LivePerson Inc (LPSN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to LivePerson's Second Quarter 2006 Earnings Conference Call. At this time, all persons are in a listen-only. Later, we will conduct a Q&A session. At that time, the operator will give you instructions. As a reminder, this conference is being recorded today, August 3, 2006. Speaking on today's conference call will be Robert LoCascio, Chief Executive Officer of LivePerson, and Tim Bixby, President and Chief Executive Officer.

I would now like to turn the call over to Mr. Bixby. Go ahead, sir.

Thanks, very much.

During the course of this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause our 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's routine for our internal projections and expectations to change as the quarter progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which the Company bases its expectations may change prior to the end of the quarter. Although these expectations may change, we are under no obligation to inform you if they do.

Our Company policy is generally to provide our expectations only once per quarter and not to update that information until the next quarter. Actual events or results may differ materially from those contained in the projections or forward-looking statements. Many factors could cause LivePerson's actual results to differ materially from those described in the forward-looking statements. Listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission for a discussion of these important risk factors.

In addition, please note that the Company updated the risk factor entitled "Political, Economic, and Military Conditions in Israel," [which] could negatively impact our Israeli operations to reflect recent developments in Israel. Listeners are advised to review the update to that risk factor, which will appear in our upcoming report on Form 10-Q.

Now, I'd 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. We've announced our 25th conference call as a public Company.

During the second quarter of 2006, we generated revenue of $7.4 million, up 40% from a year ago, and up 88% sequentially, as compared to the first quarter of 2006.

Earnings per share was $0.01 and in line with our guidance. This includes the impact of stock compensation expense.

EBITDA per share was $0.02, also within the guidance range we provided 90 days ago.

Tim and I and the rest of the LivePerson team are very excited about our growth prospects in terms of deals already signed that will have impact in the second half of this year and in the strength of the current pipeline.

Investments we made in sales and marketing beginning in early 2005, coupled with the focus on the Timpani Sales and Marketing product line, are now generating an increased level of growth for our Company. Likewise, our small business product line is hitting on all cylinders and showing consistently stronger growth than in the prior year.

From a revenue perspective, we expect to finish out 2006 above our initial revenue guidance of roughly $30 million. Future [inaudible] expense expected acceleration in organic growth in the third and fourth quarters, as well as the impact of the Proficient Systems acquisition, which is effective of mid-July. We expect our overall revenue for the year to be approximately $32.5 million. About half of that increase guidance is the result of organic growth improvements, and the other half is due to the Proficient acquisition.

During the second quarter, we signed more than 40 enterprise deals with new and existing clients. We signed several new enterprise clients during the quarter, including Netquote, IDT and New Line Cinemas, and expanded business within existing customers, including Charles Schwab and Qwest. We're also into the third quarter with the highest level of quarterly revenue in our Company's history.

I would like to now provide an update on the Proficient Systems acquisition. We are now in the middle of integrating Proficient Systems' employees and customers into our Company. We have already reduced Proficient's headcount by 30%. It's our plan to have the Proficient operation break even by year end.

It is our plan to migrate the Proficient client base onto the LivePerson platform fairly quickly. We have designed a migration process to maximize the yield of clients and minimize attrition, as we've successfully done in previous acquisitions. We will continue to separate out the revenue contribution from Proficient from our core business in order to clearly show how our organic growth rates are progressing. I will have more updates about Proficient over the next few quarters until we finish the earn-out of this acquisition at the end of Q1 in 2007.

On our last conference call, I spoke about how we were evaluating an increase investment in our R&D team that follows the investments we made in our sales, marketing, and professional service groups over the past 24 months. The demands placed upon our R&D team have increased with [inaudible] and bring on larger new enterprise-sized customers. It is time to make some focused investments in our core technology, hosting facilities, and R&D personnel.

We'll increase the overall headcount of this team by 15 people by year end, staggering hiring at about 5 people per quarter. We've already begun this process of hiring during the second quarter. Based on our current growth rates and overall business operations, we're viewing this almost as a capital investment that will build a strong foundation for the acceleration and demand of our products over the next 3 to 5 years. The net impact of this investment will be an additional ongoing annual R&D expense of approximately $1.5 million, and that will be layered in over the second, third, and fourth quarters of this year.

We also plan to wrap our investments in sales and marketing primarily around direct sales headcounts, as our organic growth rates continue to accelerate with our market opportunity. With the addition of the Proficient customer base, we currently have 85 Timpani Sales and Marketing type customers, 25% which make up the Fortune 100 and 10% of the Fortune 500.

We're clearly building this business around a base of customers that are thought leaders and highly influential over the entire target market. Our target market for Timpani Sales and Marketing is about 3,000 companies. In order to be one of the 3,000 target companies, a company usually needs to meet our minimum threshold of 200,000 unique monthly visitors and a net contribution per online transaction of at least $100. For example, one of our customers has about 10 million unique monthly visitors and over 500 different products but deploy Timpani Sales and Marketing, primarily within the jewelry, bedding, and electronics areas of the site, where contribution margins are relatively high. LivePerson [took a more] -- specifically the Timpani Sales and Marketing platform, is not, in this case, deployed within books, CDs, and DVDs, because the margins are too thin for us to introduce a Live Support Agent into the process.

If you take the 3,000 targeted potential customers and multiply that by target annual fee for Timpani Sales and Marketing of about $300,000 per customer, the result is nearly a $1 billion market size. And while the market size and revenue potential is very high, our real challenge right now is in educating the market of the effectiveness, as LivePerson is specifically the communication channel of chat as a conversion tool.

