LivePerson Inc (LPSN) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the LivePerson Q3 2004 Earnings Conference Call. (Caller Instructions)

As a reminder, this conference is being recorded on Thursday, October 28, 2004. Speaking on today’s conference call will be Robert LoCascio, CEO of LivePerson, and Tim Bixby, President and CFO.

I would now like to turn the call over to Mr. Bixby. Please go ahead, sir.

Thanks very much. On the call today will be myself, Tim Bixby, and Robert LoCascio who is our CEO.

During the course of this conference call, comments that we made regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that clinical 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’s routine for our internal projections and expectations to change as the quarter progresses and therefore it should be clearly understood that 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. Actual 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 a forward-looking statement -- our history of losses; potential fluctuations in our quarterly and annual 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 their 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 needed; risks related to the operational integration of acquisitions; risks related to our international operations, particularly our operations in Israel, and the current civil and political unrest in that region; risks related to protecting our intellectual property rights or 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 itself; 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 SEC for a discussion of these and other important risk factors.

Now I would like to turn the call over to LivePerson’s CEO, Robert LoCascio.

Thanks, Tim. Good afternoon everyone and thank you for joining us.

During the third quarter of 2004 we generated revenues of $4.4 million, up 39% from a year ago and up 1.0% sequentially over the second quarter of 2004. The revenue growth was less than we expected. We are pleased that our bottom line remained in line with expectations, with EBITDA per share of $0.03 and GAAP EPS of $0.02. Later in the call, Tim will provide you with a more detailed financial overview.

During Q3 we launched a major upgrade of our entire product line under the newly created brand name of Timpani. With Timpani, LivePerson has delivered a hosted, multichannel, online communications platform, with fully integrated email, chat, and knowledge base capabilities.

The launch of Timpani is a transformational event for LivePerson and required a tremendous amount of work and focus by our team during Q3. We changed our branding, positioning, and sales processes. We continue to be the leader in real-time chat, but we now have a new set of competitors in email and self-service knowledge base and continue to make adjustments to compete in these areas.

We launched Timpani at our Second Annual Customer Summit and the summit was very well attended and a terrific success. During the event, LivePerson’s clients from around the world interacted with peers, industry experts, and a cross section of LivePerson staff to share best practices, development plans, and product previews.

The launch of this product is being rolled out to existing customers during this quarter and the first quarter of next year and we envision that nearly all new clients will buy Timpani, with at least two channels if not all.

While chat is actually used for less than 20% of online businesses today, nearly every online business has significant needs and pain points with both email management and self-service knowledge bases. LivePerson is now a player in all three markets, which are rapidly converging into one.

We are also on track to deliver our voice or VoIP capabilities in early 2005 and we did a preview of this product line at our customer summit. As in the past, we have built this proprietary software capability from the ground up, to enable seamless integration and high scalability. We provide it on a hosted basis to ensure low up front costs, easy installation and nearly immediate ROI.

We made a number of changes in Q3 in our S&M teams in support of recent product evolution. We’re building out our marketing department and hired a very senior person as VP of Marketing, Kevin Cohn. Kevin is a 15-year software industry veteran, got his start at Xerox, and was most recently head of marketing at RedDot Solutions, a global provider of enterprise software content management tools. He also had significant sales expertise, having (starred as EVP) of Mediasurface, where he grow North American revenues by 400% during his tenure.

In the short-term, I’ve assumed the responsibilities of VP of Sales and we expect to hire a new VP of Sales shortly. I’m spending my time focused on getting our sales momentum back on track. We have great products and we have a great customer-base, but there really needed to be a greater focus on developing a stronger sales process.

After assuming the duty of the VP of Sales, it was apparent to me that we also had a forecasting issue for Q3, so this translated into a shortfall on the top line, but because we have a pretty good handle on our business we still pulled in our earnings number.

My focus in leading the sales team right now is to get Sales Edition moving and providing a tight process to selling our products. We’re seeing traction in the Sales Edition product line since I’ve been on it and for instance, we converted Overstock.com, which is one of the largest websites on the Internet today, from a proof of concept to a full-blown Sales Edition customer in Q4. And they will be one of our largest Sales Edition customers.

I expect that changes we have already made, coupled with new a new sales head to drive a tight adherence to a more cohesive sales process, will enable us to return to historical growth rates shortly. Our customer base is still very strong in attrition and recurring revenues were at normal historical levels. So we’re not seeing any issues there.

As you know, Tim and I have guided this Company through a couple of major changes throughout the past five years as a public company and we have delivered 12 straight quarters of top line growth as well as a steady increase of cash flow and profitability.

