LivePerson Inc (LPSN) 2012 Q3 法說會逐字稿

Good evening, and welcome to the LivePerson Third-Quarter 2012 Earnings Call. My name is Shonda, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console.

At this time, I would like to turn the call over to Mr. Murphy, CFO. Sir, you may begin.

Thanks very much. Before we begin, I'd like to remind listeners that during this conference call, comments will be 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 the 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 projection and beliefs upon which we base our expectations may change over time. We undertake no obligation to inform you if they do.

Results we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors, and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission.

Also, please note that on the call today we will discuss some non-GAAP financial measures in talking about the Company's financial performance. We report our GAAP results, as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures, in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website.

Now, I'd like to turn the call over to LivePerson's Chief Executive Officer, Rob LoCascio.

Thanks, Dan, and thanks, everyone, for joining us. I'm actually speaking from our Tel Aviv office tonight.

Our goal from the beginning of the year was to add sales headcount, build pipeline in the first half of 2012, and begin to close that pipeline in order to accelerate bookings and increase our run rate in the back half of 2012 and into 2013. Internally, we use the bookings metric as an important indicator of our long-term growth opportunity. Bookings were strong in Q3, and accelerated to $8.1 million, which was our largest bookings quarter in the history of LivePerson. It was a 17% increase over last quarter's, and a 56% increase over last year's third quarter. Furthermore, 17% of our overall bookings number was from new products, so we continue to see a healthy demand for our new product offerings.

2013 and the long-term strategic plan for LivePerson is unfolding nicely, as the increased capacity in product and sales headcount over the past year is starting to generate a solid ROI. We continue to work on bringing our new salespeople up to speed, and making them fully productive. When I look back over the past year on our sales organization, we increased quota-carrying sales reps to 50%, training the team to move from selling a single multi-product offering, reorganized the enterprise group into a verticalized sales structure, and added a new global Head of Sales.

In the third quarter, we signed a record number of deals at over 180, which surpassed last quarter's 136, and added 51 new enterprise mid-market customers, more than twice as many as in the same period last year. We also signed a greater number of new customers with many first-time multi-product deployments. 32% of our bookings in Q3 were from new customers, where historically, new customers are usually around 20%.

While we are seeing our bookings accelerate, delivery of [recognized] revenue was slower than anticipated. We are seeing a longer time for those bookings to convert into recognized revenue because of implementation cycles extending. The delivery of new products are taking more hand-holding than traditionally like we have with our core products, as we go through a learning cycle with our customers. We expect to gain an improved efficiency in new and multi-product deployments as we gain more experience over time.

Our customers are investing a lot of time and money into driving traffic to their digital properties, and they need the tools to convert that traffic into meaningful connections. With our LiveEngage platform, customers will be able to engage the full spectrum of visitors on their site, across the funnel, all the way from large numbers that they need for self-service treatment, to very personalized and rich engagements through video and voice. In terms of the progress, we built out the platform structure and have over 1,000 small businesses now on our LiveEngage platform.

During the quarter, we continued to strengthen our core products and offerings. We made substantial progress with the integration of our enhanced predictive targeting capabilities, rolling out a fortified turnkey mobile solution, advancing our overall platform strategy. We announced the acquisition of Amadesa last quarter, and are completing the integration of this technology into the LiveEngage platform. The addition of this technology should improve our ability to predict visitor behavior and provide results that optimize ROI, based on channel and content selection. The algorithm used to score each visitor require much less data for learning, so the predicted targeting capabilities can be used and leveraged across a majority of our customer base and across all of our new product offerings.

With the acquisition of Look.io, we now have a turnkey mobile solution that provides a clean overlay onto our customers' mobile [offer] and dot sites. We are working with about two dozen customers on implementing their mobile engagement strategy, many of which are reporting 25% to 30% additional engagements each month. Something that's been really appealing to our retail customers has been the Geo location system built directly into the agent console. They agent can actually see the customer's location system to find the nearest retail store through their mobile device. We also have the ability to do language translation on the fly, and the mobile technology we are deploying has a detection system that automatically translates to the proper language based on what a customer's device is asking for.

We are also continuing to see good traction on the new products, and seeing a growing number of interesting use cases. One of our early adopters of LP Marketer, a major online supply and equipments retailer, has been driving value by using LP Marketer to effectively gain more qualitative data on a customer base. When they initially launched a customer survey initiated via e-mail, direct-mail and social media tools, response rates were really low. So, they deployed LP Marketer to deliver realtime survey requests on-site. And due to the personalized delivery of the survey, they noticed a seven-fold increase in survey response than more traditional online survey management. In a more traditional use case for a marketer, the company also deployed a highly targeted free shipping campaign, and within just two weeks the campaign influenced about $14 million in sales, and increased conversion rates by 48%.

