LivePerson Inc (LPSN) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. I would now like to welcome e very one to LivePerson's second quarter earnings conference call. Your speakers for today will be Robert LoCascio, Chief Executive Officer of LivePerson, and Tim Bixby, President and Chief Financial Officer. I would now like to turn the call over to Mr. Bixby. Please go ahead, sir.

Thanks very much. Before we begin, I would like to remind listeners that 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 should be clearly understood that the internal projections and beliefs upon which the Company bases its expectations today may change, over time, and that we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory, and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

For more detailed information about these factors and other risks that may impact our business, listeners are referred to the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission including our upcoming Form 10-Q. Also, please note that on the call today we will discuss some non-GAAP financial measures in talking about the Company's financial performance. We will report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website.

And now, I would like to turn the call over to LivePerson's Chief Executive Officer, Robert LoCascio.

Thanks, Tim. Good afternoon, every one and thank you for joining us. During the second quarter of 2007, we generated record revenue of $11.7 million, up 57% from a year ago and up 6% sequentially as compared to the first quarter of 2007. Earnings per share in the second quarter was $0.02 while EBITDA per share was $0.05, both within the guidance range we provided in our first quarter earnings release.

We are reconfirming our revenue guidance for the year and we expect 9 to 10% sequential growth in the third quarter. Our core business remains very strong, driven by the continued adoption of chat as a primary communication channel for online sales and support. Tim will give you a more detailed guidance for the up coming quarters.

LivePerson has delivered on long-term growth and success because of our ability to focus on innovating and leading in each market that we go after. For example, in 2001 we took what was a commoditized free chat product for small businesses and increased the feature set in order to begin selling it for $50 to $100 per month per seat. We led the adoption of this product in the market by selling it online by credit card and making it very easy to install. That product was the inception of our small business group , which today accounts for 35% of our overall revenue and is growing at 40% a year.

Then in 2004, on the opposite end of the market we developed a sophisticated conversion tool called Timpani that combined real-time analytics with chat to offer a platform that helps large companies increase their online conversion rates and overall sales. Today Timpani has an average price point of $300,000 per year, up from $100,000 when we first launched it.

We have proven our ability to anticipate market demand and provide the right products that drive rapid growth and strong operating margins. Our quarter is strong because our overall company strategy is to develop new and innovative products in markets where we see future growth opportunities.

With the announced acquisition of Kasamba we are now leading the push into what we see as the next big market opportunity. The decision to acquire Kasamba came as the result of our years of experience working with our enterprise and small business customers to understand consumers' online needs and buying habits, and proving that chat is one of the most effective ways to empower consumers to purchase online.

A June article in the New York Times entitled, Online Sales Lose Steam, highlighted the many challenges that companies selling products online are facing with consumers. It suggested that online shopping seems well suited for commodity purchases, but has along way to go to tap into the emotional aspects of shopping for more personal or complex goods and services.

Consumers typically go through a process of validation and building trust in buying online and a lot of it is centered around getting information from people, from friends and family, third party review or expert sites and from companies themselves. Recently, there's been a rise of independent expert sites and blogs and they've begun to play a major role in influencing consumer buying behavior. Consumers are more likely to trust the opinion of an expert, because they view it as an independent voice.

Today, LivePerson provides strong products to facilitate business to consumer communication and with the acquisition of Kasamba we intend to expand our product lines to facilitate what we see as one of the fastest growing markets, which is experts to consumer communication.

Kasamba provides an online destination for trusted help, where a consumer can speak with an expert in any number of categories. In turn, experts can sell, market their knowledge to consumers by a chat

Our vision is to eventually create a bridge between our corporate customers and this community as a place to satisfy the consumers' needs to get an independent voice about a product or service from an expert and then have the ability to instantly purchase it through one of our customers by chat. Once the acquisition closes, currently expected in early October, we plan to make major strides with the Kasamba website as we move towards executing on our strategic vision.

I would like to now turn to our core business and give you an update on both the enterprise and small business groups. The enterprise sales group continues to execute well. As in the past several quarters we generated very good results in both signing new accounts and growing existing accounts.

LivePerson signed several new blue-chip clients during the quarter including Adobe and National City, as well as a leading global Internet destination brand, a leading US credit card issuer, one of Canada's leading telecommunication service providers, a leading UK-based credit card issuer, and a leading UK online fashion brand.

We expanded business with several existing customers including Panasonic, JCWhitney, and a leading regional telecommunication service provider, and Verizon Wireless.

Expansions came in the form of organic growth within existing sales and marketing deployment and new deployments of our proactive service offering, which we introduced in the fourth quarter.

