LivePerson Inc (LPSN) 2005 Q2 法說會逐字稿

Welcome to LivePerson Second Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS.] Speaking on today’s conference will be Robert LoCascio, Chief Executive Officer of LivePerson, and Tim Bixby, President and Chief Financial Officer. I would now like to turn the call over to Mr. Bixby. Please go ahead sir.

Thank you very much. During the course of this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements, and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results.

Any such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. It is routine for our internal projections and expectations to change as the quarter progresses. And therefore, it should be clearly understood 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. Many factors could cause LivePerson’s actual results to differ materially from those described in the forward-looking statements. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission for a discussion of these important risk factors.

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

Thanks Tim. Good afternoon everybody, and thank you for joining us. During the first quarter of 2005, we generated revenue of $5.3 million, up 22% from a year ago, and up 7% sequentially over the first quarter of 2005. Bottom line was in line with expectations, and in line with the prior quarter, with EBITDA per share of $0.02 and GAAP EPS of $0.01.

Tim and I are extremely pleased and encouraged about where the business is currently headed. As many of you know, we made some significant changes at the end of 2004 in sales and marketing. And those changes are starting to have a tangible impact. The number of large enterprise deals, with both new and existing clients increased from about 20, normally that we had in the previous two quarters, to 35 in the most recent quarter. This is an early indicator that there is a positive shift in deal flow momentum.

There are several key factors that are driving this positive shift in momentum. First, as many of you know, we completed an overhaul of our sales force during the fourth quarter of last year. Seven sales reps that we hired in Q1 are all contributing today to our top line. Each of them has booked at least one significant deal to date. Only a small portion of this revenue came in Q2, because of the nature of our recurring revenue model. So this backlog will impact our upcoming quarters.

Second, we significantly increased our marketing spend around lead flow generation to support these reps. Marketing is also playing a sort of hand in glove role when it comes to supporting the sales team during all phases of the sales process. While we had some great articles written about us, and we had one in particular in Business Week Online, I think we really will start to focus in on accelerating our PR around our leadership position, especially around what we’re doing with Timpani™ sales and market. This is one of our major goals during the second half of this year.

The third, we expanded our product lines to include email self-service, as well as much more sophisticated analytics and reporting, which we now put under the brand of Timpani™. These expanded product lines are enabling us to really go deeper with customers, and also go broader within their entire companies.

And finally, we are seeing an overall shift within the market that is playing into our core value proposition of humanizing the online shopping process. While advertising spend has increased, especially around keyword search, conversion rates of visitors to buyers has decreased or marginally changed. Our Company’s focus right now is in solving this problem.

I think it will be valuable if we briefly review the evolution of e-commerce in order to better illustrate why humanizing a website has become very important. The mid-90s, when online shopping began, the greatest challenge was designing and building a website itself. Companies that provided website design services and offering tools for building graphical websites dominated the market.

A website at that time was seen more as an online billboard, that supported offline sales, versus an actual legitimate sales channel within itself. And then in the late 90s, there was a push to integrate the online billboard with the back end order processing engine. Although a site could present products in a nice, graphical format, and then process the credit cards and ship orders, what businesses found, is that the idea of build it and they will come was not really a reality.

Therefore, marketing became critical, as websites need a way to generate site traffic, which brings us to the third stage. Online marketing began with banner ads, if you remember, and outbound email campaigns. And it was really a focus around creative pop-up windows, large formatted banners. And then sort of with the rise of Google, and the importance of getting -- for the consumer to get good information, the sophistication around being able to do outbound email campaigns, advertisers now have really the ability to consistently drive traffic to their websites. However, efficiency of online advertising, especially around keyword purchasing, has created a major problem.

And I’ll give you sort of an example. I was recently at a meeting -- a sales pitch with a luxury goods company. And about a year and a half ago, they really made the transition from being an online billboard to really being an Internet commerce site. And the head of e-commerce we were meeting with was finding it very challenging maintaining, believe it or not, she only had 1% conversion rates. And she really started advertising on Google, and her conversion rates were going down. So she was getting more traffic. But it wasn’t really translating into more sales. Her costs went up. But her revenues did not go up proportionally. So she tried free shipping, online discounts, plus promotions, and other standard marketing initiatives to drive conversions. But the results were all very marginal.

When you think about it, online, everyone is selling a very similar product. Within one click of the consumer, I can see all the different places, and basically competitive pricing. So there was really, for her, a moment of truth. What she realized was that if I am competing in this market where it takes one click to leave a store, the best thing I could do, she said, was really embrace my customers online.

