LivePerson Inc (LPSN) 2016 Q4 法說會逐字稿

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson's Fourth Quarter 2016 Earnings Call. (Operator Instructions.)

On the call today are LivePerson's founder and CEO, Rob LoCascio; and CFO, Dan Murphy. You may begin.

Thanks very much. Before we begin, please note that we will make forward-looking statements during today's call which are predictions, projections, or other statements about future results. These statement are based on our current expectations and assumptions as of today and are subject to risks and uncertainties. Actual results may differ materially due to various factors, including those described in today's earnings press release, in the comments made during the conference call, and 10-Ks and 10-Qs and other reports we file from time to time with the SEC.

We assume no obligation to update any forward-looking statements. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release, which is available in the Investor Relations section of our website. I will now turn the meeting over to Robert LoCascio, CEO and found of LivePerson.

Thanks, Dan. Thank you for joining LivePerson's fourth quarter 2016 conference call. 2016 was a pivotal year for our Company. It was a year we validated our vision that LiveEngage, our new business messaging platform, will help the world's largest brands reinvent customer care.

It was the also the year we accelerated our migration to LiveEngage, setting us up in 2017 with a very clear picture of our future. Barring any unforeseen changes, we expect to end with approximately 95% of our revenue on LiveEngage by the third quarter. 93% of the customer base is already in the migration funnel, representing almost 60% of revenue. When including our migration funnel, which represents the remaining revenue from brands who have already started moving onto LiveEngage, we have visibility into 84% of recurring software revenue today.

As we discussed last year, there would be a group of customers not likely to come along for the journey, as end-of-life nears for our legacy offering. Today we have identified that risk. Approximately $15 million of revenue will not migrate to LiveEngage, as it's associated with customers that are not aligned to a digital strategy. These contracts will not renew, and we'll start taking the revenue impact primarily in Q1.

We've enabled though to offset this impact by targeting between and $16 million and $19 million of savings in 2017, excluding one-time restructuring and non-cash expenses. Eliminating the migration overhang enables us to fast-forward the winding down of the legacy infrastructure in order to gain meaningful operational efficiencies and strategic focus.

In the third quarter, we'll be left with around $10 million of revenue that will remain on the legacy platform. These are mostly mid-market customers, and a few enterprises that are digitally aligned, but not appropriate to move to LiveEngage in the first half of 2017, because of timing of features that are not on the near-term roadmap. We've executed a strategy that maximizes the profitability of these customers by minimizing their ongoing support and technology costs. And this is tied to the savings in the $16 million to $19 million. We hope to retain and even convert them to portion them into the LiveEngage platform and onto being active revenue.

We can now focus as a company, on growth and selling. We're in a strong position to become the dominant player in transforming the relationships that a brand has digitally with its consumers over messaging. LiveEngage will support that vision, and allow us to do something even greater than we did in the past.

So we tell you about the new chapter, the one we were focused on signing hundreds of world's leading brands to messaging deals over the next 24 months, one where we take aim at a multibillion-dollar market opportunity and transform customer care. All of LivePerson is now focused on this chapter.

Our strategy is clear. Across the globe we are targeting a small group of brands, many of them already customers that hold the power to change the face of customer care. These enterprises have thousands of agents in their contact centers, and connect with billions of consumers each year. Over the next few years we expect virtually every one of them to begin shifting voice agents, and even store-based employees, to messaging.

What's exciting is how clearly we can validate LivePerson's unique position within the marketplace. A year ago, we were talking about the early signs of LiveEngage to deliver on our vision. Today we have the proof points. We exited 2016 as a clear front-runner in enterprise messaging with a large reference brand at scale in LiveEngage in each region of the globe.

We turned on T-Mobile in North America in the second quarter. LiveEngage messaging is already on millions of their devices, and they're still scaling. We turned on another major telco in Asia in the third quarter, and in the fourth quarter a leading brand in EMEA went live.

We have leveraged our unique position these past few months by holding a series of high-touch summits across the United States, Europe, APAC and Israel. Our own customers are the highlight of the events, presenting the case for messaging and LivePerson. Through these summits we have engaged with senior leaders in our targeted enterprise brands.

