LivePerson Inc (LPSN) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the LivePerson’s third 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 today, November 1st, 2005.

Speaking on today’s conference call will be Robert LoCascio, Chief Executive Officer of LivePerson, and Tim Bixby, President and Chief Financial Officer.

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

Thanks 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 our forward-looking statement. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities & Exchange Commission for a discussion of these important risk factors.

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

Thanks, Tim. Good afternoon, everyone. And thank you for joining us. During the third quarter of 2005 we generated revenue of $5.7 million, up 31% from a year ago, and up 8% sequentially as compared to the second quarter of 2005. Bottom line was a penny per share better than both our initial guidance for the quarter, and a penny better than the prior quarter, with EBITDA per share of $0.03 and GAAP EPS of $0.02 per share.

Tim and I continue to be extremely excited about where the business is currently headed. The changes we’ve made in sales and marketing and the focus on the Timpani product line are providing us with solid results.

During the quarter we signed 28 deals with new and existing clients. We added several new top tier clients, including leading players in mortgage lending, asset management, diet and nutrition services, computer equipment, and online bill payment processing. We also recently expanded business with major, with our major U.S. financial institution, as well as Bell Canada, Overstock, and Verizon.

Also, for the first time in a long time there was a significant backlog of deals that are in the implementation process but are not yet live. Our focus right now is expanding our implementation team out in the field to accelerate these deployments.

From a revenue perspective, we expect to finish out 2005 above our initial revenue guidance of $22 million, while the current pipeline of contracts is up for continued strong sequential revenue growth into 2006.

Our sales team continues to close deals with large industry leaders. Their success gives us the confidence to continue to increase our sales and marketing investment into the next year as we expand our market presence.

Our next conference call we’ll give a more detailed outline of our investments during 2006 and also give initial financial guidance for the year.

So, what’s the long-term vision of LivePerson? It’s a question we’re asked almost weekly by existing and new shareholders, and I sort of wanted to try to address it here on this call. The vision, as it should, changes over time. And for several years the vision was really to be the leader in real-time online communications around chat.

And it’s become apparent that, you know, we’re there and we’re leading the market. And yet there are some other strategic opportunities that are developing around this space. We’re approaching these strategic opportunities in a measured way, and we want to really focus and maintain our leadership in the real-time communications space as it’s our foundation.

However, there is a large opportunity developing in helping companies analyze, engage, and convert more visitors, upside visitors, into buyers. And we sort of call this the ‘visitor conversion space.’ It’s not a fancy name, but it is what it really is today. And there’s billions of dollars that are spent each year on pay search and other online advertising vehicles, like Google. And these are really focused around driving web site traffic. However, the likelihood that a visitor turns into a paying customer still remains really low.

And here’s an alarming statistic. 80% of the traffic that arrives at the front page of web site leaves without even viewing a second page. Therefore, let’s say you’re ahead of marketing, and you’re buying keywords on Google. 80% of the traffic that’s coming to your web site immediately becomes worthless, right after that first click from the search engine. And by the time the remaining visitors go through the whole process on the web site and get to the shopping cart, less than 3% will buy. It’s still along that about 75% to 80% of people of visitors who make it to a shopping cart, leave, even when they get that far in the process.

So, why do 97% of visitors that go to a web site leave? You know, we’re all online shoppers, and what prevents us from buying? So, in order to answer this question, we recently invested a little money into a consumer research project in which we went into the homes of 30 people around the United States and literally watched them shop online in their natural environment, in their home offices, in their basements, in their living rooms, in their bedrooms.

And the project was really a qualitative study; and we were searching for the intellectual, functional, and emotional drivers of what makes online shoppers either buy or abandon the shopping process.

So, let’s take a guided look outside Atlanta, Georgia for our case study. And we actually did the research in and around Atlanta, Philadelphia, and San Jose. And like everyone, this guy in Atlanta his sort of minimum expectations is that all online stores will sell end product at the cheapest price and ship it to him on time to his front door.

