course to even greater growth. In the second quarter, it marked our fifth consecutive quarter of 25% plus revenue growth, with the last two exceeding 30%, and our fourth consecutive quarter of operation at the Rule of 40. While our strategy to enhance operating leverage clearly delivered the intended results, we see rapidly increasing demand for conversational AI within both care and commerce as an opportunity to grow even faster. According to research from BCG, the market for conversational commerce is expected to exceed $130 billion over the next 5 years and we believe we are uniquely positioned to benefit from this secular shift. The breadth and extensibility of our platform, including the effectiveness of its AI solutions, enables us to deliver personalized and trusted consumer experiences at scale, which is essential for mass adoption. To drive that adoption, we’re shifting our focus from enhancing operating leverage to aggressively expanding our go-to-market capacity. Before discussing the key metrics and drivers of the quarter, I’ll first elaborate on the strategic investments we’re making to extend our leadership position in the market. We will be accelerating our…

Thank you. [Operator Instructions] Our first question comes from Drew Foster with Citigroup. Please proceed with your question.

Hi, guys. Nice quarter and thanks for taking the questions. First one is on e-bot7, the recent acquisition you just announced. Could you just give some basic info on the company, maybe the size and growth rate, number of customers? And John, if – how much if any contribution to your ‘22 guide is in there? And then just more broadly kind of strategic rationale was there a certain vertical exposure, technology or maybe a language locality, maybe just kind of double-click there? Thanks.

Sure. Yes, the e-bot7 team is a really talented and innovative team that extends our go-to-market capabilities in the region. They have about 100 employees today, 40 of which are in R&D. And they’ve built a self-service automation engine for sales, marketing and care conversations that has very strong traction in the mid-market. We expect to grow our mid-market capabilities in partnership with the team and apply that success globally, not just in Europe, but we would start with Europe.

Great. And then you talked a little bit about leaning into the sales and marketing investments, so just wanted to focus there for a second. I mean with Tony Owens now as the President of your Worldwide Field Ops, I mean can you just maybe unpeel what some of the things kind of underpinning this next level of durable growth are for you? Maybe what are the pressure points that Tony will be focused on through the end of this year and through next year, kind of focused on that direct channel maybe from a sales infrastructure standpoint?

Yes. I’ll take that one. We – when I look at the demand in the market, it’s definitely at another level coming through what we experienced last year, and we continue to see growth on the platform. So we’re behind right now. I feel like we’re behind on the quota-carrying reps definitely in that area. I think we’re leaving the mid-market open, and we’re going to go heavy at that area. Obviously, you can see our ARPU is – we’re doing very well on the enterprise, but there is a lot of action in the mid-market, and Tony can bring a lot of skills there and people to really go at that. And e-bot7 I think also can be part of that. But right now, just we have so much more demand that we’re not picking up. And that’s why Tony joined the company is there is a lot of opportunity. And then we’re seeing, obviously, expansion beyond care right now and there is a lot of use cases coming around commerce and marketing. And so, that’s adding a whole other level of access to budgets at our current base and then beyond that into new logos. So it’s a time where we need someone who has another level of operational excellence. He ran about 7,000 people over there at Salesforce, so he’s run a very big operation. And so I think we’re really excited to have Tony here to take us from here to multibillions in revenue. That’s kind of the goal.

Great. Appreciate the color. Thanks guys.

Thanks.

Operator, the next question? Victor, the Operator, can you please queue up the next question? We are having some technical difficulties here. Operator, can you hear us? It looks like we may have lost a connection here.

Can you let them in? The callers on?

I don’t have access to let him ask the question, unfortunately. I think that the Operator has to do that. But if you give us just a minute, we will reach out to the team here.

Ladies and gentlemen, we apologize for the technical difficulties. The Q&A is now back up and was Drew finished asking his question?

Yes, Drew was finished. And I believe the next person up was Raimo from Barclays.

Yes, I see. Okay, one moment. Yes, I see it now. So our next question is from Raimo.

