LivePerson Inc (LPSN) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to LivePerson's Third Quarter 2007 Earnings Conference Call. Speaking on today's conference call will be Robert LoCascio, Chief Executive Officer of LivePerson and Tim Bixby, President and Chief Financial Officer. I would 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 that 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 report on 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 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 Web site.

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

Thanks, Tim. Good afternoon everyone and thank you for joining us. We again delivered an extremely strong quarter during third -- during the third quarter of 2007 we generated record revenue of $12.8 million, up 44% from a year ago and up 10% sequentially. Earnings per share in the third quarter was $0.03 and in line with our guidance. This includes the impact of stock-based compensation expense. EBITDA per share was $0.06 at the high-end of the guidance range we provided in our second quarter earnings release. Q3 was another strong quarter as we continue to execute well both tactically and strategically. Our core business continues to grow as we see demand for both our small business and enterprise product lines. As Web sites become more sophisticated at driving traffic on a consistent basis, our suite of products and services are becoming more relevant for online marketers to seek to increase conversion rates. This is driving momentum that is enabling us to reach some new milestones.

Our bookings in the quarter were strong as our bookings in the prior quarter. We also had a major expansion at several of our largest customers. We reached a new milestone and signed a three year renewal with one of our large banking customers that's expected to generate over $9 million during the next three years. Two, three years ago, we could not even envision a single customer who could generate this level of business, but the Timpani product line continues to drive tremendous values for customers like these. This customer is using Timpani for both proactive sales and service, and we are now active in 11 distinct business units with whom we have 15 customers, with a run rate of more than $0.5 million per year, and we believe that they have the potential to reach an annual run rate of over $1 million. Seven of these have already reached that milestone with continued potential for expansion. We also continue to see solid expansion in one of the worlds best known consumer brands and recent expansion into their U.K., German, French and Japanese localized sites.

Voice usage continues to grow well. We added two new enterprise accounts using voice bringing that total to 14, while small business added more than 15 new voice users bringing their total to 585. Overall about 600 companies are now using our voice product, most in conjunction with their chat deployments. We signed a number of new blue chip clients during this quarter including Capital One, Cisco, AT&T, Samsung and Getty Images as well as the leading French provider of consumer credit, a leading national furniture retailer, a leading social networking site and a leading Internet-based personal publishing service. Company also expanded business with several existing customers including Bell Canada, a leading global provider of IT hardware, software and services and a leading telecommunications provider in the United Kingdom.

Enterprise sales group continues to execute well. In this quarter we had a good balance between expansions from existing customers and the signing up of new names. Currently we have 15 direct sales reps and the team as a whole is running at approximately 70% of their quota. Rather than hiring more sales reps during this quarter, we are really striving for balanced growth in profitability, therefore we have been very focused over the past few quarters in driving greater efficiency out of our current sales ream. The strategy is paying off as we continue to demonstrate strong top line growth while at the same time experiencing significant margin expansion at the operating level. Today, we have one of the strongest operation models in the softwares and service sector that can show both strong growth and a strong operating margin.

Our SMB group had a great quarter also, adding approximately 215 net new customers. They continued off with of one of the strongest product suites in the market, which includes chat, email, voice, knowledge base and Web site analytics. Our strategy of offering complete communications platform is driving the increased adoption by new customers, and also is keeping attrition in check with our existing customer base. We look forward to small business groups, continuing on their success and is probably one of the most competitive segment in the market today.

I would now like to turn to our acquisition of Kasamba, which we completed at the beginning of the fourth quarter. I would like to welcome our new Kasamba employees, customers and experts into the LivePerson family. Working closely in conjunction with our product, R&D and marketing teams, Kasamba has begun to make major changes to the Kasamba.com Web site. The Web site today reflects our strategic vision of having a more open platform that will enable us to expand into different categories beyond the core categories of personal, medical, legal, and technical support advice. About four weeks ago, the Web site went through a major user interface change, which you can see today at Kasamba.com.

We are striving towards our goal of having a single LivePerson brand that will corporate experts alongside our enterprise and SMB customers, and our goal is to build a central marketplace on the Internet that consumers know they can come too to get trusted help or advice on a myriad of subjects, products and services from both independent experts and companies with expertise in their respected fields.

Remain bullish about the strategic initiative, I will give you more details of our operational and financial plans on the next quarterly call.

LivePerson is in a very unique position today. We continue to deliver strong growth and consistent operational improvements in our core business, while layering a high-growth engine, and the platform in our consumer strategic initiative with the Kasamba acquisition. I am very pleased with the progress in both areas and look forward to updating you on our progress over the next several quarters.

I would now like to turn the call over to Tim, so he can provide an in-depth analysis of our financial performance during the third quarter. Tim?

Thanks, Rob. I will highlight some of the performance metrics in the quarter and detail some of the financial results and then we will take your questions at the end. We had a great third quarter. I hope we present a little bit of stability in what is obviously a fairly tumultuous market outside of the softwares and service sector.