Although in 2004 we will grow over 40% and generate more cash than in all previous years combined, it has definitely been a transformational year for us. We’ve been making product, people, and structural changes in the Company, but these changes are necessary to ensure that we continue to grow and give our customers the products they want.

As one of the largest shareholders in the Company, I just like (pursuing) (ph) on results, as a what matters basis, just like every one of our other shareholders. Therefore, in Q4 we are focused on meeting the expectations of our shareholders and in regaining previous growth rates and consistency and guidance.

I want to now recap the quarter.

* LivePerson generate cash flow from operations of $1.1 million.

* We launched our Timpani product line at our Customer Summit and our new branding.

* We added Overstock as one of our news Sales Edition clients.

* And we achieved bottom line expectations for the quarter.

I’d like to now turn the call over to Tim. Tim?

Okay, thanks, Rob. We’ll now sort of walk through the financial results in a little more detail.

As mentioned, we reported revenue of $4.4 million in the third quarter. This was a 39% increase versus the prior year and a 1.0% sequential increase from the second quarter.

GAAP EPS and EBITDA per share were in line with our guidance from the beginning of the quarter, at $0.02 and $0.03 respectively.

Gross and operating margins continued to be strong, despite the weaker-than-expected sales growth and I’ll give a bit more detail on our Q4 expectations a little bit later in the call. They’re also detailed for you within the press release from earlier this afternoon.

For revenue for the quarter in total, we reported $4.4 million. Revenue for small business grew consistently with prior periods while the mid-market and higher end business was slower than in prior periods, with new business and a small acquisition partially offsetting our normal impact from attrition, all netting out to the 1.0% sequential growth.

Our COGS was unchanged at $0.7 million, resulting in an overall gross margin of 83% versus 84% in the second quarter, a slight change there just do to rounding.

Our product development expense for the quarter was flat at $0.5 million versus the prior quarter and up, slightly, versus $0.4 million in the comparable quarter in the prior year. As we mentioned in the past, we do expense. To date we’ve expensed all of our development work as in incurred and so are capturing all of the costs for developing our new products, including our VoIP development work, in the expense lines.

S&M expense in the third quarter was $1.3 million, up from the second quarter, which was $1.2 million and significantly up from $0.9 million in the same quarter of the prior year. This is in line with our stated aim of continuing to reinvest cash flow in S&M as we continue to strengthen the sales force, as well as increase our discretionary marketing expenditures.

G&A expense for the quarter, excluding amortization of intangible assets, was flat versus the prior quarter at about $1.0 million and down from $1.1 million in the third quarter of 2003.

We recognized amortization expense of $0.2 million in the quarter, consistent with the last two prior quarters and we’ll continue to have that level of expense related to intangible assets at these same levels throughout 2005.

EBITDA or earnings before interest, taxes, depreciation, and amortization, was $1.0 million, flat versus the prior quarter and double the $0.5 million for the same quarter in the prior year. EBITDA per share was $0.03 a share, again, flat with the prior quarter and up from a penny a share 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, as compared to $0.02 in the prior quarter and compared to break even for the same quarter one year ago.

On the balance sheet, our cash balance increased by $0.9 million versus the prior quarter, showing an overall good cash balance of $12.3 million. Cash flow from operations in the quarter was $1.1 million.

Accounts receivable was flat at $1.1 million. Deferred revenue was down slightly at $1.1 million versus the prior quarter and collections, DSOs are consistent or slightly better than prior periods, again running at less than 30 days.

Let’s talk now a little bit about the expectations for near-term financial performance.

In the fourth quarter, we expect to see sequential revenue growth of at least 3.0% and revenue of $4.5 million or better and with that, expect to see EBITDA per share of $0.02 and EPS $0.01 a share. This again is in line with our focus on reinvesting and continuing to increase our spending on S&M. So you will see some of that impact in the bottom line results in the fourth quarter, again, according to our plans to expand that spending.

Maintaining this guidance would put us at $17.3 million in revenue for the year and would enable us to show GAAP EPS of $0.07 and EBITDA per share of $0.10 a share. This would represent a year-on-year revenue increase of 44%, a roughly 83% gross margin overall for the year, an operating margin of about 22%, and a net margin of 15%.

Capital expenditures, as stated in the last two quarters, will be less than $0.5 million for the year. That’s about $300,000 YTD, so it would likely be somewhat less than that $0.5 million.

From a tax perspective, these NOL’s, we don’t expect a material tax a material tax provision in 2004 anything more than we are already seeing and that is because we’re currently subject to the AMT, the alternative minimum tax.

In 2005, we expect to begin being subject to normal affective tax rates, but not at a full tax rate, so we’re now changing slightly our guidance. We expect to see an affective tax rate of about 30% in 2005. This is a reduction from our prior guidance, which was a 40% rate. We think right now that conservatively we should look at a 30% rate and we’ll update that as we move towards next year.