So what she was really focused on now was how could she interact with those customers, how can she chat with them, how can she take them to the sales process. How can she take the 99% of the people who are leaving, and at least have the ability to embrace a certain percentage? So this scenario is really what every Internet retailer is facing, and really presents us with a very large market opportunity. We are solving this challenge for these heads of e-commerce.

So we really feel the opportunity -- and especially lately -- I think there’s a real focus in our conversion rates. And really that’s where we’re playing today. So I think we’re at the right place at the right time. I think it’s also important that we have the right organization to capitalize on this opportunity. And I feel confident that we have the team in place right now to really go after this opportunity.

This is becoming evident because of our expanding sales pipelines, and our strengthening expectations for growth in the second half of this year. It’s also evident in how our Company is becoming a trusted advisor to come of our customers regards to their overall web sale strategies.

Our professional services group, which is doing, I think, a really outstanding job lately, in becoming really thought leaders for our customers when it comes to their overall online sales strategies. And this is driven by the fact that they sit in a very unique position in which they work with some of the best and largest websites on the Internet today, and they’re able to leverage experiences across all of those customers.

A good example is, we have five of the largest telcos in North America. And all these companies compete with each other. And yet they work with us. And here we sit with our professional services department. And they can gather best practices across each of these websites, and then basically translated that back into product and services, which then our sales team can use as a competitive weapon in the marketplace.

We really look at 50% of our value equations. Obviously we have our products. But then we have the knowledge that our implementation professional services team has in making this work. We just don’t dump products on customers and hope that they’ll figure them out. We really have a thought leadership around how do you sell online, how do you chat with a customer, how do you get customers to convert when they’re on a website. So we have all that knowledge, and we’re applying that back into sales and marketing and professional service initiatives.

As Tim mentioned, at the beginning of the year we felt that the changes that we made recently would really impact Q3 and Q4. And we’re still very confident in this. We’re reaffirming our 2005 number, which implies acceleration of growth in Q3 and Q4. And we’re looking forward to updating you on the progress over the upcoming quarters. Tim will provide you with more guidance for Q3, and also for the full year. And with that, I’d like to turn the call over to Tim. Thanks.

Great, thanks Rob. We’re pleased to report record revenues of $5.3 million in the second quarter. This is a 22% increase versus the prior year, and is up 7% sequentially from the first quarter of the year. GAAP EPS and EBITDA per share were in line with the prior quarter, and in line with our previous guidance at a penny a share and $0.02 a share, respectively.

I’ll give a little more detail on the third quarter, and the full year expectations at the end of the call. And they’re also detailed within the press release that you saw earlier this afternoon. There are some encouraging trends that started to form over the last two quarters. And before I run through the financial specifics for the second quarter, I’d like to detail some of these changes a little bit for you, so you’ll have a better feel for some of the things that we’re seeing internally, and how that is shaping our expectations for the rest of the year.

We’ve been traditionally strong in several key vertical markets. And that trend has strengthened. The current revenue breakdown across these verticals is as follows. In financial services, retail, in tech and software, are each about 25% of our business, so, 75% of the business across those three verticals. In telecom, we’re very strong. And that’s another 15% of revenue. And then hardware and other is the remaining 10%.

And we’re seeing good results across all of these areas, in both booked deals in the second quarter, expected deals in the third quarter, as well as both new names and expansion within existing clients. It’s important to note also that we’re dealing with, in a lot of these cases, larger organizations and larger revenue opportunities.

These organizations have more rigorous security and due diligence requirements, and somewhat more in depth implementation needs. This can add a little bit of time to the sales and revenue cycle, such that, in many cases, a dealer with a Fortune 100 client booked today in the first week of August, for example, would likely not materially impact revenue until the fourth quarter. Our guidance, of course, takes the impact of this phenomenon into account.

Here’s some specific examples of some of the success we’re seeing across the key verticals, where we did see in the second quarter. In financial services, we signed a new deal with a major online mortgage services provider. And we also expect expansion within the major U.S. banks that we announced last quarter, a top 10 U.S. bank. We’ve also expanded and extended a partnership with Digital Insight to support the financial services market, primarily in the mid-market area.

In the world of retail, we signed two new catalog retailers in the quarter, one in women’s fashion, and another, which actually was an up-sell from our small business product, which is an interesting phenomenon, in the outdoor equipment area, within retail. We also expect some expansion with Overstock.com in the coming quarters. So good signs there.

In technology and software, we signed a new deal, a small deal in the second quarter with one of the key online search providers. In the telecommunications world, we added a new deal with a top 5 wireless provider. And we expect upcoming expansion with AT&T, Crest, and Verizon, all of whom are existing customers.

