Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to LivePerson’s Second Quarter 2022 Earnings Conference Call. My name is Claudia Gandit, and I will be your conference operator today. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President of Investor Relations. Please proceed.

Thank you, Claudia. Good afternoon everyone, and thank you for joining us today. On the call with me are 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 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 and the comments made during this 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 non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are included in today’s earnings press release where applicable. Both the press release and supplemental slides, which include highlights for the quarter, are available in the Investor Relations section of LivePerson’s website. And with that, I will turn the call over to Rob. Rob?

Thanks, Chad. Thank you for joining LivePerson’s second quarter 2022 earnings call. In 2Q, we generated revenue of $132.6 million, non-GAAP gross margins were up 500 basis points sequentially, and our adjusted EBITDA was at the top end of our guidance range at negative $5.5 million, a $12 million improvement sequentially. We’re still on track to deliver positive EBITDA on cash flow by year end. Early this year, we made a commitment to prioritize profitable growth. I’m pleased to report, we are delivering margin expansion faster than expected through a combination of OpEx discipline, the improving productivity of our salesforce and focusing on more high margin revenue. We continue to make substantial changes to strengthen our P&L by focusing on the most differentiated high value components of our business with the greatest capacity to drive high gross margins, strong operating margins, and high quality revenue growth. In the short term, we’ll be intentionally trading some lower margin top-line revenue for substantial, sustainable near and long-term margin expansion and growth. Our goal is to achieve best-in-class operating and financial models, which would be near or above 80% gross margin and mid-teens or better operating margins. Incredibly proud of the agility and innovation that allowed us to rapidly respond to the needs of our clients in the market and to drive growth during the past two years of the pandemic, but as pandemic driven trends normalized laser focused on our more repeatable and high margin growth engines. As the industry leader in conversational AI messaging, we provide AI-powered customer engagement solutions to thousands of companies, including 450 enterprise brands worldwide, among them many of the world’s leading consumer businesses. Our solutions help brands cut costs while improving consumer experience and achieve measurable ROI. Our platform has reduced our brand’s customer care costs…

In the second quarter, we continue to execute on the plan. We announced on our fourth quarter call to adopt a balanced approach to profitability and growth. Revenue grew by $2 million sequentially to $132.6 million or 11% year-over-year. And within our guidance range. Despite the lower revenue adjusted EBITDA increased by $12 million sequentially matching the top end of our guidance range. The improvement in adjusted EBITDA was driven by a $9.7 million sequential reduction in operating expenses, which exceeded the top end of implied guidance. The cost reductions were associated primarily with post M&A integration and consolidation non-quarter carrying sales and marketing and research and development reduced costs coupled with the wind down of COVID-19 testing drove expansion in non-GAAP, gross margins from 69% to 74% sequentially, which also exceeded the top end of our, we expect continued gross margin expansion for reasons I’ll discuss in a moment. This year discuss during last two quarterly calls, we are focused on adapting our operating model to ensure a sustainable framework for profitable growth in a post pandemic world. To this end, optimizing our cost structure will continue to be a primary strategic imperative for the remainder of 2022, in order to position the company to deliver long term profitable growth and to generate positive cash flow throughout 2023. In addition to expense reductions, we have begun purposefully eliminating low quality sources of revenue in order to further enhance the overall of the P&L. While we expect both the magnitude of the expense reductions and the elimination of low quality revenue to impact near term growth. We are confident that these - will set a long term foundation for best in class gross margin, significant free cash flow generation, and a return to the Rule 40 framework. Before proceeding with…

Thank you very much, sir. [Operator Instructions] First question comes from Arjun Bhatia from William Blair. Please proceed with your question Arjun.

Yes. Thank you. John, can you just help us understand maybe how much of the revenue reduction that we’re seeing in the full year guide is coming from reducing investments that you’re making versus eliminating some of the lower margin revenue that you’re talking about? Like the labor portion of GainShare revenue?

Hi, Arjun. Yes, for sure. So first – just given the magnitude of that change, I want to emphasize that our proactive strategy to strengthen the P&L is playing a large role. We have a medium to long-term goal to generate 80% gross margins, as I described in the prepared remarks. And we want to do that through highly scalable and repeatable software revenue derived from what we do best, which is of course, AI automation messaging. And in order to get there, eliminating the lower quality revenue we described specifically that labor based piece in the GainShare portfolio is key that equates to approximately half of the revenue change. The other half of the change is associated broadly with the continued ramp of our newly hired sales force and, broadly rebuilding the go-to-market momentum following the leadership transition that we previously discussed. So in order, I think to reiterate some of the key measures though, that we’ve made is the new logo acquisition, 73% increase sequentially is a, a very strong leading indicator of the additional build, rebuilding of the momentum that we had lost previously that we are gaining back now. And while new logo acquisitions represent a lower near term revenue goal or revenue contribution for in the long term, they’re the fuel that our sales force uses for expansion.