With our LP Insights product, we've seen some strong examples of how understanding the voice of the customer can take a measurable impact on overall customer satisfaction. One of our long-time chat customers and a leading photo sharing website with over 95 million members, has been leveraging the Insights product we provide from the chat to improve key facets and pain points on their site, such as streamlining their refund process, pushing back their login requirements, and optimizing their photo uploader. As a result, they were able to actually reduce their phone support hours, and increase overall chat agent productivity. And since deploying both LP Chat and Insights, the customer satisfaction scores have risen by more than 80%.

Today, we also announced the planned acquisition of our Australian partner, INgage, which gives us a greater exposure to the fast-growing APAC market. We will be gaining some talented resources surrounding the selling and supporting of the hosted voice, live chat, SMS, and social media solutions. The INgage team has over 20 years of experience in both digital and mainstream voice contact channel across the Asia-Pacific region. Their experience and foothold in the region brings us tremendous value as we seek to bring our solutions to a greater number of APAC customers.

Now, I'd like to touch base on four strategic goals that we set out for the year. As you know, our first goal is Plus One, which is to have all of our customers use more than one product, which will allow us to scale our business to the next level, and create more value from the data we gather on customers' websites. The sales pipeline and the use cases we're seeing from the customers are evident that this goal is progressing well. And as of the end of the third quarter, we had approximately 600 customers using more than one LivePerson product, which compares to 550 last quarter, and 275 at the end of 2011.

Our second goal is to find new ways to accelerate the growth of our core chat product. With consumers increasingly turning to different digital touchpoints, companies must redefine strategies on how to engage them across multiple channels. With our platform strategy moving forward, which includes new predictive targeting capabilities, and our connection framework of video, voice, and chat, our customers will be able to create highly targeted interactive campaigns across multiple channels that will result in more meaningful interactions with their customers.

The third goal is to improve and scale the data intelligence layers on our platforms, and we're driving towards our vision of delivering a complete platform for real-time data intelligence, and made great progress over the past quarter with the help of the acquisition of Amadesa. We've really been able to accelerate building out these data intelligence pieces to our platform.

And the fourth goal is to continue building the systems that will help us deliver on our core values of [being owner] and help others in our mission of creating meaningful connections in the world. We've grown a lot in terms of headcount over the past year, and are working hard to maintain and scale our culture, as it enables us to continue to innovate, collaborate and succeed.

Connecting with our community and helping others are [daily] firmly rooted in our core values. This year will mark our 11th year of hosting Feeding NYC, where LivePerson employees and volunteers throughout the city get together to pack Thanksgiving meals and personally deliver them to homeless shelters in New York City. We started this program 11 years ago, after 9/11, and we felt it was deeply needed. And in the wake of what we are seeing with the recent hurricane, we will continue and expand this, this year. If you are in the area, I encourage you to join us and help on November 20, and connect with our local community. You can check out where we'll be packing and delivering at feedingnyc.org.

Just to wrap up, each quarter we are moving closer towards a longer-term vision of delivering a complete platform for intelligent engagement, and we're forging ahead in working towards keeping pace with growth, continuing to fine-tune our go-to market strategy, and scaling product sales to our 8,500-strong customer base.

With that, I would like to now turn the call over to Dan to do a review of the numbers. Dan?

Thanks, Rob. I think it's important to reiterate what Rob mentioned earlier. We continue to make progress. We've implemented a lot of change to the Organization over the past 12 months. We added a significant number of sales heads, we [began] selling multi-product solutions. We have continued to expand internationally. We've completed three acquisitions, and we've rolled out version 1.0 of the LiveEngage platform to our SMB customers.

In addition, we have made progress expanding our reach within our base of core customers and also to new ones. As Rob mentioned, we signed 184 deals in the quarter, versus 136 in Q2 of 2012. Of the 184 deals, [54] of them for new enterprise and mid-market customers, representing 32% of the booking dollar value in the quarter. Many of the deals came in towards the latter part of the quarter, so [we did not see] that factor into the top line during Q3. Based on our current time to convert bookings to revenue in addition to our customers locking down their sites for the Q4 selling season, we do not expect the backlog to be fully recognized in Q4.

Now I'd like to take some time to review the financial metrics in greater detail. During the third quarter, B2B revenue was $36.1 million, a 17% increase as compared to the third quarter of 2011. Revenue from consumer operations for the third quarter was $3.6 million, which is relatively flat compared to the third quarter of 2011, and down 10% compared to the second quarter of 2012. Total revenue was $39.7 million, an overall 16% increase as compared to the prior year.

Year-to-date revenue for the B2B segment was $103.5 million, a 21% increase over the same period last year. Year-to-date revenue for the consumer segment was $11.4 million, an increase of 4% over the same period last year. Total revenue year-to-date is $114.9 million, an increase of 19% over the same period last year.