Our strategy is working. As we have seen powerful customer momentum around our vision. Telstra, the largest telco in Australia, expanded and extended its contract with us in the fourth quarter. Telstra signed a five-year eight-figure deal to deploy LiveEngage across their entire enterprise. Messaging is in the next 12 months of that roadmap, and is the focus of that deal.

Foxtel, Australia's largest pay TV provider, attended the messaging summit, and last month we launched their app with LiveEngage messaging in it. Messaging is the only unit-assisted channel now they are providing in their app. There's no voice or email offered anymore.

In EMEA, a leading financial services firm expanded their contract with us. They signed an eight-figure, three-year contract with plans to deploy messaging in 2017. We also signed a high six-figure expansion with a major telco in EMEA to deploy messaging in early 2017.

In North America, a leader in real-time communications software chose to embed LiveEngage into their platform, and we're now integrating into one of the largest CRM platforms in the market. They will now be a reseller of our technology. And also in North America, one of the leading automotive portals went live with messaging, instantly turning on thousands of dealerships with SMS.

I want to share two anecdotes that demonstrate how our vision resonates. One relates to a prospect that was a former customer. This prospect actually cancelled about 24 months ago on the old platform, after concluding that Chat was not right for their organization. We are now engaged in a seven-figure sales deal, which is strategic to their organization. This, I think, is a really interesting customer. It's a very large customer. And once again, they embrace messaging. And the same decision-maker who looked at Chat as maybe not strategic, and went ahead and embraced messaging and is going to scale with that as a strategy for care. We're just getting started, and we have more wins to share in future quarters.

The shift to LiveEngage marks the most important product launch in our history, as it pivots us to be the lead player in what will be, what I believe is a third wave of digital, which is digitizing the relationships between brands and consumers. The first wave was digitize the world's information, and the second was social. But really the relationship today that a brand has with its consumers is predominantly still analog voice. And commerce, ecommerce accounts for less than 10%, unless you're Amazon, of course.

In the third wave consumers, they won't be forced anymore to call an 800 number, to be put on hold and have a terrible experience. Instead consumers can be connected to their favorite brands the way they're connected to their friends and family. They'll carry those favorite brands in their pocket, and they'll always have a relationship that's convenient and on their time.

This is a game-changing opportunity for LivePerson. And by our estimate, the total addressable market for LiveEngage solely among our base today is approaching about 2 billion. Not only do we have multiple offerings to sell, including messaging, mobile chat, content, analytics and searches, but our open architecture. Because we built our platform on the latest technologies. It's an open platform that allows partners and even our customers to take a rich set of APIs and do [many] integrations.

For example, there's a lot going on right now on our platform around bots. We just actually put up a bot yesterday. A customer in Japan put one up, and is now using it on top of LiveEngage. It's very easy, especially on the bot side, which I think will become more. And we'll talk more about it in future calls. The open APIs allow richness to that type of self-service artificial intelligence.

Our field org is now focused on capturing this opportunity. What's also exciting is that we've already seen great results on LiveEngage, even before the impact on messaging materializes, and even before every single LivePerson employee shifts focus to driving renewed growth, which is happening today as we are finishing the migrations.

Brands are embracing the platform. We are seeing strong mobile adoption out of the gate, accounting for 30% of total interactions of LiveEngage in the fourth quarter, versus less than 10% from what we had on our legacy system. So it's not just mobile, messaging or chat. Brands are adopting multiple interaction types, including co-browse, content, and a very powerful analytics package that comes with the product. In fact, 25% of our customers used more than just desktop Chat in the fourth quarter, versus less than 10% historically.

Year over year, same customer usage growth exceeded 10% in the fourth quarter. That is the beauty of LiveEngage. And brands can quickly and easily adopt additional capabilities. Steady usage growth should ultimately translate into revenue and upsells. And although it is still a small sample set for a year-over-year comparison, we're seeing indications of that trend within our existing customer base.

