LivePerson Inc (LPSN) 2009 Q4 法說會逐字稿

Good afternoon. My name is Lisa, and I will be your conference operator today. at this time I would like to welcome everyone to the LivePerson fourth quarter 2009 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. Tim Bixby. Sir, you may begin your conference.

All right. Thanks very much.

Before we begin I would like to remind listeners that during 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.

Internal projections and beliefs upon which we base our expectations today may change over time. We undertake no obligation to inform you if they do.

The 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 when 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's Chief Executive Officer, Robert LoCascio.

Good afternoon everyone, and thank you for joining us.

Our company had a phenomenal quarter and year as we focused on driving profitability and growth from new and existing customers. In the fourth quarter, revenue grew 26% from Q4 2008 to $24.8 million, an 11% sequential increase compared to Q3 2009 and surpassed our expectations of $23.4 million to $23.7 million for the quarter.

For the year we generated $87.5 million in revenue, a 17% increase over $74.7 million in 2008 and exceeded our original guidance range for the year of $84 million to $86 million.

All segments of the business contributed to the topline growth.

We saw revenue from business operations increase 18%, from $64.1 million in 2008 to $74.7 million in 2009, and revenue from consumer operations increased 13%, from $10.6 million in 2008 to $11.9 million in 2009.

We are thrilled with these results and energized by the momentum it provides as we head into 2010.

The economic environment remains difficult, yet these results show that our product is recognized as a key driver of success for our customers and their online businesses and that our business model has considerable leverage, even in a challenging economy.

EBITDA per share for the quarter was $0.14, surpassing our expectations of $0.10 to $0.12, and EBITDA per share for the year was $0.47, well ahead of our original guidance a year ago of $0.23 to $0.27.

EPS for Q4 was a record $0.06 per share as compared to a net loss of $0.50 per share in Q4 of 2008 and $0.05 per share in Q3 2009.

EBITDA margin for the year was 26%. We generated nearly $22.8 million of EBITDA for the year and hit a high of 29% in Q4. This operating leverage, coupled with our focus on executing on our overall strategy of providing real-time engagement services to businesses and consumers, enabled us to drive strong performance as we enter the second half of the year. Tim will provide more details on this shortly.

In terms of our enterprise business, revenue was up 15% sequentially quarter over quarter and grew 20% as compared to the prior year. Our pay-for-performance business model was a strong growth driver, contributing to 17% of the enterprise revenue in Q4. Our traditional vertical markets of financial services, telecommunications, and high-tech continued to see new inorganic growth.

At this point I thought it would be interesting here to note some key data points surrounding our leadership position in these markets. Based on our installed base, we have noted the following interesting statistics for 2009.

Seven of the top 10 most innovative companies as noted in BusinessWeek are using LivePerson's intelligent engagement solutions along with 10 of the top 15 commercial banks, according to Fortune 500, top three telco's, as noted by Forbes 2000, three of the top four software companies, according to Forbes 2000, and the top six technology and hardware companies, also according to Forbes.

I think these numbers speak volumes to the increasing relevance of our technology and the value that leading companies, both large and small, are discovering with our solutions.

Customers continue to grow with us too, proving out our business model and solidifying chat as a critical online sales and service channel.

Customers are also actively recognizing us for contributing to either their top or bottom line. In November we were recognized by Sky Broadcasting, BSkyB, for contributing to their online sales growth at their annual Sky Awards ceremony. LivePerson was named the Sky Online Partner of the Year at the ceremony.

While our revenue mix still focuses around financial services, technology ,and telecommunications, we see a continued trend in new verticals. As mentioned in Q3, we have recently added some major names in big box retail to our client list, and that vertical will continue to be an area of focus for us in the upcoming quarters.

We also believe that health care may prove to be an interesting new verticals for LivePerson. In the fourth quarter we signed a major US-based health and benefits provider, and we are targeting additional activity in this vertical in 2010.

Expansion continues in Europe. Just this quarter we signed two new telecommunications providers, and this vertical look strong for future quarters, as does the financial services and retail verticals within the EMEA region.

Our small business group increased revenue by 6% sequentially quarter over quarter and 15% as compared to the prior year. Despite the challenges that small businesses faced at the beginning of the year, we are now seeing growth opportunities in this area of the business. Many individuals are now taking to the Internet to build new small businesses to take advantage of the growth in overall Internet commerce and consumer adoption.

We saw strong new-name bookings in Q4 as well as in Q3 across all new verticals segments, with retail still dominating the revenue mix. We also began seeing increased opportunity with the top end of our SMB businesses, which is why we've now created a new group called the midmarket solutions team. I'll talk about that in a little bit.

The consumer group set out at the beginning of the year with some real challenges at the -- as our two goals were to neutralize our cash burn and to get the core category back to positive growth rates. We achieved both of these goals during the year.

Revenue grew by 35% between Q1 and Q4 of 2009, and this operation broke even for the entire year. In Q1 we are losing about $300,000 in cash, and in Q4 we generated around $300,000 in cash flow. Revenue for the consumer business increased 9% sequentially, quarter over quarter.