As discussed on last quarter's call, we incurred expenses related to deals, litigation, and international expansion that will continue to impact the remainder of our 2012 financial results. For the first half of 2012, we incurred approximately $3 million in deal, litigation, and international expansion [extensions]. In the third quarter, we incurred approximately $700,000 of deal, litigation, and international expansion costs, bringing the year-to-date total to approximately $3.7 million. As a reminder, the reported results of operations include the effect of deal, litigation, and international expansion expenses in the income statement for the three- and nine-month periods reported.

Net income for the quarter of 2012 was $0.03 per share, which was at the high end of our Q3 guidance range, and compared to net income of $0.05 per share in the third quarter of 2011. Adjusted net income for the third quarter of 2012 was $0.08 per share, which is at the midpoint of our Q3 guidance range, and compared to adjusted net income of $0.09 per share in the third quarter of 2011. Adjusted EBITDA for the third quarter of 2012 was $0.13 per share, which is at the high end of our Q3 2012 guidance range, compared to adjusted EBITDA of $0.16 per share in the third quarter of 2011.

Bookings continue to trend higher, reaching $8.1 million in the third quarter, which is 17% greater than Q2 of 2012, and 56% higher than Q3 of 2011. As Rob mentioned, new products represented 17% of bookings during the quarter, as a percentage in line with the previous quarter, but on an absolute dollar basis, an increase from Q2 in 2012. As of the end of the quarter, we had approximately 54 customers using LP Marketer, and about 13 customers using LP Insights, approximately 340 customers using ADE and Keyword Optimizer, and more than 250 customers using our APIs.

In total, as Rob mentioned, we have approximately 600 customers using more than one LivePerson product. We signed 184 deals in the quarter, compared to 136 deals in the second quarter. During the quarter we added four new enterprise and mid-market customers, including Tupperware, Smith & Wesson, and Seamless. We also continue to deepen and expand the relationships with existing customers, including Virgin Atlantic, PR Newswire, and Forex Capital Markets.

Our small-business group's revenue was flat in the third quarter when compared to the second quarter of 2012, and grew 14% over the prior-year period. As Rob mentioned earlier, we currently have about 1,000 small business customers using the beta version of our LiveEngage platform. Average deal size for all deals was $44,000. The average deal size for new customers was $51,000. The average for existing customers singing up for an upsale or expanded business was $41,000. Average sales of customer service channel were approximately $23,000, and sales of our proactive sales product were $54,000.

The breakdown of enterprise and mid-market bookings in revenue terms was approximately 68% for existing customer expansions, and approximately 32% to brand-new customers. In the past, new deals have usually accounted for approximately 20% of our deal volume. As Rob discussed, we have invested heavily in the sales organization, and while we have sequentially increased bookings in 2012, we still have work to do to make [all the rest] fully productive. The breakdown between sales and customer service revenue was approximately 83% weighted towards sales deployments, and 17% towards customer service.

Customer attrition for enterprise and mid-market accounts averaged 1.2% in the third quarter, which is in line with the second quarter. Small business attrition rates averaged 2.6%, which is consistent with the second quarter of 2012. [Paid] performance generated approximately 15% of total enterprise revenue, and 9% of total revenue. Revenue coming from outside of the US was approximately 26% of total revenue, with the UK representing our largest concentration outside of the US. In Europe, we continue to evolve relationships in the region with existing customers, signing expansions with Deutsche Telekom and [Privio] Spain.

The revenue breakdown by industry verticals was consistent with prior quarters. Telecommunications made up approximately 35%, financial services 22%, technology 13%, retail approximately 11%, and Other at 19% for the quarter.

In terms of the scope of our customers, at the end of Q3 2012, we had 30 customers above $500,000 in annualized spend, up from 30 at the end of Q3 2011. In addition, we have 12 customers spending more than $2 million in annualized spend at the end of Q3 2012, up from 4 at the end of Q3 2011. Third-quarter gross margins came in as anticipated at 77%, which compares to 76% in the third quarter of 2011, and 78% in the second quarter of 2012. This [sector] continues to perform well against the US dollar, which has driven foreign currency benefit for most of 2012. We also began to amortize the intangibles from the Look.io acquisition to our cost of goods sold. We anticipate the amortization of intangibles from the Amadesa acquisition to begin in the first quarter of 2013.

We ended the quarter with a cash balance of approximately $103 million, as compared to $101 million at the end of the second quarter. We had $3.9 million in capital expenditures in the third quarter as we prepare for the high season, and $6.9 million in capital expenditures year to date. Third-quarter accounts receivable were $22.8 million. Our DSO metric for the third quarter of 2012 was 53 days, up from the second quarter's 46 days. As discussed in prior calls, we are comfortable with a DSO in the range of 50 to 55 days.

Our tax rate for the first nine months was 40%. We expect the full-year tax rate to be approximately 39%.