That covers the financial review and now, if we could ask the operator to rejoin the call with instructions, we’ll take questions from the audience.

(Caller Instructions) Brad Mook.

Thank you. I want to talk a little bit about the sales process issue and some of the changes that are going on there and how that effected your growth in the quarter. I guess first a small incremental revenue in the quarter. How much of that was new customer versus existing customers?

Well, the sequential growth number is small. It’s 1.0%. So, breaking it down in much detail is not that meaningful. The mix in the overall business, if you look at current period Q3 and prior, has been fairly consistent, 50 to 60%, from existing customers.

But the real breakdown in the quarter was essentially a slowdown in the corporate side of the pipeline. Small business was pretty consistent. Attrition was consistent and new deals closed a little bit slower. So there’s no real material change in the mix between new and existing.

Okay and the lack of new sales in the quarter, I mean, is that attributable mostly to just the disorganization in the sales force or is that the organization refocusing on the Timpani launch or customers delaying purchasing to get access to the new technology? Or what’s going on?

Yes, it’s really three things. I mean, one is an organization in the sales force, which now I’m running, so we’re organizing it and the processes that we’re putting in place just weren’t there. We saw a sort of a slowdown starting and then finally, it’s like enough is enough. We’re ready to make changes in the leadership of that.

The second thing is really our focus in Q3 and I think it took a little bit more effort - I know you were at our conference - is that we now have to re-teach the sales force on how to sell beyond chat. And that takes a tremendous amount of effort to get our internal people and the salespeople focused in on that. So that’s what we really have been doing with them, so they can go out and sell chat, email and Knowledge Base fully integrated. Now we’re going after a while new set of competitors, too, so they have to learn how to sell against those competitors. So that was a real focus of the team.

I think there was a little bit of a summer slowdown, but most of it’s attributable to the leadership and really the launch of the new product and now we’re out of that. I’m on the road with each of those sales guys and we put a process in place and they have a like a workbook, which they use to sell the new product line, so we’re starting to get some traction in that area.

I had a real focus in on Sales Edition, because I think Sales Edition is a place we don’t compete as much and that’s really where we talked a couple of quarters ago that Tim and I both wanted see a lot more growth.

We signed Overstock, which is probably is probably in the top, it’s in the top five websites in the world for traffic and commerce and they got a very good ROI and now we just converted them into a one-year deal. So things are starting to pick up again in that area and I kind of look at Q3 as an anomaly and a thing we didn’t want to happen, but it is what it is.

Sure. 3% in fourth quarter is not very aggressive. Rob, how long have you been really heading up the sales process and digging down into it.

It’s six weeks. I basically took everything apart, from looking at the lead flow process all the way to seeing which reps we want to keep and not and working through the reps that we have, making them productive and getting conversion rates up and also training them. So that’s really been my focus, so it’s been a six-week effort.

And the other thing is we hired -- you know we’ve been building out. Now we built out our marketing department and Kevin Cohn is more of a sales and marketing person. Really he and I have been focused in on giving them the right materials and taking them out into the market, but I feel good about.

We were being conservative in Q4 because I didn’t -- what I thought was in the pipeline with the previous leader of the sales force wasn’t there and we are not a company that wants to basically not have our guidance in line. And so we want to make sure we’re conservative and we know it’s in the bag. And we know we can achieve those goals today, instead of what we saw in Q3 and I want to like once again box what happened in Q3 in Q3 and leave it there.

Yes and I’m just going to pursue this for a minute further just to try to be clear. So, if you’ve been working on it for six weeks, it’s more or less since the customer summit?

Yes.

Okay. You’ve been aware of the sales issue since at least, I think, early August. So why wait and why not tackle it sooner? I mean, it doesn’t seem to be something that you could afford to sit on too much.

Yes, I mean, you always feel like you can do things earlier and I think we did it at the time we did it and maybe I could have made a change in the leadership earlier and you always feel like you can do it earlier.

But the most important thing is that we’re trying to lead it in Q3 and focus in on -- it’s not like I lost -- I lost a little momentum in Q4 because I have no impact on Q3, personally, but I have a tremendous amount of impact, or let’s say 50% impact in Q4 and I’ll have a tremendous amount of impact in Q1. So, like I said, we made it when we made it and I’m right now just moving forward.

Okay and aside from the VP of sales leaving, did you lose any other salespeople and where does the headcount still stand?

The headcount is at 8 reps. We have 10. So we didn’t really cycle out. We cycled out 2 and then sitting on 8 right now and so it’s not like a sales rep impact or I got rid of half the sales force. Now I just feel like they are -- it’s interesting, because as selling chat, the guys know how to sell it.

