LivePerson Inc (LPSN) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to LivePerson’s first quarter 2006 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, May 4, 2006. Speaking on today’s conference call will be Robert LoCascio, Chief Executive Officer of LivePerson, and Tim Bixby, President and Chief Financial Officer. I would like to now turn the call over to Mr. Bixby. Please go ahead sir.

OK, 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. 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 a forward-looking statement. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission for a discussion of these important risk factors. Now I’d like to turn the call over to LivePerson’s Chief Executive Officer, Robert LoCascio.

Thanks Tim. Good afternoon and thank you for joining us. During the first quarter of 2006 we generated revenue of $6.9 million, up 39% from a year ago, and up 9% sequentially as compared to the fourth quarter of 2005. The bottom line was in line with guidance and EBITDA per share of $0.03 and GAAP EPS Of $0.01. EPS figures include stock based compensation and expenses.

Tim and I are very happy with the quarter and we’ve come off a double digit fourth quarter revenue growth combined with a solid first quarter provides us with a solid foundation to continue our acceleration in top line growth in 2006. During the quarter we signed more than 30 deals with new and existing customers and added several blue chip clients to the roster, including Charles Schwab, Hoovers, and Land’s End. Tim will provide more detail on our financial results and revenue progress later in the call.

I’d like to give a brief update on the market as we currently see it and how it’s been evolving over time. Humanizing the online experience in order to increase conversion rates is rapidly becoming a dominant focus for online marketers. LivePerson is at the leading edge of this evolution and we’re starting to see tangible signs that real time chat is becoming a standard within online commerce. Here are some of the trends that we’ve seen more consistently; first our customers are beginning to actively market LivePerson through press releases and other [inaudible] marketing campaigns in numerous organizations from [inaudible] to Look Smart have recently issued press releases or advertisements that highlight both real time support and in many cases LivePerson leadership in this market.

One of our small business clients, its name is Joe’s Jeans, has an advertisement running right now in magazines where we show their website and the LivePerson chat room. The text of the advertisement reads “Finding the perfect jeans can often seem like a mission impossible. Luckily Joe’s Jeans has a revamped website with a newly added live chat feature. So now you can bounce your denim dilemmas off the fit expert and receive a real time response.” We’re starting to see the potential of LivePerson being viewed in much the same way as a computer maker will put “Intel Inside” on a box, in ads it’s important especially for these small retailers, to show how to differentiate themselves from their competitors and also to show that they are a high quality website, and we’re doing this by promoting the LivePerson brand.

Secondly, consumers are also starting to be more vocal about the service. We saw this with Apple computer last quarter, who’s a customer of ours, in the proof of concept stage, and they’re testing LivePerson on the educational part of the Apple.com site. There was a recent article on one of their Apple blog sites entitled “Apple Education Store live chat service discovered”, and the blogger wrote an article about his experience with LivePerson and he even pasted a link to the chat button so that other people could click for help right out of the blog. One of his comments was “I think this was a terrific idea. The Apple rep was courteous and gave me immediate, helpful replies. I found it more efficient than wading through phone menus. I also like the idea of having answers in writing. Apple, if you’re listening, here’s my vote for expanding this service to the entire Apple store, using it to offer tech support and making it more accessible.”

[Inaudible] by setting their expectations to believe that if a website does not have LivePerson that they will find a site that does in order to feel trust and confidence in the overall online shopping experience. We’re also signing business that are much larger than we ever have in the past, and many of these have begun to see the value in deploying LivePerson, some of these customers we’ve been pitching over the last three or four years with very little success, but today they want to use the product. So many of these companies are running an online store and they used to have this idea of ‘build it and they will buy’ and what they’ve come to realize is that just does not work and they’re making major shifts in how they run their websites, including trying to create as many consumer touch points as possible.

One of our largest customers even measured the success of our program and others like it that touch consumers on [inaudible] called, believe it or not, “Consumer Delight”. So ecommerce, like the overall internet, is definitely going through a major shift. This shift is driven by consumers’ desire to build community, to create connection with other people, and to create a voice for themselves online. We’re seeing this in blogging, we’re seeing this in community sites, but what LivePerson is doing is we’re really at the heart of taking these core values of community and connection and we’re enabling our clients to apply it to ecommerce. What we should see over the next couple of quarters is really our focus on creating more and more products and services that empower the consumer to feel that they can trust and feel confident in the online shopping experience.

From a sales process standpoint we are now starting to a more senior level of marketing sales executives than we ever have in the past. Previously we were primarily a point solution embraced by early adopter managers in usually single product divisions, but today LivePerson is becoming more strategic to our customers for the reasons I outlined about the shifts around community and connection. And although selling to more senior executives on a more strategic level may increase sales cycles, in the end what this will enable us to do is create more opportunities where customers are paying us more than $1 million per year in recurring revenue. The typical annual revenue for new deployments of Timpani sales and marketing today is a little bit above $200,000 a year, and this represents some of the highest per seat revenue in the hosted software market today.