Lenschow. Raimo, are you on? Did we lose her?

Hey, John, are you there anyway?

Yes.

So why don’t I ask you a question, John?

Go for it, Rob.

Because dead air is – like, we will let them fix it up. So once you tell me about deal – I’ll do the, I’ll be as good as I can, of analyst as I can, doing this for 21 years. So tell me about the deal count and what happened in the quarter.

Yes. So again, much like in the first quarter, our deal counts were down year-over-year, about flat quarter-to-quarter. However, as planned, our move upmarket within mid-market and even kind of the high end of small business has resulted in substantially higher ACVs. In fact, our ACV growth was over 100% for new logos in the quarter. Overall, we saw a slight bump up in expansions. And again, as signaled in our prepared remarks, the investments we’re making are designed to accelerate not only the growth we’ve seen in ACVs, but also the new logo counts moving forward. So as our reps ramp, again, we expect about 9 months for new reps to become productive, we would expect not only growth in ACVs, but growth year-over-year in new logos from account perspective, which would be a turn from the trends we’ve seen over the last handful of quarters.

Would you like – I mean, with the hiring of Tony and everything like that, are you guys going to start to build out beyond? Obviously, you’re focused on the enterprise, but like it would seem like there is something, opportunity beyond that. Are you guys going to – is that part of the spend that you’re going to make for the rest of the year?

Yes. So as we think about the investments, there is two primary categories. We’ve talked mostly so far about our go-to-market capacity. Of the spend we’ve highlighted, about 75% would be dedicated to go-to-market capacity. And if I were to break that down, we’re looking at about 45% of it going directly into quota carriers, about 20% in marketing spend, and then the remainder would be focused on that sales and customer support infrastructure. So managers, SCRs, CSMs, etcetera. The other piece of the investment, though, as we discussed, is focused on our technology. So, we have seen a lot of traction with social media management tools, and we’re extending our capabilities there as in voice. In terms of our go-to-market motion, clearly, there is opportunity in the enterprise that we’ve delivered on quarter-after-quarter, but the real opportunity that we’re kind of leaving on the table right now is in the mid-market. And we see an opportunity to take our go-to-market resources and adapt our platform to really go after growth in the mid-market.

So my next question would be, once again putting my analyst hat on, what was the driver of the revenue upside compared to guidance? Because there is obviously real upside there, but what really drove that when you unpack it?

Yes. In the quarter, obviously, we had strong growth in the core business. And even without the additional testing revenue, we would have been around our – the top end of our guidance. And of course, the boost above, most of the boost above guidance was driven by the at-home rapid COVID-19 testing business. Gainshare also continued to outperform. It went from around 13% of revenue last quarter to 16% of revenue in the second quarter. So that was another key contributor of upside as was our consumer business, which significantly outperformed its internal plan.

But do you think the testing business is like – do you have it back on? Or do you want to keep playing out?

Not yet, but I was going to suggest if the analysts want to e-mail me any questions, I can also ask those questions as well.

Give them your email. What’s your email so they have it?

It’s akatz@liveperson.com.

So I don’t mind being an analyst here for a little bit while we get through this.

I believe the analysts may be able to ask questions now. Operator, are we open again?

Yes. Our next question is from Raimo Lenschow with Barclays.

What did you think, Raimo? How did I do?

Hey, this is Ravi on for Raimo. Can you hear me okay?

Yes. Sure.

Yes, you did a great job. You asked a lot of the questions I’m sure you were going to get otherwise. But I just wanted to dig into that last point a little more if possible. So you had a really nice quarter and you beat estimates by about $6 million, but the guidance raise was only $3 million to $4 million. I know you mentioned being conservative around health. Are there any other puts and takes that investors should consider as we look into the second half and even further? Thank you.

No. I think that the guidance range we put out was strong and reflects continued momentum in the core business and again the nascent phase of the healthcare testing business which was the bulk of the upside in the second quarter. So we’re excited about that business and the potential for continued growth there. But given the lack of track record, we’re reluctant to embed more upside into our guidance at this time.

