LivePerson Inc (LPSN) 2010 Q4 法說會逐字稿

Good afternoon, my name is Arona, and I will be your conference operator today. At this time I would like to welcome everyone to the LivePerson fourth quarter 2010 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). And with us today we have Mr. Tim Bixby, President and CFO, and also Mr. Robert LoCascio, CEO. Thank you, Mr. Tim Bixby, you may begin your conference.

Great. Thank you very much. Before we begin, I would like to remind listeners that during this conference call, comments that we made 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 an indication of future performance. Changes in economic, business, technological, regulatory, and other factors, could cause LivePerson's actual results to differ materially from those expressed or implied by the 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 filed with the Securities & Exchange Commission.

Also please note that on the call today, we will discuss some nonGAAP financial measures in talking about our Company's financial performance. We report our GAAP results, as well as provide a reconciliation of these nonGAAP 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.

Thanks, Tim. Good afternoon everyone and thank you for joining us. I am excited to report that 2010 was one of LivePerson's best years in terms of growth, profitability, and overall operational execution. All segments of the business contributed to top line growth in 2010, with revenue increasing by 26% for the full year. We continued to focus on driving both profitability and growth, while investing and delivering increased value to our customers.

The positive trend in online commerce, coupled with the growth of social media, has made the internet a place where people are creating more meaningful connections with each other and businesses. Companies are using our products to continue those meaningful connections with consumers on their website. These industry trends are positive indicators for our business going into 2011. We have a strong fourth quarter with a 21% year-over-year growth rate, and 6% quarter-over-quarter. We also had very strong bookings in Q4 of approximately $6 million, which is a 60% increase from Q4 of 2009.

In 2010, we also start expansion in the Asia-Pacific region, during the year we signed the largest telecom company in Australia, Optus, as well as a top Australian bank and a major airline in the region. We also signed a large bank in Singapore, and a major online travel company in Hong Kong. The 2010 launch of our mid-market group delivered strong performance in the year, and even exceeded our 2010 revenue goals. We expect this group to be a key growth driver into 2011.

We had some exciting customer wins in this market segment, including a multi-year deal with a leading online social gaming company, in which our product integration with SalesForce.com was key to winning this deal. We also signed Sierra Trading Post, a major outdoor retailer, as well as a leading global provider of semiconductors for businesses and consumer products, and a global Top 10 insurance company. At the same time we achieved expansion with several existing customers, including a top energy provide, and with Concur, a leading SaaS expense management provider.

Our small business group increased revenue by 4% sequentially quarter-over-quarter, and16% as compared to the prior year. Our consumer group grew by 9% year-over-year, and more importantly, increased operating profit from breakeven in 2009, to a 25% EBITDA margin in Q4, which is consistent with the overall margins of our business. It is worth noting that we are seeing increased interest in the education category on the consumer sight.

2010 was a foundational year for expanding our business as we made investments in people, processes, and product. We provisioned new two data centers in Europe, strengthening our base for business expansion in EMEA market, one of the core assets of our data center, is the ability to hold crucial data in the most secure way. This is a key reason many of our largest corporations in the world like financial services companies trust LivePerson as their preferred solution provider.

In 2010 we completed over 180 customer security audits, with 100% pass rate. We also opened a new office in San Francisco, putting us near the hub of US technology companies, and a logical location to builds, stronger connections with the Silicon Valley community, and our overall employee base grew by 25% during 2010. I know I have listed some of our major accomplishments in 2010, but one I am particularly proud of is that we were able to maintain Best-in-Class operating margins, while making these investments around our products and our people. We will continue the same operating philosophy in 2011 as we did in 2010, with where we target to maintain operating margins while investing and growing the business to the next level.

Our core business remains strong and continues to grow, providing us with some really unique opportunities to further strengthen our core, and add new products and services to our customers in 2011. We monitor, score, and provide intelligence for nearly 100% of the traffic on many of our customer's websites, yet we engage only about 2% of that traffic today with our current real-time products. So we have been asking ourselves how can we leverage the power of our real-time intelligence platform to help our customers reach the remaining 98% of our visitors. In the last year, we rearchitected our platform, so that other applications can be built on top of it, in addition to chat. Through these new applications we are creating an opportunity to monetize a much larger percentage of website visitors.

This year we will launch our next product, a content application that will leverage our real-time intelligence platform in new ways, this will enable our customers to deliver targeted content to their website visitors in real-time, providing opportunities to engage and connect with a broader segment of visitors, well beyond the current 2% who require human assistance through chat. One of our first use cases for this application will be on-site couponing. Using our real-time intelligence, our customers will be able to segment certain site visitors to receive a chat, and other visitors to get coupons. We currently expect to release the beta version of this application in the first half of this year, and GEA will be in the second half. As many of you know, we added APIs to our platform in 2010 to allow third-parties to develop applications using our real-time intelligence.

We began building our developer network at the end of 2010. We have seen great interest from a number of developers. We kicked off our development program initiative in November, chaired by industry leaders and LivePerson experts, and we are starting to see our first third-party applications being used by our customer base today. Many of the first applications are around video, mobile, and social. Our goal is to develop a few new core applications internally, and where there are more niche opportunities, we want to have those filled by third-parties.

