LivePerson Inc (LPSN) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to LivePerson's second quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, the operator will give you instructions. As a reminder, this conference is being recorded on Tuesday, August 3rd, 2004.

Speaking on today's conference will be Robert LoCascio, Chief Executive Officer of LivePerson and Tim Bixby, President and Chief Financial Officer. I would now like to turn the call over to Mr. Bixby. Please go ahead, sir.

Thank you very much. During the course of this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. Any such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. It is routine for our internal projections and expectations to change as the quarter progresses. And therefore, it should be clearly understood the internal projections and beliefs upon which the Company bases its expectations may change prior to the end of the quarter. Although these expectations may change, we are under no obligation to inform you if they do. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actually events or results may differ materially from those contained in the projections or forward-looking statements.

The following factors, among others, could cause LivePerson's actual results to differ materially from those described in our forward-looking statements. Our history of losses; potential fluctuations in our quarterly and annually results; responding to rapid technological change and changing client preferences; competition in the real-time sales marketing and customer service solutions market; continued use by our clients of the LivePerson services and the purchase of additional services; technology systems beyond our control and technology-related defects that could disrupt the LivePerson services; risks related to adverse business conditions experienced by our clients; our dependence on key employees; competition for qualified personnel; the possible unavailability of financing as and if is needed; risks related to the operational integration of acquisitions; risks related to our international operations, particularly our operations in Israel in the current civil and political unrest in that region; risks related to protecting our intellectual property rights; potential infringement of the intellectual property rights of third parties; our dependence on the continued use of the Internet as a medium for commerce and the viability of the infrastructure of the Internet; and risks related to the regulation or possible misappropriation of personal information. This list is intended to identify only certain of the principal factors that could cause actual results to differ from those discussed in the forward-looking statements. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission for a discussion of these and other important risk factors.

Now, I would like to turn the call over to LivePerson's Chief Executive Officer, Robert LoCascio.

Thanks, Tim. Good afternoon everyone and thank you for joining us. I'm very pleased to announce that our second-quarter results have slightly exceed the guidance set during our previous earnings conference call. During the second quarter of 2004, we generated record revenues of 4.3 million, up 54 percent from a year ago and up 7 percent sequentially over the first quarter of 2004. We are also pleased that we had EBITDA per share of $0.03 and GAAP earnings per share of $0.02, in line with our previous guidance. Later in the call, Tim will provide you with a more detailed financial overview.

When we introduced LivePerson, our goal was to be the leader in providing chat for customer support and sales to companies doing business online. Our name, our product lines and the way we sell have been based around winning in this market segment. Today we own a significant portion of this market and are growing at about 50 percent annually. Many competitors have copied our product features, follow our pricing, and compare themselves to LivePerson as the industry standard. We emerged the leader in a market that once had more than over 20 competitors. As the world of communications evolves from phone to online, we're leveraging our expertise in chat as a stepping stone to deliver on the second phase of our strategy.

In early 2003, we began developing an integrated communications platform that includes email, chat, and self-service knowledge bases. We delivered the first version of this product in Q4 of last year, called Service Edition-Platinum, and began offering it to customers in the first quarter of this year. As call centers transform into contact centers, integrating voice with email, chat, and self-service, follows the evolving needs of this segment.

In Q2, more than one-third of our new Service Edition deals included the email and our knowledge-based products combined with chat. Over the next two quarters, we will redirect our marketing, branding, and product packaging efforts to reflect these changes. We are launching new company branding with dramatically-updated messaging, marketing and sales campaign. By mid 2005, we'll have significantly solidified our position as an online communications provider as a result of these efforts.

What makes us different from other companies that have outlined a similar vision in the past is the following. In 1999 and 2000, enterprise ECRM (ph) companies with strong email products or knowledge bases wanted to manage the entire customer experience. These companies acquired chat and self-service companies and tried to integrate them onto a single platform. These efforts fell because in '99-2000, customers were looking for best-in-breed point solutions since the products were still rapidly evolving from a feature perspective. Today, the capabilities of email, self-service, and even chat are in many ways well-established. However, call centers now want more advanced integration between those individual channels. Furthermore, we did not acquire our technology. We built the individual communication components of the email, chat and knowledge base and have created a truly integrated service for our customers. Each individual component is strong on its own. Integrated together, they offer tremendous value for our contact centers.

Our success is also based around our focus on what we do best. That is providing online communications services on a hosted basis. We are not a CRM, ECRM or whatever flavor CRM company is in vogue today. We do not compete with Siebel, People Support, or Sales Force.com. We integrate with them. It would be presumptuous for any company to say they can own customer communications as well as the management of the customer's data. There are real structural reasons that telephone service providers don't provide customer relations software. This is why Verizon and Siebel are very different companies. The online world is no different.