Paid search, media and affiliate marketing continue to drive our marketing spend, and a focused discipline on strong ROI has given us the ability to generate cash from our core categories of personal advice, programming, education, and tutoring.

Now I'd like to spend some time discussing plans for 2010. 2010 marks our 10th anniversary as a publicly traded company on NASDAQ. Since our initial public offering we've been steadfast and focused on building a solid foundation upon which we plan to accelerate future growth for the company. Our financials are stable, our core business model is strong, and we are ready to increase investment in new ways to leverage our core platform.

To do this we plan to invest more than we have in the recent years in three key areas -- sales and marketing, R&D, and our hosting infrastructure. This investment will support the growth opportunities we see in new geographic regions, market segments including our new midmarket group, new business models like pay-for-performance, as well as our continued focus on new products around data and content. All these areas should further expand our engagements with existing customers while enabling them to expand in differing ways in which they can engage and convert more visitors into paying customers.

Specifically, we plan to accelerate growth in Western Europe through investments in the sales organization and in expanding and leveraging our hosting facilities. This expansion will support the growing demand we've seen and continue to see in this market.

We also will be investing in a new US-based sales team to focus on the middle market. This team will sell a new solution called LivePerson Premier that addresses specific needs and requirements of midsized businesses. To date we've hired three sales reps to support this growing business segment, and we plan to hire additional people before midyear.

We also plan to hire additional enterprise sales and support staff to support the growth in our core verticals as well as in Europe.

We are also increasing our investment in R&D to support the creation of new products and solutions that leverage our existing technology. This is where about 35% of our incremental investment in 2010 will be focused, as we believe these new products and capabilities will drive future growth.

We intend to develop a series of new products that enable our customers to leverage the data generated within our platform. Over the next few quarters we will be speaking more specifically about these and other products.

We currently have about 20 developers focused on this area, and we recently signed a deal to acquire a company called NuConomy, which will give us some additional R&D talent and relevant IP. In connection with the deal we've hired a few key developers and product personnel and will acquire some IP that we believe will help us extend our products to enable customers to deliver more relevant personalized content in addition to delivering more integrated chats.

We have several other key initiatives that will be ready for market during 2010, including a series of APIs that will enable third-party developers to create applications around our core services of chat, data, chat transcripts and our advanced intelligence. One of the most compelling use cases for our API is to enable chat within mobile devices and other third-party applications, therefore extending the use of our chat by consumers who want to get sales and support help for more customers.

In closing, 2009 was a great year, and we far exceeded our goals and expectations. We continue to see strong demand for our products going into 2010, and therefore we're going to make greater investments this year in order to put us in a position to accelerate our top- and bottom-line growth over the next few years.

Thanks for your time, and now I'd like to turn the call over to Tim.

Yes, we really did have a terrific quarter I think, excelling on nearly every key metric. As compared to our original guidance from a year ago, we exceeded the top end of the revenue range we gave at that time. We over-performed the cash flow estimate from that time by about 50%, and overall we added about $13 million in revenue during 2009 and added about $13 million in EBITDA as well. So 100% of that incremental revenue dropped to the bottom line, which is a great result.

Free cash flow increased by a factor of six as compared to the prior year, another outstanding result.

All in all, great results in a tough economic climate.

As a result, we are planning for significant continued growth and aggressive investment to meet that growth, and we will give details on that in a moment.

A little more specific detail on the actual results for the quarter -- our revenue increased, as Rob mentioned, 11% sequentially to $24.8 million, up 26% as compared to the prior year.

EBITDA per share for the fourth quarter was $0.14 as compared to $0.07 per share in the fourth quarter a year ago. This was well above our guidance range of $0.10 to $0.12.

And fourth-quarter EPS was $0.06, also well ahead of our guidance range of $0.03 to $0.04, and as compared to a net loss of $0.50 per share in the prior year, due primarily to a goodwill impairment charge.

Revenue for the full year was $87.5 million, a 17% increase from $74.7 million in the prior year.

EBITDA for the full year was $0.47, a 135% increase as compared to $0.20 per share in the prior year.

EPS for the full year was $0.16 as compared to a net loss of $23.8 million, or $0.50 per share, in the prior year due to the accounting adjustment.

Revenue from business operations for the fourth quarter was $21.4 million, which is a 24% increase as compared to the fourth quarter of 2008 and a 12% sequential increase.

Topline growth within our business operations continues to be driven by both net new customers as well as expansion of existing customer relationships across both their online sales and their services channels. We signed 14 new names in the enterprise group in the fourth quarter of 2009. Again, this is a very strong showing and up from 13 in the prior quarter. Total new names of the year was 43, up from 38 in the prior year.

Also within the enterprise group our pay-for-performance, or PFP business, increased as a percentage of total enterprise revenue to about 17% in the fourth quarter as compared to 15% in the third quarter and about 10% in the first quarter of the year. So that pay-for-performance area of the business is growing a bit faster than the overall revenue base in the enterprise group.

Consumer revenue continued to grow, delivering a third consecutive quarter of at least 9% sequential growth.

In terms of deal sizes, we saw good results across the enterprise group. Average deal size overall a $70,000. Average deal size for new customers was $100,000. Average deals for existing customers that expanded was $60,000, and our average proactive sales deal overall, over all the customers, was about $80,000.