Dollar retention on LiveEngage in 2016 was greater than 100%. For the customers that are on LiveEngage, the revenue impact is greater than 100% on renewals.

The path towards translating our vision into renewed growth and higher profitability is clear. In 2017 our entire organization is seeking to capitalize on the momentum we are building around LiveEngage and messaging. And LivePerson has once again captured the pole position in a pioneering industry.

We will leverage the unique position we have built around our proven platform, referenceable customer base, and a rich history of digital transformation. We expect to exit 2017 with a revenue run rate that points us toward renewed growth in 2018, and as much the adoption spreads through our customer base, we will be in a position to accelerate upsells and capture the multibillion-dollar market opportunity that is in front of us.

With that, I will turn the call over to Dan, who will discuss our second quarter results and outlook in more detail.

Thanks, Rob. 2016 was a year of significant accomplishments for LivePerson. We accelerated the migration to LiveEngage, and are now on target to have 95% of our revenue on the platform by the third quarter. We are excited to end our transition in 2017 and start our new chapter, with a strong, profitable base of revenue to build upon as we complete the migration, drive messaging adoption, and refocus our field organization on growth.

Early data points from LiveEngage verify the potential of the platform. We had a greater than 100% dollar retention rates on full-service customers on LiveEngage in 2016. Same customer usage on LiveEngage exceeded 10% year-over-year growth in the fourth quarter. And LiveEngage customers are embracing mobile, as mobile accounted for approximately 30% of interactions in the fourth quarter. Equally important, as we are able to fast-forward plans to operationalize cost savings tied to moving brands off legacy, and realigning our go-to-market strategy around LiveEngage.

Excluding one-time restructuring and non-cash charges, we are now targeting $16 million to $19 million of savings in 2017, following the nearly $15 million of savings realized in 2016. The breakdown of the 2017 savings are as follows. We had an approximate $7 million to $8 million reduction in cost of goods sold, as we were able to fast-forward the wind-down of our legacy operations. Gross margin was 69.9% in the fourth quarter of 2015, 73.4% in the fourth quarter of 2016, and projected at approximately 75% in the fourth quarter of 2017.

An approximate $9 million to $10 million reduction in sales and marketing; we are running a leaner, more nimble field organization, as our approach to LiveEngage is to target the world's largest brands, those with the potential to change the face of customer care. An approximate $1 million to $2 million reduction in general and administrative expenses, as we leveraged system investments made over the past few years to operate more efficiently. Conversely, we're increasing our R&D investment by approximately $1 million in 2017, as we focus resources on extending our lead with LiveEngage and messaging.

I will now review our fourth quarter operating results, and then discuss our 2017 financial guidance. Total revenue of $56.1 million was within our guidance range, and consisted of B2B revenue of $51.9 million, and consumer revenue of $4.2 million.

Trailing 12-month average revenue per enterprise and mid-market customer was just over $200,000 in the fourth quarter, in line with prior periods in 2016. We signed 93 deals in the fourth quarter of 2016, as compared to 83 in the third quarter of 2016, and 122 in the fourth quarter of 2015. As we have guided, in 2016 LivePerson focused on migrations instead of upsells from existing customers.

The trailing 12-month customer renewal rate held at 83% throughout 2016 for all of LivePerson. Although we expect the weight will rebound to our 90% plus target once all brands are on LiveEngage.

The B2B revenue breakdown by industry was retail 24%, financial services 26%, telecommunications 15%, technology 9%, and other at 26%. International operations accounted for approximately 37% of total revenue in the fourth quarter.

As I mentioned earlier, we were able to move more quickly to operationalize savings tied to the wind down of our legacy offering and realignment of our field organization. We recorded $7.2 million or $0.13 per share of charges in the fourth quarter. These charges were comprised of $2.8 million of write-down of costs related to shutting down the legacy platform and aligning around our LiveEngage strategy, a $2.6 million roll-off relating to a previous investment, and $1.8 million in litigation fees.

Gross margin in the fourth quarter increased 350 basis points year over year to 73.4%. This improvement primarily reflects the diminishing costs of our legacy operations and lower production costs for LiveEngage as the platform matures at the enterprise level.