Our third quarter results came in at the higher end of the range for revenue, income and EBITDA with a nice improvement in gross margin as we projected in our last earnings call. Strong second quarter bookings coupled with continued strong deal flow and bookings, again in the third quarter will enable us to finish the upper end of our projected revenue range for the full year of 2007, again showing annual growth of nearly 50% based on existing guidance. With the addition of Kasamba, that number will increase to more than 55% annual revenue growth.

Revenue came in just above the high-end at $12.8 million, which is a solid 10% quarterly sequential growth rate. Bottom line results was also right in line with expectations and we were also pleased to add 10 new enterprise clients in the third quarter, up a couple of clients from the second quarter. Gross and net bookings in the third quarter by the enterprise team were in line with the very strong bookings in the second quarter. The Kasamba acquisition closed as expected during the first week of October and our integration efforts, they have gotten off to a running start as we prepare for a strong 2008 with an expanded consumer offering. And in core enterprise and small business product line, that is stronger than ever. Our GAAP EPS for the quarter was $0.03; this was right in line with our expectations. EBITDA per share was $0.06, which is at the higher end of the guidance range.

I give a bit more detail on these results as well as our fourth quarter and full-year expectations in a moment. We will not be giving 2008 guidance today, but we will give you more detail on that on our next quarterly conference call as is our practice over the past couple of years.

We signed several new blue chip clients as Rob mentioned, including some terrific names; Capital One, Cisco, AT&T, Samsung, Getty Images. As well as expanded business with our existing customer base; Bell Canada, one of the world's largest banks, another global financial services firm, a leading global provider of IT, hardware and software and services as well as a leading telco provider in the U.K.

Among these, we extended a long-term agreement with a major customer that will -- that today is the largest deal in the history of the Company, as Rob mentioned. We currently have 15 clients generating more than $0.5 million of annualized revenue, seven of those generating more than $1 million per year as mentioned. The top five now surpassing -- well surpassing the $2 million per year mark for the first time. These metrics certainly set us a part from most, if not all of our softwares and service peers. We continue to have among the very highest ASPs and revenue for client metrics in the market. Despite these increasing revenue measures, no client represents more than 5% of our overall revenue and our small business customer count is now continuing to grow and surpass 6000 companies as of this quarter.

In terms of the number of deals signed in the quarter focusing on enterprise deals, which of course excludes our small business group, we signed 28 enterprise deals in the quarter with both new clients and upsells combined. This is a lower number than the prior couple of quarters, but the average deal sizes was dramatically higher, so we saw an interesting shift where, as Rob mentioned, the existing sales force was able to generate [eight] bookings by generating more revenue per customer. Annual deal size, our Q3 enterprise deals was about a $160,000 annualized per deal, up from $90,000 in the prior quarter and about [technical difficulty] versus a $150,000 for proactive deals and about $140,000 for newly added customers. This mix I think is a unique event in this quarter due to the signing of a significant deal and I would expect over the coming quarters that the metrics in this area will look more like what they looked like over the past three quarters and that the Q3 mix will be somewhat of an anomaly.

In terms of the revenue mix itself, about three thirds of new enterprise deals and about 90% of new revenue in the quarter came from Timpani Sales and Marketing deals, while 35% of the deals were Contact Center deals. In terms of the mix from new and existing clients, about 70% of incremental revenue in the quarter came from existing clients and the other 30% from new clients, and this represents the continuing slight shift each quarter towards new clients. Our small business group, as mentioned had strong growth of about 9% sequentially quarter-on-quarter and is up about 40% overall in terms of revenue as compared to one year ago. This portion of revenue continues to be about one third of our total revenue, excluding any impact from the Kasamba acquisition. We continue to see good progress on our more recently launched voice or click-to-call channel. The number of small business customers using the product increased by about 50 to about 585 while enterprise deployments increased from 12 to 14 in the quarter.

I will now review some of the specific financial results as well as some expectations for the fourth quarter. As mentioned, we reported record revenue of $12.8 million, which was a 10% increase versus the prior quarter and a 44% increase versus $8.9 million in the third quarter of 2006. Deferred revenue at the end of the quarter was up to $4.1 million from $3.8 million in the prior quarter and up about 35% as compared to $3 million in the comparable quarter of the prior year. Cost of revenue in the third quarter was $3.3 million as compared to $3.1 million in the prior quarter and $2.1 million in the same prior of the prior year. This resulted in overall gross margin of just over 74%. This was a nice turnaround from the downward pressure we've seen on gross margins as we continued to add larger enterprise customers. Gross margin in the quarter improved by about 85 basis points as compared to Q2, despite the third quarter being typically a continuation of the ramp up period for holiday traffic needs.