In the hardware world, we signed a new deal with a top 10 U.S.-based computer equipment provider. And we also expect some expansion from HP over the next 6 months. So very good signs across all of our critical verticals.

We’re also starting to see a little bit more activity outside of the U.S. During the quarter, we signed new business with large firms in the U.K., in Denmark, in France, and in Germany. Now, as you probably know, we support all of the existing clients out of the U.S., Canada and Israel currently. But, based on some of the success that we’re seeing, we’re obviously evaluating the appropriate timing for increased investment in sales and support resources outside the U.S., with Europe as our primary focus. That would really be a 2006 initiative for us.

As Rob mentioned, we’re making good progress with the sales team. We have a team of 10 direct reps in place. We expect that to grow by 2, at least, by year-end. As Rob said, all reps, even the newest, have closed a major deal. And an interesting metric, the time to close a major deal for the newest reps has decreased from 5 months from date of hire to 2 months from date of hire. Now obviously that’s a small sample size, and probably not statistically significant. That’s a great result nonetheless.

Our average deal size is also growing. As you know, our business has shifted over the past couple years away from a purely dollars per sheet type deal to more of a revenue per customer focus. The proactive capabilities within the Timpani™ product line are enabling us to support higher average deal sizes, as a result of the higher ROIs that we drive for this product line. The result has been an average deal size in Q2 of about $6,000 per month. And that’s all recurring revenue. And that’s up about 25% versus the first quarter.

On the proactive side, the isolate, the sales and marketing deals alone, delivered an average $12,000 per month, or about $144,000 per year per customer, again, all recurring revenue. And as more business shifts to the proactive product features, this should have a favorable result on the overall average deal size. The quantity of deals increased as well, as Rob mentioned. And we expect the impact of these increases to begin to hit in the third and fourth quarter, and into 2006.

Another key metric I think is the number of implementations of our sales and marketing product. That number we expect to surpass 50 by year-end. And that’s as compared to 30 at January 1 of this year -- so significant increases there. That includes unique implementations. We count that as unique implementations within a company. So, for example, HP, we would count as four implementations, because they have four unique deployments within the company, in different divisions.

The mix of revenue has continued to shift towards the proactive sales and marketing products. Currently, our revenue mix is 30% of revenue coming from sales and marketing, 35% from customer service, and 35% from our small business group. And this breakdown represents a shift of 10 percentage points over the past several quarters, away from service to sales, with relatively little change in overall margins. And also, we were able to change in the ratio for small business. We expect that that shift will continue over the next several quarters.

About 70% of new revenue in the quarter came from sales and marketing deals. The remaining 30% from contact center, customer service deals. And if you look over at new clients, that number increases to about 85% for sales and marketing for the quarter.

As a quick refresher for people that are new to LivePerson’s story, we continue to have about 95% revenue visibility into a subsequent quarter at the time that we give guidance. So about 85% of that comes from recurring revenue already in place. So revenue from a prior quarter, the vast majority of it will recur in the coming quarter.

Another 10% comes from expected add-on business for existing clients. We have a solid track record, as they grow over time. Plus new deals closed since the quarter began on July 1. So we’re hitting here today, first week of August. We’ve got one month of business under our belts. The remaining 5%, which represents new business done in the second and the third month of the quarter, that is the portion where we have to rely on our operating history and our pipeline analysis to estimate growth.

So, by any measure, this is quite good visibility, and I think a lot of key benefits of the on demand software model. Now I’d like to go over some of the detail on the numbers for the quarter ended June 30. As we mentioned, we reported record revenue of $5.3 million, a 7% increase, versus $5 million in the prior quarter, and a 22% increase versus $4.3 million in the second quarter of 2004. And this was better than our prior guidance of 6% by one full percentage point.

Growth from new clients was very strong in the quarter, as I mentioned, representing 70% of incremental revenue from large clients. This has typically been in the 40-50% range historically. And I think this shift really represents some of the continued strengthening we’re seeing in the sales pipeline.

We’ve got, as we mentioned a quarter ago, many well known brand names in the pipeline of prospective clients. We’ve signed a number of those in the most recent quarter. This is definitely more so than we saw 6 or 9 months ago.

Monthly attrition was slightly below 2%, a little bit above the prior quarter, but below what we’ve seen historically. And actually, we recently turned a few clients that we felt were at risk into up sell opportunities with additional revenue. So we are working to improve this metric, by being much more proactive with existing clients, when we think we can have an impact.