So to recap, our successful chat application is used today to engage about 2% of the web traffic that we monitor. We now intend to layer new applications on top of our existing platform, to enable our customers to engage a much broader set of web visitors beyond the 2% who chat. All leveraging the existing infrastructure that we have built to support our current set of core products. We look forward to executing on this strategy, and delivering new products and services to our customers in 2011. I want to congratulate our entire LivePerson team on a great 2010 which laid the foundation for a great year, an exciting year ahead.

With that, now let me turn it back to Tim for a more detailed look at the numbers. Tim?

Great. Thanks, Rob. The fourth quarter capped a very strong year for LivePerson both in terms of strategic accomplishments and financial metrics, sequential revenue growth in the fourth quarter nearly matched the third quarter's strong result at 6% sequential revenue growth, and 21% growth as compared to the fourth quarter of 2009. As Rob mentioned, we had record bookings in the fourth quarter and very strong cash flow for both the quarter and the full year. More importantly than the short-term financial results, however, we beginning of the year was a good time to take stock of our longer-term success and future trajectory, and the opportunity is ahead for LivePerson.

We continue to be the market leader in our sector, far ahead of any competitor in enterprise class deployments. We continue to generate revenue growth and an operating margin at the top of the range of the most successful SaaS leaders, even while investing in new applications to bring to our more than 8,500 customers. In January alone, more than 1.3 billion online sessions were captured and analyzed in real-time by our proprietary rules engine and analytical tools. In a world of just more than 1 billion internet users, we will analyze more than 15 billion user sessions this year alone. With this level of interaction continuously growing at a rate of more than 20% per year.

We see opportunity ahead both in the core business of existing revenue streams, where we will expand our sales capacity by at least 20% this year, on top of a more than 60% increase over the last year and a half, as well as in the new applications coming to market that Rob has outlined. Customer retention continues to be very strong at more than 93% for enterprise accounts. Up time exceeds four 9s, 99.99%, and our core business, excluding investment in new initiatives continues to generate an EBITDA margin of better than 30%. With this foundation in place, we have combined core profitability with steady investment in the future, where we expect to engage a greater proportion of the billions of interactions with our online customers.

Let's review some of the metrics that give us confidence in our outlook, of which we are quite proud. For the full year we achieved revenue of nearly $110 million, fully 4% better than our initial guidance from 12 months ago. As a result of this accelerating growth through the course of the year, we increased our revenue guidance three times during 2010, while fourth quarter revenue fell slightly short of our most recently revised guidance range by about $200,000, EBITDA per share hit a new record, and along with net income was right within our guidance range. The revenue shortfall in the quarter was a result of slightly lower than expected PFP revenue related to holiday sales patterns for one of our PFP customers. We have since seen fairly steady PFP revenue growth, and feel that overall the PFP model continues to be a very strong and growing revenue driver into 2011.

Fourth quarter revenue overall increased 6% sequentially to $29.9 million, and increased 21% as compared to the prior year. EBITDA per share for the fourth quarter was $0.15, as compared to $0.14 per share in the fourth quarter of 2009. While fourth quarter earnings per share was $0.05, which was at the upper end of our guidance range. Adjusted net income per share was $0.09,also top of our guidance range. Revenue from business operations for the fourth quarter was $26.2 million, this is a 23% increase as compared to the fourth quarter of 2009, and a 7% sequential increase as compared to the third quarter of 2010. Revenue from our consumer operations for the fourth quarter was $3.7 million, this is a 9% year-over-year increase from $3.4 million in the fourth quarter of 2009, and was up 3% sequentially from $3.6 million in the third quarter.

Full year revenue was up 26% to $109.9 million, revenue from business operations for the full year was up 27% to $95.7 million. While full-year consumer revenue was up 19% to $14.2 million. Full year EBITDA per share was $0.51, as compared to $0.47 in 2009. Adjusted net income per share was $0.30 add in the prior year, whileGAAP EPS was $0.18 in 2010, as compared to $0.16 in 2009.

As Rob mentioned, bookings increased significantly to a new high of $6.1 million in the fourth quarter. This represents a 33% increase from just the third quarter, and a 60% increase from the prior-year fourth quarter. Full year bookings in 2010 were also very strong at approximately $19 million, which is a 57% increase from the prior year, full year figure. We signed 14 new larger clients in the fourth quarter, several of which are highlighted in the press release from today. And we signed 88 total new enterprise and mid market deals in the quarter.

As you can see from the higher bookings, average deal sizes were also up across the board in the quarter, and we pulled in a couple of larger than average deals, among them the largest upsell to an existing client that we have ever done. Pay for performance continued to be a solid contributor as we mentioned, and generates about 17% of total enterprise revenue both in the full year and in the fourth quarter. Following are the average deal sizes that we experienced for our fourth quarter bookings, the average deal size for all deals was $70,000. For new customers signing up for initial deployment, the average was $53,000. Existing customers signing up for an upsell or expanded business was $72,000, proactive sales deal only about $78,000, and customer service only deals about $34,000.

The breakdown of enterprise bookings in revenue terms was about 90% existing customer expansions, and this was really driven by the large, the one-time very large deal that was an existing customer upsell, and about 10% to brand new customers. The breakdown between sales and customer service was about 90% weighted on a revenue basis towards sales deployments, and 10% towards customer service. This is a little more heavily skewed towards sales in the prior quarter which was about 80/20.