And finally our small business group, which I feel is a leading indicator to overall ecommerce on the web, is growing at its fastest rate since the inception of this product line in 2001. In the first quarter revenue for this group grew nearly 9% sequentially. Furthermore our attrition rates continue to decrease as we have expanded our product offerings to offer chat, email, knowledge base, and now voice. Small business owners can now consistently drive traffic by doing advertising with pay per search or outbound email campaigns, and what they’re really looking for is to use LivePerson to embrace customers when they get to the website and convert them into paying, loyal, long term customers.

As many of you know, over the past year and a half we have made significant investments in our sales, marketing and professional service groups, and these investments are starting to derive some strong growth for the company. With this growth we feel it’s time to make some focused investments into our core technology, hosting facilities, and in adding some more senior executive horsepower in the R&D team. Our role in the industry has always been one of a leader, and this means that we consistently have to pioneer new technologies that [inaudible] market before our competitors. It is important, based on our sales growth and the market opportunity ahead of us, to do some pre-investing into this group so we can maintain our leadership position in the upcoming years. During 2006 we will be making these investments and we’ll give you an update as we receive through the quarters these investments in R&D.

One investment we did make in R&D last year was developing an integrated voice platform, and we released this during the past quarter. We now currently have 30 plus customers using it, primarily in our small business platform, and we’re now rolling it out through our enterprise group. We will also give you an update on the success of this integrated product offering in the upcoming quarters.

As you probably can sense from this call, I’m excited as ever about the opportunities ahead, and I look forward to 2006 being another significant stride forward toward reaching our company’s ultimate potential. With that I will now turn the call over to Tim, who will give you a more detailed outlook of our financial results.

Thanks Ron. We’re very pleased with the results in the quarter. We exceeded our revenue growth expectations and had bottom line results in line with our guidance from last quarter. We’re seeing good progress in new client growth as well as business booked by our growing sales team, on the enterprise side of the business, that we believe will enable us to sustain, and potentially accelerate, sequential revenue growth.

We reported record revenues of $6.9 million in the first quarter, which was a 39% increase versus the prior year, and a 9% increase from the fourth quarter of 2005. EPS was $0.01 and in line with our guidance. This includes the impact of stock compensation expense pursuant to FAS 123 for the first time. EBITDA per share was $0.03, also in line with expectations we shared with you 90 days ago. I’ll give a bit more detail on these results, as well as on our second quarter expectations in a moment. They are also detailed within the press release from earlier this afternoon.

In the first quarter we exceeded expectations on the revenue line, both our enterprise and our small business sales teams are performing well. We are especially pleased with the success we’ve had signing several accounts that are both household names and present significant potential for revenue growth over the longer term. Our small business team also had strong performance in the quarter; with the addition of the voice channel as well as continued strong interest in the website monitoring feature set within the small business product we’re seeing stronger sales growth and a consistent decline in attrition rates.

As in the past several quarters, we generated very good results in both signing new marquis accounts, as well as growing existing accounts. In fact, we added Charles Schwab, Hoovers and Land’s End as new accounts, among several others.

Average deal size was somewhat lower for our contact center product during the quarter, and somewhat higher for our sales and marketing product. The quantity of deals was strong as in the prior quarter; we closed about 30 deals with enterprise clients, including newly added clients as well as up sells to existing clients.

In terms of revenue mix, about 80% of our incremental enterprise revenue in the quarter came from Timpani sales and marketing deals, while the balance of 20% came from contact center deals. This is about a 10 point shift from last quarter’s figures in favor of Timpani sales and marketing. 50% of our incremental revenue in the quarter came from new clients, with the balance 50% coming from existing clients, an even split.

In terms of long term growth, we are on track to grow at an annual rate approaching 40% this year and into the future, which is in line with our revenue growth of between 30% and 45% consistently over the past four years. Our target performance remains to deliver at least 10% sequential revenue growth, this goal remains within our reach this year. I’m very encouraged by the fact that we were able to sustain current growth rates, while at the same time retaining almost 100% recurring revenue. In contrast to other hosted software vendors, who typically supplement growth with perpetual license sales. This predictability has enabled us to accurately estimate our revenue growth in nearly every quarter since going public 24 quarters ago.

I will now review the financial results more specifically for the quarter ended March 31. For the quarter we reported record revenue of $6.9 million, a 9% increase versus $6.3 million in the prior quarter, and a 39% increase versus $5 million in the first quarter of 2005. Again, this was better than our guidance, which was to do between $6.75 million and $6.85 million of revenue.

Deferred revenue was up slightly from the prior quarter, to $1.8 million and is up nearly 30% from a year ago at this same time. Cost of revenue in the first quarter was $1.5 million, as compared to $1.3 million in the prior quarter, and $.9 million in the prior year. This resulted in an overall gross margin of 79%, which is in line with the prior quarter.

We have caught up with the significant deployment demands created by signing larger corporations over the past nine months. Thus, the decline in gross margins we experienced in prior quarters did not recur this quarter. While we will continue to invest in our network infrastructure, as well as our implementation personnel, and as such may see short-term gross margin impact, long-term gross margins may improve from current levels.

Product development expense for the quarter was $.9 million, as compared to $.7 million in the prior quarter, as well as in the comparable quarter in the prior year. We continue to add R&D resources that support product development and expect to hire additional resources that will further improve the scalability and reliability of our network infrastructure as we expand our business with larger corporate clients and more complex deployments.