But our expectations is being able to sell this suite and to sell Timpani and so that needs a different skill and if the rep’s got the skill then they stay. If they don’t have the skill to do it, then I can’t really waste time with them. So, as we know, I’m not wasting time on it and I want to get on it and make sure that we can at least get the momentum going starting now.

Okay and then just jumping over to Timpani for a second. How -- are you really starting to unwrap that for customers now, at this point, over the next couple of weeks? Do they start to get the client site download and get a feel for the product and how will they evaluate it and make decisions?

We have a marketing campaign. I mean, we’re starting with our current customer base, marketing to them, and so they received, around the customer summit, all the customers got a “hey, here’s what’s new, here’s what’s coming with Timpani, this is what you’re going to get”.

Now we’re in the process of actually migrating them. The first customers in the small business side are in the midst of getting migrated as we speak. They are sent an email. They are talked to through an account management or online and they’re being educated about it, so it’s interesting. We signed about 39 new customers in the small business side for email, so there’s an interesting sort of product focus there.

So we’re upgrading our customers and if you go online right now and you want to be sold a small business product client, they will actually sell you the complete solution for a small business. So they’re educated, the online sales reps are, and they’re going . We kind of use small business as the leader to move out a new product and so that’s happening and by the end of the year we’ll the majority of our customer onto that platform and marketed.

On the enterprise side or on just the small customer side?

In both. It’s on the enterprise and small business already started and then enterprise will come in about two weeks. They’ll start to get migrated and we’ll finish up the migration bar a few eTellers who don’t want to migrate until Q1, after the holidays. We’ll migrate them over into the Timpani platform.

Everyone will be on Timpani. There’ll be no more LivePerson Sales Edition or Service Edition. There’s Timpani call center and there’s Timpani sales and marketing and we’ve extended some of the features in each of the product lines. But it’s the first time we’ve had like when you look at our knowledge base product, it’s strong. It’s very strong, and if you look at our email product it’s as good as any of the email leaders out there and so we can compete with all the major guys and that’s where we’re starting now in Q4.

I wish I could have made the transition, I think, a little smoother from there, from our old product lines to Timpani. But once again, I’m just looking at what we got in Q4 and going forward.

Sure. Okay, I’ll jump back in the queue. Thanks.

Mike Roesler.

Rob, you mentioned sort of the skill set that your sales force had with chat and seemed to know how to sell that but it’s different as you get into the additional platforms. What do you see from your customers, particularly on the enterprise side, that might have had an existing email platform and how do you convince them to, even if they like chat, to switch over to more of the uses from Timpani?

The customers are definitely -- I was going to start us out with a couple customers in Boston, potential customers, and everyone is looking at the same thing. They don’t want a point solution anymore and that’s why we ended up building Timpani and we started a year and a half ago. If we were in this spot now with just chat, I think we would be in a challenge. Because they’re saying “we just want to bring all these communications together”.

And so what happens is the leader in email right now doesn’t really have an integrated solution for all these products and so that provides an opportunity for us. I also think there’s a tremendous green field opportunity in the mid-market email where companies like Hana (ph) and eGain have never really supplied product to that market, because they’ll never buy enterprise.

So, actually, we’re very focused in on the mid-market in that area and so we picked up about, I said, 39 new customers in the small business, non-chat. These are email customer and so we’re starting to see that flow across the other products. Our goal is to really show, in Q4, a couple of wins against some of these predominant email guys and show how we can convert them.

And just following up on some of the sales force questions, last quarter the full year guidance, I think, was closer to $18 million for revenue and one of the keys in our mind has been that this is a pretty predictable business model and we’re giving recurring revenue. How does that change a few months later? And I’m referencing the full year revenue guidance.

Yes, I think what we saw in the -- we were in a position at the end of the second quarter where we were estimating the second half of the year. That’s sort of the most difficult point of a year, just because you don’t have -- there’s some flex in the numbers in terms of where you expect to end up and where you do end you up at the end of Q3 and obviously that rolls into Q4.

So our goal has always been to be conservative but also not whipsaw the numbers around dramatically and overcompensate. So we spoke pretty specifically on the second quarter call, saying here’s what we expect for the third quarter. We’re not going to adjust the full year number too dramatically because we just don’t know where the third quarter is going to come out and that has a lot of impact on the fourth quarter.

Now, because there was a shortfall in Q3, again, it all sort of rolls into Q4 so it has a little bit of an amplification impact. What really changed versus prior periods is we just saw -- our starting point was a little bit lower at the beginning of the quarter than it had been historically and sometimes that’s driven by selling more professional services. Or onetime sales, where we’ve seen a couple of the quarters in the past year’s, we’ve seen that kind of spike. We had that.