The effectiveness, though, of our product, of the Timpani product, is very significant, and our customers usually experience about a 25% conversion rate of chatters to buyers, the comparable of its paid search for outbound marketing, typically sounding like a Google or a Yahoo, where typical conversion rates are only around 2 to 5%.

The high industry conversion rates and the adoption of LivePerson by business leaders like Apple Computer, Bank of America, HP, Charles Schwab, and Verizon are driving the overall market to embrace LivePerson as a standard way of doing business online.

During this call, I spoke a lot about increasing investment while increasing our sales momentum in market share. Our Company has a strong history of being fiscally prudent and our investment decisions are primarily based on a clear ROI within some reasonable timeframe. We've not changed how we run our business, however, we believe that we have a distinct opportunity right now to reach our strategic goals and we want to do everything possible to ensure our success.

We have a few accelerateds in our business right now, and we're building off a stable base of recurring revenue. Our sales team is starting to perform quite well against aggressive booking targets and our existing base of Timpani Sales and Marketing customers are starting to show substantial growth within themselves. So, with 3 or 4 factors at hand, we want to increase our level of investment and fuel more opportunity, that's really from a place of strength. Therefore, while we invest as much as we can, we want to maintain our healthy gross margins of nearly 8%, so we want to maintain the cash flow or EBITDA margin of between 15% and 20%.

And with that, I will now turn the call over to Tim, who will give you a more detailed outlook at our financials, and then we will take some questions. Tim.

Thanks, Rob.

We had another very good quarter. Both revenue and bottom-line results were in line with our guidance from last quarter. We continue to see good progress in new client additions, while book of business at this point in the quarter is very strong. This enables us to raise our revenue guidance for the year, even without the added benefit of the impact of the Proficient acquisition. We'll talk a bit more about expectations at the end of my portion of the call.

We reported record revenues of $7.4 million in the second quarter, which is a 40% increase versus the prior year, and an 8% increase from the first quarter of 2006. This is right in line with our guidance range for revenue. GAAP EPS was $0.01, and also in line with our guidance, and this includes about $0.01 per share as an impact of stock compensation expense, pursuant to FAS 123.

EBITDA per share was $0.02, also in line with the guidance range we provide 90 days ago.

I'll give you more detail on these results on our third quarter and full-year expectations in a moment. And you can also find some details within the press release from earlier this afternoon.

As in the past several quarters, we generated very good results in both signing new market accounts, as well as growing existing accounts. We signed several new blue chip clients during the quarter, including Netquote, IDT, and New Line Cinema, among others, and expanded business with many existing customers, including Charles Schwab and Qwest.

As Rob mentioned, at this point, looking at the Fortune 100, a full 25% of those companies are now LivePerson customers. If you look at Fortune 500, they represent more than 10% of the largest companies based on revenue.

In terms of overall deal quantity and size, we closed 40 enterprise deals in the quarter, which was a big increase from 30 in the prior quarter, and averaging a price of about $90,000 annually per deal. If we isolate Timpani Sales and Marketing, specifically, the average new deal size was $200,000-plus, with notably large up-sale deals in the quarter to existing clients.

We now have 8 clients that are paying us more than $600,000 per year, all on a recurring revenue basis. And our largest client, as you know, exceeds the $1 million per year recurring revenue benchmarks.

About 90% of new enterprise revenue in the quarter came from Timpani Sales and Marketing, and 10% from contact center deals. And this is about a 10-point shift, a 10-percentage point shift, from last quarter's figures in favor of Timpani Sales and Marketing. This is on top of a similar shift in last quarter, so a significant move towards Timpani Sales and Marketing. And again, it's in line with our expectations and in line with the focus of the direct sales force.

20% of incremental revenue in the quarter came from new clients, while 80% came from existing clients. And this really follows on the earlier comment I made that said we had significant upsells to existing clients. In some cases, these clients have been clients for several years - in the case of one of the telco clients that we have; in other cases, they're very recent additions within the last 6 to 9 months, but in both cases, very significant upsell. These upsells take these 2 clients, specifically, into the ranges of being above $.5 million per year clients each. Overall, the vast majority of the growth in the quarter came from these existing clients, and this really follows our strategy. As I said, sign up large clients and then help them grow over time.

The enterprise group, as a whole, grew about 10% sequentially. Our small business group had another strong quarter, bringing in 11% sequential revenue growth. [So this sign] would have been a strong year-to-date for that group. With more than 200 small business clients now using the voice channel, this represents about 5% of that small business base. And up from 40 just last quarter, this group is rapidly becoming a multi-channel customer base. More than 600 small business clients, representing about 16% of that base, are now using a full suite of chat, e-mail, and/or knowledge base.

As Rob mentioned, the Proficient integration is progressing very nicely. We have already eliminated a few [inaudible] positions that have enabled us to trim headcount by about 30%, while we are working with each of Proficient's existing clients and sales pipeline customers to ensure the maximum benefit from the acquisition.

We're on track to minimize the cash burn in Q3 and to generate breakeven cash flow in the fourth quarter. We're working hard at integrating the 2 teams and have had much of the Proficient team here in the office as in New York City for the past week and are moving quickly down that path.

Our client roster has been bolstered significantly, with the addition of several of the world's largest financial institutions, in conjunction with this acquisition, in addition, to other well-known companies, including CarMax, E-Loan, Oracle, and others.

I'll now review in a bit more detail the financial results for the second quarter.