Understood. That’s helpful. And then I think Rob, one of the things that you mentioned as, a goal of yours going forward is to open up your AI and provide access to it to third parties. Can you just help us understand how those partnerships would work in practice and how you would be able to monetize some of the, providing some of your technology? What’s the plan on that front?

Yes, the part obviously that’s the very high valued part of our platform is our AI and automation technologies. Today, it runs solely on our messaging platform and soon to be voiced, but what our customers want is sometimes they’ve got voice investments and other platforms they’re running and they, but they want our AI running on it. So we want to kind of free it from our own walled garden and then move it out into the ecosystem of other CRM players and other contact center software. And do those integrations, Tenfold allow the acquisition, allows us to do a fair amount of that. Like we now can take our agent console and it can be – it’s sitting in salesforce, like our messaging console now can sit within salesforce if someone’s a salesforce user. So we’re kind of at place in the evolution of the market to be much more platform centric than product centric. And that’s what we’re doing then the other part is we do run other AIs on our platform as we’ve been doing for years, but we don’t allow our automation tools like our analytics tools to optimize those AI. So we’ll also be doing that, whether it’s Google Dialogflow or Lex or Watson, they can use our, all of our tool sets on the analytics side to optimize their, those bots too. So we’re becoming more of a hub for the AI and that, that’s where we’re moving with our investments this year.

Okay. Got it. Perfect. Thank you.

Thank you. The next question comes from Zach Cummins from B. Riley Securities. Please proceed with your question, Zach.

Yes. Hi, good afternoon. Thanks for taking my questions. Yes, John can you talk about if there’s been any sort of changes to the commission structure for the sales force, now that you’re really prioritizing higher margin revenue sources? So I’m just kind of curious if any sort of changes on that front to incentivize the behavior?

Broadly. I think we would want to ensure that our reps are made whole during the year despite the change in strategy for the lower margin GainShare piece of the portfolio. So that’s, that’s something we’re evaluating, but we would ensure that the, the overall structure is fair and equitable for everyone.

Got it. And another question for me, is really just around the net revenue retention number for the quarter. I mean, I think you touched on this a little bit in your script, but can you give us a sense of maybe some of the factors that drove that slightly below your targeted range of 105% to 115%?

Yes. In fact, the variable revenue from GainShare and some labor based revenue that we slowed down and some that was a downfall were the primary in the aggregate primary contributors to the myths of the range of a 105% to 115%, I’ll note though that even with those factors, we’re still a 100% net revenue retention.

Understood. Well, thanks for taking my questions and best of luck in the coming quarter.

Thanks, Zach.

Thank you. The next question comes from Samad Samana from Jefferies. Please proceed with your question Samad.

Hi, this is Nathan on for Samad. Thanks for taking our questions. Wanted to circle back to your guidance. Can you help us understand what you’re embedding from a macro perspective? Are you assuming the environment stays the same its worse or perhaps improves from what you were expecting previously?

Yes, I mean, right now it’s, it’s kind of hard to tell for us because of the rebuild that we have, change in leadership back to, the person who ran it for many years. So I can’t really tell yet whether there’s a macro impact or not. I mean, the new logos is a good green shoot that the team is starting to really perform. There’s a lot of landing and expand in there. So they’re, they’re smaller deals, but they’re landing and they’re going to grow. But it’s, we can’t see it right now. Our value proposition is cost takeout, like the Solunus, if you know, Solunus. They’re all about cost takeout too. And so we form this partnership with them because that’s kind of what the world wants right now. And especially contact center labor. It can be, in some cases the big brands have 40,000 people on payroll, and there’s an opportunity to really, change the cost structure using AI automation. So, but it’s hard to tell for us just because of the, the building up of our sales force. So, I think in a couple quarters we’ll know where, where we stand with that on the macro side.

Understood. And then on – this quarter, but that was down a little bit from, from where you were tracking previously, just talking about kind the factors impacting this and where you stand on that ELA to CPI transition?

Yes, I think ARPUs in a range we would expect considering, as I described in the guide in the build to guide, there is some step down from customers that were previously contributing to that value. Namely the larger customers in our GainShare portfolio. In terms of ELA to CPI, we we’re tracking pretty close to where we were last quarter. We didn’t have a very large number to convert this quarter. So that’s around 70% and I would expect it to, to be in that ballpark in Q3 as well.