Cost of revenue in the second quarter was up 18% sequentially to a million dollars. That’s compared to $0.9 million in the prior quarter, and $0.7 million in the prior year. And this resulted in an overall gross margin of 81%, which was a couple of points lower than we have seen historically. We’re continuing to invest ahead of the growth curve for capacity, for security and for redundancy in our server infrastructure, all of which combined is a total short-term gross margin down slightly. This is by design.

Even with all that, we expect to see some continued improvement in gross margin, as revenue continues to grow. Product development expense for the quarter was flat at $0.7 million, as compared to the prior year. And that’s up from $0.5 million in the prior year. Sales and marketing expense in the second quarter was $1.7 million, up 14% from $1.5 million in the prior quarter, and up from $1.2 million in the same quarter of the prior year.

General and administrative expenses for the quarter, excluding amortization of intangible assets, were down 14% sequentially to $1.1 million, as compared to $1.3 million in the prior quarter, and was up slightly as compared to a million dollars in the second quarter a year ago. Sarbanes-Oxley compliance costs are tailing off as expected, following the filing of our first year compliance result in early May. And this is the primary driver of these G&A cost reductions.

We recognized amortization expense of $0.2 million in the quarter. We’ll continue to have that level of expense through the remainder of this year. EBITDA, or earnings before interest, taxes, depreciation and amortization was $0.8 million. This is up 18% from $0.7 million in the prior quarter, and down from a million dollars in the prior year. EBITDA per share in the quarter was $0.02. And that was down a penny versus the prior year.

The reconciliation between EBITDA and GAAP net income was provided in the financial statements accompanying our earnings release. Net income per share in the quarter was again positive, at a penny, compared to a penny in the prior quarter, and $0.02 for the second quarter of 2004. Earnings overall were up 32% sequentially. And we dropped 30% of incremental revenue in the quarter to the earnings line, which was a good result.

On the balance sheet, cash balance at quarter end was up half a million dollars to $13.2 million. Our accounts receivable balance was roughly flat with the prior quarter, at $2 million. Deferred revenue was up a bit, 17%, to $1.7 million, versus the prior quarter. And DSOs are flat with the prior quarter, running at approximately 35 days.

I’d like to now talk a bit about our expectations for the current quarter, and the rest of the year. As you may have noticed in the press release, we are adjusting the format of the guidance we provide slightly, to give a range of financial results, rather than just a single number, and to help communicate the solid visibility we have into the coming quarters.

Many companies providing on demand software and services provide guidance in this way. And we think it will give investors a little bit more insight into how we view the up side and the down side for the coming quarters. The range we give is a real boundary of our expectations. So there is some small chance that actual results could be outside of the range, either above or below. But we feel that probability is probably quite low.

For the third quarter of 2005, we expect that revenue will come in between $5.7 million and $5.8 million, and that EBITDA per share will be $0.02, and EPS will be a penny. We expect revenue for the full year of between $22 million and $22.3 million. We expect EBITDA per share to be in the range of $0.10 to $0.11 for the full year. And we expect EPS for the full year to be in the range of $0.04 to $0.05.

Expense categories as a percent of sales will remain relatively unchanged in Q3, as compared to the Q2 actual results, with the exception of sales and marketing, which should increase by 2 or 3 percentage points in Q3. And then we would expect that to remain flat at that percentage rate through Q4 of this year.

We’re expecting -- currently utilizing an effective tax rate of 35%. And none of these figures, as in the past, include any impact of expensing options. We expect to implement a change in accounting policy around the expensing of options, as required, beginning in 2006. Capital expenditures will be approximately $500,000 for the year. There is no change there from our expectations in previous quarters. And that covers the financial review. And now Rob and I would be happy to take any questions that you may have. If we could ask the Operator to rejoin the call, and give instructions for q-and-a, that would be great.

Thank you sir. [OPERATOR INSTRUCTIONS.] Brad Mook.

Thanks. A couple of questions here. You’re implying sequential revenue growth of 8-10% in Q3. Last quarter you had given guidance to 6%, and said you were tracking a little bit behind that at the conference call. How are you tracking to that 8-10% at the current time?

We -- I mean setting a range for expectations, we’re very clearly expecting to come in within that range. I think if you compare where we are today versus where we were relatively 90 days ago, which I think is your real question, I would say we’re in a slightly stronger position in the current quarter. So more business, a greater position of what we expect to be booked in the quarter, has been booked as of today, than what we were seeing 90 days ago.

Okay. That’s a good sign, because with the -- having been behind pace at this point last quarter, and then putting up a number that was ahead of your guidance, that implies pretty good things.

Can you give us a flavor for your expectations in ’06? It sounds like you’re involved in a lot more projects right now. They’re taking a little bit longer to reach implementation and start to hit the income statement. But obviously it suggests pretty good things going forward. I’m wondering -- I know you haven’t given guidance for ’06. But I’m wondering if you can just give a flavor as to your expectation for growth.

I think -- I mean the short answer is no. We’re not going to give any expectations for ’06 quite yet. But I think, to your question, what we are -- we’re seeing two sort of competing issues here. And one is great things happening in terms of interest and strengthening of the pipeline.

And that’s countered, to some extent, by a little bit more uncertainty about timing. And so where historically we may have been estimating based on winning or losing deals, and what that percentage might be, now we’re really winning a lot more deals. But we’re estimating a little bit more around timing. So the net of all that really means that it’s critical to sort of get further into the fourth quarter, so that we know when the starting point is to give guidance for next year.

Okay. I understand. With the GM gross margin having been lower this quarter, you had, last call you said 84 to 85 exiting the year. Is that scaled in now as well?

Yeah. I think I would expect the end of the year would probably be 83, based on some slight improvement Q3/Q4, but just based on what the actuals that have come in the first half. It’s going to bring the full year number down a little bit.

Okay. And the climb in deferred revenue, a little counter to your seasonal trends in years past. What’s going on there?

Some impact from the larger customers and larger deals, where we’ll do a little bit more work up front, and we’ll collect money up front more frequently than not. But I think it’s not something I would, at this point, extrapolate out yet. I think a good portion of it is probably a one quarter phenomenon. We’ll come back next quarter. And if we see something consistent, then it may be becoming a trend. But I think it’s premature to say that yet.

Are most of your deals still the monthly subscription model?

Yes.

Okay. And then, final question here, in terms of your cross selling now, I’ve heard anecdotal evidence of some customers starting to buy both the sales and marketing and the contact center product. Is that a growing trend? Or what do you expect from your contact center product?

I think it’s a consistent trend. We are leading for most larger clients with the sales and marketing product, because it’s one where obviously the demand is very high, the competition is relatively low, and the customer doesn’t have a system in place that we’re competing against.

On the contact center side, the opposite is true on all of those counts. And so it’s a little bit tougher sale. So we found it to be much more efficient to get in with the proactive product, where we have a unique proposition, and then work the other way. So we’re doing that in the accounts where we think it makes sense.

And is that happening?

Already happened.

Okay. And then within the contact center product itself, in terms of multi-channel adoption and an update on the voice product?

Yeah. We are -- when we look at those sales for the Timpani™ product line, most of them are multi-channel, in that we’re not just selling chat. We’re selling it with the knowledge base, or with email. So it’s still -- it’s starting to climb from the 20% above range right now. And then our voice over IP product, we have our 7.5 release that comes out in a few weeks. And it will be in the 7.5 release. So it will be an active channel for customers to use in that release.

Okay great. Thank you.

[John Hickman].

Hi. First question, could you guys talk a little bit about the competitive landscape, who you’re seeing, what kind of is being pushed back? Is it from competitors? Or is it just people not ready to buy yet?

Yeah, I mean there’s -- we still have a couple of small guys on the chat side that are competing with us in our sales and marketing product lines, and also the call center parts. But I think the guys, our sales team is doing a really great job right now in creating momentum against those guys. In one case, we took one of their largest customers. And that customer has acted in a reference in other deals that we’ve been in against that small competitor. So I think Jim’s team is doing a far greater -- far greater against competitors.

But the reality is, we aren’t seeing a lot of competitors in the deals. So when we walk in on the sales and marketing side, because we have such a strong base of customers using it, with good ROI results, we sort of have this leadership role right now. And I’ve been out on a couple of deals personally with the guys. And we’ve been out with a lot of the big name brands. So I think it’s sort of us to lose in that area.

On a contact center side, we’ve got right now the [McConnas] [ph] and the eGames and small guys out there. And I think that area has a lot more pressure from a competitive standpoint. I don’t there’s 100% clarity on the buyer side of who leads in what, except we lead in chat, and there’s guys that lead in email, and guys that lead in knowledge base. I still think there’s a point solution, buying, going out there, versus the whole suite. Where we see selling the suite, is when we sell sales and marketing, and then they’re buying email and chat around that for their support needs. So that’s how it’s sort of shaking out right now on the competitive side.

Okay. One more question. Could you maybe give us a little more color on your thinking about -- you know, you’re forecasting fairly decent revenue growth for the year, and for the coming quarters. And what’s your thinking about how much -- ? You said you’d let 30% of that drop to the bottom line this quarter. What’s the thinking going forward?

I think we’re still in the mode of increasing spending a little bit. We started out in the quarter, late in the fourth quarter last year, and hit it pretty hard in the first two quarters this year. We’ll bump up again, as I mentioned, about 2 or 3 percentage points in sales and marketing Q3. So while we’re in tune with what the impact is on the bottom line, I would say our primary focus is to make sure that we’re not getting in the way of growth, which is -- we’re going to err on the side of investing a little more than a little less, where we see opportunity.

That being said, the long-term target margins that we historically talked about, we think are still definitely valid. But we may see one or two -- a penny or two of movement as we sort of get through the next several quarters.

Okay. And then just real quick, what did you say your -- the sequential increase in deferred revenue was this quarter?

It was about 17%, if I’m not mistaken. It went to $1.7 million.

Okay. And then what was the cash generated in the quarter from operations?

About $5 million. I’m sorry, about $500,000.

Okay. Thanks. I’ll let someone else ask questions.

[Chad Cooper].

Hey guys. Tim, did you say that for ’05 your gross margin for the year would be around 83% or 82%?

We don’t give specific guidance on that. But I think I -- if you want to quote me, I said 83.

Okay. So that implies -- I mean if you can’t answer this, because of the guidance, but that implies that you’re getting back to an 83% run rate? And I’m just asking, because the trend, obviously more dramatic this June quarter. But the trend has been down from 84% in June of ’04. And so are you expecting it to flatten out around 83% going forward?

Yeah. I think the first quarter was 83, second 81. I think it’s fair to say somewhere in the range of 82 to 83. It might be more like 83, flat. So I would expect it -- I don’t expect it to deteriorate from here. So it’s really just a question of how quickly it improves.

Okay. And then per your last comment about the operating leverage, I think that we’re getting close to a $30 million annual revenue number. And I think the historical thing that you had talked about at that sales level was around a 30% EBITDA margin. No changes there, which is effectively a doubling of your current EBITDA margins?

Yeah. That’s correct.

Okay.

And then just to go a little bit into the cost of goods, we, because of what’s happening in the sales team, and the ramp in sales right now, we sort of pushed the technology guys to buy out a little ahead on equipment and stuff, because if we look at getting even a box up and running, we have to literally -- when we look at -- based on ordering it and getting it live and installing the software, it can be a 30 day process.

So we sort of pushed the technology guys to hire out and go ahead and also build out a little bit more, so we can handle the sales and not -- we don’t want to get held up in implementation, because, as you guys know, we book our revenues when we implement. So that’s really the nature of the impact on cost of goods today, which I think is a -- it’s sort of a good problem to have, type of a problem.

Given your focus on organic growth, are you guys looking at anything, technology wise or other, on the acquisitions front? Or?

I think we’re always open. And strategically we think there’s some other areas to pick up some pieces. I think right now the team is so engaged in the organic side of the business, and there seems to be a pretty big opportunity right now, especially in the sales and marketing product line, that there’s a focus of resources in that today.

Myself and Tim, we always look at opportunities that are out there with some of the other providers. And then I think towards the end of the year, we’ll have a clear picture of some of the surrounding spaces, where in the past we’ve been really focused in on what I’ll call customer support.

I think if we look at more of what we’re doing today, which is helping companies with conversion rates, this technology that sort of play around conversion rates in the analytic space, in sort of the ad networking space. There’s some things out there that we think are interesting. But I think we need probably another quarter or so to just stay focused, and continue executing on our current growth rates, accelerating them.

Great. Thanks guys.

Mike Shonstrom.

Just a couple of clarifications. You talked about a $6,000 a month average deal size, which is up 25% from the first quarter.

Yeah.

But you also mentioned a $12,000 customer deal size in sales and marketing. That, as I understood it, you were pricing the sales and marketing at a minimum of five seats at 2,500, so that would be comparable to what you set out to charge. And I’m just curious what is happening with that average.

Yeah. That -- we’re actually seeing more, a broader range in pricing for the sales and marketing product. So, historically, everybody that started up on that product would be sort of -- we typically start at the starting point, which was originally 10K a month, and went to $12,500 a month. Now we’re seeing some indication that some customers will start at a higher point, will do a larger implementation. We’ve seen that a couple of times in the second quarter. And we think there was a couple of potential deals coming in the second half of the year, that could be a fair bit larger than that. So I think the range of what those deals will look like is going to get broader.