The [third] quarter, as I said, we reported record revenue of $7.4 million, 8% up from $6.9 million in the prior quarter, and 40% up from $5.3 million in the second quarter of 2005. Deferred revenue was flat at $1.8 million, as compared to the prior quarter, and up slightly from a year ago at this time.

Cost of goods sold, cost of revenue, in the first quarter was $1.6 million, as compared to $1.5 million in the prior quarter, and compared to $1 million in the prior year, resulting in overall gross margin of 78%, again in line with our expectations.

Product development expense for the quarter was $1 million, as compared to $.9 million in the prior quarter, and $.7 million in the comparable quarter in the prior year. We continue to add R&D resources, as Rob mentioned, to support product development and expect higher additional resources in the second half. As Rob said, now is the time to reinvest in our core capabilities, given our optimism about top-line growth, and specifically within the R&D team and their capabilities.

Sales and Marketing expense for the second quarter was $2.9 million, up from $2.6 million in the prior quarter, due primarily to compensation-related expense from the full-quarter impact of Q1 hires. We currently have 13 quarter-carrying sales reps on the enterprise side of the business and expect that to grow to about 16 by year end.

G&A expense, excluding amortization and intangibles, was $1.4 million in the second quarter, down from $1.5 million in the prior quarter, and up from $1.1 million in the comparable quarter a year ago.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was $1 million even, up from $.8 million in the prior year period, while EBITDA per share in the quarter was $0.02, flat as compared to the prior quarter, and up $0.01 as compared to the prior year.

We reduced our valuation allowance against deferred bad debt this year, as we discussed on the prior call, and this has resulted in an effective tax rate of zero for the first half of the year, and we'll expect that to continue for the second half as well. The reconciliation between EBITDA and GAAP net income is provided in the financial statements that accompany our earnings release.

Net income per share in the quarter was $0.01, including the impact of stock-based compensation expense.

Turning now to the balance sheet. Our cash balance at quarter end was flat at $19 million, as compared to the prior quarter. Cash flow from operating income was offset by prepaid expenses, slightly higher capital expenditures, as well as an increase in accounts receivable.

Our accounts receivable balance increased to $2.4 million, from $1.8 million in the prior quarter, due primarily to both increased sales, as well as slightly slower collections from larger clients.

Deferred revenue was flat at $1.8 million, versus the prior quarter and the prior year. And DSOs remained low, even with the increase in AR, running about 30 days.

We'll now go into a little bit more detail on our expectations for the current quarter, the third quarter, and the rest of the year. Last quarter, we told you on this call that we were focusing on a target of 10%-plus sequential revenue growth, and I'm pleased to say that we expect to achieve that goal in the third quarter.

We expect in the third quarter, revenue of between $8.15 and $8.25 million, and this would represent a sequential revenue growth rate of between 10 and 11%. And this excludes the revenue impact of the Proficient acquisition. We expect revenue, due specifically to the Proficient acquisition, of approximately $.5 million for the third quarter of 2006. And the effective close date of that transaction is July 18th, so we'll get somewhat less than a full quarter impact from that transaction. Combining those gives you a total revenue expectation in Q3 of between $8.6 and $8.7 million for the third quarter, EBITDA of $0.03 a share, and GAAP EPS of $0.01 for the third quarter of 2006. All of these bottom-line figures represent total expectations for the Company, including post-acquisition impact.

Total revenue for the year, we will expect to see revenue between $32.2 and $32.8 million for the full year. Again, this does include the impact of the Proficient acquisition for the full year. EBITDA per share of $0.13, and GAAP EPS of $0.04 for the full year. The GAAP EPS expectations include additional expense of $0.01 per share for amortization of intangibles related to the Proficient acquisition. Our share count will increase by approximately 2 million shares, given the Proficient acquisition during the third quarter, and may increase by up to 2 million additional shares during the second quarter of 2007, based upon the revenue earn-out provisions related to this acquisition. We'll give you more color around our success against that earn-out over the next couple of quarter as we see that progress.

These GAAP EPS expectations also include the estimated impact of adopting FAS 123 in January of 2006. This impact is expected to be $0.05 a share for the full year and $0.01 per share for the third quarter. This is based on shares issued to date, options issued to date, as well as the 2 million additional shares related to Proficient. This impact, of course, may change based upon additional stock option grants and forfeitures, if any, or methodology refinement, or other factors.

CapEx in Q2 was about $250,000. We expect that to be less than $.5 million for the full year of 2006. Deprecation and amortization, excluding stock compensation, is expected to be approximately $1 million in 2006. This is no change from prior quarters, and also excludes the impact related to the Proficient acquisition.

Share count assumptions for the full year, we would advise the use of approximately 44 million shares fully diluted, and this includes the impact of Proficient. We also had an upward adjustment of the share count in Q2, due to refinement of a tax assumption in the fully diluted share calculation.

Our target operating model remains strong. We believe an operating model with significant leverage with an 83% gross margin and a 35% EBITDA margin is attainable at a revenue run rate of between $50 and $60 million. This is fairly remarkable, given the major transformation we've made in our business. Three years ago, we were a small click-to-chat vendor for customer service only, facing potential commodization of our market and significant competition. Today, we're serving the world's largest companies and helping them increase their on-line conversion rates for the market-leading products, a multi-channel platform, including chat and voice, and we've just acquired our closest competitor in this market. Yet, we still are comfortable with a target margin structure that is little changed from what it was 3 years ago. Few technology companies, in my opinion, could have made, or have made, this level of progress over this period of time.