Sales and marketing expense in the fourth quarter was $2.6 million, up significantly from $2.1 million in the prior quarter, due primarily to compensation related to the hiring of additional reps, the full quarter impact of sales hired in prior quarters as well as commission expense.

General and administrative expense, excluding amortization of intangible assets, was $1.5 million in the first quarter, up from $1.1 million in the prior quarter and up as well from $1.3 million in the comparable quarter of 2005. This increase was driven primarily by employment search fees, related to accelerated hiring of additional resources across the company. These expenses hit the G&A line, as well as slightly higher legal and accounting fees in the period.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was $1 million, up from $.7 million in the prior year period. EBITDA per share in the quarter was $0.03, flat as compared to the prior period and up from $0.01 in the prior year.

We reduced our deferred tax asset in the quarter by 50% and this resulted in an effective tax rate of zero for the quarter and for the year. This is a change from our prior guidance and is driven by the valuation of the deferred tax asset at March 31.

The reconciliation between EBITDA and GAAP net income is provided in the financial statements accompanying our earnings release. Net income per share in the quarter was $0.01 and included in this figure is the impact of stock-based compensation expense for the first time. That impact, in exclusion, is about $0.01 as well.

Turning now to the balance sheet, our cash balance at quarter-end was up significantly, to $19.1 million, an increase of $2 million as compared to year-end 2005. This increase was driven primarily by cash flow from operations and, to some extent, by cash received from the exercise of stock options during the quarter.

Our accounts receivable balance increased slightly to $1.8 million, from $1.7 million in the prior quarter. Deferred revenue, as I mentioned, was up to $1.8 million, vs. the prior quarter, which is 30% up from a year ago. DSO, day sales outstanding, is very low, as is typical, running at about 25 days. And now, we’ll talk a bit about our expectations for the second quarter as well as for the rest of the year.

For the second quarter, we expect to see revenue of $7.4 million to $7.5 million. We expect a bottom line EPS of $0.01, in line with the first quarter, as well as an EBITDA per share of between $0.02 and $0.03.

We expect to see, for the full year, as before, revenue between $30.0 million and $30.5 million, as well as GAAP EPS for the year of $0.05. And that includes about $0.05 of stock-based compensation costs. We also expect to see EBITDA per share of between $0.14 and $0.16 for the year.

These GAAP EPS expectations, as I mentioned, already include the estimated impact of the change in the accounting policy. This change, related to FAS123, is expected to impact net income per share by $0.05 for the full year and $0.01 for the second quarter, as in the first quarter. This impact, of course, may change, based upon additional stock option grants and forfeitures, if any, methodology, refinement or other factors.

Our sales force, that is driving these revenue expectations on the enterprise side of the business, continues to grow. We currently have 13 quota-carrying sales reps on the enterprise side of the business and we expect that to grow to at least 16 by year-end.

Our professional services group has also grown quickly, as we’ve added significant horsepower to deploy new customers at a faster and more efficient rate. We currently have 145 employees in the company, up from 110 a year ago. We anticipate headcount growth to continue to get us to approximately 160 by year-end, with most of this growth coming in sales, client support and research and development.

Capital expenditure in the quarter was less than $60,000. It will be approximately $500,000 for the full year, while depreciation and amortization, excluding the stock compensation-related charges, is expected to be approximately $1 million for the year. That is unchanged from our prior guidance.

For the share count assumptions for the full year, we recommend using at least 41 million shares, fully diluted, on a go-forward basis, which is somewhat conservative. And, in terms of our margins, we saw a couple of increases between the fourth quarter actuals and the first quarter actuals. Our sales and marketing cost, as a percent of revenue, increased by about 3 points, from 33% to 36%, as you can see in the numbers, while G&A was up 5% of revenue, from 17% to 22%. The sales and marketing increase we expect to continue at that higher rate, into the second quarter, at about 36%, while the G&A we expect to improve slightly. It would be flat at worst, but more likely to improve slightly in the second quarter.

And that covers the financial review. At this point we would be happy to take any questions that you may have. If we could ask the operator to rejoin the call and let folks know the Q&A instructions.

[OPERATOR INSTRUCTIONS] It looks like our first question comes from Brad Whitt. Go ahead, please.

Hey good afternoon guys. Is there any way we can get a breakout of your stock-based comp, you know, how it falls into the different line items on your income statement?

Sure, I can run through that really quickly. It will be in our filings, but the stock comp charge, in aggregate, for the quarter, was about $600,000, $583,000 to be exact, which you can see on the press release. The way that breaks down is about $45,000 in cost of goods, $185,000, sales and marketing; $230,000 in G&A and the balance in R&D. So, the bulk of it in G&A and sales and marketing.

OK, great. That’s helpful. And, what kind of tax rate are you using now in that GAAP estimate?

The effective rate for the year should be assumed to be zero. We updated our analysis of our deferred tax asset. We’ve entered our third year of profitability, consistent profitability. So now is the appropriate time to do that analysis, based on where we saw the first quarter and where we see the rest of the year. We released half of that asset and that resulted in the 0% effective rate for the year.

OK. What about for ’07?

We will not give guidance on that until we get further through the year and likely not until the fourth quarter, because that’s when we’ll really have a better view in terms of profitability for ’07.