One of our largest retail banking customers also expanded their use of Timpani to support their existing customer base in the authenticated part of their website. This would be the part of the website in which you log in with a username and password. The site traffic there is several times greater than on the public part of the website, so we expect some significant growth within that customer.

We're also encouraged by the interest and adoption of our new proactive service offerings by several of our enterprise customers, especially amongst our telecommunication and banking customers. The expansion into the service areas of our current sales and marketing customers with proactive service represents an excellent growth opportunity for LivePerson. The broader our penetration across enterprise customers, the stickier we become and that drives two very important metrics - revenue per client and retention.

Our overall bookings for the quarter were strong, which bodes well as we enter the second half of the year. As we mentioned on our last call, our second half seems to have much more strength than the first half. We don't know if there's some seasonality or what, but we're seeing sort of a repeat of what we saw in 2006.

Our SMB group had a very strong quarter with June being a particularly strong month. Our small business offering provides a complete communication suite that includes chat, email, knowledge base, website analytics and the very important voice. Offering a complete communication platform continues to drive an increase in adoption by new customers.

We also continued to see real demand for the voice capabilities of the platform. We introduced the voice to SMB customers in the third quarter of 2006 and we currently have 500 small business customers already using it.

We also introduced the voice platform form to our enterprise customers at the beginning of the year and we currently now have 12 customers fully deployed. That's up from 8 last quarter, including several of our largest telco customers are using it, one of the leading travel portals, WCI Home and the NASDAQ, to name a few.

For enterprise customers when we combine the voice platform with the proactive capability with Timpani, we're able to deliver on of the most complete dynamic solutions for generating online sales.

We are very excited about the opportunities in front of us for 2007 and we are confident both our core business and our pending acquisition of Kasamba are setting the stage for continued long-term success. And with that, I would now like to turn the call over to Tim, so he can provide a more in-depth analysis of our financial performance and expectations. Tim?

Thanks, Rob. Our second quarter reported results are right in line with our expectations. A very solid quarter on a number of metrics. And our bookings, as Rob mentioned, have built a very strong foundation for the third quarter and the second half of the year. The activity we saw in the quarter was not unanticipated, but none the less represents great work by our enterprise sales team, with solid support from our small business product line.

Revenue came in at the high end of expectations provided on our last conference call, at $11.7 million. Bottom line results were right in line with expectations. We added 8 new enterprise clients in the second quarter, up from the first quarter. Gross and net bookings in the second quarter by the enterprise team were the highest ever in the company's history.

We've had strong bookings to date, thus far in the third quarter. In fact, we're already at approximately 6% sequential growth rate booked to date for the third quarter. And this is in line with what we booked for the second quarter throughout the whole quarter. We're only four weeks into the quarter so this has gotten us off to a very strong start.

EPS for the quarter was $0.02, again , right in line with our expectations, while EBITDA per share was $0.05, also in line with guidance. I'll give more detail on the financial results, as well as on our third quarter and full-year expectations in a moment. They're also detailed within the press release issued earlier this afternoon.

As Rob mentioned, we had solid success signing new clients and expanding existing clients. We've seen solid progress on other client metrics as well. We currently have 13 clients that we are billing at a rate exceeding $500,000 per year. Five of those are above the $1 million per year mark. However, our client concentration is still quite diverse, with no client representing more than 5% of our revenue and the top-25 representing only about a third of our revenue base.

While our entire small business customer base of more than 5,000 companies continues to deliver fully one-third of our current revenue run rate. Usage fees continue to grow, even though the holiday season is several months away. Usage fees were up approximately 40% in the second quarter as compared to the first quarter.

In terms of deal quantity and size, we closed 48 enterprise deals in the quarter and that's both new clients and up-sells combined. That's about 50% more than the 31 in the prior quarter. Annualized deal size for Q2 enterprise deals was up 60% from Q1 at about $90,000 per deal. For proactive deals, or Timpani sales and marketing deals, this metric was up about 90% to $150,000 per deal. And for new customers only, average deal size was about $130,000, up 20% versus the prior quarter.

In terms of revenue mix, about 50% of new enterprise deals and 90% of new revenue in the quarter came from Timpani sales and marketing deals. While 50% of the deals were Contact Center deals, 85% of incremental revenue in the quarter came from existing clients with the balance of 15% coming from new clients. And this is showing a shift away from existing client growth towards new clients, but it's a slight shift.

Our small business group had a strong quarterly growth of about 6% and is up nearly 40% as compared to a year ago. We've succeeded in increasing price points in our small business product line by adding features including voice most recently. Q3 is off to a great start with this group, with one of the strongest months in history.

