LivePerson Inc (LPSN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2005, Inc. Earnings conference call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. And we will be facilitating a question and answer session at the end of this conference.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to LivePerson’s First Quarter 2005 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 May 5, 2005.

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. And 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; competition in the real-time sales, marketing, customer service market; continued use by our clients of the LivePerson services; technology systems beyond our control; risks related to adverse business conditions experienced by our clients; our dependence on key employees; competition for qualified personnel; the impact of new accounting rules including the requirement to expense stock options; 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; 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; and risks related to 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. [Inaudible] 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 now 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. During the first quarter of 2005, we generated revenues of 5 million, up 22% from a year ago and up 8% sequentially over the fourth quarter of 2004. Bottom line was better than our expectations and in line with prior quarter with EBITDA per share of $0.02 and GAAP EPS of $0.01 a share.

Tim will give you a more in depth analysis of the numbers later in the call and I would like to now speak about our industry and our company as a whole.

We would all probably agree that shopping online is still a very challenging experience. The Internet may be in theory a great place to spend our hard-earned money, but it frequently fails to deliver on the promise of being an easy and service-oriented place to shop.

How serious is the problem? Let’s take a look at some statistics that were recently published by Forrester Research. Conversion rates of visitors to buyers on websites decreased from 3.2% in 2003 to about 2.4% in 2004. In a typical brick and mortar store like Macy’s, around 35% of the people who walk into the store purchase something. This imbalance between off and online conversion rates is alarming.

I believe that LivePerson will play a major part in correcting this imbalance. Our core value is to connect people. By creating a connection between people, our customers find that over 20% of those people they connect with will buy something.

Just think of the implications of that type of conversion rate. If we move conversion rates to 20% across the board, Internet commerce would be 5 to 8 times larger than it is today. In an online world which is increasingly depersonalized, LivePerson is the humanizing factor.

In a normal retail environment, the success of the store is measured by revenue generated on a per square foot basis. This is equivalent to the conversion rate online. Etailers are showing that the revenue per virtual square foot is far too low than traditional brick and mortar and direct mail retailers. Most of this has to do with the fact that they’re continually spending money on driving more traffic, especially from search engines, without really focusing on solving the core problem, which is improving conversion rate.

What if Amazon could convert 20% of its traffic into sales? How would that radically change their profitability? People ask me all the time, you know, why doesn’t Amazon have LivePerson? And today, Amazon is very focused on creating the world’s largest online automat and has a core mission of deflecting customer contact. Recently, I tried to purchase a pair of Bose speakers on their site. And after 40 minutes of going through the sales labyrinth, I became frustrated, could not find a way to communicate with them, and decide to buy someplace else. Companies like Amazon are addressable market and we expect that one day they’ll be using LivePerson.

The importance of our products translates directly into continuous sequential growth rates. In the fourth quarter, our revenue grew 6% sequentially and that increased to 8% in the first quarter. As many of you know, we recently added new resources to our sales and marketing team. These resources are expanding our sales pipelines and we feel confident in our continued growth and accelerated pace.

I’m very happy at what both Jim and Kevin are doing in their respective departments and as Jim puts it, he can’t wait to be looking through the rearview mirror at our target double-digit quarterly sequential growth rates.

I’d like to now give you an insight into each of our product lines. With regards to Timpani Sales and Marketing, we currently have over 25 implementations of this product line, our largest being with Overstock and HP. This product is a game changer for companies that are using it to sell online and it affects their conversion rates directly.

Today, most of our customers will convert only about 2 to 3% of their overall website traffic. In contrast, 20% or more of the people who use LivePerson will buy something. Our enterprise sales force is very focused on this product and we are looking forward to signing new marquee names in the upcoming quarters.

During this quarter, our largest implementation came from a top ten U.S. financial institution. This is a great opportunity for us as we are implementing in three distinct product areas within that company and see a lot of room for growth. We also signed NetTeller, an online secure payment processing provider during the quarter.