He also believes that the Internet has made him an extremely well informed shopper. That, you know, if you’re looking for a specific product he can get all the information out there, competitive information, you know, where is the cheapest price, how is it rated technically. He can get all that information at his fingertips. And even then sometimes he felt that he was better educated than anyone who would even work at the web site.

So, let’s now shift over to the number one online retailer, Amazon. And Amazon states in the press release that Amazon.com seeks to be the [erst], most customer centric company where customers can find and discover anything they may want to buy online, and endeavors to offer the customers the lowest possible prices. That’s right on the money.

And there is a guy in Georgia who basically looks for those basic things. And so he goes to Amazon, and he shows up at that front page looking for the lowest prices and for a lot of selection but it doesn’t mean he buys. So, how and why does he buy?

So, in this case this gentleman owned a small manufacturing company outside of Georgia, and most of his online buying is around his business needs. And he talked about having sales reps who come into his office, pitching products that he needs for his business. And then what he does, he goes right on to Google, and finds the 20 or so companies around the United States that will sell them the same product at a better price.

So, then we asked him, ‘well, how do you select through that list of which companies to buy something from?’ And here’s where he said something interesting. He said, ‘although he does not have many product questions he still picks up the phone and calls someone at the company before he buys online.’

And we asked him, ‘you know, why do you need to do this if you already know what product you want?’ And he said, ‘it’s make him feel comfortable that there’s someone at the other end. That if there was ever an issue he knew that the company would answer the phone and help him. And 100% of the time if he had not purchased from that web site before he would definitely have to pick-up the phone and speak to someone before making that first purchase.’

He did say, ‘afterwards, after his initial purchase, he felt comfortable communicating by e-mail, but still felt that it was important to have some type of ongoing connection with the person at the company.’ He never had used chat before but, obviously, he liked the idea that he can communicate and do it in real-time, it fits his needs.

And so the reality is, and I don’t think this is just about a business of buying products, but this is also the consumers, we saw this throughout the other 30, the reality is many products and services today that are sold are basically commodities, they’ve commoditized. Low prices, fast shipping, you know, a really well laid-out web site, does not guarantee that the visitor will go past that front page and buy.

However, the customer service is not a commodity. The connection between buyers and sellers is not a commodity. Treating high valued customers as unique individuals is not a commodity. And the proof is in the statistics. When a visitor uses live persons to chat with someone at an online store, 25% of those visitors on average will become paying customers.

I think a real interesting case right now as you’ve seen recently, eBay has made a really big bet in that they purchased the VoIP company, Sky, for $2.6 billion, and this is a company that had $60 million in revenue. And when you read why they did it, it’s because they believe that getting buyers and sellers to communicate directly will increase sales.

Well, last week we hosted a two-day event with some of our largest customers to talk about some of the studies we just did, and they included Banc of America, and Hewlett-Packard, and Microsoft, and Overstock. And this group for companies I think is a fairly reliable indicator of where internet commerce is headed. And based on what we heard, online priorities over the next several years will focus on customer connection, experience, and conversion rates, rather than low prices, free shipping, and offering one click shopping carts to visitors. This is why we believe LivePerson will be a major force in revolutionizing online shopping.

This will be our last conference call in 2005, and I wanted to mention that on November 28th LivePerson will mark its tenth anniversary of its founding. A lot of people gave and continue to give their hearts and souls in building this Company, and also investors, analysts, friends, and especially our customers who continue to support us. I want to personally thank everyone who has been a part of this journey, and I look forward to the next 10 years.

And, with that, I would now like to turn it over to Tim.

Great. Thanks, Rob. Let’s shift gears a little bit, and do a quick review of the financial results for the quarter. And then we’ll do questions and answers at the end.

We are very pleased to, again, report record revenues. We generated revenue of $5.7 million in the third quarter, and this is a 3l% increase versus the prior year quarter, and an 8% increase from the second quarter of 2005.