I’m just curious; I mean, what are people using in the numbers, you know, that go in the first column? I mean, obviously the first column doesn’t take EBITDA last time I checked, so in order to get a tax rate, should we be using some kind of pro forma tax rate?

From this point forward, it would be appropriate to use zero. Yes, it would be appropriate to use zero.

OK, Rob, I’ve got a question for you. What are the constraints at this point, you know, that you see internally as far as growing the revenue, you know, maybe even at a higher clip, based on some of the additional expenses that you’re taking on in the hiring in sales?

This is a natural process to the – because they’re bigger deals now, as I said on the call, more strategic bids, sales cycles may be a little longer. But, you know, the professional service in implementation now isn’t really a bottleneck. So, they’re just adding more people.

I think the one thing we see is like, on a customer like Bank of America, it’s still taking a fair amount of resources. It’s a new type of customer in that, this is much more strategic for them. It’s a large account, so we do a lot more and did a lot more resources on one single account than in the past. So, I think that we still have to borrow resources and implementation but I think it’s just getting more deals like that.

So, I think Jim is doing a good job in hiring people and getting them on board and then training them and just expanding the sales force.

OK. So you’re not seeing increases in deployment cycles but just a little bit so in the sales cycles?

Yes. I mean, there’s a little bit, you know, I think in the sales cycle, just because of the nature of where Jim’s taken the sales process. But I think they’re moving quickly. Once again, everyone is focused on double-digit. We did 9% this quarter and 10% the previous quarter. So, we’re still focused on those double-digit numbers.

OK, and where do you think, based on your 13 salesmen that you have now, how much leverage is in that? I mean, how much – do you basically need to hire more sales reps in order to accelerate the revenue growth? Or, is that – do you have room for up side with the current capacity you have now?

The reps are definitely not at – the team, as a whole, is not at full capacity, just because of the nature of – there are three or four people that were just hired in the quarter and a half ago. So, they’re just getting up to speed. And, we have a team in the UK that’s just come on line and they’ve added one person. So, that person is coming up to speed. So, I think there’s still obviously capacity in the sales team.

I also think there’s capacity in the professional services team as they get smarter in deployment. And then, we’ve got, let’s say, our voice product just came out and that’s going to be basically offered to the base of customers. So, our goal is to get some quick pops and increase the per-customer revenue by offering a new product like the voice-over-IP product and then our market edition products. So, Jim’s focus obviously is new deals. And then the second is how to take an existing client and add more product into that existing client.

So, everything still feels fairly new. Everything they’re doing still feels fairly new in those teams, because of the nature of the new types of customers we’re signing.

Thank you. Our next question comes from the site of Michael Kern. Go ahead please.

Thank you very much. Can you give a split out of the revenue between the segments, the sales and marketing, contact center and small business?

Yes, it’s fairly consistent with prior periods. We haven’t seen a huge shift. One thing we are changing, somewhat internally, is the line between sales and marketing contact that is becoming a little blurrier by design, because we’re trying to encourage, as much as we can, sort of a cross pollination of those product lines in our largest customers. So, I would not be surprised, over time, if we’re really just reporting an enterprise sales number. But for the current breakdown is consistent with the past, which is a couple of points towards sales and marketing, which would put sales and marketing at sort of 35%, 36%, small business, 34%, 35% and then the balance in contact center. So not a huge shift, but one or two points towards sales and marketing.

OK, and can you give any color on any competition that you’re seeing? Has the landscape changed at all?

No. I think on the landscape, it’s still what it is. We have a couple of small competitors, but I think we’re doing a very good job at it. They do maybe do a couple million dollars a year in sales compared to our numbers and there’s a real focused approach to make sure those guys can’t grow. We continue to take a leadership on the research and development front, on adding new products, making our reporting engine more robust. And, as we said in the past, half the game on this sales and marketing product is the professional services that we do and the training of the operators and the reading of the reports of building the rules engine, and the building of the rules, so that takes a lot of heavy lifting that the other small competitors just don’t have the bandwidth to do. So I think we’re doing really well against our competitors today.

OK and last question before I hop back in the queue, you’ve mentioned about introducing new products, can you give a little color on where you’re looking to add those new products?

Well the two that are up right now is, we just introduced after about a year of development is our voice product, and the voice product we started to offer in the small business product line. So basically when a consumer comes to a website they now can have the ability to either click the chat or they can click and put in their telephone number and a phone call is given back to that customer and they can do voice, but they can still be experiencing the web, they can do co-browsing and being shown around the web while a voice call is taking place. So that was just introduced, the small business customers, we’ve signed about 30 and now we’re moving that into the enterprise. So the enterprise group is going to start selling that as part of the Timpani sale and marketing platform. So they should have a couple of deals starting this quarter, they’ll be larger deals, but they feel pretty confident about the take rate of that product line.

Then the other one is the Timpani marketing product, which is the non-chat based, where its rules based but we offer content and we try to drive a conversion based on helping a consumer through content, through non-chat. So those are the two product lines that they’re out cross selling.

Thank you very much.

Thank you. Our next question comes from the site of Richard Baldry, go ahead please.