The breakdown of enterprise bookings in the quarter in terms of revenue was 35% being driven by new customers and 65% driven by existing customer expansion. This is a slight shift from 25% new, 75% existing in the prior quarter.

In terms of the breakdown between sales and customer service focused deployments, 80% of the revenue bookings in the fourth quarter was driven by sales, and 20% driven by customer service focused deployments.

In terms of attrition, enterprise attrition improved for the fourth straight quarter, dropping over the course of the year from 2.2% in the first quarter, steadily decreasing and improving over the course of the year, and finishing the year at just 1% monthly in the fourth quarter. The full year attrition impact was overall a 20% improvement as compared to the same metric in the full year of 2008.

As Rob mentioned, our small business group recovered very nicely in the second half, resuming a traditional growth rate and generated $6.8 million in revenue for the fourth quarter and $25.4 million for the full year, representing about 15% annual growth and 6% sequential growth as compared to the prior quarter.

Attrition within the small business group held steady in Q4, representing the continued improved stability in the area of the economy, and that's improved from a 3.3% monthly average in the first half of 2009 at a 2.6% monthly average in the second half of the year.

In terms of the breakdown of our revenue bookings geographically, about 23% of revenue being driven outside the US, again, primarily in the UK, but a good portion of that coming elsewhere around the world, including other countries in Western Europe.

In terms of verticals within different industry areas, financial services was consistent at 20% of overall revenue, telecommunications companies again consistent at 30%, retail was up from 12% to 15% of overall revenue, which is customary in the fourth quarter, while technology companies and all others making up the remaining 35%.

As Rob mentioned, the consumer group generated positive cash flow each month during the fourth quarter, delivered $3.4 million in revenue, which was a 40% increase as compared to a year ago, and 9% growth as compared to the third quarter, and this growth was driven primarily by higher average fees per minute that are charged by our independent experts, as well as higher average commission rates applied to the overall gross expert revenue.

In summary, overall quarterly revenue grew 11% to almost $25 million, putting us on a firm 26% annual growth rate as compared to the prior year.

In terms of gross margin, we delivered a gross margin in the fourth quarter of 75%, and that was consistent with the prior second quarter and the third quarter.

Other operating expenses were slightly higher, primarily in sales and marketing and in the R&B line items. Sales and marketing is customarily higher in the fourth quarter, due to -- some due to increased hiring in that area, which we'll talk about, as well as higher commission rates based on higher levels of booking.

In Q4 we began to recruit and hire aggressively across the company after a fairly conservative approach to hiring during the preceding 12 months. And we added 27 net heads, which is about a 7% increase, ending the year with 390 employees. He began the year with 366.

Our enterprise sales team headcount is currently at 20, having increased by 18% from 17 in the prior quarter. And this we expect to increase by between four or five -- by four or five over the next two quarters, as Rob mentioned, to support growth opportunities in both the US and in Western Europe.

Also as we mentioned, we've launched the midmarket sales group, have already hired three sales reps into this group, who are off and running. We have plans to hire three more by the end of the second quarter of 2010. This group will focus on deals that fall between our typical enterprise and our typical small business deployments, and this will be a -- primarily a telemarketing focused sales team.

Overall our direct sales headcount between both our enterprise and our new midmarket group will increase from 17 as of Q3 2009 to an estimated 31 by Q3 2010, which is a full year later, representing an increase of 80%. I think this is probably one of the strongest indicators of how we see our position and our potential in the market currently. We see a large and we see a growing market that we are leading by a significant margin among all players.

Our operating cash flow was strong in the quarter. We generated $8.2 million from operations. This was partially offset by capital expenditures of $1.4 million driven by capacity increases in our hosting facilities, primarily to support large customer expansions.

Over the course of the year we generated $21 million of cash from operations, and we incurred capital expenditures, again, primarily related servers and networking gear, of approximately $5.4 million.

We ended the year with a cash balance just shy of $46 million as compared to $36.5 million at the end of September 2009 and as compared to $25.5 million at the end of 2008.

Accounts receivable was flat at $10.3 million. This resulted in a days sales outstanding, or DSO, metric of just 37 days, and this is an improvement from 42 days in Q3 and right in line with a year ago.

As we move into 2010, as Rob mentioned, we intend to continue the investment that we began in the fourth quarter. We are investing primarily in talent, added headcount in R&D, sales and marketing, product marketing, and professional services. These investments will support both current growth, but will also enable us to bring new products to market that will enable our customers to leverage our existing deployments and technologies and to generate more value from the intelligence we generate related to their website visitors.

While we expect these new initiatives to drive additional value and revenue in the future, they are early-stage, and we are not including any material revenue increase related to these investments in our 2010 revenue guidance at this point.

We will also invest in the expansion of our European-based hosting facilities as well as the production team that deploys and optimizes all of our hosting facilities around the world. We have done this previously, made a significant investment, when we transitioned our US-based hosting facility from managed services to our own co-location infrastructure. It requires upfront investment that lowers gross margin in the short term and then generates benefits in ROI and improving gross margin as the company continues to grow.