We continue to see good progress on our newly launched voice, or click to call channel, as Rob mentioned. The number of small business customers using the product increased by about 25% to more than 500, while total enterprise deployments increased from 8 to 12 in the quarter.

Our proactive service initiative, which was highlighted earlier this year in a White Paper and a press release featuring the successes of Earthlink and other customers, continues to progress well. Our current annualized revenue run rate from proactive service deals alone are nearing $1.5 million, which is a tripling as compared to the first quarter of this year. So we're seeing off a relatively small base, very nice growth in that area. In summary, it was an impressive quarter all around.

I will now review the financial results for the quarter ended June 30. For the quarter LivePerson reported record revenue of $1.7 million, which is a 6% increase, versus $11 million in the prior quarter and a 57% increase versus $7.4 million in the second quarter of 2006.

Deferred revenue at the end of the quarter was about flat as compared to the prior quarter at $3.8 million and up 15% as compared to $3.3 million in the prior year quarter. Cost of revenue in the second quarter was $3.1 million as compared to $2.8 million in the prior quarter and as compared to $1.6 million in the same period of the prior year, resulting in overall gross margin of just over 73%.

Revenue mix continues to impact the gross margin line, especially during the first two quarters of the year, when revenue growth has been in the 6% sequential range. As we sign and add more large clients with multimillion monthly visitor accounts, we of course increase our capacity to support that growth ahead of anticipated revenue.

From Q1 to Q2 we did lose about 1 percentage point of gross margin as we ramp up this capacity ahead of the holiday season coming in the second half of the year. We saw this similar impact a year ago, where we experienced about a 2% deterioration as we ramped up to the end of the year and then saw a return to the high 70s for gross margin as revenue growth accelerated in the second half.

We should see similar improvements as revenue grows this year in the second half, which will enable us to return to the 75 to 77% gross margin range in the short term. We also see the opportunity to improve gross margin by at least 4% on top of that improvement over the longer term as we build out our server infrastructure with greater efficiency and greater scale.

With those long term efforts coupled with the short term revenue growth impact, we still have the full confidence in our ability to reach an 80% gross margin over time.

Product development expense for the quarter was $2 million as compared to $1.8 million in the prior quarter and $1 million in the comparable quarter in the prior year. Sales and marketing expense in the second quarter was $3.5 million, up slightly from $3.4 million in the prior quarter and up from $2.9 million in the same period the prior year.

We continue to see leverage in the sales and marketing expenditure line as this expense declined about 100 basis points as a percent of revenue as compared to last quarter. General and administrative expense, excluding amortization of intangibles was $2.1 million in the quarter, up just slightly from $2 million in the prior quarter and up from $1.4 million in the comparable quarter of 2006.

EBITDA or earnings before taxes, depreciation and amortization was $2.2 million for the quarter, up from $2 million in the prior quarter and more than double the $1 million of EBITDA in the prior year. EBITDA per share in the quarter was $0.05, up $0.03 as compared to the prior year.

We released a portion of our deferred tax assets based on current estimates of future taxable income and it's resulted in a tax rated zero for the second quarter and an expected rate of zero for the remainder of 2007.

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 $0.02, including the impact of stock-based compensation expense. Share count was 46.7 million shares fully diluted and this included the recent issuance of shares related to the Proficient acquisition, which share issuance occurred in mid May.

Cash flow from operations was up sharply to $1.5 million in the quarter as compared to $0.6 million in the prior quarter and $0.4 million in the prior year. The second quarter cash flow run rate is a more normalized run rate cash flow for the company, as we typically pay out annual bonus compensation during the first quarter each year, which directly impacts that metric.

Now on the balance sheet, our cash balance at quarter-end was up quite quarter bit, $2.6 million to $26.5 million in cash and marketable securities, from the prior quarter. Our accounts receivable balanced stayed steady, increased slightly to $5 million from $4.9 million in the prior quarter, right in line with our expectations. DSOs remained unchanged from the prior quarter, running at about 40 days.

Now let's turn to our expectations. We generated strong bookings in the second quarter as mentioned, fully 80% greater than the first quarter. This booking strength combined with a strong start to Q3 supports our expectations of at least 9 to 10% sequential growth in Q3 and similarly strong growth in Q4.

The company currently expects the following financial results, excluding any impact from the previously announced acquisition of Kasamba. Revenue of between $12.7 and $12.8 million for the third quarter of 2007. And this would put us right in the range of 9 to 10% sequential quarterly revenue growth. EBITDA between $0.05 and $0.06 per share and GAAP EPS $0.03 per share for the third quarter of 2007.