There is about 8,000 people, around 8,000 people today who wake up every morning and are using this platform. These are consumers to take these tests, and today they are rapid COVID tests, so they can go back to work. The second part of that is, obviously we’re working with these testing companies to develop beyond that. So we even have a contract we signed during the quarter to develop a platform beyond that to do other testing. And the testing business is kind of a really hot market because of COVID testing drove a lot of investment into the market. I don’t know if you guys saw it, but even Goldman Sachs I saw was putting a bid in for one of these companies. And so the PE, the private equity part of their business, they want to buy one of these companies. So there is a lot of investment going in it because the in-home testing market got a lot of infusion of capital, and they are not very good at software. And they need conversational AI platforms. So once again, we came out of the chute pretty hot on this, and we’re excited about it, and we were able to swarm it and go after it. But we got – it’s a new – it’s like we built a startup within months and launched it and generated millions in revenue. So we’re feeling good, but we don’t want to over-promise on what it is until we get our legs behind it.

Awesome. Thank you. It makes sense. Thank you.

Thanks a lot.

Thank you. Our next question comes from Richard Baldry with ROTH Capital. Please proceed with your question.

Thanks. Can you hear me?

Yes.

Okay. Congrats on getting us through the quiet period there. Can you talk about how tough it is to actually double the reps in two quarters? Obviously, given macro challenges, delta challenges, bringing people on virtually, it seems like it’s a pretty high hurdle to do. And then maybe add to that any backdrop you’re willing to offer about the sort of existing sales utilization, quota achievement to kind of give us a view for how capacity starved you feel like the field force is? Thanks.

Yes, I’ll start there. Go ahead, Rob.

No, start.

Right. We’re really – we’re pulling all the stops to get boots on the ground here with this strategic round of investments. So yes, it’s a tough hiring market, but with Tony on board and our focus to really bring on frontline managers first who, each of whom, can then bring on reps underneath, will help to accelerate our path to the target. And on top of that, like the investment is aggressive in that we’re going to use many different channels to hit our targets for the year. And it’s an estimate, of course, but given the demand we see in the market, there is not a lot we won’t do to get the right people onboard to go after that opportunity.

Maybe to follow-up, do you feel like any of the backdrop M&A activities, whether it’s on the voice side, etcetera, are they – is it easier to hire than we might think because of specific things that have happened around your vertical? Or where are you really looking to find these people from? Is it very tailored with backdrops that are narrowly tied to where you’re at? Or can you cast a broader net into CRM type areas?

I think we can – we’re definitely casting a broader net. We have a very good story to hire the best talent in the world. AI is a very obviously big area. Conversational AI is even more specific and people think, okay, this is a hot area. So if you’re in the software industry right now, we’re in a good place. And if you’re a technician, you get to work on some of the best brands in the world with some of the largest datasets in the world, conversational datasets. And if you’re someone in the field and sales, there is a great opportunity to really drive large deals here and that’ll be mid-market and will expand. So we just have a good story right now and we want to capitalize on it. I feel like we got very caught up last year in just the growth in the business, and we probably should have started turning on the jets in September with hiring. It’s like easy to look backwards because I look at the demand right now, but we came through last year with a lot of demand in the business. We saw it continue into this year. It wasn’t like an anomaly through the pandemic. We were probably a little conservative. But now we can open it up. And once again, I think hiring Tony and other people into the company will help drive to the goal to really take those growth levels, the growth rates, to a different level.

I would add also that the success we’ve had in winning talent over big tech, Google, Amazon, Facebook, Twitter, etcetera., has been phenomenal and due in large part to the story Rob described to our innovative platform and the growth prospects we have ahead of us. And I think we will be able to leverage those dynamics to go after go-to-market talent in the same way.

Great. Thanks.

Thank you. Our next question comes from Mike Latimore with Northland Capital Markets. Please proceed with your question.