And then we also just say pipelines that were probably just a little bit looser than we now believe they are, upon digging real firmly into them and finding out what’s really in the pipeline. So the net of that and just deals that we expected to close that did not close or were closing a little bit slower, was being off in the corporate side by about 5 points. We made up a good portion of it through small business and through keeping attrition at low levels and that’s sort of the way things came out.

And there’s no reason for anyone to be concerned about any historical numbers? It was just more in terms of lead forecasting?

Yes. I mean, once again, it’s like by the time I got my hands on looking, really digging into the pipeline, I think I saw certain things. And that was that it would be, what was sort of provided to us when we dug into, when you’re really dug into it, and talk to each sales guy and go through being ahead of sales. It wasn’t there and then we took their attention off selling and really focused them on training and getting Timpani up and running. It really impacted us for this quarter.

So, once again, we want to leave what we have in this quarter and we want to be conservative in our Q4. I’m running sales. I’m sitting with the sales guys. I’m going through the pipelines. I’m doing the forecasting with Tim. So I don’t want to get back on the call for Q4 and go, “Okay, we had this happen”. We have an understanding of the pipeline now.

Okay, thanks.

Mark Diker.

Hey guys.

Hey Mark.

When you migrate people, customers from the chat only up to the Timpani, are you getting an uptake in price per seat?

Yes. We will get an uptick in some price per seats if they buy new seats. So, if they buy new email seats then obviously we’re going to get a price tick up per seat.

What typically happens is there’s more traffic. There’s more transactions that they’re processing. So, if a customer, for example, has 5 chat seats and they want to start using Timpani for email, then they’re going to have -- those 5 chat seats are typically maxed out or close to maxed out to handle the additional email traffic. And they’ll have more operators and they’ll need to by more operator seats.

I understand, but if they only want chat, are you then -- if they say, hey, I want to stick with chat are you not migrating them to Timpani or you are migrating Timpani and they’ll only use the chat functionality of Timpani but won’t pay anything extra?

Exactly. So everyone has to get migrated and so --

So only if they use the new functionality?

No. Everyone gets migrated. There’s Timpani chat, which is basically just our chat product and so everyone will have the full capabilities of the product. They can use what they want of it and they pay for what they use, because --

Yes, no, I understand. So, if they use more functionality.

Now, from a marketing perspective, the reason we’re doing it this way is that everyone is moving in this direction and so this upgrade is also a marketing event for us to say, okay you got all the features, you might as well use them.

It’s been a interesting thing, because we have been migrating like the small business. There’s a customer who was going to look at another competitor for a knowledge base and then they saw that on their interface, on the admin console, it said Timpani, you’re going to be upgraded, here’s all the great things in it. And then called us and said look, I’m looking at knowledge base vendors, oh, you guys have it now, show it.

So that's the nature of what we’re trying to do with the Timpani product. That’s why we renamed it, because of we used a name like “Person Also”, people would just think it’s chat plus and it’s not chat plus. It's really our email and our knowledge base and chat are equally as good in that product line.

And then, are the first points, kind of the ARPU’s, are they holding? Let’s just talk about chat only for example. Or are you getting some pricing pressure? And maybe talk about the service side and then the sales side.

The sales side we don’t see any pricing pressure because we are one of the only companies that has a real-time analytics and the engine we built is very sophisticated and we still see very little competitors in that segment.

On the knowledge base, email segment and the chat segment, there’s a little pressure because it’s highly competitive right now. So we are seeing existing competitors out there trying to use price as a way to differentiate. Now, we have really thick margins, so we’ll play with them if we want to on the pricing side, but we don’t see competitors in every deal.

It’s probably 20 to 30% of the deals you’re seeing a competitor in. But I assume that would go up, because as we’re selling more into these segments people will get to know us as a knowledge base and email company and they’re going to invite us into deals, which we don’t see as much yet.

Okay and then can you give a little more color on the attrition side? I mean, looking at this, you’re basically flat quarter-to-quarter and it’s a recurring revenue business model. Which means that -- and then you also said that 50 to 60% of revenues are from existing customers, which would imply that kind of 40% are from new customers, which would then imply - unless I’m looking at this too simply - that you had about a 40% attrition in the quarter, which can’t be the case. So how does that all fit?

No. There were fairly limited new deals in the quarter on the corporate side. We had basically a 1.0% net total growth. We have normal attrition.

What does normal attrition mean?

Normal attrition is, in a quarter, might be in the 3 to 5% range over the entire quarter, net.

Okay.

And then we offset that with new sales. So the offset quarter, small business was fairly steady, professional service was up a little bit and then the new recurring revenue sales was where we came up short.