Understood. Thanks for taking our questions.

Yes.

Thank you. The next question comes from Peter Levine from Evercore. Please proceed with your question, Peter.

Great. Thanks for taking my question, I guess. Robert, John, if you look at the top of the funnel, were you not as successful at converting leads or adding leads at a similar level versus kind of expectations or plans?

No, I don’t think it’s about the top of the funnel. Like we were saying, it’s been a rebuild, we lost a lot of our capacity during, when we had the leadership change last year. So when we look at the bookings capacity, it’s definitely a build, it was trending nicely and then it went down and now it’s trending back up. But I don’t think its top of the funnel. And we did, we started the marketing events, which did definitely created some closes in the quarter that we saw in the new logos. So but it’s a built, I mean we’re rebuilding a lot of what was kind of unbuilt, so it’s but I don’t see anything on the top of the funnel right now and we have very good attendance to the events. So we’re seeing demand for what we’re offering in the market.

Then you prepared remarks, you kind of mentioned voice as a preferred channel for customers, can you kind of outline to us what differentiates your voice Contact Center offering versus what’s in the market today? When that product will go, GA, I believe you said if I missed it on the call. Sorry, but I think you said the second half, but any updates on when that product goes live and kind of what differentiates you versus some of the competition out there?

Yes, I don’t think voice is a preferred channel. It’s still the largest channel, but it’s predominantly non-digital. And so most of the world, whether it’s contact center or digital heads at the companies want to convert as much analog into digital as they can. So, as we know, messaging still as a growth channel is still the growth engine over voice. What that said is, is voice, people still want to sometimes talk to a machine like an Alexa type thing. And so we’re already out in beta, there’s a handful of customers using our voice AI platform. And by the, we said second half of the year, we’ll have it out in GA in Q4, we’ll be when it hits a GA. So what makes it different is that, when you create an automation on our platform, you can deliver it through any endpoint, including a voice endpoint. And so you kind of write once and deploy. And then, and then with VoiceBase, which is a very powerful product and it competes with the likes of other voice analytics, but it’s, it’s very powerful. We also can do the voice analytics around, how is that automation performing. And even today, our guys, our sellers are baking in the VoiceBase into sales opportunities, because it’s the start of a relationship on the voice side. We can analyze the voice channel and see how it’s performing. And then we can layer in our voice automation and then live agent. We’re not trying to build, become a CCaaS player. And so we can – we want to do voice automation. And then we do have live agent abilities to take a voice call, but we’ll also be integrating into all the major voice platforms. And you also could bring your own voice, or we will have voice on the platform. Also if you don’t have your own voice, but we’re more or less looking to integrate into all the voice platforms that are there, but you get a single way to make an automation and deploy to all endpoints, whether it be messaging or voice.

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

Great. Thank you. A couple from me, just guys on the retention, maybe you could address the retention rate X GainShare. I’m curious what you saw there? And then secondly, on the AI messaging, it looks like the AI messaging volumes were down a bit last quarter, and then down even sequentially on an absolute basis this quarter. And to help me sort of contrast that with what I think most people believe in that your leadership around the AI capability. So, why are volumes down there?

Hey, Jeff, I’ll start with the retention question. X GainShare we’d be in the range is the short answer.

Okay.

And your other question was on volumes?

Yes. AI messaging volume has been down.

We typically – yes, I’ll start there. So typically following the first quarter, we do have our kind of seasonal low there, before it picks up again in August, September, and reaches our seasonal peak in the fourth quarter. So, I – we don’t, there’s some slight variation there. We don’t see anything in the trends that would suggest a problem though. It’s more or less consistent with how things have trended seasonally in the past.

Yes. Like we see…

I would also that, sorry, Rob, add one more piece here. That is that we have automated volumes at a very high percentage of total messaging. So the pace at which that continues to grow will lessen over time naturally.

Yes.

Okay. And then on the rep count need a little clarification there. I guess we ended Q4 2020 at 80 reps, I think in Q4 2021, you said you were around 144 and you were going to stop there. You went through the sales leadership change. But I think at that time, the expectation was that you you’d see some leadership churn where you probably retained a lot of those guys. So just the comments around sort of not having capacity and not having ramped reps at this point, where are you in terms of rep count and then just kind of recap that chronology for me if I have that wrong.