We're reiterating our existing revenue guidance of between $48.5 and $49.5 million for the full year 2007, which would put us at about 47% annual revenue growth, again, right in line with previous guidance. EBITDA $0.22 to $0.24 per share for the full year and GAAP EPS between $0.11 and $0.12 for the full year 2007.

The effective tax rate we expect to be zero, as well as a cash tax rate of zero. As we move closer to year-end we have more visibility on the likely rate of profitability for the year, we will continue to revisit our tax assumptions. Any change, based on these changing assumptions would likely have a favorable tax impact on the year.

These GAAP EPS expectations just mentioned already include the estimated impact of the change in accounting policy related to FAS 123. We expect a total stock comp expense for 2007 will approximate $3.6 million. We expect that this will impact net income per share by $0.08 for the full year and $0.02 for the third quarter, respectively. These estimates are based on the unamortized stock-based compensation expense as of June 30 and they do include the impact of the recent share issuances related to the Proficient acquisition. This impact may change, of course, based upon additional stock option grants and forfeitures, if any methodology refinement or other factors.

Capital expenditures in the second quarter were approximately $100,000 and are expected to be approximately $750,000 for all of 2007. Depreciation and amortization excluding stock compensation was $554,000 in Q2 and is expected to continue at that quarterly rate during the balance of 2007. This does not reflect the impact of the pending acquisition of Kasamba. That impact is included in the Kasamba related guidance I will provide here.

Now let's turn to Kasamba. The company expects the following impact from the pending acquisition of Kasamba if the transaction closes as currently anticipated on or around October 1st, and this guidance is unchanged from our recent announcement about 30 days ago.

An increase in monthly revenue of approximately $1 million upon closing. A decrease in EBITDA of $0.01 per share in the fourth quarter of 2007. This is due primarily to the impact of additional share issuances related to the anticipated transaction. Also a decrease in EPS in the fourth quarter of 2007, due primarily to deal related amortization and additional stock compensation expense between $0.01 and $0.02 per share.

As expected, there has been a significant amount of interest among our current and potential investors about our intentions and goals relative to Kasamba's financial performance and expectations. While we will not be able to give specific 2008 guidance until the fourth quarter earnings announcement and after the expected closing of the deal, we can provide a bit more color around our currency issue.

Our current intention is to operate Kasamba on a breakeven or better EBITDA basis following the close and then to closely evaluate the appropriate ramp-up period to increase profitability over time. Kasamba has similar positive scaling characteristics to our small business product line, which has higher gross margins and higher operating margins than our enterprise product line.

Only to highlight a couple of additional metrics, we'd like to break down the stock compensation charges, which you may find helpful. In the second quarter within the cost of goods sold line, $113,000. Within R&D stock compensation was $286,000. With sales and marketing stock comp was $257,000 and within G&A stock comp was $242,000. Total stock comp coming out right around $900,000.

Our headcount increased slightly in the quarter to a current global headcount of about 215 employees.

And at this point, that does complete our prepared remarks and we would like to ask the operator to rejoin the call and give instructions so that we can take some questions for folks that are participating.

(OPERATOR INSTRUCTIONS) Richard [Velory] with Canaccord Adams.

Just a question, you said there was some, I think you described it as low-hanging fruit ways to improve some of Kasamba's visibility in terms of like search engine optimization, etc. So I'm just wondering if there's still some cross pollination or some efforts to work with them ahead of the integration, so that by the time you pick it up it may be in even better shape than it is today? Thanks.

I think that the management over at Kasamba was already focused in on a lot of these things like search engines and the optimization. And so yes, there will be a lot going on I think on their side preparing for once we flip it open and close the deal so we get running. They're working on interface changes and optimization of traffic and marketing in that, yes.

Then in terms of the second half ramps, I think Q3 last year had a bit of a step up in terms of maybe not a fair comparison quite what fourth quarter would have been. So could you talk about maybe where you see that ability sort of first half average 6% or where the second half or maybe on absolute dollar basis, given the accelerated bookings early in the quarter? Thanks.

I think what we're seeing with the sequential growth percentage rates we mentioned 9 to 10% or better range, a year ago I think we were looking at our dollar incremental additions of $1.3 or $1.4 million range. 9 to 10% sequential this year off a much larger base doesn't quite get you to that number, but it does get fairly close. So I think we're seeing, while not an identical trend with last year, we're definitely seeing the same seasonality which is a growth in bookings steadily through the second quarter with fairly visible impact coming in Q3 and Q4.

Is there some component of usage seasonality that you're trying to keep out of forecast because that's really far less predictable than say the contracted minimum kind of revenue commitments?