Okay. So it seems -- but in the statement you said 50 to 60% of revenues coming from existing customers, actually, in this quarter, that’s much higher. Is that right?

Yes, I see where there was a little confusing there. Let me clear that out. When we say 50 to 60%, that number historically we are talking about incremental revenues or new revenues and since in this quarter incremental was 1.0%, it’s not (multiple speakers) --

Oh, yeah, okay, so it’s half of 1.0%.

Yeah. So about 95% is recurring revenue from (multiple speakers) --

Got it. So you lost 3 to 5% and you said that’s normal and the back-filled that with 3 to 5% of new.

That’s right.

But you’re expecting an additional 5 to 6% of new.

That’s right.

Exactly.

Okay. I got you.

That’s how it works.

Okay.

Okay, thanks guys.

Denise Rush.

Hi. You mentioned signing a new customer overstock in the current quarter. Can you give us a sense of the size of the seats that might be filled there in the Sales Edition product and when you expect that revenue to start coming on? Is that something that would start this quarter or into 2005?

Yes. The overstocked deal, which we haven’t released a total number on, it’s probably our second or -- it’ll be second or third largest Sales Edition client. They will -- the POC started. It ended in October 1st, so they went starting a full contracts in October 1st , so basically we get the full hit of revenue in Q4 with beyond the POC revenue.

Okay. Is this a situation where once you’ve done the proof of concept and they’ve signed on, they’ve signed on to roll out slowly over call it a year or do you expect the seats to be up and running all at once?

The seats are probably going to be their heaviest during the holiday season, because their traffic on overstock doubles or triples. So same with the volume that we’ll get in our Chats. So we’ll see the biggest growth right now. That’s why they started big. They’ll continue big, because they have a tremendous amount of traffic.

I think they’re like the top -- they’re probably the largest site in the world, so you can imagine the traffic that we’re getting from them and the amount of chats that they’re taking too.

Can you talk about if you had any 10% customers in the quarter and also, some of your existing customers, like HP and Earthlink and Verizon that have been onboard, what the existing sales process is there? Are any of them talking about adding additional seats, rolling out across their organizations?

Yes. I think the focus of the sales effort is really going back to those customers and attacking them with the additional product lines. So there wasn’t much offered in Q3 on the Chat side, versus gearing up for, okay, we’re going take these guys into Timpani and what are they doing with email, what are they doing with knowledge bases.

So, if you look at let’s say our top 100 customers, there’s more of a strategic conversation with those guys in saying, okay, let’s look what are you using for email service today, okay how can we convert that onto the Timpani platform. And that sort of was the focus and that’s the focus going forward.

Q3 was no selling into the current base because it’s just that the sales guys are gearing up for selling Timpani versus selling chat and that was really the focus of educating them.

Okay and can you also talk about your new head of marketing and you mentioned the incremental marketing spend? What will be the focus of marketing specifically and also, can you comment on building out any channel partners?

Yes. I mean, Kevin is basically [indecipherable] Kevin Cohn and hired two people in the marketing department, which was nonexistent before he was there, so it’s not where -- we didn’t replace anybody and now we’re building out marketing. It’s really lead flow.

It was interesting. I started to look at the lead flow process, which it looks like we had a tremendous amount of leads, because we get a lot of people who use our product on the Internet and then come to our website and we’ll say leave their information behind and then our sales guys follow-up.

And the reality is that the lead flow process wasn’t set up in a way to put a barrier up to get rid of leads that weren’t qualified. So our sales guys were wasting a lot of time on what I call non-qualified leads, so we improved that and we’re looking at our lead flow and saying, well, we need to do better.

And so Kevin’s focus is basically twofold. One is we’ll have three campaigns going out between now and Q1. One focused in on the base, one focused in on the mid-market and selling predominantly with folks on the email campaign and then also Sales Edition. We’ll start a Sales Edition campaign in Q1, out to about 500 targeted eCommerce sites or eRetailers. So that’s his focus to drive leads.

And then the second part is website collateral, sales workbooks, all the stuff that our sales guys need as tools to sell Timpani. That’s what he’s working on. We’re about three-quarters done. We started the process before he got here and now he’s just taking it and by end of November you should see a tremendous amount of change externally. And then we have that coupled with all the changes internally from a marketing perspective.

Okay and just also on the sales front, before we were looking at your sales force coming up to (closer to simple) (ph) production. Now that you sort of pruned out a couple and are looking to hire a new VP of sales, can you give us as sense of if there was any disruption in terms of their production, given the new product or where that stand right now?