We also got a bit of a boost in the gross margin area from the completion of the Proficient migration whereby former Proficient customers are now fully migrated to the LivePerson platform as expected and the duplicative Proficient platform is no longer in active use. I do expect the gross margin will remain in a fairly tight range right around 74% for the fourth quarter as well. While we are seeing operating efficiencies that we did see in Q3, we will continue to see those going forward, those will serve to increase our gross margin. But there will also be some downward impact in the amortization expenses related to the Kasamba acquisition, which will counteract some of those improvements. Overall this -- we expect to result in more or less flat gross margin into Q4.

Our product development expense for the quarter was $2.2 million, up slightly from $2 million in the prior quarter and up from $1.4 million in the comparable quarter in the prior year. Sales and marketing expense in the third quarter was $3.6 million, up just a bit from $3.5 million in the prior quarter and up from $3.1 million in the same period of the prior year. We continue to see leverage in the sales and marketing expenditure line, as Rob highlighted, and this expense improved more than 200 basis points as compared to the last quarter. Sales and marketing costs for third quarter were roughly 28% of revenue. This will increase as a percent of revenue in Q4 due to Kasamba's higher sales and marketing expense ratio. Overall, we expect this line item to run right around 33% of revenue in Q4 as a result of that change.

General and administrative expense, excluding amortization and intangible assets, was $2.3 million in the quarter. This is up slightly from $2.1 million in the prior quarter and up from $1.8 million in the comparable quarter in 2006. EBITDA or earnings before interest, taxes, depreciation, amortization was $2.7 million for the quarter, up from $2.2 million in the prior quarter and more than double the $1.3 million of EBITDA in the comparable period in the prior year. EBITDA per share was $0.06, up $0.03 as compared to the comparable period in the prior year.

We released a portion of our deferred tax assets based on current estimates of future taxable income resulting in a tax rate of zero for the third quarter and again, have an expected rate of zero for the remainder of 2007. The reconciliation between EBITDA and GAAP net income is provided in the finical statements accompanying our earnings release. Net income per share in the quarter was $0.03 and this includes impact of stock-based compensation expense. Excluding that expense, $0.03 increases to about $0.05 per share. Fully diluted share count was 46.3 million shares rather for the quarter. Cash flow from operations increased 60% to $2.5 million in the quarter as compared to $1.5 million in the prior quarter and has improved six-fold from $0.4 million in the prior year.

Turning now to balance sheet, our cash balance at the quarter end was up $3.7 million to a total of $30.2 million. This balance has subsequently decreased after the close of the quarter by approximately $9 million due to the cash component of the Kasamba acquisition consideration. Our AR balance increased to $5.8 million from $5 million in the prior quarter, while DSOs only increased slightly due to the higher revenue rate, they are running at right around 41 days.

Now, I would highlight our expectations of the remainder of the year as we head into the fourth quarter. We expect the following results and this includes the impact from the consolidation of the operations of Kasamba, which was acquired effective as of October 3. We expect revenues of between $16.8 million and $17 million for the fourth quarter of 2007 or approximately 32% sequential revenue growth. We expect EBIDTA per share of between $0.05 and $0.06, and we expect GAAP EPS of between $0.01 and $0.02 per share for the fourth quarter of 2007. For the full year, we expect revenue of $52.2 million to $52.5 million, for the full year as well we expect EDITDA of between $0.20 and $0.21 per share and GAAP EPS of between $0.09 and $0.10 per share. I continue to expect a tax rate of zero for the full year 2007. And we also would like to highlight that our share count in Q4 will increase as previously announced by approximately 4.7 million, and this includes the impact of the shares issued and options assumed in relation to the Kasamba acquisition.

If we exclude the impact of the Kasamba revenue in Q4, the sequential growth rate is expected to be between 8% and 9%, and these expectations for Kasamba in isolation have not changed materially since the last quarterly call. So, if you sort of do the math, you will come up with approximately $1 million revenue run rate per month for Kasamba in the fourth quarter. The impact on our EPS and the impact on our EBITDA per share in Q4 is in line with the Kasamba impact again as estimated on the last quarterly call. These expectations include the estimate impact of change in accounting policy related to FAS 123. That impact of course for stock compensation is expected to decrease net income per share by $0.04 and $0.10 for the fourth quarter and the full year 2007 respectively. This impact may change based upon additional stock option grants, if any, methodology refinement or other factors and does include the impact of approximately 624,000 options assumed in relation to the acquisition of Kasamba. Capital expenses in Q3 were less than $100,000. Depreciation and amortization excluding stock compensation was $475,000 in Q3 and is expected to increase to approximately $1.1 million in the fourth quarter. This increase is primarily due to amortization related to the Kasamba acquisition.

I will now break down for you the stock comp charges for the quarter -- for the third quarter. In the cost of goods line $105,000, in the R&D line $317,000, and these are in thousands of course, and the sales and marketing line $245,000, in the G&A line $263,000, totaling $930,000 for Q3. Overall, our global headcount is right around 225.

And that concludes the highlights, so I want to just conclude in summary and then we'll go to questions from the participants. So overall, we had a great quarter. As I hope you will agree, this quarter we saw net income increase more that 500% compared to a year ago and 75% nearly as compared to the prior quarter. EBITDA likewise increased 100% and 25% respectively. Incremental revenue growth in the quarter of $1.2 million, fully 50% of that dropped to the operation income line as we saw margin improvements on every line item this quarter. We continue to be very consistently among a small set of public companies with annual growth nearing 50%, a gross margin in the mid 70s, and an EBIDTA margin above 20%. With these four metrics supporting the foundation of the business, coupled with an upside potential as we expand our connections to online consumers, we look forward to the next phase of our expansion in 2008.

And that covers the financial review and at this point, if we could ask the operator to rejoin the call. We would be happy to take people's questions.

(OPERATOR INSTRUCTIONS) Your first question comes form the line of Rob Breza.

Hi, good afternoon, thanks for taking my questions. One question around the quota carrying, currently at 15 kind of flat quarter-over-quarter, where do you think that ends at the end of the year and how should we think about maybe where you are going to be taking the sales force into 2008 and then Tim, maybe as a comment more around the taxes, should we expect a material change in the tax rate for FY '08 or how should we think about taxes given that Kasamba is now onboard? Thanks.

Sure, I think on sales rep side, we've -- I think what we've seen over the past couple of quarters is a sort of solidification of high performers. We really built this sales force starting in 2000, really the beginning of 2005 and beyond, and so we got to a point where we are really able to recognize great performers and not so great performers. And so over the last two quarters, we turned over three reps and a majority of the team really hitting solid numbers. And so while the total number has remained flat, we have really upped the overall talent level of the team during that period and I think you can see that in the bookings number, especially in Q2 and Q3, where we are getting dramatically higher numbers from what on the surface looks like exactly the same number of heads. So, that continues to be our focus, we are actively recruiting, we expect to bring in more, here we are in November 1, so it's unlikely to bring in probably more that two by year end. But, that's probably a reasonable estimate between now and January. In terms of the tax rate, we continue to be in the sort of switch-over period as is typical for companies as we move into our third and fourth year of profitability here, where we have got deferred tax asset. It's likely to be relatively similar that completely flips over, but we have some uncertainty related to Kasamba, which is why we continue to see the 0% effective tax rate. As we look into '08, while we have not given specific guidance, it seems reasonable to assume that our historical guidance looking that far forward has been 40% effective tax rate. I think for those of you modeling cash flow using the tax rate as a driver for cash flow, I think that 40% rate is reasonable, but it is entirely possible that because of the high level of option activity relative to our profit level that we may see a higher effective tax rate or a book tax rate that you will see on the face of the P&L, and what you will see if you see at sort of similar companies, you'll see rates that sort of vary between 45% and maybe as high as 65%. But again, when you adjust for cash, it would come back to a more normal 40% tax rate. So that I think is as much detail as I can give you at this point and then we'll obviously come with more exact figures as we close the year and look into '08.

Well, that's helpful. Maybe just one follow-up, in your prepared remarks, you talked about the strong bookings and in the prior question, you just talked about the increased productivity on the sales force. What else are you seeing from a bookings demand that's really or what's the key driver that you're seeing there from the bookings strength, is it overall strength or a particular vertical, any additionally color would be helpful? Thanks.

There is a couple of things there. One that I think is notable is the willingness of people -- companies, large enterprises to sign up early on for a bigger number. If you look back maybe a year to two years, you would see a very consistent pattern where large companies start small, maybe a $10,000 a month, $15,000 a month sort of a run rate and then overtime would ramp up, and that's held pretty constant for most large companies. Over the past year, and I would say even more so over the past two quarters, we started to see for a couple of reasons big companies willing to sign up upfront for a number that may be two to three times as much. And I think what's driving that is two things, one is the sophistication and the skill of our sales reps. They have just seen a lot more than they have seen two years ago in terms of what it takes, in terms of proof points and case studies and support to make that sale, and then the second is a lot of these companies are much further along in the adoption curve than they were again a coupe of years ago. We are starting to see decision makers who come to us and already get it, though we are not explaining that the increasing in conversion rate online is the smart thing to do. They are just looking for the best tool and so, again, we are able to turn that into a commitment drive number on day one verses waiting 6 to 12 months into the deal.

Great, that's very helpful. Thank you.

Your next question comes form the like of Rag Sarathy.

Good afternoon and thanks for taking my questions here. First, a clarification question, did you say the number of enterprise deals were 28, I missed that?

Yes, that's correct.

What -- can you give us some color on why it's down? I know you talked about the ASPs are higher, but can you give us some color on why it was down sequentially?