Our GAAP and EPS and EBITDA per share were each a penny better than both the prior quarter and better than our guidance at $0.02 and $0.03, respectively. And I will give a bit more detail on the fourth quarter expectations at the end of the call, and they’re also detailed within the press release that was put out earlier this afternoon.

As in the second quarter, in terms of deal flow, we generated very good results across key verticals. In financial services we signed a leading asset manager with over $100 billion in assets under management. In the travel area we signed a leading theme park resort manager. Within the technology software vertical we signed a leading United States based PC distributor. In the general industrial vertical we signed a leading homebuilder. And within general internet services we signed a leading online diet, fitness, and health information provider. These are sort of an indicator of the kinds of companies and the kinds of verticals that we are seeing success in, and we expect this to continue as we look through our pipeline.

Internationally, we’re also continuing to see improving activity, primarily in the UK and Europe. We’re currently increasing our investment in UK sales support and hosting resources as a result. And we’ve recently signed deals with British Telecom, Prudential UK, as well as Honda UK, and we expect more to come from this region as we get into 2006.

On the business development front we recently announced a partnership with Salesforce.com. We have been chosen as the chat technology for Salesforce.com’s app exchange efforts. App exchange enables customers to greatly simplify and speed the process of deploying a multi-channel support organization, along with the ability to provide sales force automation. We will also continue working in concert with Salesforce.com to generate additional business for each other within our respected customer bases.

We’ve also recently hired a business development manager, a newly created position focused on creating revenue streams that are complementary to our direct sales efforts. This manager will coordinate larger enterprise deals, as well as partnerships with key technology players, with outsourced labor providers, as well as sub-distribution opportunities to support all of these efforts.

In terms of overall deal quantity and size, during the recent quarter, our average deal size was comparable to the second quarter; and as you may recall from the second quarter that was significantly increased from prior periods. The quantity of deals was, again, strong as in the prior quarter; and we closed about 28 deals in excess of $1,000 per month and this is a combination of deals with both new and existing clients during the quarter.

Another key metric is the number of implementations of our sales and marketing product. That number we expect to surpass 50 by yearend and 60 by the end of February, as compared to approximately 30 at the beginning of 2005. There is a significant number of these that will come online later in Q4 which will have some Q4 impact, but will begin to hit Q1 of ’06 as their first full quarter of revenue impact.

In terms of the overall revenue mix, it continues to shift toward the product and sales and marketing product. Currently the split of revenue is as follows: 35% sales and marketing; 35% customer service; and 30% small business.

About 70% of new revenue in the quarter came from sales and marketing deals, and about 30% from contact center deals. This is in line with last quarter’s figures.

And now for the specific financial results. In terms of revenue we reported record revenue of $5.7 million. This is an 8% increase versus $5.3 million in the prior quarter, and 31% up versus $4.4 million in the third quarter a year ago. And this was right in line with our guidance of between $5.7 million and $5.8 million.

Growth from new clients was about 40% of new revenue. This is a shift from approximately 70% in Q2, and this is a typical pattern we would expect to see whenever there’s a large surge of new clients, new customers, as we saw in the second quarter, they obviously become existing customers as you roll into the following quarters. Attrition was, again, below 2% and slightly below the prior quarter.

In the area of deferred revenue we’re seeing an interesting trend. Deferred revenue has been flat as compared to prior quarters, which is a departure from the typical pattern we saw in both 2003 and in 2004. Historically, deferred revenue would typically increase in the first quarter and then decrease gradually over the course of the year in Qs 2, 3, and 4. This was driven by a small number of clients that paid for a full year’s service upfront.

Breaking down deferred revenue between annual deals paid up front and new deals shows that deferred revenue related to new deals had actually grown consistently over the past two quarters. Simply put, our deferred revenue in Q3 is approximately 50% higher than we would have expected based on prior year patterns. And this further supports our view that a meaningful improvement in client acquisition is happening. This revenue in deferred revenue will be recognized for the most part over the next two quarters as those clients are implemented, trained, and go live with the product.