Thanks. Given your guidance for the second quarter, if you were to continue out on a 10% sequential growth side you’d have significant upside to your full year guidance. Is there something in the second half that’s flowing or is it simply a matter of conservatism at this point? Thanks.

As always it’s a combination of both. I think we’re always a little bit to the conservative side, but we do see – one fairly significant change is that it feels, when you analyze the sales pipeline, that we’re laying the groundwork with a greater number of deals that potentially take longer to grow after the initial installation. As a specific example I can sort of point to two or three customers that were implemented in say the fourth quarter last year that we expect to see a fairly decent surge in revenue but not until end of Q2 or beginning of Q3. So there’s a good number of those deals that have been implemented and are up and running where we think there’s a lot of potential for growth. But until we really have a date laid out and budget commitments from the customer we don’t want to put those into the guidance. So that I think really supports some optimism for the second half of the year, that’s why we’re reiterating the full year revenue guidance. Q2 I think has the potential to be as high as Q1, that’s kind of the highest end of the range, but I don’t think that is necessarily indicative of the rate we expect for the rest of the year, the second half of the year.

Given the up tick on the sales and marketing side, can you update us on the actual number of quotaed reps? I think it was 12 in the last quarter. And then maybe go over recent sales trends in terms of vertical end markets, tech, financial services, telecom etc., sort of if that’s changed at all.

We have 13 reps, so up one from your last data point. In terms of the verticals the break down that we typically provide has not shifted, we’re capturing all existing revenue, about 25% from financial services, 25% from technology, 25% from Telco and about 20% from retail so that overall breakdown has not shifted. Where we are seeing some interesting up tick in the incremental business, the newer business, is travel and leisure, so that seems to be coming on fairly strong, and that’s a more recent change. As well as I think just continued strength in financial services. So a year from now I’d expect those two areas to be a larger percentage of revenue.

On a sequential basis, even if you back up the stock based comp, it looks like total Op Ex was up, almost approaching 20% sequentially. Can you talk about the trends for the balance of ’06, it seems like that was a pretty significant step up, whether that starts to flat line a bit for the balance of the year.

What you should be hearing in the comments that we’re making is that we have a very distinct bias toward spending more versus spending less to support growth. We saw it in the fourth quarter; we saw it in the first quarter. An example of that kind of thing is when we are looking to fill key positions, we’re sort of pulling out all the stops, we’re incurring headhunter fees, we’re moving very quickly and there’s a cost to doing that. We expect that to continue in terms of a strategy, a philosophy. In terms of the exact numbers, I would not expect the increases to be as significant as they were in the first quarter, but the expectation should be that there will be increases over the rest of the year. We adjusted the guidance for the EBITDA, created a range, $0.14 to $0.16 to sort of make that crystal clear that that’s the most likely outcome. We’re very focused on supporting and accelerating sequential revenue growth.

Thanks.

Thank you. Our next question comes from the site of Richard Fetyko, go ahead please.

Hey guys, congrats on the quarter. You mentioned something about a team in the UK that just got started, could you expand on that? And then in the past you provided the number of sales addition or Timpani sales and marketing customers, I wonder if you’d care to update that metric for us. Then on the pricing trends on the ON&I and of your product any sort of change in the pricing trends, it was interesting to see that the small business product sales picked up nicely.

On the UK we have a full team there now on the ground, we have an executive manager who’s in charge of expansion in that area, both the UK and Europe. We have a very senior sales rep with experience, we have an account manager and we have a technical support person. That team has worked with us for almost two years, but on a non-dedicated basis, they were supporting other clients. We made a transition on January 1 where they’re not full time LivePerson employees so they’re dedicated solely to selling primarily Timpani sales and marketing. The key opportunity in the UK right now seems to be financial services. There are others as well, the other verticals that are strong here in the U.S., but financial services seems to be the low hanging fruit there, so that’s what they’re focused on. I would expect that group to grow over time. We’ve invested a fair amount both in the people that are there as well as a server infrastructure, so in the same way that we did a major upgrade in our investment in the U.S. three years ago when we did a major launch of the Timpani product, we’re doing the same in the UK now. So there’s a fair amount of investment that’s happening there and as revenue grows then we’ll see the margins normalize over there. But that’s all being captured, obviously, within our current expense base.

In terms of the number of customers, we don’t really give a specific metric, only because it tends to not sync up directly with the revenue growth and the revenue growth expectations. We did mention that we closed about 30 deals between the addition of new customers and up sells with existing customers. So that’s either in line or actually slightly ahead of the most recent quarter in terms of number of deals. In terms of pricing, small business is very strong, we’re actually moving fairly aggressively to add value but increase the price at the same time for that product. So if a small business consumer wants to be using the voice channel they’ll pay 50% more than they would pay for chat alone. So we’re seeing some progress there in the revenue per customer based on the addition of the voice product.

On the sale and marketing side, while we’re not increasing prices there’s a fair amount of pressure to increase the size of deals, meaning we’re targeting bigger companies and implementations are larger to start. So again our revenue per customer is a bit higher, and that’s really where our focus is. Historically we focus a lot on seats and revenue per seat, pricing per seat, that has really changed the market and we are doing our best to move the market toward a better model, which is revenue per customer. That is tied to the value that the customer is receiving. So if you do the math and you get a per seat price it’s still the highest per seat equivalent in the business. But we’re really focused on revenue per client.