We saw gross margin dip somewhat two years ago to the 72% range and then move steadily back up to the 70% -- 75% range we saw during 2009. We expect a similar trend as we make a similar investment in our hosting facilities to support our business growth outside the US.

I will now give a little more detail on the specific expectations we have for financial results, starting with the first quarter in 2010.

We expect to see revenue between $25.0 million and $25.2 million, EBITDA per share between $0.11 and $0.12, adjusted net income per share between $0.06 and $0.07, and GAAP EPS of $0.02 to $0.03 in the first quarter. And we are assuming a fully diluted share count of approximately 51 million.

For the full year of 2010, we currently expect revenue between $105 million and $107 million, EBITDA between $0.50 and $0.52 per share, adjusted net income between $0.30 and $0.32 per share, and GAAP EPS between $0.16 and $0.18 per share. And we are assuming a fully diluted share count of approximately 51.5 million.

There are couple of other metrics that we think are helpful in your understanding and analysis of the business. We expect an effective tax rate and cash tax rate of approximately 40%.

Our GAAP gross margin we expect to be in the range of 72% to 73%, which would result in a cash gross margin of between 76% and 77%.

Sales and marketing we expect track between 30% and 32% of revenue.

G&A, between 15% and 16% of revenue.

R&D at approximately 15% of revenue.

Total depreciation for the year we expect in the range of $6 million.

Amortization of intangibles, approximately $1.5 million.

And stock compensation expense, noncash expense of approximately $6 million.

We also expect capital expenditures over the course of the year to be approximately within a range of $6 million to $7 million for the full year 2010.

Without the increased investment that we just highlighted, we would expect to see EBITDA margins in line with the 27% to 28% we experienced in the second half of 2009. Adding in the additional investment, which is an additional spend of approximately $2.5 million, brings the overall EBITDA margin down to approximately 25%.

With the current annual growth rate of 25%, as we delivered in Q4, as compared to the average public Software-as-a-Service company growth rate of about 15%, and cash flow margin well above other SaaS players at 25%, even with these aggressive investment levels, we expect to continue to perform at the head of our peer group on these key financial metrics.

Strategic investments such as these in key areas of growth for the business have enabled us to deliver significant revenue growth as well as build a solid financial foundation for the company. If we look at our peers, we continue to grow just as fast or faster and are still more profitable than most. The investments we've made and will continue to make in the first half of 2010 in support of growth opportunities in new geographies, the middle market, and existing verticals within both enterprise and small business will continue to fuel the steady revenue growth we have seen over the past several years.

We believe that the new product initiatives we have invested in and plan for will, as Rob mentioned, deepen relationships with our existing customers and add compelling new offerings, further cementing our technology's position as a critical communications and marketing tool for online businesses.

We are very pleased that you've joined with us today to share some of the terrific results we have achieved in 2009. And as we head into our 10-year anniversary as a publicly listed company, we look forward to sharing future quarterly results with you, as well as details around our new product offerings and how we expect them to play a role in the financial future of the company.

That covers our operational highlights, and we would now like to ask the operator to rejoin the call, and we would now be happy to take any questions that you may have.

Richard Baldry, Canaccord Adams.

Thanks and congrats on a great quarter. Can you talk maybe a little about the seasonality that you expect in 2010. The first half sequential growth rates in '09 were fairly modest, the second half sequential growth rates were much -- or sharply higher. Do you see that being the same trend in '10?

We've seen I think a pretty consistent pattern now looking back over a couple of years, even in a down market where Q1 is the lightest sequential growth. That will especially be the case when you have a very strong Q4, as we've just had. And then it starts to normalize a little bit higher in Q2. And Q3 and Q4 tend to be the stronger sequential growth quarters of the year. I would expect that to continue in 2010.

With regard to the significant step-up on the cash balances, you have almost doubled them year-over-year. Can you talk about whether you think that puts you in a position to do more aggressive sort of growth via acquisition, maybe think about things like the new, more conservative push in the midmarket and/or the Western European front? Thanks.

I think -- we basically put in our operating plan for 2010 that I think it's pretty aggressive on the product side and the sales and marketing side. So we feel like we are going pretty heavy on the investments right now. So I think the current plan with the amount of cash we are generating still allows us to do a fair amount of investment between R&D and new products and on sales and marketing.

Thanks.

Jeff Van Rhee, Craig-Hallum.

Thanks, congrats as well. Very nice across the board. A couple of question. First, can you just expand the pay-for-performance? It's certainly been a bright spot coming up pretty aggressively as a percent of mix. Can you talk about the pipeline there and how far you think that can go as a percent of mix. Does the pipeline suggest continuation of this?

Yes, pay-for-performance has really been just a real success story across the board over the past two years. And we see nothing that really suggests that that is going to change anytime soon. It's been very successful, primarily out of the gate with telecommunications companies. The biggest names that you would be familiar with. But we are also starting to see more traction with retail. And any company that has a good understanding of its average order value can work well with pay-for-performance. So both of those types have worked well.

In terms of the percent of the business, it came in in Q4 about 17% of the enterprise business, about 10% of the total business. That was almost exactly on line with what we expected it at the beginning of the year, and we've always said, and we're planning for this to continue to grow and outperform the growth rates of the overall enterprise business. I think there is a range between 20% and 50% that we are comfortable with. So if we look out two or three years, I would expect it to be within that range.