Great. Thanks a lot. I guess just two here. One would be, it looks like you’re guiding effectively to negative EBITDA in the fourth quarter. I guess any thoughts on whether you’d be EBITDA positive in fiscal ‘22?

Yes. I would expect that as we succeed with our hiring plan, the blips we’re on right now would normalize in 2022, perhaps the end of the first half or second half of 2022.

Got it. And then the AI volume growth, I think it was 40% this quarter. I think it was 50% last quarter. I guess any thoughts just on the changes there?

No, it’s typical sort of dynamics in the business. There is some seasonality with regard to the Gainshare business that obviously is a contributing factor there. And overall, volumes continue to rise. And so on a year-over-year basis with regards to total billable volume and automation, which has fluctuated with different types of intents in different industries, we saw that manifest in travel and hospitality in a big way during the pandemic and then coming out of – or not coming out of the pandemic, but when travel opened up and the rate of automations changed based on the types of intents that are most in demand or most asked about from are the consumers entering the platform. So in general, I would say to recap, it’s still strong growth across total volumes and automated volumes.

Thanks.

Thank you. Our next question comes from Siti Panigrahi with Mizuho. Please proceed with your question.

Hi. This is Alex Lim on for Siti. You guys previously talked about converting ELAs to CPIs for contracts. And I just wanted to know how this has been trending so far. And what assumptions do you have for growth rates coming from conversions versus new logos and your Gainshare business? And to add to that, how much growth do you expect to be driven from this contract conversion versus new logos and I have a follow-up after it?

Yes, from – in terms of ELA to CPI, that’s our enterprise license agreements to cost per interaction agreements, we are on track with what we had described in the previous quarter. Last quarter, we had converted approximately 40% of those contracts. We are up around 45% at the end of the second quarter. We still expect to be nearly 70% converted by December 31, of this year. And in terms of growth, that conversion from ELA to CPI is taking place at the time of renewal when total volumes for these customers are typically many are far in excess of what they were when the ELA was initially signed. So, those almost always result in up-sells upon conversion, so that contributes to ARPU and contributes to growth in general.

Okay. Thanks. And you guys talk about launching of a payment solution last year, can you provide an update on your payment solution, and when you think it will be a material revenue contributor?

It’s implemented. It’s out in the market, with a bunch of enterprise customers. We haven’t really given any guidance yet on. It’s doing transactions right now as a service on the platform. So, we tokenize the card. And the consumer doesn’t have to go outside the messaging flow, it’s adding to DARs or CPI. So, that’s how it’s built in today. It’s growing. But we haven’t put anything in it yet on. We aren’t giving any numbers yet around it, but it’s in revenue right now.

Thank you. Our next question comes from Sterling Auty with JPMorgan. Please proceed with your question.

Hi, it’s Maya on for Sterling. Could you just give a little bit more the color for the core business during the quarter, so not including anything from the expansion to healthcare? How much of the growth was driven by new versus existing customers?

Yes. As I have mentioned earlier, in response to kind of Rob’s analyst questions. Without the COVID-19 testing, we still would have been in excess of our sort of previous guidance range. Just with the core business. Again, a lot of growth there coming from the Gainshare business as well as our consumer business.

Okay. Thank you.

Thank you. Our next question comes from Ryan MacDonald with Needham & Company. Please proceed with your question.

This is Alex on for Ryan and congratulations on the quarter. I just have one question for me here. Can you give us an update on the progress you are making on the indirect sales initiatives? And what was the mix of bookings versus direct and indirect channels this quarter?

Sure. We continue to add to our partner network. I mentioned two integration partners, Adobe and Google. And in terms of total contracts that were influenced by the partner network, we were around 27% of bookings in the quarter were influenced by that network, and that’s consistent with the first quarter. Our goal is to move that number up closer to 50%.

Great. Thank you.

Thank you. Our next question comes from Steve Enders with KeyBanc. Please proceed with your question.

Hi. Great. Thanks for taking my question. I just wanted to get a better sense for how you are thinking about those go-to-market investments and what gives you the confidence to more than double the rep headcount over the next few months, over the next six months here?