Yeah, I think the time spent on a given deal -- while doesn't vary in a perfect direct line with the size of the deal, it tends to move directionally with it and so you saw a much lower unit number of deals, but a dramatically higher average ASP per deal and it was driven -- in the U.S., it was driven by a couple of very large deals that really took a lot of resources and there was a lot of focus on making those deals happen. But, again, that resulted in a long term renewal that won't really require those resources over the next quarters and next couple of years. In the UK, we saw really a combination of several larger deals that have been in the works for longer than average I would way, they were bigger than average and therefore it was more of a timing impact where a lot of -- a good number of large deals came in during a short period of time and so that drove the average number for the UK up. So, I think it's -- if you just look at the dollar number, it's a higher number than last quarter, but again as I mentioned going forward, I would expect a unit number more in line with prior quarters than an average order size more in line with prior quarters going forward.

Okay. And what was the mix that's in Timpani and Contact Center [on the 28] deal?

In Timpani, the sales piece in terms of revenue was about 90% or sales and marketing about 10% for Contact Center. In terms of number of deals, it was about 65/35, 65% sales and marketing, 35% Contact Center.

Okay. And just one final question, if I have the numbers right, last time when you guided for the full year after Kasamba, I'm looking at EBITDA of $0.21 to $0.23, now I am looking at $0.20 to $0.21. Is that because of higher expenses or stock based comp or what is the downward revision here?

Well, are you focusing on the EBITDA or the --?

Yes, EBITDA.

On the EBITDA, it is roughly half higher expenses, so if you add up, if you look at some of the actual results for Q3, which is now been factored in and then combine that with the dilution impact of more shares from the Kasamba acquisition through the combination of those two -- probably roughly 50/50, neither of those is the dominant, but it's a combination of those two.

Okay, alright thanks.

Thank you.

Your next question comes from the line of Kyle Evans.

Hi this is actually Carter Malloy. I'm filling in for Kyle here. So, I am assuming you are starting to see more competitive situations and I kind of want to get some color around what the differentiating characteristics are between the LivePerson platform and the eStara platform? What seems to tip the scale one way or another in competitive situations?

One of the interesting things about eStara is that if you read their disclosures, they group all of their sales together, where we break out small business and enterprise, because it's really how we run our business. And so, it's a fairly stark difference if we report our numbers in the same way and in terms of voice, we would add together hundreds of voice deals as compared to I think eStara disclosing 40 or 50 chat deals. So, it's an interesting mix. I think you have to sort of pick apart the numbers to understand what's really going on. That being said, there are still both enterprises and small businesses that are very, very focused on voice usage, either because of an historic use of voice or because it's more conducive to whatever they are trying to sell. And so, that will really -- eStara has got a longer track record and a greater number of customers using it, but what we found is that the way that our proactive technology works and the way that our rules engine is really driven in a hosted structure from our servers as opposed to being on the front end is that our conversion rates at the end of the day tend to be higher. This is what our data shows and we have got market information that seems reasonable to us that suggests that those conversion rates are higher than similar companies that are seeing from eStara. So, we are confident that our focus on conversion is the right one, our voice technology is I think gaining a lot of ground quite fast, but yes, there continue to be deals here and there, where they are a tough competitor.

Okay, great. Thank you.

Your next question comes from the line of Nathan Schneiderman.

Hi, it's Nathan Schneiderman. Hi, Rob, hi Tim, good afternoon. I have one question for you. Just if you look at the business last year, Q3 to Q4 and you take out the impact of Proficient, it looks like the core business was up about $1.2 million and then your guidance that the core business would be up, maybe a little bit less than that, at or a little bit less than that this Q4, I was just kind of curious about that, because I would expect at this stage your revenue would be accelerating -- the growth quarter-to-quarter would be accelerating, year-over-year not flat, just slightly down.

Well, good question there. Well, I think if you put guidance next to actual, you will always find a bit of a discrepancy because obviously the actual growth in the prior year came in, I think, well above the guidance range. So, I think in talking to you, it is good to compare the guidance to guidance or actual to actual. So that has one piece of it and I would maybe look at it a little bit differently. And then the second is really, we see ebb and flows quarterly in the business where Q4 in one year and Q4 in another year are interesting, but they are not exactly, totally in alias. So, I think I would -- we will really focus more on the overall growth rate and the bookings, which suggest that we are definitely tracking very strongly. Last quarter -- fourth quarter last year was an extraordinarily strong quarter and that's great, it makes the comparisons a little tougher, but the underlying business, bookings, ASPs, customer counts, all those metrics are definitely going in the right direction.

Okay, that's helpful. Flipping back to the tax rate comments. I wanted to be sure I understood your suggestion properly. Are you recommending from the income statement purpose, we show at least 45% tax rate and so our EPS would be affected by that on the First Call report?

I think, at this point here, we are not giving guidance, so I wouldn't suggest any major changes. But it is likely that our taxes rate will be -- will certainly be at least, from a book perspective at least as high as our cash tax rate. And so I would not recommend a big change there. A lot of it is very predictable due to market prices, the stock option exercises and those kind of things, which impact us a lot more than a company that might be a little bit larger, so I wouldn't recommend a big change there, I would hold and will give you much more detailed guidance on the next call when we have a better view of this year's profitability and final tax rate.