Our next product release, slated for late September, will continue to deliver on the vision that communication services for contact centers can be provided as easily as getting a phone line for your home. The days of selling expensive hardware and software are ending. We are in a solid position to capitalize on this shift. Communication services have predominantly been provided on a hosted basis, but when you buy a cell phone or a landline, you don't put a server or switch in your house; you just purchase the access. And our service enables call centers to move to this same outsource model.

Let's now turn to some operational improvements we're seeing in our business. On the last call, Tim and I spoke about the rate of adoption for Sales Edition. We have increased our marketing resources and upgraded our sales process and sales rep procedures. We should start seeing this product line pick up steam once again with some large retailers coming on board soon. Sales Edition continues to be a big hit with our current customers, and companies like HP and Verizon continue to expand their service. Tim will outline some specific ROI results within new Sales Edition implementations when he speaks.

In the second quarter, 60 percent of incremental corporate sales came from existing customers. So, we continue to see a healthy mix of new sales and existing customer sales. The Service Edition sales team that began selling in Q1 is predominantly selling the integrated communication platform -- email, chat and self-service. This team is ramping nicely and is currently at about 40 percent of quota. And finally, our small-business group also started selling a more limited version of the integrated platform about a month ago and is seeing also positive results. Their group sequential growth was up over Q1 a little bit.

On the last call, we spoke about specific customer issues in Q1 that would have an impact in Q2 and the year. This is primarily attributable to three customers, accounting for around 40,000 in lost (ph) monthly revenue as a result, which is an annual impact of about a half-million dollars for the year. 500,000 is a small number, but as you know, with our recurring revenue model, it gets harder to make up lost revenue as we move towards the latter part of the year. We are working very hard to close this gap, because we are responsible for hitting our short-term revenue goals; however, we've shifted revenue guidance for the year to a range of 18 to 18.5. While still very possible to hit the 18.5 target, we want to be realistic in setting expectations for our shareholders. More importantly, this lost revenue was a one-off event during Q1, and our current customer retention rates are high and are healthy again.

In a technology market in which many companies face flat or declining revenues or are burning cash, LivePerson has delivered consistent positive performance. We're growing over 50 percent annually and are generating nearly 1 million each quarter in free cash flow, which is more than double the prior year.

As some of the know, Tim and I have created a partnership that is a balance between being opportunistic while also being aware of the time and investment it takes to make good decisions. Our goal is to invest our cash intelligently so we can provide great products and services to our customers, and also to take appropriate risks that will enable us to accelerate growth of the company. We are excited about the transforming events that are taking place, and we have a great team that is executing on both short and long-term goals. We look forward to seeing some of you at our Customer Summit here in New York City on September 21st. We will be unveiling the new branding, our product release, and messaging for the entire company.

Thanks for joining us today. I'd like to now turn the call over to Tim to review the financial results and outlook in more detail. Tim?

Thanks, Rob. We're pleased with the second quarter and our continued improvement in revenue and in gross margin. We exceeded our expectations for the quarter as revenue grew 7 percent versus the prior quarter, and increased 54 percent from the same quarter in the prior year. Our revenue growth exceeded our guidance by 1 percentage point, and our GAAP EPS and EBITDA per-share were in line with our previous guidance. 100 percent of the incremental revenue in the quarter dropped to the contribution line, as our cost of goods sold remained flat quarter-to-quarter from the first to the second quarter, while revenue increased 7 percent.

Professional services revenue accounted for a large portion of revenue during the second quarter. About 6 percent of sales versus 3 to 4 percent historically. This is typically driven by the increased usage of Sales Edition by larger clients that prefer additional consultantive services across multiple implementations of the Sales Edition product. Our client roster has continued to strengthen. Clients added recently include American Airlines, Bell Quebec, EDS, Stanley Works, Steamboat Ski & Resort, Verizon Online and Verizon Wireless.

Existing clients adding expanded services recently include Ameritrade, Bell Canada, Fujitsu, Neiman Marcus, Rackspace, Toyota, and Verisign. Growth from new customers continues to be complemented by strong growth from existing customers. In the corporate side of the business, 60 percent of sales growth in the quarter came from the continued growth of existing clients, while the 40 percent balance came from new customers. This ratio was approximately 75/25 in the prior quarter.

Also during the quarter, our Service Edition product made up 65 percent of gross recurring revenue growth, driven by greater sales of the Service Edition Platinum product. Fully one-third, as Rob mentioned, of the Service Edition deals in the quarter included the newly-released email and knowledge base capability in addition to chat.

