LivePerson Inc (LPSN) 2008 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the LivePerson Second Quarter 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the call over to Mr. Bixby, President and CFO.

All right, thanks very much. Before we begin, I would like to remind listeners that during the course of this conference call comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The internal projections and beliefs upon which we base our expectations today may change over time and 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, please review 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.

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

Thanks, Tim. LivePerson delivered another solid quarter of top and bottom-line results growing over 9% sequentially, 59% as compared to the prior year including the impact of acquisitions, and 35% annual organic growth. We are very happy with how all three parts of our business are performing, as we continue to execute on our long-term strategy and near-term operational plans.

Given the challenging economic environment, this quarter's performance was particularly strong. In fact, this is our 27th consecutive quarter of revenue growth.

Thanks for joining us on the call today, and now I'd like to turn it over to Tim, who can take you through a more detailed operational and financial results, and then I will be here to take your questions with Tim. Tim?

Thanks, Rob. LivePerson performed very well through the midyear point in each of our three operational areas. We are on track to deliver a similarly strong second half and expect that our performance in 2008 will again place us within a lead set of public companies that have consistently grown their revenue line in excess of 30% annually and posted gross margins well above 70% and invest wisely in future growth while delivering current period cash flow. This is a club that we're proud to belong to.

We also believe we have a unique strategy and a track record of innovation that continues to place us in a leadership position; able to generate multimillion-dollar customer relationships serving the world's largest companies while supporting more than 7,000 clients of all sizes and tens of thousands of independent experts across the globe.

As we continue toward our goal of surpassing the $100 million revenue mark, I note that our stock trades at a roughly 50% discount to the average of our software-as-a-service peers on a market value-to-revenue basis.

Our belief in the Company's future, coupled with our current relative valuation against our peer group, supported our decision to repurchase almost $4 million of Company stock over the past two quarters.

Now I'd like to review in a little more detail the great progress we've made since the beginning of the year. We operated in three areas -- our business operations support both enterprise and small business customers while within our consumer operation, an expert network enables users to find, evaluate, and pay for personalized expert advice in real time in many categories.

Our enterprise group did great work in the second quarter delivering 11% sequential growth following on a first quarter that saw several implementations pushed out on the calendar, the second quarter experienced the reverse, where we delivered somewhat faster-than-expected and made up nearly all the Q1 revenue shifts.

Some of the Q1 impact does roll through the year because of the recurring nature of our license revenue stream, but the full-year enterprise expectation is for a strong finish.

We signed 48 enterprise deals in the quarter. This is the same number as in the prior quarter. We signed 10 new enterprise accounts as compared to eight in the first quarter. We signed new or expanded business with Sun Microsystems, Nestle, Harrod's Department Store in London, and the Booth Pharmacy also in the UK, as well as Leap Wireless.

We were also chosen as the chat provider of choice company-wide for one of our largest customers, a company that is a leading provider of systems, software, and services globally.

In terms of the new business that our enterprise group delivered, the breakdowns that we typically give you are as follows -- in terms of new versus existing customer expansion, new deals represented about 30% of enterprise growth in the quarter while existing customer expansions represented 70%.

In terms of sales and marketing focus as compared to service focus, about 70% of the new business in the enterprise was driven by sales and marketing business while 30% was driven by customer service focused business.

Overall, the average enterprise deal was about $60,000, down slightly from the first quarter and representing overall bookings right in line with both the first quarter last year and the first quarter.

We continue to see strong interest in our Pay for Performance business model for enterprise companies. LivePerson pioneered this concept. Over the past two years, we've created an operating model that is now far ahead of any competitor. We are able to bring a turnkey solution to an enterprise customer that can deliver significant, immediate, measurable revenue increases. We get paid for every incremental dollar of revenue that we deliver.

This model is distinct from our standard model in that the fixed base is lower, and we generate incremental revenue with every sale, and thus the potential for ongoing revenue growth in line with the business results delivered is greater. We have greater control over the channel and it's day-to-day operations, and thus greater ability to drive our own financial success.

Today about 6% of our enterprise recurring revenue is tied to the Pay for Performance model, and this is up from zero approximately 18 months ago. This model can become even more attractive in a recessionary market environment as larger companies that may be slower to hire personnel necessary to maximize the conversion potential of their site traffic. Our Pay for Performance solution can eliminate the need for additional headcount for our customers, as LivePerson's existing partner relationships are able to provide this labor.

[The over-expanse in the might otherwise fall] due to headcount pressure or hiring freezes can move forward, shortening sales cycles and accelerating revenue.

