LivePerson Inc (LPSN) 2005 Q4 法說會逐字稿

[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, go ahead sir.

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. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission for discussion of these important risk factors. And now I would like to turn the call over to LivePerson's Chief Executive Officer Robert LoCascio.

Thanks Tim. Good afternoon everyone and thank you for joining us. During the fourth quarter of 2005 we generated revenue of 6.3 million, up 37% from a year ago and up 10% sequentially from the third quarter of 2005. This growth exceeded the top end of our initial guidance for the quarter. EBITDA per share was $0.04 and EPS was $0.03, both a penny per share better than our previous guidance for the quarter.

Tim will give you a bit more detail on our strong quarterly financial results later in the call. I'd like to now review some of our major accomplishments during 2005 as well as provide some more color around our plans and expectations for 2006. Over the past 12 months we have delivered a consistent message about the changes we made at the beginning of 2005 and how the impact of these changes in our product lines, sales and marketing groups would begin to bear fruit in the second half of 2005. During the first three quarters of 2005 we delivered solid sequential quarterly revenue growth rates of 7 to 8%, while continuing to aim for a goal of at least 10% sequential quarterly growth rates. In Q4 we achieved this goal. Tim and I are pleased about the steady progress we are seeing, our sales pipeline remains strong and we are signing up many name brand customers, so we anticipate that 2006 will be another year of strong growth. During the quarter we signed 25 deals with new and existing clients. We added several new top tier clients including Back Country, J.Jill, Verizon Wireless, MacroMedia and Citigroup. We also recently expanded our relationship with Bank of America and are now operating six lines of businesses. Beyond Bank of America we now have six of the top twelve U.S. financial institutions as our customers. There's several key areas of focus for LivePerson in 2006. We plan to accelerate our top line revenues to expanded sales, marketing and product initiatives and at the same time we want to get better at delivering our products in order to expand our margins.

I spoke a little bit about our professional services group during our Q3 call and I would like to give an update on that group. This group was slightly behind in staffing, against our accelerated sales until we added five new people into that group during Q4. Although we increase in the head count in special service groups by 20% we're simultaneously improving how we implement and train our customers. For example we have a formal program called center of excellence that enables us to transfer training and implementation best practices to key people within our customers. The long-term effect of this program enables us to grow a customer without having to do a hundred percent of the heavy lifting, because we are using some of the key resources on our projects. We're also expanding the Timpani sales and marketing product lines to include, [Acrops and Upsell] marketing component that drives dynamic content by leveraging our existing rules engine. Our rules engine can be used to generate a unique promotion like free shipping to a specific customer, based on the value of their shopping cart or behavior pattern exhibited while browsing the web site.

Our goal with these expanded marketing capabilities is to expand the number of touch points on a web site to include areas in which our customers cannot use sales reps to drive conversions like low margin products. A shareholder recently asked me what I thought would indicate that LivePerson is reaching its full potential, my response was when I go to a cocktail party and I majority of people in the room use LivePerson to get through the process of buying on line. For a very long time on line commerce was driven by the notion of build it, they will come and they will buy. The reality for on line marketers is 98% of the people who come to the web site don't buy. We embarked on a research project in Q4 in which we actually went into the homes of about 30 consumers in the United States, in Philadelphia, San Jose and Atlanta, we work with a research firm to find out why people don't buy, why do they abandon their shopping carts, why do they leave the process of buying. What we found is sort of what we have all been reading about lately which is version 2.0 of the internet and why it's important. In version 1.0 of the internet it was about organizing information on the internet and making it easier to find and navigate an online store or queue the online store.. In companies like Google and eBay, Amazon sort of embrace this idea.. What you will see in version 2.0 of online shopping is a web site's ability to tap into the emotional drivers of why people buy. We just don't buy because of price, because of large selection, because of overnight shipping. When we walk into a retail store we buy because their emotional drivers that make us buy specific items in a specific store and this is an area that's been sort of neglected on the internet until now. When we realize that two of of these emotional drivers of why people buy are around connection and community and they're really at the core of the why person service.

What our future product road map will do is take us down a path to creating more services that drive the emotional connection between buyers and sellers on line. With the ending being the ability to increase conversion rates significantly for our customers. We had a national sales and service meeting about half of the Company was in New York City last week and I know everyone who was at that meeting came away feeling very excited about the future of the Company and more importantly about the overall strength and energy of the team today. I want to thank everyone at LivePerson, all the teams for contributing to a really terrific year, a year which we had to rebuild a lot of new processes, based on the new product lines and for achieving what we set out to be, a goal of ours, which was double digit sequential growth rates in Q4 and I look forward to continuing this momentum into 2006 and to achieving our ultimate success. With that I'll now turn the call over to Tim, who will give you more detailed outlook into our financials, Tim.