Yes, the…

Go ahead, Rob.

So, on the demand side, I mean once again, we see demand and we are seeing that our current reps are at their targets. And there is more left on the table right now. So, we feel very good about adding that type of capacity into the system. Once again, we hired Tony to go ahead and drive the next level of running that investment and bringing people in and doing all of that. We have a good story for reps. You can make money here. So, this is what reps want. We are in a hot space. There is large deals you can do here, like very large deals, and we can open up mid-market also. So, I just think right now, we are just so – there is such a dynamic happening in the market. Every day there is another article about messaging and conversational AI and conversational commerce. And we were very early out of the gate with it. As all of you know, we kind of pioneered this whole market, and we want to maintain that leadership position and accelerate it. And we are leaving some areas open that we don’t want to leave open, and we think there is more verticals to go after, and there is just more use cases even beyond care. So, this is really an opportunity now to double down on what we are doing and take the company to the next level. We definitely have moved out of the early adopter phase. We are definitely – there is just – it’s like just all these different industries and people are adopting it. It was a very early adopter thing for the first couple of years, but we definitely have transitioned into more mass adoption and especially retail. They got sort of a taste of what it’s like to shut down your stores, and they definitely want more digital connections, meaningful connections with their consumers, and we can provide that on our platform. So – and then even the social side, opening up socially, there are public companies that are social media companies and we know we can take that business. We actively have done that over the last two quarters. So, we also know there is some activity in those areas. So, there is just a lot of overall activity in the business today.

Okay. No, that’s great to hear. And then just I was just kind of wondering how you are thinking about kind of the up-sell opportunity and being able to push more of these incremental use cases that you are talking about into the rest of the customer base today? How do you drive more than one use case outside of kind of core customer care into commerce and marketing and social, and kind of where are we on that journey?

It’s really – I mean our marketing motion right now is very focused on commerce. And we call it warm commerce. We are in talking to our customers about how to create this call it warm connection with your consumers, and ongoing connection with the consumers. And especially in selling, the brands just want to have this different relationship. And what’s happened now is, I would say our platform is sort of self-actualizing in many ways, which it started as messaging as a communication channel. Then as we started to get a lot of volume from our customers and maybe 30%, 40% of their voice volume transitioned to messaging, then they want to automate it at scale because they don’t want to add human agents, so they want to automate that. We built a lot of great automation capabilities and continue to. And now above that is how do we create, how do we deliver, how does our platform deliver these very intimate, high-valued connections between consumer and brand. And then what do you ride over that framework. So, people are putting videos over that. They are running different use – they are running different content over it. It’s not just messaging as a communication channel. They are using it as a digital channel to deliver things they would on a website. And so these are the things that are really changing the business, and it definitely is changing. What happened is competitors are still back trying to compete with messaging. And we do have a very strong messaging platform. And we are up to the place now where we are creating these very special connections between consumer brand, and they want to bring branded connections to that. How do you create the special engagement, and that’s why even things like Adobe, we are partnering with Adobe because they are very involved with engagement and engagement management with web. But they don’t do anything on the messaging side, so we have combined forces of how do we bring an engagement strategy to selling and marketing. And that’s really what we are seeing. So, we are just selling it right now. We are positioning it, and we are working with different partners in that area, so it’s starting to take off.

Okay. Perfect. Appreciate the response there.

Thanks.

Thank you. Our next question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Please proceed with your question.

Great. Thanks for taking my questions. Two categories are kind of areas I wanted to focus on, if I could. Rob, on the Gainshare business, why is it you think consumers are gravitating to that over a non-Gainshare model? Kind of how do you think about where that’s going? I mean, given it comes in with lower gross margin, maybe has a little more complexity in terms of the implementation, it seems like it’s taking off. And I guess just frame that for us. Why is that the preferred channel? Where does it go? And what are the gross margins on that initially?