I think there can be and to the extent we see upside, that is where we saw a fair bit of it last year and I think we mentioned in the 1.5 to maybe percentage points of sequential growth came from some of those activity-based metrics. As we've mentioned on a couple of the prior calls, we have begun testing new models with a couple of larger customers that are more activity based. There are flat fees. Our monthly flat fees might be slightly less, but there is more of a participation in the upside. And so while the percent of revenue of those aren't significant or material, it is more likely that we can see some upside based on those kinds of activity based revenue metrics.

Brad Whitt with RBC Capital Markets.

Tim, I don't know if it's my phone or what, but you were breaking up when you were going through the stock-based comp. Can you just run through that real quickly?

Sure. Let us know. We got a little feedback, but it felt like it began when we went to the Q&A, but let us know if anything is not clear. The stock-based comp break down was as follows. Cost of goods sold, $113,000. Sales and marketing $257,000. G&A $242,000 and R&D $286,000, should total right around $900,000.

Good. And Rob, I want to make sure I heard you correctly on the bookings. I think you said you had record enterprise bookings in the second quarter and something about your -- is it the stock drops in Q3 is exceeding that? I wasn't quite clear on it.

A couple of things I mentioned there. One, yes, the gross and net bookings by the enterprise team in the second quarter were the highest they've ever been and then the second point we mentioned was that there's a metric we track internally which is growth, it's book to date, so there's a significant portion of our revenue -- you know, our growth in Q3 is based on deals that have already been signed and are moving forward and that number, that sort of book to date metric growth rate is right around the total growth for all of Q2 so it's right around that 6% metric. So that's a very good start to the quarter given that we're only 4 weeks in.

Okay. And do you anticipate that Kasamba will improve -- the addition of that revenue, does that improve your gross margin? What all's in their cost of goods, mostly just the network?

Their cost of goods is -- there's two things that are innate about it. One, overall we expect it to be higher than our current mix and more in line with our small business cost of goods, which is well above the 80% range. So it should have a favorable impact. And the second piece is there is a fair amount of it that because it is a gross [connectedness], meaning there's a certain amount of revenue that's generated on a gross basis and then Kasamba keeps about 35 or 40% of it, there are credit card fees that are based on the gross revenue that hit that cost of goods line. So any improvement or method you can generate by negotiating slightly better credit card fees have a disproportionate positive benefit on the company. So that's an area where we hope to also have some positive benefit.

Okay. And is there any change with the number of shares that you expect to issue with the Kasamba transaction? Is that a fixed amount or does it fluctuate with the stock price?

It's a fixed amount.

Okay. And I'm wondering if you can give us an update on activity with your business development group? Anything new to report there?

We continue to be pretty active and the focus there has been really around honing in on a small number of high value potential partners and they can be partners in really two different ways. One is a more in-depth relationship where we can sort of leverage internally our ability to get our product more quickly moving within the organization than we can through direct sales. And that's more of a service based opportunity.

And then the second is, we are looking at potential partners where some slight integration would help us to really accelerate some sales. We're seeing some interesting things there. We're not really at the point where we can put something concrete in front of you, but we have been making some good progress along both of those lines.

Okay. And then maybe if you could give us -- what do you think some of the key drivers were in the strong bookings this quarter? It sounded like you said they were up 80% in Q1? I don't know if I heard that correctly. But was it--?

Yes, that's correct.

Was a lot of that driven by the proactive service or just the timing of when the deals close? What do you think were some of the key drivers there?

I think the bulk of it was sales and marketing, though we are seeing some impact from one or two very large accounts who are moving more heavily into the service side of the business. So again, where you typically lead with the sales and marketing product in our enterprise sales over time, we then, once we're at a certain penetration level then we can go back and say let's talk about your service center. And each of these guys has many thousands of customer service reps that are typically talking on the phone.

And so the pitch is really, let us help you using rules, minimize the likelihood of somebody going to the phone and let's get them on the chat and get their problems solved. This is a much more effective sale if you've already sold them on Timpani sales and marketing, as opposed to a greenfield sale out of the blue. And so that I think was a good support of the strong bookings also in Q1.

Raghavan Sarathy with Ferris, Baker Watts.

Tim, if I'm looking at this number correctly, your previous EBITDA guidance was $0.24 before December. Now you've dropped that in to $0.22 to $0.24. Can you help us understand why you are bringing the guidance [at least midpoint]?

It's based on sort of the results to date and our expectations. So because of rounding and adding up the cents per share for Q1 and Q2 now that we have actuals, we're just sort of building in a little bit of cushion so that we're comfortable that we'll be within that range for the full year.

