Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to LivePerson’s Third Quarter 2022 Earnings Conference Call. My name is Ryan 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 to Mr. Chad Cooper, Senior Vice President, Investor Relations. Please go ahead sir.

Thank you, Ryan. 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 about future results. These statements are based on our current expectations and assumptions as of today, November 07, 2022, and are subject to risks and uncertainties. Actual results made 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 as in 10-Ks, 10-Qs and other reports we file from time to time with the SEC. We assume no obligation to update any forward-looking statements. Also, during this call we will discuss certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earning express release. Both the press release and the supplemental slides, which include highlights for the quarter are available on the investor relations section of LivePerson's website. With that, I will turn the call over to Rob. Rob?

Thanks Chad. Thank you for joining LivePerson's third quarter 2022 earnings call. I'd like to start off with an overview of the quarter. In Q3, revenue grew 9.5% year-over-year to $129.6 million and adjusted EBITDA of $9.1 million moved into positive territory. Our non-GAAP gross margins were 74% up 200 basis points year-over-year. A few weeks ago, we hosted one of our customer events in San Francisco where many of our largest brands and key prospects were in attendance. Our partners and customers at Google, Verizon, Virgin Media, Priceline, and Elements Health gave tendency a private view into AI powered digital customer engagement journeys and strategies they have implemented with LivePerson to date. These events offer us a clear lens into our customers thinking and help inform our product roadmap in the future. There were three broad strategic themes that were validated by our largest brands at the event that I want to share with you. First, I was struck by the fact that meeting after meeting, our customers told us that they now consider us a tier one provider. The CTO of one of the largest airlines in the world told me that out of their thousands of systems that they have in their company, that there's only a small group that are considered tier one, including the reservation system, and that we are now one of those systems. Where we now seeing enterprise customers shifting 30%, 40%, 50% of contact volume to us, we really validate what no other company has done in our space. We took something that for 50 years was ingrained in people that we need to pick up the phone, the call brand for customer care, and we create a clear alternative to traditional voice. Being considered a tier one provider serves as a…

Thank you, Rob. In the third quarter, we continue to advance the profitable growth plan we launched the start of this year. To that end, revenue grew 9.5% year-over-year to $129.6 million, which was an improvement relative to the expectations we'd set last quarter. The upside relative to prior guidance was primarily driven by wild health continued overperformance and by the accelerated timing of upsells and professional services deliverables. The net effect of revenue upside and continued cost reductions translated to $9.1 million in adjusted EBITDA. Non-GAAP gross margins of 74% were at the top of our guidance range and attributable to cost reductions and the focus on scalable high margin sources revenue. In order to close out the year with a balanced approach to profitability and growth, we continue to optimize our cost structure in the third quarter. Restructuring during the third quarter is expected to reduce our expense run rate exiting the year by significantly more than the actions we've taken in the first half of the year, advancing our goal of double digit just EBITDA margin and positive free cash flow for 2023. For perspective on the pace and magnitude of the P&L transformation year to date, note that when we launched our profitable growth plan at the start of a year, we were burning well over $30 million in free cash flow per quarter and forecasting that number to grow. Over the medium to long term, we expect these cost reductions coupled with the emphasis on scalable high margin revenue sources to better align sales and marketing, research and development and general and administrative expenses with best in class industry benchmarks. Turning to our reporting segments for the third quarter within total revenue, B2B grew 10% year over year. Revenue from hosted software was down 4%…

Thank you ladies and gentlemen. At this time we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Ryan MacDonald from Needham. Please go ahead

…questions and congrats on a nice quarter here. Maybe we start with just the guidance and just can you provide a bit more color and help us understand the one-time components you discussed from some of the early pull forwards that that came into Q3 that we won't see repeated in 4Q?

Hi, Ryan. Yeah, those one-time components relate to an acceleration of recognition revenue for usage true ups. So in other words, the customers who we renewed and upsold early in the third quarter were well ahead of the usage that was contractually committed and so needed to essentially raise the overall cap. And that was the nature of the episode going forward and accelerated recognition in the third quarter.