Now I would like to discuss the financial expectations for the fourth quarter of 2012, which continues to include costs associated with deals, litigation, and international expansion, as well as deal amortization and operating expenses related to the acquisitions that were completed in the first half of 2012. We expect revenue between $41.5 million to $42 million, adjusted EBITDA between $0.12 and $0.14 per share, adjusted net income between $0.07 and $0.09 per share, and GAAP EPS of $0.02 to $0.04 per share. A fully diluted share count of approximately 58.3 million shares.

Full-year guidance is also reflective of deals and litigation-related expenses, as well as international expansion. The expectations are revenue of $156.5 million to $157 million, adjusted EBITDA of $0.51 to $0.54 per share, adjusted net income per share of $0.30 to $0.33, GAAP EPS of $0.10 to $0.13, and a fully diluted share count of approximately 57.5 million shares. Other full-year 2012 assumption to also count in the aforementioned costs and expenses include amortization of intangibles of approximately $600,000, stock-compensation expense of approximately $10.7 million, depreciation of approximately $7.8 million. Effective tax rate of approximately 39%, a cash tax rate of approximately 37%, annual capital expenditure is approximately $10.4 million. Costs associated with the acquisition, litigation, and international expansion of approximately $5 million, and operating expenses of $1.5 million from the Amadesa and Look acquisitions.

We continue to expect gross margin on a GAAP basis to remain more consistent than last year's levels at about 76% to 77% for the year, but is sensitive to foreign currency fluctuations. Furthermore, as a percent of revenue for the year, we anticipate sales and marketing to be approximately 32%, G&A of approximately 20%, and R&D of approximately 19%.

This covers all the operational and revenue highlights. I would like to remind the listeners and people asking questions that Rob and I are in different locations, so if there is some choppiness to our responses, it is most likely due to the remote locations. If the operator could rejoin the call, we would be happy to take any questions from folks participating. Operator?

(Operator Instructions)

Nathan Schneiderman, ROTH Capital Partners.

This is actually Sean Yuan, sitting in for Nate. Let me start off by asking you, can you provide some high-level broke-brush comments on how we should think about 2013, in terms of revenue and operating margin? Do you think -- is this deal going to be a year-of investment, or are you expecting some level of margin expansion or if that is operating margin?

We haven't given guidance on 2013. We will provide guidance for 2013 after the Q4 call.

How should we think about the pay-for-performance business in Q4? To what extent are you expecting unusual holiday shopping-related traffic search?

From a PFP perspective, we are comfortable where the business is at 9% of total revenue, roughly 15% to 16% of our enterprise revenue. We are comfortable with where it is today. We expect it to be in that 9% of overall revenue.

Also, can you discuss the sales force hiring plan for Q4? How many reps are you planning to end the year with? How many do you plan to hire next year? Also, if possible, can you discuss mid-market reps versus enterprise reps, separately?

We don't break out the mid-market and enterprise reps. In total, as we discussed back in the first-quarter call, our plan is to have about 50 [quarter-countering] reps by the end of the year. Today, we are about to 48, and our expectation is still to be in the neighborhood of 50 quarter-countering reps by the end of 2012.

Okay. Thank you for taking my questions. I will get back in queue.

Richard Fetyko, Janney Capital.

First of all, on the topic of elongation of implementation periods that you've experienced. Could you give us some idea, perhaps how many days, weeks, or months, was a difficult deal taking previously and taking now? And, secondly, can you give us a little more color around the INgage acquisition? Will there be impact in the fourth quarter? Should we expect impact on the 2013 numbers? Profitable business, will there be some dilution into earnings, as well?

On the first part of the question, when we look at the core business, we can implement around 60, 90 days. Because there is a lot of process around it. Now that we have -- we've built this pipeline up, we have really good bookings. Now we've got delivery. We are seeing a lot of hand holding with our customers, which is extending out for four months or so.

It's not a little longer, because there's a number of different use cases. They want it implement in different areas. They're doing LP Marketer in one area and Chat in another area. Then, to do insights, we've got to bring in a transfer some stuff. There's a little bit of a learning curve that we are going through, now that we've got the deal going. We've extended out the deployments a little, which has affected the recognized revenue piece of it.

The goal, here, is to have all these products on the live engage platform. Today they were all separate, which is also creating a little friction. Really, the goal is to do that. We have about 1,000 customers, small businesses, starting online. It's kind of, we don't want our customers to just be on their own right now and just dump a product on their lap and say, good luck. We are spending more time than normal on getting those use cases, like we are seeing with Home Depot and PetCo, and some of these companies who were at Aspire.

Makes sense. Actually, while we are on that topic, do you feel like you need to step up a little bit more in the professional services area to keep up with the demand?