Fourth quarter GAAP net loss per share of $0.17 was below previously issued guidance, due to restructuring and one-time charges. Excluding these charges, we would have been in line with our previous guidance.

Adjusted net loss per share of $0.04 was below previously issued guidance, due primarily to non-cash tax effect on non-GAAP add backs, which I will discuss in more detail. Diluted adjusted EBITDA per share of $0.09 was within our guidance range.

The Company held $54.9 million or approximately $1.00 per share of cash, including restricted cash, at the end of fourth quarter, which was in line with the year-ago period. LivePerson generated cash from operations of $24.6 million in 2016, as compared to $21.8 million in 2015. Cash flow continues to benefit from our lower cost structure and our ability to move customers to cash payments in advance on annual billings. Deferred revenue nearly doubled to $27.1 million in the fourth quarter, from $13.9 million a year ago.

Capital expenditures totaled $12.3 million in 2016, and the Company also spent approximately $10 million to repurchase 1.5 million shares of its common stock in 2016. An additional $20 million remains available under the share repurchase authorization.

For 2017 we anticipate starting the year at a low run rate of revenue, reflecting the last stages of our transition from legacy to LiveEngage. We project in the first quarter 2017 about $50 million to $51 million, as compared to $56.1 million of revenue generated in the fourth quarter of 2016.

The guidance incorporates the $15 million of annualized attrition that we're recognizing starting primarily in the first quarter, tied to the transition to LiveEngage from legacy. Also recall that due to our focus on migration versus upselling to existing customers in 2016, we exited the year at a lower recurring revenue run rate than when we started.

Finally, the guidance incorporates the typical seasonality we recognize in our variable revenue streams, as we move from the fourth quarter to the first quarter. We are targeting second half 2017 revenue higher than the first half. This will position us for renewed growth in 2018. Our success leveraging LiveEngage usage growth reducing attrition post migration and steady messaging adoption, offers upside to that run rate in 2018.

The intent is to maintain, if not improve, our non-GAAP margins in 2017 relative to 2016, and position LivePerson with a leaner and more nimble footprint as we prepare for growth in the years ahead.

I will now review our detailed first quarter 2017 and full-year 2017 expectations, which with the exception of GAAP earnings guidance exclude the following estimated restructuring and one-time charges for 2017-- estimated charges of $400,000 to $600,000, or $0.01 per share in the first quarter; and $2.3 million to $2.5 million or $0.04 per share in the third quarter, related primarily to the further cost reductions of our legacy platform; estimated one-time legal expenses of $6 million to $6.5 million, or $0.11 per share tied to litigation.

For the first quarter of 2017, we expect revenue at $50 million to $51 million, GAAP net loss per share of $0.12 to $0.10, adjusted net income per share of zero to $0.02, adjusted EBITDA of $2.9 million to $3.9 million or $0.05 to $0.07 per share.

For the full-year 2017, our expectations are as follows. Revenue of $201 million to $209 million-- revenue guidance includes a negative foreign currency impact of $3 million; a GAAP net loss per share of $0.40 to $0.31; adjusted net income per share of $0.07 to $0.12; and adjusted EBITDA of $17.3 million to $21.3 million or $0.30 to $0.37 per share.

Furthermore, as a percent of revenue for the year, excluding one-time charges, we anticipate gross profit to be approximately 73.5%, sales and marketing at 38.5%, G&A at 16.5%, and R&D will be 20%. Also note that we have updated the methodology for calculating adjusted net profit per share. Whereas we previously incorporated the GAAP tax rate into our calculation, we now start with GAAP pretax profit, add back restructuring, one-time, and non-cash expenses; and then apply a standardized 35% tax rate. The goal of this revised calculation is to limit the volatility of GAAP tax rate fluctuations, and to more closely align non-GAAP taxes with cash taxes.

A full reconciliation of 2016 adjusted EPS under the historical and updated methodologies, is available on the supplemental fourth quarter earnings presentation that you may find on the Investor Relations section of the Company's website.