The take away, I feel, for investors should be this, when we're confident in the future growth aspects of the Company and the growth prospects of the Company, we increase investment levels, which can dampen operating margins in the short term. When we are concerned about the market opportunity, we tend to hunker down, cut headcount, and then margins can actually increase in the short term. But today, we are increasing investments because we see an expanding market, we see accelerating revenue growth, and we see, most importantly, increased market adoption among thought leaders, like the Fortune 100.

That covers the financial review, and at this point we'd be happy to take your questions. If we could ask the operator to rejoin the call and help folks out with those instructions?

[Operator Instructions] Michael Kern

What do you think the breakout between the sales and marketing contact center and small business, I wondering if you could give that revenue breakout again?

Yes. The total -- the breakout we, typically, give is relatively unchanged. It is moving sort of, maybe a half a point to a point a quarter. At this point, it's 30 -- what we gave out last quarter was 35% sales and marketing, 35% small business, and 30% contact center. It's shifted, I would say, between that 1.5 to 2 points from contact center to sales and marketing over the past quarter. And we'll probably see by year end that it might cap out around a 3% shift, so you might see 38% in sales and marketing. Small business has been fairly consistent in holding its own at that 35% level.

Okay. Can you give out the vertical splits that you've given in the past between financial services? I'm sure going forward, also financial services is going to become a larger part of your market.

I think when -- it would be more appropriate when we really have more data available on the Proficient acquisition, because that's really where I think the potential swing is. In terms of our existing breakdown, which is about 25% historically in financial services, that has not really changed and those numbers don't tend to swing. Because of recurring revenue models, those don't tend to swing much quarter to quarter. If we see something moving dramatically, then we'll update that metric. I think 6 months from now, once the result of the Proficient migration and the Proficient pipeline are known, we could potentially see a more significant move towards financial services. But right now results really show no major change from where we were last quarter on that split.

Okay. And finally, now that you've taken out your number one competitor, can you give us a little color on the competitive landscape and who are you seeing now in your deals?

I think Proficient was really the only competitor with more the Timpani Sales and Marketing feature set. And then there's just -- the flock is the smaller click-to-chat vendors that we compete with, primarily in our small business product line. So today it's -- we don't have many competitors in that Timpani Sales and Marketing. We have none right now.

Kyle Evans

That's a pretty significant increase in the R&D expenses you're expecting for the second half of the year. Can you give us some sense for where you're going to be deploying those and what you're trying to achieve for your customers?

Yes. The real, I think, strategic focus and the changes that we're making that are increasing the headcount is in the past we've sort of had what's called a single-product team developing both features for the sales and marketing products and the small business product lines. And because there's a lot of momentum in both of those, and now they are looking more and more as just totally different products with totally different needs, we can try and sort of uncouple them and have, more or less, 2 separate product groups. And so it would be 2 separate product groups and then a core development group that's developing all the services that those product groups are using, like chat and voice and all that.

So, we're seeing a [inaudible] in these and we just see growth. And accelerated growth in both market segments sort of warrants us to do the investment, which, to put it in context, we really haven't done any really significant investing in R&D. We would do small headcount incremental changes year by year, but nothing in a way where we could really accept something for the next 3 to 5 years, and that's really the plan with the investment.

Are the incremental hires going to be in Israel where most of the R&D is today?

Yeah. All of the incremental hires will be in Israel. There will be some people on the hosting and maintaining our hosting facilities that are here in the United States, but the development resources are still in our R&D facility outside of Tel Aviv.

Okay. In the past, you guys have talked about your incremental growth coming kind of half from new clients and half from existing clients, and it sounds like you had a pretty big shift this quarter towards existing client growth. I guess my question is, well, my first question on that is why would your gross margin be down with that as a backdrop? I would expect that to be up, not down, year-over-year sequential. And then kind of what are your expectations for the mix on incremental growth in the second half of the year?

Yeah. We're sort of seeing the effect that we thought would happen with the Timpani Sales and Marketing implementation, which is we start with a small group of operators, maybe 10 or 20 operators chatting, and then once they see the successes, they increase. There is sort of a, if you can envision an S-curve, there is sort of a 2-stage S-curve, which -- and during that whole [inaudible] we put a lot of professional services, and that is, if you look at a customer, I think, over 12 to 18, 24 months, we do a fair amount of hand holding to get them to grow. So they start with 10 seats and they may go up to, let's say, 110 seats, 120 seats during that time period, and that takes them from a $200,000-a-year customer [fill] with $1 million a year, and that's our goal.

Now what happens is we look at some customers, like HP, where they are paying us close to $1 million, but we don't put too many resources into professional services because they are mature. They are through the second stage of that S-curve. So what you're seeing now is still a lot of hand holding from our PS group. But what will happen long term and over the next 12 months for these guys is the cost will go down and those margins will improve. So it's sort of what we think is natural within a customer. And then they become like an HP, where they need a little maintenance every now and then, and we're dropping a lot of those license fees, that revenue, to the bottom line, probably 80%-plus.

And what do you think the mix will look like for second half? Do you expect to see kind of continued -- continuation of this 80/20 existing to new split or do you think it will switch back to 50/50?

I think we're going to see an in and out of the 50/50 to 80/20, because we signed sort of a big group of new customers, and then they become existing, and then we're counting on that existing. So I think you should sort of look at it from the 50 to 80% kind of fluctuating back and forth. And that would be a natural in this new business. It could be some marketing is a different business than we had in the past. And this seems to be a standard way, unless the business performs -- if it's performing healthy.

Okay. One more and then I'll get back in the queue. Tim, can you help me understand the share count recalculation?

Yeah, there is -- [technical difficulty].

Mr. Bixby, we are experience difficulty hearing your line now.

Operator, can you hear me?

Yes, sir. One moment, ladies and gentlemen, and I'll try to reconnect Mr. Bixby.

[Pause in conference call. Music hold.] [Operator Instructions]

Mr. Bixby has rejoined the teleconference.

I apologize for the break there. Kyle, if you could go ahead with your question.

Hi. Can you hear me?

Yes. Go ahead. Thanks.

Okay. If you would, could you help me understand the share count recalculations? There's a pretty significant bump in the share count in the quarter.

Yes. There's a couple of assumptions in the fully diluted share calculation that are in fact, [bad] assumptions. And there's one that's related to effective tax rate. Because our effective tax rate changed dramatically this year, we felt it was more appropriate to not take the tax benefit in that calculation. This was a change versus the first quarter. When we made that first adjustment, we were using -- we were taking credit for a long-term effective tax rate. So taking that effective tax rate assumption down to zero to synch up with the adjustment of the tax allowance caused that shift in the share count. So we felt that while it was -- it is an assumption, we felt it was more conservative, and chose to make that adjustment at this point.

Okay. Thank you. I'll get back in queue.

Thanks.

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

Thanks. Guys, you've done a nice course correction over the last two years from the customer support area into your new area. And obviously, by your investing, you expect to see pretty significant growth going forward. My questions I guess to start with are twofold. One, you talk about making the investments with an expectation of ROI in a reasonable time frame. What is that time frame, and how are you defining the return? Are we going to start to see the bottom line improve out a year, year and a half? Or how are you looking at that?

I think the guidelines I gave in terms of our target operating model and when we could achieve that is probably the best way to answer that, which means you'll see a short-term impact, specifically in Q3 and Q4. And we expect that within a time frame to where we can get to $50 million or $60 million in revenue, we would be at our target EBIDTA margin of 35%. And so that suggests an ROI that we're comfortable with of let's call it three to five quarters, where we'll see, at minimum, a recovery of the margin and probably more likely an improvement from where we are today.

So I think a good analogy would be if you look back at what we did in sales and marketing over the past let's call it 18 months. Sales and marketing, we saw the opportunity. We made a pretty significant increase in sales and marketing as a percentage of revenue. And that's kind of peaking, I think. Last quarter or this quarter, we will probably see that same phenomenon in R&D. And so some of these things -- ideally, you make these steady stated revenue increases, but once in a while, you have to make a big shift. And we felt that now is the right time to make a pretty big investment shift into R&D.

Okay. And that segues into my second question. For this [step] function investment, it seems to come on the heels of what was a good Q2 in terms of getting deals into the live stage where you start to see the revenue. What happened during the quarter that you were able to really ramp the organic growth and come into the quarter with the highest book revenue?

A couple of things. One, we're seeing broader success across the team of sales reps. So we're seeing more deals from more individual reps, more so in Q2 than any prior quarter, which is a good sign, I think. Second, we're seeing the carry over impact of deals that were closed last year, where we're now into -- past year one on some larger deals, and definitely into quarter three or quarter four on some very large deals.

And you start to see a little bit of an accelerator impact from a deal that might have been closed in the third quarter or the fourth quarter of last year. And an upsell that will come. It's tough to predict when those upsells will come. And I think that's why if you look back to January 1 of this year, we didn't go out and say, "Look, we're going to do 10% or 11% growth in Q3." We felt it was possible based on the pipeline, but you just don't know until these deals fall into place. And a good number of them fell into place in the second quarter.

Okay. And your implementation, you had hit a bit of a hiccup a couple of quarters ago, and now that seems to be taken care of.

Yes. That issue's really been solved.

Okay. Just a couple more smaller ones. Sales and marketing deployment, you mentioned 85 was the number. How many of those [come from] Proficient?

Proficient represents about 25. Sales and marketing deployment, there's been a few more than that. We think there might be some upside. But the count did not change. Again, the deployment count didn't change dramatically in the second quarter, just because there's so much activity with existing accounts. In terms of number of actual projects, I think the number's close to 100 at this point. But many of those are in existing accounts where we're expanding. And so I think that kind of reflects the heavy activity in existing customers.

Okay. And with that, just to be clear, that 85 number is how many you have deployed now?

Yes. Closed in the quarter.

Okay. Small business group you said saw nice sequential growth. How much of that is from existing customers adding additional modules as opposed to adding just new customers?

The vast majority is new customers. We are seeing some uptick from existing customers as they add the voice component. And that we think could grow over time. But at this point, it's still the vast majority coming from new accounts.

Okay. And then finally, Proficient head count you said was down 30%. What are the plans there as far as additional reduction? And then I think you mentioned keeping the revenue lines separate. I'm wondering how you're going to do that, and for how long.

Well, I think -- we will not report anything separately. There will be a normal required filing, which will give some pro forma information. Probably early in September there'll be an 8-K that's required as part of the transaction. But beyond that, we'll just give sort of color commentary on these calls in Q3 and Q4. Because our organic growth rate is changing, we want people to be pretty clear on that, and not have it masked by the Proficient impact. But my assumption is by Q1 of next year, it'll be very -- pretty much fully integrated. And so we won't see as much commentary past that point, I think. It'll be sort of all LivePerson Inc.

Okay. And that head count?

The head count, we're pretty close to where I think we'll end up. Proficient was a unique acquisition in that because their business model and product focus was so similar to ours, that there's a lot of really strong expertise there, both in terms of the product from an R&D perspective, in terms of running a scalable operations facility, as well as with the customer relationships and account management. And so we'll be expecting to keep most of those people as part of the LP family.

Okay. And is your total head count now around 175 or so?

That is almost exactly correct. Yes.

Okay. And where do you see that at the end of the year?

I think with the R&D change, we're looking at plus 10. I would expect it to be, if not below 200, very, very close to 200 by year end.

Okay. All right. Great. Thanks, guys.

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

Hi, guys. Tim, can you give me the break out of the stock-based comp by line item?

I don't have that at my fingertips, to be perfectly honest. But it will be -- you have the breakdown from last quarter?

Yes. [Inaudible].

A pro forma -- yes. If you take the total amount which is broken out on the press release and use the same allocation basis, you should be able to get there.

Okay.

The total -- yes. But that'll get you there.

Okay. And so Rob, what is the go to market strategy with Proficient? Will you -- it's my understanding they didn't really have much of a sales force. So have you trained your existing Timpani sales and marketing, your enterprise sales team? Are they ready to sell it? Are they actively selling it? What's the plan there?

Well, we're no longer selling the Proficient platform. So all the pipeline deals are basically being offered the Live -- our Timpani product line. So there's no change in how they're selling. And these guys obviously in the past know the difference between the two products. So we've just sort of changed the top track a little bit to be more focused on sort of integrating how we're in the future going to integrate some of their technology with ours. But all the deals that are closed from here on out, there may be one or two that go on the platform of Proficient because they're about to go live like next week, but the rest that are in the pipeline are going to go on the Timpani product line.

Okay. So you're not going to use their IP?

No. I mean, we're going to use their IP long-term. We're going to integrate their RTDM, the real time data mining, into our system. But we can give the same -- the value proposition was the same, which is we can help you increase sales, whether we have RTDM or not. We know we can do that. And that's all the customer wants to hear. And so it seems like the -- our value proposition is resonating just as much as theirs.

Okay. So how will they be able to achieve their earn-out?

Basically, we're taking their -- that customer base. We define a finite amount of customers that we weren't pitching in that were new customers. And we'll close them on our Timpani product line. But they get the credit for that. Even though it's on our product, it was within customers that we didn't really have relationships with. And that's how the earn-out works.

Okay. And I think, Rob and Tim, I believe you were, if I'm not mistaken, you're basically saying you had record bookings this quarter? Correct me if I'm wrong. Driven mostly by existing customers. Do you anticipate any seasonality, any Q3 negative or positive seasonality in the bookings? Or should we expect those bookings to continue to grow sequentially?

No, I don't think that there was any seasonal phenomenon. As you expect with bookings, they ebb and flow based on the client base and the success of the reps. But we, as far as we can see, which is -- we have tremendous visibility in Q3, obviously, and quite good visibility into Q4. And the bookings numbers in Q2 really impact those quarters most significantly. So it's a trend where we think that could continue.

Okay. And then I'll ask one more and get back in the queue. But Rob, can you give us a little more color on the voice and the product and where that stands at the enterprise level?

Sure. I'll just mention that we launched the product I'd say two quarters ago. And we always -- we will tend to launch new product into the SMB. And so we launched it there and marketed [200] SMB customers. So that's going healthy in that market segment. We've got about two or three enterprise-type customers going live on it. They have a sort of different set of needs than the small business do. We have one very large telco that just went live actually this week.

So so far, everything looks pretty good. I think our sales force is pretty excited about the opportunity, because as we know, we don't really have to educate the call center guys or the marketing guys about voice. They have calls centers. They're doing phone. It's now just a -- now they have the ability to use our product [and rules] engine and deploy it off their website with the call scenario. So I think [our sales guys] feel pretty pumped that there's a lot of opportunity there. And SMB's a good leading indicator of that success.

Brad, I got the breakdown here. I looked it up for you. Saved you a little work. So the total stock comp for the quarter's $439,000. [Comps] to revenue is $40,000. Product development $102,000. Sales and marketing $112,000. And G&A, $185,000.

Okay. Got it. Let me ask you one final thing though, Tim. What kind of -- I know you're not giving '07 guidance, but can you give us any kind of idea what kind of tax rate we should use in our models?

Yes. We expect to have a full rate -- most folks are using 35% for next year. My expectation -- we're New York based, so we -- a more conservative number would be something like 40%. So I'd recommend somewhere in that range. 35% to 40% for next year.

Okay. Thank you.

Thanks a lot.

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

Thanks. Can you talk maybe on just how you think the sales cycle will be changing now that you really don't have a competitor? Whether [it] sort of primes some customers, which [inaudible] increased awareness? How you sort of fill that void? And then on a deal per rep side, like about three per rep in the quarter. It seems actually kind of high. Whether you can discuss at least qualitatively what you see as sort of a ceiling there, and how that [gates] your hiring on the head count side to maintain the [comp] growth. Thanks.

On the sales cycle side, I think it's too early for us to tell what the impact will be of not having a competitor. So I think there's a negative and positive like -- I think you're right in saying that a competitor out there spending a certain amount of marketing dollars and sales resources to educate the market, and they definitely were doing that. So we kind of lose that.

The reverse is that the market is becoming more and more aware of these types of products. And so they're looking for a vendor, and now we're the only guys that are out there. There's a voice company that's voice over IP that's starting to sort of bleed into our space a little bit, because we offer, obviously, a voice product. But since we're the only guys with the [proactive] engine, it probably will create a lot of opportunities. So there's probably a bounce of good and bad.

I think the issue about the market right now, and I've said a couple of times that everyone's talking about Web 2.0, and if you look at blogging and community sites, like Myspace and all that, those are interesting, and I think everyone's trying to figure out the revenue models there.

But that thought and those ideas are bleeding over into the ecommerce space. And marketing heads are now thinking about how do they create a better, more solid connection with their consumers, and chat is one way in which they can do that. I actually read an article this week on how Sprint was reaching out to 400 different bloggers, and giving them free phone service for a short period of time in order to sort of entice those bloggers to write more and more about their products. So this whole concept is really being embraced by the marketers, which is creating more demand for our products.

Which leads to the next question. I think our sales guys are seeing a little bit more inbound. Say they closed three a quarter. I think we're hoping that they would close at least that amount, maybe one or two more deals more per quarter. So we were saying at least one month. And they're kind of there, and we'll see if they can get to four or five a month with what we're seeing in the changing in the market.

So you don't see that as [gating] factor?

Don't see what as a gating factor?

The number of deals per rep sort of hitting your prior target?

I don't know. Once we hit the prior target, like everyone else in the world, we kind of set a whole new target, and see if they can hit that. I think the more outbound prospecting they have to do, the more it makes the target harder to hit. If we see more and more inbound happening and more awareness in the market, then it makes -- it could open up their ability to go above one a month.

And so we're seeing that shift. It's not overwhelming. I'm not going to say every ecommerce head is sitting there embracing the concept of connecting with their customers. But we're definitely seeing the shift. And over the next I think 24 months, this will change. And we could see three definitely go someplace higher than three per quarter.

Thanks.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the site of Richard Fetyco. Go ahead.

Hi, guys. Congratulations on the quarter.

Hi, Rich.

Just a lot of questions have been asked. Just on the voice, just a follow-up question on your voice product. What sort of incremental pricing, or how are you pricing that product on the small business side? And could you give us an idea of how you're thinking about pricing on the enterprise level? And then I assume on the Proficient acquisition, you're keeping all the sales reps?

First, on the voice product, we are -- the typical price is about a 50% uptick for a basic chat and email seat for small business. So someone that would pay without voice $100 a month, $99 a month, essentially would pay $150. So we've had a fair amount of success at that $150 price point. We're not quite to the point where that's [inaudible] customers, but it looks like there's a lot of support at that level.

Enterprise side, we are -- as with chat, we're very much focused on revenue per customer. So that's really what our cost is, as well as activity rather than a seat. So we're looking for -- an ideal enterprise customer for us is, on the very, very low end, $5,000 to $8,000 a month. Typical in the $15,000 to $20,000 a month range. And so that's really where we're looking to start to make that a viable business. So we'll sort of see how the first couple of telcos go, and we would expect them to be in that range.

On the Proficient sales force, they were very -- they had some key executives who were kind of driving the sales, because they were a quite a bit smaller company. So the CEO was very personally involved in selling, as was the general manager of the whole company. That was really the core of the team. And they are not staying on at the company. So that was really the bulk of their sales force.

In the UK, there are sales resources there, and we're sort of reviewing our need there. The UK is a real opportunity for us, and so that will be one area where we would look to beef up our resources.

Thanks. And then I'm just curious about other sort of product partnerships that you're thinking about to really move up the product into deeper into sort of the marketing, online marketing and advertising value chain, if you will. If that's a direction that you're thinking about going as well.

We introduced the voice channel, so that's the other real time channel. And then we've also, as we mentioned, I think, on the call, maybe two quarters, ago, we've introduced sort of a non-real time part of the Timpani sales and marketing [cog], which basically enables a marketer to drive behavior on the website and conversion rate by offering content to the consumer, the visitor on the website, without chat operators or voice.

So I think for us, where we want to see really the expansion there, and the expansion -- we've got about four customers using that marketing component. And then expansion of voice. And as we mentioned, in the core, which is chat, we think there's close to $1 billion market here, with these 3,000 targetable customers. So we have a long way to go, and I think if we just continue to execute well on our core business, we can get there fairly quickly now because of some of the momentum we're seeing in the business today.

Okay. Great. Thanks.

Thanks a lot, Richard.

Thank you. Our next question comes from the site of Samuel Johnson. Go ahead, please.

Yes. Just I want to try to explore a little bit more about what the motivation may have been here to bump up the R&D investment. You guys have said a couple of times now that really there's virtually no competitors left in the proactive chat space. And that the biggest challenge you guys are facing right now is particularly around education. So it doesn't really look like you're going after market share necessarily against another competitor. So I'm curious about what are the opportunities you see with the ROI and the R&D, given that really this is kind of a land grab move on your sales and marketing side. Is that money better spent in sales and marketing, or even [letting] the margin side up a bit?

That's a good question. We see the needs of the large enterprise customers, and I go back to, again, the Timpani sales and marketing product. I don't want to use the word, the saying night and day, but it's fairly night and day compared to our click to chat product line. So the needs of those customers, like an Apple Computer, or a Bank of America, is fairly different. And that requires a different level of product development. We have greater needs on our servers because we take more and more traffic. These guys have tens of millions of unique visitors a month, which puts a little bit more, obviously, strain on our servers. And we have to be ahead of that.