With regards to Timpani Contact Center, this is our flagship product line and over 200 enterprise customers and 3,000 small businesses use it today. This product was our original [picturechat] product line and with the release of Timpani, we increased its capabilities to include inbound email and natural language knowledge bases. We signed Hitachi and Starwood Vacations during the quarter on this product and over 20% of our sales come from multi-channel product sales.

I’d now like to highlight one group in the company that is really doing an outstanding job. If I measure the value of LivePerson, I would say that a significant portion of it comes from the account management group doing an outstanding job. This team is the customer’s voice at LivePerson and their focus on making sure our entire company provides the highest level of service to our customers. These team members are on call 24X7 and at any moment are willing to hop on plane and to be at the side of our customers to help them with implementations or just general support needs. We’re also expanding this group now to meet the increased needs in new customer LENs(ph). As shareholders, I believe we should really recognize these and be proud to have them as one of our team.

We’ve been a public company since 2000 and probably managed through one of the worst technology downturn in our country’s history. And survived and thrived to see another day. We are now way past survival mode and are constantly working on bettering the company and moving it to the next level.

We are fortunate enough to have a dedicated team of people at LivePerson who are focused on making LivePerson a stronger company. I’m excited about our future and look forward to reporting our progress in the upcoming quarters.

Let me now turn the call over to Tim. Tim?

Thanks, Rob. We did have a very nice uptake in revenue in the first quarter. We’re pleased to report record revenues of $5 million for the first quarter, which is a 22% increase versus the prior year and up 8% sequentially from the fourth quarter. GAAP EPS and EBITDA per share were in line with the prior quarter and we’re better than our previous guidance at $0.01 and $0.02, respectively.

I’ll give a little bit more detail on our Q2 expectations at the end of the call and those expectations are also detailed within the press release from earlier this afternoon.

We’ll now review the financial results in a little more detail for the quarter ended March 31, 2005. For the quarter, we reported record revenue of $5 million. An 8% increase versus 4.6 million in the prior quarter and a 22% increase versus 4.1 million in the first quarter of 2004. And, again, this is better than our prior guidance, which was 6% sequential growth, by about 2 points.

All products continued to grow nicely. Some highlights. Our Timpani Small Business product grew at about 8% in the quarter. Sales and Marketing product growth was roughly at that same rate so both of those products doing very well. Growth from the Contact Center in the quarter was a little bit behind those but still strong growing more than 3% sequentially in the quarter.

Growth from new clients added was very strong in the quarter. It represented 60% of the incremental quarterly revenue. This metric has been typically in the 30 to 50% range historically and this represents some of the strengthening we’re seeing in the new client pipeline.

We have many well-known brand names in the pipeline of perspective clients, much more so than 6 or 9 months ago as well. The accepting(ph) of our multi-channel Timpani product suite is quite strong, as Rob mentioned. Roughly 20% of the new deals in the quarter involve multiple channels, i.e., they included email and or knowledge base, in addition to the core chat product. This is great progress but we are not satisfied with this rate and we’re working to continue to accelerate that portion that is growing with using the multi-channel product.

Our retention rates from the first quarter were excellent and have improved from the prior several quarters. Our overall attrition rate has run at just above 1% monthly in the quarter versus just above 2% historically for the company overall. We will see if this is a trend we can maintain. We’re putting more resources against this metric so we expect to maintain or even improve on these lower rates going forward.

We have signed six new enterprise customers in the quarter including two of the top ten U.S. financial institutions, one of Europe’s top banks, as well as many smaller clients. Some of the other names you may be familiar with will include Hitachi, NetTeller, and Starwood Vacations.