In addition, please refer to LivePerson's earnings release issued earlier today for details on our full-year 2017 assumptions. We've also published a supplemental presentation in the Investor Relations page of our website that reviews key points from the earnings call.

I'll close with what I view as a summary of our key takeaways. With migration ending in 2017, we now have the visibility to target the [bottom-end] revenue for LivePerson's transition. Our forecast for $201 million to $209 million in revenue in 2017 provides a solid base to build upon future periods. We successfully protected cash flow. We're on target to shred approximately $16 million to $19 million in 2017 expenses. This is in addition to the $15 million in 2016, when excluding one-time restructuring and non-cash costs.

By Q4 of 2017, we expect to have increased our gross margin by 500 basis points to 75%, as compared to Q4 of 2015. With $55 million and nearly $1.00 per share in cash and no debt, we have a healthy capital structure in place to execute on our vision. Deferred revenue nearly doubled to $27.1 million in 2016, and although early, we're seeing greater than 100% dollar returns on LiveEngage from full-service customers.

With that, I'll open the call to questions. Operator?

(Operator Instructions) Richard Baldry, ROTH Capital

Thanks. Can you talk a bit about the difference in the go-to-market between customers who you know you're targeting up front for messaging opportunities versus ones that are more applicable across the LiveEngage platform? Do you have different people going after those very narrow messaging types of opportunities, or is it really everyone selling across the board?

It's everyone selling across the board, although the target, there's a big focus on a very small group of customers that have very large contact centers. We have about 23% of the total target that we're going after right now. Because that's where we think we can have the greatest impact. And we're seeing with like, the T-Mobiles, the impact we can have on these large enterprises and the scale of it, is what the platform is all about.

With that said, we have small business and mid-market customers that have gone live also on messaging. They've also done messaging on Google and Facebook. And as front end, some in-app, but we're very targeted on the enterprise. Which allows us to focus and have a very, very small enterprise team going after this group of customers.

And can you talk a little bit about the deployments and how their revenues are recognized on those deals, when you think about either large six-figure or low seven-figure deals? Do they ramp pretty quickly and the revenue is recognized ratably? Does the revenues come in sort of in a hockey stick, as they deploy but it takes a while to get it out into the customers, and get an active set of users?

Yes. So from a [method] perspective, although it's still early on the deals that we've sold, we expect it to increase over time. So from the initial contract date, there's an implementation period of time. And that's a little bit longer than just your normal LiveEngage piece, but not much. And then over time we recognize a little bit more revenue as they roll out to their business.

And we're deploying both care and sales. And we're obviously doing integrations into their back-ends and into their apps. So there's a little bit of an integration piece that's a little stickier than even in Chat.

So with the-- so the customers identified that you think are going to maintain on the platform versus the stub customers that you don't think are going to come; how much are your sales time now on-- or your sales bandwidth can be reallocated to growth? Is it really now it's 100% they can focus, or is there still a certain amount of hand-holding the salesforce has to do as they finish that migration through Q3?

It's pretty much, it's almost 100% of their time now can be focused on selling. We did, as you can see, we took a-- there's an impact on revenue, about $15 million of those customers we thought weren't going to convert for many reasons, some strategic, some product apps, some things. But we just wanted to move on. And now we, as a company, can be out there focused on selling.

I know from my time, I'm spending 90% of my time out with customers, to talk about messaging and focused on supporting the sales team as they go to market. So we're getting back that capacity in the R&D. We're about-- I'd say, 50% to 60% is focused on features that are not related to the legacy. But we're still finishing up some for the customers that are going live right now, or migrating to LiveEngage.

But the organization, we've shifted. And we want to sort of start the year with that shift. And as a company, we can focus on growing and executing on our plan.

The last thing would be, could you talk on the messaging space specifically in the larger deals? Who do you see as sort of last vendor or two standing competitively? And why do you think you win when you do go head to head? Thanks.

There's a host-- it's a hot space. There's a handful of startups that are out there. Salesforce bought a small startup-- it wasn't a startup, it's been around for a while-- and just kind of tucked it into their Service Cloud. So a couple of perspectives on that.