We also had some very impressive success stories over the past quarter with Sales Edition implementations. To give you some flavor of the return on investment experienced by our clients using the Proactive selling product, let me walk you through an overview of one recent deployment. This client generates more than $1 million in sales each month through chat. And generates an approximate 500 percent ROI based on a joint analysis generated by the client and LivePerson working in tandem. Close rates are as high as 50 percent, meaning about half of the chats result in a sale. Using the Sales Edition rules engine, we enabled this client to monitor, track and filter millions of random Web site visitors down to the meaningful subset that can drive this level of incremental revenue.

Customer retention has improved since the last quarter, and is on track to be at or better than historical rates. In specific terms, customer attrition was 40 percent lower in the most recent 90-day period ending July 31st, versus the same period one quarter earlier. Our expectations shared on the last conference call, that the lower retention experienced last quarter was a short-term spike, is being borne out thus far by hard data. While, as Rob mentioned, it will be difficult to make up the revenue loss due to this spike in attrition, gross sales and retention rates are back on track. It is the nature of the recurring revenue model, that recurring revenue lost in the early part of the year has a greater impact on the full year than if it were to happen in the latter half of the year. I will also give a bit more detail on our Q3 and full-year expectations at the end of the call. They're also detailed within the press release from earlier this afternoon.

I'll now review the financial results for the quarter ended June 30th. For the quarter, we reported record revenue of $4.3 million, which was a 7 percent increase versus $4.1 million in the prior quarter, and a 54 percent increase versus $2.8 million in the second quarter of 2003.

Cost of revenue in the second quarter was unchanged at $0.7 million, resulting in overall gross margin of 84 percent, versus 83 percent in the first quarter. We expect the pattern of slight quarterly improvements in gross margins to continue.

Product development expense for the quarter was up slightly to $0.5 million versus $0.4 million in the prior quarter and versus $0.4 million in the comparable quarter in the prior year.

Sales and marketing expense in the second quarter was flat at $1.2 million versus the prior quarter and up from $0.9 million in the same quarter the prior year.

G&A expense for the quarter, excluding amortization of intangible assets, was $1 million, up from $0.9 million in the prior quarter, and also in the first quarter of 2003. We recognized amortization expense of $0.2 million in the quarter, and we'll continue to have amortization expense related to intangible assets at approximately these levels going forward.

EBITDA, or earnings before interest, taxes, depreciation and amortization of non-cash compensation, was $1 million, up from $0.7 million in the prior quarter and versus $0.3 million in the prior year. EBITDA per share was $.03, versus $0.01 in the prior year. The reconciliation between EBITDA and GAAP net income is provided in the financial statements accompanying our earnings release.

Net income per share in the quarter was, again, positive at $0.02 compared to a penny in the prior quarter and breakeven for the first quarter of 2003.

Turning now to the balance sheet. Our cash balance at quarter end was $11.4 million, up from $10.6 million at the end of the first quarter. Cash flow from operations was approximately $0.8 million and was offset by about $80,000 in capital expenditures.

Accounts Receivable was flat at $1.1 million. Deferred revenue was down just slightly at $1.2 million versus the prior quarter. DSOs are consistent with prior periods, running at less than 30 days.

We would now like to outline our expectations for near-term financial performance. For the third quarter, we expect sequential growth of 6 percent and revenue of $4.6 million, and EBITDA per share of $0.03, and EPS of $0.02 per share. We are adjusting our full-year revenue guidance to a range of from 18 million to $18.5 million, with no change to our previous guidance for EBITDA per share of $0.12, and EPS for the year of $0.08. While achieving our previous full-year revenue guidance of 18.5 million is still doable, it would require a 10 percent sequential growth in both Q3 at Q4. And thus, we are erring on the side of caution until we have the actual third-quarter results in hand.

Capital expenditures will be approximately a half a million dollars for the year, and we currently have 38.4 million fully diluted shares outstanding.

From a tax perspective, due to NOLs, we don't expect a material tax provision in 2004. We do expect pretax earnings to be fully taxed at 40 percent beginning in calendar 2005.

That covers the financial review. And at this point, we would be happy to take your questions. If we could request that the operator rejoin the call and give instructions for the Q&A session.

(OPERATOR INSTRUCTIONS). Michael Roesler, CJS Securities.

A question in terms of how customers are viewing the Sales Edition and Service Edition -- I'm wondering if there's maybe any confusion or are customers waiting to see maybe the two products come together that might slow sales growth in the short-term?