Thank you, Rob. We are very pleased with the results in the quarter and for the full year of 2005. We exceeded our expectation on quarterly guidance on both top and bottom line. We reported record revenues of $6.3 million in the fourth quarter, which was a 37% increase versus the prior year and a 10% increase from the third quarter of 2005. Full year revenue was up 28% year-on-year, to 22.3 million, which was also better than our guidance range of 22.1 to $22.2 million. Quarterly GAAP EPS was a penny better than our guidance at $0.03 per share. Full year EPS was $0.07 cents, which was $0.02 cents better guidance. We give a bit more detail on our fourth quarter full year results as well as our first look at guidance for 2006 later in the call. There are also detailed within the press release from earlier this afternoon. We exceeded expectations on the revenue line. As indicated on our last quarterly call we anticipated as we increased size of our implementation team we would be able to pick up the increased deferred revenue that was on the balance sheet over the course of the fourth and the first quarters. We got a bit more of that in the fourth quarter than was reflected in initial guidance. Therefore we get a bit less of it in the current quarter. Underlying that small impact was of course, very strong growth in recurring revenue as well as new business. As in the third quarter we generated very good results across key verticals.

Within the financial services area we signed two more top ten U.S. financial institutions taking us to a total of six of the top twelve as LivePerson customers. Within the area of travel we signed another leading theme park resort manager as well as a leading online travel site. In the internet sector we signed the second of the top three online search providers to the customer list. Our average deal size was comparable to the third quarter and the quantity of deals was strong as in the prior quarter. We closed about 25 deals in excess of a thousand dollars a month with both new and existing clients during the quarter. Recurring revenue in the quarter was 95% of total revenue, professional services revenue made up the remainder of the revenue. We have no perpetual license business. About 10% of our small business clients are using our contact center product at this point. That product includes e-mail and self service capabilities in addition to chat, so we are seeing good uptake in that product line.

We're also continuing to build out hosting capabilities with greater capacities in both the U.S. and United Kingdom. Our uptime in these facilities continues to be at the highest levels, with an overall uptime in the full year of 2005 of, 99.94%. This represents about half an hour of of unscheduled downtime per month on average. Significantly better performance than nearly any high volume premise based software solution. We increased total customer count to more than 4,000, representing significant growth across all our product lines. In terms of revenue mix, the revenue mix continues to shift toward the proactive sales and marketing product. Currently our revenue mix is very evenly split. 35% sales and marketing, 32% customer service, 33% small business. In the quarter about 70% of new revenue came from our sales and marketing product and about 30% from contact center. This is in line with the results from last quarter. We're also taking this opportunity to update our revenue split among key industry verticals. Currently our revenue breaks down as follows. Financial services makes up 25% of our current recurring revenue. Technology companies about 25% as well. Telecom companies also 25% and that's a significant increase over the past year. Retail companies about 20%. And all other make up the remaining 5% of revenue.

Our largest client today represents less than 5% of our total revenue, while our top ten make up 20% and our top 25 about 30% of our total revenue, reflecting a very broad and diverse customer base. In terms of revenue per client our average small business client pays us approximately $2,000 per year. Our average contact center client about $45,000 per year. And our average sales and marketing client, about $200,000, per year. I'll now review the specific financial results for the quarter ended December 31, 2005. For the quarter our reported record revenue of $6.3 million which was a 10% increase versus 5.7 million the prior quarter and a 37% increase versus 4.6 million in the fourth quarter of 2004. This was better than our guidance between 6.1 and 6.2 million. Growth for new clients represented 50% of incremental revenue in the quarter, this was slightly higher than the prior quarter when it was 40%. Revenue for the year was $23 million, up 28% from the prior year and also better than our initial guidance of a quarter ago. Deferred revenue was down slightly to 1.6 million from 1.7 million, but still up more than 20% versus a year ago. Cost of revenue in the fourth quarter was $1.3 million as compared to $1.1 million in the prior quarter and$0.8 million in the prior year resulting in overall gross margin of 79%. This is down two points from last quarter.

Cost of revenue for the year was $4.3 million as compared to $2.9 million in the prior year, giving us a gross margin for the full year of 81% as compared to 83% in the prior year. As noted on the last two conference calls we have been quite aggressive in building out our professional services and implementation teams to support the larger clients we have begun to sign during 2005. As Rob mentioned, this has a dampening effect on gross margin in the short term, but is without question, the right decision to make to foster growth and confidence among these much larger clients in the early stages of our relationship with them. We expect gross margins to continue to be pressured in at least the first two quarters of this year, though to remain at 80% or better and then to begin to edge up again as revenue grows. We believe that our long-term target of 85% gross margin overall continues to be attainable at a $50 million revenue run-rate. A significant proportion of our R&D investment each quarter is directed toward improving our ability to implement our product lines in an automated way. To enable our PS staff to focus on only the most value added tasks. In the short term we are busy implementing new clients as efficiently as possible. Over the longer term we expect to expand this implementation capacity without necessarily adding the level of implementation related head count as we have during the past year.