Okay. Then would you -- maybe expand -- obviously you're aggressively investing in the R&D side. As you look at your -- the things you touched on, content, analytics and data, can you give us a little more specifics on when we might start to see some product announcements or see these products out at least in trials?

Yes. Towards the latter half of the year is when we will start to release. We have some alpha versions going out on data fairly soon. And then -- but general availability will be towards the latter half, and as I said, we already have about 20 people that have been working on developing the core infrastructure for it, which took a little over a year, and that's in our data warehouse investment we made. And then we are building our applications above that. So I'd say the latter half of the year is when we'll start to release those. We didn't really forecast any revenue in 2010 for those products, it's really for 2011.

Great. Then I guess just last one then on the consumer side, you've certainly done a great job turning that around into being a cash generator. What are your thoughts on the resumption, just in terms of gross minutes and other variables that go into driving that revenue line, but in terms of just driving improvement or growth in the total minutes of usage, what are your thoughts there?

It's minutes and rate, or average rate per minute. So we constantly try to move those triggers with the experts, and so actually rate per minute has been up in the last couple of months, so we've been doing some things to bring up the per-minute charge with the experts. And then the average minute still hangs around about 12 minutes is the average. It's sort of -- it's been there, so we've been more playing with the per-minute charge, which has been a little bit easier to drive. So --

And any thoughts there, just in terms of what you're expecting out of growth of any of those factors for the forward 12 (multiple speakers)

Yes. It's -- the business is doing well right now. I think strategically it really enables us to go after some of these other consumer products. The things we're working on with content on the B2B side and some of the data side, we are going to fold into the dot -- our dot-com website. So you should also expect the latter half of the year that the dot-com will have more integrated pieces of the B2B customers, data and content. So you'll see some action there.

Sounds good, thank you.

Richard Fetyko, Merriman Curhan Ford.

Good evening guys, congrats on the results. First, with respect to the guidance, what contribution are you expecting from the new sales or the midmarket team, as well as the additional enterprise salespeople? And what did -- did you say that you expected to have 31 enterprise salespeople by the end of 2010? Or did I mishear that?

Yes. The clarification on the headcount, that 31 is a combination of both enterprise and the new midmarket group together. So enterprise has been fairly level at 17 for several quarters, that's now at 20. And we expect that to grow to 25 by the end of 2010. The midmarket was zero a couple -- last quarter, is now at three. We expect that to grow to at least six by year-end. So the total of those two together gets you to the 31.

In terms of growth, at this point it's -- we are not breaking out any specific midmarket projections and forecasts. We certainly expect incremental revenue from that group, but they are -- the way we've structured it is they are taking over an existing installed customer base, some of which was served within our enterprise group, some of which was handled by our small business group, and part of the real opportunity there is not only bringing in new midmarket customers but also with more -- a more focused approach, growing that existing base. So within the guidance for the full year is a small proportion that is incremental business driven by that midmarket group, and we are hopeful that they can outperform, but since it's the first quarter out of the gate, we have a fairly conservative forecast in the number for them right now.

How did the idea for the midmarket sales group come about? Were you getting a lot of inbound calls that weren't properly addressed? Or -- just curious what gave you the start.

It really is that we saw this middle group customer, which was too small for the enterprise sales guys to really focus on to make quota, and for our SMB group, which is serviced out of Israel, which mostly and obviously are phone and chat sales, not much face-to-face, there was really just this middle market where customers want -- they want to meet you, they -- they're going to buy five, 10, 20 seats, so that it's good deals. They do want to do some more sophistication, so they want to use a subset of the proactive rules and all the intelligence in our products. And so they need a little bit more handholding, and there's a lot of opportunity, but they are too small for the enterprise guys. So --

And then we've seen sort of a weakening in the midmarket competitive set, and so we've decided just to kind of like go ahead and just open that up.

About $6 million of revenue right now is what's attributable on existing customers to that market segment. And I'd say half of that came from small business, half of that came for enterprise. So it's starting with a good base. I've been on some of these calls there. They were up-selling our customers, and these customers want more of our products. So I think there's real potential there, and that's why we're being very aggressive.

Tim, can you finish -- and thanks for the guidance on that. Can you finish the breakdown of revenue by -- you mentioned small business was about $6 million of total revenue. What was the contact center and the sales addition as a percentage of total?

In terms of the bookings for the quarter?

Just I guess total [revenue] (multiple speakers)

The [financial] (multiple speakers) yes, the normal metrics that we give? The split between new and existing was 35% new, 65% existing. The split between sale and service was 80% sales, 20% service.

Right. I was just wondering if you -- and I think you in the past talked about -- or maybe just talked about the growth rates in the -- the contact center revenues versus the Timpani sales addition revenues? Or am I -- are you not providing those anymore?

That is not something that we have been providing for quite a few quarters. In terms of -- yes, in terms of their internal growth rates.

Sure. Then lastly if I may, just in terms of your customer or addressable market penetration, you obviously have been extremely successful with penetrating some of the top companies, as you listed off, Rob, in different verticals. It also sort of brings the question, are you sort of -- has the low hanging fruit been picked? And what kind of penetration opportunities do you see from here on, since you've kind of signed up a lot of the biggest in each vertical?