Yes. So, it’s preferred because we take over – there is a budget right now they have for outsourced labor in taking phone calls and even maybe they are doing chats. We get that entire budget and that entire operation and it comes under us now. And there was always a time, not always, but there are times of friction point with the outsourced provider because they want to increase people. They make money by increasing headcount. And the brands are like, we don’t want to increase headcount, but there is that friction. We come in and say, look, we are going to take that labor. We are going to manage it as human labor to start, but we are very quickly going to automate, and our goal is to reduce that human labor. And so what happens at the beginning is, we do take that entire operation, and we even in the core took a voice operation. And we are running those voice agents and basically transitioning that voice volume to messaging and then we are automating it. So, what happens over time is the margins go up nicely because we start to reduce the labor, but we still fix the budget. We have that original budget they already gave to the labor providers. So we keep that budget, but we start taking out headcount faster than they ever can. And so it’s just a great solution versus like trying to transform their own contact centers where we take it over and we own the transformation. And that’s why they are very excited to work with us on that. And it’s really booming and it’s a great way to move the business along. It just has speed to market because we control everything.

And what you are thinking on where that could go as a percent of revenue?

I mean it could…

Yes. So, right now we are at 16%, and that’s up from around 13% last quarter. We see it kind of staying in the 15% to 16% range right now. Certainly, there is potential for more acceleration. But from where we sit at this moment, we would guide that range for Gainshare.

I am sorry, you broke up just a little there. Did you say 15% to 18% is where you think about it?

15% to 16%.

15% to 16%. Okay, great. And then my last question, on the move to mid-market, I mean certainly my sense from our field work, the full feature nature of your platform dominates in the large enterprise space. And mid-market, my sense is, has not been your strength. And I think your – the move down market, what do you have to do there to succeed? Is it simply just a matter of taking the product you have and just putting more sales resources after that market or is it more a pivot that’s needed on the product set to make it easier to consume? How do you think about what’s different mid-market versus enterprise?

I mean there is obviously more self-service ability that you would – that we want to create, and we have been working on that. So, we already had, we have a team that’s focused on that area. They still need help with like bot building and all of this. All the platforms, even ones that are mid-market focused, they can be sort of self-service, but that means they are very basically like FAQ bots. And we have all seen bots. As I say, bots like a four letter word. It’s a very – not a very good thing. Truly AI automation is having an end-to-end conversation with the person. So, we can give that power of our toolset to the mid-market. I still think they are going to need training. There is things they are going to need handholding on. We may do that with partners, more of agencies, smaller agencies that can help out there. But we have a lot in the area of the product. It’s just really team. What happened was we have a mid-market team, we have one, but they are getting pulled up-market every quarter. So, we just have demand, more demand in even the – we will call it the mid-market, the high end of the mid-market is where they end up gravitating, because it’s big dollars and the reps want those dollars. So, it’s obviously how you compensate the types of reps, you hire a younger group of reps. So, it’s just a group we have got to get focused on and not have them drift up-market with the demand we are seeing in the enterprise.

Okay. Thanks for taking my questions.

Thanks Jeff.

Thank you. Our next question comes from Zach Cummins with B. Riley FBR. Please proceed with your question.

Yes. Hi, John and Rob, congrats on the quarter and thanks for taking my questions. John, I think you kind of touched on this a little bit in your prepared remarks, but can you give us a little more insight into kind of what’s kind of temporarily impacting the gross margin profile for the business? And kind of what you think that could look like once it starts to normalize a little bit more?

Yes. So, gross margin is impacted by Gainshare as we discussed, but that’s more of a temporary impact. We, over time, approximately a year after first signing a large contract, we would expect those margins to expand. The – in the quarter, the healthcare testing expenses, lower margin profile also contributed to what we saw. And then we have some additional hosting expenses tied to the public cloud migration that, again, will be temporary, but impacted the quarter and will impact the year.