We are going to bring the products together from a sales perspective, but today the sales force is out selling each individual product. It's going to change shortly in that we're seeing a change in our customers. When we sit down with them now, it's not about they're doing sales and service; it's about how they are communicating online. And they may saying, "well, we want to implement chat to start, but we want to do email as a follow-up or vice versa." So that's why we're really shifting how we are going to be selling the product. But today, our sales team is still very focused on selling Service Edition, selling Sales Edition as two separate products until we do the training and bring them forth.

How do you think that migration or merging will affect price points?

From what we have seen in this recent quarter, there's no price compression. It just creates greater opportunity. And that's really what we're trying to do, is align with the customers. And so we're making the shift in branding, in messaging and product naming. And all that, actually we started over a year and a half ago. And we're actually delivering the external phase of that in September/October. We are on target. It's pretty much on plan.

And as part of this rebranding effort, do you anticipate an increase in sales and marketing expenses?

Nothing that will have any impact on this year. So, obviously we haven't given guidance for next year, but right now, we pretty much don't see any increase, or I baked it into our plan for the year to increase expenditures at the end of the year. But it's good; it’s exciting. I'll be honest with you, internally we're very excited about it, and LivePerson as a company has been known as a great chat company. And our name represents chat. Like I said, top competitors will name themselves "Live-something." But we're really going to make a shift in the next two quarters so that when our custom looks at us, they're looking at us as a communications platform versus just chat. And even if you today go on the Web -- and from a marketing perspective, we start to market and Knowledge Base and we're selling them today. So we're doing this because we see opportunity and there was opportunity from a plan from a year and a half ago.

A final question for now -- as you bring these products together, does it open up new opportunities at customers? How will it impact your future growth, I guess, is the real question?

We are doing it because of growth. We see a greater opportunity with our customers. If we look at some of the Service Edition customers, they bought some Sales Edition products, but we see vice versa across the base. Yes, it creates greater opportunity. The one thing we want to do is really reduce the friction to market. And part of the rebranding of the product and the remessaging of it is just to reduce the friction because people really come to us for chat. Our current customers know us as chat, and we want to make sure that if they are thinking about buying another product like email, that they basically look at our products. Because we really have a very strong email product, and when it's integrated with chat and with the Knowledge Base, it's very powerful. We are really talking about bring the call center and all the communications together.

Brad Mook, Emerging growth equities.

With respect to your sales force. Correct me if I'm wrong, didn't you just a couple of quarters ago change your sales strategy to segregate the two products?

Yes, the current sales force is split between Sales Edition and Service Edition. That was done about three quarters ago. And so, they will continue as two separate groups, but they'll basically be cross-selling the platform. So we're not changing anything short-term right now, but they will have the opportunity to sell the entire platform.

So in what way are they still segregated; are they two separate groups if they are both selling the same product offering?

There's still -- they have a lead product. And this is a short-term thing, so there's a lead product in which they sell. And our marketing activities, let's say around Sales Edition -- those leads will come back to the Sales Edition team because they are experienced at selling it. But we want to still give them the opportunity to go across the customer. Once again, a lot of this has to do with -- I sort of went out into the base and new customers on Sales Edition, and we have these conversations about Sales Edition, the Proactivity and the use of our Proactive features, where we can identify a customer and their needs.

What has come of it is that the site owners are saying, "look, if you can use this to generate a chat, where we can identify that a customer is having a problem, let's pop up a chat, why can we use that same technology on our support side to generate an email link. Why don't we match the right channel with the right customer need?" And that is what we're seeing and we want to be able to give our sales team the tools to be able to provide that product. Up to now, they would be selling Sales Edition, and then they would bring someone in to do Service Edition. Now, with a single platform, they can go across with that sale.

So how will you determine who gets to knock on which doors going forward?

It's where it is right now. I mean, we are maintaining our place where basically a rep has a territory and they have a lead product line. And this is where we are going to do it for the short-term. Will it change in the future? It may change in the future where those two teams come together and they're selling differently, but today we don't want to have any impact on our sales team. Let them lead with the product that they know, but let them have the opportunity, the collateral material, the marketing material, the messaging behind it to go across that customer base and create greater opportunity.

Touching on the Q3 sequential growth guidance of 6 percent, I think a lot of people are going to key on this that in Q2 you had a couple of issues, you had some attrition, you had mentioned some issues generating new sales leads for Sales Edition. A couple of issues like that, which you seem to be indicating have gone away. So with retention back up and more confidence in your sales pipeline and your ability to convert leads, why are holding the sequential revenue growth down at 6 percent? Why are we not seeing a reacceleration?