Okay. And then looking at Kasomba's history, now that it's part of LivePerson, could you share with us its Q3 revenue? And then, historically how volatile has its quarterly revenue been, is there any notable seasonality or just how does that business tend to progress from a revenue perspective?

Well, we haven't yet disclosed the Q3 numbers. You will get a view into more of the details on the financials when we make a required filing, post-acquisition and you should expect that in sometime in the first half of December, and that sort of a normal 8-K filing that updates and gives you some more history. But in terms of the growth rate and the consistency of the growth rate, this is a business with a huge number of transactions happening constantly and so that, it benefits a fair bit from a lot of large numbers, which is that, if you isolate it down to the day, you can see some variability, but if you look at a week or a month or especially a quarter, you see fairly steady solid growth. And it's one of the things I really like about the business that even though, if not strictly a recurring revenue in that someone has a contractual obligation to pay you money, it acts very much like it, and in a lot of ways, it's very much like our small business group where someone pays us by credit card and has a lot of flexibility in terms of their commitment. Yes, we see a very high level of consistency and predictability.

Okay, and then final question for you and I will drop off. Just hoping you could give us a little more detail on that very large three-year renewal, the $9 million, so that about $3 million per year. What was this customer paying you in the past on an annual basis and any special dynamics around that deal and do you expect other kind of similarly large deals going forward or do you see this as anomaly? Thank you very much.

Yes, well we -- I think we shared a lot of information, which is as much as we really can, given our commitment to our customers in terms of should you expect this kind of thing, it will definitely happen again, but it is not something that I would build in one per month or one per quarter going forward, this is a major highlight and that's why we are detailing it. But I yes, I think that there are several other customers where over time we can see similar commitments. There's a couple that are -- come to mind quickly and there are others that I think over time we will definitely drill into it.

Your next question comes from the line of Mike Shonstrom.

Hi.

Mike.

Just a question on Kasamba. Probably you can give us as to synergies with the existing customer base, are you seeing -- you obviously are late, what, a week or so into owning it, but what's the direction with that with your existing customer base? What are you -- how are you going to try to market that and what is the outlook? How should we think of this going forward?

I mean we are really focused on right now, we flipped the look and feel of the Web site about two weeks ago and then we are moving towards the first half of the year -- is flipping Kasamba over the LivePerson, so there will be a single brand, and then marketing it actively to our base of customers. We have already some of that, proactively want to be in and then we have talked to and that's on the small business as well as the enterprise side and the real goal for them is to get leads. So, if they can get high quality leads and we know chatters are high quality leads because they use convert in the 20% to 25% range, they chat and then they buy. That's really the driver for them to be putting themselves in the system. Obviously, it benefits the small business customer base, which is our largest base of customers, because for those guys to get leads, it's a greater challenge than one of our large enterprise customers. So, I think that's really the focus of that. Obviously, the core business of Kasamba is strong in itself and as we said many times, probably no one knows Kasamba, but yet they do $30 million in gross transactions off of their Web site. So, the real focus is to just have this exist in the world and there will be the LivePerson site as a major destination on the Web and a major brand, as a place where people can go to get expert advice on everything. So if you want to travel, you could go and chat with the travel expert, maybe someone who lives in Italy and who is sitting in Rome and will help you book your travel, but also we have orbits, where I could got to buy my tickets to get to Rome. And I think that's really what we are going to be focusing on as we go forward and we know there's demand on us, there is demand on both those systems, (inaudible) business is doing well and our business bringing together should sort of create a stronger service for consumers.

You see this as sort of sustaining your strategy to sustain your current growth rate or do you see a one plus one equals three kind of thing here where your growth rate could, I mean you could have three prongs of growth, the core business, the old legacy Kasamba business, plus this new aspect, this synergetic aspect?

I mean we see it as though one plus one equals three and I think our greatest challenge and that's why we acquired Kasamba is that we don't really have a relationship with the consumer today, even though 5 million consumers this month will chat through LivePerson and one of our 6,000 customers, we really don't have a direct connection with them, we haven't built a brand with them. And so, if we are able to do that, where my consumer thinks "Jeez, I need help on buying a computer" and they go over -- the first place they want to go is the LivePerson's site to get it because I can get it live with experts, and I also know the brander there. And we will then have a direct connection with that consumer and that gives us a lot more power going forward to even generate more demand for our core products. Today, we are limited by -- we even see it on the conference call, we can out of the 28 enterprise customers that we signed, we can only talk about four. So, really enabling us to tell the stories to the world about how chat really empowers consumers to get help and it solves their problems will allow us I think to take our growth rates, which in both business are around 50% to the next level and that's really what we are focused on. So, it's a definitely one plus one equals three.

And just a quick question for Tim on the sales -- as a percentage, sales and marketing as a percentage of revenue going forward, you said that it would rise to 33% in the fourth quarter. And comments for the future periods?

Well, I highlighted that because it's really the one line item within Kasamba that's markedly different from ours and so, it will have a significant impact on our overall marketing structure, as you break it down as a percent of revenue. So I highlighted that they -- the Kasamba group spends more as a percent of revenue on sales and marketing. Going forward, this is -- it's not anomaly meaning, there is fair amounting marketing spending that's occurring there and we will be doing it in different and creative ways, but we will be continuing to spend that money as we develop that product line and sort of build out the visibility of that. So, that should be relatively consisting going forward.

Great, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Richard Baldry.

Thanks. Can you talk maybe about the headcount of both pre and post Kasamba? I think it's a different item, but last quarter you said that your usage base revenues for less than 5% of total revenues or how that tracked into what is, I think, a seasonally stronger period for the usage in the third and fourth quarter, what your expectations are there? And then, finally, my understanding was that Kasamba actually had a higher gross margin sort of run rate given that it has shown the revenues on a net basis. So, I would have thought that between that and the sort of scaling you achieved, for example, last year the gross margins went up over a 100 basis points sequentially in the fourth quarter, that there would have been some upside to it -- the margins in fourth quarter, so maybe a little more color on that. Thanks.

Sure. So, I would hit one by one. On the headcount, as I mentioned, we are right around 225 in the pre-Kasamba world. Kasamba headcount is right around 75 and so, I would assume right around that number for October and we will continue to add heads over the remainder of the year, but I think 300 is the accurate current count however. In terms of usage, we saw two things that will be of interest, one is overall usage increase, just a little bit about 10% versus Q2. So, it remains a percent of revenue that's relatively low and sort of less than 5% range. But what is more interesting I think is that that we did see a couple of customers that were of significant size do away, hope they do and that is to commit -- higher commitments of recurring revenue rather than the usage base fees. So, it's kind of doing what's it's designed to do similar to your cell phone model where if usage fees increase to a certain level, it triggers a higher commitment to get little bit better economies of scales and so we did see a bit of that, which dampened down the overall usage number in Q3, but we did, of course, get the benefit of that in a higher commitment. So, it did hit the revenue line but just in a different portion of revenue. And then, finally on your multi-part question there, the Kasamba gross margin, you are correct and that the operating gross margin for Kasamba is right around 80%, is the number that we've disclosed. What's unique about that going forward is that because of the acquisition of the amortization impact that will hit non-cash amortization that will hit the gross margin line post acquisition for Q4 and going forward. So, that has the sort of the opposite effect in terms of the overall gross margin. So, once we get to a new run rate, you will continue to see those improvements. But, there is sort of -- there will be a one-time shift as we layer in the purchase accounting impact in the cost of goods line a bit more so than the other line items just due to the nature of the Kasamba operation.

And then, last one on the -- it looks in the space of maybe two quarters, you will have generated enough cash to pay the cash consideration on the Kasamba acquisition. Prior you had an outstanding authorization -- buyback authorization. Can you talk about maybe what your thoughts on that would be post 3Q? Thanks.

Yes, that's obviously something we keep an eye on in terms of the market price and other opportunities for our cash. But, that is something that we actively look at when we are in a position relative to open trading windows to do that. So, that is on the list of things that we review for system (inaudible) and we will look at that again as our training windows open up over each quarter.

Thanks.

Your next question comes from the line of Jon Hickman.

Hi, can you hear me?

Hi, John.

Hi, John.

Hi. I was wondering if you could give us some color on the people like -- I thought of the actual expects, have you -- what's the turnover they take with you, are they happy? They were -- when you did that initial call, there were a number of callers that were kind of concerned about the future, what happens then?

Yes, there is -- it is sort of an 80/20 rule like every other model in that about 20% of the experts generate 80% of revenue. Those 20%, it's a living for them. So, they are happy with -- I think the first thing we did is obviously we made a significant change to the look and feel in the UI of the Web site, which happened two weeks ago and we got their feedback through that process, and they seem happy about it. We see -- we don't see that much turnover from that base. Where you get your turnover is people come on because anyone can come on and register themselves an expert. But, if they don't -- if they are not online to take chats or they don't start to really work up reviews, so the whole system basically as reviews are going to drive revenue for an expert. And the more times they are online or how they set their pricing per minute will dictate whether they are going to make money off the system or not. They don't, then they drop off and they become dormant. So, but the guys who actually are making a living of it, are very passionate about it and we have had a couple of calls with them and we have had a bunch of one-on-ones and we will actually be focusing a fair amount of our efforts on building that community or building a greater sense of community between the experts and sort of the focus in what are the main focuses of the -- of development going forward. So far so good, and even on the consumer side, same thing. There people who use it are very sticky, they use it in their daily lives and they are also looking forward to us expanding the categories.

Okay. And then, can you tell us what is going to happen to Live Personal Shoppers site?

The Live Personal Shoppers will more or less -- the actual shoppers have moved into the Kasamba Web site and we are starting to drive traffic there in that category. So, the Live Personal Shoppers site will more or less just be a site that will board traffic to the Kasamba site and we will consolidate everything under Kasamba. And then, coming early next year, probably towards the tail end of Q1, we are going to flip, the Kasamba site will become LivePerson and the Kasamba -- the Kasamba brand will be folded into the LivePerson brand and LivePerson.com will become the primary way in which you will get the service. And so, those are sort of the main goals of the first half of next year.