Enterprise attrition ended the year on a positive note, ended the quarter at about 1.6%, and actually looks improved to date in Q1. This is a very conservative measure of attrition in terms of revenue dollars. If we look at attrition by customer count, it is significantly less than this at about 0.6% per month. Small business attrition was unchanged at about 2.6% per month.

Our split revenue coming from outside the US was unchanged from the prior quarter, this is primarily business in the UK, it remains steady at about 22% of revenue, with the UK portion of that making up about 12% of that. This begin to shift as our Asia-Pacific region comes online and continues to grow. Revenue overall in the Asia-Pacific region in 2010 was just under $1 million, and is expected to continue on that growth path, now that our established selling partner in Melbourne, Australia is up and running, and as Rob mentioned we experienced some nice wins and a growing pipeline in the second half of 2010. The revenue in our verticals was unchanged in terms of ratio. Financial Services making up about 23%,Telecommunications at the top at 32%, and Retail and Technology each making up about 15% of our revenue base in the quarter.

In terms of the scope of our customers, we continued to make good progress of making large customers even larger. As of the end of the year, we had 16 customers over the $1 million annualized revenue mark, this is up from 14 in the prior quarter. We have about 33 in total above $500,000, that is up from 30 in the last quarter. We have one customer over the $10 million run rate at this point, and we have two above $5 million, and that is a pretty significant shift in that range, as compared to the prior quarter. We continue to be really pleased with our ability to land and expand large accounts. In fact our Top 10 accounts currently have grown on average more than 400% over the past three years. This really speaks, I think to the significant growth potential we have within our already active customer base.

As mentioned, the consumer group continued to improve their cash flow this quarter. Revenue for the fourth quarter was up 9%, fees per minute increased while commission rates were also up. But most notably EBITDA margin for our consumer operations improved dramatically. From breakeven in 2009 to about 15% over the full year of 2010, and as Rob mentioned reached 24% in the fourth quarter of 2010, which puts it right in line with the overall operating margin of LivePerson as a whole.

Our gross margin for the year finished at about 73%, and that is fairly flat, fairly steady over the course of the year. As Rob mentioned our headcount increased by about 25%, and ended the year at about 472 people. The 100-plus people we added during the year, were primarily in the areas of technology, hosting, R&D, Q&A, Engineering, about 45% of those added heads, while Sales and Marketing was the next largest, making up about 25% of the increase. We planned to add about 135 people in 2011, with a continued focus on product innovation and sales capacity expansion. We expect to add 5 to 10 reps in enterprise and mid-market during 2011, this will expand the team of 27 we have currently selling to our largest accounts.

We ended the quarter with a cash balance of about $61.4 million, as compared to $50.4 million as of September 30 2010. We had strong cash flow from operations, trimmed Accounts Receivable, and also had significant cash inflows related to option exercises in the quarter. Accounts Receivable improved by more than 10% as compared to the prior quarter, and is tracking back quite nicely toward our historical range after a bit of a spike in Q3, due to slower collections from a couple of customers, and the ironing out of a new and highly sophisticated general ledger system that is now fully implemented in our US headquarters.

Now I would like to talk a little bit about on our first view on financial expectations for the first quarter 2011, as well as the full year that we are in now. In the first quarter we expect revenue of between $30 million and $30.5 million. EBITDA between $0.12 and $0.14, adjusted net income between $0.06 and $0.08, GAAP EPS of $0.04 to $0.05. Fully diluted share count of approximately 54.5 million shares.

For the full year, we currently expect revenue of between $133 million and $136 million. EBITDA per share of $0.60 to $0.63, adjusted net income per share of $0.33 to $0.36, GAAP EPS of $0.20 to $0.22, and a fully diluted share count of approximately $55.5 million.

A couple of other full-year assumptions that we are expecting currently. We expect an effective tax rate of approximately 36%, and a cash tax rate right in line with that. In 2010, we actually had a favorable cash tax rate of about 25%, which was better than our earlier expectations. Capital expenditures for 2011, we expect to be in line with 2010 at about $8 million, and that will bring that percentage rate down as revenue continues to grow, and we hold that capital expenditures line relatively steady. We expect gross margin on a GAAP basis of about 73%, Sales and Marketing in Q1 and the full year of approximately 30%, and G&A and R&D both at approximately 15% of revenue, both in the first quarter and over the course of the year. Depreciation for the full year, we expect approximately $8 million, amortization of intangibles approximately $1 million for the year, and our stock-compensation expense, we expect to be approximately $6 million for the full year.

That covers all of the operational and revenue highlights, and now if the operator could rejoin the call, we would be happy to take any questions from folks participating.

Yes, sir. (Operator Instructions). Your first question will come from Richard Baldry, Signal Hill Capital.

Thanks. Can you talk about the linearity in the quarter in terms of signing, and maybe what you are seeing early into 2011?

As in past quarters, past fourth quarters, we see a pattern where it is a little bit stronger in October/November, and a little bit lighter in December. As you knowthe pattern of signing doesn't have any impact on how we recognize the revenue. The larger deals that really drove the bookings were effective for only a portion of the quarter, and so on a dollar basis they were probably weighted a little more to the second part of the quarter.

And maybe looking at the Receivables a bit, I know it came up last quarter, and part of that was attributable to the pay per performance side of the table, it was pulling almost about even in the quarter, can you talk about maybe the components in there, and whether we should expect to see it come down, kind of early in 2011?