It's truly really a matter of timing. You know, these are not just isolated -- (indiscernible) in a specific quarter. So I think what we are gave guidance on in the second quarter -- on the first-quarter conference call for the second quarter -- was things that had already occurred in the first quarter and things we could see coming early in the second quarter. And so, there is just more of an overlap, I think, beyond just ending at the end of the first quarter. So, while what we see now is the attrition rates have returned to what we think is a more normal level, again, that has to sort of work its way through the system. You have to get a few months under your belt before that drives the financial results. So, I think it's a combination of caution and trying not to overreact and sort of whipsaw the guidance back and forth, but to just be conservative and steady. And we see it improve, then we will adjust the guidance further.

Do you have confidence that it will improve as we look at the sales force having expanded and your sequential revenue growth having decelerated?

Yes, the things we are looking at are the pipelines that reps have, the kinds of names they are speaking with, the level of context we're getting at large corporate deals. The penetration of Platinum, where a third of the new deals included a component of Platinum, either the email or the FAQ. We've got five customers now that are active users of both Sales Edition and Service Edition. So all of the signs are there of everything we put in place showing specific improvement. And again, it's just a matter of time before that sort of generates up through the financial results. But the targets are there; the new teams are coming up to speed; and we are seeing the customers broadening their acceptance across all the product lines.

Have you been able to cross-sell or upsell the Island Data customers?

To some extent, it has not been dramatic. The primary driver there is they have not yet been migrated onto the LivePerson platform. And that is, as we planned to do at the outset, was to run that platform in parallel so it will sync up with our new product releases in September. And so, those clients will then be moved over to our platform. At that point is really the appropriate time to move them into a broader use of the products.

And on the competitive front, now that your product offering is expanding beyond chat and you're really changing the face of the Company, are you seeing the competitive landscape changing? And has that been affecting your ability to generate business?

We see it changing. It has expanded. And so, now we are competing with a different group of companies in chat -- excuse me -- in the email and Knowledge Base space, so it is interesting. I mean, it's like a win-loss; we're doing this because we can expand, but we're learning a lot on the sales side as we win and lose deals. And then we get a stronger strategy in going after these competitors like we did effectively in the chat space. The chat space was no cakewalk. It was 20 guys, some people giving it away for free at one time. And we managed to get through that, and that's what we're doing right now in the Knowledge Base. I think what is very powerful is that most of our competitors are really -- even though they say they've got integration, they've got platform and they've got all this great stuff, the reality is they have one product that is really strong and the other two products are very weak. And the integration between them is almost nonexistent, if you really dig into their products. So it really gives us an ability to, I think, go out and capture some of that space. And so, it's good.

I'll jump back into the queue.

Mike Shonstrom, Shonstrom Research.

Just a little update on where you stand in terms of upgrading the Knowledge Base and the email products so that they are competitive with what's out there. The upgrading process, are your competitors continuing to upgrade their stuff as well? Is that a moving target? How does that stand?

The release of the platform in September, I believe, will get us to being a leader in the email and the Knowledge Base space. We learned a lot through the Island Data acquisition. That is why we bought that company. And we're able to take at a very sophisticated Knowledge Base. We actually took a core of their technology and understanding of it and applied it to our Knowledge Base. So, 50 percent of success in a software company is great products and the other 50 percent is execution on your sales marketing and your service. And I think that's where we are very strong. So yes, the products will be there when we release them in the late September/October/early October time frame.

In doing the call, you were talking about upgrading and rebranding and whatnot. Is that going to be coincident with the release of that integrated product?

Yes, at the Customer Summit that we're going to have here in September, where we take our largest customers and bring them together like we did last year, we'll release the new branding, the messaging, the platform. We'll do demos of it. We'll even show -- we talked about Voiceover IP, if you remember a couple of months ago. We'll probably show a first level of integration with our Voiceover IP piece of our platform. So it's really where we are going to do the launch, and then we are going to take it forward from there. But the reality is that we started this in Q4 of last year by having one-third of our sales attributable to more than just chat, and so we are executing on that plan. It takes time. It's like anything. We do things around here -- I don't know if they're faster or slow, but they are the right pace. And so we want to make sure we get to the market and do it right so that we have long-term success and generate cash.

A final question, I thought I heard you guys say that your sales and marketing was not going to increase sequentially that much. And yet, you're talking about upgrading resources, which in my mind means increasing sales force and marketing expenditures. Did I understand that or did I misunderstand what was said?

Well, just to clarify that, we have been increasing our sales and marketing expense, I would say relatively consistently over the past three quarters. And baked into the guidance for the rest of the year is relatively modest improvements in bottom-line, and the driver there is increased sales and marketing expense. So we don't think it's going to affect -- the guidance we're giving includes the impact of that increase. So we have increased a little bit each quarter, and we will continue to increase it.

But not a big lump impact in any given quarter?

No, it will be more in line with the increases you have seen since Q4 of last year.