Cost of revenue in the third quarter was $1.1 million as compared to $1 million in the prior quarter, and $.7 million in the prior year, resulting in overall gross margin of 81%. And this is in line with the figure from last quarter.

Product development expense for the quarter was again flat at $.7 million, as compared to the prior quarter and up from .5 million in the prior year. Sales and marketing expense in the third quarter was $1.7 million, flat as compared to the prior quarter and up significantly from $1.3 million in the same quarter of the prior year.

General and administrative expense for the quarter excluding amortization of intangible assets was down 6% sequentially to $1 million, as compared to $1.1 million in the prior quarter and down significantly as compared to $1.2 million in the third quarter one year ago.

We recognized amortization expense of $.2 million in the quarter. This is consistent with prior quarters, and we’ll continue to see that expense into the fourth quarter of 2005.

EBITDA or earnings before interest, taxes, depreciation, and amortization was $1.2 million. This is up 46% from $.8 million in the prior quarter, and up 74% from $.7 million in the prior year. EIBTDA per share in the quarter was $0.03, up a penny as compared to both the prior quarter and the prior year.

The reconciliation between EBITDA and GAAP net income is provided within the financial statements accompanying our earnings release. Net income was up 72% as compared to the prior quarter, while net income per share in the quarter was up $0.01 to $0.02, and as compared to a penny in the prior quarter, and as compared to a penny for the third quarter in the prior year, as well.

And next, on the balance sheet, our cash balance at quarter end was up significantly, to $15.2 million. This was an increase as compared to the second quarter of $2 million or about 15%. And this was driven primarily to the timing of cash collections.

Our accounts receivable balance was down significantly to $1.5 million from $2 million in the prior quarter, and this is obviously in line with the cash increase. Deferred revenue was flat at $1.7 million versus the prior quarter, as discussed before. And DSOs are very low running at about 25 days.

And now to review the expectations for the current quarter and what that means for the full year 2005. As you may recall, last quarter we began to give revenue guidance as a range of dollar figures rather than a sequential percentage growth number. We expect to continue to provide this guidance format going forward.

For the fourth quarter we expect revenue between $6.1 and $6.2 million, EBITDA per share of $0.03, and EPS of $0.02. Achieving this performance in the fourth quarter would result in full year revenue of between $22.0, $22.2 million. EBITDA per share of between $0.10 and $0.11, and EPS of $0.05.

While we have not given guidance for 2006 yet, we do feel that the growing base of deferred revenue and the strengthening sales pipeline gives us an excellent starting point for the first quarter of 2006.

We expect expense categories as a percent of revenue in Q4 to be in line with the actual results we showed in Q3, so no significant changes there. We also expect an effective tax rate of 35% for the full year, which is not a change although this may be adjusted downward slightly as we move further into the fourth quarter. These figures in terms of expectations don’t include any impact of expensing options. We expect to implement a change in accounting policy regarding expensing of stock compensation beginning in calendar 2006 as required.

Capital expenditures YTD have been $240,000, and are expected to be less than $500,000 for the full year.

That covers the overall financial review, and now if we could ask the Operator to rejoin the call we can take questions from those of you who have any questions to ask.

[OPERATOR INSTRUCTIONS.]

We have a question from the site of [Brad Witt]. Your line is open.

Hey, good afternoon, guys.

How are you doing?

Hey, Rob and Tim. I was wondering if you could give us any color on just general color on the bookings this quarter as compared to last quarter and whether or not that’s moving up, or?

Yes, I think the deferred revenue discussion I walked through is the best indicator of what’s happening there. And what we – it’s – there’s some complexity there; and the correct way to analyze that is to really pull up our two pieces of deferred revenue. One is what we’ve seen historically for I would say at least two or three years which is a buildup in the first quarter and then a slight draw-down over the ensuing quarters of the year.

What we’re seeing this year is that reduction following the first quarter is not happening. In fact, we’re seeing flat or actually slightly increasing over deferred revenue. And what that means is the normal trend is happening, meaning we’re resigning folks who are paying up front in January, and that drives deferred up in the first quarter. But then we’re also signing a greater proportion that goes into deferred revenue in the following quarter.