Cost of revenues in the first quarter was up slightly to $.9 million as compared to .8 million in the prior quarter and .7 million in the prior year, which resulted in an overall gross margin of 83% which is the same level we reported in the prior quarter. The cost of revenue, as you know, includes the cost of running our hosted server infrastructure as well as backup facilities for recovery. We continuously improve these facilities to handle increasing and more complex site traffic and interactions as well as the added security needs and protection of a backup capability. Even with all of that focus and investment, we expect some continued improvement in gross margin as revenue grows.

Product development expense for the quarter was up to $.7 million as compared to $.5 million in the prior quarter and $.4 million in the prior year. The increase was primarily due to planned increases in investment in both internal and external development resources to support our continued product development.

Sales and marketing expense in the first quarter was $1.5 million, up from $1.4 million in the prior quarter and up from 1.2 million in the same quarter of the prior year. We have been continuing to focus our efforts on direct marketing via email and mail, targeted trade shows and trade publications, as well as an increased focus on targeting the CMO and the head of online sales within enterprise companies with web operations. These are the core focuses of our sales and marketing efforts.

General and administrative expense for the quarter excluding amortization was flat at $1.3 million, as compared to the prior quarter, and up from $.9 million in the first quarter of 2004. This expense includes continued costs related to Sarbanes-Oxley compliance that has just finished up for 2004 with our successful filing of our report on internal control on May 2nd. We are now past the most significant part of those efforts and those costs as of mid-May. We spent about $400,000 in the first quarter on all accounting costs combined, just to give you a flavor of the magnitude of these expenses, and that’s compared to slightly less than $100,000 in the same quarter a year ago. We expect lower accounting costs beginning in the second quarter and continuing their decline to a more reasonable run rate in the second half of this year.

We recognized amortization expense of $.2 million in the quarter. We’ll continue to have amortization expense related to intangible assets at approximately these levels throughout 2005. And this is related to acquisitions we have made in prior years.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, was $.7 million up from $.6 million in the prior quarter and down from $1 million in the prior year. EBITDA per share, as previously mentioned, was $0.02, which is flat, versus the prior year. The reconciliation between EBITDA and GAAP net income is provided within the financial statement accompanying our earnings release from this afternoon.

Net income per share in the quarter was, again, positive at $0.01, $0.01 better than our guidance compared to the same level in the prior quarter and compared to $0.02 for the first quarter of 2004.

Our current headcount is right around 100, up from 85 a year ago. The increases have been primarily within sales and marketing, client support and administration, R&D and analytics, and the balance in Help Desk and support efforts for adding the addition of new customers.

There was a fair amount of pent-up demand for additional resources as we’ve been historically, relatively conservative on hiring. We’ve filled key positions a bit more quickly in the past couple of quarters to capitalize on the growth expectations that we currently have.

On the balance sheet, our cash balance at quarter end was up $.3 million to $12.7 million. Our cash in the bank has grown almost 60% over the past three years from a low of around $8 million. Cash flow from EBITDA of $.7 million in the quarter was offset primarily by timing of accrued expenses that were paid in the first quarter.

Our accounts receivable balance is $1.9 million. This is a pretty hefty increase of $.4 million as compared to year end and this resulted primarily from large customer receivables that were collected very soon after the end of the quarter. This was a larger increase than we normally see but no real cause for concern for us since that cash was collected some time ago.

Deferred revenue was up slightly at $1.4 million versus the prior quarter. And our DSOs are up as well running at about 36 days, which is just a function of the slower collection on that couple of large accounts that I spoke about.

Let’s talk briefly now about our guidance for the current quarter as well as for the rest of the year. For the second quarter, we expect to see sequential revenue growth of again about 6%, which translates into revenue guides from $5.2 million for the second quarter and EBITDA per share at $0.02 and GAAP EPS of $0.01. We’re also reaffirming our prior guidance for the full year of $22 million in revenue as well as EBITDA per share of $0.11 and GAAP EPS of $0.05.

