LivePerson Inc (LPSN) 2007 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson fourth quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) . Thank you. Mr. Tim Bixby, you may begin your conference.

Thanks very much. Before we begin, I would like to remind our listeners that during the course of this conference call comments that we make regarding LivePerson that is not historical facts or forward-looking statements and they 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 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 and regulatory and other factor could cause LivePerson actual results to differ material 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. 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 website. Now I would like to turn the call over to LivePerson Chief Executive Officer, Robert LoCascio.

Thanks, Tim. Thanks for reading that disclosure statement. Thanks for joining us. As we enter our eighth year as a public company. Over this time many of you watched us grow when product, customer, employee, and share holder at a time. It has been an exciting eight years and we are about to embark on another interesting phase in our company's journey. We have great opportunities ahead of us in 2008. Our core enterprise business continues to grow and is operationally strong. We grew by 9% in the fourth quarter and expected business significantly both in the U.S. and in western Europe. We continue to lead the market for realtime customer engagements solutions. We will continue to invest necessary resources in order to go after the full potential of the enterprise market opportunity.

Our core enterprise business is expect to generate about $14 million in operational cash flow on 65 million in revenue in 2008. This represents approximately a 45% annual increase in EBITDA. We were also very excited about adding another growth engine to the company with the acquisition of Kasamba. We view this acquisition which is our sixth as a significant growth opportunity. Kasamba already has a solid financial and operational foundation. In 2007 over 600,000 transactions took place between experts and consumers on the Kasamba.com website. This generated close to 25 million in gross fees and Kasamba received approximately 40% of the transactions as fees or $10 million. Kasamba currently spends about $5 million a year on marketing in order to generate expert in consumer traffic to their website. We will continue to employ this amount over 2008, and we will invest a little more in order to reach our strategic objectives. We will take a small portion of our cash flow from our core enterprise business, about 15% of the cash flow and invest it into Kasamba in 2008. I think it's pretty clear to say that we are not betting the farm on this acquisition. This will be a very controlled spend and directed mainly to on and offline marketing campaigns aimed at experts and consumers. Our goal is to expand into other categories. And once we start this expansion, we will get more data points that will enable us to forecast any upside on revenues.

We will use the next few quarters to execute our operational plan and much of this you will see reflected on changes to the website. We have already done a lot of significant work to the Kasamba website, and some those things are, we changed the overall look and feel of the website. We added a community area so experts could actually interact with other experts and we seen some good results on the first day. There is about 500 posting on that expert community so there is a lot of interaction that they want to do with each other. We added a new search engine that gives consumers the ability to do broader and more effective searches. And we fired up a new category called shopping and style. We already have 75 new experts into that category and we have done no real promotion of that category marketing. The experts seem to show up. So all of this is moving us towards our goal of expanding the platform and depth and breadth of our experts.

Our enterprise sales team has been having initial conversations with our enterprise customer base about the expert offerings now. Positioning dynamic developing between our enterprise customers and their experts. Many of our enterprise customers have very active on-line communities on their own website. And they are using these communities to embrace power customers or experts to answer sales and support questions from other consumers. Many companies have determined that best way to supplement internal sales and support teams is to get people who have used their products to sell and support their products for them.

These adjust preliminary conversations but we this as a clear opportunity to use the Kasamba platform to power these communities so that experts can easily be identified, rated and even charged for their expertise. There will probably be other opportunities to leverage the strength and knowledge we now have around the expert market in our enterprise customer base. So seen a lot of interesting things over the past 18 years of running technology companies and I feel that we are entering an interesting period of time at LivePerson. There is definitely something happening in the area of enabling people to share their knowledge with other people.

Over the past few months many of the major web providers like Google and Yahoo! and even Amazon have started offering consumer to consumer answer sites. However, I think we were in a unique position because of foundation of LivePerson has been and continues to be about creating value in those interactions. We created technology in which a consumer can ask a question from another person and they are willing to pay for that. They are willing to create value during that transaction. And for the past seven years our focus is enabling consumers to chat with experts who also work at companies.

So we are now expanding that to the individual expert market. And based on our industry research as many as 20 million independent experts on the internet today. This is a large and fragmented group of people and our goal is to bring many of them together on our platform. This is the opportunity of a large opportunity we see today. So you may be asking yourself the question is LivePerson now B to B or B to C or ACR and Company? And I'd say it probable doesn't make sense to put us in a box right now with a very tightly label like B to B or B to C. It may be better to serve all of us at share holders to think a little simpler and think about the value our company creates for the market.

I would like to explore the idea of value creation from the consumer's point of view because they ultimately decide the true value of the products we create here at LivePerson. Companies pay us hundreds of thousands of dollars per year because consumers want to use chat when they are shopping on-line. Consumers ultimately drive and validate our products. The more that consumers want to chat, the more money we make. So when a consumer clicks on a chat button whether on the company's website or on Kasamba.com, they want the same thing. They expect an expert to help them with answering their questions in realtime. They want expert advice whether it's from a call center agent or an independent expert. When they click on that button, values created for both the consumer and the expert. That is how we make money at our company. Chat is just a method in which we were able to create value which drives -- which today drives several revenue streams for us. Revenue streams that include seats, revenue share programs, traffic, overage fees, implementation and training fees and now a percentage of fees generated by individual experts. The more consumers of the world it that want to chat, the more revenue we make. Therefore our mission is to provide the best realtime platform where consumers can get expert advice live from as many different experts in as many different places on the web as possible. It's that simple. So we believe consumer demand for chat will continue to increase and by expanding our footprint in the on-line world we will be able to capture the full potential of this opportunity.

I'm sure everyone on the call has at one time or another been let down by the promises of the internet. The promise of making our lives easier and better by giving us access to the world's information and its people. Access to the world's information is at our finger tips today with search engines like Google. However, access to the world's people and their knowledge is not. There is a doctor in Pakistan who gave up his full time job as a doctor in his local town to provide expert medical advice on Kasamba. He did this because he found he can make more money selling his knowledge to the world on Kasamba than he could in his local town. How many other people in developing countries could change their lives by solving their expertise on Kasamba. Which person would you most likely influence your purchase of a new HD TV? A person who is an HDTV fanatic or $6 an hour call center agent who is reading from some marketing material who has never ever seen an HDTV? Does it make sense then for a company to place experts on their website to answer consumer questions? Or $6 an hour call center representative from India? 76 million baby boomers will be retiring over the next few years. What are they going to do to feel productive. They have so much knowledge. What if they can work when they wanted to from wherever they wanted to and make money from sharing that knowledge with the world?

So I ask yourself the questions. What do you need an expert for? Where do you an expert -- (inaudible - background noise) who do you know is an expert at something? What if you or they had the opportunity to sell that expertise to the world, how would life change? I think any intelligent person can see how tapping into the world's experts can be something valuable to us all. The real question to ask is, if we execute on this mission and back leader in this space like we have done in the realtime space, how will this change our company? Being one of our company's largest shareholders, I think the subtle change in how we now view our purpose and mission in the on-line world could exponentially unlock the value of our company's business model. With that, thank you for your time. Now I would like to turn the call over to Tim who will take us through the financials and also through some of the metrics we are going to use now to measure our company going forward. Tim.

Thanks, Rob. Let's shift gears a little bit and talk about the fourth quarter results as well as the full year results and we will also give you a first view into our initial guidance for 2008. And then we will do questions and answers at the end. Our fourth quarter 2007 and full year results for 2007 came in right in line with our guidance from our previous quarterly conference call on revenue and EBITDA. Our EPS came in well above our guidance and this was including the impact of a significant tax benefit in the quarter. Without this benefit our EPS results were also right in line with our guidance from the last conference call.

Overall 2007 was a terrific year both financially and operationally. The core business is stronger than ever with significant expansion among the very largest enterprises in the U.S. and around the world including many of the world's leading banks, retailers and telecommunication service providers. We completed the acquisition of Kasamba as of the beginning of the fourth quarter. And we again surpassed 50% annual revenue growth. If we exclude the impact of the recent acquisition, revenue grew 47% in 2007.

Operating margins continue to be very strong with EBITDA running at 20% of revenue for the core business. This margin is well above many hosted software companies with high growth rates similar to LivePerson. We added in the fourth quarter eight new enterprise clients. While Kasamba revenues were about 5% under our guidance for the quarter, we believe this is the result of some short-term impact on revenue. We expect we may see a bit more of this impact as we reorient the website as Rob was discussing in his comments. I will give more detail on these results and our initial guidance for the first quarter and full year 2008 in a moment. They are also detailed within the press release we issued earlier this afternoon.

We made significant progress internationally during the quarter. Strengthening both new business and expanded existing implementation of leading companies in western Europe including COFIDIS, France's leader in distance consumer credit. British Sky Broadcasting, or Sky, Lloyds TSB , a leading U.K. based financial services group. HBOS and British Telecom, one of the world's leading providers of telecom solutions. We also expanded domestic business with several existing U.S. based customers including Saturn and Orbitz, and completed global expansion projects with U.S. based customers including Cisco as well as industry leaders in personal computers and digital media and a global provider of the world's leading system software and service.

We also seen continued success in our efforts to expand our pay for performance business model within our enterprise sales group. This model ties our revenue directly to customer success, it has been one of our key goals to create and expand upon a model where we would receive value in relation to the value we drive for our customers. I am pleased to report that these efforts have paid off with five enterprise clients now generating revenue for live person under this model. Specifically, each time one of these customers generates an on-line sales order through LivePerson proactive engagement services, LivePerson receives fixed payment. As the customers chat driven revenue increases, LivePerson revenue increases. This puts us in the unique position of having customers that actually have an incentive to increase the monthly fees that they pay LivePerson each month.

We also seen continued success in our efforts to expand proactive service with many of our largest customers either using or considering expansion into this area. As you know, this type of deployment uses our proactive engagement technology to more efficiently target customer service interactions with goal of reducing expensive telephone interactions with efficient proactive chat interactions. This is interesting for LivePerson as the number of on-line agents dedicated to customer service within large enterprises is typically measured in the hundreds. We have a dedicated resource with a significant experience for both call center, re-engineering and LivePerson deployment within the call center who is driving this opportunity for us.

During the quarter, we signed 49 enterprise deals with both new clients and up sales combined in the fourth quarter, up from 28 in the prior quarter. Annualized deal size for Q4 enterprise deals was about $60,000. For proactive deals about $90,000. And about $70,000 for newly added customers. This represents a fairly large swing as compared to the prior quarter to a larger number of smaller enterprise deals. As you remember in the prior quarter, we had a relatively lower number of deals at very large revenue points. I expect the metrics in coming quarters to revert to a more normalized range of deal quantity and deal size in line of historical averages.

In terms of our revenue mix, 60% of new enterprise deals and 85% of revenue booked in the quarter was driven by Timpani sales and marketing deals, while 40% of deals representing 15% of book revenue are contact center deals, 75% of incremental revenue booked in the quarter came from existing clients, and the other 25% from new clients, which is continuing a shift toward new clients. Our small business group delivered another strong quarter. Again growing at 9% sequentially.

In terms of our voice product, we continue to see good progress on our newly launched voice or click to call channel. The number of customers using this product increased from 585 to 650 customers in the quarter. We have begun to transition our primary hosting facility in the U.S., as we discussed as a potential opportunity for us on the last conference call. Historically we services of a third party hosting provider for hosting requirements. We pay a monthly fee in exchange for the use of hardware, bandwidth, floor space, floor space and management services. In this arrangement, we don't own the fixed assets. And we rely on the hosting provider for significant level of support. We are now transitioning to a structure typically referred to as co-location. We will still rely on a service provider for space, power and bandwidth. But we will purchase and own all of the network equipment and hardware and have more direct control over the management and expansion of our systems and infrastructure.

As a result, as this transition occurs, we expect that our cash operating expenses will decline while a depreciation in expense related to higher capital expenditures will increase and partially offset this decline. Once the transition is complete, we expect lower ongoing costs. Longer-term, this change is expected to have a favorable impact of up to two to three percentage points on our cost to revenue. We have purchased much of the necessary equipment for this transition. We have installed our application on the new network and have begun initial testing for the transition. We expect this transition to be complete by the fourth quarter of this year.

The majority of the $2.6 million increase in net property and equipment on the balance sheet at year end that you will see is due to the purchase of this equipment. Total spending related to this initial transition by year end 2008 was expected to be approximately $5 million. Once the transition is complete, we will move into a more gradual spend rate for this type of capital expenditure in line with our business activity growth rate.

I would now like to review some of the specific financial results for the quarter and the year ended December 31, 2007. As previously disclosed, the Kasamba acquisition closed on October 3. Our core business continues to perform well, with strong revenue growth rates, expanding margins. We expect revenue growth to continue and margins to remain strong in the enterprise SMB business in 2008. This is reflected in our guidance we will detail today. Give that strength we intend to invest about 15% of the expected cash flow generated by our core operations in 2008, for approximately $2 million, into marketing efforts to expanding the consumer business. We see this as a logical way to invest strong cash flow to drive top lion growth in a potential market that is complementary to our core business. Realtime on-line interaction between consumers and experts whether in an enterprise, small business or direct to consumers themselves.

For the quarter, LivePerson reported record revenue of $16.8 million, a 31% increase versus $12.8 million in the prior quarter. And a 62% increase versus $10.3 million in the fourth quarter of 2006. Excluding Kasamba, core revenue growth was strong coming in right in line with our guidance at 9% sequential growth. Full year revenue was $52.2 million or a 56% increase from the prior year. Again, excluding Kasamba, annual revenue growth was approximately 47%. Deferred revenue at year end was in line with the prior quarter, at $4 million and up from $3.3 million in the prior year. Gross margin, includes significant non-cash expenses related to stock compensation and amortization of purchase intangibles. Excluding these non-cash items our cash gross margin in the fourth quarter was 77%, this is 100 basis points better than Q3. Our GAAP gross margin excluding the impact of the acquisition improved by about 50 basis points in the quarter to 75%. Overall cost of revenue in the fourth quarter on a GAAP basis was $4.3 million, as compared to $3.3 million in the prior quarter and $2.4 million in the same period of the prior year and this resulted in an overall gross margin on a GAAP basis of 74% which is in line with the prior quarter.

Product development expense for the quarter was $3 million as compared to $2.2 million in the prior quarter. And $1.8 million in the comparable quarter in the prior year. The increase from the prior quarter was driven primarily by the addition of Kasamba R&D expense. Sales and marketing expense in the fourth quarter was $5.7 million up from $3.6 million in the prior quarter and up from $3.3 million in the same period of the prior year, 75% increase from the prior quarter or $1.6 million was due to the addition of the Kasamba operations in the quarter.

General and administrative expense excluding amortization intangibles was $2.9 million in the quarter up from $2.3 million in the prior quarter and up from $1.9 million in the comparable quarter of 2006, 50% of the increase in the prior quarter or about $0.3 million was due to the addition of the Kasamba operations. EBITDA or earnings before interest taxes, depreciation and amortization was $2.8 million for the quarter, up from 2.7 in the prior quarter and up nearly 50% from the $1.9 million of EBITDA in the comparable period of the prior year. EBITDA per share in the quarter was $0.06, up $0.02 compared to the comparable period of the prior year. EBITDA overall was $9.7 million for the full year, up 83% as compared to $5.3 million in the prior year. EBITDA per share for the full year was $0.21, up 75% as compared to the comparable period in the prior year. During the quarter, we released the remaining deferred tax asset base on current estimates of future taxable income and this resulted in a tax benefit in the fourth quarter of $1.7 million.

Now I would like to talk for a moment about adjusted net income. Most of the analysts that provide LivePerson research report adjusted net income as a key metric for the company. And the research services including Thomson Financial typically report this number as their EPS measure. This number is essentially GAAP net income excluding amortization intangibles and stock compensation expense. This adjusted net income figure is included in our press release today and we encourage the analysts covering the company to use this consistent measure in their coverage and to confirm this figure is being reported consistently by the various services that track and report your consensus estimates.

Adjusted net income in the fourth quarter on this basis was $4.4 million or $0.09 a share. For the full year adjusted net income was $11.5 million or $0.25 per share. Both figures include the fourth quarter tax benefit of $1.7 million. The reconciliation between EBITDA, adjusted net income and GAAP net income is provided in the financial statements accompanying our earnings release.

Net income per share in the quarter was $0.05 and was $0.12 for the full year. Both figures again include the favorable impact of the tax benefit. Fully diluted share count was 50.4 million for the fourth quarter. And was 46.8 million shares for the full year of 2007. Cash flow from operations increase significantly to $4.4 million in the quarter as compared to $2.4 million in the prior quarter and as compared to $0.4 million in the prior year quarter. For the full year, cash flow from operations was $9 million as compared to $2.6 million in the prior year.

Now turning to the balance sheet. Our cash balance decreased by approximately $4 million to $26.2 million at December 31, as compared to $30.2 million as of September 30. The current cash balance reflects the fourth quarter payment of the cash portion of the consideration paid for Kasamba of $9 million and this was partially offset by two things, $1.6 million of cash to acquire this transaction as well as $3.4 million in cash primarily from operations. Our accounts receivable balance increased just slightly to $6 million from $5.8 million in the prior quarter and DSOs were still relatively low at less than 40 days.

At this point we will begin tracking and reporting some new metrics related to some of our consumer efforts, the expert network in Kasamba. Active experts and active users are important metrics around experts generating revenue and users who are paying fees to those experts. During the fourth quarter, we would like to report initial views on what those metrics were at this point of 2000 -- the end of 2007. On average, each month during Q4 there were approximately 2200 active experts. Providing service and getting paid for those interactions with consumers. During that same quarter, the fourth quarter, there were approximately 10,400 active users paying per interaction to those experts for their advice. Each month on average during the fourth quarter about 59,000 paid interactions occurred. And finally, if we combine the user and expert metrics with a number of interactions, it triggers metric where we can compare revenue per interaction which on a gross basis was approximately $41 in the fourth quarter and on a net basis which is the revenue that is recognized by LivePerson was about $16 per paid interaction in Q4.

If we turn now to capital expenditures, the fourth quarter we are a bit higher than normal as we discussed $2.4 million in the quarter and this was driven primarily by the co-location transition expenses related to hardware and network equipment as we detailed earlier. We expect capital expenditures to be approximately $3 million coming in 2008. Depreciation and amortization excluding stock compensation was a $1 million in the fourth quarter. And we expect a roughly $1 million quarterly run rate for that figure to continue in 2008. Stock compensation expense and amortization intangibles by line item can be found in the table within our press release from today. Our global head count, today stands at approximately 315, and that includes 75 that were added related to the acquisition in the fourth quarter. Excluding the head count impact of the acquisition, our head count increased from 215 to 240 during the fourth quarter.

Now I would like to detail our guidance for the first quarter of 2008 as well as for the full year. In the first quarter we expect revenue of between 17.3 and $17.5 million or approximately 4% quarterly sequential revenue growth. Revenue growth excluding the impact in both Q4 '07 and Q1 '08 of the Kasamba acquisition is expected to be approximately 5 to 6% sequentially. Our EBITDA per share we expect in the first quarter to be between $0.04 and $0.05 per share. And our adjusted net income we expect to be between $0.04 and $0.05 per share in the first quarter. We expect GAAP EPS of a $0.01 per share for the first quarter of 2008.

For the full year, we expect revenue of between 77 and $79 million and this would represent approximately 50% annual growth. Within that number, we expect the Kasamba operations and a base case to generate between 12 and $12.5 million. EBITDA is expected to be between $0.22 and $0.24 per share while adjusted net income per share is expected to be between $0.20 and $0.21. GAAP EPS for the full year between $0.04 and $0.05 per share. And this also assumes an estimated affective tax rate of 55% for the full year 2008. We also would estimate based on our current view and understanding of net operating loss benefits and other tax items that will impact our tax rate that our cash tax rate will approximate 20% for the full year 2008. In developing these expectations we taken into account our current enterprise and small business pipeline, our outlook for small business sales, our investment in our consumer expansion as well as some of the uncertainty in the current economic conditions. Our revenue expectations for the Kasamba operations are a base case with no upside revenue built into these expectations that may result from our marketing investments and the strategically positioning that will take place over the course of this year.

As we begin to get real data driven by some these efforts, we will adjust the guidance to reflect that data. Our share count we expect to be approximately 51 million shares fully diluted in the first quarter and approximately 51.5 million for the full year of 2008. Gross margin in the first quarter overall is expected to be 72% on a GAAP basis. Remember, this includes additional charges that we not seen before related to the acquisition from the fourth quarter. If we exclude non-cash items, our gross margin is expected to be in line with the fourth quarter at approximately 75%. These GAAP EPS expectations noted here, already include the estimated impact of a changing accounting policy related to adopting FAS 123 in January of 2006. This impact is expected to decrease net income per share by $0.02 in the first quarter and $0.11 for the full year of 2008. This impact, of course may change based upon additional stock option grants if any, methodology refinement or other factors.

That covers our financial review and at this point if we could ask the operator rejoin the call we would be happy to take any questions that you may have. If we could ask the operator rejoin the call, we were ready to do the Q&A portion of the call, please.

(OPERATOR INSTRUCTIONS) . Your first question is from the line of Richard Baldry.

Thanks. Can you contrast for me the incremental $2 million in spending or investing in Kasamba to what they currently spend to try to drive demand for their business in terms of maybe scaled. Does that double their spending in that segment? Or 50% change? How would we look at that?

Right now they spend $5 million on marketing predominantly search engine marketing and some affiliate marketing which is predominantly focused on the category they have been strong at which is around the spirituality category . We will redeploy some of that spend because our mission is obviously to now build out other categories and we will take a fair amount of that and put it into other areas, continue to grow that area, but open up other areas and put $2 million on top of it around the buildout of these areas. Our goal is obviously not buy traffic., it's expense -. All of us know that or most of us know that Kasamba is not a well-known brand but they are a company has a lot of experts and consumers coming to it. Our goal is to build out the brand and get more organic traffic and that's the goal over the next couple months.

And then could you remind us what Kasamba's revenue base the '07 versus '06 comparison is and then contrast out maybe a little broader on why you view it as or even putting a base case end of it being flat for '08? Thanks.

Yes, the historically is if you refer back to the 8K that was filed not to long ago showed fairly significant percentage growth off small relatively small base numbers. So I think what we are looking at in terms of our guidance is focusing current spend rate in a narrow category and then broadening that out and see what we can generate in additional categories. I think it's fair to say as we reallocate the marketing investment more broadly that the initial growth in the narrow categories of today will not cap out , but that growth rate will soft an bit and then as we see the impact of broadening out the spend we will see revenue growth. Now we did not build that into the base case because there is really limited data at this point and we want to come with a firmer set of facts when we deliver that updated guidance. But this is what we see currently.

Thanks.

Your next question is from the line of Brad Whitt.

Couple questions. Tim, first question, can you clarify the gross margin guidance. I thought you said it would be flat when you look at it on the non-GAAP basis adjusted basis. I thought adjusted base it was 77% and now you are saying guidance for Q1 is 75%.

Yes, the 77 is I wanted to highlight that is something that is a bit of a change that as the non-cash charges have increased relative to stock compensation as well as the Q4 transactions is one of the highlight some of that improvement that we see in the real cash operating cost gets lost. The 77% is gross margin you strip out all non-cash charges where as the 75% is stripping out the impact of the Kasamba acquisition so again on a cash and a true cash basis that gross margin number would be higher in the first quarter but that's not a number we will give specific guidance on because it's just a few too many metrics. The 75 is without impact of acquisition. The slightly lower number is plain old' GAAP that we expect to see.

I'm totally confused now. So what is your non-GAAP EPS guidance for this quarter? Let me ask it a different way, its $0.04 to $0.05. What gross margin are you assuming to get to that number?

The GAAP gross --

Your adjusted net income is $0.04 to $0.05 for this quarter?

That would be about 75%, if you are looking at the adjusted net income number. And about --

Far from 77% that you didn't --

No, that's not right.

We will talk offline then on that.

We will take it offline. But I will summarize to make it clear. Our cash gross margin in Q4 and expected in Q1 are similar around 77%. Our gross margin adjusted for the acquisition are also very expected to be similar in Q4 and Q1 at about 75%. On the P&L in Q1 you should expect 72% and that's with all of the non-cash charges and the accounting charges.

Let me ask you this. What's your definition of adjusted net income?

GAAP net income and then add back stock compensation expense and amortization of intangibles.

Okay, what about tax?

Adjusted net income does not make any adjustment for taxes.

So then that 20 to 21% assumes that 55% tax rate, $0.20 to $0.21 for fiscal year '08? What tax rate are you assuming there?

That assumes a book tax rate of 55%.

Are you sure about that? Okay. What about sales hiring in the quarter, enterprise sales rep, where did you finish up and what kind of plans do you have for investing there in '08?

Right now we were at 14 direct sales reps. And we have at least one expected to be hired additionally by the end of Q1. And then over the course of the year I think on a pace of maybe one between one and two per quarter. We made more investments recently and I think when I spoke a little bit about the pay performance efforts as well as the proactive service efforts, we added resource there within the sales group which are not technically quota carrying head count, but they are driving activity to the quota carrying head count. We have expanded our sales capacity beyond the direct quota carrying head count and that's why we see part of the reason we see increased productivity even though the sales head count hasn't increased dramatically in the last quarter.

Okay. Thanks. I will turn it over for enough to.

Your next question is from the line of Richard Fetyko.

Hey, guys. I hate to continue the discussion about the definition of some of these guidance items. On the EBITDA guidance can you just provide a definition on that is it adjusted for what non-cash items?

Yes, EBITDA is consistent with what we always used which is earnings before interest, taxes, and amortization. And so specifically stock compensation would be excluded as well as amortization of intangibles, taxes and then depreciation.

So both stock compensation and the amortization of intangibles are excluded?

That's right. That is not changed for -- that's not changed.

And then with regards to the core segment growth excluding casome but a, you mentioned that within your guidance you took into account some sort of economic uncertainty. Are you suggesting that you think you can do better what you guided to but you trimmed it back and held it back to account for potential weakness?

Relative to the guidance overall? Or just to the consumer and the Kasamba portion?

Specifically talking about your -- the core enterprise business which will be I guess implied guidance of 65 million in '08 or so?

Yes.

I was wondering overall you talked about -- I guess I don't know which part of the business you were talking about with regards to adjusting it for economic uncertain. Maybe you adjusted for the Kasamba business. I'm not sure.

That's the core business because that's driven by enterprise activity primarily. And then small business activity and so that comment really applies to those lines of business. But obviously any major macro-economic impacts could impact the total business overall. It's really just represents our view based on what we know today.

And within that in the past provided a breakout of different verticals or contribution revenue contribution from different verticals and financial services has always hovered around the 20 to 25% of total. What are you seeing in that vertical? Are you seeing any hesitation in terms of new account sign-ups or the existing account as well?

We have not seen any direct impact. There is the issues sort of concern that these client companies overall in term of day to day operation, but in our conversations they are focused on generating revenue and how to convert site traffic into value for our customers. And so the tougher the economic environment gets the more important that really is to our key decision makers. So we are cautiously optimistic that this could be -- potentially have no negative impact and have positive impact. We keep a close eye on it. So far it's -- we continue to see similar sale cycles and good flow of deals.

Okay. Thanks guys.

Your next question is from the line of Brad Mook.

Thanks, guys. Questions relating to Kasamba, I want to follow-up on what Rich was asking to make sure I understand it. In terms of the guidance for '08 and what we saw in Q4, do I understand correctly that you are reallocating some of the investment spending that they have been making and you add into other category and until you have data you are trying to be cautious assuming growth from those categories and at the same time assuming some deceleration in the growth from the traditional spiritual category?

Yes. We figured we would be fairly conservative because there is an unknown here. And so we don't want to start forecasting -- we see very good things but we don't want to start forecasting revenue potential because also with this model unlike our enterprise model, revenue moves very quick here. And consumer shows up tomorrow, they pay, we book it. It's very different from others. There is no cycle. So revenues can move fairly quickly but we want to get more insight into as we expand categories about how the revenue will move in each category . And so that's really why, right now we want to go base case plus reallocation of some of the budget into other brand building and other categories and we are assuming it will have an impact. But these are just assumptions.