Yes. The rep count is pretty much where it was last quarter, but during at the end of last year, beginning of this year, there was a lot of – we overturned reps. So even though we added more reps. We lost a lot of season reps during the past leadership. So basically where we see then a buildup of capacity then where we were, if we kept all those old reps that were already baked in, we’d probably be – we now probably would be at a different bookings number during the quarter, but because we have a lot of new reps they’re just building up. Now, they’re showing new logos, which is good. So they’re showing that and there’s a little bit more than 50% of them all had a deal so far this year. So that’s good. So, we’re seeing some good once again, green shoots on these reps starting to come out. We didn’t on the losing of the leadership. We kept our regional leaders. And then we hired a new set of leaders below them in that, in North America. So, we have that leadership team, some of the leadership team below the main leaders are new, and they were put in Q1. So, they’re also coming up to speed, and then they have their reps under them. But the actual leadership team that’s running, that was the one that was there previously. So…

Okay. I’ll leave you there. Thank you.

Thanks.

Thank you. The next question comes from Ryan MacDonald from Needham. Please proceed with your question, Ryan.

Hi, thanks for taking my questions. Rob or John first one for you, as you think about ramping reps, can you talk about what the expectation is in terms of sales cycles? Or what they’ve historically trended as? And then is there any – are you seeing anything in pockets with whether it be an EMEA or APAC of an elongation of those sales cycles? I know you’re – I understand that you’ve got new reps that are ramping, but just curious, I guess, how those sales cycles and those time to productivity are trending versus historical, expectations and whether or not the macro could be playing any role in that?

Yes. I mean, there’re…

Yes, I think – go ahead, Rob.

I’m going to say they’re, we look at about nine – we model a nine month sales cycle. It could go out a little bit longer now, once again, it’s hard to tell on the macro, just because just to be transparent, just because of when you’re ramping a bunch of new reps, and they came at the end of last year, beginning of this year, it’s hard to see with the macro, but I’m assuming it’s playing into something. I mean, it would be foolish to think the macro doesn’t play into slowing down sales cycles and elongating sales cycles. But once again, we’re just monitoring like how well do these reps, like the new logo count once again, shows, okay, these reps are starting to deliver more than 50% of them have at least one deal under their belt. So, I – it’s just hard for us to tell cycle yet. I think by Q3, Q4 will understand a little bit better and then understand the macro impact. What’s happening in the macro, just on the enterprise side is there’s a lot of layoffs going on in the enterprise customer base, they’re restructuring, and what they’re restructuring around is cost savings, obviously. So once again, we’re trying to play into what automation does. And that’s where we’re really we’re going. But I, once again, I think we need a couple of quarters to see if there’s a macro impact on what’s going on with – in the enterprise with the restruction, but as you can see, we sign, we even had renewals and some of our very large enterprise customers like Verizon and Starz [ph]. So far I feel pretty good about that, but I assume there’ll be an impact somewhere. It’s just – we it’s once again, with a bunch of new reps, a little hard to tell,

Understood, thanks for the color there. And then on the gross margin trajectory, can you give us a sense of the timeline it’ll be required to sort of get that labor component of the GainShare revenue out of the P&L and then how quickly you think you can start getting to the progressing to those 80% plus target margins? Is this a fiscal year 2023 expectation? Or is this more of like a 2024, 2525 expectation? Thanks.

Yes, so the gross margin expectation in that 80% range would be not just 2023, a little bit longer term broadly is the way we’re thinking about it now, but in terms of your first question on the lower margin GainShare components, we’re executing swiftly on that in the back half of 2022, and probably at least the first quarter of 2023.

Thanks for the color. I’ll hop back in the queue.

Thank you. The next question comes from Siti Panigrahi from Mizuho. Please proceed with your questions, Siti.

Thanks for taking my question. I just wanted to dig into the third growth driver you talked about today, is that opening your platform to third parties. Could you dive a little bit more, I understand you have partners from Tenfold and VoiceBase, but is it something you are opening up your AI messaging, and then who are the CRM vendors right now you targeting to a partner, is my understanding a lot of CRM has this solution messaging, so that will be helpful?

Yes. So, obviously we’re, we just put into salesforce, the app stores and integration of our messaging platform into it. What you find is most – it’s not a channel of communication. If you look at messaging at its core, it it’s a way to operate the business in a digital way. So yes, if you treat it as a channel and communication, it becomes like chat. And we used to be in the chat business, but messaging provides really this digital connection to the consumer. You can be proactive over it. There’s a bunch of technology around asynchronous operations, and that’s where we really shine. With said, we know over time messaging, it may become like chat. It’s not there right now, but we knew that from six years ago when we launched it, and that’s why we got heavy into AI four and a half years ago, an automation, the value of it is an and if I can step back for a second, when you look at the contact center, the care software business, it’s it – and you add up Genesys and Five9s and everyone else in there, it’s about a $10 billion TAM, if you add their revenues. But if you step back, there’s close to $40 billion, $50 billion in labor. And so it’s not about the software. It’s really about how do you take the pot of money that’s in labor and move that and take that and we – and automate that. And that’s the value that it provides. If we develop – if we deliver a messaging and have a human behind it, we are not reaching the goal. And so that’s what most of these companies are doing. They’re providing their platforms and basically you just put more humans on…