Yeah, that makes complete sense. All right, thanks for clarifying that for me. And then, it's great to continue to see some of the early, I guess, performance from Wild Health. Can you just of us understand as where that's coming from, whether it's sort of on the B2C side or in the B2B initiative. And then as that business continues to grow as a mix of revenue, I think you called out sort of overperformance there could create some wider variability on the adjusted EBITDA performance. Can you help us sort of sync up what success and Wild Health translates to in terms of adjusted EBITDA or could we see downward pressure I guess.

Go ahead, John.

I was just going to make a comment on adjusted EBITDA, just on that specific financial point. I think broadly, as we discussed previously, Wild Health has a lower overall gross margin, but we have now greater insight into ways we can expand that gross margin to be more consistent with LivePerson's target over time. So we don't expect it to necessarily get worse, but to improve over time.

And then we're seeing -- we're seeing good traction on the B2C side right now and some B2B, but there are a number of people signing up for the service. And then also we're onboarding medical professionals on the overall platform. So it's a sort of a combination of both right now.

Excellent. Maybe just one more from me, just on broader rep productivity, it's good to see some of the gains there and improvements despite sort of a uncertain macro environment. I'm curious as you're looking out into, in planning for 2023, can you talk about how you're feeling about sort of sales quo capacity at the moment in quota coverage and how we should think about sort of incremental investments on the sales head count? Thanks.

Yeah, Ryan, I think that where we stand today, we do continue to see progress on ramping the reps we have. We have more ramping to go as we exit the year and think about 2023. Big picture, we started 2022 with mid-fifties numbers in terms of total ramp reps, and we think that number will be mid-18 as we start the year in 2023 with a healthy number who are on ramp shortly thereafter. And in terms of… No, I just think investments will flow in 2023 in light of a broader overall profitable growth framework right. We have certain targets for overall free cash generation and EBITDA margins and we'll make investments accordingly.

Excellent. Thanks for the color.

Thank you. Our next question comes from the line of Mark Schappel from Loop Capital. Please go ahead.

Hi, thank you for taking my question. And yeah, nice job on the quarter. John, given the strong 3Q performance, I was surprised to see that the profitability guidance looks like it remains pretty much unchanged here. Could you just run through some of the puts and takes there and why that is?

Yeah, some of the upside relates to the one time components I described at the top of this call. And then other components relate to our sort of expectation for continued outperformance going forward, but less predictability in, in terms of wild health and also in terms of our ability to accelerate certain professional services deliverables. And I think the other component on the cost side is that as we continued to assess the business, we felt that there would be greater impact on our long term profitable growth strategy by staying the course and delivering on certain product roadmap deliverables on, on time with our customer base than simply cutting costs and dropping those to the bottom line. So it's a balanced approach we're taking here with respect to taking costs outta the business, but, but not harming growth opportunities as we look forward.

Okay, great. Thank you. And then I believe your international business, which is mainly Europe, was up about four and a half percent, if I recall correctly. Could you just talk about some of the dynamics you're seeing there? It seems to continue to underperform, in the US

Yeah, we are looking at sort of rethinking the investment in there and how we make some changes to accelerate the growth. Obviously, we feel the markets are still very strong for our products. But we feel like the European market is just has a lot of we have a lot of opportunity there, but we think we need to do a little bit better of a focused approach. I don't have anything specific to talk about it right now. I think a lot of it's around the execution and leadership, but we're basically, rethinking that and how we, how we grow it at the same rates that we'd see in the us but there's definitely demand there, so.

Great. Thank you. That's all for me.

Thank you. Next question comes from the line of Siti Panigrahi from Mizuho. Please go ahead.

Thank you. Thanks for taking my question, Rob. Some of your peers in even platform contact center, they talked about macro pressure. So wondering what are you seeing among your enterprise base or yeah, among your install base? Are you seeing any sort of macro pressure or many, any kind of impact to your business?