And, finally, our enterprise customers continue to encourage us with their interest in enabling their sites with access to our expert network, which is the engine of our consumer business. With the deployment already up and running on Sun Microsystem's Java.com and others in the pre-deployment stage, we now see independent confirmation from enterprise customers of the value proposition of integrating experts onto their websites.

A consumer who visits the Sun sites and seeks support in what is a fairly complex technical area now sees and option to chat with independent experts that are affiliated with our expert network. They can chat with them, seek advice, and then engage them from negotiated fee per minute. The back-end operations all flow through our consumer platform while the front-end, in this example, runs on the Sun and Java websites.

Our small business group passed the 7,000-customer mark during the first half of this year. What began as the core of the LivePerson offering many years ago remains a solid, growing revenue base for the company.

With 8.5% sequential growth in the first half and an expected 7% or better sequential growth expected in the second half of the year, this group's massive abilities compete against free offerings, lower-cost offerings, and even the enterprise offerings of other market players. With more than 200,000 companies in our target market space for small businesses, we believe this group has plenty of room to continue on its growth path.

Moving now from business operations to consumer operations, we continue to execute on our plan to dramatically improve our expert network operation in several ways. We integrate with the consumer and business URLs so that all activity for the company now centers on LivePerson.com. We transitioned the consumer hosting operations acquired last year into our new co-location facility on the East Coast so that all US server operations are now managed directly by our production team.

Consumer revenue has remained stable throughout all of these changes, which is quite an accomplishment given the speed with which we've redirected traffic flow, upgraded the interface, and rebranded the site itself as LivePerson.

We are now moving forward developing creative marketing support for a broader launch in the second half of the year, in line with the scheduled investments we discussed on our last conference call. As planned, we will begin expanding our marketing efforts in the third and fourth quarters and will update our guidance when we begin to see results from these efforts.

We are testing partnerships that will enable us to deliver our expert network resources not just on our own site but in partnership with established online brands with significant site traffic.

Overall, we are seeing the benefits of a strong portfolio of three product lines all leveraging a common hosting facility, R&D infrastructure in the industry of most advanced understanding of the benefits of real-time interaction and the value that can be generated by it.

From a financial perspective, we also achieved several milestones during the first half and the second quarter, specifically. In the quarter, revenue grew 9% sequentially. Our dollar growth exceeded $1.5 million in the quarter. This is a record amount for the company in our history, and this supported, as Rob mentioned, our 27th consecutive quarter of revenue growth.

Enterprise revenue in the second quarter grew 11% while small business grew 8% and consumer grew about 4%. If we look at the year-ago period, we delivered 69% annual growth, and if we adjust this number for acquisition impact, the organic annual revenue growth rate for the company in the quarter was 35%.

Gross margin began to show the improvement we expected to see as a result of operating leverage due to revenue growth as well as reduced hosting cost driven by our co-location transition. This is the first quarter of impact from the co-location hosting arrangement, which yielded about 40 basis points of improvement in our GAAP gross margin, and 100 basis-point gain in our cash gross margin.

Our network operations team that manages the hosting facilities is now fully staffed. As a result, we expect the rate of increase in that portion of our cost of goods to slow. This will support further improvement in gross margin as revenue grows.

Operational costs, overall, below the gross margin line were right on track with expectations. We spent a bit less than expected in sales and marketing, a bit more than expected in G&A, and we're right in line on our R&D spending during the quarter.

The ongoing operating leverage benefit associated with revenue increases was partially offset by an adverse currency effect as the US dollar depreciated against the Israeli shekel. This exchange rate has recently deteriorated at an historic rate similar to what has occurred against other major world currencies. Without that impact in the second quarter, we would have seen cash expenses total about $500,000 less, and income, that equivalent amount more.

While this decline stopped in June it has since recovered some of the lost ground. We continue to carefully consider hedging strategies that mitigate this risk. If there is no further change in this exchange rate from now until year-end, the impact on our full-year bottom line expectation, as detailed at the beginning of the year, would be an unfavorable impact of about $1.6 million, which is about $0.03 per share, and this is reflected in our updated guidance today that we'll talk about in further detail.

Our operating cash flow was very strong in the quarter. We generated $4 million of cash from operations. That was partially offset by our repurchase of company stock. This amounted to about $1.6 million since March 31st. And we also had capital expenditures of about $0.5 million in the second quarter.