So, in Q2 we saw about a 20% higher deferred revenue than we would have expected to see based on prior periods. And that 20% is driven by bookings, essentially. In Q3 that number was 50%. So, deferred revenue in Q3 was 50% higher than we would have expected based on historical patterns. So, that is really, while we don’t give an exact booking number, that’s really where you see the impact on the balance sheet.

OK, and can you talk a little bit about some of your sales and marketing transaction, you know, sizes? What you’re seeing as customers do the proof of concept and then kind of go to the rollout stage? What kind of investments they’re willing to make?

We’re seeing I would say results are consistent with the larger deals in the first and the second quarter. So, you know, again a typical proof of concept will be $45,000 onetime for a 90-day period, and then we’ll roll into a recurring deal following the POC of typically $15,000 a month or up, and so, you know, we’re really targeting deals in the $150,000 to $200,000 per year and up.

Okay. And what – were there any kind of restraints on your ability to recognize this revenue this quarter from not having enough implementation people?

Yes, I think there’s – I mean right now there’s a fair amount of retailers in the signed area. And as you know, we don’t recognize revenue until we deploy it. So, we got as many as we could in before the holiday starts, which is essentially now. So, some of those guys will start to go late December, and then we’ll start implementing them in January and February.

And then the second part of that is we’ve increased the implementation team by about 20% from a headcount perspective just to catch-up with the new signings that are happening in Jim’s team, so sort of a combination of both. But there’s – that’s why we have a backlog right now that’ll go into Q1 for implementation.

All right. Can you just walk us through from the time, say once the proof of – once you get past the proof of concept, then kind of what the next stage is as far as how long it takes to deploy it and then when you start to recognize revenue in general?

Well, we start to recognize revenue upon the implementation, during the proof of concept, and we’ll start to recognize that in three equal chunks, usually around $45,000 for that 90-day proof of concept. Then once they go live, we bill them immediately, so there’s no work, I mean there’s a little bit more expansion we’ll do, some more rule building and some analysis of the site. But they’re paying us from the first day of implementation off the proof of concept, and then as they go live they just expand.

The big bump happens is once the proof of concept is done, we get a pretty good read on how many operators they really need, because we can tell how many shots they’re not taking. So, they may start with five or 10 operators and then during the proof of concept we realize 20, 30, or 40 operators is necessary to do the implementation. They’ll jump right to that part, and then we’ll do the training of those 20 to 40 operators which, you know, takes about – it’s a three-day event to train operators right now.

Okay. I’ll turn it over. Thanks, guys.

Our next question comes from the site of [Brad Knuke]. Your line is open.

Thanks. Can you just go back to the seasonality on the implementations? If your e-commerce customer shutdown a bit for the holidays in terms of making changes to their sites are you, are other vertical and other customers still pushing ahead, or is there seasonality there, as well?

No, I mean like if you look at Banc of America implementation, that continues to grow because they’re around financial services. So, financial services, the telco guys are pretty much not really in a cycle during the e-commerce, you know, during the holiday season, so those two verticals continue to go, you know, during the quarter.

Are you able to re-deploy implementation teams then?

Yes, I mean it’s basically, I mean the implementation teams are working around the clock, but they’re working full throttle to get those guys up. And then there’s – and then we look at companies like Banc of America, these are big deployments. So, they’re taking a lot more resources than even we’ve deployed in the past on a single customer just because we’re moving through, I think we’re in our third group over there right now, third or fourth Division, and that went a little quicker than we thought. So, we’ve got to train those operators and then get those Divisions up and running and build the rules and things like that.

Okay. So, there shouldn’t be any seasonal affect on your P&L in terms of getting deals to revenue recognition?

I mean there’s a little bit, and some of it’s going to – like I said, some of the e-commerce guys push out into Q1. But the bump will be a little, you know, there’ll be a bump, but it’s not like a doubling of revenues or anything like that in Q1 because of the fact that we still have to get them deployed. They physically still have to get up and running.

I’m also looking at Q4 in terms of your guidance, and the 7 to 9% sequential growth that you’re implying. I’m just trying to get a sense as to whether that’s got some downtime factored in?

I think there’s a little down time factored in that from an implementation perspective. And I think it’s the combination of ramping, you know, more people into the implementation team, catching up with sales, and then a little bit of the, you know, of the e-commerce guys that we’re not going to go live until post, you know, into Q1.

So, it’s a combination of both of those that sort of creates a little bit of a backlog. Where traditionally we’ll sign and there’s enough bandwidth in the implementation team to take them live immediately. And that’s not the case today.

Okay. And on the sales and marketing side, have you been continuing to increase your sales headcount?

We’re still at 10 currently. We have added the business development resource, and right now that sits in the sales area, sort of in partnership with Jim and the sales efforts, you know, the direct sales efforts. We are still actively interviewing and filling the pipeline on the sales rep side, so I’d expect to bring in more over time. And we are also bringing onboard our UK resources as, you know, 100% dedicated to LivePerson which will also give us some increased sales bandwidth.

Okay. And is your hiring strategy on the sales side being dictated by your backlog, implementation backlog? By the opportunities you’re seeing in the field?

It’s more opportunities we’re seeing in the field in leads that are generating though our marketing efforts; so, you know, Jim is just, Jim and Kevin are really just going as quick as they can to get as many new deals as they can in regardless of the implementation team catching up with it. And I believe the implementation because we just hired a couple more people will be able to catch-up with it fairly shortly. So, but those guys continue to go.

Okay, but it sounds like you’re proceeding pretty cautiously with respect to adding sales heads?

Yes, I mean he can only train and hire, and he wants to hire good, talented people. And we have I think a very strong sales force right now. So, I mean we basically say, you know, hire against the opportunities and as quick as you can, based on good talent. And we don’t just want to throw bodies out there. You know, you guys have met Jim, he wants to hire a strong sales team at this point and have everyone be very, very strong, and have strong players. So, that’s what his focus is right now.

Okay, understand. And you’ve done a great job controlling G&A. In fact, it’s sitting back where it was about two years ago. So, what’s going on behind the sequential decrease over the past couple of quarters? And how have you been able to contain that?

In G&A?

Yes.

It’s driven almost entirely by two things. The largest, the larger of which is Sarbanes-Oxley implementation. So, we’re seeing the benefit of the lower costs in year two of that, versus year one.

And the second was overall legal expense. We were sort of finalizing some legal settlements in a year ago, a year-and-a-half ago relating to some restructuring efforts we went through in 2001 and 2002. And that cost a bit in terms of outside legal counsel. So, both of those, you know, favorable changes have now sort of hit with a full impact, and that’s why we’re able to keep that number down where it is.

Okay. And then I know you’re not touching on ’06 guidance at this point, but just can you comment a little bit on the gross margin? What you expect out of that over the next couple of quarters?

Yes, I think, you know, it’s been sort of been 81% last quarter, 81% this quarter. I don’t expect it to increase dramatically next quarter. I would expect it to be, you know, roughly the same. You know, it’s probably 81, maybe 82.

And then I think it is reasonable to expect that it will be, you know, begin Q1 at that level and then increase from there. Whether or not we can end the year at above 83 or 84, I think it’s too early to say. But I think that is a range that we should be, you know, expecting based on what I see right now. So, you know, entering the year at 81 or 82; exiting the year ’06, 83 maybe 84.

Okay. And the driving factor there or determining factor is really your needs to add equipment and stuff for capacity with new customers coming online?

Yes, it’s – yes, it’s exactly that. We’ve had a couple, you know, we want to beef-up our structure in the UK. There’s some fixed costs to that because, you know, once, obviously you’ve got to have one database whether you have one customer or 100 customers. And there’s some other components of our infrastructure where that’s also the case.