Not right now. I think, I think this quarter and what I talked about is becoming a tier one provider tells the story we've wanted to tell, which is that it's not about the channel communication. We're not like messaging as a channel to replace voice. It's about being an AI automation company. And when you look at what the value of our platform is as we've said about 75% of the billion conversations we carry have some form of automation in it. And even when, when I was talking about that, I sat down with that CTO from one of the largest airlines in the world, he talked about the automation capabilities and, and you're critical because we're automating at a very high scale things that normally needed a human agent. So it's not, wasn't about, moving voice calls to messaging. Yeah. That was the kind of inning one many years ago. It was moving that to automation so we can get them scale to have more conversations. So I think what it should show is that we're starting to diverge from the concept that we're channel of messaging or people say chats sometimes that we are really moving into, very high quality AI and there's more we're going to do in that area. And I think that that's what we're seeing in the market today. I feel very good about the demand in the market because we're driving costs out of the, the businesses. So…

That's great. And then how do you characterize the competitive landscape right now?

It's really you still have like the, the cha the voice providers that are out there. And then you've got the CRM players like Salesforce and once again, we're integrating with them. One of our, one of our strategies now we've been sort of a walled garden, although our platform's open, you can other AI can live in it. We're very integrated into things. I think we're really thinking about now is how do we take our AI and run it over a Genesis platform? How do we run it over five nines? How do we run it over these voice platforms because maybe they've got relationships there and instead we got to take them out. Why don't we run over those platforms? So we see them, we're going to see them more as cooperative. Like I give an example in Twilio, which obviously they've got a contact center product flex where in their marketplace now with our voice-based product and people are integrating that into some of the Twilio flows. So, we kind of are starting to evolve ourselves beyond the walled garden into more of a platform for AI and then you can do it on our platform. You can do it all for our platform. And that's really where we're moving now.

That's great. Thanks for the color.

Thank you. Our next question comes from the line of Zach Cummins from B. Riley Securities. Please go ahead.

Hi, good afternoon. Congrats again on the quarter and then thanks for taking my questions. First question for me is, is there really any sort of change into the go to market focus for your enterprise sales force at this point? Are, is there more of an incentive to, to focus on these larger customers just given the higher payoff to begin with and the potential upsells over time? Just curious if there's been any sort of involvement in that, in that strategy, just given the current macro conditions. S

No, it's been the same. If you don't remember, we, we kind of, we went up to the enterprise and we kind of abandoned the small business market. So we've got the mid-market and, and the enterprise that we're focused on. We do our best work there. It's, it's very hard to, sell seven, eight figure deals into those customers. We do it well, we're renewing them, well, we're becoming critical like the tier one for them. So I think as a company, we get most excited when we get most excited when, the largest banks in the world and telcos and airlines are like, you're critical now. You're carrying 40%, 50%, 60% of all of our customer engagement. We want you guys to be like something even better. And they're pushing us now as a company to be a better company, which is exciting. So I just think as a company, we really, and people, even the people who work here, we get excited by working on that. The other thing is, from an AI perspective, they have these large data sets. I mean, so we generate a lot of conversations. They have a lot of internal data and the ability to sort of crack the note on how do you automate all that at scale, that that's exciting. So I think for us, for now, that's where our focus is. It's been our focus. We're trying to get more streamlined, into '23. We just want to be operationally better at going after that and that'll be our focus for the near to medium term.

Understood. That's, that's helpful. And final question for me geared towards John, in terms of the double digit adjusted EBIDA margin target that, that you've put out there for 2023, is there any sort of needed growth that, to achieve that sort of target or, or what are some of the puts and takes that, that give you to confidence around that double digit adjusted margin target?

Sure, there's certainly a revenue component, but as we think about the, the, the range of double digits that are possible even in a, in a lower growth scenario, we'd still be able to achieve that goal that we've set for ourselves.

Understood. Well, thanks for taking my questions and, and congrats again on the quarter.

[Operator instructions] Next question comes from the line of Tom Blake [ph] from KeyBank. Please go ahead.

Hey guys thanks for taking my question and congratulations on the results. I might have missed this, so I apologize if it was already discussed, but just wondering about the installed base and expansionary growth. I know I saw the new bookings growth. Just wondering specifically if there's any during the pandemic there was some pull in from other of your peers in terms of spend there, if there's any type of like maybe shelfware an old term, an old term there, right. But that you're worrying about or kind of monitoring as you go into 2023? I have a follow up.

No, I wouldn't say we have anything other than the sources of revenue that we've discussed previously. From the pandemic, namely the COVID 19 testing, primarily if one particular customer, Citi group and the pandemic accelerated variable revenue in our gain share portfolio, which has both of which have largely rolled off the P&L in the first half of 2022. As Johnson, we accelerated some pull into the Q3 because of customer usage. So there's not really any shelf, there's no shelfware in the customer base per se. If anything, we're pulling stuff in where we have, they hit their -- they're hitting the top of their range on their usage, they'll go into overages. So then we restructure the deal, to like move them to another tier. So

That's a great follow up there. Thanks Rob, for the clarification and solid to have, a new bookings and installed base growth heading into out year would be it does seem great. And my second and last question is just on the defensible of LivePerson's technology. I think this is tenfold led, but, adding LivePerson to these larger platforms, I'm just wondering, maybe it's for Rob, if you could just add maybe a comment or two about, the defensible of the technology as maybe hedging off of a long term risk type of question of consolidated technology or consolidated spend of the LivePerson functionality as you attach yourself to these larger kind of strategic mandates. Thank you.

Yeah, I think there's kind of two parts to it. One is the one you outline, which is, how do we become more of a platform in the past our partners are like BPO partners and like the technique hinges and the info system people like that where we're seeing, the greatest opportunity is, the Salesforce and Twilio's and technology integrations because our customers want us to be more of this hub. We are controlling the front end experience to the consumer. We've got the AI rails to automate behind that is a lot of systems that need to get integrated to make that a high quality automated experience. So I think our role becomes more important as we become this hub in, in the system of our customers business. The second part is we've got the, some of the best AI technology in the world. Like, I know that it's like, I know founders and CEOs, you may drink your own Kool-Aid, but we just had this conference and I've been out with customers. I was in South Africa with a new customer, a cap tech for their launch. And I met a bunch of other customers who'll be like, we're opening up the South African market, like with all these new companies. And they just, they look at everyone, they look at all the potential competitors who say they've got AI and they're choosing us. And so I just think there's a lot of opportunity there just because we had a head start and we've got some of the best people in the world to build this type of technology, and we see it as AI. We're not trying to build a contact center company, that's better than voice. We're trying to build a trillion AI company that can automate business processes. And I think we've, we've just got a good lead there right now. It's about execution. We got new head of marketing. I think our marketing needed a lot of help, and we have a new head of marketing. We've definitely have streamlined the sales force. And so we just got to get our, our sales execution like solid. And, but I feel like we don't have a market issue nor a product challenge. We really got strength there. It's just now just executing into the global markets.

Is there, if I could follow up, Rob, sorry on that, are there specific, are there specific pools of spending that when you say they're choosing us for AI, it sounds like there could be some bakeoff component to that. And, and relatedly to your prior comment about LivePerson possibly becoming a hub in that context of AI is today or in the future, are we going to consider LivePerson a system of record that kind of key software term in terms of this, digital customer engagement strategic motion?

Yeah, I mean that, that's what we say. We say, digital customer engagement powered by AI and the advances by the way, in the last 24 months in AI is pretty amazing from a model perspective and what we can do with, with our technology going into the future. And so you're right that I believe AI and conversational AI especially will become the focus point for everything. For instance, even content management there's the ability today on the fly generate content based on ai, based on patterns of consumers. You can build an image now on the fly and render it in pixels without a jpeg. You can do all these things that we could tailor to a conversation based on a consumer intent. And so our AI machine ultimately will be, about a business saying, I want to do something with consumers, a group of consumers, and we want to target them and we want to provide the right content and conversations with them. And that, that's really what we're trying to go after. So I do think we're in that driver's seat to execute on that just because of how we approach this strategically. And it's, and I've been out with the customers the last two or three months really focused on what their needs are and I just feel like we're in a really good place. Just got to execute.

Excellent. Thanks for the answers, guys.

Thank you. Next question comes from the line of Ryan MacWilliams from Barclays. Please go ahead.

Hey guys, thanks for taking the question. Just a few for John. John investors are pretty happy to see the big operating leverage improvement in the quarter with sales and marketing and R&D spend declining. Was there any call actions taken in the third quarter that weren't fully reflected in the quarter that could also further benefit for you?

Hi, Ryan. Yeah, there are certainly some that were late in the quarter or, or that have been action but will have p and l impact in the fourth quarter so that that dynamic holds true. Although most of the actions in the, in the third quarter will, will translate and be reflective. And, and of course as we, as I said in the prepared remarks, we have some additional PNL optimizations that we're working through as we speak.

Perfect. And then any way we should think about kind of the differences between EBITDA margins and free cash margin at this point? Like should, is there any like, puts and takes given some of those changes in the quarter and we expect these two to like converge over time?

Over time as you may know there is a large software capitalization component after just EBITDA to get to pre cash flow in addition to a variety of CapEx needed to support our private cloud. So there's, as those become less over time and we are reducing software capitalization moving forward then we'll see them start to converge. We'll see them start to converge. I wouldn't expect them to ever fully converge however, but that they'll get closer over time.

Perfect. And just two more kind of like, just check the box ones. You mentioned, I might have missed this in the prepared remarks, the contribution from wild health in the quarter and maybe what we could think about impacting four Q for the guide.

Yeah, I think we, the continued strength and I think the upside that we already saw in the third quarter and the growth we're seeing serves as kind of a baseline for we can expect in the fourth quarter, hence the, the, the contribution to the increased guidance. But because it's a newer business and we have less predictability at this point in time we're, we're being conservative. We're not sure exactly where that will land.

Excellent. Appreciate the color. Thanks guys.

Thank you. Our next question comes from the line of Jeff Van Rhee from Craig-Hallum. Please go ahead.

Yeah. Great. Thanks. So several from that, I guess from a guidance standpoint, realize you're not given '23, but can you at least give us a framework of how to think about it either at a high level growth rate or and probably preferably you've got the hosted versus PS versus consumer segments and just put and take into how we think about '23. If you can't at least give us some bounds around it.

Hi, Jeff. Yeah, we're, we're, we're clearly focused first and foremost on generating profits and, and specifically generating cash next year. And as I described in response to another question that framework will dictate kind of how and where we can make investment as we think about growth. We had a great third quarter as, as we noted, bookings were a significant improvement over the last four quarters, even normalizing for COVID 19 impact. We, we are expecting right, continued strength in B2B consistent with the prior guide that we put out. But I think before we give more color on 2023 we want to see where things land in the fourth quarter. To answer your specific question on PS again, in the prepared remarks, we said we expect PS to continue to be elevated in the fourth. I think it will start to moderate but we'll still have more PS than we have had in historical years in in 2023.

And just to round it out, any thoughts on consumer?

Yeah, I don't have expectations for consumer different from how it's playing out this year, at this point in time.

Okay. And then from a product standpoint, I know the platform particularly around AI and automation is the competitive strength. Help me reconcile the messaging growth. I think you said conversational messaging is up 25%, but automations were up 11% and it seems like it probably should be the inverse, unless I'm thinking about that incorrectly.

No, it depends on the use of the automation and new, new logos and where we go live with agents first or the automation. So we don't see anything different than, what we expect in a pattern right now. So there's nothing there. I can get back to you on it, but there's nothing that we see that's not normal for growing our new customers and stuff like that.

Thank you. Our next question comes from the line of Arjun Bhatia from William Blair. Please go ahead.

Hi, thanks. This is Chris on for Arjun. Thanks for taking my question. But I wanted to unpack the number of new logos being done a little bit year over year while the bookings dollar amount was up. It sounded like this was primarily, from better traction in the enterprise market. Can we discuss whether this is the result of kind of intentional go to market changes? So are you changing your message to fit the current macro backdrop or is there any way that you're landing with customers at changing at all?

No, I think it just because we're doing big game hunting on the enterprise side, it kind of fluctuates quarter by quarter. So like last quarter we had a great new logos this quarter we're expanding and bigger deals, the sales rep sort of optimized to deal size. But obviously we're, we're, we want to get as many new logos as we can so we can generate a future value for the company. But it, it's sort of because your gate big game hunting, it's this quarter by quarter up and down, it's not really a trend. We'll see what happens next quarter.

Thank you. That's, that's helpful. And then once we touch on bringing third party platforms onto the conversational cloud, I was wondering how does this kind of fit in with the theme of customers using you as a hub and then how you're thinking about the revenue opportunity that this generates going into 2023?

Yeah, basically what we're looking to do is always drive usage. And where we see is, we get greater. There's two things that drive scale. It's obviously the quality of the automations and then the endpoints that we're on. So like we're, we're deployed on web, in app, Apple Business Chat. The more places consumers can get to us, that gets them into the system. Then sales service and marketing use cases, and then automation versus human. And what drives a lot of that when you look at the cross-sale service and marketing is our ability to get into more and more systems. So there are billing systems, there are marketing systems and when we're integrating into those systems, when you're, when you're communicating with an automation with the AI when it comes back and, and does the full process and takes a sale or handles a service inquiry end to end, that's when we do our, our best. But that needs backend integrations. So we see this as really you integral, if we're really going to scale to even a higher level of, of automation. So where we, we cross 50 or 60% of volume gum store platform, we may have automated, 20%, 30% of that. And there's still a fair amount on human agents. The only reason human agents are, are still around in contact centers is because of backend systems that are not API enabled. And our ability to interact with interact with those like our tenfold acquisition gives us more ability to integrate with those. So, so that's really key. The second part is sometimes they bought off on a voice platform, like a genesis and they spent money on it and it's capitalized. Maybe it's an enterprise system. And so unseating that is one thing, but riding over that, if we can put our AI onto that platform, then we have a better way to get more volume. So all of that, whether they're doing voice calls, we automate the voice calls on their legacy platforms, whether we bring that traffic on our platform, we do end to hand automations with hitting the backend systems that all drives volume, which will drive more revenue for us. So, that's how we align everything with our partnerships.

Thank you. Ladies and gentlemen, we have reached the end of our call today. I will now turn the call to Rob LoCascio for closing remarks.

So thank you so much for your time today. And I want to iterate our focus on leading in the AI and automation space and also delivering profitable growth is obviously a focus of ours. It's, we put that out, I think it was February, where we said we were going to head towards that. We were burning over 30 million a quarter at that time, and now we're heading into obviously generating cash, a positive EBITDA, which was our goal. And we did it very fast. As we can see, a lot of other people in the space are starting their restructurings now, and they're going to have to go through all that into '23. Our goal was to get it all done in '22. It gives us a fresh P&L and a focus in '23 to drive growth and profitable growth. And once again, I want to thank everybody in the company a lot of hard work in Q3. We did a lot of restructuring. It ultimately drove the results we have today and very excited that to become a tier one provider is something that we dreamt of four and a half years ago, five years ago, and we're now doing something that no one's ever done. We've created an alternative to traditional voice. And that's a testament to the hard work of everybody in the company, even in these very difficult times. So looking forward to next quarter and thank everybody, our shareholders and also our employees for all the great work. See you next quarter.

Thank you. The conference of LivePerson has now concluded. Thank you for your participation. You may now disconnect your lines.