Our close attention to accounts receivable and collections paid off in the quarter as accounts receivable declined representing a 15% improvement in DSOs from 38 to 32 days. This is a great job by the finance and sales teams on that metric this quarter.

Also impacting cash flow, going forward, we will begin implementing a transition of our US disaster recovery facility from managed hosting to co-location similar to our transition of our primary facility over the last couple of quarters. This will again entail a similar up-front cash outlay that is relatively quickly earned back to lower ongoing cash costs, and this will happen in the second half of the year.

Global headcount overall increased from 332 to 357 in the quarter. We've seen about a 13% increase in headcount since the beginning of the year, and we expect headcount additions will be at a slower rate in the second half than the first half.

In the third quarter, we expect to see revenue in the range of between $19 million and $20 million. We expect EBITDA per share of $0.04 to $0.05, adjusted net income per share of $0.03 to $0.04, and GAAP EPS between breakeven and a penny. Our share count, for modeling purposes, should be assumed to be 50 million shares in the third quarter.

We expect to finish the year with total revenue for 2008 in the range of between $75.5 million and $77 million. This puts us a bit under the range estimated at the beginning of the year driven primarily by the Q1 shortfall impact on the full year. If we begin to see some revenue impact from some of the consumer distribution testing in the second half, it may add upside to these figures in the fourth quarter, and we will update you on this progress on the third quarter conference call.

We expect the full-year bottom line to be impacted by the exchange rate impact discussed earlier, and to quantify that we expect full-year GAAP EPS of between breakeven and $0.01, EBITDA per share of between $0.19 and $0.21, adjusted net income of between $0.14 and $0.16 per share, and our share count, again for the full year of approximately 50 million shares.

On a modeling basis for taxes, we would recommend and estimate of approximately $0.5 million of cash taxes that we will pay during the year, and this is a relatively small amount driven by our ability to use NOLs between now and the end of the year.

For our expense margins, we expect, for the full year, a GAAP gross margin of 72% or better, and a cash gross margin of between 76% and 77%. Sales and marketing as a percent of revenue should be about 34% for the full year; G&A about 19% of revenue for the full year; R&D coming in at about 18% of revenue for the full year.

Essentially, the entire variance between the current income expectations and those from the beginning of the year is due to the dollar/shekel exchange rate impact. If the exchange rate continues to build on recent improvement, this impact on the full year would likely be lessened.

Revenue growth, overall, would likely be greater in Q2 and Q4 than Q1 and Q3, and this is driven primarily by the timing of enterprise implementations and expansion rather than by the calendar itself. The pattern in the first half of the year where we saw greater activity late in the first quarter, producing much higher results in the second quarter, will likely recur in Q3 and Q4.

Overall, the annual (inaudible) of organic revenue growth remains right in that 30%-plus range.

We expect capital expenditures to be less than $3 million, just slightly less than $3 million in the second half of the year and that, of course, represents the continued investment in hardware and software for the co-location facilities both primary and backup.

And that really covers our operational highlights and financial results, and we would now be happy to take any questions you might have. If we could ask the operator to rejoin the call and give instructions, that would be great.

(Operator Instructions) Nathan Schneiderman, Roth Capital Partners.

I have a couple for you here. I just wanted to be clear on the revenue guidance and the reduction in revenue guidance for the Q3 -- really, for the balance of the year. I just wanted to understand your thinking there -- why the reduction and is it -- were you saying in your comments that you effectively completed projects a little bit earlier during the June quarter than you thought? Some of the revenue possibly came out of Q3 into Q2? Is that the reason? Or just if you could explain that in a little more detail.

Sure, so there were two points there that we're trying to make. One is the pattern of revenue on a quarterly basis, and, two, is the amount of revenue. So given that we now have Q1 and Q2 actuals and while we were very pleased to have made up and really exceeded our expected performance in Q2, it made up for much but not 100% of the shortfall in Q1.

As you remember, some of the shortfall in Q1 was driven by deals that were pushed out, and then those deals go live, so even though they go live in Q2, and we generate a higher Q2, that portion that's out of Q1 is out of the year and, obviously, does not recur.

So we were able to make up some but not all, and our view of the second half is I think quite strong, which enabled us to really adjust the guidance, I think, just a relatively small amount. The top end of the guidance now is the equivalent of the low end of the guidance previously, so it's essentially about $1 million adjustment so the primary driver is really Q1.