So, anytime we expand that, you know, you’ll see that. As we build out in the UK you’ll see that as we build out a backup facility in the UK, as we expand our backup facility in the U.S. Those are really, you know, fixed costs that you’ll see hitting this year and next year, but then those should scale over time as we saw the fixed cost scaling, you know, a year-and-a-half ago when gross margins were increasing.

Understand. Okay, thanks, I’ll pass it on.

A question from the site of [John Forrest]. Your line is open.

Is there any question?

All right. Our next question comes from the site of [John Pinto].

Yes, sorry about that. Good quarter, guys. I guess just a, you know, maybe the expectations out there have gotten a little ahead of themselves. But I guess where we were thinking is given the strength in your business, obviously, great signing and hearing great things about the product, would have expected to see, you know, the beginning of acceleration of the sequential growth rates.

And then given especially your 4Q guidance basically staying at the same level, just help us understand what is the bottleneck? I mean I know we’ve got some salesmen you’re looking for qualifying, you’ve got some limitations, it takes time. But, you know, there are a lot of moving parts in the background, revenue – what is holding you back from what obviously seems to be a very strong product lineup from, you know, accelerating that sequential growth? What’s going to be the thing that takes us to the next step?

Well, I think we actually are accelerating growth, so just sort of step back a minute. If you look at the actual, you know, the dollar growth amounts, you know, we’re adding incremental revenue in Q3 and Q4 based on expectations at a rate that’s 35% higher than we saw in Q2. So, we are seeing an acceleration. If you factor in also the deferred revenue impact, you know, we’re seeing even more significant acceleration from a bookings basis.

So, that is, you know, part of the reason why we stepped back a little bit a couple of quarters ago from the percentage growth guidance because we felt that there’s a tendency to miss the impact of a continuously increasing revenue base. And, therefore, the sequential growth rates, you know, you’re working off a bigger base and creating a bigger number every quarter.

Now, that being said, we would, our goal internally is to not only show accelerating dollar growth but to show standing sequential revenue growth and increasing sequential revenue growth which really, you know, suggests a not an increasing rate but an actual inflection where, you know, you’re seeing sort of a hockey stick impact when both of those things happen.

We, you know, at this point we’ve really ramped up the sales and marketing resources. We’re seeing the bookings. We’ve got the pipeline in place where we’re going to go from 30 implementations at the beginning of last year to 60 implementations by the end of February. There’s, you know, there’s probably another 1% of growth that we could have gotten this quarter if we had absolutely no implementation issues, but it’s not a dramatic impact where, you know, we’ve got a significant backlog here. This is one of the issues that we’re seeing so we wanted to highlight it a little bit.

So, you know, that means that there is no real holdup. We are, you know, increasing our sales resources. Each rep is increasing their productivity each month, our results versus quota are increasing each month. So, you know, I think things are on track. Our goal as ever is to see double-digit sequential revenue growth. You know, we don’t see that in Q4, but we do see the potential for that in 2006, and that’s what we’re striving towards.

The – okay, the 30 to 60 implementation, and that’s kind of a 12-month, it’s a 12-month comparison figure, right?

That’s right.

So, would it be fair to say then that given the size of your contracts are actually increasing a little bit, is that fair to say?

Relative to the beginning of the year, yes, they’re fairly steady at this point but at a much higher level than we’ve seen historically.

Okay, so if I do the math there, is it fair to say, and I know you’re not giving guidance for ’06, that ’06 will have double the revenue? Or that’s the pace that you’re on if you don’t go backwards in sequential growth?

The 30 to 60 implementations reflects the portion of revenue from sales and marketing.

Okay.

Which is a proactive product.

Right.

And that’s about 35% of our revenue currently.

Okay.

And so if you – you’d have to adjust for that, it’s not 100% of your revenues currently, it’s about a third, so you’d have to factor that in, as well.

And at this point, that’s the fastest growing part of your business?

That’s correct.