Yes. I mean there's probably a little bit, but what we are really focused on is getting the platform out, and getting it to be much more frictionless to go live. But we are going to shift some resources within the company to help with these implementations. Once again, our goal is to make sure that we don't get someone up on LP Marketer and then they leave us because they can't find a use case.

We found, as we said before, use cases we never thought about. Like filling out a form or liking someone on a Facebook page. We want to get those learning. We are taking our time. But, bookings are strong, the future looks really great. We just got to take our time with it. I expect things to move quicker the next quarter or so, as we understand how to do these implementations. We get more of a process behind them.

Got you. Understood. On the INgage acquisition, Dan, perhaps you have some insight on the impact?

Sure. We are just announcing -- we have not closed the deal yet, but we have signed the deal. We expect to close in the fourth quarter. Sometime in the fourth quarter. Considering there's only about a month and a half to two months left, the impact will be minimal in 2012. The company, at this point, is profitable. We don't expect it to be diluted. But the revenue stream is not large.

Thanks.

Mark Schappel, Benchmark Capital.

Switching gears a little bit, here. Rob, I was wondering if you could give us a little bit on the Apple roll out, where you are with that?

Yes. We are in the middle of getting -- this is the rollout where we do chat, video, voice, and screen sharing. We have already deployed in two or three countries. We are continuing. We are going to have US deployment shortly. So, that continues to roll out. Then, we've got other customers -- a handful of customers that are lined up to get the connect platform beyond that. So far so good. We like what we see, and we like the demand that we are seeing with some of our larger enterprise customers.

Once again, all of these technologies collapses down onto the live engage platform. It'll be much easier for our customers to decide, let me give this person content. I'm giving this person video. Let me give this person a voice call or chat. The connect framework is going down into live engage, as we speak, also.

Okay. Thank you. With respect to the difficulties you're seeing on the revenue front, is there anything geographic-based with respect to that? Are you seeing a little bit more difficulty overseas? I know you are trying to expand aggressively overseas. I was wondering if you are seeing some more trouble over there than you are domestically?

I don't think we are seeing trouble. I think we are seeing pockets of weakness in Europe. I don't think we are seeing wholesale trouble, at this point. We have strong bookings from Europe, just like we did in the US. We continue to build up our base in the Pacific and the acquisition should afford us a good spot to continue to grow in the Asia-Pacific region. In Europe, like I said, we've got pockets of weakness, but no wholesale of not purchasing or not bookings.

Okay. Thank you. That's helpful.

Mike Latimore, Northland Capital.

Just back on the elongation of implementation. You talked about, I think 32%, of your bookings coming from new products. Is it primarily those, that 32%, where the elongation is occurring? Or are you also seeing longer time frames for the non-new product bookings?

No. It's -- because we've got -- the 32% is new customers. So, the new customers are taking, obviously, longer. The existing customers are getting use cases. The new customers to take longer now. Because, when we go into a customer, we have this whole practice engagement we do, where we map the user engagement on their site. We decide where chat is going to be, where voice is going to be, where content is going to be. We look at different use cases.

The new ones take longer, because we are now doing tagging. We have that, which we normally do, and then we have to put the multi-product in there. They are taking longer. We have more of them now, which is a great sign. So, it's just -- also, we decided we can just push these things through. If we don't take our time with them, I think we are more focused on the recurring revenue element. We make the booking -- if it goes to attrition in the future, we have wasted that sale. We are very focused, now, to make sure we get it right. We hand-hold our customers, and we get below the line. But the combination of a much more, bigger, newer base, plus multi-product caused all little bit of hang-up in the implementations.

What about, I think your thought is to upgrade current customers. Add new tags to their site so they can handle INgage next year. Do you think that would lead to any longer implementation on the current customers, or non-material change?

We're hoping it won't. They don't have to have it 100%, that gives them an enhanced way to collect the data. We want our customers to have that, but it's not a necessary thing. The people who are going on INgage now, some have the new tags, some don't. LP Marketer customers are using old tags. It is the old [packing structure]. We like the new tagging structure because it allows us to collect data in a different format. It allows us to create a more structured of capturing data internally, but it's not a necessary requirement.

Last, on PFP. I don't think that's expected by these implementation time-frames, but shouldn't that grow as a percent in the next couple of quarters?

Yes. I mean -- go ahead, Dan.

From a PFP perspective, it's growing a little bit less than at the rate of the overall business. We are comfortable with where it is. We are comfortable with the growth in the business and, as far as being 9% of the overall business. We've always said it should be between 9% and 10% of the overall business.

All right.

Look, we believe it should grow at a greater rate. I think there's a focus on it right now. I'm would not say we're 100% happy with it. I think there's a lot more we can do with it. We are actually taking the guys from Amadesa and running a different level of predictive model on it. So, we've got that. We are looking at our labor partners. I'm not 100% happy with where we are with it. I think there's a lot of room to grow there.