Our product development expense for the quarter was flat at.7 million as compared to the prior quarter and up from $0.5 million the prior year. For the full year our development cost was $2.7 million, up from $2 million in the prior year. Sales and marketing expense in the fourth quarter was $2.1 million, up significantly from $1.7 million in the prior quarter due primarily to compensation related to increased sales and business development head count as well as higher sales commissions. Sales and marketing expense for the full year was $7 million versus $5.2 million in 2004. General and administrative expense for the quarter excluding amortization of intangibles was up slightly to $1.1 million, as compared to a million dollars in the prior quarter and down significantly as compared to $1.3 million in the fourth quarter of 2004. Full year G&A expense was $4.5 million, this is flat with the prior year. Though our quarterly run-rate [exiting] the year was 20% lower than a year ago. This change is related primarily to lower legal and accounting costs that we expect to carry forward. We recognized amortization expense of $200,000, $0.2 million in the quarter and$0.9 million for the full year.

EBITDA or earnings before interest taxes depreciation and amortization was $1.3 million. Up slightly from $1.2 million in the prior quarter and more than double the prior year result. EBITDA per share in the quarter was $0.03 cents, flat as compared to the prior quarter and up significantly versus a penny in the same period in the prior year. The reconciliation between EBITDA and GAAP net income, is provided in the financial statements accompanying today's earnings releases. Net income was up 67% as compared to the prior quarter. Net income per share in the quarter was up a penny to $0.03 cents as compared to $0.0 2 in the prior quarter and compared to a penny for the fourth quarter of 2004. Turning now to the balance sheet, our cash balance at quarter end is was up significantly to $17.1 million, an increase as compared to the third quarter of nearly $2 million. Also was up $4.7 million from $12.4 million in cash one year ago. Our accounts receivable balance increased to $1.7 million in the prior quarter. While deferred revenue was down slightly to $1.6 million versus the prior quarter. DSO's continue running very low at about 25 days.

I would now like to talk a bit about expectations for the current quarter as well as for the rest of the year 2006. As in the past our guidance tends to be conservative and is based on what we see in the business at a point now where we are really only one month into 2006. We currently expect the following financial results. We expect revenue in the first quarter of 2006 of between 6.75 and $6.85 million. We expect EBITDA of $0.03 per share and GAAP EPS of a penny for the first quarter of 2006. We expect revenue of 30.0 to $30.5 million for the full year 2006. We expect EBITDA of $0.16 per share and GAAP EPS of $0.05 cents per share for the full year 2006. We're also assuming and encourage you to assume an effective tax rate of 40% for the full year 2006.

The GAAP EPS expectations of just highlighted, already include the estimated impact of a change in accounting policy related to adopting FAS 123 as of January 1, 2006. This change is expected to decrease net income per share by $0.05 cents for the year and a penny for the first quarter of 2006. This is based upon the number of options outstanding as of December 31, 2005. This impact of course may change based upon additional stock option grants and forfeitures if any, methodology refinement or other factors. It is reasonable to assume a consistent impact, this change each quarter on a straight line basis during 2006. Given that there is a potential volatility in the stock option impact estimates in that there are many inputs and assumptions we will continue to report EBITDA and EBITDA per share as we have in the past and encourage you to use an apples to apples comparison basis excluding this change until we are past this transition period. Our sales force that is driving the strong expectations continues to grow. We currently have 12 quarter carrying sales reps on board, that's up from 10. Recently and expect that to grow to at least 16 or more by year end 2006. Existing reps on board are progressing well, but still have incremental revenue generating capacity. Between increasing the number of deals closed and increasing the revenue per deal we believe we can get another 30% or more productivity lift out of the existing reps that are already on board. Growth in 2006 will come both from existing reps as well as from the additional sales head count.