The second part is their needs on just a pure product perspective. And I'll say there's two levels of needs. There's core, I want voice, and I want something cool, and I want to be able to use this technology for [at least] three or four other interesting things in order to create -- increase conversion rates.

The second part is our implementation group, our professional services group, has a whole different set of needs when they implement a customer like this. But we think long-term, in order to also tighten up our gross margins, is by developing more technology to automate some of the processes that we don't think are value add, like adding tags on page or reading a report. If we can make that easier and better and simpler for our customers, then we need to do development there.

So that's really what driving it on the enterprise side. In the small business side, the small business product is just really -- it is radically different than the Timpani product line. And yet in the past, and we've seen this the last couple of quarters, we've kind of slowed down development there because of the overwhelming needs of the Timpani sales and marketing product, which isn't really fair to that group. So we've uncoupled the two groups, given them separate development product groups, and so they can have the freedom to really develop their products and go after more and more revenue opportunities.

And so in the end, the reason we're doing this is really to create more revenue opportunities as we see them in the future.

So can you identify any specific feature sets or market opportunities whereby we'll either see increase in price or extended market options here?

Yes. I think a good -- I always like to use sort of [facts] is a good sense of what we can do on an execution perspective. But we added voice into that small business product line, and we're taking our seats from $99 a month to $150 a month. And so that's a significant increase for just adding let's call it one communication channel of voice.

The head of that group, who has consistently executed, has a couple of other interesting things that he would like to develop, that he believes will create -- could take a $150 license and make it $200, and maybe someday $250. And so he wants to make sure that he stays ahead. The [issue with him] is he's competing with three products, and yet we charge the highest prices and we've got the most customers, and he's got the highest revenue base of any one of his competitors. It's just because he continues to develop differentiated product. So I think that's a good sort of case in point on that one, on the small business product line.

Great. Thanks. Final question on that is you've got about 85 deployments now in sales and marketing. Can you give some color about -- I know this is an early stage kind of product for you. Where kind of as a percentage basis these guys run on s-curve in terms of [company] investment on pro-serve versus kind of steady state versus kind of growth? And then how many are pre-deployment? So how many are kind of in the pipeline behind that 85?

So I would say, if you looked at the beginning of last year, we had about 20 of these customers. So let's take between the beginning of 2005 to now is 60. Sixty I would say are in the first s-curve. So they're somewhere in that first s-curve of the gone from 10, 20 seats, and they're moving into 50 seats. And then they kind of sit there for a little bit, retrench, and then they move up the curve. So there's still almost three-quarters of them are still in what I'll call a potential growth mode.

We do have -- I'd say 25 of those are the Proficient base. And we're just getting into the Proficient base of customers to see what the opportunity is and where they are on the s-curve. And I need a couple of more weeks just to get my hands around, but we think there's some opportunity in that area also.

Thanks very much.

Okay. Thank you.

Thank you. Our next question comes from the site of Kyle Evans. Go ahead, please.

Hi, guys. Could you talk a little bit more about the Proficient milestones and how you feel they're tracking towards them right now?

Yes. We feel confident that we will execute on the acquisition and the integration of the acquisition on plan. We've reached out to all of the customers in the base and have spoken to them. We've articulated -- some of them [wanted to know if they'd] be transitioning onto our platform, and why that's a benefit. And so that's going well. We made the head cut right at the close. So the day we closed is the day we had a plan to cut that -- the right heads. So that's going well.

We have some strong people on their side who are sort of -- who we put a plan together. And so we've done a couple of these before, and so we feel confident that we're on track. And our real milestone is just to make sure it doesn't burn cash by Q4. And so we believe we're sort of on that trajectory.

Okay. And lastly, just with housekeeping. My associate and I have been arguing about exactly what the number was you said on the R&D incremental expense in the second half of the year.

$1.5 million is what we will layer in over second, third, and fourth quarter. Out of 15 people, we've hired five already of those 15. So we'll hire ten more, and probably five in Q3 and five in Q4, which gives us a total of an additional $1.5 million in the R&D department.

Thank you.

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

Yes. Tim, your depreciation jumped up this quarter. What's your expectations for next quarter?

Depreciation?

Yes. Is it going stay at $130,000?

It should be -- it should be relatively flat with the current quarter.

Okay. What's your expectations for your cash balance over the remainder of the year?

Q2 is usually the tightest cash quarter for -- and it was tighter this year than even typically in the past. There were a couple of significant insurance payments, annual payments that hit in this quarter. And so I would expect us to be back on the sort of -- close to 100% of EBIDTA going into the bank, maybe slightly more, over the second half of the year.

Okay. And I think, Robert, Tim mentioned that you have about eight customers now that are paying you more than $600,000 a year. How does that compare to last quarter?

I think if I look back at nine months ago, it was one or two. So I think it's been a steady growth, I would say, from two to eight, or two to six rather.

Okay. And I guess final question, this morning, Rob, are you seeing any interest from any particular new -- any new verticals that you're seeing? I know you've got your traditional verticals. You have telco and financial services, etc. But anything outside of those that looks interesting?

Yes. I think travel is a vertical that is sort of trying to come online, and we'll probably -- we'll announce some travel type customers. So there's everything from the bookings website to the actual resort to a cruise line to things like that. So we've sort of got a mix of travel guys that just sort of popped in. And so I think that vertical's going to start to sort of heat up beyond what we've seen in the past.

Okay. That's all I have. Thanks.

Thank you.

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

Thank you for being on our Q2 call, and we will see you on the Q3 call. Thank you.

This concludes today's teleconference, ladies and gentlemen.