And one follow-on, you mentioned three customers you lost in the prior quarter -- I remember eBay as being the principal loss.

Yes, there was one Island Data customer and there was the bank. It was not attrition; it was a conversion from a pilot of Sales Edition into a sale, which they did not do. So the three customers, eBay being one and the other two.

John Malone, stockholder.

Yes, I've just got one really quick question. Other than email chat, are you thinking about adding any other marketing features?

Our focus right now is really on the chat, email and Knowledge Base. And we do inbound and outbound for chat and email. And we haven't done any outbound email stuff, so we aren't adding anything on the marketing side. Although it's interesting, our decision makers on the Sales Edition product line have been predominantly heads of marketing who want to basically create a conversion opportunity. And there are some things they're looking for on their side like greater form of analytics. We do a piece of it right now, but we haven't productized that.

Denise Rush (ph), Roth Capital.

Tim, could you give us the breakdown of service, sales and pro for the quarter? I think you said that Service Edition was 65 percent with one-third being the Platinum?

Yes, a couple different breakdowns there. Between sales and service, the breakdown is about 65 percent service, 35 percent sales. That's sort of a top-level breakdown. And then within service, that same ratio, 65 percent straight chat, and about 35 percent the Platinum products, including email or FAQ. And then the overall breakdown among the product lines is not changed dramatically, so it is still -- its continued at the roughly 45 percent service, 35 percent small business, or pro, and the balance 20 percent in Sales Edition.

Okay, so then the 65 percent you're talking about Service Edition was the growth quarter-over-quarter?

No, that is the breakdown within the -- of the incremental growth, 65 percent was service, 35 percent was sales.

Then when you talked about the 500,000 for the total year, the attrition amounts, the total year being 500,000, was the majority of that -- or can you give us a breakdown of how much of that was just with eBay versus the other two? I'm guessing that the larger part of it was just with eBay.

The big picture was probably a third each between those three. They were all within a range. We're not getting exactly specific on each one, but they were all within the same range of revenue per month. EBay was a little less than one of the others -- (multiple speakers)

The one that did not convert was not at a monthly revenue rate? That was just a non-convert, right?

Well, our pilots are paid pilots, and so when a pilot does not convert, it does have revenue, in fact, and while that is not truly attrition because they're not yet a long-term customer, a true customer, we do count that. We count that as attrition because it has a revenue impact.

That's relatively low, you know, under 40,000, correct?

Yes.

Well then, when you talk about your win/loss rate, can you give some more characterization, maybe Rob, in terms of the conversion rates? I think you talked about last quarter, 70, 80 percent conversion rates when you have a new customer and a pilot or in a trial. And talked about those rates staying up that high. Could you talk about that a little bit? And then discuss what you meant by win/loss rate? Is that more skewed in one product versus another?

We still say if our customers do the proof of concept on Sales Edition, then a high level of them convert. It is still in that range. We had that one customer last quarter that did not, but the other ones have gone forth because we do a good job at pretty much doing an ROI count with them before we go live. On the win/loss percentage, we haven't really given any numbers, and I think it's premature because we just have really a quarter and a half -- we are on our second quarter of results from winning against some of the leaders out there in those specific markets of email and Knowledge Base. So I'd rather get another quarter under my belt and then I can say "okay, here's what we look like when we run up against these guys." I'd say about 50 percent, though, are probably greenfield, where they're just customers that we've marketed to, or we are out practically getting, and there isn't an incumbent in there or we're not competing with one of the leaders in the market. It turns out a big space, and it's probably enough for 10 of us to compete in. So, we are out there and we're not seeing a leader in email or Knowledge Base in every deal to that.

You announced several large customers, new in the quarter.

Yes.

Is the fact that guidance wasn't kept up -- not kept up, but rather why you don't think you could hit the high end of guidance, given that you added so many larger customers? Is that having to do with implementation times and larger seats?

Yes, I mean, the customers tend to start with a small level of seats, and then they work themselves up. They can start with 5, 10 seats of the product, and then they start to accelerate. It's like anything, when something negative is happening, it shows up two quarters later. When something positive, it's the same thing. It's just that there's a lag effect in that customer growing. As we said, 60 percent of our growth in the quarter came from existing customers adding new seats. So it happens, but it happens over time.

But, in terms of the difference in implementation times, prior to when you started getting traction in the Sales Edition and Service Platinum -- how much are the implementation times different? Is it 30 days going to maybe 60 days because they are larger companies?