We expect an effective tax rate for the year of 35%, which is a slight reduction from the prior quarter’s guidance. We don’t expect to implement a change in accounting policies around the expensing of option grants until 2006 based on a recent change in the requirement for this new accounting treatment. And this timing change had a slight impact on our effective tax rate estimate, which is slightly favorable.

Capital expenditures will be approximately $.5 million for the year. That is not a change, that’s no change from our prior guidance. And that really covers the balance of the financial review.

And at this point if we could request that the operator rejoin the call and give us instructions, we’ll be happy to take any questions that folks on the call may have.

W[OPERATOR INSTRUCTIONS]

We’ll take our first question from the site of Brad Mook. Go ahead.

Thanks. Rob and Tim, nice job with the 8% sequential growth. Can you talk a little bit about the Contact Center? We’ve heard a lot about the benefits in terms of ROI that that can produce and the benefits of improving customer service online. The 3% sequential growth is a little bit of surprise. I’m surprised that’s not growing faster given that you have an established customer base that should be seeing the benefits and that we’ve kind of been expecting to see increased use from that base. Can you just talk about why there’s not more growth in this option from existing customers?

I think the majority of it is, it’s still a focus with the direct sales team, as we said on the last call, we sort of put everyone or most of the high-end sales guys on the Sales and Marketing edition. And then I just think there’s a timeframe of getting existing customers on it. Some of them have legacy systems and they just-- they won’t convert, you know, right away. But it’s just a matter of time. So I think you can only push them, the existing base, so far. I mean, what we’re looking for more is opportunities within the base to move out into like, let’s say if they’re using Contact Center, can we get them on Sales and Marketing or if they’re using Sales and Marketing, let’s move them into Contact Center. So I think that’s where we look at the opportunity.

Okay, have you saturated then the existing base for say, chat seats?

No, I mean, that’s still, you know, accounts for a significant part of our overall revenue. I mean, still we’re growing. It’s probably like 50, 60% a quarter is existing customers buying new product. And the majority of that is still in the chat seats, so.

Okay. All right. And is your sales and marketing spending where you wanted it to be? I think last quarter you had said you were targeted about 35% of sales and I know sales ran a little bit ahead of-- or revenues ran a little bit ahead of expectations. Is that-- is it a function of strong sales or have you not be spending as aggressively as you had hoped?

We were a little conservative in the guidance for the estimated spending so, you know, we planned in some costs on day one that we’ve been phasing in over time. So I think you’ll see us catching up on that over the course of the year, especially over the, you know, course of the second or the third quarter. So I think that’s just a short term timing issue where actually, you know, if we continue to see what we’re seeing now in the sales pipelines for the newest reps, you know, we may actually accelerate that spending a little bit more so.

Okay. And this is really your first major marketing initiative. Have you been able to assess at all how that’s performing?

Yes, I mean we’re pretty pleased with the first junket(ph) campaigns which went out in Q1 was really focused in our retailing because we know we really have to get involved with those guys before September, October where they shut their sites down and focus on the holiday season. The second campaign that’s right now, they’re focused on is really on the financial services sector so insurance, banking, brokerage firms. And so they’re doing a very good job right now with penetrating that.

And it’s really always-- they’re really using sort of three tiers which is we do this, you know, we’re doing an outbound campaign online and then a direct mail piece follows to a Webinar online. And then we’ll do-- we’ll be present at different key shows which believe it or not we sort of thought trade shows weren’t that relevant but they’ve actually been working quite well. And then we also fired up an external call center to do some outbound sort of scrubbing of some of these leads that come in because we’re started to increase lead flow and we wanted to make sure that the high-end sales guys are just focusing on ones that have at least have been touched and then qualified. So I think we’re pretty pleased where we are right now.

I still don’t, you know, sales and marketing still hasn’t had its full impact. I mean, they were in Q1 I think they had sort of a one quarter impact on the entire quarter. This quarter they’ll have more and by Q3 they should be fully impactful with, you know, Kevin’s marketing efforts should be sort of fully impactful on the company and Jim’s, you know, sales team should be fully impactful third and fourth quarter.