Can you give us a little bit of a feeling as to in sequential growth or in the growth parts of the business where you see the other, is this growing at double the rate of the customer service or the other parts of the business?

Each of the pieces, if you sort of break it down and look at sequential growth, small business over, you know, let’s look at the last two or three quarters, or the last two quarters. Small business grows between 6% and 9% sequentially. Contact center, which is the customer service part, the large companies.

Right.

Has grown in a 2 to 3, 2 to 4% sequential rate. And sales and marketing has grown in the 12 to 14% sequential range.

Okay. And do you see the relationship of those changing over the next year as to the differential growth rate? Not the absolute level, but just, you know, the relative differential growth rate?

I would expect those relative rates to remain consistent. I think, you know, ranking them one, two, three, I think that ranking will remain consistent into, if not the whole year of 2006.

Okay. All right. Good work.

Thank you very much.

Our next question comes from the site of Richard Fetyko. Your line is open.

Thanks, guys. I was just wondering about the marketing initiative that you’ve implemented? Are they generating any sort of inbound deal activity? And also the sales force implementation, could you just go over that? What that means for you? Who will be selling your product, and how big could this channel become? Thanks.

Yes, the marketing efforts that are focused around, sort of direct marketing approach which we’re targeting verticals. I think it’s generating a significant amount of leads right now to the sales force, and that’s increasing all the new sales activity. So, we’re pretty happy with what we’re seeing there right now.

We do have an outbound call center to a third party that we have three or four people to do some outbound work for us, combined with the online and some trade show stuff. So, that’s where, we’re happy with that. And I think Jim’s team is getting some good quality leads.

As I look at a lot of the names, and we haven’t put them out yet, there’s some big brand names down that we’ve signed that we will release over the next couple of quarters. That’s exciting. So, that shows that we’re targeting the right people.

The second part is Salesforce.com, we did a launch about six or seven weeks ago, so here in New York City with the Salesforce.com guys, I was up on stage with Mark Benioff, and we talked a little about the partnership. And so we were in front of I think a couple of hundred of their customers, and we got some inbound lead activity already through that.

And we’re the feature partner, if you go to their app exchange, we’re the first application on there, and we’re also embedded in their support product. So, I think they’re making a much more proactive effort, and that should generate more sales.

We haven’t given any numbers because I think we should see one quarter’s worth of deal activity and then we can give a sense of what’s the reality of it. But there’s definitely a proactive marketing push and sales approach on both of our sides. So, we should see some activity from it.

Okay, thanks.

Our next question is from the site of John Forrest. Your line is open, sir.

Hi, thank you. I’m sorry I got disconnected earlier. You guys have answered just about all my questions, but can you talk about the aging of your pipeline? And also the last conference call you talked about the time to close your sales and marketing deals was shrinking. And maybe you can just update us on that a little bit?

Yes, I think in terms of aging, I think we’re seeing potentially a onetime shift, although, you know, it’s tough to say until you’re looking backward in time. But based on two things, we’re seeing a slightly longer time to implementation. One is increased deal flow, so we have more to implement. Two is they’re typically larger companies, more complex deployments, and more moving parts within the Company that we’re selling to.

The combination of those two things has added maybe 30 days, maybe 40 days to a large company implementation. So, in terms of aging, I don’t see sort of a steady upward trend. It’s more on sort of the onetime shift where the companies are bigger, the deployments add them on. Does that cover your question?

Thank you.

[OPERATOR INSTRUCTIONS.]

We have a follow-up question from the site of Brad Knuke. Your line is open.

Hi. I don’t know the answer to John’s question about the timeline to close the deals? Maybe you could answer that?

Oh, in terms of just general sales cycle? We’re not seeing any major shift. The range is still fairly broad, meaning we’re closing sales and marketing deals in as little as two months and as many as, you know, six or seven. But the average I think hasn’t moved from its, you know, call it five months expected length.

Okay.

Very good. There appears to be no further questions at this time.

All right. Thanks very much for joining us, and we will see you on the next call.

Thank you very much.