First, our focus on the enterprise and what we do at scale is very unique. And we've done that with Chat. We have the security, the scalability. Just handling payments through messaging and securing a payment is actually a very hard thing to do. But we do it. And we can handle thousands of agents, and our up-time is like enterprise-grade, obviously.

When it comes to Salesforce, they have a small acquisition. I think it's like Chat. It's a feature in Service Cloud. We know something now that this is a platform. And it's a platform for creating a digital connection with consumers. And we treat is as a platform.

So right now we are just executing and having that pole position. I think the most important part is we now have a handful of enterprise customers that are live that are referenceable for scale. And being the first to go out, and we announced T-Mobile last time on this call. That's a great lead for us, and shows the capabilities of our platform. So that's really the game we're after today.

And we put three years of development into it. Obviously you know what we took to get here. And everything we're doing is really focused on that scale. And that's what we built.

Thanks.

Brian Schwartz, Oppenheimer

Oh, hi. This is Koji Ikeda sitting in for Brian Schwartz. And thank you for taking my question. Just one quick one for me on the cost savings in 2017. Great color there on the breakdown of the potential cost savings, and I think I have a pretty good idea of how to think about the legacy wind-down. But I was just wondering if I could get a little bit more color about how we should be thinking about the cadence of the other cost savings and the other line items? I mean is a first half? Is it more in the first half or more in the second half, or is it more of a linear type savings environment in 2017? Thanks.

Yes. So that's a good question. So we're aggressive, and as we talked about this before, we were aggressive in our migrations in getting customers off the legacy platform and onto LiveEngage. And as we came to the end of the fourth quarter, we actually were able to fast-forward some of those savings. So that's one of the reasons that you'll see the charge being taken in the fourth quarter of 2016. We were actually able to shut down some of our legacy operations, or operations related to our legacy platform. So we were able to actually fast-forward that.

And I talked a little bit on the call, is we'll have another charge in Q1 primarily related to the legacy platform, of between $400,000 and $600,000. And then we'll have another charge in Q3. So what I would expect, Koji, is that we'll start off the year with decent cost savings, but they will continue to grow as we finish out the migration and take some of those charges.

So we've saved about $15 million year over year in 2016. And we're targeting $16 million to $19 million in 2017. And so well, give or take $30 million to $35 million over a two-year period, and that's related to the focus on LiveEngage, which we've always talked about in having our resources focused on one platform and our vision for opportunity messaging and growth. So that's kind of one aspect.

And the second aspect is we know that the LiveEngage platform is cheaper for us to support than the legacy was. So we're starting to see some of those benefits. And as you think about going in 2017, and the $15 million worth of customers that aren't going to migrate, traded off with $16 million to $19 million worth of savings, for us, a pretty good tradeoff and a pretty good opportunity as we move into 2017 and beyond.

Great. Thanks for that color. Thank you very much.

Glenn Mattson, Ladenburg Thalmann

Hi. Good afternoon. The statistic on the percent in the migration funnel, 84%, it's nice to see that tick up. But did you give us-- maybe I missed it-- did you give us a timeframe on when you expect that? I think in the past you said 80% converted by 2Q 2017. Is that the 84% now to that same date, or is it--?

So the 84% we were just talking about is that we have a line of sight. And what we're clearly outlining is we'll be 95% of the revenue will be on LiveEngage by the end of Q2 or Q3 of 2017. And there will be about $10 million sitting on legacy that we've optimized from a cost perspective, and some of it will be at risk and some we'll have the opportunity to move over, as we continue to develop on the LiveEngage platform. And those customers are ready to move over.

Some of those customers had things in their business around their strategy or direction that they were going, but they needed a little bit more time. So that's about $10 million sitting on the legacy. But 95% will be over by the third quarter of 2017, which is Glenn, where you see the charge that we're taking for the next big chunk of writing down the legacy platform.

Okay. And maybe just a little color on the salesforce now that it seems that they've shifted towards being able to sell new again, as opposed to conversion. Is there kind of an enthusiasm there, in general, in the salesforce? And what's the headcount there, and just some general color on the tone in the sales organization.