And by impact, are you talking about revenue impact or just new signs? Because I know given the way your model, you recognize revenue, the impact doesn’t necessarily occur.

It’s sort of-- I would say recognized revenue-- recognized revenue. So, you know, third quarter, fourth quarter they’ll have 100% recognizable revenue but there’s stuff that’s getting signed-- more stuff that’s getting signed now that’ll impact, you know, Q3, right? But I would look for Q3 and Q4 even though we’re very happy with the numbers in Q1, their impact, personally, will be in those two quarters.

And that 6% sequential growth number for Q2, how should we view that? I mean, it implies deceleration but your comments on your pipeline certainly don’t seem to gel with that. And my guess is that that would represent business that you’ve already booked and that any incremental growth on top of that would be from business you secured, you know, a little bit more into the quarter, early in the quarter or something like that. How should we be viewing that?

It’s in line with our, you know, efforts to guide what I would say in the past couple of quarters, which is we’re not, you know, we’re being relatively conservative. We’re not quite to that level yet but we can see most of the way into the quarter in terms of what we think we’re going to close in the quarter. There is some upside to that number.

Okay, you’re not sending a signal. It’s more just trying to be conservative and cautious.

Yes.

Yes. It’s really a--

Okay.

Yes, it’s not a impact(ph).

Is all that recent-- is the recent sales personnel build all still on track? Have you had any-- have all the hires been successful and everybody tracking to plan?

Yes, so far, so good. I think Jim’s done a really, a great job at recruiting a very strong team. And as we said, you know, last year we thought the challenge ahead of us was really sales process. And, you know, Jim is really-- that’s his thing. You know, he’s very strong with the sales process and he’s got everyone on it and these guys have all come from places where, you know, have also very strong sales process. So I think we’re really happy on how the teams are working. I also think the way sales is leading the effort but how, I think, marketing and our account management groups are all really integrated with his team. It feels pretty good what’s happening right now. You know, we’re all-- once again the full impact of these guys will be in Q3, Q4. You know, they’re having impact now but they’re just sort of rolling now.

Okay. And did I hear correctly that you said six new enterprise customers in the quarter?

Correct.

Okay. So that would be the three financial services that you referred to plus Hitachi, Starwood and NetTeller?

Yes. And there’s other smaller ones but those are really sort of the blue-chip corporate customers we consider enterprise.

Okay. And can you share any of the financial institution names or are you restricted?

We’re, unfortunately, unable to do that. So we gave you as much as we could on that.

Do you hope to change that?

Yes.

We always hope to change that.

All right, fair enough. Thank you.

We’re working to change that. And I also just want to clarify on the segment growth between contacts that are in sales. Some of that difference is also due to the size of the installed base so that percentage growth number, I think, somewhat distorts what’s really happening there. And just to clarify, if you understand the size of each of the bases, for example, Contact Center’s about 50% of our revenue. Sales and Marketing is a little more than 20% of our revenue. If you apply the two growth rates I gave, the 3% and the 8%, to each of the bases, you actually get an incremental grow for each of them that’s about equal in terms of dollars. So the percentages are distinct but the actual dollar growth is almost equal between the two areas. And if you look at average price point, it’s much higher for the Sales and Marketing products actually in terms of number of deals; there are significantly more Contact Center deals that are happening. But they are at a lower price point and so the sales reps are, you know, prioritizing appropriately. Their goal is really maximizing revenue and so I think the results there are sort of reflecting that.

Chad Cooper

Couple things. Can you give us some sense for pricing in the quarter, ASPs for both Contact Center and the Sales product?

Fairly consistent, I would say with at least the last quarter if not the last couple of quarters. We’re actually starting to see on the Sales and Marketing side-- it’s a little early to say that this is a trend -- but we’re starting to see some upward movement in terms of average selling price. And that is less a function of us raising prices-- which we have not done -- and much more a function of the caliber of clients that we’re now able to attract and able to get into the pipeline. So we’re just dealing with much bigger enterprises which enables us to lay out a larger initial deployment. So the trends there are very good.