You still assuming that suggest that you haven't begun the reallocation process?

No, not yet.

And looking at the $7 million that you will put into marketing for Kasamba this year, to what extent is that flexible based on how well things are going or not driving the results you anticipated. Would you pull back that spend or accelerate that spend.

It's very controllable. And so it's -- we can turn off 90% of the marketing in five minutes. And we can accelerate it and double it in five minutes. It's got a lot move levers on it and the business is a lot more scientific. It's about we are looking for certain ROI on a person who comes to the website. A consumer and they convert and so that's really how we are measuring and then reallocating dollars based on the ROIs. There is some low performing I think key word in things we are doing right now because they were supporting a single category so we can reallocate those very low performing investment and move them into other areas and to other categories, as I mentioned, too, we fired up the shopping and style category . And if you go into it right now you can see it off the front page. We have 75 experts in it. We have done nothing to get them there. We are not sure -- we aren't sure how they got there. We know that there is experts out there. They find us. Sign themselves up. You will also find that they have been chatted with and people are paying for their advice and the base which is predominantly women between the ages of 30 and 40 right now on Kasamba are buying the advice from the shoppers. So our assumptions are playing out that those consumers are really power shoppers on the web. They want other things to talk about and they want -- and if they are using Kasamba already, it looks like they will use categories. Some of the assumptions we laid out are playing out.

When did that shopping and style category go live?

90 days ago.

Okay.

So our -- what you will see is coming up in Q2 we will make a shift over into a single brand and a single website and that will be LivePerson. That will happen and then we will go out in the world with a real campaign and we will focus on telling people that there is a -- if you an expert in the world and sell your advice you can sell it and explain and talk about the stories of the successes that we have seen so far on the network where some of the experts are making hundreds of thousands of dollars a year. And there is real value being created for the consumers. We will start telling those stories and getting them out there. We were seeing other interesting things like somebody put out a book called -- they have a website called KasambaSecrets.com and it's a book, a PDF like an on-line book that you can buy and figure out how to be a great expert. So there is a lot of stuff happening in the community. And we were getting started. So we are very excited but we don't want to say, okay, this is what it's going to be. We will be more conservative about how we approach this.

You mentioned shifting to a single branded website. Something you mentioned in the past. Does that mean you won't be investing in the Kasamba name and what happens to the people -- how does that work in terms of transitioning KasambaSecrets.com over to LivePerson.

We will reach out to the community. There is a lot of work that we have started into doing that. So we want to make sure that we aren't impacting everyone. And ultimately this is our mission. To promote that LivePerson brand. We have also our 6000 customers who have an interest in being a part of this community. And so we want to have a very clean single brand out in the market. I think it will benefit everyone because ultimately even the experts on Kasamba today, Kasamba does have its been known as a spirituality site. And yet there is Java programmers on there, there's doctors on there. There is a lot that we have been seeing a good growth in the on-line education site. And yet Kasamba -- because they focused their resources in one area have that area -- it's attached to spirituality. We think about transitioning the brand we will be able to expand. And this is what the guys at Kasamba think also. So in April we will make a flip into a single website. Convert everyone over and driving more traffic to that site.

And last question, on the organic head count at, Tim, you touched on some of the ads in the sales area around the paper performance and the proactive service. Any other notable areas that is head count increases?

Pretty general across the company. Just sort of growing in normal complexity. The only one I would highlight we invested a little bit more than we have in the past. Sort of growing from two to four heads over the last couple of quarters in our data analytics capabilities. And I think that really is our continued commitment to large enterprise customers and their data analysis needs and some of the opportunities we were seeing there. That's the one I would sort of highlight. The rest I think are spread fairly pro rata across the company.

Thanks, guys.

Thank you.

Your next question is from the line of Raghavan Sarathy.

Good afternoon and thanks for taking my questions. First on the enterprise deal metrics, Tim, you mentioned the annual record in revenue from new customers is roughly 70k. About half of what you said last quarter. Obviously the deal metrics is pretty strong this quarter, but can you give us color on was it driven by more shift of product mix towards contact center? Or more of driven by customers starting out with pilots a small number of -- can you give us color on that?

Yes, we looked at this pretty closely because obviously because of the significant shift. And as I noted there is -- it's appears more significant because Q3 was also an out outlier the other way. I expect it to revert between the two. The driver is typically when deal numbers are smaller in average selling prices larger. Typically means a high volume enterprise account typically a financial services firm or a Telco is doing a major expansion or a major renewal and expansion combined. And we saw couple of those in Q3 that really drove the number. When the reverse is true, a larger number of smaller deals you are typically seeing add-on business. Ongoing expansion where somebody is adding either a business unit or expanding within their set call center and that's what we saw more of in the fourth quarter. I don't see that it's significantly driven by product line so much as it's more customer driven.

But I think the new customer ARR, I'm not referring to the overall ARR, if I look at the new customer ARR with 70k if I got that number right, that's 140 last quarter.

That's right. I think the driver, when that number is lower will typically be the vertical that the customer is in. So we will see financial services companies typically start out higher. We will see retailers start out somewhat lower and so again the mix of the customers is more of a driver. But there is really not something that I can give you that will be much more helpful on a go-forward basis than that. It's a little bit more case by case in a given quarter.

And then a few questions on Kasamba. So the Kasamba contribution was roughly $2.9 million if I got that number right. So you mentioned it was a little bit under your expectation and was it more related to the redesign of the website with the -- related more to the redesign?

Yes, it's more -- there are changes we are making on the site. So, yes, it's a lot around the redesign and the changing in the categories, if you look at home page now, you look at the home page in the past, they are radically different looking home pages. This has more categories and we are doing a lot more experimenting with showing those categories up front and like I said, one of the results is we fired up the shopping category and put it on the front screen. Started with no experts and now we have 75. So some of the thing testing we have to pull some of the experts that are not in that category spirituality a little bit in the back and that's the change. So that's what we saw little bit of an impact.

Is there any seasonality in that business?

Yes. There is a little bit of end of the year drop. So -- but like the after the holidays or during the holidays it's a different -- it's a little different -- that is people are away for Christmas and they are not chatting, we don't get paid. There is a down day. And a down day can be significant. So there is definitely seasonality because we were running day by day. But outside of that we see holidays obviously have an impact. Short months have an impact. So those are sort of the things that we see in the business today.

And then previously you had indicated you are expecting 80% gross margin for Kasamba business. This is still the case?

The only thing I would highlight there is that because of the non-cash charges related to the deal, those whether those are true Kasamba related expenses or just G&A for LivePerson, Inc., those do have impact. So if you pull that out they have been consistently at the 80% gross margin level and we expect that to continue going forward.

And non-GAAP basis but for amortization and intangibles it's 80%?

That's right.

And then just pick up on Brad's question on gross margin. What is the expectation for the full year on a non-GAAP basis? In other words, what is the guidance for the full year assumed the non-GAAP EPS guidance assumes for a gross margin?

I think we will see as I noted in Q4 that number was around 77. So indicated that we expect to have -- see some benefit from our implementation of the co-location transition. So I would expect that level or some improvement in the single-digits. So that would put us in the high 70% range.

And then what is your depreciation assumption in the EBITDA of guidance, you indicated that will go up.

Depreciation should run for the year right around 1.2 to $1.3 million.

Okay, thank you.

Thanks.

Your next question is from the line of Nick Pajwani.

Hi, thanks for putting me in here, can you throw color on the overage and what is the lift you got from overage in Q4. And also should we expect the tax rate to be 55% or so in 2009? And if you could share some more color on why is it so high typically we see 40% or so. Thank you.

Yes, in terms of the tax rate, we aren't giving 2009 guidance at this time. But the factors that drive that rate -- you will see this in technology companies, hosted software companies, sales force as an example I would use that has a relatively high rate and the driver of that is essentially the relationship between net income and permanent tax differences related to stock option exercises and stock option accounting. And so you will see it more as the stock option expense accounting literature changes changed in 2006 you are seeing this more frequently. Now that over time if the company I will give you an example, if a company revenue continues to grow, you would expect the ratio of those expenses to the revenue to improve over time and that would lower that tax rate. But again at this time we are just going to give guidance for 2008 on that. There was -- can you repeat, there was another part of your question that I may not have answered.

Yes, on the overage, what was the lift you got in Q4 due to overage?

That was -- we won't disclose the exact amount. We saw probably a 1 to $200,000 impact in the quarter. So it's been a fairly consistent run rate. It's grown a little bit each quarter. And it's probably not something we will see huge seasonal cyclicality when we started to discuss these kind of charges. It's fairly steady and grows a little bit each quarter.

Thank you. Lastly, just on Kasamba, I know we discussed this in a lot of detail today. But some of us were expecting a slightly higher revenue run rate for Kasamba in 2008. When your guidance now indicates it's going to be 12 to $12.5 million. Is that a function of the macro environment in which you see the B to C side or consumer side hit a little bit more. Do you anticipate any increases on the -- do you pricing pressure or is it just related or redesigning the website? Thank you.

This is related to unknown. You don't give guidance and sort of pick numbers out of the air. It's unknown. And we rather come back in a quarter from now and give some more color as we start to execute on our strategic plan. And I think that's what overall for the Kasamba business I will go back to what I wrote in when I talked about in my speech we will take a small amount of our cash flow from the core invested into this. We will need a couple quarters to play this out. We were excited about obviously we made the acquisition for a reason, for all of the reasons I once again spoke about in my speech. We don't want to go and say everything is wildly great and here is what it's going to be when we come with the numbers, we will come with the numbers.

Your next question is from the line of Jon Hickman.

Hi. Thank for taking my question. Great year, by the way.

Thank you, John.

I was wondering if you could talk a little bit more about the pay per performance. You have five company enterprise customers doing this now. Would you -- are you still giving a per fee per month charge? Or is it all per per performance? And if we talk again in a year, will it be ten customers? Or 15 customers? What do you think?

It's an interesting piece of the business. It's something talked about as a strategic goal of the company for several years which is you want to tie our value and the revenue we charge to the value we are driving for our customers and this is something that is now we are working on this for sometime, pay per performance specifically. We were starting to see some the hard work pay off from the sales team in these efforts and that we have -- we were comfortable enough with the results to share the number of customers that are using it with you. It's important to note that the fee structure is a mix because we want to number one share in the value as they grow and succeed. But we want to temper the volatility a little bit so that we don't see significant revenue swings. So the structure is two pieces typically. A base fee that is lower than what a normal base fee would be without pay per performance. Plus the fee we generate based on each sale. In combination you get I think a good mix that tempers the volatility but gives us a nice, consistent upside as the customer increases their revenue.

Okay. And the growth prospects here?

There are definitely more opportunities and customers that are interested in this kind of a model. It's not something where we have delivered that to every customer. But where it's appropriate. We found good interest in it.

We want to -- if you are look at the where we try to take the business overall, I think aligning the value of the chat with what is really truly created. Is where we are trying to move the company as much as we can. And so our sales guys and we have one person dedicated on the sales team who came to us this year and he has done a lot of these models from his previous history and where he worked in the past. And he is going out to key customers and saying let's convert you over. We think it's a better model. Allows us to capture potential growth rate that we never capture on just seats. We are pretty bullish is about it.

And the receptivity on the customer side is --

Good. Because if we can align it with what they are doing. We tend to work with outsourced providers so we will come in with partner, a call center partner who has the labor and then we will provide turnkey solution. It's a win there where they don't have to worry about resources and it's a win in which we are being paid on performance. So they feel comfortable that we will all be aligned such as selling quote-unquote software. I think it's good. If you look at the overall business, I think this is where we want to take the business as much as we can.

Okay. Thanks. My other question has been answered.

Your next question is from the line of Robert Breeza.

Hey, guys this is Matt [Timber] for Rob. Tim, the new casome but a metrics were helpful. Could you give us what they were roughly on a year-over-year basis for comparison purposes?

Well, at this point we aren't going to go way back into history and so we want to share with you what was happening in the fourth quarter. The fourth quarter did not represent a dramatic shift so I think those numbers while they were improved over time have been relatively consistent. I can't say that. Have sort of grown as that overall Kasamba business has grown.

Okay. One last question. In the you mentioned that western Europe was strong for you guys. Are you still kind of around that 25% international number and where do you think that would be at the end of '08? Thank you.

I think that split because the growth is strong there and we will not change dramatically meaning that piece is keeping up with the overall growth. We are continuing to see a lot of opportunity there. And investing more resources and hiring both sales resources and account management resources there. But I wouldn't expect that split to change dramatically.

Your next question is from the line of Paul [Kompel]

Good afternoon, guys. You know, with respect to your gross margin guidance, on a GAAP basis, Tim, did I hear you correctly you are expecting 72% gross margin for Q1 and for fiscal 08? Or did I get that wrong?

That was for Q1.

Just for Q1?

Yes. I didn't gave specific number for full year. But you should see flat in the down side case and -- some improvement continuous improvement over the course of the year.

And that continuous improvement has to do with the co-location agreement, is that correct?

That's the primary driver. Not the only thing we look at but that's the key driver in that cost item, yes.

And then you talked a little bit about a bit of an erosion in Kasamba. Some of it is seasonality, understand that. If you were to look at that right now, how much of that -- how much of that erosion in Q4 was really attributable to a decrease in spirituality versus some of these other initiatives not necessarily taking hold just yet. Is it possible to quantify that or talk around it?

It's a lot of their revenue is around that category . Obviously we -- as we make changes they there will be an impact in that. It's not a big enough impact for us to really care to be honest. It's not like we see it as something of a trend or some problem. We are making changes and we need a little flexibility in making these changes. I think myself being a share holder and share holders out there, I think we should look at it as we bought a platform that is a strong platform and one of the best platforms in the market today for doing this for providing this advice and we need flexibility in sort of making changes and experimenting because we have to get to our goal quickly. And we were moving very quickly. We made a lot of changes to that website even since we just bought these guys and closed in October. I don't think we should look at these little fluctuations as anything major. Our goal ultimately is to build this thing and have thousands of categories. And tens of thousands of experts. And that's our goal. And that's what we are focused on right now. We don't -- the things we change may have a 5% impact here or there, they aren't really important to us on our overall goal with this. In our core business obviously because that's the business that's stable. It has a lot of a repeat process to it. If we start seeing trends there, then those concern us. Not in this. This is more like a startup. This part. It's a startup that does $30 million in gross sales.

Right. Last question for you. At what point should we expect to see some linkages between the two? It's clear that you are talking your enterprise customers right now. When might we expect to see somebody really put a stake in the ground and say, yes, sounds like a pretty good opportunity. Let's try to marry some of the experts together and drive some transactions or conversions.

We are moving as quick as we can in our sales guys are out there. I don't want to give any expectation. But I will tell you the sales guys are excited about the opportunity and our customer base have these communities. If you go on any of our customer website especially on the technology, Telco side, not as much in financial services today. There is a little bit. But you seen them. You have been on these forum sites or go to whatever HP's website there is a big forum. They are looking at how can we empower these experts to really be connected to us. If they can give them away to make revenue streams, it seems like an interesting thing to them. I think we obviously talk to our customers before we made the acquisition and now things are playing out the way we expected them to.

And I don't want to hold you a time frame. Something you see developing in '08 or later than that?

No, it's '08. You guys can't see the internals of this company on a day to day basis. But like we are as a company strategically focused on this. This is not acquisition that's sitting in a corner. Our company is out to build an expert network.

Okay. Terrific. Thank you.

You have a follow-up from the line of Raghavan Sarathy.

Thanks. Quick follow-up. Tim, you said you are expecting 1 million run rate for depreciation and amortization (inaudible). And you give us the split between depreciation and amortization more like --

That comment was just depreciation for the full year. I think I mentioned around $1.2 million. The amortization of intangibles is about $2.7 million or about it-- $2.7 million for the full year.

Okay. On a quarterly basis it's --

Amortization tends to be flat or slightly declined over the course of the year. But fairly stable quarter to quarter. Where as depreciation will increase fairly significantly between the first and the fourth quarter over sort of consistently quarter to quarter because it's driven by some of the additional capital expenditures related to co-location. So the first quarter rate might be 150 to 200,000 where as the fourth quarter might be $0.5 million, I would use a ramp up assumption over the course of the year.

Okay. And then one book keeping question. So you indicated SMB revenue increase 9% sequentially. Can you give us some mix of Timpani and Contact Center?

With in the enterprise in terms of the booking the metric we typically give, I think I can run through it again is is about 60% of the deals were sales and about 85% of the revenue were proactive sales deals where customer support or service deals were the balance.

Okay. Thank you.

There are no further questions at this time.

Thank you very much, and we will see you on the next call.

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