And on the sales and marketing, just -- I just sort of wanted to go over the impact that it does have on a typical sale. I think you’ve done some releases that gave examples of where you were able to marginally increase the stickiness of a site. But it wasn’t huge. It was just -- it was marginal. Is that enough to continue to drive interest in the product?

Actually, the typical results are fairly significant. So, for example, a site -- and this is consistent across most of our implementations, where the key metric we and they focus on is the conversion rate. So we can take -- and historically they would take conversion rates that are, say, averaging 2%, and take those to 3%. And so with the customer, the metric the customer is looking at, is a 50% or better increase in their conversion rates. And that’s the focus.

That’s compelling.

That’s a significant number.

Great. And just one final thing on the P&L. You mentioned that your gross profit margins were down because of more investment. You would think the investment would be in the R&D and the sales and marketing side. But what is the increment that goes into cost of goods that is sort of higher at this point?

The cost of the -- the driver on the cost of goods line is really the network infrastructure that we host the customers on. So, for example, we have done a couple things, where we’ve beefed up our backup infrastructure, because we’ve got larger clients, running more traffic, that has the security needs of financial companies. So we’ve increased investment there.

As Rob mentioned, we’re also buying a little bit more ahead of the curve. So where after the second quarter, we now have a pretty strong pipeline coming up. And so, rather than waiting and seeing, as we might have six or nine months ago, until the deal is materialized, to build up that infrastructure, we’re doing it more aggressively now. So what that means is, in the third quarter, I’m probably paying for infrastructure that may not support revenue until the fourth quarter.

And most of this is all hosted by others? You’re not -- I noticed your PP&E went up a little bit. But most of that just flows through on the expense side.

That’s right. It’s all -- we utilize a company called Verio as our primary hosting provider. And that then hits the cost of goods line.

Great. Thank you.

[Taylor Bough].

Hi, a quick question, to get some clarification. On the sales and marketing implementations, I think you’d said that you were targeting somewhere around 50 implementation by year end. If I recall, the business model kind of had about a 30 to 90 day proof of concept for most of these sales and marketing deals. I was wondering, how many of those 50 you think are proof of concepts, and then what the conversion rates you were expecting out of those pilots.

The majority of this implementations are proof of concepts. Historically it was close to 100%. I would say it’s -- we’ve had sporadically more customers do more due diligence up front, and then skip the proof of concept, and go straight to implementation. But, still the majority are proof of concepts.

And the conversion rates, we assume, are very close to 100%. Now obviously in our guidance, we’re somewhat more conservative than that. But our historical conversion rate has been very, very high on those proof of concepts.

Okay. And just a follow-up question on the average of the $12,000 per month. I believe that should be -- that’s just software revenue. Right? What do you also see? You said an important part of the strategy in what you’re seeing moving forward is more services and/or expertise that’s being built into these solutions. So what are you seeing in terms of a revenue per deal on the services and consulting side?

Well, currently, our services revenue is keeping pace with the overall growth. So it’s right around -- we don’t break it out in the filings. But it’s right around 4%, in the 4-5% range. What we’re seeing, a couple of trends is, one, the number is growing. And so that percentage is staying flat as revenue grows. We’re also seeing more clients who are using professional services to such an extent that we’re building in, basically, a recurring professional services stream.

So now we’ve got 3 or 4 clients who we’ve locked them into a recurring revenue, professional services structure. So they get a slightly better rate than if they were to buy it a la carte. But we get a guaranteed stream. So that is something we’re seeing more frequently with the largest implementations.

And are you starting to dedicate a professional service staff to those functions and consulting organization? Or where are you pulling those expertise in the company?

We have always had a very adept professional services team, providing that sort of service. What has changed is a couple of things. The team has gotten bigger, as the pipeline has grown. The team has gotten smarter in that their experience today versus a year or two ago is dramatically more sophisticated in terms of what we can bring back to the customer.

And that has enabled us to charge higher prices in general, and also to charge for things that historically we might have done for free, because we’re now -- we have a very tight grip on the value that it provides to the customer, and we’re able to charge for things that we historically would not have done. So there’s a lot of interesting things happening in professional services group.

So, moving forward, to you expect that $12,000 a month to increase appreciable, based on, potentially, these recurring professional service streams, and any one time consulting shots?

I think there’s two things that are happening. One, we’re signing at least, I would say, two customers or more a quarter that have the ability to really grow significantly. So to move from an entry level point, to $12K a month, is $150K a year. I mean we’re seeing it settle. But we think it can move to a $300,000 to $500,000 per year level.

Again, the majority of that increase is due to usage. So, more divisions using the product, more operators using the product. But a good chunk of it will also come from professional services as well.