No, we still -- there's still a ton of customers that we haven't really gone after. We are probably in the -- on the high end of the enterprise probably at 8% to 10% of the total addressable market. And so it's still fairly small. And there's -- what happens is also there's -- midsized companies have become larger companies, so that constantly grows that base. So it's about 4,000 customers right now is the target there.

And in SMB, the SMB's -- that base has I think really grown because of -- people are starting to form small businesses online, and they want chat, and so I think we are in a good position. I think there's other verticals like health care that we -- and government and some other areas that we haven't really been in that are also just greenfield for us. So I think we feel really comfortable.

And then we are also doing things like pay-for-performance and taking some of our things like telco customers and putting them into a whole different type of model, so I believe we have a lot more to go in the market segments today.

Another thing I think is encouraging and has continued to be a trend is the size of the largest customers. And that number continues to grow and still has not really capped out. So even in an existing reasonably long-term customer, we've still seen business grow from $0.5 million to $1.0 million into the multimillion dollar range. And so we also just feel that that existing base growth has quite a ways left to go, even before you add in the potential of the new logos.

And then just to -- not to go too much on the question, but a lot of the investment we are making in R&D this year is -- right now we are only touching about 1% of the traffic that goes to our customers' websites. So that -- there's 1% that they want to target with the chat. But there's 99% that they are willing to target with other things besides chat. And so a lot of the development we are going to be doing this year is all around using our real intelligence and then driving different things -- it could be a landing page, it could be a coupon, it could be a number of different creatives that will drive higher conversions without chat.

So I -- what I really believe will happen is also we'll go wider in our customer base as we focus on these new products.

Got it, thank you guys.

Nathan Schneiderman, Roth Capital Partners.

First one for you, you -- 14 new, large enterprise clients versus, if I heard right, 13 last quarter. I was curious, what was it in the year-ago period?

You're good -- you've got the good stump question. So a year ago in Q4 it was 10, and in Q3 it was eight. So quite a good increase.

I'm sorry. It was eight in Q3 2009?

Of 2008.

Oh, okay. Eight in Q3 2008. And then the last few quarters you've been giving us the sequential increase in bookings. I was wondering if you could share that with us for Q4 and maybe also give us the year-over-year.

The Q4 bookings was down about 8% coming off Q3, which was a pretty extraordinary performance with a couple of big box retailers. In terms of dollars, Q3 bookings was about $4.1 million; and Q4, about $3.8 million. So pretty close, but just a little bit shy, a bit lower.

What that doesn't capture, of course, is growth in small business, which has improved over the past three quarters. It also doesn't capture the continued strength in pay-per-performance because those -- that's -- each month you can see improvement in growth there, which we have, which is not capturing in a bookings number. So I think it's important not to just simply look at that bookings number and extrapolate growth from that.

Okay. And in that $3.8 million, what would that have been in the year-ago period?

2.5.

2.5. Okay. And I was curious on the analytics solution what you are thinking of in terms of a likely ASP for that?

The analytics, we are not giving any guidance yet on how we are going to price it or how we are going to deliver it yet. So -- but we will give that in the upcoming quarters.

Okay. I was curious on -- kind of in that framework of acquisitions, if you could share with us the NuConomy deal. To what extent did that have or does that have a negative -- to what extent is that driving down your operating margin guidance for the current year, 2010? How does that kind of ripple through the financials?

Just to clarify on the NuConomy transaction, it was really an immaterial transaction. As many of you may have seen, there was a purchase price of $3 million picked up in a trade press. That number was inaccurate. It was high by a factor of four. So it's really an immaterial transaction.

What actually is happening there is we were able to hire a team that was focused on data-driven products and expertise within this company, NuConomy (technical difficulty) [but] we also picked up a little bit of IP in relation to that so that we were confident we would have no IP ownership issues going forward. So the core there is really three really excellent developers with a good amount of learning in this area to help us jumpstart the data initiatives.

Final question for you, your small competitor, Instant Service, was picked off recently. Could you share with us how, if at all, you see that affecting your business, either positively or negatively? Thanks very much.

I guess they have been out there for as long as we have, and I think they said they did about $6 million in revenue. So we just see them -- they're immaterial to us as a competitor. They are small, they compete with our small business product line, so that's kind of how we view it. No differently than it's been in the past.

Thank you.

Brad Whitt, Broadpoint Capital.

How should we -- the free cash flow was extremely strong this quarter. Were there any particular drivers there? And how should we think about cash flow next year? Should that still approximate your non-GAAP net income? Is there anything you're doing different from a billing standpoint?

In the fourth quarter there were two things happening. One, obviously very strong operating performance, which drove the number up. There were also -- because of the stock price increase over the course of 2009, there were more option exercises from employees, which drives that cash number up. So that offset the majority of the CapEx expense in the area. CapEx came in a fair bit favorable to our expectations, and that cash from option exercise is also favorable.