Yes. I think there was a little bit. I mean, you guys were at the customer summit and that was sort of an introductory for the sales guys too. We taught them in at the summit, literally after everyone left. We did a full day of teaching on the Timpani product and I think that, coupled with the changes I’ve been making in sales or having them basically focused in on one thing and that was learning versus selling and that’s where we are

Once again, I look at it as like I have very little impact on Q3 from running the sales team, but I can have an impact on Q4 and going forward. But we are looking to hire, obviously, a head of sales fairly soon, but I’m extremely active in it. It’s part of what I’m doing now.

When you say you’re -- are you extremely active in actually having sales yourself or in interviewing for a new VP of sales?

I missed it.

Are you at the point where you have a short list for a VP of sales and you’d like to hire one this quarter?

Yes. I’m on a short list, yes. I started the process back six weeks ago, so I’m on a short list with a prospect.

Okay.

It’s interesting. I mean, there’s a lot of interesting changes and I think we need to add another level of management that we’re doing, like with Kevin, with a new head of sales and we continue -- it’s interesting. Even in the quarter where I’m not happy with our top line, we still controlled it to bring in our bottom line and we’re not running around here thinking things are not happening. We’re kind of like saying, okay, this is what happened in Q3 and we know what we have to do in Q4. So that’s kind of how I’m viewing it right now.

Thank you.

Michael Shonstrom.

Hi, how are you doing?

Good, Michael.

Just one question. I sort of zeroed in on some of the literature you had on the summit, one of which had referenced to the fact that in addressing some of the issues your customers have, you were addressing the difficulty or problems in using the chat product. I don’t know how to elaborate on that, but apparently some of your customers had difficulty using it. Could you elaborate on that and do you think that chat has some inherent weaknesses as a tool because of the need to manipulate your message back and forth and so on?

I think what our real focus there is - and this is really a core focus of our professional services group - is that our experience has been that there’s a learning curve. Which is not to say that its difficult. It’s actually very easy and intuitive to use and small businesses and medium-sized businesses can be up and running in a day, which is really a testament to how easy the basic features are to use.

That being said, there are, especially with Sales Edition, tremendous upsides that are available if a customer working with our professional services group really dedicates time and effort to get them from a low end user to an average user to a best practices user. And those improvements are really centered around understanding the capabilities of the product, meaning let’s make sure that customers know 100% of what’s there versus the 20 or 30% that a new customer might be aware of.

And then number two, share with them all the best practices of our long-term users, so that we can move them up the chain where they’re dramatically increasing conversion rates along the chain and that’s really the goal for Sales Edition. To, at each conversion point, just maximize the potential to move people along the chain and get them to the position where they can buy.

So that’s really a key focus and then that’s going to be just as true with email and Knowledge Base, as I think it is in the chat world.

And this question was asked before, but I really don’t know whether I understood the answer. Everyone is going to be sort of plugged into the new platform, which enables them to do sales, service, Email, Chat, and Knowledge Base. But the existing customers are not paying additional if they use these various functional modules? Or are they paying additional? What is the additional cost for new customers coming in, etc?

Yes. They pay additional. If they’re only using Chat and we migrate them onto Timpani Chat and they’re only using the chat piece of Timpani, then they’re going to pay what they’re paying today. If they go into Email, them they’ll just pay us an additional seat fee, which is around $250 additional per seat. So if they have a $500 seat they’ll pay us an additional $250 to get let’s say Chat and Email. I’m simplifying it, because the pricing structure is a little bit more complex than that. But that’s roughly what they’re going to be paying for an additional seat.

And did you comment upon the timing to migrate everyone over or is this a difficult process, a long-term process or?

No. It’s basically a one-quarter process. So we have to really -- it’s not the migration, which is literally everyone gets flipped onto the new platform. They will all have the new admin features in the back end and then they have to just do the little download, which takes about a minute, to upgrade the client interface on the desktop. So that’s not really -- we just try to roll it out against customers and we’ve got to train them, so we expect to get most of that done in this quarter.

There’s a couple of holdouts who just don’t make any changes during the holiday season. They’re some very big retailers, so they’re going to wait just till the first probably month or two in Q1 and that’s it. But everyone else will go into the migration. It’s the power of the hosted model.

So your professional services focus in the fourth quarter really is going to be, in part, on this migration.

Exactly and once again, its by design in many ways, changing the name, changing the product - it’s all by design, because we want to be able to touch our customers again and create an upsell experience. Versus what we normally do is just stay version 6.0 is out and upgrade now and they do it and they’ll either add more seats or they won’t, but we don’t have much influence.

Here we get an opportunity to educate them that LivePerson is not chat anymore. It’s a communications platform and that’s really our focus. It’s a big shift in our customer mind, because they know us as LivePerson the chat task.

So is that -- splitting off that professional service effort, is that going to take away from -- is this also an influence on growth in the fourth quarter? Is that going to take away from typical implementation efforts of your PS staff?