Okay. And Rob, you gave the number of in place deals you said is 48. Can you break that out between Timpani and Talk Back Center?

The vast majority -- well, let's see, I think I mentioned that. Give me a moment. In terms of number of deals it was about 50-50, but in terms of revenue it's about 90% sales, because of the higher sales prices, higher ASPs for sale.

Okay. And just looking at R&D expenses before stock-based comp and G&A before stock-based comp and amortization, the expenses came in a little bit higher than expected, G&A actually lower. Could you help us understand the factors that drove these expense lines and what to expect?

I think we're continuing to see scaling in G&A. We're a little conservative in how we forecast. In terms of R&D I think it sort of falls in line with out cost of goods philosophy, which is we tend to over-invest rather than under-invest, because those are really things that directly support clients. So, I think you've seen where we vary from either guidance or your estimates, you're typically seeing positive variants in sales and marketing, G&A and potentially negative variants in gross margin and R&D. But I don't see the variances as so significant that it's a major indicator going forward. We picked up a basis point I think in each of two items and lost one on the other two and the net was slightly favorable to the quarter.

Okay. And then [you must see] customer accounts at the second quarter for Timpani [contacts in] SMB?

We've really gotten away from giving that specific count every quarter. So that's not something where we give an exact count. We sort of stick to the number of deals.

I'm sorry I might have missed this, did you give the number of SMB customers you added in the quarter?

We are about -- last public announcement about 5,000. We're probably at about 5,500 rate and that 500 we've added since January, up about 10% in terms of customer count. We're seeing more of the growth over time supported by revenue increase per client, so the customer count has gone a little slower, the revenue accelerating pretty nicely. And so that's what's really been supporting small business growth.

And then just one final question. You kind of broke up discussing the fourth quarter [inaudible]. So me and other guys are looking at about 9% sequential growth, between 9 and 10 for third quarter and then for the fourth quarter are you looking at over 10% growth for the core business?

Well, I think -- I think -- well, we're not giving specific numbers for Q4. If you extrapolate or interprolate rather from the full-year growth range we gave, timing unlikely will come in at the lower end of the range at this point. If we hit the Q3 guidance, we'd be at the higher end of the range, which would be the 490 to 495 range. And that would put us right around the 9 -- 8 to 10% growth, sequential growth number.

Nathan Schneiderman, Roth Capital Partners.

A handful of questions for you. Where did you end the quarter in terms of your quota rep count and where do you expect that to end up at the year end?

We are unchanged at 15. We've had some turnover in the sales team so we brought in a couple -- we replaced a couple. Right now, I would -- as we're here at August, we're probably on track to add 3 by year-end. So we've probably got a low -- at year-end a slightly lower headcount offset by a higher productivity per rep. And that's why the overall guidance and bookings has been unchanged for the full year.

Got it. In terms of the usage or activity fees, how much of that contributed to the 11.7 of revenue?

Did not disclose that specifically. We've gotten away from that as a specific metric. But we did mention that it was up -- up versus the prior quarter by about 40%. But that's not an exact metric we're going to be disclosing at this point.

Is there a way you can size it for us in a general sense? Is it more than 10% of the revenue or -- I'm --

It's (inaudible). Yes, it's less than 5% of revenue.

Okay, great. And then, you've given us some percentage details on the bookings. It sounded like you're making a lot of progress there, but can you help scale that for us on a dollar basis? What are your typical bookings in a quarter or how can you help us understand that on a dollar basis rather than a percent basis?

Well, we stick to the sequential growth number for Q3 and Q4 to really give you an idea of what the impact of that is going to be. Because there is so much variability in terms of when a book deal will have impact that we kind of want to do the math for people to some extent. So the bookings were at the high end of the range that we've ever had and that's really why we're confident in the 9 to 10% sequential growth for the remainder of the year. But we don't disclose the specific dollar bookings number at this point.

Can you help us understand it in any way though? Is it similar to the quarterly revenue or significantly less or just --?

Well, it's usually, in terms of when it's likely to have impact, it's highly likely that a book deal during the second quarter will have impact in the third, begin to have impact in the third quarter and have full quarter impact in the fourth quarter. And so that, within 6 months, you would expect to see impact of those bookings.

And a booking is typically a one-year commitment?

Yes.

Okay, great. And then, a couple of questions on Kasamba, just in helping us understand '08, you said that the Kasamba business is generating a higher operating margin than your core business. Would that imply that it should contribute to the EPS? Because it sounded like that wasn't what you were saying.