The pattern, which is sort of the second point, with Q1 and Q3 being lighter, Q2 and Q4 being heavier, is -- the important thing there is it's not really a seasonal impact. It's much more of just timing of deals and the actual enterprise customers that we're dealing with that drives those revenues. So what you'll see, I think, is an overall growth rate for the year that's just slightly under the original guidance but a little bit more volatility between the quarters, a little stronger growth in Q2 and Q4 offsetting Q1 and Q2 but, overall, right around a 30%-plus growth rate for the year.

Okay, and then -- that was helpful, thank you. A question, too, on the new guidance for EPS of $0.14 to $0.16 less. Last quarter, I believe, you had that at $0.20 to $0.21, so it's a fairly large reduction there, and I just wanted to make sure I understood it, because I understand the FX impact during Q2, though it looks like things have already adjusted pretty well. So can you just explain the adjustment there and what you're thinking? Why such a reduction on the EPS side?

Yes, it's really a direct tie to the two factors we spoke about. So we adjusted the revenue -- that has a bottom-line impact. We talked about the shekel exchange rate, that has a bottom-line impact, and then I think you are referring to adjusted net income. That obviously takes into account taxes, and so the tax assumptions will -- on a book basis -- will change given that those other two drivers lower income before taxes. So the combination of those three drives the full variance. So exchange rate, revenue adjustment, and tax impact.

On an EBITDA basis, you'll note that the change is less because you don't have the tax impact there.

Okay, and to be clear, are you expecting a negative FX impact versus your prior view in the second half of the year, or only a Q2 impact from the significant shift intra quarter?

We're not expecting a decline as compared to the second quarter. We are expecting -- you know, our assumption now is the current history sort of continue so that, as compared to our original guidance for the year, which reflected more historical rates, we expect that will continue. So if you've been tracking the rates the past month or so, we've seen some improvement. If that continues, then the impact will be less. If it settles back into the Q1 and Q2 rates, then the impact will be right in line with the adjusted guidance we've given.

And, I guess, final question area for you -- I guess the main variance on the expense side versus my model was in cost of revenue, and I was wondering if that came in above your internal plan and, if so, was that more on the Kasamba side or the LivePerson or what exactly drove that?

To answer the second question first, none of it is driven by consumer. The consumer cost of goods are quite lean, predictable, and fairly steady with revenue. The driver there is -- Q2 is really the -- as you may recall, we accelerate our transition to co-location. Originally, it was sort of a Q2, Q3 event -- or I'm sorry -- Q3, Q4 event. We were able to get it done in Q1 and Q2, so Q2 represented sort of the maximum expenses from that transition and not yet seeing much of the savings. So you only saw a slight improvement in the cost of goods, but an improvement nonetheless.

We also adjust compensation company-wide in the second quarter, so traditionally the second quarter expense increase is more dramatic than the other three quarters. And so given all of that happening in the second quarter, we were quite pleased that we were able to improve gross margin in light of those impacts.

John Pinto, Brightleaf.

A couple of questions -- one is just a clarification, Rob, Tim, on CapEx. You had talked about the second half -- $3 million, did I understand that right?

Yes, that's right. It should be less than $3 million, but that's a conservative estimate.

Okay, so that would put the year -- I'm just trying to make sure I understand that -- wouldn't that put the year -- you did $3 million in the first half, that would put you about $6 million for the year, right?

The first half was a little bit less than $3 million.

Okay, just wondering, I guess, if there was some extra CapEx. I think you said before, about $4 million for the year. So there was a couple of million dollars there more. Just kind of what is that on?

Yes, there's a couple of things to note there. On the books, about $3 million went through -- a little less than $3 million went through in the first half, your number is correct. Because of our approvals for payment and actual cash payments, there's some flex there. So we'll likely approve $3 million but we may only pay cash for $2 million. But that $5 million to $6 million number, I think, is a pretty conservative estimate.

Is it just more of the co-locations or are there any projects in there? Is it for Live Advisor or --?

It's really driven by co-location. So we're doing two things. We're growing the existing co-location environment with, really, growth at this point. Most of the heavy lifting on the initial implementation is done, as well as the expenses. But that continues to grow, over time.

The second is moving pretty quickly on disaster recovery transition will drive the balance. And that's really the vast majority of the spending there.

Okay. On the gross margin side, how should we think about the benefits of co-location for Q3, Q4. Will we start seeing those come through then, or should we expect that's being pushed off a little bit until next year?

I think we should see, you know, we saw some improvement this quarter. It was small. I think, you know, flat to small improvements each quarter here out we should see. We could have quarters where it's flat just because when you're in these transition quarters from one system to another, there can be some double spending. So because the co-location went, actually, so well, we accelerate our plan to make the disaster recovery transition. It's good as that is meaning we're going to get more savings when they're both done, but there's more transition happening in 2008 than previously expected.