No, it is the same. When we do a pilot, we'll do a 90-day pilot, or what we call "proof of concept." The first 30 days are basically training and going live, and there are 10 lines of HTML code that goes on the website. And then they have to download the 2 MB download on the desktop of the agent. And then we train them for two, three days. And then we collect the data, we build the Knowledge Bases, and we usually say that's about a 30-day process. Some people will do it in two weeks if they put their resources on it. So we don't really have those implementation things. Once they go live, then they want to get the data. 90 days later we conclude the proof of concept, and then from there, we all kind of sit back and say "okay, you should be staffing at these rates. You may have five operators, you need 50. Okay, let's go over a certain period time." We saw that at companies like HP and Verizon. Started with a handful, but have grown nicely as they have been a customer of ours.

Okay, and then, could you just talk about the competitive environment for your Sales Edition product? I think we know that there is a couple small companies that are private that have a product that maybe isn't as feature-rich and it seems to be widely discounted to yours? Can you just give us some idea of what -- if you run into those competitors in that space and what you think of possible new entrants into the Sales Edition product?

Yes, I mean, there's -- we had traditional chat guys who are of the chief chat companies. And they would traditionally try to undercut us in price. And then when they see us have a new product, they try copying that product. But, we have the largest base of customers in the market with that product line today. And I think we also have some of the best-named companies. And that is consistent when we look at our Quick to Chat business; we have the largest names in the industry and the largest revenue. And then, they will pick up small guys who are very price-sensitive. We do not really want to offer this product or drop the price on it so that we are picking up small companies, and now we are commoditizing it. This product is a very sophisticated product, and it has a lot of power behind it. And we want to make sure that we are getting our revenue that we want to on that. Yes, we are going to have competition, and they're going to try undercutting us, and they may win some deals with companies that don't care. And that's life.

Brad Mook of Emerging Growth.

A couple of follow-ups. The new customer additions in the quarter obviously start small and move along over time. Can you give us a sense as to how your customers in general are scaling? How many have reached a significant size? I don't know whether that's $100,000 a quarter or $50,000 a quarter or how you define that. But, obviously, a couple like HP and Earthlike have scaled to really significant sizes. What is the rest of the base doing?

It's a pretty steep distribution, meaning there's -- if you graph it out, there's a long tail of 3000 small-business customers. And then a couple of hundred larger corporate customers, and then a small number of what I would term as maximum users, which would be like an HP or a Bell Canada or a Qwest, where we have penetrated three or four or five distinct divisions, and we are really embedded across the company. So, the goal is obviously to move category 1 to category 2 and category 2 to category 3.

I think the most recent success story I would say is with Verizon, where we started in one division and have had very good success with the first POC, converting to a long-term contract and then relatively quickly have moved to begin a pilot with a second division. So that's one where -- initially, when we signed that customer up, we saw a lot of potential, and that is starting to show us that that is the case. In terms of numbers, I think that the telcos continue to be a very strong opportunity. Hardware and software as well. But it's really a matter of hitting the right company with the right internal aggressiveness to move it across multiple divisions. HP and Verizon have an internal culture to do this, and have really helped us in a partnership. Other companies are a tougher challenge, and we have to push a little harder and it takes a little longer to move across divisions.

Do you think of many of the new customers that you've signed over the past couple of quarters, that most of them have the potential to scale over time? Or do you think most of them become modest users that plateau and a few break out?

I think it's probably -- I would say all of them have the potential to scale, but again, its going to follow the same pattern in our small number. I think absolutely have a potential to be as large as our share of top five customers. I think the density of the five potential customers is greater, meaning, if you look at that list of names that we put out there, it is a longer list than you've seen, which I think opens up more opportunity for us.

On the first services, up a higher percentage of revenues than typical this quarter. Is that something that you'd expect to continue going forward? Or is that an anomaly? How should we look at that going forward? And why didn't that affect gross margin?

It is really -- to answer the first question -- it really depends. It's not seasonal; it's really customer-specific. So when one or two Sales Edition customers get real focused on internal improvements, it'll spike that number up. So you may remember in the fourth quarter of last year, we had a similar surge and that was driven by one or two customers -- same thing again this quarter. There's just a cyclical pattern within these larger companies where they really focus on improvements and then they go do professional services with us. And then they'll let that sit and gather data and gather learning from it. And then they'll come back and do it again. It might be one or two or three or four quarters later. And so that's what really drives that number.

So there will be variance, and it is not predictable?

Again, it has been within a relatively small range of, say, 2 to 6 percent, but it just has a pretty big impact if you just isolate one quarter's growth.

Any effect, or lack of effect on gross margins?

Really, just means the same group of people are probably working harder nights and weekends to get things done. But it's really a fixed cost of professionals versus server costs or network infrastructure, those kinds of things.

