LivePerson Inc (LPSN) 2015 Q2 法說會逐字稿

Good afternoon, my name is Brandon. I will be your conference operator today. At this time I would like to welcome everyone to the LivePerson second quarter 2015 earnings 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). On the call today are LivePerson's founder and CEO Rob LaCascio and Dan Murphy. Sir, you may take it away.

Thanks very much. Before we begin I'd like to remind listeners that during this conference call comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time and we undertake no obligation to inform you if they do.

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

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

Thank you for joining us for LivePerson second quarter 2015 call. I was pleased to report revenue and adjusted EBIDTA at the high end of our guidance ranges. LivePerson delivered it's 52 consecutive period of year-over-year revenue growth in the second quarter with revenue increasing 22% in constant currency year-over-year. We made great strides this past quarter in delivering our vision to the market through our LiveEngage platform and as I mentioned in the past, our vision to eliminate the need to deliver the majority of customer care through the use of antiquated 800 numbers and that's the majority of how we get our service today.

My dream is to obviously get rid of it all together. I think the 800 number is a very big problem. It's about 270 billion calls are made a year that consumers are making to brands, and we have a platform that is a weapon for us to really impact those phone calls and that's LiveEngage. There's some interesting stats around the calling of 800 number. Each call on average costs a company about $6.00 so there's about $1.2 trillion in spending that's going into something that 85% of the time puts the consumer on hold.

So that's a lot of money to spend on really pissing people off when you think about the amount of funding a brand is putting into it. Most of our competitors today, and we'll start to talk a little bit differently about the competitive set, which is the genesis of the world of IM Cisco and their call center solutions, they keep trying to sell the fact that people like to call the 800 number because there's 270 billion calls made a year. So the concept is, like, of course people like to call.

But the brands are starting to realize that that's not the case. And not only is it expensive for them, but they're seeing day after day their consumers now publicly going online in social networks and saying it sucks. And we saw it with Comcast a couple quarters ago. We see it every day. Someone is recording a call and putting it out. So the 800 number in itself, it's a lose lose situation and for the consumer as well as the brand things have to change. There's obviously -- we're focused on the that and that's a shift for us a little bit.

We've obviously dominated providing engagement on a website, but now it's time to extend that to how do we move what's happening between voice calls on to our platform. And we even have been sponsoring a movement called Hold No More. We can go to the website holdnomore.org, and you can check out some of the things that are happening in which we are starting to collect the feedback of consumers and they are posting pictures of themselves on hold and doing things to show their displeasure with it.

As I mentioned, LiveEngage is our weapon to deliver the strategy and just a few quarters now 25% of our customer base has been moved onto the platform and we've doubled the number of enterprises that market customers quarter-over-quarter. I know there's a focus on it internally, especially externally, about when are you going to get everyone over to LiveEngage and obviously that's the number one thing because it delivers our strategy and I think we're moving quite quickly at doing it. Obviously we continue to add more features to the platform as we move more -- create more features we're moving more and more of the enterprise.

We expect by 2016 to probably have everyone across the line, but we're just moving it as they want to move and as we move to creating more of those features, which -- we're seeing very strong adoption with LiveEngage and the people that are on it. Brands that are on LiveEngage are growing interactions faster than the ones that were on The Legacy. Our LiveEngage interaction tripled sequentially in the second quarter, an acceleration from 75% sequential growth in the first quarter. So as they get on the platform they're using more of it. One of the many highlights of the quarter was the signing of a new seven figure deal, Global Technology consulting firm on the LiveEngage platform.

They're an industry leader and they recently launched a new service to compile real-time conversations on mobile devices between technology consultants and the millions of consumers that want advice. Their incumbent chat provider was delivering basically a very focused chat product, didn't scale, no mobile capabilities and so we were selected to replace that competitor because of our focus on mobile and our ability to scale millions of interactions. This brand also obviously valued the things we can provide on security.

In this day and age, the data we collect through the engagement is all the private data and credit cards and we're able to provide the things that are necessary to secure that data at enterprise levels. We also signed one of the top telco firms in Japan on the LiveEngage platform. The company signed with LivePerson after looking at the industry and we beat out our competition primarily due to not only the platform but we're starting to build some real momentum. We've got a large bank, [Nuvo] and couple other banks and telcos so we're starting to build a nice base of business out in that market and that continues to expand in our secondary markets outside the U.S. and UK.

Contact At Once is also doing quite well. During the quarter we signed a contract with one of the largest online marketplaces for real estate. So we've been a pilot. The pilot converted into a contract now, and now we'll be focusing on obviously building up the vertical of home builders along with the value of the relationships that we can bring between this marketplace, the builders, the real estate agents, and we can bring that all together on that -- on the platform. So we're looking for real growth in that segment on 2016 and beyond.

One of the major pillars of LiveEngage is its ability to scale and the platform, one unique principal is allowing us to drive a higher level of concurrency and continuous improvements on the self-service journeys. And so one of the things not only are we talking about the experience of, hey, you can drive out calls, you can move 800 number calls to mobile. The other half of the story is, we can do it in a much more efficient way than voice. An agent can handle more than two or three messages at a time, two or three customers at a time.

For example, leading retailer saw very strong results in engaging the performance of the customer care professionals. They saw a nearly 50% increase in interactive chats, a 70% increase in the number of simultaneous chats handled by each agent, an increase in customer satisfaction of 80% to 85%. So that connection that we're providing plus the concurrency allows us to be quite -- much more efficient than the voice channel.

We also saw similar success with the telco in Europe. We've been working with this telco for a number of years, and we analyzed about 50,000 of their interactions. This is part of our LP Insights product and what we see is some results that are pretty significant. One is it informs the increase in self-service journeys. What they're seeing is that the content that they're using in driving not only chats, but the content on the site, we're able to drive much more self-service on the website so the consumer doesn't have to interact and nearly -- they have a 90% customer satisfaction level from 2014 forward, using the platform.

So interesting enough, Aberdeen put out a report during the quarter that talked about the value of messaging and scale with the customer care professionals and they showed that it -- messaging over voice you get at least a 30% savings, if not a 50% savings. And the annual lifetime value is far greater than voice. Voice is a very disconnecting experience. I talk to a customer service rep, I had to hit one, two or three, I had to be on hold. All of that provides a disconnected experience. When you put someone to mobile messaging or even chat on the website you have a much more engaged customer.

And so we're able to show higher conversions and what I, what we look at is really the yield per labor hour. How many more interaction can we do per hour? How many more of those turn into a sale? And how many more of those drive greater connection between brand and consumer? And we see all those things on our platform. LivePerson spent the past two years, obviously, building a strong cultural foundation and now we have an award-winning platform and we're leveraging the foundation to really drive the Company to the next level.

We had very good growth in the second quarter, as I mentioned revenue increased 22% year-over-year in constant currency. We have a very solid sales pipeline right now. We continue to sign in the pipeline very large enterprises because that's really obviously where we're deriving the business from. And the Company also is very focused right now on how do we generate greater leverage off the bottom line. As I mentioned on the last call, the last three years has really been about building. How do we create a good culture? How do we invest in that? How do we create a great platform? How do we invest in that?

But we are, with those investments, ready to bring the top and bottom line up and we're focused on getting leverage in both areas. We're confident about the future of our business. We have our Aspire event happening in a few months on October 21 here in New York City, it's our biggest conference. We will be unveiling I think some major pieces to the platform that, once again, will help us accelerate the strategy of killing the 800 number and we're very excited about some of the things we'll be showing in a few months.

With that I'll turn the call over to Dan who will review our second quarter 2015 results in more detail and provide an update to our outlook. Dan.

Thanks, Rob. I will begin with a review of our second quarter 2015 operational and financial highlights and finish with an update to our guidance. The operational highlights for the quarter include, LivePerson generated 19% growth in the B2B segment despite a negative six percentage point impact for foreign exchange. We doubled the number of enterprise and mid-market brands on the LiveEngage platform sequentially. We now have approximately 25% of LivePerson's customer base on the platform. We added a second seven figure enterprise contract to LiveEngage.

In total, LiveEngage interactions more than tripled sequentially in the second quarter. Brands on LiveEngage on average are increasing interactions more rapidly than customers still on our Legacy offering. We are beginning to see an increase in annual paid in advance and multi-year deals as evidenced by the growth in deferred revenue. And mobile remains the fastest growing channel with interactions more than tripling year-over-year. As we move into the back half of the year we will continue to focus on execution and our opportunity to help brands communicate with consumers on their mobile devices.

We will also remain committed to expanding profitability by capitalizing on our scalable model. In fact we pursued several initiatives in the second quarter aimed at capturing $13 million of additional leverage in our model in 2015 as we scale our operation. Turning your attention to our second quarter 2015 operating results, we delivered revenue near the top of our guidance range. Total revenue increased 16% year over year to $59.3 million, excluding an approximately $2.9 million or nearly 6% drag from foreign exchange. Total revenue would have increased 22%. B2B advanced 19% to $55.5 million or 25% year-over-year in constant currency. Continued revenue declined 15% to $3.9 million.

We signed 129 transactions in the second quarter and 36 of those were with new enterprise or mid-market brands and approximately 80% of the deals were on the LiveEngage platform. The Company reported an 88% customer renewal rate in the second quarter of 2015. The customer renewal rate represents the number of enterprise and mid-market customers that renewed contracts with us over the trailing 12 months as a percent of the total enterprise and mid-market contracts that came up for renewal.

On average, revenue per enterprise and mid-market customer increased 5% sequentially in the second quarter of 2015 to $183,000 from $174,000 in the first quarter of 2015. This metric represents the average total revenue generated by each of our enterprise and mid-market customers over the trailing 12 month period. These figures are pro forma to exclude contributions from a previously disclosed customer contract that ended in the second quarter of 2015. The B2B revenue breakdown by industry was telecom 19%, financial services 22%, retail 18%, technology 14%, and other at 27%. Sales coming from outside the U.S. were approximately 34% of total revenue.

Second quarter gross margin was in line with our expectations at approximately 70%. Second quarter per share adjusted EBIDTA at $0.06 and adjusted net income of $0.02 were both at the top of our guidance ranges. GAAP net loss of $0.09 per share was a smaller loss than we had guided. The second quarter 2015 GAAP net loss included $3 million of restructuring costs tied to wind down activities for the contract that ended, adjustment to LivePerson's expense plan and reprioritization of certain initiatives.

The Company's cash balance was $42.5 million at the end of the second quarter of 2015, which includes cash being used as collateral for foreign currency (inaudible). LivePerson generated solid cash flow from operating activity of $7.9 million the second quarter of 2015, aided by 21% sequential and nearly 70% year-over-year growth in deferred revenue. Capital expenditures for the second totaled $6.7 million as a result of our Asia-Pacific data center and began our preparations for the fourth quarter [high season].

Turning your attention to our outlook, we are reaffirming our revenue guidance for 2015 and raising the guidance ranges for our profit measures. For the third quarter of 2015 we expect revenue of $60.5 million to $61.5 million, which includes a negative foreign currency impact of more than $2.5 million. Adjusted EBIDTA of $4.9 million to $5.7 million or $0.08 to $0.10 per share, adjusted net income of $0.03 to $0.05 per share, and GAAP net loss per share of $0.06 to $0.04, with a fully diluted share count of approximately 57.7 shares.

For the full year 2015 our expectations are as follows. Revenue of $243 million to $247 million, which includes a negative foreign currency impact of more than $6 million, adjusted EBIDTA of $19.5 million to $22 million, or $0.34 to $0.38 per share from previous guidance of $19 million to $22 million or $0.33 to $0.38 per share. Adjusted net income per share of $0.12 to $0.15 from previous guidance of $0.10 to $0.15. And a GAAP net loss per share of $0.26 to $0.23 from previous guidance for a net loss per share of $0.29 to $0.24. With a fully diluted share count of approximately 57.5 million shares. Furthermore, as a percent of revenue for the year, we anticipate gross profit to be approximately 70%, sales and marketing 41%, G&A 17%, and R&D 17%.

Please refer to LivePerson's earnings release issued earlier today for details on our full year 2015 assumptions. As the guidance suggests we anticipate our second half 2015 adjusted EBIDTA margin to rebound back to our first quarter margin level despite parting ways on April first with a large customer. This outlook is a direct result of the expense adjustment and reprioritization initiated by LivePerson in the second quarter and combined the scale efficiencies to be generated from the LiveEngage rollout. LivePerson is positioned to deliver improved operating leverage into 2016.

With that, I will open the call to questions. Operator.

(Operator Instructions). And your first question comes from the line of Michael Nemeroff.

Hey, this is Kyle Chen in for Michael Nemeroff. Thanks for taking the question. I guess Rob to start off can you share your thoughts on your sales capacity and productivity this quarter? Are you satisfied with the level of productivity currently? And I guess longer term, what is your strategy to bring sales investments and unit economics more in line with historical levels?

I think we still have a fair amount of capacity in the sales team, obviously we've had some changes in that team in the last two quarters or so. But so I think there's a fair amount of capacity still left. So we'll -- I think we're going to hold where we are right now, capture that capacity, and sort of grow from that. We're doing larger deals so it's basically focused on a very targeted account list right now. We know who we need and we also have a large group of customers that we're obviously trying to expand. A large portion of our revenues come from expansion. So the capacity we have right now we're just focused on getting more out of and leveraging them.

Okay, that's great. And I guess Dan, can you give us updates on the pay for performance business. What was that as a percent of total revs in Q2 and what are your expectations for this business over the next six to 12 months.

Yes. Pay for performance as a percent of total revenues is about 10% of our total revenue. What was the second part of the question Kyle?

I'm sorry. You said it was 10% of total revs?

That's correct.

Okay. I just thought that if might look somewhat different post AT&T in the second quarter.

Yes, that's a great question. We've had a couple of customers in PFP in the pipeline and we were actually able to start ramping them in the second quarter so, we've had the benefit of ramping some of those customers on our PFP product and have seen very good results.

Okay. That's really good to hear. So I guess if we were to exclude AT&T or normalize AT&T for last year and this year and kind of exclude contribution from Contact at Once, do you think you can achieve an organic ex-AT&T growth in excess of 10% this year?

For the year, if I exclude AT&T and exclude what was the other component?

If you normalized for AT&T in both years and exclude Contact at Once in terms of organic ex-AT&T, do you think kind of 10% is the right way to think about the growth rate?

Yes, I mean, I think it's the right way to think about the growth rate, Kyle, but, the big impact is currency. So we have quite a bit of billing happening in Australia and the euro and the pound and as you know currency has been a headache for quite a few companies, including us. And in our guidance we're assuming about $6 million of currency impact.

Sure.

But it's a -- it's played a large factor on our growth rate.

Okay. And I guess if I could squeeze one more in. Just expectations for Contact at Once it seems like there's some revenue synergies here. Are you still expecting the $31 million from that business this year?

The expectation is still the $31 million as we integrate our businesses it's getting harder and harder to break that out. As we focus on the real estate industry and one of the things I highlighted, part of the thesis around the Contact at Once acquisition was moving us out of automotive and putting them into other industries. So making some headway in the real estate industry but it's getting harder and harder to break those numbers out. But as our expectations are now, approximately $31 million.

Okay, great. Thank you very much. Appreciate it.

And your next question comes from the line of Richard Baldry.

Thanks. Can you walk us through how you see the similarities or differences in this new real estate piece for the Contact at Once? Go through having one sort of a major portal now, what the Company's experience has been and, working from that relationship down to the end user relationship and how that sort of payment model works. Thanks.

So it's very similar to the automotive area so you get the marketplace and then the marketplace owners, the owner basically creates what's called an advertising unit and says you can add chat to your advertising, your home builder or dealer or agent, real estate agent. So basically what happens then is most of the agents and builders want to buy because it's an excellent way to promote themselves on that portal, on the marketplace. Then what happens is we go back to the actual broker dealer and also the home builder and we sell for their individual websites.

And so because they're taking the chat off the marketplace, usually they want to take the chat on their local website and have all that integrated. We, LivePerson, for a second, already have a fair amount of home builders because these are very large websites, and we talked about that. There's some synergies there. So we can sort of bring that base. We have some home builders already. And we'll integrate those into the Contact at Once offering. So the synergies are pretty great and there's a great similarity between that and the automotive industry.

With 25% of the base now on LiveEngage, can you talk a little about early experiences with customers who have been moved on to the platform who probably thought we're still just going to stick with chat but they now have all that functionality available to them? Are you seeing more or less than you might have expected testing the other functionality and how sort of that uptake maybe has been in that audience? Thanks.

Yes. There's a lot of content impressions on the platform. So we are using a lot of content. There's a lot of increase of click through on the content and that's how we get paid. So we are seeing usage with the content side. The other side is obviously what we're going to be doing with mobile and all the mobile interactions and so we are seeing greater use. The second part is the analytics. There's the reporting in it and also we released a pretty big part of it which allows you to basically look at the relationship you have with the consumer.

So on real-time you can see if the consumer has a connected relationship with you, and we score it. And we can see if that customer is happy or sad, if I can put it in those terms, in real-time. So you see all the messages happening on the console. You can see like smiley faces and happy faces or sad faces and that's how we show an indication. And they're finding it very valuable. You can imagine like the heads of marketing or the heads of sales or the heads of the contact center can overlook all the interactions in real-time and see, wow, there's an issue with this specific consumer. Let me jump in and see what's going on.

And then we're measuring the impact of that on the business, which we've got some really interesting metrics around if you can drive a more connected consumer you can have a more profitable consumer. So these are some of the features the analytics that are built into the platform now that are also a great benefit and being used by the customer base.

Thanks.

And your next question comes from Brian Schwartz.

Yes, hi, thanks for taking my questions here this afternoon. Rob, I had a follow-up question from Kyle's, his first question, just on the productivity of the deal flow activity in the quarter. Did the reprioritization of the growth initiative, did that have any impact on the sales productivity or the deal flow in the quarter?

No. No. No impact. Which growth initiatives?

I'm coming out of Q1 you were talking about reprioritization. I didn't know if maybe there was some training or maybe you pulled some reps out of for some training or new initiatives.

Yes, in that case, yes. I mean, we obviously in the first quarter did all the training and all that stuff and it's benefiting the impact of some of the sales, the pipeline is growing nicely. So we're seeing the take rate of customers increasing so that's good. So there's the benefit of that, obviously. I just think the leadership there now is -- knows the business and there's very little guessing work in what's got to be done and they're just sort of -- they bring it back to the basics, bring it back to what we -- how we got to where we are and they're just working with the team and executing on that.

Well, you're raising your profitability targets so I assume you're feeling that there's some leverage here in the second half, which is great. Rob, the other question I wanted to dive into, I thought it was really interesting in your introductory comments, you gave an update on the competitive landscape, and you talked about displacing -- it sounds like mostly the legacy telco vendors that are out there in the enterprise market.

Yes.

And what I was kind of curious about is those vendors typically sell either into central IT departments in the enterprise or they sell into the contact center, they're selling very large deals that typically got out of capex budgets.

Yes.

Verse selling into a line of business managers and selling more productivity apps. So I'm just trying to understand, is that maybe more of the focus and the direction now that you have the platform, you're looking to sell bigger deals maybe even to the suite level out of capex budgets versus going for a higher volume of deals selling productivity apps into the line of business managers?

Yes. And I think the thing that we're seeing, there's a big shift in the market. And so like I just -- I was out to a meeting with a CIO of one of the largest banks in the US, who is not a customer of ours. And I was very surprised, what he's been working on at the bank is really about, how do you integrate all the pieces and then he talked about moving to messaging and mobile messaging. And so, and I've seen this at a bunch of companies.

So what's happened is, it's really like a -- it's really a CEO initiative in many ways and it's a suite initiative, which is especially banks and telcos, when you look at them today and let's look at the banking industry, they're highly regulated and so the products don't differentiate and so they are very focused on right now, how do we differentiate with service. So they're looking at a way, which everyone keeps talking about, how do we create a deeper connection with our customers. And they do look at voice now and say where in the past it was like, yeah, voice is the only way to do it and we've got this infrastructure.

They see and they hear from their customers that they're finding that disconnection because they're using that channel. And it's costly and what they've come to the conclusion is no matter how they staff it unless they want to over staff it and really be unprofitable, there's no winning. There's no win. So they're saying can we move that to something different? And then in their own personal lives they're using messaging to communicate with their friends and family so they're saying why can't do I this in my business? So we are seeing a real change in the market.

I was just speaking at call center week. I did like a three-hour seminar there and it was just amazing to see the buyers and how they're thinking now. These are traditional call center guys and they're sick of it. And they also know that these voice guys, who have been selling omni, quote unquote, omnichannel and digital and then they'll throw in chat, they don't do any of that. They tried that, and what they end up doing is very minimal amount of digital, and then they say, well, it doesn't really work because your consumers really want to call you because they're calling you. But the buyers are not buying it anymore.

So I think, and I've said this, in the next 36 months we're going to see a drastic shift in voice and we are going to see an impact and these companies like Genesis and Avia, if you look at them they haven't grown. They're sort of just treading water and they're ripe to be sort of killed. The thing that they can't do is they can't pivot. Pivotive to digital, and they should have been in chat competing with us years ago. In just the court -- but if they do that they're going to cannibalize their court. So we are very focused on them now, and we haven't been. Even though we've got our chat providers, our competitors in that set, they're still much smaller and we're very focused on the next set of competitors.

And so I think, it's an exciting time by it's definitely a shift in the way we're thinking. And it's a much big bigger market. As I said, there's 270 billion calls. Each of those cost about $6 on average. That's $1.2 trillion, which is basically in the system. And it's a huge amount of money that's wasted, and I'm not saying calls will go away completely. But why can't we take 10% of them out today and start moving? And I can see a world three years from now with 50% of calls don't exist and they go into a digital channel into mobile. So that's where our focus is now.

Very interesting. Thanks a lot, Rob, for that update. Very interesting. Dan, last question from me, just a real quick one on metrics. Just wondering if you were able to buy back any shares of the Company stock in Q2? Thanks again for taking my questions.

Sure. Thanks, Kyle. We bought back a small number of shares.

Thank you.

Thanks.

And your next question comes from the line of Glenn [Matsen].

Hi, good afternoon. Congratulations on executing this quarter. I just based one metric, Dan, was it the renewal rate. Could you repeat that, please?

Sure. It was 88%.

Maybe I'm just splitting hairs. Is that a down tick a little bit? I think you were running maybe the low 90s. Is there anything to read into that or anything?

No, there's nothing to read into it. It was a down tick of 1% from the previous revenue reported in Q1.

Okay. Great. Curious, just maybe feedback from the sales force on when they're trying to transition people over to LiveEngage, do you ever get any feedback from them saying, well, this is giving the customer maybe a chance to take a step back and kind of evaluate what other options are out there one more time before they make the plunge on to this new platform or anything like that? Is there anything similar to that in the competition front? Thanks.

No. I don't think LiveEngage, per se, drives that event. Obviously, we've got competitors and there's always thinking of how do they stack up against you guys because we're the leader in what we do. But I don't think it particularly drives that conversation. I think the exciting thing is when we show LiveEngage as I said in the past, we -- imagine our core platform, it is the leading platform in the market. So imagine where -- we're replacing that with a product that -- a platform that, plus all those great things that we built into it for our future.

And so in itself, it's such I think a fantastic platform and the customers see it, they love it. We've got a couple of thousand customers on it already. So in our mind in the Company, it's a question of time. Obviously we're going to get every customer onto it. It's not a question of whether it works or not or whether they really like it when they're on it because they really do. It's a question of time and we're working with them, sort of adding more features that some of the enterprises need. But in our mind it's not sort of a show stopper anymore because it's out and it's going.

Okay, great. And I guess just last the -- did I hear it right? Did you say that 80% of the new enterprise, the mid-market customers went on to LiveEngage? Is that the metric?

No. The metric, just to clarify, the metric was 80% of the 129 deals we did in the second quarter.

Okay, okay, got it. Great.

That's inclusive of selling to new customers and selling to existing customers.

Great, okay. Good. Thanks.

Thank you.

And your next question comes from the line of Mike Latimore.

Thanks. Nice quarter there, guys. The pay for performance being 10% of revenue, were these customers that were kind of already customers and they moved to the pay for performance model or were they new customers?

So it was a combination of two things, Mike. Some were new centers some were existing PFP customers that were able to expand.

Okay, great.

If I understand your question correctly. Was it licensed customers moving over to PFP? Was that your question?

Yes.

Primarily, it's all new PFP or existing PFP that we're expanding.

Did you see this kind of PFP category growing faster than the overall company?

I think it's a good opportunity. I mean, we've always been positive on PFP and we've got a couple of customers, like I said, that we're ramping up and we -- as we move forward we'll still continue to push the PFP. We don't give guidance on specific lines of business but we're happy with how PFP is going right now.

Great. And the small business segment, how is that doing overall? Do you see that growing this year?

It's actually doing well. We're seeing it picking up. We just put out a new offer into the market, sort of a try and buy type of situation, and we also have our mobile product out there that's getting a very good tick rate. So I feel like they're turning a corner and it's going in the right direction. We're getting a lot of downloads and sign-ups a day, which is very different than the past. We just started to put in the marketing about a little over two months ago so it's moving in the right direction and so we're pretty happy with it.

And just last question^ LiveEngage drives a fair amount of efficiencies, I believe. Gross margin eventually, I guess, when do you think sort of LiveEngage implementations and use will help the gross margin line?

We've been in guidance for 2015 we expect our gross margin to be about 70%. There is a cost of ramping up some of these PFP customers, but our goal as we move into 2016 is to focus on our, obviously growth in revenue and profit and gross margins. But eventually I do see helping in the gross margin area, but for 2015 we've given that guidance.

Okay, great. Thank you.

And your next question comes from the line of Craig Nankervis.

Thank you, good afternoon. I guess, Rob, my question is around sort of a forward-looking question. If you were to look a couple years out at how you view these 800 number conversions playing out, I guess, number one, what portion of 800 conversions might you expect to be for service primarily and what portion might be using the platform for sales-related? And then, secondly, how do you see uptake or usage of LiveEngage for 800 number conversion customers versus other customers that you might win for other reasons? Thank you.

The first one I understand. Can you give a little more color on the second question?

Is the 800 number conversion business that you expect to do, would that on average show a different profile of your platform usage than a non-800 number conversion customer, new customer?

Okay. Yes, I think I've got it there. So on the first one, the biggest implementations will be service-related because that's where the majority of the pain is with the 800 number. So you're put on hold mostly post sales. Pre-sales most of the time you're not put on hold because they'll staff those channels to a certain degree. So I expect about 70% of interactions to be service-related and 30% to be sales-related. The interesting thing is it kind of blurs. In the messaging world, service and sales actually blur into one because the consumer is always connected to the brand because the brand can proactively get back to them through mobile. So I think long-term it becomes a blurry world but at the beginning, the big ones we're looking at are on the service side.

Great.

When you look at the usage of the platform, it's really the mobile capabilities of the platform. We do have a piece of the platform now that just came out, which is allowing for IVR deflection. We have a piece of code that goes into the IVR and the IVR is that thing you press, one, two or three or four, it does the routing. We have a piece of code now that's off of LiveEngage, you stick into the IVR, and you can say press one for this and press two or press three to get a message and not do a call. And it sends the message back to the mobile device of that consumer and then they start a secure message right on their mobile device or we can even launch an app. We have the ability to launch an app.

So we are taking the call out of the IVR, which is pretty unique situation, especially once again against the voice guys because we're attacking the first line of their business, which is IVRs. So I expect those types of technologies are the ones that will end up playing into the platform. There is content that we can target back through mobile, just like we do on the web. And then there is a combination of web and mobile, where if a consumer comes through a web channel they can be pulled into the mobile and we know that they're a unique consumer. So, but the mobile capabilities and the ability to deflect out of the IVR is sort of the lead play that we're out with today.

Okay. So you're saying just on that last sentence that you said, you're saying if we thought about the say, your pipeline right now that has 800 number is for 800 number replacement opportunities, that is largely characterized by desire to be more mobile enabled for those prospects? Is that -- do I hear that correctly?

Yes. So, and when we walk in a deal now, obviously, last year, I think I said this at the last call, was the first time where mobile web interactions increased over browser-based interactions. So the mobile is accelerating and then web-based off the desktop is decelerating right now and being replaced. So we're aligned to that. So we walk in the door, we'll lead with our mobile capabilities. Obviously, they're still going to want to do web chat, and they're all integrated on to a single platform. So it's the same platform, same strategy, except because mobile today is the lead dog even for them, we are connected to that, and we have our series of mobile products that are out today.

Okay. That helps me with the landscape. I appreciate that.

Okay.

And your next question comes from Jeff Van Rhee.

Great, thank you. Rob, with respect to the pricing model as you move to LiveEngage and the more transaction oriented pricing structure, is that model matured and ironed out and stable? You see that likely unchanged going forward, or is that still in the process of tweaking and a little more fluid?

Good question, Jeff. I mean, from the model perspective, it remains largely unchanged. We think we're in a good spot and we're talking to our customers all the time about the pricing but we think we're in a good spot.

I'm not sure I understood. So it probably is -- probably stays the way it is? There's no -- I shouldn't be thinking of major tweaks to the variable pricing model as it stands is now.

No.

Okay. Okay. And then to the growth question, just -- I guess help me understand. If the math is this 10% growth out, I understand there's currency moving here, but if you exclude the AT&T and contact at once, should we think of that 10 as coming exclusively from the newly signed customers on LiveEngage and that the existing customers that are being migrated to LiveEngage are -- it's a probably a wash event for those customers in terms of what they're likely to spend, say, in the forward 12? Or do I have that backward?

I think you're slicing it way too thin. We're still selling into existing customers and existing customers that are on the Legacy platform are continuing to grow and they're even on the mid-pricing model. So I think you're slicing it too thin by just saying the growth is going to come from only people on LiveEngage or only the Legacy. We're still out there selling to our customers and we're still engaged in the model and growing their business.

Understanding it's a little early on the enterprise customers on LiveEngage, but you've got a lot more history with the SMB guys who you've migrated a lot earlier. Are there any quantified data points that give us a better sense of what an adoption of LiveEngage looks like over three, six, 12 months in terms of increased spend based on that usage times whatever the pricing model is?

Yes. It's tough when you're looking at the small business customers because, again, they're not using high volumes of our product on a monthly or quarterly basis. But what we have seen in our small business customers is they are using more than just chat and they are using more interactions than they were on the legacy product moving over. So from our perspective, it's going in the right direction, but, again, you're talking about a small number of interactions. Even as we started to move the enterprise and mid-markets over we're starting to see the same trend but it is still a little bit early.

Yes, okay. Then just, I guess, one high level question, Rob, as it relates to the 800 -- the strategy to kill the 800 number. If users prove to slow to change in terms of, I'm using 800, that's the way I want to interact, I may be comfortable with technology, I may be comfortable with chat but I prefer 800. If that morphing of the user and the user's desired method of interacting changes slowly, say, five, ten years it takes people to morph away from that, does the current marketing message still make sense?

Well, we moved. We've already moved. So consumer behavior, we don't use our mobile devices to call people. So the number one and two usage of a mobile device is messaging. Number three is taking a picture. Four is Facebook. Five is alarm clock and six is voice call. So you're right. Actually, what you're saying is right. Consumer behavior you can't change. But the consumer behavior changed. The brand portion is that they're not aligned with consumer behavior and that's the interesting part of the strategy. So we don't want to change consumer behavior.

It's now just a brand aligning to the consumer behavior and I believe it's going to go and go fast because it's not just us who is in the market. There's a lot of people talking about it. And even the companies like Facebook and some of the messenger products of course, somewhere they want to connect with businesses. And they have the consumers too. So I don't think it's a question of consumer behavior. I think it's brand behavior aligning. So we can say brand behavior could be slow, but what I'm seeing in the market right now is that brands will move and they're going to move shortly.

And when we saw it even with proctor chat or chat, when the big brands go like one of the telcos goes or one of the banks goes, they'll follow because it becomes a competitive and that's the goal. So I think you can move quite quickly. I think it's a three year, it's not going to happen over, like, 12 months, but I think we can fire up the first telcos and banks and airlines and get those guys going in the next 12 months and then from there I think it moves quite quickly, but the consumer part is kind of done.

Got it. Okay. Great. Thank you.

And there are no more questions in queue at this time.

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Thank you.

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