Our target is to get it in our historical range on an absolute basis is far better than the average SaaS player, but for us it did spike up a little bit mid-year, we are about halfway back, which is about a 10% improvement in terms of DSOs. Our target is to get it back in that historical run rate.

The reality is that as these customers, we talked a little bit about these $5 million and $10 million customers, it is not so much driven by the type of customer, whether it is a traditional model or PFP, but rather just the size and scope of the deployments. Large companies tend to pay a little bit slower. It is a source of cash flow, and so there are folks that are compensated on slowing down payments, so I think we are doing a pretty good job on that.

In terms of the sequential guide at the low end, theoretically it could be roughly flat. Can you talk about what components, either one-time or seasonal, that would come down, that would leave the recurring or more predominantly recurring part of the business having to off set that to hit the low end of the guide, versus the upper end, and then last would be, maybe something on the competitive environment with one of your former competitors getting absorbed into one of the largest software players, whether you think the competitive environment has kind of eased, and what you see heading into 2011? Thanks.

Sure. I will take the first one first, and then hit the competition. So actually why don't you want to hit the competition first?

Yes, so on the competition, one of the competitors ATG got acquired by Oracle, and so the stuff we have been reading and we obviously talk to people, and we actually have some ex-employees here, and obviously Oracle I think is more focused on their commerce platform, and the chat is a very minimal part of the acquisition. So I actually think it is a great opportunity for us, because I don't think Oracle reps are going to be selling a chat product, versus they are looking at how do they leverage more data into their database using the commerce platform, so I think it creates more opportunity for us, at least today.

And then in terms of the seasonal flow from Q4 to Q1, historical patterns continue where Q4 is quite strong. Pay-per-performance is strong in the fourth quarter, and then there is sort of a reset with holiday sales that decline in the first quarter, and then begin to build up over the course of the year. One sort of nice offset is we have signed another larger customer to a pay for performance model, which will start to gear up end of Q1 into Q2, and so that is the kind of change that might be a difference as compared to last year. So those are the primary ones. The rest, I think is just normal seasonal flow. Stronger growth in the second half. Slightly slower in the second half, and then ramping up again in Q2 and Q3.

Thanks.

And your next question will come from Nathan Schneiderman.

Hi, Rob and Tim, thanks very much for answering my questions, or taking my questions. Curious if you could just talk in a little more detail just on the quarter reported. You mentioned that there was a slight issue with one of the PFP customers and the revenue flow you were expecting for that. I was hoping you could elaborate on that?

So as you know PFP is based on the revenue flow from customer sales for those accounts, and we forecast internally a slightly higher sales amount, and that drives our fees almost directly. Holiday seasons drive a lot of consumer activity. Telco is the dominate fourth quarter holiday force within our PFP operations, although we do have some retail accounts. This is really one account where we were a little more optimistic based on prior history, but it turned out to be just couple hundred thousand dollar shift in revenue that didn't come in Q4. Overall, as you know, PFP is a pretty significant proportion of revenue, and this is a pretty tiny shift in what is overall a pretty big piece of business for us.

Okay. And then just a clarification question on your guidance. I was curious, in your 2011 revenue guidance, how much of that revenue includes your new couponing solution? What is your assumption there? And then also on the EPS side, I was curious how much your investment in this solution you feel is hurting your EPS for 2011?

We have essentially no revenue in the guidance. We have put something greater than zero, but inconsequential levels of revenue for the new. The focus is really to get people to see the product, test the product, and start to gather data and get feedback. That is really the goal. All of the expenses, of course, related to that are built into the guidance, and that is what is enabling us to move quickly on it, but it is really all about getting data, and then as soon as we get data, then we will start to move things as quickly as we can.

As I said when I was talking, is the interesting thing about these products, and also the products from third-parties, is that they are sitting on a infrastructure that has already been created.

They are on the same infrastructure as our chat product, using the same data, intelligence and the rules and everything, so there is a cost obviously that we last year and into today about building them with people, but the actual, once we deliver the product, a lot of that revenue should drop to the bottom line, because it is not an incremental cost to deliver the coupon. The coupon looks like an invitation to chat, except it is not going to be connected to a chat. So I think that is the interesting thing about getting real leverage on our platform. Even with the third parties and what we are seeing today, the stuff they are building is just leveraging what we have, so revenue share will do with them, once again our incremental dollars to the bottom line.

Great. It sounds like you had a very exciting existing customer expansion you were referencing as your largest ever. If I recall right that customer of yours last quarter that you mentioned, scaled to be in the neighborhood of an eight-figure customer. That was an existing customer as well? So does this customer you now reference for Q4 leapfrog that customer?

Doesn't leapfrog, but certainly narrows the gap.

Okay. Is it in the same vertical as that other customer?

Yes.

Thank you very much.

Yes.

Your next question will come from Richard Fetyko of Merriman Capital.

Good evening, guys. With respect to the big upsell, just curious if you could elaborate on that? What solution did you upsell? Or what constituted the upsell, and then with respect to the couponing product, when you say it is in beta, is it being tested with customers right now? For how many? And for how long has it been in test mode?

So on the first one, on the upsell, the crux of the expansion was really a much more significant deployment across an existing customer, so long-time customer, good success with our proactive engagement product, primarily selling subscription services, a good mix of their overall services to consumers, and an expansion where we moved from being partly deployed within their company, to a much more significant deployment. Definitely not tapped out, in terms of how large that customer can be some day, but definitely a big win for the enterprise team. We also have an opportunity, are beginning an opportunity with that same customer in the per-per-performance model. So it is really showing how one customer is not limited to one billing model. And not limited to, not capping out in terms of the revenue potential.

And with respect to the couponing product?

Yes, we just came out of alpha with it, which was on our consumer site, our consumer site was using it, and they saw about a 16% lift in sales with the coupons, so we got very good data and results, and now the product owner is out with the sales team, and they are signing up the beta customers, and then they will go live shortly, and then we will have the results from beta. We are charging a nominal fee for the beta customers, so they are a serious customer to be a part of it. The interesting thing about the coupon product is it is delivering content. So there are some use cases where it is pure-out couponing, and there are some cases where they want to use it for just segmenting a customer, and giving them a different message, like a welcome message, or a different experience.

And the interesting thing is that it is the same marketer or buyer who uses our chat product. So they have been saying to us, look, you are monitoring all of our traffic, and yet we can only touch 2% with chat. Why don't you give us other things to touch the other parts. As a matter of fact, one customer jury-rigged the proactive Windows, the invitation windows to just be coupons, one of our large big box retailers. And so from that is how we came to the conclusion of let's put this product out in the market, leveraging what they are already using. So it is fairly exciting.

Alright. Thanks. That is all I had.

Your next question will come from Brad Whitt, Gleacher.

Hey, guys, thank for taking my questions. Tim did you have a CapEx number for the quarter?

About $2 million, which takes us to $8 million for the full year. Okay.

And would you, it looks like your free cash flow was lagging your adjusted net income. How would you expect that to trend looking forward?

It should sync on an annual basis for this year. It tends to be back loaded in the year. We have seen that pattern for a couple of years, but overall the full-year number should kind of track to what we saw in 2010. I think the ratios are pretty accurate.

Okay. And Rob the coupon solution sounds a lot like a product that I actually thought you already had a couple of years ago, you used to talk about it. I believe there was a telco in Canada that was doing something like that. Can you just explain to us the differences, or whether that product just didn't off of the ground a couple of years ago?

Yes, a couple of years ago, we tried to, without really using the rules of intelligence of taking the invitations and making them something of a content-based system, but we really never developed it out, because part of it is we were focused on the proactive chat, and from the sales guys perspective, they found that is a low-hanging fruit and that was the greatest opportunity. And today what is happening is because we have penetrated a lot of large customers, now when we look at the sales guys, they are saying, okay, there is opportunity in here now. I have penetrated a customer, I have expanded the chat,now I want another offering to go beyond that, and our customers also want that offering. I think part of it was probably timing.

Part of it was building out the product to have all of the features that you need to deliver content, and those are things that we didn't have in our chat product, which we have today. Like one of those things is frequency cap. So we can say when somebody hits the website, give them a coupon twice. Maybe they see a coupon, they turn to a page, and it goes away. Okay. Show it to them twice, but don't show it to them four times. In the chat product, the invitation is out, it goes out and it stays there. So these are things that they wanted and things that we had to build out, so that is what we have done.

That is helpful. And Tim, it sounds like your attrition did well in the fourth quarter. Is that kind of the rates you assuming going forward in your fiscal year 2011 guidance?

Yes, we are assuming no real change versus those rates. They actually are a little bit better than that so far in the first quarter, but the guidance is built assuming that they will track as they have historically.

Also looking at your AR, is there anything that has changed in your billing cycle, are you still primarily billing monthly, quarterly? How are you normally billing your customers now?

Yes, the vast majority are billed monthly. We have a small number of accounts with relatively larger dollar amounts that pay quarterly, and a couple that pay a year in advance, but those amounts in aggregate are relatively small.

Okay. That is all I have. Thanks for taking my questions.

Thanks, Brad.

Your next question come from Jeff Van Rhee, Craig Hallum.

Several questions, Time on the pay for performance how have you modeled the go-forward quarter for pay-for-performance and the year, and in two respects maybe for the year just in a percent of revenues, but maybe more qualitatively, it didn't meet your expectations in Q4, how do you build an outlook for Q1?

Well, I think we are certainly factoring in Q4, but remember, the overall trend for 2010 was well ahead of our expectations. So Q4 in isolation we got a little ahead with the forecast, but the full year, we probably ended up 15% or 20% ahead of our expectations from the beginning of the year. So it is following or actually exceeding our expectations to that extent when you look at the full year.

In 2011, we guide for the year, as we have, I think previous quarters, which is we assume we are a little more conservative on the upside, because that is where PFP can really overdeliver, and on the down side, sort of, we have a decent amount of visibility in line with our core business. So surprises will be unlikely on the down side, and a little more likely than traditional models on the upside. That is kind of how we have built it in for the rest of the year.

Do you in mind a percent of revenues?

I think it will be steady or slightly up. It shouldn't decline unless we have unexpected revenue upside elsewhere in the business, then it could stay steady. But overall I think this 17%, 18%, 19%, 20% is probably as high as it would get without, absent any other major changes in the business.