Our professional services group has also grown quickly as we have added significant horsepower to implement at a faster and more efficient rate. Overall we currently have 120 employees in the company, up from about 90 a year ago. We anticipate head count growth to approximately 150 by year end with most of this growth coming within the sales, client support and research and development groups. Our effective or book tax rate for 2005 was 21% and is expected to be 40% in 2006. Our cash tax rate was less than 1% in 2005, but is expected to be approximately 30% in 2006 as we make the transition between an accrual tax basis, a cash tax basis and accrual tax basis. Capital expenditures in 2005 was about $360,000 and will be approximately $500,000 for the full year of 2006. Depreciation and amortization is expected to be approximately a million dollars in 2006, or about $0.02 per share. Share count assumptions for the full year, we would recommend you use approximately 41 million fully diluted shares. Current quarter number is 40.6 million fully diluted shares. At this point that concludes our financial review. We would now like to open up and ask the operator to give instructions so that we can take questions from our listeners.

[OPERATOR INSTRUCTIONS]

Our first question comes from [Brad Muck], go ahead please.

Thank you. A couple questions. How many deployments do you have of sales and marketing at this point?

We're right on track with what we went through about a quarter ago where we expected to have about 50 to 60 by the end of February. So I would say we're on track with that, we're closing in on 50 at this point.

Okay. Of the number of transactions you announced this quarter, I think 25, are those mostly sales and marketing, how does that break down?

Yeah, in terms of dollars it's about 70% sales and marketing. In terms of deals it flips the other way, so it's probably one third of the deals are sales and marketing, two thirds contact center because of the large difference in the price per product.

I understand. How long is it taking to get customers live once you have actually closed the deal, is there an implementation backlog you are still trying to work off.

We have worked through most of the backlog at this point. I think we saw one time event that we discussed today and discussed on the last call. At this point I think we are back on what we expect to a normal schedule where there's no back up. It does tend to be a little bit longer where once 30 days was the norm it runs between 30 and 45 days for that first piece of the implementation cycle, but is primarily within that reasonably small range.

Okay. And you talked about upsell, cross sell opportunities with some new product pieces. Rob, you and I have talked a little bit about different pricing models. What are you doing on that front, are you still pricing [per seat] or have you gone off that?

It's predominantly revenues driven per seat. In Q4 we started to add a transactional per chat fee above a certain amount of chats to get with each seat a certain amount of chats, based on the volume on a client basis, then we will charge $0.10, or $0.15 above per chat. So on the marketing addition, on the stuff that's nonchat based we're sort of looking at the same way, how many transactions can we drive through, this is nonchat, this is somebody getting the marketing information, then going to the shopping cart and buying, that's where we are trying to move the model.

Okay. And was that the incremental overage chat charge anything material?

I'm trying to think on a percentage basis. Probably half a point. In the quarter.

So it actually did help.

Yeah, absolutely.

Okay. And that's it, I'll jump back, thanks.

Next question comes from Richard Feddica. Go ahead please.

Congratulations on the quarter.

Thanks.

Thanks for taking my questions. One first on the sales cycle, what you're seeing on the contact set aside for enterprise customer on the sales addition side, then also plans for European expansion, what you're seeing out of that region, thanks.

On the contact center side, we moved a predominant amount of that business into our small business group. So our small business group is servicing the one [QC] deals also up to about five or six feet, sales cycles are fairly short, within 90 days is when a customer is closing on that side of the business. Then the Timpani sales and marketing is probably still 4 to 6 months to get somebody closed, you know, sometimes a lead will come in and they will close within eight weeks. But it's pretty much I would say about four to six months. European expansion, we have now got three people in the UK and so two salespeople and implementation person. We had them running for a couple months, to serve contractors, we are converting them into full-time employees right now. We think Europe has some good viability. We had some good successes in the quarter in Europe, mostly in financial services. One of our competitors is sort of out there focused on financial services, so we sort of wanted to shut that down in Europe. But the business is predominantly in the UK today and not on the continent yet.

Our next question comes from the site of Michael Kern, your line is open.

Good afternoon you guys. You had given growth rates for going forward for each of the product lines. Are those still holding true or is the sales and marketing, are you expecting that to grow faster.

I think those are consistent. What we have given in the past we have seen small business group growing in line with the overall growth of the Company. So this quarter that, you know, probably remains at about the same level, 8 to 9%. We sort of overperform on an overall basis this quarter. Small business still running about 8 to 9. The sales and marketing piece in the 12%, 12 to 14% plus range and contact center about 3 to 4% range. I think that as the base you're calculating that percentage on changes, I think that, you know, can drive -- can change that number as much as the actual growth rates themselves. We will continue to update that if we see it changing.

One other question, you guys had mentioned previously that you had seen several of your sales and marketing people coming back and actually adding seats and some of those implementations I guess were getting close to a million dollars a year. Are you seeing more customers coming back to add more seats.