The Contact Center side I would say has been pretty stable. You know, similar pressure that we’ve seen. There’s more competition but no real dramatic change versus the last several quarters.

Okay. And slight decline in gross margins, you know, I think you had said though as revenues ramp that that gross margin number should trend up. Is there a number to, you know, kind of think about or that you see as we approach the end of the year? I mean, is it closer to 85% or is it, you know, 82.5, 83 about the right range to expect?

I think on an isolated quarter we could probably see 84, maybe 85 by year end. So then the average for the year would be somewhat less than that.

Okay. Fully diluted shares went up by 2 million. Is that correct?

Yes.

What is that from?

We actually made a correction in the assumptions that went into our fully diluted share count when we updated our numbers in our 10-K. And we’ve actually highlighted that change within the 10-K but basically a couple of the assumptions that go into building that model in terms of in the money options investing, we corrected an assumption or selected a more appropriate assumption, I’ll say. And I think the current number more accurately reflects the portion that should be included. So it was really just an update of the methodology.

So wasn’t a huge jump from the new sales/marketing team?

No.

Okay. And I just-- last thing. Any movement, you know, on additional groups within HP? I know that last year, you know, there was a push to get more groups within HP using the product and part of that was being held up by just internal HP, you know, bureaucracy. Any update or color there?

Yes, there’s two groups that I think are line of sight to get up and running soon. So, yes, things are starting to move again.

Great. Thanks, guy.

Ross Kohler

Can you talk a little about the buying patterns of the new customers in the quarter? Is it very departmental? Is anyone thinking enterprise wide(ph)? Maybe give us a little color on that?

I mean the-- I think part of the sales methodology that Jim is really pushing his team to do has really reached as high as they can. I think one of the things, Jim came in and he said, you know, a lot of the accounts or there’s a fair amount of accounts that are sort of divisional level and they’re made on a divisional-level basis. So when you look at the HPs of the world, those were not divisional levels. We’ve talked about those were much higher level and they’ve spread larger and makes them a million dollar customer.

So I think a lot of that is due to the fact that when we look at like the financial institution that we signed, one of the top ten banks, it’s a very, that’s the highest level being involved with it and then they’re putting it in three divisions. But it started using a methodology to get the highest levels involved so we can make sure this thing goes forward. And then continuously we’ve got a process in place so that every quarter we’re sitting down with those people and they’re always engaged with the successes or challenges of the project. And so that’s one of the things is definitely being employed in the sales methodology.

Well, what are the strategies going forward to increase the attached rate of more services around Timpani, the chat and the knowledge base and the email? And in the pipeline, is that a pass(ph) rate look higher?

Yes, I mean, it’s when the guys are going and selling, they really look at it from a multi-product sale. So they go in and they say how are you communicating with your customers? You know, here’s what we can do with chat and then what’s the opportunities with email and knowledge base. So I think it’s just it’s a natural thing that they’ve built into how they’re selling. I’ve been going out with the sales guys and I listen and see what they’re doing. So it’s just part of their strategy.

What you see sometimes is that the customers do have something already deployed and whether they’re happy or not with it, it’s there. And so they really want to start with let’s say something they don’t have like the chat product and then they go, okay, once you guys prove yourself here, then we’d feel comfortable with working with you on these other product lines. And so that’s how it’s playing out today.

And with respect to the higher ROI, the product, is there any chance you could raise prices?

Yes, I mean, we sort of look at not raising each individual seat price but how do we get more revenue per customer. And so, I think, you know, that’s happening and that goes again with a sales methodology that goes to a very high level decision maker making it a corporate initiative. So that’s exactly what Jim’s focus is. It’s obviously, it’s easier for Jim to make his numbers getting one customer to go large than having to sign, you know, ten more of those customers to make up for what one large deal could be. So he’s very focused in on that.