Okay. Then on the consumer side, you called it out with some good commentary around EBITDA improvement. As it relates to the top line, help me get a sense of what you are thinking in 2011 for the consumer business? It looks like this year, the year-over-year growth decelerated as you progressed into Q4. I didn't hear you comment on revenue in Q4 relative to expectations for consumer, but maybe you could touch on that as well as your thoughts for 2011 in terms of growth there?

Yes, we are modeling a little growth not, right now we said it will probably be flat, because we are optimizing for cash flow in that business right now.

Okay.

They do have some opportunities, but we basically set out on a goal to optimize for generating more cash. That business pretty much is driven on SEM and driving leads. So if you cut back on your spending in SEM, then there will be a direct impact on growth, but like I said we decided let's optimize for cash flow in that business, and give it a little more breathing room, and let it be accretive to the business, and that is kind of the goal right now.

What would drive a change in that strategy in terms of convincing you it is worth investing some more there?

They are working on interesting things about integrating the actual platform, and taken the platform and letting third parties use that. So there are some things they are working on, but I have got to see it. Our strategy is to optimize there.

Okay. Last one, and I will let somebody else jump on. Just in terms of the leverage last year, was a heavy investment year you really ramped sales among other things, this year you are guiding to similar conditions. As you look out on your longer-term modeling, how do you think about the expansion of margins over the next two to three years?

It is interesting, I get obviously asked this question all of the time, and when I look at our margins today, we have the best margins in the software-as-a-service industry. And we know those are strong and healthy, and we also want to grow our business as much as we can, because there is great opportunity especially in the intelligence data space, and so it is an interesting question. As I have said to other investors, I want to maintain margins, we don't want to, and some companies have done this, they have decelerated margins, and they take that and use that investment. As a Company, we want to do something different.

So we want to maintain the margins we have today, and we want to go for it, and we want to go for a bigger possibility of building a much bigger company with the higher growth rates, so I think we are taking I think the most balanced approach, and it is a better approach than anyone has out there. I have seen SaaS companies, our growth rates take it down to 5% operating margins, and everyone is like, okay, that is fine. We have gotten to very high operating margins and we are going to maintain them. But I also want to take this Company and we are, I think, really at the beginning of something great, and if you look at all of the data, all of the intelligence, all of these 8,500 customers, we have only started, really I think getting into opportunities, and we have one product, chat, and we have some voice that touches 2% of that traffic. So that is kind of the philosophy we have today. It could change. If we see, wow, we are taking growth rates up another level, and as a Company we don't need the money, then we will put it back in. But today we want to maintain our operating margins, and that is the most important thing.

Your next question comes from Mike Latimore, Northland Capital.

Thanks. On the customer that was a large upsell, you said that they obviously had large order, but they also added PFP. I imagine most of the order, was under your standard pricing model, and then the PFP is a small part of their new initiatives?

PFP is all in the future, so it will all be Q1, Q2 and forward, and the upsell was a Q4 event.

And at that customer, do you envision the PFP segment of that business being a large segment of their revenue streams, or is that going to be kind of a small minority?

I think it will increase probably like the other PFPs. This is another telco that has new product that they are selling, and it is kind of similar to other PFPs and other products from our telcos, and that probably could follow similar suit to some of our other large PFPs. So I think it is a pretty interesting opportunity for us.

Alright. Great. And then historically you have talked about business intelligence applications as being kind of a new product area, I mean, they are looking at all of the transcripts, and so forth. Is that something you are going to have this year as well?

Yes, we are actually out right now pitching these types of products to our customers. Some with third-parties, some internal. But yes, we are going to go after this portion of the data. The data is when you read these transcripts, and we have $10 million a month, and as Tim said, we got 1.1 billion sessions that we monitor. When you combine this data, and you look at behavior, and we monitor the behavior of consumers on the internet, what products they are looking at. What key words they came from, how much they are spending. On a site basis, it is an extraordinary amount of data, and it has a lot of intelligence, so we are really focused now on shifting this Company to being known as a data intelligence company, that has products like chat that drive more data and more intelligence and more conversion, more usage of that data intelligence. So that is the strategy that we are going after today.

Okay. And just in the fourth quarter results, gross margin was down a little bit sequentially. Was there some incremental hosting investment there? And also G&A was up a fair amount sequentially. Was there any kind of one-time item in there?

In the hosting, it can be sort of chunky. We were kind of finalizing the last steps in the UK expansion, where most of the implementation happened in the beginning of the year, but that was the primary driver of the hosting increase. We would expect the gross margin to be fairly steady state going forward with some potential for improvement. G&A we had a one-time expense related to severance costs for myself. And so that is something that won't recur in the first quarter, so a little bit of a spike for that.

Got it. And just last question, what is the break out between enterprise, mid-market, and SMB in terms of revenues?

We don't give that exact breakdown, but it is in line with what we have seen historically. We don't give that exact number, but it still follows the two-thirds mid-market, one-third small business breakdown.

Great. Thank you.

Your next question come will come from Craig Nankervis, First Analysis.

Thank you very much. Good afternoon. Congratulations on the great bookings. I wonder if we could just start just on sort of the sequential performance in Q4 versus year ago sequential performance? Maybe particularly on the enterprise, you had such a big jump in Q4 2009 from Q3, and the jump was maybe half that or so in this quarter. Is there any other commentary beyond what we have heard so far that sheds light on the different ways that the two Q4s played out?