You know I think there’ll be a focus in on it, but we still -- we have to deliver PS for our largest customers. So I guess we’re hoping that we don’t have any impact and right now it looks like we won’t, but I don’t know 100%. If issues arise or we see we got to do more hand holding. Right now we have a plan and it seems to be working accordingly, but I can’t give you 100% certainty on it. But we’ll know fairly shortly, but I don’t expect that much impact from it.

Okay, great, thanks.

Brad Mook.

Thank you. I just wanted to follow-up. It looks like, as you look out to ‘05, the customer base in the market is really prepared to start accepting the platform technology and the integrated multichannel solution. You guys have done a lot of work getting the Timpani platform ready and you have sales issues, but it looks like you’re trying to address them pretty aggressively so you’re ready for next year. Can you give us a sense as to what you’re looking at next year in terms of ramping your sales force to be able to sell the product more aggressively and also, maybe give us a top line range in terms of the growth that you might anticipate?

Yes. I mean, from a sales perspective, I think 2004 was an interesting experience for us and I think obviously we’re being judged on growth. We have a model that generates cash. We have high margins on both top line and bottom line. So our mission here is to sell more seats and that means additional marketing spend and that means ramping the sales force.

I also think we have a better understanding of the sales process around selling this product. But, once again, it’s talk and we have to deliver it and I don’t have any numbers yet for we’ll hire 10, 20, 5 salespeople next year. I think I need a little bit more time in this quarter just to see what those opportunities are and especially when we start turning up marketing and lead flow.

We’re haven’t given guidance yet for our 2005 year and we’ll give that at the end of our Q4 call, so we’ll do it in January and we’ll give guidance out for our 2005 numbers.

Okay and as you look towards the next year, -- you’ve said many times in the past that you are preparing your product line to meet the market at the point when it’s ready to accept and implement the technology. Do you still sense that you’re moving to the right place at the right time? Or, because of maybe the pace at which some of your competitors are growing, or at least one in particular, that you might be missing some opportunity here in the near-term?

No. I mean, I think this is -- it’s obviously a big market. It’s obviously a growing market and it’s a changing market and we have -- we’re a leader in one of the segments, which is the real-time segment. So I think we’re in a good position to execute on 2005. I think our frustration is that we have a great product. We have a great customer base, as you all know, and we just need to hone down on the sales process side and the marketing side.

I feel confident with what Kevin’s doing right now and he’s been just, I think, doing a great job and his campaigns will go out soon and we’ll see what the lead flow is and then we just got to get our sales execution. So I think we’re in a good position and this isn’t a one-horse market. This is a big market. It’s a $21 billion market for call center software and so I think we’re in a good position.

I think if anything -- we showed our VoIP product on the second day of the conference and we spent two hours with our customers talking about it, so there’s some interesting stuff happening there. So I believe we have the product and now it’s just execution and we feel good here. I hate to back it up with a Q3. That was a little slower than we expected, but like I said, we feel like we’ve got things going.

But the proof’s in the pudding. In Q4 we have to deliver these numbers and then Q1 deliver another set of numbers.

Okay and then looking out as the multichannel solution takes hold and even voice enters the picture. Professional services has been typically a small portion of your revenue base. Do you see that having to grow as you need to work with the customers to help them better use the technology?

Yes, I’m I do, but I believe it’s got to go the other way. I think previously the leadership in sales used professional services as a way to sort of move the number, because you can get these onetime slugs and I just don’t buy them. I think you got to create packages that are recurring and that’s one of the things I’m doing with the sales force now. There was a focus on, okay, let’s get another $20 to $30,000 out of a customer for PS work, where let’s convert that into a package that’s a one-year deal and that’s how I kind of see it.

So, we’re trying to make our products easier to use and I believe that the way that we’re taking our product line is that these types of technologies should be as easy as getting a home phone. Creating your call center and the communication services for call center should be as easy as saying, “I want it” and that’s really where we’re pushing it right now.

I mean, today you can download a product off our website, give us your credit card, and you can have Chat Email and Knowledge Base ready to go and you can get into a group training session and you got it. And so I think that a lot of our focus is that, is moving the business towards there.

And not to go too much, but I think companies like sales force have done a great job. If you look online, they’ve done a great job at almost providing a solution sale and a lot education online, so by the time it gets to a salesperson they can have an easier chance of closing it. And I really think that’s our strength. That’s why our product is where it is.

All right, thanks, Rob.

Thanks a lot, Brad.

That appears to be our last question.

Thank you for tuning in to the Q3 2004 call and look forward to talking to you all in January. Thank you.

This concludes today’s conference. You may now all disconnect your lines. 14