Understood. And Rob, just kind of building upon kind of the momentum you are seeing on the Gainshare side of the business. I think interesting dynamic to see that you are actually taking over some of the voice operations. And I think John in his commentary hinted towards maybe even an AI-enabled voice solution in this coming year. So, can you just talk about kind of your overall strategy on that side of the business and then why it makes sense to take over that entire process?

Yes. I mean, obviously, my talk track for the last couple of years is about getting rid of voice. And so if you can own it and control it, you have a better chance of transforming it. So, we are actually running voice cloud platforms, and that gives us a lot of I think preparedness for what we will deliver on the voice side because we are working on a voice automation offering. And obviously, most of you know Alex Spinelli, he is our CTO, ran Alexa, the engineering team. So, we have a lot of engineering talent that built the Alexa. So, we are bringing those skills to bear. We will do it our way. It’s about commerce, it’s about the brand being able to build their own consumer experiences that are very on-brand versus like an Amazon Alexa. But we are going to go pretty hard at it. And I think obviously, the more we control of it, we are preparing to transform it and replace it. And so that’s really what the Gainshare is working on. We hired a very senior guy out of Talkdesk, not out of Talkdesk – John, where is he from? Not Talkdesk – from one of the other big voice providers.

RingCentral.

RingCentral, who is running the team and he is doing a great job and he hired a handful of people already, and we are starting – we have started the development on it. So, we are moving very quick to get into the voice automation arena.

And from a tactical perspective, just to kind of frame the strategy near-term, if we look at the performance of our IVR deflection that exists today, we see that 30% to 50% of those consumers who are already in the IVR opt to exit and message. And so that kind of forms a soft, lower bound for the level of volume we would expect that we could actually transform from voice to messaging if we owned, end-to-end, the voice and the messaging operations. So, there is a lot of upside from that perspective as well.

Our next question is from Arjun Bhatia of William Blair. Please state your question.

Yes. Thank you very much. John, maybe this first one is for you. But I did notice that messaging volumes may have declined quarter-over-quarter, just looking at some of the presentation materials that you have put out. And I am curious if those expectations are impacting your Q3 guidance at all or if it’s primarily the healthcare and Gainshare portion that are driving your Q3 guidance?

Yes, primarily the latter. And in terms of volumes, again, total billable volumes up about 15% year-over-year for the quarter. Messaging volumes up 40% as was automated volumes. Quarter-to-quarter, as you noted, it’s less growth, flattish, but not impacting our view of the third quarter.

Okay. Got it. And Rob, maybe just one for you, given all the traction that you are seeing in healthcare and the COVID-19 rapid testing market, can you maybe just explain to us what the role LivePerson is playing in that at-home COVID-19 test? And why that’s lower gross margin than a typical messaging conversation or a typical CPI contract?

Yes. So, we built a technology platform, so there is a lot of investment that went into the technology platform. And we then deliver that platform with the tests to a B2B customer. And then they are bringing that to their employees. And we deliver the whole entire offering together. And so it has a little bit lower margin in it for some of the testing revenue that’s in there and the software revenue because we are just starting investment. There has been some heavy investment in services and delivery to start. So, we have – basically, it’s a pretty heavy lift to do what we did in a very short period of time. So, those were the main drivers to margin right now on the testing side.

Okay. Got it. Thank you very much.

Thanks.

Thank you. We have reached the end of our call today. I would like to turn the call back to Rob LoCascio for closing remarks.

In closing, growing organically is about making long-term bets and having the best teams to deliver them. We have a great team, and we will continue to hire the best we can in the industry. We have a very powerful AI platform that can serve the most scaled and impactful use cases. We have a lot of cash on the balance sheet to go after accelerated growth. We intend to capture as much of the market as possible as we accelerate our investments into adding more people, capabilities to our platform and opening new markets. I want to thank the team for another great quarter, for hitting the Rule of 40 for the fourth consecutive quarter, and for delivering our second quarter of 30% plus growth. Thanks, and we will see all of you on the next call. Thank you. Have a good night.

Ladies and gentlemen, this concludes today’s webcast. You may now disconnect.