No, that's not correct. It's -- Kasamba's gross margin is currently, and we expect it to be, post-acquisition, higher than our overall mix gross margin today. We expect an 80% (inaudible). And then we mentioned that we thought that the potential operating margins at a certain point of scale are very much in line with our small business products. So our small business product today, at a third of revenues, has obviously scaled quite a bit more than Kasamba's current run rate, which in Q4 we expect to be around the $11 to $12 million run rate. So we think, based on its cost structure and what we know about our small business group, that over time we would expect to see operating margins that are more similar to our small business group and those are higher than our enterprise group currently.

Okay. So you're saying that for '08 it will be more of a breakeven business and longer-term it will be similar to your core business?

Yes. I think it will ramp up over time and that's -- the profitability, and we expect to run it at or near breakeven for some period of time and then sort of evaluate the tradeoff that we're seeing between investment spending or spending additional to support revenue growth and the revenue growth that we're getting, sort of in the same way we do our core business. As long as we see that balance there, then we'll start to increase profitability over time.

Okay. And final question for you, just kind of trying to understand the future direction of what you may do with Kasamba. Would you potentially take it in the direction of more of a personal chat, the kind of thing you'd see advertised on late night TV, or is that more of an absolutely no? And just help us understand what directions you would take it and what directions you absolutely would not take it.

I think the direction we want to do is more align it with our core business, which is when we look at all of the retailing activities that are happening online and where consumers are going to expert bloggers are on, everything from buying a camera or seeing an ex -- talk to an expert on cameras and shopping and travel. So it's more focused on commerce than the late night stuff. So -- and then, obviously, we want to integrate that with our core business. So that's kind of where we're headed and we see the opportunity and that's what we're doing today.

Kyle Evans, Stephens.

Rob, could you give us an update on the competitive landscape out there?

Yes. I mean, we've got the -- when we look at, on the chat side, we've got for the instant services and a couple other small guys that are out there, obviously, we've got right now technology [Dicanna] that has secondary, I call secondary chat box because they are very strong in their other core products. We haven't really seen anybody on the Timpani side. Although we've heard people want to enter the market, there haven't really been any entrants. And I've said it before, I think it would be good if someone would enter. We have a lot of expertise in that product line, but we better have some more marketing dollars stimulating the growth in the market. So there's that part.

We have ATG, which is more on the voice side. They don't really have a very sophisticated chat product, but we, as we did, we launched a voice product and we are attacking them at both the high end and the mid-market with our small business product line, which now has about 500 customers on voice, and our enterprises have about 12. So -- and we do offer, obviously, our voices on top of our Timpani platform and it's fully integrated with chat, so I think there is a stronger value proposition there to go after that core. So I think the market is playing out with it. There are still a couple of pure chat providers out there. We're not really seeing that much on the Timpani side yet, and then we're attacking proactively in the voice side.

The seasonality that was pretty pronounced last year looks like it's cuing up to occur again. Honestly, I'm not sure why that's the case. Why does this business have so much seasonal momentum in the second half of the year? Could you guys help me understand that a little better?

Yes. I think one of the things we're seeing is that there is a natural -- there are two types of seasonality. One is the typical holiday related seasonality where there is a fair amount of activity that's driven by the holiday freeze. People can't touch their Web site after, depending on the company, September, October, in some cases as late as early November. And so that creates a calendar that drives Web site activity. Anything that touches the Web site has to basically be done by that freeze, which means we have to start, you have to sort of work backwards, and that means it has to start in Q1 or Q2. And that, I think, is a key driver. So people, they get through the holidays, they take a deep breath in December, they start to look at, okay, what are next year's initiatives and that leads us to contracts that start to accelerate in terms of signing and quantity in the second quarter. And this is the second year that we've seen it. If I look back three years ago, you may have started to see the beginning of it, an inkling of it, as we started to sign more enterprise customers. So I think this is something that's here to stay, it's just a question of what the magnitude of it is.

And the second is just the reality of the calendar is that people, because it's all recurring revenue, when a deal gets signed and goes live, that's when it starts to have financial impact on us. We have that -- we see that same impact with people, our decision makers on enterprise deals just tend to be more focused in line with our budget years, and those tend to be, the vast majority of those, tend to be calendar.

Yes, Tim, you were -- you gave some gross margin guidance and I had multiple calls going, I apologize. Would you mind reviewing that again real quick?

Yes. We came in right around, right between 73 and 74% gross margin, which is we're down about a point versus the prior -- versus first quarter. And this is an area where obviously we're very focused on it because we think there is a lot of opportunity to improve this over time. We expect two things to happen to that gross margin. We'll continue to see pressure on it, and pressure in our business is a good thing, meaning we've got 20 deployments of multi-million visitor sites already on the schedule for the second half of the year. So we have to be going out to our hosting facilities, beefing up our capabilities and our capacity so that we can hit those marks.