And then just finally, on the partnership side, you've announced a couple of new relatively small partnerships. Can you just give us some thoughts on that strategy and whether it is bearing any fruit?

Because we now have the combination of the email chat and the Knowledge Base, we cut a deal with some of the outsource call centers. I think we spoke about this maybe on the last call about how this was a target of ours. And so, we have gone ahead and struck some deals. One of them, the outsource of Knoah in India. They are the outsourcer for Earthlink and they are now selling our product out to customers. So they wanted an integrated platform, and now we can give it to them. And they'll also be testing out; they're helping us with testing some of the Voiceover IP stuff since they are in India. And that is obviously a need of theirs. So we just think strategically it sort of plays into where we are going now as a company.

Greg Goldfetter (ph) of Gardner Lewis Asset Management.

Just a real quick question -- you guys guided for $4.6 million next quarter, which gets you up to 13 million-ish for the year and then 18 to 18.5 million for the entire year. Does that imply -- I think what you are saying is that growth in the fourth quarter seems like it's going to get back closer to normal? 10 to 12 -- 8, 9, 10 to 12 percent sequential topline growth? Are you seeing that in the deals in the pipeline now that you have to get you back to those levels?

Yes, we are seeing -- again, we're not giving fourth-quarter guidance, but we are seeing enough in the pipeline to suggest that something in that range is doable. As I said, hitting 18.5 or above requires 10 percent back-to-back. And so, we're really just, again, looking at the whole pine and backing it off, but with the goal of not dramatically whipsawing it every quarter on people, but just taking it conservatively.

Ross Kohler (ph) of Deiker (ph) Management.

Can you guys talk about the current composition of the sales force and maybe get into what kind of productivity you're seeing?

Yes, we've got ten sales reps, divided into two teams. The total number has not change dramatically in the last couple of months. It grew relatively quickly from three at the end of last year. We're looking at bringing on additional reps over the next two quarters, so the size is about right. The newest reps are 40 to 45 percent of quota, so they're coming up well, in line with what we spoke about 90 days ago. So, we think that two things are really going to deliver results. One is that we've got some good data from having dedicated sales teams on each of the products. We've now got customers that are using both products, and so we think that as we bring it all together under a common branding and aim to pitch the entire product line to specific customers, we've now got to get a foundation to do that, enabling the reps to sell all products, which is -- again, that's going to happen over the next couple of quarters. We'll remove some of the final obstacles from the sales process.

And in terms of the number of pilots that commenced in Q2, was there any marked difference from Q1 or maybe Q2 of last year?

It's not a specific number we disclose. Just to give you a flavor, it would be -- I would say it would be in line with the last three to four quarters.

(OPERATOR INSTRUCTIONS). Bob Menerech (ph) of Arbor Capital Management.

A nice job of keeping your hands down and executing on your business plan. Quick question -- I don't know if I missed this earlier, but the pricing environment that you are seeing with these new customers for your various products?

Yes, we have not seen a tremendous amount of price compression in the product lines. Now that we're selling more than just the chat product, we're sort of sustaining the pricing that we have today. I do feel, though, long-term, chat will have pressure on it just because it is becoming a little bit more mature. But we just don't see it today. And part of that is because if we combine it with, let's say, Sales Edition, that product has a tremendous amount of value. And so we are still selling it at the price points that we went into the market with. So we have not seen anything yet today.

And if you could just quickly refresh me on what those costs are per month per seat for the chats, Platinum and Sales Edition?

It is $2500 a month per seat for Sales Edition. It's $500 a month per seat for Service Edition. And Platinum is at a 750 seat. And then, if you want Knowledge Base transactions, it's sort of grouping in Knowledge Base on a per-transaction basis.

Any thoughts yet on the pricing for your new platform that you're launching here in the next -- (multiple speakers)

Yes, we will maintain -- it's close to the structure of (indiscernible) seat, but we also will be moving to a per-transaction model, too. Our goal is really to move these call centers away from being -- they're buying software in their head, to buying communications. And communications are usually charged on an incremental basis, per minute, per chat, per whenever, per session. And so we'll have both pricing models. And we built into the platform the ability to track that on a customer basis and then bill on that too. And so we think that will allow us to open up some markets. For instance, the outsourcers, traditionally our partners now, don't sell -- they sell on a per-minute basis. So they are charging for their labor on a per-minute basis. They want to sink up the chats with a per-minute charge. And so, we'll also be doing that with the platform.

There are no further questions in queue, so at this time, I'll go ahead and turn the call back over to management for any final comments.

That is all we have. We want to thank everybody for joining us. Good afternoon.

This concludes today's conference call. We'd like to thank everybody for their participation. You may now hang up at any time and have a great day.