Okay. Thanks a lot, guys.

[OPERATOR INSTRUCTIONS]

Richard Fetyko

Just curious on a couple of things. How long would you say the sales cycle was on the six enterprise deals that you closed in the quarter? And secondly, any kind of, you know, product development initiatives over the next few quarters that you’re working on? Thanks.

On the sales cycle question, I think, you know, we’re seeing things continue to be consistent. Meaning some were shorter, some were longer but a 5 to 6 month sales cycle still seems to hold true. The largest company that we closed a deal with, I think it was probably right at the 5.5 month mark. We recently closed a pretty sizable deal after just barely more than 60 days. So there is a fair amount of variability but overall it’s still hanging at about the 5 month rate.

And on the new product, we’re really, you know, I think we spent a lot of time and focus at the end of last year with the launch of Timpani on the product development side and now we’re obviously making additions to the current product line but nothing probably earth-shattering right now. It’s really a focus in on sales and marketing and then everything around that. And so even when you look at the presales support, there’s some, a little bit more technical resources that are needed in presale as you start to ramp sales so you have some technicians that are on the phone and support the sales guys during the process. So that’s our focus right now.

And if I may, another one in terms of how you structure your sales force. Is everyone selling everything or are you focusing certain sales people on certain products or perhaps geographically or by vertical?

It’s by geography and each rep has been assigned about 100 names of very large companies so in their geography, in their territories they own those 100 names and then they can go out to whatever they want outside of those names in their territories, too. So that’s how it’s broken out today. They’re not by product, although the focus of the enterprise sales team has really been primarily on the Sales and Marketing edition today, although they have to sell everything. When they go in they talk about Timpani and they talk about using it for a sales and support and they look for all opportunities within an account.

Thanks.

Thanks a lot, Richard.

[OPERATOR INSTRUCTIONS]

Michael Keefer

Yes, when you guys look over your existing Contact Center customer base, you’ve got 200 enterprise and 3,000 small businesses. What kind of opportunity do you see there to move those guys up to the Sales and Marketing? I guess how many of those would be potentially good customers to move up?

Well, an appropriate customer for Sales and Marketing, the cutoff and the metric is really how much site traffic they have number one and so they have to be of a certain size so small business clients are really not typically appropriate for that product. So it’s within the couple of hundred larger enterprise Contact Center clients. Maybe a quarter to 30% of those probably have sufficient site traffic to warrant the Sales and Marketing product and so those are the ones we focus on from existing customer base. And then we also hit that-- that is the same measure that we use externally as well.

Okay. And then if you look at your attrition, which accounts are turning at 1% a month? Is that mostly just your small business Contact Center customers?

It’s-- that number is a mix. And so for small business it’s about 2.5%, which is an improvement versus historically was running 3, 3.25%. So that number’s come down a fair bit. And that I think is also, it’s a conservative measure that we use. I think you can isolate, you know, do the analysis which we’ve done of when people cancel if they cancel, it’s typically in the relatively early months of a deal. And so because we’re a hosted service, it’s very easy to get up and running and test the product and evaluate whether it’s right for you or right for your company. And then if it doesn’t make sense, you know, we have the risk of losing those clients early on. Once you get past a certain date, and that’s typically, you know, 4 to 6 to 8 months, the attrition rates get very, very low after that point.

So from a revenue standpoint, it’d be a pretty low number then.

Yes.

It’d be much lower than the 1%.

Well, that number is a revenue metric.

Oh, that is revenue. Okay.

That is revenue metric but it’s really, you know, we are including every, you know, if a client-- especially in small business -- a client used the product for a month and had three chats, we’re counting that as attrition just to give the most, you know, basic view of the revenue changes.