Well there was a difference. It was probably more like 70% or 75%. So it was a little bit smaller. A year ago, it was an extraordinary jump. The PFP customer, one customer really expanded and simultaneously a really strong holiday season hit at the same time with some unique products that were available in the market. A lot of really positive things happened simultaneously a year ago. I think this year probably reflected what we have seen in other years, which is really strong, among the strongest of the year, but the year-on-year comparison was a little tougher because of a year ago.

And then can you just review how the headcount, the hires in 2010 versus your original plan in 2010, where that came out? Did you meet your goal or can you review where you came out with that, please?

We didn't meet our goal, so we set out to hire more people, and then we cut that back about midway through, so about 30% we shaved off of what we were supposed to hire and plan, so there is a reality to it even we have a plan now, and we had some hires in for January, and we are not there yet, so it is hard to hire good people, and we also have to backfill people that are leaving, I am not sure if there is a traditional metric yet, but we came up about 30%, because we have said we don't want to shove these people in. We don't need them right now, and we want to sort of maximize for the bottom line, and also what we think would be good for the business.

And then, Rob, while I have you, on the new products, the new product delivery plan for this year, at first after hearing your prepared remarks, I sort of got the impression that you are planning to come to market to make, generally available, essentially one product line, or one product capability, which is the couponing. But now I hear, based on the previous question, you are also likely to come to market with some chat transcripting analytics, so my question is, what are the products, how many new products, whatever type they may be, do you plan to be delivering by the end of this year?

That is a good question. So there are what I will call core products, and then there is also, like the couponing product is important, because today we know one of the limitations on taking the traffic and engaging it is a human being, and chat you have to have a human being, and there is a limitation to the types of products that we can go after. Certain products don't have enough margin to put a human being in it, they may not be able to be staffed, so that was one part, so we wanted to solve that one with use the engine to deliver other things that don't need a human being. That is a big, 50% of the other, the challenge of a human being involved with the chat.

The other things I will call potentially, we think they are smaller incremental revenues, and some of those like the transcript, there are some other data products we are looking at. There are partner products with mobile, and there is the social integration with Twitter now, all of those things will bring in incremental revenue, but I think they are a step below these two cores, which one is engage chat, engage non-chat it is very binary. And then the others are, take the data and enhance it, and do interesting things with it. So I think those are smaller portions, and they may only be good for the 400 or 500 large customers that we have, and mid-market customers, versus the base of 8,500, where these other two products we will go after 8,500.

Okay. But the products for the smaller portion of your customers, your largest customers, they will potentially see multiple new product available this year?

Yes. Exactly, and if I look at what is happening today, if you are a customer of ours, and we started to go out about two weeks ago, there is one group that is going out and talking about intelligence and transcripts, and how we can give you better marketing intelligence. There's another group that is going out, run from a former person who comes from SalesForce.com, he runs our app exchange,and he is out there with partners, and saying what is your mobile strategy? What is your social strategy? Because we have got partners that can enhance that with things that they have built on top of, on the platform. So those are the two things.

Then we have another group that is basically looking at our chat product, and saying that thing continues to grow at a nice rate, but can we enhance it. And so we have someone who is right now focused on getting more click throughs on chats, so we can increase the amount of chat volume, which should drive more revenue. So there are like these three buckets right now, enhances the core, and let's do more at the core on chat, take the data that is coming off of it and build products, and then whether the third-party, we call them connectors, which are going to take real-time and enhance it off of your website, social, mobile, we have an integration with a video provider, to drive videos on your website for explaining about products. So that is the three buckets right now.

Alright. I appreciate you taking us through that. And then, I guess, maybe there is no new news here, but just to confirm that there is no update you are offering on Tim's transition on the CFO front? Is that right? There is no comment whatsoever?

Yes, the only comment is we have a retained search firm, one of the big ones. We have started to see candidates. Tim is involved with that, including obviously numerous people in the Company. So I think it is going as expected.

So does that mean the timeline is unchanged versus previously as far as you can tell?

Yes. Yes, the timeline is unchanged.

Thank you very much.

Your next question will come from Jay Freedman, Crystal Rock. Mr. Freeman, your line is open.

Hi, can you hear me okay?

Yes.

Thanks for taking the question. Can you expand a little bit more, or I am going to ask another question related to the beta test. How broad do you expect the beta to be? How long do you think it is likely to go? And then I have another follow-up to that?

We are going to put 10 to 15 customers in the beta of the couponing product. We are using the word couponing so everyone understands it, it can do other things besides couponing, but let's call it the couponing product. We will put 10 to 15 customers in there from each of the three segments, mid-market, small business, and enterprise. And then we will go through, I would expect about a 30-day-to-60-day period with them to optimize for the results that we saw in alpha.

The other part of it that we are gathering is there are other use cases beyond couponing, so we are getting all of that feedback that goes back to the product group, so that they can enhance the offering around what other things they may want to do with it. And so that is the first part of it.

What percentage of clients do you think that might be of potential interest? It seems obviously more like a retail product than a customer service product.

No, I think it is a broad group of customers that can use it. Look, our data and our intelligence drives a very high conversion rate for chat, and they know that, because that is why they pay us a lot of money, and they want to do other things with those customers. The challenge right now, and we all know it, when I arrive at a website today, as a consumer, I may have a lot of money to spend, but I am treated equally to someone who may not have a lot of money to spend, and it is a very frustrating thing from a consumer's perspective, because you want to be treated differently, and what we are now, what we have been doing is really empowering the site to treat specific types of people, about 2% of the traffic differently. And hold their hand and get them over the line to buy.