Thanks for that color. And then John, follow up to your commentary and thanks for that color on gross margin. But if I look at a EBTIDA margin, you kept it same to your prior guidance, guidance. When should we think about EBITDA margin expansion and how much, is it mostly that when you see the revenue ramp up? When we should see the, if that’s going to float to margin or any cost cutting you’re going to do? And any kind of without guiding, like help us understand how the margin, EBITDA margin expansion we should think going forward?

Yes. I think if you look at the implied guide on [Audio Dip] expenses, the overall cost structure of the organization is improving marketly. And to sense for where we’re going, we think as Rob described, this can allow us to produce double-digit margins at least next year, for the full year, in addition to very healthy free cash flow. So, we’re – that’s the path we’re on, and the one that we started earlier in the year.

Great. Thank

You. The next question comes from Ryan MacWilliams from Barclays. Please proceed with your question, Ryan.

Thanks for taking the question. Just to follow up on the last question, John. While things might look different now, given you’re exiting some of the lower quality revenues, how do you think about the normalized financials of this business? And as we’re working through our model, any guidance on how we could think about revenue growth expectations for next year? Like, could we expect to see improvement of the implied revenue growth rate exiting the fourth quarter?

Yes, I think, it’s interesting actually, to take a look at the business on a normalized basis without let’s say the pandemic driven COVID-19 testing and the pandemic driven GainShare that that helped benefit growth over the last two years. If we normalize for that, meaning, remove its impact from last year and remove its impact from this year. For the second quarter, we’d be mid-to-high teens, for example. And for the full year, we would also be mid-to-high teens. So, I think that’s a good way to think about our core business, and growth potential moving forward into 2023.

Excellent. And then Rob, I’d love to hear your thoughts around the agreement and partnership with Starboard that was announced in the quarter. What are some of the goals of the new operating committee that was announced as part of the agreement? Just love to hear your opinion there. Thanks.

Yes, we obviously made an agreement with them and we are going to put a new board member on, and then they’re going to put three people that we can select from. So we’re going to put one of their people and we’re going to start interviewing both people. So that’s what we’re going to do and then we had one of our board members retire. I’m not sure the operating committee, I mean, we haven’t defined it yet. I guess when we get together, we’ll do that. We’re just working on interviewing and try to find great candidates for the board.

Appreciate the color. Thanks.

Thank you. We have reached the end of our call today. I’ll now turn the call to Robert LoCascio for closing remarks. Thank you, sir.

Thank you so much for listening today. And I wanted to just reflect a little bit on what we’re trying to do with the P&L. We that back in the dotcom or we were one of the few survivors and we made some radical changes. Some of you were shareholders back then, and we went from burning a lot of cash to profitability in a matter of in three quarters. And that saved u, and we’ve been looking at the business as a leadership team. And what we’re looking to do now is, we feel like it’s growth is important. Obviously we’re a growth company, and this is a growth market, but I think one of the lessons we’ve looked at and learned is about growth on top of a P&L that doesn’t generate cash flow is not really a great company. And we’ve generated cash for 20 years. That’s how we got here. So, we talk about it, even though we’re taking down top line revenue and we could just hold onto that revenue and keep it going. We just felt it’s time to kind of cut it loose and move forward, because this is a huge opportunity for us, as you can see all the new logos and stuff, but putting revenue on a weak company will not make for long term value. So, as shareholders, we’re all aligned with just making this a strong company. And when you look at even a lot of the peer set in cloud today, and it’s when you look at the P&Ls, they’re all not so great. And we just don’t want to be a part of that and we want to strengthen this up. So, we’re going to make some broad changes to the company, continue to do what we’ve done. I think you’ll see a different company on the other side of this and over the next two quarters where we’re going to focus on delivering those type of results. And what’s in the leadership team at the company is really focused on this. Because we know we have this giant opportunity, Conversational AI is one of the biggest transformational technologies, but once again we chased a lot of revenue during COVID like everyone did, but it’s time now to just work on revenue that can help us build a stronger company in the future. So, I want to thank everybody in the company, and also I’m looking forward to we’re going to add these two new directors, one from Starboard, one from us, and looking forward to also adding new blood on the board. And with that, thank you. And we’ll see you next quarter.

Thank you very much for [Audio Dip] this conference. You may disconnect your lines at this time. And thank you very much for your participation.