All right, then sort of a high level strategy question about any sort of acquisitions that you may be thinking about, [inaudible] and what direction would you be targeting?

I think there are two types, one obviously is the core channels of chat and voice, which there are still a couple smaller [inaudible] out there and we’ve done three acquisitions or four acquisitions with this type of role. We don’t have anything right now in the works that we think is that interesting.

Then the second part is technologies that we think are in line with this idea of community and connection and creating much more confidence for the consumer. So today there’s chat, we think there’s content based technologies around consumer reviews and things like that, so that’s more of a strategy, more outward facing than just the core channels. But I think right now we’re really focused on beating a lot of these competitors down and taking their customers and organically just growing our company.

All right, thanks.

Thanks a lot Richard.

Thank you. Our next question comes from the site of Karen Haus, go ahead please.

Thanks very much and I’ll add my congratulations for a very strong report. A couple of questions; just in terms of the hiring, are most of the key positions filled at this point, or are there still a couple of openings that you feel you need?

I think we’re at a normalized pace, which means a couple of quarters ago we felt that we were playing catch up a little bit, because things were really taking off and we filled a lot of slots quickly. At this point I think we’re sort of on track, which means we’re looking for good people in key areas, in sort of a more relaxed way, and as we find them we hire them, R&D, sales and professional services, because we continue to be very comfortable with the sales pipeline and the continuing demand. So it’s a little less of a scramble, but we’re continuing to hire consistently.

Great, then in terms of your gross margin, could you give us a sense of – I know you gave us some commentary earlier on the call about how to think about that, but could you really maybe walk us through sort of what some of the drivers are there and how should we be thinking about that line going forward?

Sure, gross margin is really driven by two categories of expense, by revenue obviously, but by two categories of expense; one is the monthly operating cost of running our infrastructure. We do not buy and own and depreciate servers currently, we lease the servers and support of servers from a third party provider in a primary and a secondary location. So that’s about 1/3 of our cost of goods. As revenue grows, as customer usage grows, as you add new customers, that increases the demand on the servers and that increases those costs. There is some scaling in those costs, i.e., a single database server can support a fairly enormous amount of activity, so as you add on revenue there’s some scaling there.

On the other hand application servers are sort of a straight line expense with added customers. So there’s a bit of a mix in the expenses there, but it does tend to scale. Some pressure going the other way is that we have implemented, for example in the UK, a wholly independent infrastructure that even at the point we had zero revenue in the UK we still had to pay for 100% of a primary facility. So as we grow, there are these incremental investments that are not offset by revenue initially. That’s what can cause the gross margins to decline, in the short-term. And, in some cases, the faster you grow, you might see more decline in the short-term. So, it’s a bit of a good news/bad news from the server cost side.

On the people cost side, we hired a pretty aggressive number over the past nine months, to sort of deploy large accounts and support large accounts. That, again, is normalizing somewhat. We’re becoming significantly more efficient. So, in the short-term, we’re going to continue to spend on those lines. Again, we’re not going to short cut any of those things that can support growth.

But, I think over the longer term, we would expect to see gross margins creep back up.

Great, and then, can you give us a sense of, were there any overage charges that contributed materially to revenue in the quarter?

They were in line. Overage charges for the larger audience are really fees that we charge in conjunction with activity. So, if a customer is typically past a base fee for a certain number of seats in a certain amount of activity and then if they go over activity limits, in terms of chats or visitor traffic, we’ll pass an additional fee, based on that activity.

Those amounts were in line with the first quarter. In the first quarter, you know, it was really the first quarter where they were significant. So, we had an expectation of a bit of that. It’s probably, you know, half to a point of our growth, at this point. It does have a potential to grow more significantly in further-out quarters, but I’d anticipate it to be roughly flat at these levels into the second quarter as well.

OK. Thanks very much. I’ll pass it to someone else.

Thank you. Our next question comes from the site of Brad Muck. Go ahead, please.

Thank you. Early on in the call, Rob, you mentioned the number of $200,000 associated with the sales and marketing product. I missed what that number was in reference to.

Just $200,000 is the average revenue per customer per year, from Timpani sales and marketing.

OK. How many – as you look at the customer base and you’re getting more customers that have the potential to scale, how many would you consider to be large scale? And, I don’t know if you define that as $1 million a year or $750,000 a year, $500,000.

I think the right metric is, I think $1 million is a good metric, because that’s where the biggest shift has been. If we look across the enterprise customer base, today there are at least 25 companies, 25 current customers that have the potential to run at a $1 million rate or more. And that’s really a key target for us, because obviously those are the – you know, we’ve done the heavy lifting and the heavy expense to get them in. But there are, you know, several of those. You know the majority of those that are at $200,000 to $300,000 per year rate and so there’s a fair amount of room to grow there.

Understood. And then Tim, just on the gross margin to clarify, I understand the dynamics that are driving it. Are you suggesting that there might be some incremental pressure on the gross margin here in the next quarter or two?

That’s possible. I mean, if so, it’s maybe a point or two, kind of thing, not a five-point impact. But yes, there could be. You know, we’re looking fairly hard at the next level of scaling for large customers that would have an impact of that. Some of that will likely hit the gross margin line. Some will hit R&D but it’ll be a mix.