Great. Thanks very much.

[Skip Barrons].

I wanted to ask a total available market type of question. If you threw into one big pot, you guys, right now, sales force, the whole batch, recognizing we’re not totally keeping in the definition that everything is an apple in this barrel. But what would be the total available market opportunity for all these companies, including yourselves?

Well, it’s a tough question to answer. I mean each of those companies are dealing in fairly different areas. SalesForce.com, obviously sales force automation; right now, customer service, but now moving into sales force automation. There’s others who are much more focused on analytics.

We’re very focused, I think, on what is rapidly becoming defined as the conversion space, which is how do you take all of this information that people are collecting, and act on it in real time, in a way that humanizes the experience? I mean that’s a number of different things happening at the same time.

So if you put all those markets together, I mean that’s -- you’re sort of combining two or three or four very large markets. When we look at our -- or just the conversion space, and say we feel that we can provide the benefits we’re providing today to Microsoft and HP, and six or eight of the telecoms, and provide that to each of the Global 3000, that’s a $2 billion or $3 billion a year market.

Okay. Let me ask another question on a variation of that. If I were to take an Overstock.com, and you were to wind up with every position that they have in their telemarketing, what’s the multiple recurrent revenue you could end up with in that account alone?

They’re probably at -- right now it’s maybe 80 operators. Probably get to I’d say about 5% penetration of Overstock right now.

Yeah?

There’s sort of two parts that drive that. One is they keep increasing their product lines. And so as they increase product line -- like they just fired up jewelry on the site. And they’re doing diamond rings and things like that. That’s obviously a pretty good margin product. So we fire up operators against that.

And then just, I think, our greatest opportunity right now is actually in -- it’s still a very small number of their overall traffic chat. And used as a product. And I think that’s where there’s a huge up-tick for us, is getting more of their consumers to actually use the product. Right now it’s in like the 10% of the people who are engaged in a chat are using it. And we think we know what we can do to sort of move the needle on that.

So I think those are two dynamics that will create greater growth in a per customer area. And then the other part is just the obvious one, which is more and more people are going online. And they’re using instant messenger, and they’re seeing chat. And so they expect it more. And so I think that’s driving also a lot more consumers to look for it, want it, and want it as a channel to communicate.

Well great, just keep your heads down, and keep executing.

[OPERATOR INSTRUCTIONS.] Brad Mook.

Thanks. On the release 7.5 that’s coming out, I think, if I’m not mistaken, there’s an analytics piece in that. And obviously that would be a pretty important part of improving web convergence. Can we talk just a little bit about how that puts you into competition against the analytics companies and I guess how you stand relative to that opportunity?

Yeah, we -- what sort of has driven us to go in this area is, today we provide analytics. But the analytics are sort of actionable, that we analyze all the traffic in real time, and then we can drive in action in real time, like a proctor chat or it can be a marketing, it could be a popup window, or just a [schlad] [ph] or something.

What we’re seeing is that all of our decision makers use one of the major analytics package out there right now. And they’re tagging their site. You know, we have tags on every page. And they’ll put those tags on every page. We tie together with those products right now, so that we analyze a certain amount of the sales pipeline, so when somebody goes and they’re looking at product, and they put it in a shopping cart, we analyze a lot of that. And we provide base level analytics for it in reporting.

What we don’t have is more of the historical view, which the other guys have, which is, okay, over the last month, X amount of users came from AOL. And they came from China. And we don’t have that as much. We actually, in our version that released in the end of the year last year, we actually re-did our database. So we collect the information from memory. But we don’t save it. And now what we’re doing is we’re going to save it and report it.

So we think it’s very important, because it completes the visibility into the success of our product, and then also gives a lot of visibility into what touched the customers. The other thing, I think there’s a different way to do it. I mean I think we’re taking a little bit different approach. And I think analytics have sort of copied each other in the past. I think there’s a little bit different way to skin the cat. And it’s a lot of the first version out in the 7.5.

So are you moving from a complimentary position to a competitive position then?

I would say it’s still complimentary. I wouldn’t put a flag in the sand yet. We have enough competitors. So, but I think we need to get a quarter under our belt. It’s basically, once again, it’s a customer-driven thing that they want, and that they’re paying for today. And we think there is an ability to sort of be in that market.

Alright. And your head count last quarter I think was 100. Where does that stand now?

It’s right around that same point. 103 -- hired a couple since then.

Okay great. Thanks.

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

Alright, that’s all we have. We’d like to thank everybody for joining us. And we will see you next quarter.

Thank you very much. Q2 2005 LivePerson Earnings Call 1