Yeah, I mean we're about 50% of our, you know, 50% of incremental growth on average each quarter is from existing customers adding new seats, that's been fairly consistent. The thing is the average price on sales and marketing, a yearly price about $200,000. It's much higher than our other products, but these customers usually have multi- divisions. Like Bank of America is a good example, [started with one now we are up to six]. We think there's a lot of opportunity in there right now. I think you should see this more because we're signing bigger multi-divisional companies and each division wants to interact with our customers online. Okay, thank you very much you guys. Thank you.

Your next question comes from Karen House, go ahead please.

Thanks very much and I'll also add my congratulations to a pretty strong quarter. Just a couple questions. Tis the season for resetting sales quotas and all that good stuff, were there any significant changes to the call plan. I know that 2005 was a year of build-up for your sales organization, how are you thinking about 2006 and are there any changes to how you will pay your salespeople.

In terms of quota, '05, you're right, was a real sort of build and test year. What we found was the quota and the comp structure that Jim put in place actually was quite good. So we made very minimal changes to it. We did not change the quota going forward, but what we did do was add some sort of accelerators and kickers as people outperform, because we found that the caliber of the folks that were getting on board and the sort of optimism that they see in the pipeline warranted that kind of extra encouragement, we think that will have some results that was the only real net change there..

On the deferred revenue front, I know that it's down sequentially my understanding is the reason for that is you have a couple customers that pay annually in advance. So should we expect, A is that a true statement, B should we expect the deferred revenue balance to pickup in Q1 again.

That's a little tricky for us. The best way to analyze that is do a year to year comparison. Look at deferred revenue on a quarterly basis for '03, '04 and '05 and you will see that the pattern was consistently a big uptick in Q1, then a significant drop-off over the latter quarters. That was really made up of a small number of large customers that renewed annual deals and paid up front. And that [sinqued] up with a January contract start. In '05 that change, that pattern changed where we went from Q2 to Q3 with actually a flat deferred revenue line where historically we would have expected a 50% drop. So if you sort of do those comparisons you will be able to see that the net change this year versus last year really tells the story. As I mentioned we're up 20% at year end versus where we were a year ago. And that increment of 20% is really the change in the business as opposed to just the annual deals that are being renewed.

Got it, thanks very much.

Our next question comes from the site of Brad [Witt].

This is Brian Short sitting in for Brad [Witt]. Tim, got a question, you talked a little bit about your gross margins being under pressure in the first two quarters. It looks like you will be bringing down the guidance from 83 to 84 for the year. My question is do you feel like you have an updated capacity to make the investments here, that you won't need to make additional investments for capacity in 06?

Yeah, I think, I think right now the driver of all this is really the newness of the sales and marketing product line. So it's a fairly new product in these large deals and so it requires a little more hand holding plus by doing the hand holding we're learning a lot about the product. That gives us more product ideas. Right now I think we made the investment, I don't think that we will do any more. We feel pretty confident on where the team is right now. We want to make sure we have a close relationship with our customers. When you have a new product they're driving a lot of new features, and functionality allowing us to grow revenue within customer. So even the marketing addition to our product that's nonchat based was driven out of a couple of our customers. I think we will play it by year, but right now what Tim said on the margins is looking about yearly margin.

Yeah, I think the key thing for us is not so much the actual number, because anything close to 80 or above 80 is a strong gross margin number. But more so the trend. So we're looking at a plan for the year, which is a fairly conservative plan where gross margins are essentially flat in a downside case. We hope to see some upside versus that. But that's the trend line, I think that's good. So they will continue to be higher expense but revenue growth will outpace it.

Is it possible to quantify or talk about the bookings during the quarter.

We don't disclose bookings number. I know that makes it tough on folks, I know other companies do that. Because, you know, the vast majority of our business is recurring, billed every month, recognized every month, we think it is a much better indication to look at our guidance for the coming quarter in terms of revenue rather than a bookings number. So we are going to keep doing it that way for the time being.

And Robert, I know we are a little bit early in the salesforce.com partnership, but do you have any update for us, how that's progressing, maybe when you would expect to have revenue from that partnership.

Yeah, I think in the beginning as I said previously, today it's basically based on customer driven, a customer says they want chat and we're the preferred vendor, we're the vendor they will sell if one of the customers says they want chat integrated CR system. We got a couple leads from it. We're not banking any revenue in our guidance on it. We are making a concerted effort in the [biz-depth] side of our business. We just hired a very senior BD guy. His focus primarily right now is actually working with more outsourcers who provide labor. We think there will be some really solid partnerships there where these guys right now, let's say they have call centers in India, the Philippines, they're fairly could comoditized when they can go ahead and combine their labor with our product and give a complete solution to a customer it pretty much provides a lot of value. So you should see some partnerships around there and then we will be more opportunistic, we have net sweep which was the oracle spinout, we have sales force.com so we will be more opportunistic there as we go forward.

Just a last question from the macro side again Robert, any changes in the competitive landscape. I hear some companies talking more about chat these days, wonder if you're seeing any change at all in your landscape.

We haven't seen anything yet. It's the same list of competitors that have been there for the last couple years. I think, you know, what we're doing with the sales and marketing product is unique and that's the focus of the company, but we haven't really seen a shift yet in competitors. I also think there seems to be a pretty strong demand right now for chat after many years I think a lot of companies even small, even our small business group is doing really great and a lot of it has to do with the market is sort of -- there's a big demand right now, I think there's a lot for everybody.

That's very helpful. Thank you for taking my questions.

Your next question comes from Richard Baldry. Go ahead please.

You talk about whether sales and marketing product has had greater acceptance with people who have had experience with the contact center product, sort of where the verticals might diverge or where the two really meet up well, thanks.

Most of the the guys that were siding on the sales and marketing side are [green sales] so they don't have any chat or, they may have e-mail, but not with us. So most of the customers signing are new names for us. There has been some up sales within the base like we talked about before, EarthLink is the largest contact center customer and also the largest sales customer today too. If you look at majority of the sales that are coming through for sales and marketing, it's new opportunities with new customers. I think a lot of that is driven by, you know, when you look at a contact center who we used to sell to, it's a different set of decision makers and a different ROI. So it's all about cost savings and call deflection and reducing phone calls. So those decision makers are radically different than today we saw the heads of marketing, heads of sales, online sales, product managers for online, so it's sort of a different sell today.

And the sequential growth in terms of absolute dollars is roughly up 600,000 sequentially, is there a seasonal pattern to watch there if you were to keep up that kind of trend line you would come in well ahead of your guidance, noting you did use the words conservative, but is there some sort of season to watch on a quarterly progression basis to model that with, thanks.

It's not so much seasonality. I think it's fair to say that we picked up a little bit of extra growth in the fourth quarter. Quantify that as maybe a point and a half was due to this little bit of implementation backlog we spoke about in the last call. We expected to work that through in the fourth and first quarter sort of evenly, I think we may have gotten a little bit more, a little bit ahead of it faster than we expected in the fourth quarter which is good news. But that is not something, that's sort of a one time and won't necessarily recur in the first quarter. Part of the driver why the guidance for Q1 is a little bit less than what the actuals were in Q4. So its a mix.

And you talked a lot before and achieved in this quarter your 10% sequential growth target. Knowing the numbers are getting larger now is that a number that now you have achieved it a larger numbers, it's not one we're really going to focus on now or is that with the head counts improving there will be times that you, can get back to that rate even though the numbers are getting tougher.

Yeah, I think, we will both answer that I guess. I think, you know, that milestone we're very pleased that we achieved it. It still remains the target number, had hitting 10% forever obviously it becomes fairly difficult after a large number of quarters. But I think focusing over the course of '06 that's definitely a doable number in each of the quarters based on where we are today. It's not what our guidance is. We hope to see the sort of results of the first quarter that will enable us to come back and adjust the guidance.

I think we believe that what we're seeing out there, the market is large for this type of product and we're only at the beginning of executing on our sales platform. The guys came in better, our sales team as most of you know came in at the beginning mid-year of last year. So this is a fairly new sales team. We have only gotten 50 to 60 retailers up on this product line. We know there's a target of about 2,500 that we think meet this target. So, you know, we think obviously it's important as I talked about we're helping people with the conversion rate. We would like to keep the growth rates at that pace, we have to go forward, keep adding sales and see what we do.

Thanks congratulations.

The next question comes from the site of Kyle Evans, go ahead please. Hello, Mr. Evans, your line is open.

This is Wilson [Kennedy] for Kyle Evans. Congratulations on a good quarter. I wanted to follow up on the competitive landscape question. What is the sustainability of your market position going forward as you generate this kind of growth. What hurdle would a large competitor have to get over to get into your space.

I think there's really two parts to the hurdle. One is there's a technology hurdle that this product, unlike the [quick a...] product which is a little bit easier to develop although we have a lot of features in there. This product is about selling on line and a lot of it is driven by the experiences we now have with companies like Bank of America and Overstock and Microsoft and HP. So I think it's hard to get that experience and incorporate that into a product unless you can work with that size of customer. With that said, you know, we feel like we have, everyone here feels like we have a great opportunity and we don't want to blow it in execution. We want to continue to pick up the largest retailers and keep closing down the market from a competitor. A competitor will come about, we believe that will happen, but we want to make sure we're out there quick enough where it's hard for someone to get any one material.

Thanks a lot. Just to follow up who are you seeing competitively on the sales and marketing product.

We see there's still the small who have added very basic rules into their products like instant service is one of those and so there's really, we really haven't seen it because we created this product and sort of developed the market. So it's more or less the little shop guys, they do a couple million dollars a year in sales and it's very hard for them to go after the large customers. Bank of America was interesting because they had a competitive product in there, we took that product out and we took, you know, customers paying maybe $10,000 a month to that competitor and now they're paying close to $60,000 a month with us. The difference is just the resources we can give them. We have our professional services team knows how to make these things work. It's not just throwing software at it, there's a touch to understanding traffic on a web site and conversion rate. I think that's our competitive advantage today too.

Thank you.

Our next question comes from the site of Mike Shaunstorm, go ahead please.

Hi guys. Just a quick one, in your release you said something about a 40% effective tax rate, then in your commentary you said 30% or at least I thought you did, I just wanted to clear that up.

Yeah, a couple different things going on. Going forward in '06 we assume an effective tax rate or a book tax rate of 40%. Then the 30% reference was to cash tax rate and that's an estimate just if anyone for those who are forecasting cash flow.

Got you, okay. Yeah. Fine. And just sort of coming back to the Timpani product line, we sort of started 2005 with a lot of noise about Timpani, no PUN intended. And it shifted fairly significantly to the sales product. I'm just curious as to what you see that looking at over, you know, next year or two, particularly whether or not you will try to add Telephony and continue to try to penetrate the enterprise market with that product.

Yeah, I mean we, the Timpani product line is two products. It's Timpani sales and marketing and then Timpani contact center, but I think we were talking about the contact center and the multi-integrated channels. So Timpani sales and marketing product it's still extending the channels. It's important for us, we do have a voice product that's out now. We have 25 paying customers in that small business product line, about 15 more that are coming online in that group. So we will add voice into the sales and marketing product. I think the difference is for us Timpani or the focus of the Company is yeah, it could be chat, it could be e-mail, it could be the knowledge base which actually we turned into the marketing addition, but it's proactive. That's the difference is, we added the proactive capabilities to it and to drive sales versus integration for just support.

Does that make sense? Yeah. So it's sort of a follow-on, it will continue to be a follow-on product, not a focus.

It's all one product except the difference is the contact center isn't the driver right now in the business.

Great.

The sales marketing, the driver, then they will sell the contact center product as a follow up group. We have done that in overstock. Overstock start sales and marketing and now is the contact center process.

Yeah, I just saw a number of articles talking about integrated platforms as being sort of an important area going forward. You're seeing that, but not in a major emphasis.

Yeah, I mean the integration has to be there. If you look at sales and marketing product it still has to offer chat. It will offer voice very soon on the enterprise side. If they want to push out an e-mail they can do proactive with an e-mail. The knowledge base part we shifted, that's what our marketing part is, it's knowledge. It's static information that can be dynamically delivered. It's nonchat based It's still multi channel, but it's proactive.

Thank you.

Thank you.

Our next question comes from the site of Michael Kern, your line is open.

Thank you, my question has been answered.

Okay, thank you. That was easy.

In that case we will go to the site of Brad Muck, your line is open.

Thank you, two follow up questions. First the contact center performance is lagging, which isn't a surprise because sales and marketing is really where you have placed your efforts. But is that slower growth there a function of competition and emphasizing the sales focus or are you seeing some attrition there as you kind of move emphasis elsewhere.

It's purely, let me actually take a little step back, because I know we changed the products or extended the products over the last year, so it would probably be good to just take one step back. The contact center product now is predominantly sold by our small business group. So what we ended up doing is saying-and that group now went from a hundred, at the beginning of the year about 130 or 40 implementations of contact center up to 560 implementations of contact center by year end. So we gave those guys the product line and said look, we think there's a lot more mid market opportunity with this product, go forth and conquer and that's their focus. They are driving a lot of their business through that. The other interesting thing with that, they had when they originally signed contact center at the beginning of the year their attrition rates were up in the 8% range, now they're attrition rates on contact center are about 2%. So they're driving more sales of contact center and they have lower attrition because it's a stickier product than just chat. That's where it's dividing right now. We took our enterprise sales group and said you will post on Timpani sales and marketing and go after the pure big revenue opportunities around conversion rates. Obviously that product line is growing. The focus of that group is, you know, basically a hundred percent sales and marketing. The focus of the small business group is self contact center.

You don't really have any outbound sales activities directed at potential customers for contact center.

Very little, no. It's basically of the overstock example, where we go after them with hay, you know, we have you on sales and marketing, let's upsell you because you have an e-mail product that is old and not integrated. That's really how we're doing it today. Our focus, we have limited resources and as you can see the pricing points on sales and marketing are much higher, we can get a higher caliber salesperson selling that. I think there's a lot of pressure in that market today. If I try to go into an enterprise deal and try to sell them 50 seats of contact center there's just a lot of competition, you have right-now technologies out there, you have got a lot of guys who are trying to get that and the pricing pressure seems significant.

Okay. Do you think as your adoption on the sales and marketing side really gets going that will revitalize your presence in the customer support area?

Yeah, I think it could. I think it depends on whether we want it to. I think everyone here feels like there's a lot of product opportunity in sales and marketing on conversion rates. We're just scratching the surface with the product we're delivering today. If we can affect conversion rates on the internet it seems like a far greater-rewards could be far greater for us. Our development team and our sales is just a focus issue. We are continuing product developing will continue to develop features for the small business feature product line in the contact center area and, put predominantly enterprise on the sales and marketing, because we have a lot of product to build there.

Okay. It's still a meaningful piece of your business today?

Small business is a third of our business and it's really growing right now. It grew sequentially in the quarter, growth rates. 9%. 9%, normally grow about 6%. It came up nicely.

Okay. Then the other thing I wanted to ask about are there goals as an organization, do you have a goal in mind, I mean internally whether you quantify it for us or not as far as where you're trying to take the organization, are there incentives in place for the various people on board, whether senior management or down into the organization to get to a certain point?

Certain point being.

A certain revenue side or certain growth rate, some kind of quantitative assessment.

Yeah, we have bonuses internally all of us are on a plan and that's a revenue number. There's an earnings number there too. So all of us, are basically and our bonuses are based off this number, that's an internal number. So yes. Everyone is to grow revenue at a certain rate and have a certain amount of earning.

How high is that bar set in

It's not an external number we give out. The board likes to set stretch targets for us, there's a stretch target in which we get our bonuses and that's what we're all aiming at right now.

Okay, good, thank you.

Thank you Brad, appreciate it.

Our final question comes from [Sareete Sevaja]. Go ahead please.

I was wondering as you say that a lot more people, are you changing your product a little bit because of the customers, are you going to hit different competitors as you change your product line. Are the costs going to increase because of that.

I mean no, I mean we're out there right now, so I think, you know, I think our goal is to steer clear of the obvious competitors, guys in analytics and areas like that we don't think are products we want to go after and build but we would rather partner with. That are obviously focused on conversion rates on a web site or measuring it. I think we're focused on all these technologies around as I said this emotional driver and there aren't any. It's like there aren't a lot of technologies and you guys know when you go to a web site you feel emotionally connected to the site. You look at a price, see if you can get it shipped overnight, that's your decision point. If we can provide different ways to connect and embrace a customer on the web site and that's our forte, then I think there's a lot of product there. I don't see anyone out there today with it.

A lot of times customers go to websites and see the LivePerson chat, then they don't have to wait a long time, they actually get a response. Don't you see that detrimental to the experience of buying a product and how do you hope to hit that, you know, the issue.

Yeah, I mean our, we have a huge focus on training on both groups, small business group as well as the enterprise customers. So that is a focus, you know. We talk about brand, when those windows pop up that has the LivePerson logo and there's experience the customer feels. We have done surveys and about 15% of the base of chatters will fill out a negative survey and actually 85% of them fill out and said they had an excellent experience. So I think there are times where, you know, we don't control the labor, but if we see issues we do a lot of training, we will do on line training, we do face to face training, I think we do a pretty decent job today, but we continue to focus on that.

You also mentioned you're working with certain partners, these contact centers. Do you see Philippines and India that actually use your product to I guess service their clients and has that been a better experience or has it been a worse experience than people doing it.

No, I think honestly outsource labor they're basically marked and paid based on doing it right. So 90% of the time it will be a very good experience if they're using outsource labor we're working with partners. Predominantly where you will have issues is in small business. Small business, you click on that button, maybe the guy who owns the company is taking a chat, at the same time getting a cup of coffee, that could be an issue. On the large guys, if you go to overstock today or go to Bank of America, or HP our software tells them how long the wait times are. The other thing is in the sales and marketing addition product there are no lead times because there's no buttons. You have to be proactively engaged. You're only proactively engaged if the operators are ready to take you for chat. In the sales environment you can't make people wait. Those customers don't experience any, there's very little latency in the chat. It's only on small business.

Are you considering getting your own chat center so you can save your brand, especially in the contact center.

No, no, no, that's a different business. It's too many people and the margins are very challenging. And once again, about 85% of the people have a good experience with it. So we think training is the most efficient way to fill that.

Thank you, that's all.

Thank you, have a good one.

I'll turn it back to you for any closing remarks.

Thank you everybody for being on the call for Q4 and we will see you in, on the Q1 call. Have a great day.