So for the rest of this year, the improvements will be slight. On the other end of it, we definitely expect to see the gains that we laid out to folks on the call when we initially did the co-lo, and that was in the 2% to 4% impact on the gross margin.

And that 2% to 4%, that's from a base of 74? Is that right?

No. From where we started making the changes, so the 72 range.

Okay.

On a GAAP basis.

On a GAAP basis, okay. So right now, I guess, when you're saying quarter-to-quarter improvement, it's a sequential quarter, right?

That's right, that's right.

And then on -- just so I understand the quarter business, I just couldn't catch it. I came on a little late. Did you say 7% sequential is kind of what we should think about for the back half?

It's going to be more heavily weighted to Q4 than Q3 -- so the overall revenue, between $19 million and $20 million in Q3. And then that will imply a stronger Q4. We have a pretty good view of the calendar at this point, and so there's things happening in September, October, that are contractual, but that obviously have a much greater impact on Q4 than on Q3, and we have a pretty good visibility into that right now.

Okay. Yeah, I was just talking about the core business ex Kasamba. I know the 19, 20 is the whole company, right?

That's right. Within these numbers, the assumed growth for consumer is minimal, flattish -- flattish to slightly up. So the growth driver is really the core, and we were -- we're specifically not giving numbers on consumer growth -- assumptions on consumer from the efforts that we'll be making until we have real hard data to support it.

Okay, fine. And unless there's other questions, I have one more question, which is on Live Advisor. If you can just give us an update on how you were able to use the Sun relationship and what's on the horizon now? Maybe, Rob, if you can kind of give us a thought process what is on the horizon next?

We implemented on this Java.com website, there are experts from our Java category. So if you go on that website, you'll see there are Java experts that are there and also on the LivePerson.com website, and they're utilizing that as a way to do support around the installation of Java servers and Java on the client side. So we are working -- the enterprise group is the group that sold that deal. It's a revenue share with Java, with Sun, and they're working on more deals like that with their enterprise base, and then we're just focused on, really, expanding the categories and expanding the amount of media buys we do around different categories in the Q3, Q4, and also around launching the brand. So those are the things that we are going to be focused on, and you'll see some more changes to the website. And so we're pretty much on plan for what we wanted to do in the latter half.

(Operator Instructions) Rich Baldry, Canaccord Adams.

Denise Rush for Rich. I was hoping you could talk a little bit more about the new accounts that you have. Have you seen any flowing in the sales cycles, and then also could you talk a little bit more about the partnerships that you're targeting? Was that specifically for the consumer business or is that an enterprise partnership? Thanks.

I'll take the first one on the sales. On the sales side, what we saw really driving the quarter, and this really, of course, in the enterprise group -- continued strengthening and growth in financial services, which I know is something everyone is pretty focused on, so we're pretty pleased to see that that has actually been the strongest grower in terms of our overall revenue mix over the past two quarters. So that continued.

Continued expansion in the UK where sales cycles historically have been a little longer in the US because they tend to be the largest telcos and financial services firms, so we really started to see some strong payoff there in Q1 and Q2 out of the UK.

And those are really the primary drivers. Sales cycles don't seem to be shifting much at all. Pay for Performance, I think, is kind of offsetting some of the potential weakness where it's given us another real nice tool to deploy when we get pushed back on -- "I think your product is great, and the return looks great, but I need to out and hire labor to make it work." That's really given us something to really counter that and get people up and running. So those are really the key drivers in the quarter.

And then, Rob, if you want to cover the partnership side.

We're focused on, right now, the enterprise team on taking the technology and the marketplace that we have for experts and going out to the basic customers. We went out to Sun Microsystems, obviously, it seems like our technology customers who already have existing communities where they're trying to leverage their base of customers to help each other, they are most receptive to creating an area in these communities in which experts that can be rated and reviewed can actually give advice on the products that the company sells.

And as we said before, I think long term customer service and how it's provided on a website, it's far better for a customer to talk to someone who is an expert, who has used the product, versus a call center operator who has been educated on how a product works that they may have never used. So we're seeing some good traction in more of the software/hardware to start.

So we'll give more updates as more of these deals come through.

And there are no further questions.

Okay. Thank you for the Q2 call, and we will see you after the Q3 call. Thanks.

Thanks, everybody.

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines.