LivePerson Inc (LPSN) 2008 Q3 法說會逐字稿

Good afternoon. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the LivePerson third 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) Mr. Tim Bixby, President and CFO, you may begin your conference.

Thanks very much. Thanks for joining us. Before we begin, I would like to remind our listeners that during the 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. And 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. Good afternoon, everyone, and thank you for joining us. We again delivered an extremely strong quarter. During the third quarter of 2008, we generated record revenue of $19.4 million, up 51% from a year ago and up 4% sequentially. Revenue, excluding our consumer service, increased by 30% as compared to the prior year and 6% sequentially quarter-over-quarter. EBITDA per share was $0.05 in the quarter, at the high end of our guidance range.

Q3 was another solid quarter, as we continue to execute both tactically and strategically. Our core business continues to grow for both our SMB and Enterprise product lines. Although there are macro environmental events that are creating uncertainty for both businesses and consumers, the online channel seems to be holding steadily. Many of our customers have continued to focus on investing in their online marketing and support strategies. Just today, the Wall Street Journal noted that more than 50% of online retailers expect at least 15% sales gains in the holiday season this year. As the migration of retail, consumer, and business activity to the web continues, we believe we are well positioned to provide services to help consumers and businesses communicate and share knowledge in real time with each other.

We began our general brand building and marketing campaigns for our consumer service in the fourth quarter. While we don't yet have sufficient data to draw conclusions, we expect to gather that data over the next several quarters and will report that accordingly. Our consumer service provides a third revenue stream for the company, while also enabling us to broaden our footprint strategically in the market.

Our platform enables the real-time connection to consumers and business online and now we are addressing the needs of both groups, both businesses and the consumers. With that expanded view of our market, during this quarter, we started to implement our new branding. If you go to the www.LivePerson.com website, you will see some changes that reflect what we have done over the quarter.

Since I assume many of you are in front of a computer, let's go through the LivePerson.com website, and I'll give you a brief overview of some of the changes. I'd like to start from the main navigation of the home page where we highlight some of our top categories. So technology, counseling, education, health, business, and spirituality are where the majority of our revenue comes through today. A high percentage of our traffic navigates through those categories and also ends up using the search box to also gain access to experts.

Our search is a fairly sophisticated technology that takes into account the experts' ratings, their reviews, their profile, data, and even past chats that they did with consumers, and that's how we return the search results to the consumer who's trying to find an expert.

Another key website goal is to showcase high-quality experts who can provide real-time personal advice on a wide array of topics. You can click on the Meet the Experts [card] on the top right-hand of the side of the search box, and you will see a short video of some of the featured experts. Viewing these videos is I think a great way to understand the various types of experts available on our platform today, learn what makes them experts in their area of expertise, and see their passion for what they do.

I would like to highlight one. There's a woman called Jamie Lynn Parker who she is a creative writer on our service. And I think she tells a very inspirational story of how LivePerson's become an integral part of her pretty amazing life. And once again, there's about five experts there today.

Below the main areas, you'll see other featured experts and also a listing of some timely topics that link to expert categories. Some of the topics that are there right now and they do change often, but the ones you'll see there today are balancing your budget, hottest fall fashions, developing a work-life balance, preparing for standardized tests, avoiding foreclosure, managing your next career move, which I assume a lot of people are looking at today, and I need help with immigration issues.

We also have some articles that the experts are writing, and we're tying those articles to the actual expert. So you'll see on the right-hand side, one that says the life of a stylist on LivePerson and also surviving the credit crisis.

So basically our goal here is to feature as many of the experts as we can and tell their stories because we know from a consumer standpoint what they're trying to do is understand why are experts truly experts and why should I pay for the advice.

Along with the general changes I just described on the website, we're also testing some online and offline marketing campaigns. Once again, these campaigns are based around telling the stories around some of our featured experts. We're running campaigns on both national radio and we're doing some online banner ads in different sites like Ophrah.com, Prevention.com, and sites that are predominantly focused on women today.

We're many -- we're running a bunch of different tests during the quarter. And through these tests, it will basically give us the focus on where we should spend our marketing dollars in 2009, around the consumer initiative. So I'll give you more update on the spend and also what's happening with the results in the upcoming conference call, obviously on Q1 -- Q4 during Q1.

If you're interested in seeing and hearing any of the campaigns that are running, feel free to e-mail me at Robert@LivePerson.com, and I can send you actually some of the radio ads, if you haven't heard them already, and some of the banner [creative].

From an operational perspective, on the consumer side during the quarter, we completed the migration of the consumer marketing group to the New York offices, and also our support and product teams are now fully integrated, and since January the folks from Kasamba have been integrated into our offices Televiv. So I would say we're pretty much on the far side of integrating this part of our business into the entire company.

What I'd like to do now is turn a little bit to the Enterprise and Small Business groups, and Tim will give a more detailed view of everything, but I like to highlight I think one really interesting program that the Enterprise group is running called Pay for Performance. So under this program, which I think is fairly unique to our offering and to our company today, we supply the technology bundled with the chat labor and we do this with a partner. So we have a partner who provides the labor, we provide the technology. And what we do is we actually share in revenue that is generated by our customer during this program. Sow hat it really does, it really aligns us with our customers. As they grow their revenues, we get a cut of those revenues.

The other thing is I think it really creates an opportunity to increase revenues more quickly than in a traditional deal structure because we have control of the labor with our partners. What we're seeing is a lot of traction in this model in the subset of customers like our telecommunication customers where there's a really well-defined, let's say a lifetime value. So a DSL consumer is worth X amount of dollars over their lifetime and it's easy to measure that in revenue share against that.

This program was started early last year, and by Q4 it will account for about 10% of the overall revenues in the Enterprise group. So it's really starting to take hold now. And we do have dedicated resources that are selling this and implementing it at the company.

The SMB group also continues to grow at a nice pace, and it's continually expanding its feature set and going after a much broader set of products which is obviously chat, e-mail, voice, and the knowledge based [F&Q] markets. Once again, they're doing a great job right now and I'm creating a lot of opportunities within customers and doing a fair amount of increasing of seats and product upgrades within the base. And I think the strategy that we put in place a couple years ago, which is creating more of a suite of communication products for this Small Business base is really paying off right now. So we're very pleased with the results of that group.

So we're very pleased with the overall results of the company and feel that we're well positioned to capitalize in the long-term opportunities that lay ahead. And I think that the nature of how we run our company with a balance between being innovative and financially sound serves us in whatever macroeconomic environment we face. I think the beauty of what we have built and especially since I think really 2001 is we don't have to change our strategy in the face of a changing economy. We built a very strong business model and it serves us whether the economy's booming or not doing so well.

And so our nature is to really focus on five guiding principles, and I'd just like to spell them out and then turn this over to Tim. One is, we believe cash flow is obviously king and there's nothing more comforting than the ability to generate cash year-after-year as we have since 2001, and this focus has enabled us to have some of the highest operating margins in the entire software-as-a-service sector.

The second thing is, we develop and nurture a very strong customer base. We work today with many of the world's leading brands, including Bank of America, Apple Computer, or just Apple as they're called today, Verizon, and dozens more like those big names. And during tough times innovative leaders like these companies, they thrive, and even gain market share, and they do that by continuing to invest in high ROI solutions like ours.

And I sort of look at this as all boats sort of rise with the tide. If they do well, we tend to do well too. So we're continuing to expand even in these financial services companies because they are leaders in what they do.

The third thing is we have a very strong business model. More than 85% of our revenues are recurring. Our gross margin exceeds 70% and it improved this quarter, and our cash flow is strong. This year we'll generate about $9 million in operational cash flow, even while we're investing a little bit of cash into the consumer initiative, and we've also had some impact of the exchange rates in our Televiv operation. And with that, we're still generating I think very strong cash flow.

The fourth thing is we retain strong people. So being a software company, our people are really what matters. And our culture attracts talented, high performers and enables them to contribute to their full ability and becoming better at what they do every day. In the end, it's their passion and their smarts that helps us grow and become a better company. And I think everyone here also has that balance of being fairly innovative and also being smart about the bottom line.

And finally, we don't lead. I mean, we don't follow, we lead. And we lead by innovating. And we've shown that in the products. We've done like Proactive Chat. And today we're the leader in that area and that product line has obviously grown considerably in the last four years since we invented it. Even though we hear competitors go out on the market and even some of you have reported about these competitors, they're going to take our market and they've got Proactive, for some reason they never can quite get it right. And that comes to the part that we invented it, we understand it, and we continue to lead with it. And what this does, it really serves us that we've grown with the compounded annual rate of 40% for the past four years.

So I'd like to end it with my grandfather, not to get sentimental, who just turned 100 years old this year, has a great saying. He says, if you're running a race and you're following someone to the finish line, you most certainly couldn't win. So I really believe this is an integral part of what's going on in our business today and how I think we're going to be successful in the future and that's how we're going to win.

So with that, I'd like to turn the call over to Tim, and I will take questions after that.

Okay. Thanks, Rob. We'll dig into the numbers a little bit and then do a Q&A at the end.

As Rob mentioned, we did, even in a fairly unpredictable market environment that we're all looking at right now, LivePerson delivered results for the quarter, right in line with our expectations on all the key financial measures, including revenue growth, gross margin improvement, EBITDA per share, and GAAP EPS. The bottom line measures even at the high end of the range. So we're pretty pleased with that in the third quarter.

In terms of Enterprise deals, we closed 49 new deals in the quarter. That was right in line with the 48 in Q2 and again the same number, 48, in Q1. So that's a decent performance on that metric, and a job well done by the Enterprise team. We signed 11 new names with Enterprise accounts. That's up one from 10 in the second quarter and up a few from eight in the first quarter. And we signed new or expanded business, as detailed in our press release, with a number of large players, one of the largest US cable providers, the world's largest mobile phone maker, another deal with one of the world's technology management consulting leaders, one with Quest software in the Amir region. And a fair amount of expansion with Verizon, with AT&T, with National City, as well as with the world's leading theme park operator.

We feel pretty strong and confident in the Enterprise sales team and we've actually increased the overall rep count from 15 to 17 in the quarter. And so we have some new folks on the team and will look forward to them ramping up over the next couple of quarters and becoming really productive reps.

We'll turn now and break down the Enterprise deals for you before I go into a little bit more about the Small Business results. In the Enterprise group, the deal splits, in terms of revenue for the quarter, were between new customers and existing customer expansion fairly heavily weighted towards existing customers expanding. And that's not surprising in the current environment. About 80% of our growth in the quarter came from existing customers expanding the LivePerson footprint and about 20% of the growth from newly added customers.

In terms of the breakdown in revenue growth for the Enterprise between sales and service, again, heavily weighted toward the Proactive sales side of the equation, with about 85% of our growth coming from sales and [proactivity] versus 15% from our customer service oriented product.

Average deal sizes overall for the quarter $70,000 annualized. That's up from $60,000 in Q2 and right inline with about $65,000 in Q1, up a little bit. Deal sizes for new customers, about $90,000 in Q3. That compares right inline with the same number in Q2 and down slightly from $110,000 in Q1. Existing up-sell deals, about $65,000 annualized and that's up from $55,000 in Q2.

Proactive sale deals isolated, $95,000 average deal size, down just a little bit versus $105,000 in Q2. And service-based deals $30,000 average deal size in Q3, right inline with the same number, $30,000 in Q2.

Enterprise sales, as Rob mentioned, continue to benefit from the Pay for Performance model, and we do see that continuing to grow as a proportion of sales. And by year end, as Rob mentioned, we should be right around the 10% mark, as a percentage of our overall Enterprise revenue.

Small Business group, now serving more than 7,000 customers, is on track to surpass the $2 million per month revenue mark by year end, which is another great milestone for that group. Growth in the third quarter was about 4% sequential, a little lighter than in what was really a terrific Q2. So a tougher comparison. And we're still right on track to hit the full-year plan that we laid out almost a year ago for this group; so they've been performing well.

Consumer revenue was just under $900,000 per month in Q3 and was fairly steady month-to-month despite some pretty drastic pressures on consumer spending in the macro environment as well as a nearly complete re-launch of the site as Rob highlighted. So we saw fairly minimal attrition impact there.

Overall, revenue grew 4% sequentially, and that supported what is our 28th consecutive quarter of revenue growth. Enterprise revenue in the quarter was up 7%, while small business grew a little more than 4%, offset by the consumer decline, which is just a little less than 5%. If we look at the year-ago period, we delivered 51% annual growth. And if you adjust for just business operations, annual growth rate was right at 30%.

Our gross margin overall continued to show the improvement that we expected to see as a result of two things, operating leverage due to revenue growth, as well as reduced hosting costs driven by the transition to co-location that we began several quarters ago. Gross margin improved by 120 basis points as compared to the prior quarter, to 73% on a GAAP basis and is running at 77% excluding the non-cash expenses that impact gross margin.

Operational costs below the gross margin line, again right on track with expectations and essentially did not increase from the prior quarter. So a nice growth in revenue without any material increase in cost. We were able to invest more in sales and marketing in the quarter and offset that increased investment through a little bit lighter spending in R&D and G&A as compared to the second quarter.

We did increase our sales and marketing spending plan for Q4 as we discussed on the last couple of quarterly conference calls, such that we expect to expend about $1 million incrementally on marketing in support of the consumer efforts in the fourth quarter if you compare to the run rate of the prior quarters.

From a cash flow perspective for the full year, what we're essentially doing is taking about $4 million from the cash flow of the business operations and investing that in support of the consumer efforts, and that's about $1 million quarterly run rate. And again, that's quite a -- fairly in line with what we've talked about for a couple of quarters. If we look at just the fourth quarter, as we noted, the spending rate's a little higher as we rolled out some new marketing programs. That incremental or investment number's right around $1.8 million.

As we discussed last quarter, the deterioration in the dollar-shekel exchange rate in the first half has created a little bit of a headwind for expense management. However, the currency has recently moved more favorably and is a little more volatile to the positive side. So now we're optimistic that the impact on the full year will be somewhat less than the $1.5 million we forecast last quarter. Despite this impact, careful expense management has enabled us to reduce certain planned operating costs over the back half of the year, such that the vast majority of this impact should be offset by spending reductions and that our total operating expense for the year will be right inline with our original internal plan set at the beginning of the year.

Our operating cash flow is strong in the quarter. We generated about $2.8 million of cash from operations. And from a cash flow perspective, this was offset by capital expenditures of $2.3 million, and that was related primarily to the continued build-out of our primary hosting facility as well as our disaster recovery facilities now within a co-location environment.

Accounts receivable remain steady as a percentage of revenue as collections continued right inline with historic norms. And overall our global headcount increased at a slower pace in Q3, from 357 at the beginning of the quarter to 369 at quarter's end. And we expect that net headcount additions from now until the end of the year will be minimal, greater than zero, but definitely in the single digits.

In terms of financial performance for the fourth quarter, we expect to see total company revenue in the range of between $20.0 and $20.5 million. We expect EBITDA per share in the range of $0.04 to $0.05. And we expect adjusted net income per share between $0.03 and $0.04, and overall breakeven GAAP EPS. Share count should not change materially, should be right around 49 million share -- fully diluted shares for the quarter.

Sales and marketing expense, as I noted a moment ago will run higher in the fourth quarter at about 39% of revenue. And this -- that's compared to 34% in recent quarters, and that's due primarily to the incremental $1 million that we spoke about in relation to consumer marketing initiatives. Outside of that sales and marketing change, R&D, cost of goods, and G&A will -- are expected to remain in ranges similar to recent quarters, relative to revenue.

We expect to finish the year with total revenue, therefore, in the range between $75.0 and $75.5 million. For the full year, we expect GAAP EPS of right around breakeven, and that's subject to the tax impact that we'll be able to ascertain very closely at year end. Because we're around breakeven, that can be a little more unpredictable. But in terms of cash impact, there should be an immaterial impact on our cash flow from taxes.

EBITDA per share, we expect to be between $0.17 and $0.18 for the year, adjusted net income between $0.13 and $0.15, and share count for the full year also right around the 49 million count mark.

For expense margins, for those of you who are building out models, we expect for the full year a GAAP gross margin of 72%. This is for the full year. And a cash gross margin, excluding non-cash items of about 76%. Sales and marketing is expected to come in between 35% and 36% of revenue, G&A right around 20% of revenue overall and R&D in the range of about 18% of revenue.

We expect CapEx to be less than $2 million in the fourth quarter, which would put us at approximately $7 million or maybe a little bit less than that for all of 2008.

We will, of course, continue to closely monitor the spending environment for our existing and target business customers and we'll carefully review our hiring and spending decisions accordingly to ensure that we continue to be in a position of strength during this period. We continue to generate positive cash flow. We have nearly $25 million in cash on the balance sheet. We have no debt. And we have invested aggressively in the past two years in significant hiring, our co-location hosting infrastructure, as well as R&D innovation within our product lines.

With a recently added third revenue stream driven by consumers rather than businesses, I think we're now in a position where somewhat more conservative investment rates will not handicap our progress to expand our customer base and continue to innovate our product lines. One side benefit of a more challenging economic environment is the increased focus of businesses on their most cost-effective channels to retain existing customers and to expand their customer base. The online channel can be the most cost-effective way to accomplish this. Consumers, likewise, may actually increase, in some cases, their online activity when they feel they are able to access the best value.

In all cases, uncertain times can actually increase the likelihood that consumers will more than ever seek out expert advice from both businesses and individual experts alike. Given these and other macro factors, growth for the overall hosted software solutions market for 2009, based on current analysts' estimates for many peer companies, look to be in the 20% to 25% range. So the overall prospects for growth for the industry as a whole are strong.

We, of course, expect to give our initial view of 2009 financial expectations as is our usual practice, on our next conference call, revealing our Q4 results.

And that covers our operational and financial highlights. And now, if, Michelle, if you could re-join the call, and we'd be happy to take any questions that our participants may have.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Richard Baldry of Canaccord Adams.

Thanks. Can you talk a little bit about the spending on the consumer side, whether you view it as likely to [go] coincident with the revenues it would generate or is there sort of a lagging effect because it's more of a branding effort versus a direct sort of keyword or is somewhere in between those two?

It's -- there's some that's just brand related, and I'd say it's more just a mix right now and then there's some that's tactical and are clicks and keywords. And so we're sort of doing a mix right now just to test what gets the better reaction from the consumers. So it's a mix right now.

In terms of the Enterprise deals, you held up the wins in the quarter versus prior quarters, where we've heard some other companies say that they really saw that fall off in -- certainly in the last month of the quarter. So could you maybe talk a little bit about linearity and then maybe verticals within that, whether you saw any particular strength or weakness in different verticals?

Yes, I think a couple of observations there. I think, in terms of the number of deals, yes, you're correct, it did hold quite strong and we were pleased by that. In terms of the mix, one notable item I think was a shift of the mix toward existing customers. And I think that is -- it's probably a mix between some just natural volatility in that number. It -- any time it swings back and forth and we see some shift in that number.

But I think our reps are definitely seeing where an existing customer with an understanding and supportive live person is going to be a little more receptive in these times than a start-from-scratch deal. And so we're taking advantage of that and rally focusing our bets in that way. We have seen -- it's very anecdotal at this point. I've seen a couple of occasions where a deal that we may have gotten three out of four signoffs, where a year or two ago or even three or four quarters ago, that fourth signature would just be a given in terms of approval for a new deal. We've seen a couple of those where we are seeing delays, where someone just says look, the deal makes sense, the ROI's terrific, but I'm just not cutting it. I'm not going to cut that check until January, for example.

And so I think while we're not -- we're not immune to those -- that sort of slowing and we're working that into our expectations accordingly. It's not been highly concentrated. It follows, I think, in line with our revenue breakdown. So it's a little more likely to happen in financial services and retail. We're not seeing much, if any on the technology side or on the telecom side.

Then in terms of sequential guidance, if you looked forward or if -- sorry. If you look back, typically Q4 is a pretty heavy usage quarter, all in from Enterprise, we'd assume also on the consumer side now. So I'm sort of curious about the sequential guidance. It's actually inline to below what you've done from Q2 to Q3, and I would have expected it to be up from there. So you think that's more of a conservative stance or is there something more driving that?

I think it's, while we're definitely conservative in general and slightly more conservative given the facts on the ground over the last three or four months. We are seeing some slowing in some larger deals. And so I think where we would, perhaps, have factored in a little more upside due to timing, following that Q3-Q4 pattern, we've really not given -- we're not giving ourselves any credit for that. And that's not to say they're -- our estimates are artificially low. But I think it's less likely that we'll see that kind of a potential upside deal in this -- certainly not in this quarter. So the pattern, I would say, is broken for this year. But that could be just a 2009 event and we'll see how that pans out for -- I'm sorry -- 2008. We'll see how that pans out in 2009.

Thanks. And I'll finish with sort of a question on the cash balances. I think you still have an outstanding authorization for a buyback. So given where you're sitting, where would that look in terms of attractive places to deploy your cash versus saving for a rainy day, if you will? Thanks a lot. Bye.

I think on the repurchase that's correct, we have an authorization to spend up to $8 million by -- through the end of March the approval is effective for. We've already spent about half of that, mostly in the first and second quarter of this year. So it's obviously something we think is a good use for some of our cash, but we've been more focused on things where we can really drive the return and not be quite so subject to the market.

So I think it's, on the one hand, on the other hand analysis where we look at the consumer opportunity to invest. We look at innovation and that tends to be an R&D or technology investment. And then the repurchase, I think, is really number three after those two.

Thanks.

Thanks, Rich.

Your next question comes from the line of Richard Fetyko of Merriman Curhan.

Good evening, guys.

Hey, Richard.

Hi, Rich.

Just a couple of questions on the Pay for Performance deals. Sounds like you're -- it makes sense that you're getting some attraction there. It seems like there's no downside for the client there, really, only upside. As a portion of new Enterprise deals, you announced about 49 that you closed in the quarter. How many of these were Pay for Performance deals? I mean, I know you said 10% of Enterprise revenue will be Pay for Performance based by the end of the fourth quarter or so. But I was just curious as a portion of new deals what it represents.

Low single digits. So two or three of those, let's call it, were new deals. But we've seen quite a bit of the makeup of that 10% that we mentioned by year end, quite a bit of that is from clients who were -- who started out with several quarters ago on Pay for Performance, as well as a couple who were longer term customers whose model we switched from the basic business model to a Pay for Performance. So we really got all three types, brand new, somewhat older, and then people who have been on both models. So we're getting some good data as we see how each of those three types progresses with the PFP model.

And when you say 10% of the Enterprise revenues will be Pay for Performance based, you talking about Enterprise revenues that's basically the business segment less the SMB revenue?

That's right.

Okay.

That's right. So, yes, so overall revenue breakdown, if you just take a snapshot of the year, about 85% is business and about 15% is consumer. And then of that 85% business, about two-thirds of that is Enterprise. And so the 10% applies to that, that two-thirds business portion.

Okay. And with respect to the marketing increases in the marketing expenses for the consumer segment that you're committing in the fourth quarter and going forward, perhaps, what would you guys sort of consider a success? What are looking for, a lift in revenues sequentially of 2 to $3,000, perhaps, would be satisfactory? How would you gauge the success or the target that you're -- the ROI that you're placing on this $1 million in marketing spend?

It's kind of two-fold. I mean, one is there's a pure -- we look at the return on investment and currently we get about a -- if we look at the keyword buys we do, we get about a three to four X return on keywords. So we're just looking at each channel that we're doing and then saying, okay, how is it performing from a return on investment from the traffic we're driving from it. So that's kind of how we're gauging it today.

There's obviously, this service isn't really known by too many people, except for the basic consumers who use it today. And so there's a brand building portion to it that I don't think is 100% measurable, and so we kind of accept that. But that's a small portion in the direct banner buys and keywords and stuff like that.

Right. What was the marketing spend for the consumer segment in the third quarter, so we can compare?

The run rate in Q4 is about $2.8 million.

Okay.

And that's a million -- I'm sorry. That's the cash investment rate. But in terms of -- let's see.

The $2.8 million in the fourth quarter just marketing online marking or offline marketing alone?

Yes, it's about 400 -- we spend about $450,000 a month on our buys right now, when it comes to predominantly keyword buys.

Okay. So is it fair to say in third quarter you spent about $1.5 million on marketing expenses or so?

Robert LoCascio Yes.

And you're taking that up by about $1 million or so?

Exactly.

Right. And that's all in -- some of the million -- the pure out buy on media is about $700,000. And then there's another 300 in different things related to creative, the website. There was a lot of heavy lifting on the brand side for Q3 and Q4 that won't -- I mean Q4 that won't continue; it's sort of one-time fees. But it's about $700,000 in additional media we're buying between radio and online.

And that $700,000, what you're saying will not necessarily recur, or some of it sounds like it will, right?

It depends. I mean, we're -- it's -- we're getting some data back. We've been up for two weeks with the buys. And so some of it will recur, but we're not sure what portion because we also have the $460,000 a month in keyword buys to play with, which we're not really touching right now because we don't want to impact revenues. So if we change the mix and we see a higher ROI, let's say on some other channel, then we may just repurpose off of another channel. So we're going to keep a pretty tight lid on it as we test.

And then with respect to some of the Enterprise implementation of the expert network, where do you stand on that? Do you still have some interest? Is there anything in the works?

Yes, I mean, if you -- actually, we've been very focused on the [Sun] implementation and Java.com. And if you actually, if you go back to it today, it looks totally different from where it was two months ago, or even, actually, in this case, three weeks ago is where we made some major changes. So, in that case, we're using them as really a way to work through the model and making changes to get a higher click-through rate. We changed just recently the billing flow, for instance. So now when a person [flexed] on a job expert, they don't have to put their credit card in first. They can just go straight into a chat and then they put their credit card in when they hit the buy button. So we're looking at the conversion rate not putting that in front of them. On the LivePerson.com website today, you've got to put your credit card in before you take the actual chat, initial chat. And the initial chat's always free, but you still had to put your credit card in. So there's a lot we're changing there.

And then, yes, we're continuing pitching into the base. But I think we're very focused on trying to make Java.com and Sun work at the level we want it to work at so we can roll it out across the base.

Did you make some more changes across the whole network? I think I saw an e-mail that alerted some of the experts that you were going to change the whole billing process a little bit.

Yes. We're testing. So we're testing the billing flow on different landing pages so that, yes, so that the [billing fund] is being tested a little bit. The challenge with that is some experts don't want it because, obviously, they're chatting and they just want to chat for money and they have a very big installed base. And they don't want to clog it up with a free chatter coming in who potentially doesn't have a clearance on a credit card. So for the expert, it's a little bit of a balance. And so we're testing it. We didn't roll it out across the website.

Okay. All right. Thanks, guys.

Yes, it's an interesting -- right now there's a lot of interesting, I think from a testing perspective, we're the only guys who really have this model working, and whether you look at what Google is doing with [Noll] or Yahoo has Yahoo Answers or Skype has Skype Prime, we're really the only ones who have a real active community on the experts page. So there's a lot we have to do to figure it out versus copying what works. And that's really what we're doing this quarter. Next call.

Your next call comes from Nathan Schneiderman of Roth Capital Partners.

Hi.

How, you doing, Nat?

Hi, Rob. Hi, Tim.

We're channeling here, Nat, that today's going to be a positive question, Nat. So shoot it towards us.

They're always positive.

Come on, it's like it's time for change. Didn't you --

I don't have too many companies that are growing 51%, so congratulations there.

You ought to let us know, please.

Just to clarify, I wanted to just make sure I understood the guidance now that's 75 to 75.5 for the year, which is a little bit lower and toward the low end of what you had talked about last quarter, I just wanted to clarify which portions of the business are feeling kind of the incremental pressure relative to what you thought last quarter? Is it the consumer, the SMB, the Enterprise, or just a mix of all three of those?

I think it's really across the board. So there wasn't one that really stands out. I think what we're seeing is, on the consumer side, is fairly flat in consistent numbers. We had a pretty high April, which makes the comparison with Q3 show a little bit of a downturn. So that's been fairly study. So neither a big upturn, nor a big downturn going into Q4.

On the SMB side, we are seeing a little slower growth in SMB. We saw 4% in Q3, that's a little below the 6% to 9% that we've seen the couple quarters before that. And so I think we're being cautious if that that trend continues between now and year end. In the current environment, small businesses are affected or even more so in some cases as large businesses.

Then on the Enterprise side, same thing, great bookings in Q3. But again, sort of taking the macro view into account, there will be -- there's some impact from Enterprise. So little bit for each of the three. But on the flip -- on the good side, obviously, each of the three is contributing. So I think that's the positive message that comes out of it is we have three strong business lines rather than just one or two at this point.

And then just a follow-up. My recollection is that you, certainly a portion of your revenue is coming from variable fee that would seasonally, I think, be a little -- traditionally be a little higher in Q4 than other quarters. How much of this reduction is related to reduce expectations from the variable fee component?

Those numbers are fairly steady. So I think we'll see what we've seen historically. I think the two pieces that are variable at this point are the Pay for Performance we talked about, and that is not typically seasonal, that's fairly steady or growing. And then overage fees, again, which has decreased in terms of its importance to the overall revenue stream, don't expect that to be a material driver of the revenue either positive or negative, so.

Is the -- do you feel like the reduction in the SMB business to slightly slower than typical growth rates, is that reflecting more of a challenge to get new SMB customers to sign up or is it reflecting a slight increase in churn?

I think what -- when we look at that business, the churn is in op and I think there's a little bit, like Tim said, just a little bit of impact on I think everyone in the last quarter and this quarter, is our feeling, is sort of in an, okay, from a business perspective, let me see what's going to happen in the world. And so I think there's a little impact of that in that overall business. But it's -- attrition rates aren't any higher than they normally are. We're selling more to the base, so they've gotten on selling a little bit more into the base and the -- like I said, we're probably seeing a little bit because of the mental anguish that some businesses are probably feeling about spending. But the impact seems fairly minimal right now.

Then I also wanted to clarify on the spending side. I understand that you're going to be spending more in Q4 on the marketing initiatives around consumer. Can -- I was getting lost a little bit in the numbers. How much of a lift did that represent overall relative, quarter-over-quarter, how much more in Q4 than you're spending in Q3. And how much -- how did that compare with what you were expecting last quarter when you gave guidance? Because I think you were planning incremental marketing in Q4, but I wasn't quite sure if it's just spending along the lines of what you're thinking before, if you've actually stepped it up relative to what you were thinking before?

It's inline and in plan with what we were thinking in Q3. So it's exactly what we want to spend.

And then how much is the dollar increment in Q4 versus Q3?

It's about $1 million. About $700,000 is media and $300,000 is creative.

Okay. But that's equal, I mean, with what you were planning -- with the increase you were planning as of the last guidance call?

Yes, that's incremental to exactly on plan.

Okay. And then any --

Let me clarify, it's exactly on plan.

Okay. So the --

Thought I'd clarify my --

The reduction to the EPS and the EBITDA is really just a reflection of the revenue adjustment, not really incremental spending versus your prior plan?

Can you repeat the question?

You took down your EPS and your EBITDA view just a little bit for the year. And so it sounds like your spending is consistent with your prior plan. So this really just reflects more conservatism on the top line but not any real change on the spending side.

Yes, that's right. It's flow-through impact from the revenue line.

That's correct.

Okay. And then I guess the final question areas for you, things were clearly in a state of a lot of chaos in the second half of September, and then October was a pretty crazy month as well. I'm just curious if you can speak to how did the October environment compare with what you were seeing in September? And then the other question is, you mentioned 20% to 25% industry growth in 2009. Do you think you're going to be able to grow faster than the industry or do you think an industry bench mark is more reasonable? Thanks very much.

I don't think we're seeing too much chaos. So I think our customers, because we have very large, some of the leading customers, it seems pretty stable. So I don't think there's any real chaos. I mean, there's some chaos, obviously, in the world around us. But in our customer base so far everything looks very stable. I don't know. From a growth rate perspective, we have target rates. We've been g rowing between 30% and 40% for the last couple years, and that's kind of our focus. And we do, obviously, have new products coming out. So, yeah, even in tough times we're an innovative company, so we intend to grow. We don't mark ourselves to the industry, but we like to continue with those 30% and 40% growth rates.

Okay. Good luck. Thanks very much.

Thanks, Nat.

And there are no further questions at this time. Do you have any closing remarks?

No, that'll wrap it up. Just want to thank everybody for joining and we'll see you next quarter.

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