We are also doing -- starting to performance base with LP Marketer. We are also seeing performance-base there. I think there's really opportunity for our company to build more performance-based programs. So we have a focus now. I'd like to see it get to the next level.

Thank you.

Craig Nankervis, First Analysis.

On the push out on the elongation of the implementations, can you, Rob, maybe discuss a little why you didn't see this in Q2 and what happened between Q2 and Q3 that now, of a sudden, it's an issue? It might not have been, previously. That would be a good place to start.

You know, it's just sort of a stack up. We started Q1 with those bigger -- with the big bookings. Q2 comes and it's six months. They start to roll. You think about when we signed a deal, by the time it goes live it's four months. So, while we are waiting were thinking, okay, this is going to happen at a certain timeframe. Does it look like how it normally does? That already puts us into the second quarter. Then, we are starting to see that slowdown second quarter and then come into third quarter, now we have that data. We are looking at it and saying, what's going on? We talked to implementation managers and PS and we see how our customers are using our products. They're just like, look, these are new products. We've got to take our time with it.

We've got good use cases, we got some enterprise customers who are using this in many different places. It is tying up more labor than normal. Then we do a chat, and we implement. Then we move them on from implementation to a PS engagement to almost a self-service. But here, we have to stay with them more before we let them go to PS and then self-service. It's by design, right now. Our greatest focus is, are people buying products and are they staying with the new products, or are they leaving? They are staying.

The reason they are staying is because we are working with them and building those use cases. It takes that time between the first sale, say in January, by the fourth month, okay, we are off here. We can see that happening more into Q2. And now Q3. So, we have the data and we want to share it. We can project into Q4, now, and look into the future a little bit.

Okay. Thanks for that. How do we think about the extra costs associated with that? Can you just help us with about how that's being absorbed or how that's incurred?

Well, one of the things you will see in the revenue, in the detail, is PS revenue has picked up. We are covering a base level of that cost with charging for it. Some of it we give for free, where we are implementing. Some is extended and we are sharing that burden, the customer is sharing that burden with us. PS revenue has picked up a fair amount. That is really an indication of PS being more in the implementation cycle than longer.

Once again, the strategy was -- we had multiple products owned by different product owners. We wanted to free them, so they could go out freely into the market. Get their use cases, drive it through sales, which we've seen great successes with the bookings. Then, where we are moving this to is all those products will ship back into the live engage platform, where there is one single sign-on, there is one way in which you segment a customer, and then you can pick your multiple engagement channels. We've got 1,000 small businesses on that already. That's going to start to roll out through 2013, and that should start to reduce the friction. There won't be all these different products in the market, different training's and things like that.

Okay. So that was sort of my next question. What happens, exactly, in your mind, that solves this issue that's come up. I guess, you are saying, in part, it's getting back to the live engage platform. Is that sort of the key, here? To ironing this out, or are there other things?

No. That has always been the strategy. That's why live engage is out there. We knew that you don't want to support four or five products in the market like separate products, separate logins. You want to have that collapsing down. The strategy from the beginning was live engage. We started with LP Marketer, LP Insight, ABE, Keyword lift, and now those are collapsing down into the platform. The platform is already in beta, with about 1,000 small business customers. The strategy is the strategy. We are about 2% off on our overall goal for the year in revenue. We'd like to hit that and beat those numbers, but we also have to be very careful right now not to jam these products down our customers' throats. Leave them.

Then, we are going to lose a Home Depot or a PetCo, or whatever, because we are not holding their hand. So, it's very important we do that. But, we've got a lot of learnings down. You can see we have a good base customers. We're going to start baking those learnings into the product, into the engaged platform before it. We are on it. We are focused on it.

Thanks for all that. Just lastly, real quick. Any comment on what's going on, on the consumer side? I mean, you had a couple nicer quarters for consumer in the first half of the year. Now, it's a bit lighter. Anything to say on what's happening there?

Q3 is always a little light. You have students that are gone for the summer season. There's holidays. It's the consumer business. There is always a little seasonality through Q3. Q4 usually picks up because we have the education and tutoring category back. I expect it to come back a little bit in Q4. We've been very also focused on the capital aspects of that business. But, I think, going into 2013, we want to grow it at a different rate than we are. Because it's a good business. It's a good little business.

Thanks for the help.

Jeff Van Rhee, Craig-Hallum.

Couple questions, here. First, Rob, in terms of the time to go live, can you give any more proof points or a little more detail behind your conviction or confidence in the four-month window? What gives you confidence that it stays at four and doesn't end up at five or six next time we talk? Just fill in the gaps, there, a little bit if you would?