So I think going forward there was probably a little bit of a tailwind from the option exercises. That is not something you should necessarily project, since it tends to be driven by stock price appreciation. But even with that backed out, the free cash flow number and rate was dramatically improved from the prior year.

That's helpful. And what would your -- the ASP I think on the last quarter was abnormally high because of the big deals at 95,000. What was the comparable number this quarter?

70 is the average deal size that compares to the 95 in the prior quarter.

Okay. And here in terms of bookings, I think one of your -- I guess one of your quasi competitors mentioned they saw online retailers kind of shut down their websites earlier than usual. I was wondering if that had any impact on you. It doesn't look like it, but just curious as to whether you were having to defer some revenue that you may pick up in future quarters.

When you say shut down you mean (multiple speakers)

It's kind of like some online retailers, they -- what they said was shut down their websites, meaning they weren't willing to make any changes or anything earlier, closer to the holiday season than normal.

We didn't see a big difference. That tends to be a rolling date, anywhere between October and early December, depending on the company. We didn't note a huge difference there. We were actually pleased to see our biggest deals with the biggest companies go live within a very short period of time, essentially in the middle of the holiday season. So we didn't see much negative impact from that.

Okay. And then, Rob, I was wondering if you can kind of give us a little bit of example of a pay-for-performance situation without mentioning a customer name. And I am assuming those are structured that there's a minimum commitment, and then there is a -- the pay performance component -- or maybe give some more color there.

So I'll take that one. So pay-for-performance, the basic structure is a relatively low monthly commitment, a fair bit lower than the normal commitment for a traditional model, and then an estimated productivity rate that we know from experience, and a price per order -- or a fee per order that we generate that we are confident will give us well more than the traditional revenue per month if we perform it at reasonable rates.

In terms of how those numbers break down, once a customer is up and running and fairly well optimized, the base fee is almost immaterial to the overall revenue that's being generated and been booked by us. So it's really -- the base fee is really just a backstop for us, but the vast majority of the fees are variable and tied to performance.

So in Q4, for example, some of the over-performance that we saw was certainly driven by pay-for-performance coming in, even ahead of our pretty optimistic projections. But we are also seeing enough growth there so even with the Q1 falloff due to seasonality, we are still seeing some of that offset by just the happy customers, seeing these incremental orders come in on the reports are -- they're just very encouraged and willing to pay us more money for it.

Is there any risk or have you seen any customers that after going with the pay-for-performance would kind of revert back just to a normal subscription model?

The risk is pretty low. We've had one account that did that, and the way we kind of mitigate that risk is to start reasonably small and then move up very aggressively. So I can only think of one that was a small retailer where it was almost a test of a new price point for us. But other than that, it's a pretty well-oiled machine where we know our performance level that we should expect within a reasonable range. And because we are bringing in a partner with labor, we only will move forward where we have that level of confidence. If we are not sure, then we will likely push that customer to a traditional model.

Great, that's all I have. Thanks for taking my questions.

Mike Latimore, Northland Securities.

Great quarter as well. On the pay-for-performance one more time, how many total customers do you now have there in that category?

It's -- depending on how you count, because we have a couple of customers with multiple business units within them, but it's essentially around 10 distinct companies. There are three or four that drive the vast majority of the revenue within the telco vertical.

Right. (inaudible - microphone inaccessible) And just as you look at your reprise pipeline, do you think the average sales price will be similar to what it's been tracking to recently? Or is there any reason for it to go up or down?

It's been fairly steady. We look at that pretty frequently overall, both new deals -- and that goes up and down quarterly, we share those stats. We also look at just the entire existing proactive sales customer base, for example, and that number has tracked over time at an average of about $300,000 per year. And that one has moved up over the course of 2009. It was about $310,000 in Q2, and Q3 also, and looked to be about $320,000 in Q4. So quite stable with definitely more bias to the upside, a slight increase versus a decrease.

I think in the past you've given a total number of enterprise deals in the quarter, I don't think I picked that up this time. Do you have that number?

56.

Okay. And then on the small business segment, is the kind of the churn of this 2.6%, is that about where -- obviously you want it better, but is that about where we should stabilize?

I think that's what we are modeling going forward, and I would urge others to do the same. Longer term I think it can get better, because we've seen it in the low 2's and even slightly below 2 historically, but given what we've seen in the economy in general, I think we'll see this at least through 2010.

How about pricing in that segment? Can you talk a little bit about how pricing played out sort of by quarter throughout 2009? Did it get worse? Has it gotten better recently? Anything like that around price?

Pricing is not a significant factor for us. So we tend to be premium priced in almost every competitive situation, whether it's enterprise or small business. Even our small business price points are $100 or $150 or $200 a month to start for a seat license, there still competing against free and very low-priced products, and that's certainly true at the high end as well.

So because of that we really don't -- while we will use typical discounting methods that everybody uses when selling host software, we are not a price competitor and we don't compete on price.

So those -- over a quarterly basis if you sort of analyzed it quarter by quarter, they're fairly static. Where we see more variation is just in sheer number of deals and in customers willing to commit. But we really are pretty firm about not chasing volume by giving product away.

Great. And just last question, any foreign exchange benefit in the quarter, and if so how much?

Minimal. Immaterial in Q3 and Q4.

Thanks.