And then, I have one financial question. Tim, could you review what you said about depreciation in fourth quarter, did that kind of (inaudible)?

Yes. It is actually depreciation and amortization combined was about $0.5 million in Q3, and that's a pretty comparable run rate to the prior quarters. But, in Q4, our estimate is that will increase to about $1.1 million because of a deal -- acquisition related amortization. And so, that is factored into both of the EPS and the EBITDA figures that we gave. So, right around $1.1 million.

Okay. Thank you.

Thank you.

Perhaps one more. As I have gone through your numbers, it looks to me like your total operating expenses were down to 64.3% of revenues. It is like a 300 basis point improvement. Have I got that right?

That's -- yes, it's correct.

Well, congratulations.

Thanks very much. Yes, we are pretty pleased. 2% from the sales and marketing line, a full point almost from gross margin, and about a point from R&D. So, we -- that's where I think we are pretty pleased is a pretty consistent across the board improvement on the expense line. So, we are -- we appreciate you highlighting it. I think a lot of it is driven from the -- as the Timpani product line is maturing and all the resources are maturing behind, so the sales resources and the implementation resources, it enables us to get more leverage out of the model. So, we have a better way and more efficient way to sell and more efficient way to deliver. We are building more into the technology to make it easier and cheaper to deliver. We get more scalability out of our servers and so that is sort of a national progression as your product lines mature.

And one day you are going to take the whole thing in-house to get the money there?

It is something that we definitely are considering seriously. We have a number of different operations, we have a primary in the U.S., we have a back-desk, we have a U.K. infrastructure, and so, in each of those, there is an opportunity. We have indicated that that's one of the -- a couple of different things we are looking at where we think we can definitely drive more gross margin efficiency.

Okay, thanks.

Thank you.

Your next question comes from the line of Rag Sarathy.

Hey, Rag, you there?

Rag, your line is open.

Hello, can you hear me?

Hello, Rag. Yes, we can hear you now.

Okay. You guys seem to be excited about the bookings. Can you give us some color maybe quantitatively -- this historically has declined sequentially, but this year you have seen an uptick. Can you talk about quantitatively how you would describe -- if I just look at the enterprise deal metrics, the number of deals, it seems like it has picked up significantly on a year-over-year basis?

Yes, I think -- I mean, there is a couple of things. One, some of the commitments are larger and over a longer term. So, that can influence the bookings number. But, I think it is definitely factoring into the results, can obviously a 10% number -- 8% or 9% or 10% now is dramatically higher than that same percentage whether a year ago or especially two years ago. So, I mean, it is overseeing what's supporting our growth, the same number of reps or a few more reps are doing dramatically higher revenue per person and we are doing what we can to continue to support that.

And would you say it's up over 40%, your base level?

On a year-over-year basis?

Yes, the enterprise side of the business.

Yes, that is a reasonable number. It is probably a little bit more than that. It's a good estimate, yes.

And then, in terms of the -- you talked about the amortization expenses. What's the split between cost of goods and G&A for the fourth quarter that you are anticipating? I presume the depreciation is for the remainder same or slightly up?

Yes, depreciation is not moving dramatically. It's primarily in amortization of intangibles. And so, we will see a fair amount of will hit the cost of goods line but also the R&D line related to the acquisition.

Right. I am trying to get some sense rather how much it is to see why we are seeing a decline in the kind of gross margin at 74% basically. If you were to take it out, the amortization expenses, we should expect a gross margin improvement, is that correct?

Yes, I think it is something we look at and have considered giving more color on and I think we will look at it at year-end and as the gap between the cash gross margin and a GAAP gross margin gets lighter, it is something we may consider. But, there is probably 1 point to 1.5 point, 100 basis points to 150 basis points of impact due to noncash charges. But, that is something we will definitely consider if it helps folks going forward, because we are expecting to see continued improvement in the cash costs. But, those are a little more predictable than some of the noncash impact that are related either to M&A activity or option activity.

Okay, thank you.

Thank you.

There are no further questions at this time.

Okay, we want to thank everybody for joining. But, in closing I see that there is an opportunity for all of our analysts on the call and listening to the call later to help us out in clarifying our performance versus expectations. If you could do us a favor and confirm that First Call and Reuters and the other services are picking up your correct numbers, because it is clear to all of us on the call that 6% -- $0.06 for EBITDA is definitely hitting the top side of our guidance. So, we are looking for you to help us out and make sure that message gets out there clearly. It's tough to always rely on AP and Reuters and some of those to get it correct. So, we will look forward to your assistance in doing that. Thanks for joining the call.

Thank you. Bye-bye.

Thank you for participating in today's third quarter earnings call. This concludes today's conference. You may disconnect at this time.