We've got, now, enough customers under our belt. We can see where some of the extra work they want us to do with them is -- so, I think we feel good about it. But, I have to tell you, the focus is success, and making sure they don't leave us. So, if it extends out another month and we had to do that, we would do that. Today, we have enough customers now because we've now got about 2.5 quarters worth of sales in this, starting with implementation, that I feel like we've got a good baseline. Now, we are also attacking some of the issues. So, some of the things we see we can productize. Some of the things we can do we can also create processes around them that can be repeatable. But a lot of the last couple of months has been pone off around how do we implement Insights, and how do we employ Marketer. I feel like we have a good sense of what the challenges are in that -- you can see going to Q4, once again, between the platform coming out and our understanding what some of the challenges are.

Once again, the most important thing is customers are staying with it and they're growing, and the bookings number -- they are buying new ones. The new customers talk to the existing customers who are using these new products and say, how it's going? We've got to make sure we have a reference-able base, right now.

You can productise it, obviously, that would streamline it -- improving the processes in other items. The vision that ultimately leads to a point where you have to reconsider, reevaluate staffing levels, particularly on the professional services side?

No. I do want to -- I just want to make sure that we have a product-focused organization, here. The product has to be frictionless. The way we are moving with live INgage is that a customer can get up and use it on their own. We would have professional services come in where we think there is added value, and not doing the more commodity implementations stuff that they have to do today. Rule-building. To do a lot of rule-building today.

Building rules for an LP Marketer campaign are different rules than in LP Chat. They are spending a lot of time building rules. There are things we can do to automate that. AD automates some of that. It takes Google analytics and uses a base data to build automatic rules. Ultimately, we want to productize stuff and we want this to be a very frictionless platform. It has to be. That was the vision of it and that's the way we are delivering.

Okay. And then, last one, just on the bookings. Obviously, overall very good bookings number. New products, really good bookings number. The offset of the legacy products. Can you just talk about the demand environment and the bookings environment for the legacy? Whether or not you are satisfied there, whether you are concerned there, any changes you might be making?

Well, it's interesting. We were talking about this internally. There will be a day where there is -- we call it the core. We still call it the core, which is chat, and ultimately, there is a day where the core is the platform. We are very focused on the strategy of engagement with consumers. We are up to about 20 million interactions of chat in Q3, and that was up from 15 million at the beginning of the year. And now we've got healthy marketer interactions happening. We are all about, how do we get the platform out?

We are not as focused on is it just the core being chat, its -- for us, we have to transition the mindset for the core as the platform. With that said, chats got a lot to go. We are only at 5%, 10% penetration of all the contact center seat. We've got the connect framework where we are doing video, voice, stuff we are doing with Apple. There's a lot of exciting things in that product. It's really a positive overall strategy.

Just last one to follow in that. How quickly do expect that sort of migration away from legacy being a material part of the bookings? If we are talking in a couple of years, roughly, how do think about that split between what we are now calling the legacy or core and new products?

I don't know what the percentage would be, but I just now talk -- if we didn't talk about in the future. Is just like the question is how many consumers did you guys engage on your platform in the month for the quarter? Last, like I said, we were doing about 20 million chats right now a month on the platform, up from 15 million at the beginning of the year. But we were talking about overall engagement, so we would say we have 100 million engagements out of 1.6 billion visitors a month. That is going to be a lot of visitors. In the future, we'd like to talk about it like that. I think it would be more like a 50/50 split. It would be very blended, the conversation.

Great. Thank you.

Shyam Patil, Raymond James.

And this is not necessarily trying to get 2013 guidance or anything like that, but when you look at the top line, on a blended basis, of the new products and the core chat products, do you still view the business as a 20%, 25% top line grower over time?

Yes. I mean, look -- we think that's a good rate. We set out to actually want to do better than that. That's the goal. We only touch about 2% of the traffic that we monitor in chat. With all these new products that we've got 98% of the other traffic we don't touch to go after with the non-chat stuff and voice and video. So, yes. The goal is to do that. There's a lot of excitement in the base. There's customers -- the interesting thing I'm finding fascinating right now -- I'm actually in Israel, but I have been in Europe the last couple of weeks. Customers are really finding it challenging to get more traffic to their website. And the thing I was startled about, a lot of the customers are up 50% on the paid traffic that they buy bounces off the first page. When we meet with them, they are like, look, we have run out of ways in which to drive traffic in an efficient way, and in a cost-effective way. We want to focus on, on-site engagement.

So, having the chat and non-chat video and voice, and the keyword lift in these products, gives us a way to go into the market marketer and say that we can help you. The way the marketing mind is shifting, it's shifting towards us. We've been building these products and we are here with them. I think we are in really good position to take advantage of where things are moving.

Great. And then, on the sales force structure, how do you feel about the current structure? Is it where you wanted to be? Or do you anticipate some changes next year?

We set out, from the beginning of the year, saying that this is an investment year. We were going to put additional feet on the street and expand our coverage, from a sales perspective. We've hired quite a few people. We've increased the sales force by -- quarter-carrying guys by about 50%. The goal is to get them up to speed and as productive as we possibly can.