What we'll see in a couple of points of improvement, I expect, as we did last year, as we hit higher sequential revenue growth rates. That, I think, takes us back to 75, 76, 77% range. And then on top of that, we are looking further down the line, over the next 2 to 3 years, more strategically around how we deploy our network infrastructure. Now that we are -- we can see the future and the future is big, large customers with heavy visitor site traffic, we are looking into ways to be a little bit more clever about how we deploy our server infrastructure and we see, at least, a 4-point benefit from some of the things we're looking at there, hopefully more. But we are pretty comfortable that 4 points, plus or minus, is something we're going to take out of our server infrastructure longer term.

And that 4 points is on top of 75 to 77?

That's right.

Okay.

The rest of those costs, that's really all hosting and server and network infrastructure related costs. The rest of the costs, which are full related costs, we're actually seeing -- we're essentially right on plan. We're seeing decent scaling and so we're on track with that. We see a bigger opportunity, however, on the server side.

Your line went away there. You said it was primarily hosting server network and there was another piece in it and then right when you said what it was your line went out.

Primarily hosting -- did you catch the part about the people and support costs?

No. That's what I meant.

Okay. So people and support costs are right in line with our plan and scaling fairly nicely. So I think we're doing well in that area, but we are -- I do see more opportunity in the server and infrastructure costs and that's where we -- that's where we're definitely focused.

One last question. Make sure that I got the bookings right because it sounds like it was pretty impressive. Pick up 80% in the second quarter off the first quarter?

Yes, that's correct.

And then, did I hear you say that July you're already up 6% off all of 2Q?

July, yes. If we lock down what we booked to date for Q3, we have grown in Q3 about 6% over Q2.

(Indiscernible).

Look, if you have August and September, like you did in July, how much -- I mean, what kind of sequential growth rates are we talking about for fourth quarter?

Well, our guidance is -- nothing has changed about our visibility and our ability to give guidance. So I would urge you to view it the same way as you typically do.

Yes.

July can have a significant impact, but once you get into August/September, that's really going to impact Q4 more significantly. So, while, as always, there can be some upside, I think -- I don't want you to extrapolate too much from July to understand the confidence, why we feel confident.

Did -- was July better than you anticipated and significantly better than last July?

We're a little bit ahead of, if I look back maybe 8 quarters, we're probably, if not number one, probably number one or number two in terms of book-to-date performance.

Joe Lawson, Anchorage Capital

I was just hoping if we could touch upon the Live personal shopper site, just in terms of, first, whether there was any in cost impact negatively in the second quarter and also how you see site traffic evolving post the pretty successful launch in the first quarter.

We're still giving significant or good site -- significant, good site traffic to it. The focus internally is really looking at, though, Kasamba. Some of the experts on their own are now on Kasamba because there is -- Kasamba decided to set up their own shopping categories. So we're focused right now -- our -- as LivePerson on the Live personal shopper site and Kasamba is doing its own thing that they already had in plans for creating shopping on their site. But, yes, we're still seeing good (technical difficulty) the site, we're still getting good volume with each of the experts and we're still measuring and fooling with different financial models that I think ultimately we'd want to pull over into the Kasamba site, so it's good. It's a very good test.

Was there any negative cost impact from running that site in the quarter? Just looking in comparison to a year ago, the second quarter?

No. All of the costs of running that are obviously factored in. We're expensing everything as we go. So they are not material.

Okay.

But there are some personal related costs, primarily.

Raghavan Sarathy, Ferris, Baker Watts

On the competitive site, Rob, can you give us some sense of the win rate on the enterprise site? And then, on the S&B site, is there any change on the win rate while you [enter the day on] the competition?

I don't think there is any -- Raghavan, I don't think it was a great change. Both of those products were leaders in each area. And so we have a pretty high win rate when we go in. In Timpani's case, our greatest competition is marketing budget, where we're fighting against other initiatives that a marketing comp -- that a marketing department may have. It's not as much a direct competitor. On the S&B side, it is. It's -- obviously, we've got 3 or 4 lower-end products. But we're seeing continued growth. Real businesses, real small businesses, want to work with real vendors and we're able to charge a premium price because we can provide a premium service. So I don't have a percent, like 80% on that, win rates, and things like that, but they are continuing to grow strong and we can see it in their sequential growth rates.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay. Thank you for joining our second quarter call and we look forward to speaking with you guys on the next quarter. Thank you.

Thank you very much.

Okay, bye.

Thank you. This concludes today's conference call. You may now disconnect.