This allows the site really to say, okay, what other people do we want to touch. I can give this person a personal hello. I can give this person a dollar coupon, I can give this person $0.50 off, and all of the data intelligence we capture, hey, this person has been here before. This person came from a very valuable key word, this person has a geo-location, they are from New York. This person has been on a competitor's site, because we can see the last referral URL, which can be a competitors URL. And all of that allows now the site to be empowered, to say let me treat somebody differently. I won't say it is for really we are going out to the base, and we will see where we go with it, but we will introduce it to the base.

The value you add when your existing product is relatively easy to measure, this feels like it is going to be somewhat more difficult to measure. Can you step back and take me out a year or two, and say if it works, is this going to double your value to a client, or triple your value to a client, or make it 20% more?

Triple is it. That is my goal. No, I mean--

How are you going to price it?

Okay. So we're going to price it on there is a base fee, and then there is more of a performance-based model. Like a CPM, CPC model. So like pay for performance, these are really good models. It aligns us with our customer, we can capture greater value long term, and these are marketing conversion products, so that is where we are going to, that is the pricing model that will go out on the product.

So as you put pencil to the white piece of paper, do you think that this has an opportunity to be as big or significantly larger than your existing business?

We believe, obviously we have talked to our customers about this, when there is no human involved, so if you don't have labor, they can offer it to everybody if they want to, so the cost to them in offering it, it is just like a marketing campaign. In essence when they are buying key words on Google, that can offer the key word, they can offer an advertisement to everyone, but they have got to pay for that click, or on an ad network they have got to pay for the view on a CPM basis. They can send it out to everyone, but they are going to pay us for it, so they have to be very targeted and smart with the product when they use it, to only target certain customers that they can get value.

The good thing is our engine takes out a lot of the guesswork, where we are segmenting already. 100% of the consumers on the website actually get scored by us, so everyone gets a score, and the ten out of tens get that chat. And maybe the nine out of tens get a coupon, the eight out of 10s get a different coupon, and the one out of tens get just a welcome page. And so that is the unique thing. Most of the systems that people are using, they don't have the intelligence of data on them. It is like you can AB test something. I can give someone one landing page, and I can give someone another land page,but truly segmenting customers based on their behavior, and targeting for conversion is what makes us unique.

It sounds a lot like the predictive analytics we have been hearing a lot about. Are you doing this all of this internally? Or using outside any companies to help you?

Our predictive analytics that we have built, so we have got two sets of analytics, one is we have got predictive analytics where all of the data comes in, and actually in real-time it builds on the rules on the fly. We already have that out in our system, it is driving our chat. And then you can manually set up based on the data, your own sets of rules, and that is the same with this product. We are doing some interesting stuff, where we are going to do in the interface of the product is almost use cases, so instead of the predictive analytics just rolling out, you can just say, like, one use case that we know is backing out of shopping carts. So it is like back out of a shopping cart, definitely give them this. Backing out of a shopping cart, has been here before, has product above $500, Blah, blah, blah. Give them definitely a coupon. So we are building a web-based interface. It is a lot easier to use.

And one last one, sorry. Meaningful revenue contribution should be expected later this year?

Right now we are not baking anything in to the guidance. What we have given here is our core chat business, which is healthy and doing great. And once we get through betas we will start modeling revenue. So we don't want to put anything in the model with hope, we only want to put in the model what we think we can deliver based on what we know.

Okay, but just from the timing, you suggested, it feels like the middle of the year is when you would hope to have something to start going out more broadly?

Yes, on the coupon product, yes. And the other ones we are starting now.

Okay. Super. Thank you very much for taking the questions.

Thank you.

Your next question will come from Mike Latimore, Northland Capital.

In the fourth quarter were there over rage fees or were they similar to prior fourth quarter contributions?

Yes, not a big difference. Not really as much of a driver of variability as they used to be in earlier years for the Company.

Yes, and then on the small business market, is there anything that you are focused on there to drive growth in the small business market this year?

Yes, I think when we are really focused on partners and integration, and we are seeing with both mid-market and small business more of a focus on combinations of products, so I think that is an area where it is not just small business, we are actually looking at across the board, but where we are getting a little more pick up there, but that is really a good intermediate business that keeps out all of the other smaller players from getting any more traction, and we do very well, it is growing very nicely, but that is more of a higher margin, and slightly slower growth business, and that is kind of how we are managing it.

I guess last you won a number of larger retailers the end of 2009. Any update on kind of new big box retailers as an opportunity?

We picked up one specialty retailer in the fourth quarter, sort of a smaller one, not quite as big as those, but we have seen some really nice movement with some new applications with Home Depot. We have picked up an online clothing retailer that you are probably familiar with, so there are still a couple of 800-pound gorillas out there that we are working on, but I think we are making good progress in the vertical overall.

We have got to get Amazon, Best Buy. We still have a list, there are still a fair amount of customers out there to go after.

Okay. Thanks.

Okay. Cool. Thanks Mike.

Your next question will come from [Drew Pahar].

My question was just answered, thanks.

Thank you.

At this time there are no further questions.

Thank you, everyone. We will see you next quarter.

And this concludes the call. You may disconnect.