Okay. And then can you talk a little bit more about the competition you’re seeing out there? Who you’re running into and then who probably is your toughest competition. And just a little bit about how you compete against them or, you know, how much you’re winning, losing, things like that.

There’s a couple of smaller guys out there that we compete with today. But, I mean, and there’s Kana and there’s eGain on the email side and then Kana’s got a chat product and they’re an enterprise provider so we’ll see them out there today. But I would say about 50% of our deals we’re seeing a competitor in like that and then the other 50% we don’t. We’ll see a little bit of RightNow Technologies in the tech center area because we have their core product now. And so we’ll, you know, we’ll go after the knowledge base product line so we’ll see them out there a little bit. But it’s about 50% of the time.

Okay. Thank you.

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Brad Mook

Thank you. Just a question on implementation times. How long does it take to get that stuff live from when you sign a deal? And is there a difference between Contact Center and Sales and Marketing?

Yes, contact center is very, very, very quick. We can go-- in either case we can go as fast as our customer is able to go. But Contact Center can be from, you know, a half a day on the very short end to a couple of weeks. And it’s very little elapsed time but it’s, you know, typically on the outside, maybe a month. On Sales and Marketing it can be, you know, from the day that the customer is prepared to go forward full speed, it’s typically a 30-day implementation period and then a 60-day effective trial during the proof of concept. But we’re getting paid during that essentially 90-day period.

So you start collecting revenue once it’s signed as the implementation’s taking place?

As soon as the customer’s ready to begin the implementation which starts with phone call then training. And that can be as early as, you know, the day after it’s signed. It’s probably typically within a month after the deal is signed.

Okay. And do you-- is the implementation and training aspect included in the subscription that turns on that day or is there a supplemental fee as well?

It’s part of the fee; it’s a package deal for the whole proof of concept that we charge.

Okay.

We do follow up professional services work so if they want a-- let’s say, you know, we have a thing called site optimization where we’ll go in and then we’ll optimize some of the rules that are in the product. And we’ll charge for professional services so there’s some one-time fees that are done post the, you know, during the contract.

Okay. And I-- Rob, you kicked off the call talking about Amazon and said you hoped they were a customer some day. Was that kind of big vision type stuff or is that something that you’re a--

That was a--

Not to put you on the spot or anything.

I guess I’m so frustrated with I literally wrote up a case study for the company and centered it around of my trying to get a Bose speaker. And then I literally had an investor who sent me over an email about his experience about a week ago over there and he’s like, you’ve got to get these guys live somehow. So we consistently try and once again it’s a-- I think there’s a sort of a focus over on deflection. But I welcome any shareholder who could help us make a little bit more traction into that account.

The analysts(ph) would appreciate that as well.

Absolutely.

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Justin Boris

I was hoping you could maybe quantify a little bit in terms of revenues what one of these financial services companies could be in say, a two-year timeframe? I know it takes some-- several quarters to ramp up seats and departments and all that. I’m just trying to get an idea for what you feel how you could do out at one of these customers in a couple of years.

Well, it’s-- I think it’s better to maybe look of a benchmark of somebody who we’ve been working with for a couple of years and use them as a guideline. If you take, look at a couple, two or three of our largest accounts where we’ve really done a great job of penetrating into multiple divisions and the product ROIs are excellent and all the metrics are in place. We’ve seen our, you know, our largest customer go from, you know, a couple hundred thousand dollars per year on a recurring basis to near a million on the high end. And I think that amount could, you know, we’d say within two years that top end could increase by 20 to 50%. The kinds of companies we’re signing currently I think could fall in that range so maybe not at the top end but maybe half of the way there or so. You know, that’s a roundabout way of saying, you know, .5 million, $1 million a year clients I think are definitely possible.

Okay. Thank you.

Thank you.

Mr. Bixby, it appears we have no more questions at this time. I’ll turn it back to you for closing comments.

Okay. That wraps it up. We just want to thank everybody for participating and we will see you next quarter. Thanks very much.