OK. And as you mentioned the usage, the overage charges, do you see any trade off in your underlying seat pricing when you do that? How does that work? Or, is it all incremental?

Well, we believe it’s really almost entirely incremental. It comes into play for accounts that are of a certain size, such as that the seat count is not really relevant anymore. Seat count’s really important when you’ve got five or 10 seats. But once you get to, say, an HP or a Bank of America level of deployment, the seat count sort of becomes irrelevant. It’s really driven by the amount of activity that’s occurring. So, those are the accounts where the overage, number one, makes sense, and number two, comes into play.

OK, and then just, Rob, kind of two higher level questions; one looking back a little bit, one looking forward. Talking to you in several conversations over the past year or two, I think Jim was building a sales force and you started to get a sense as to how this was going to build. You were really optimistic and I think the double-digit target seemed like something you expected to hit sooner.

Is the fact that you’re now talking about perhaps hitting it this year an issue of just trying to find what the real sales cycle, the appropriate sales cycle, is? Or, is it something more than that?

I think it’s still not out of the realm, obviously. It’s a target.

Yes, sure.

So, we’ve got to set a target and the target should be a stretch goal for our teams, and that’s the target. So, we know we can grow somewhere between 8% and 10% is where we’d like to grow and 10% is the target.

Yes. I think we’re looking at – you know, we may have to deploy a lot more resources on a single account right now, like a Bank of America. And maybe that sucks some other resources from another deployment. But we’re doing it because we think long-term that could become a $1 million-plus customer for recurring revenue. We also know that we can pull resources back in the long-term, maybe 12 months, we can pull those resources out. And then they’d sort of normalize and then they’re on their own.

So, I think we’re still getting our hands around the sales cycle and the implementation cycle, just because of the good nature of these customers. I guess even when we signed Bank of America, we could’ve said they would’ve been something like an HP. But it turns out they’re bigger than an HP. So, that’s a different dynamic.

OK, and then, kind of looking the other way, if you look out, I know your competitive situation today, you’ve got a few smaller ones nipping at your heels that you’ve been able to keep at bay pretty effectively. But if you look out, and you’ve been pretty good as far as seeing the way the space is headed and planning accordingly, if you look out a year or two, what’s in your head as far as what your true competition will be at that point? The space is evolving pretty quickly.

I think the shift that I have talked about when I was giving my little speech was, there’s a huge shift going on right now, in the Internet, on this emotional side. And, I think there are a lot of different technologies out there right now, that address the emotional side of shopping online. And, I said before, like customer reviews, I believe this is going to be a huge segment in our market. And, based on our research, when a consumer shows up at a website, they do a couple of things. One is they obviously research and one of those points of research is looking at other peoples’ experiences of the website or products. So, I think there’s something there.

Obviously, what we do with the communication channels is important, I think. Any way that a consumer can be emotionally driven to a site to connect, and I think this area will become as big as search under marketing or anything that has to be driving traffic. So, once again, there’s this review part that I think will be big and there’s what we’re doing on the customer-to-business connection, which will be obviously big.

These other technologies, mostly small pieces, but will need to be rolled up into a bigger solutions at this point?

I do and I think our division of this company is to be that, you know, to provide the products for these retailers that will allow them to connect and tap into the emotional side of the consumer. This is the part that will take the 2% to 3%, you know, conversion rate, today that are primarily based on functionality, which is price selection and overnight shipping. And that’s why the conversion rates are very low.

I believe once we tap into the consumer’s emotional side, like we do in normal shopping, offline shopping, these conversion rates will go to 5%, 6%, you know, maybe 10% conversion rates. I think our company should be the one to lead that effort. And then, I think long-term, our models, which is more to something where we’re getting a cost-per conversion, or a cost-per chat or a cost per interaction.

And, we’re flipping more to aligning ourselves with the value of our product, vs. seats. We know seats is the legacy, you know, pricing model from call centers, which isn’t really in line with where we’re going today. That’s a long answer, but ….

But I appreciate it. Thank you.

Thank you. Our next question comes from the site of Wilson Kennedy. Go ahead, please.

Hi guys. I want to ask if there’s been anything - you mentioned in the past you’d hired a guy to run business development. I was wondering if there was anything to come out of those partnerships, either with salesforce.com or NetSuite or if anything else is on the horizon right now?

Yes, they’re at Day One of the area that we’ve been talking about. Obviously, there’s salesforce.com and NetSuite. We’ve got a couple at CRM Players and we’d like to see more deal flow in those areas. And so, I think we’ll see over the next couple of quarters where they go.

I think our - where we think there’s more of a potential strategic impact is us aligning with some outsourcers who can provide a turnkey solution with labor and also doing a lot of the PS work. And so, in the upcoming quarters, there are some partners that we’ve been talking with, having very deep discussions with, that we could basically do a turnkey solution for a potential customer of ours. And then, also allow that outsourcer to provide professional service value in doing the training, the building of the rules and all the heavy lifting. So, there’s real money there for an outsourcer.

The other thing for the outsourcer, it gets them out of being just a body shop, which is obviously commoditized. And it gives them some real value where they provide the labor but then they provide a real value for increasing sales and conversion.

So, I think that’s where our investors should look for us to focus and to see some bus-dev efforts happening fairly soon.

Is there any goal for margins on the business that you bring in through these outsourcers?

I think I’m [inaudible].

Yes, the reality is that there’s a fair amount of opportunity that would be at a distinctly lower margin. So, we’re balancing that with, you know, we obviously have very strong both gross and operating margin opportunities. So, the revenue potential is significant enough that we would accept some margin impact. But, that’s the kind of balancing act we’re looking at right now, to make sure that these [inaudible] opportunities make sense.

I think the goal with any partnerships is that we want to, somewhere in the future, is have a number of companies out there that rely on us and our technologies for their own core revenue. And so, we’ll suffer some margin impact for the idea that we build an ecosystem of businesses out there that support us. By doing that, you’re creating, I think, you’re adding another leg onto the stool. That’s why we’ll take a little bit of margin impact for it to add that leg and stability.

Thanks a lot and just more question. In the past, you’ve mentioned your Center of Excellence program, where you would sort of train some of the in-house guys at your customers to take some of the heavy lifting off of you all. How is that going?

It’s going really well where we’ve implemented it. There’s actually a process to doing it now. So, when we first launched it, there was a lot of sort of walking very slowly. But now, there’s a person who actually owns it in the company.

We’re actually launching a new website. You’ll see an entirely new website for us in the next week and in our website, we literally have a whole area dedicated to the Center of Excellence. Part of that will be exposed to potential new clients and then there’s a part that’s password protected, that’s for our existing clients to go in and have resources and all that. It definitely gives us a lot more leverage to expand within our client base.

Excellent; thank you.

Thank you. Next we have a follow up question from the site of Brad Whitt. Go ahead, please.

Hey Rob, will you have Chat on that new website?

Yes and it’s going right to my desktop. So, I will be taking chats on the website. No, but we obviously, we run a lot of chat off our website for a small business, so yes, you can chat with us.

Good, now Tim, if I heard you correctly, maybe Rob, you’ll want to chime in too. It sounded like you were saying that some of your projects are taking longer to expand into larger commitments than you maybe originally expected. Maybe you could give some more color on that, you know, what’s driving that?

I think what we were referring to is that has been, historically, a deployment [inaudible] at a certain revenue level. Then, over time, some customers grow; some grow significantly, some don’t grow at all, if they’re small or a single division deployment. And that time from initial deployment to revenue up tick is fairly variable and we’ve found it be that the bigger the company the more variable it is.

So, the larger the opportunity tends to be a little bit longer to that first revenue up tick. I give a couple of examples of folks - you know, we’d signed in late Q3 or early Q4, where we probably a year ago, based on our experience at that point, we would’ve expected them to grow, sort of hit the second level of growth in Q1, maybe late Q1. But now, we kind of are seeing Q2 or Q3. And that’s a little bit more consistent and the trade is really a bigger company, more divisions, bigger opportunity for growth, but a little bit longer time from first deployment to [inaudible].

I think it’s the – I mean if I take the, I mentioned Apple Computer as a customer currently in proof of content, which we think will be a great long term partner for us. When we went into that account, it mirrors most of the accounts that we’re signing today, we won’t just stop at a division. We could come in on a division level for someone who was interested in this type of product, but the sales people have to go through the process to somehow get the number one person involved in owning that website involved. Because we know if we do that it takes a little bit more time up front, but long term it gives us some executive visibility that makes this product a must have versus a nice to have.

So maybe there’s a little bit more up front but it makes it great for us because we’re working with great clients, they’re growing, we know e can grow with them long term, we become strategic with them and they pay us a lot of money long term, so it’s a win/win all around.

A final question on the voice product, are you seeing any competition for that product at this point?

There are some existing players who are larger than us, not larger than us as a company total, but larger than us obviously in the voice segment. So yes, we’re not the number one player in voice right now, we’re entering the market, and we have a plan to go directly at the competitors. One of the major things we have is they predominantly just have voice, they offer ‘click to call’ on the web and that’s all they offer, where we offer fully integrated with chat and all the other channels, and have all the reporting engines around it, and we have teams that can support the integration. We’ve got the proactive rules engine for selling with it, so we’ve just got a lot more, I think, in the value proposition and I think Jim we’ll focus on it and do it. We’ve been to some meetings actually today on it, and I think we’re pretty excited about it, I think they’re very excited, because voice is obviously a channel that people know about. We don’t have to sell them on the value of voice.

OK, do you have an update of the number of deployments of Timpani sales and marketing?

Our expectation at this point was to be at 60 and last count it was probably 69 or 70 at this point, so we’re ahead of our expectations. I think that time lag to revenue growth is really the driver in terms of when that 70 turns into increased revenue. But yes, we’re definitely on track and that’s been the result of our increased hiring of implementation teams, they’ve been very busy.

And Tim, final question, do you expect the depreciation to be about the same rate, it was $62,000 I think this quarter.

Yes.

OK thank you.

Thank you and I show no further questions at this time.

Thank you for joining our call and we will see you for Q2. Thanks.

This concludes today’s teleconference. Thank you for your participation. You may disconnect at any time, and have a great day.