While they've had a strong bookings quarter, we need to continue to make sure our team is productive and the support of the organizations around them making them as productive as they possibly can be. We still have some work to do. Erica, who is our head of sales, who joined us back in the second quarter. She's understanding the organization, getting a good feel of our customers, meeting with customers. We will continue to make progress and change as we move into 2013.

Okay. Great. My last one. On the litigation and legal cost, can you maybe talk about where we are with that? What kind of expectations going forward?

Yes. The bucket that we've talked about, a bucket of deal litigation and international expansion. Year-to-date, we have spent about $3.7 million of that $5 million we talked about at the end of the Q2 call. We are still actively involved with patent trade, and every now and then, as part of the business, you have patent trials come up and start engaging you in potential litigation. We will continue to progress against that litigation. We think we will continue to pursue all avenues from a legal perspective as we can against these patent trials.

Okay. Thank you.

Brian Murphy, Sidoti and Company.

Thanks for taking my question. Rob, you may have touched on this. Given the longer implementation periods, can you give us a sense for what kind of impact, if any, that might have on near-term bookings? Could we see bookings pick up here in Q4, particularly ahead of the platform release?

I think we feel we've got a nice run rate happening on the bookings side. We've got to really separate bookings from those implementations. The sales guys are going out now. They are armed with case studies. They've got -- you can reference more customers with new products. They've got the connection framework. They've got the platform. They have a lot in there. They bag to sell. We've seen increase.

We had a big step up, obviously, in Q3. We feel good about what we are seeing in pure bookings and new sales. It's really disconnected from that implementation cycles, once they are handed off to PS.

From a customer standpoint, the longer implementation cycles are not an impediment to doing the business?

No. The only thing that will push things back is if we start to up-sell, obviously. Normally, there's a certain amount of up-selling happening in that base, once we get them outside of chat, that is. Chat, we have a process to deliver and then up-sell and move it along. But, in new products, it could push back up-sells a little bit. But a lot of these bookings are, obviously, new customers. I think we feel good about the bookings and where we are going with it, right now.

Okay. Great. Thank you.

Jon Hickman, Ladenburg Thalmann.

Just one more question about the implementation. I'm not trying to put words in your mouth. Do you think it's, since the fourth quarter, people, your customers don't like to do much because they are in the holiday selling season. So, do you think it's the first quarter of next year by the time this kind of normalizes itself?

Yes. I think that's why we also look at Q4. We know there's lock-downs on the site. There's some stuff there, we know where our customers are, obviously, in Q4. That is releases itself going into the first half of the year. We are being cautious and kind of seeing where those implementations are happening. Especially with large enterprises, small business, non-retail sites, you wouldn't see that as much. But in the corporate, big companies, you are going to see that in retail.

Then, talk about -- you talked about your sales force. You are still kind of getting them to where you want them to be, because many of them are new.

Yes.

If they are as successful as you want them to be, aren't you kind of creating a little bit of -- I mean, it's a good problem to have. But, your implementation cycles might stay prolonged if your sales guys are successful.

Look. It's something that we know. If you look back in 2005 when we first created proactive chat, you are going to see the same thing. It's a new product in the market. Learn how to do it. We had to build the rules. People are tagging their website, which was different. We go through and it just became a process. Obviously, we are talking about it on this call. You can imagine the conversations we're having internally on this about how can we speed this up. There's certain things we know that we can, now, put into a process to replicate. Certain things we want to bake into the platform. Certain things, we are saying, we have got to keep touching them because we are getting good results.

We are seeing new use cases, so stay on it. Or, we've got to try building different rule sets and things like that. With the engagement, with the intelligence. We are playing around a little bit. We are on it. We're focused, we are talking about it here, so you can imagine we are talking about it internally. As long as we have that focus, we can move it along.

Okay. Dan, could I just ask you to repeat a couple of numbers for me? How many customers to do so you had above $2 million? Was it 12?

Yes.

And 30 -- how many above $500,000?

You have 38 in total above $500,000.

Okay.

And 12 spending more than $2 million -- those 12 are inclusive of that 38.

Yes, okay. And then, could you repeat the percentages, your year-end percentages of revenue? For sales and marketing, G&A and R&D?

Sure. Hold on one second.

-- as fast as you wrote them --

Sales and marketing 32%, G&A 20%, R&D 19%.

Okay. Thank you, that's it for me.

There are no more questions at this time.

I look forward to seeing you guys in the next quarter. I lost you there on the sound from Israel. Hopefully you will come out to our Feeding NYC event. There is a lot of people in need now in New York City, and it would be great if we could all get out -- we are going to feed 3,000 or 4,000 families on the 20th. If you want to come out and help, go to feedingnyc.org, and with that, I will see you in Q1. Have a good one. Thanks.

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