Craig Nankervis, First Analysis.

I echo the congratulations on a very solid quarter. I wonder maybe, Rob, could you just talk qualitatively about whether you saw a -- much of a sequential change in business tone. Are you (technical difficulty) you're able to ride the coattails of some big marquee wins in Q3, and just the total number of enterprise new deals at 56, that's a pretty significant sequential jump. I just wonder if you could talk about that a little.

I think we feel very confident about the business, and that's why we are willing to sort of ratchet up investment in both sales and marketing and new [products] (technical difficulty) in R&D, new products. So we -- I think the world is swinging towards, hey, we want to touch our customers, we want to chat with them, we want to do it in a very intelligent way. And we have been in the market kind of long enough to have obviously a great customer base and a lot of experience. So I think we are capitalizing on the change in a lot of the retailers' mindset about touching customers.

I've said this before, I think in the last -- at least the last 24 months, all the things that have been going on with social networking, between Twitter and Facebook and advertising in these mediums, the e-retailers are really focused on what can we do there? I actually met with one of our large banks, and they have someone basically looking at Twitter all the time, and if a customer posts something negative, they want to have someone there to respond. So it -- there's in the mindset of the business owner now is, we are going to touch our customers. And that's a big shift, and that's what's really driving a lot of the -- I think the excitement in the business and our ability now to really invest on a different level.

And as you focus more on Europe, it sounds like here in the current year, can you just relate some of the overseas selling dynamics that some of us might not be as familiar with, sort of the competitive landscape or the LivePerson brand strength overseas and how much different challenge that might represent versus North American business?

Honestly, we have -- it's a fragmented market from a language perspective. So that poses one challenge versus the United States. And so what we're going to do is obviously we are going to put some local reps in areas like Germany or France or Italy, and we primarily today are out of the UK, our office is right out -- is outside of London. So those are really the dramatic shifts.

I think the other thing is that each country does have a way in which they do business, so there's ways in which working with resellers or third parties is also important. So it takes a little bit more of -- I think there's a nuance to each of the countries, but the reality is, Germany and France and the UK are the largest markets, and then you've got Italy and Spain behind that. And we're focused right now -- let's get the telco's, let's get the banks, let's get the e-retailers -- the things we know. That's where we are having a lot of success, so that's why we really want to ratchet up the investment there too.

Thank you for that. And can you comment on the likelihood in the consumer business that that business would see more enterprise participants this year -- a la Sun.

Yes, we've kept it pretty focused. We continue that, but we will work on more integration points on the site and more of the B2B customers into our website. And so I wouldn't expect like a ton of new things, because everyone is very, very focused. You can see there's a lot -- it's sort of like there's a lot of business task at hand for each of the groups, and so the majority will just stay kind of focused in our market segments and continue to grow.

Tim, did you give the number of million-dollar customers?

I did not. That number in Q3 was 11. The number in Q4 was the same. But we actually saw some movement within -- we saw $2 million plus go from zero to one, so we saw a little bit of movement within those numbers.

Okay. And also I'm not sure that I heard new deal pricing on the annual revenue per new deal. It was 175K I think in Q3. Did you give the equivalent of that?

The equivalent in Q4 was 100.

Okay. I think that does it for me for now. Thank you.

Richard Fetyko, Merriman [& Co].

Just on the product development side, I heard you talk about an API. What would be the timing of the launch of that for third-party developers? And what sort of applications do you foresee? Or what sort of third-party developers do your foresee extending your platform or adopting your platform? For what types of applications most likely in the near term?

The platform will be out in Q2. So we will start going out to third parties. We actually already started this process. It would be -- the real low hanging fruit applications right now are enabling the chat window to be embedded in different places, so one is obviously -- we have a set of mobile apps that are coming out now for iPhone, BlackBerry, you can use SMS, you can take Microsoft Messenger or Google Talk and chat with that to an agent. So there's that area.

There's areas in which people want to put chat into applications, so they've got an application that gets downloaded onto a desktop, and they want chat embedded into that. We have a lot of technology companies, and so there's an interest there.

Then there's an interest in applications in which consumers may be interacting on the website through virtual agents or FAQ type systems, and once again we can pump that information into the chat window.

So the chat window part, which is using a REST API, is the place I think there's going to be -- there's a lot of low hanging fruit. And then from there there's a data API, there's a content API, and there's a core application API that takes advantage of the proactive rules, all the behavioral targeting that we have, so you can go ahead and sort of pull that piece out and can build applications upon the intelligence of the rules.

And the reason we have done this is that -- and we spent most of last year re-architecting the service to be a platform -- is now that we have over 8,000 customers, each of those customers has such a diverse set of needs that it's really, really hard for us to put down the development pipeline all their needs and get to them. Most of the time we just focus on what the big guys want. And so what wanted to do is enable small businesses or large, it doesn't matter, or people who support those small businesses or large businesses, to develop apps and the things that they need without us having to get in the middle of it. So that's really what the focus of extending the platform is.

Thanks guys.

At this time we have no further questions. Mr. Bixby, do you have any closing remarks?

No, we are all set.

Thank you very much, and we will see you in Q1.

This does conclude today's conference call. You may now disconnect.