Yes. We sort of have the sales team now split into two areas. One is focusing on the enterprise and new sales. And then we've got a group that's doing-- because if you're on LiveEngage, you have a lot to use on LiveEngage, including messaging. There's a lot of what we call green space on it. So we have a group that's just focused on making sure that the customers understand all the new things they can get on the platform.

And then the other guys are basically focused on hunting the very large enterprises. We have a target list. We're doing a lot of marketing to drive interest, being thought leaders, actually. And we've been doing some good events, and bringing our customers together to talk about this, to meet with the customers that are live. So that's how we're sort of going to market right now.

But they're enthusiastic. Because they've got a shiny new object called LiveEngage. It's working really well. You've got referenceable customers on it. So that's what we've been waiting for. And their focus is not telling someone why it's good to get on LiveEngage. The focus is you're on LiveEngage, now you can do these 10 great things, plus get the vision and messaging. So that gives a lot of excitement on it.

Okay, great. Thanks for the color.

About 45 people quota carrying in that direct sales headcount today.

Okay. Thanks again.

Jeff Van Rhee, Craig-Hallum

Hey, guys. Good evening. This is Ryan sitting if for Jeff. On the big renewals you saw in the quarter, can you just go over and give us a little more color on the renewals? What happened there? What was the incremental piece of revenue? What did they take? Just any other color and explanation you can give would be great.

I'm sorry. I'm having a little bit of trouble hearing you. You said something about renewal?

Yes. On the two big renewals that you mentioned, the eight-figure multiyear deals. Can you just go over them in a little bit more in depth and kind of describe what was the incremental piece of revenue there? Is it a larger deal because they're taking more or going broader, or just a longer duration? What drove that?

So the one in Australia, the big part of it is messaging. That's actually the-- and they're actually on a legacy voice platform. And they had Chat on that voice platform from that legacy provider. And they actually want to get off of it. And so we're focused on messaging. And that's the deal today. So that's what we're focused on in that one.

All of them are messaging driven today. So all those deals are driven by messaging and going live, in-app, and transforming the voice platforms to reduce those voice calls.

Great. Thanks. And then just on the 10% or exceeding 10% same-store usage increase; what's your confidence that that will ultimately drive ARPU uplift and kind of your timeline for that?

Yes. So I mean we're excited about a 10%. We've got programs in place that continue to drive it. But remember, in the early-- the one step that I referred to was just the dollar retention rate is greater than 100% for customers that have been on LiveEngage.

Now granted, it's a small population. But as we go throughout the year in 2017 that implies that usage is continuing to increase and revenues continue to increase from those existing customers. So we're pretty confident that that usage will turn into upsells and more usage of the platform.

I think one of the unknowns is that it's like a new-- it's obviously-- we have a strategy behind the platform, because we built it. But there's an unknown about-- and it's an exciting unknown-- which is we've got this new platform. They're using a piece-- usually they're on Chat. And there's a whole range of things they can do on it now. And obviously then-- and get to messaging.

So I think we know what we don't know yet. We also built the platform to be self-service. If you remember if you went back three years ago and read some of the transcripts from what we were speaking about as we were building the platform that as we scaled, we could see on the old platform was costly. We needed PS. So people are setting themselves up on stuff.

Like, we'll send them marketing campaigns. There's something cool on the platform for you. And then we see a reaction where they implement. People have gone live by themselves on messaging, without even talking to us. So we don't know what we don't know yet. Because we built the platform as self-service. We're seeing those early indicators that they're using it. And then we're obviously focused on marketing the capabilities.

Like I said, we've got a lot of green space. And the most important thing was just allowing the organization to be free to focus on the opportunity, and no longer-- the hardest thing is focusing on customers that you know maybe won't come and won't transfer to the new platform. We spend a lot of time with them. We may have to do features we don't want to build. And we kind of said, enough is enough. It's time to move on, and for the revenue trade and the cost savings of winding that platform down, we've said it's time now. And now that frees us to expand. So we're kind of getting going with a new car here.

Got it. Great. And then just lastly for me; any thoughts on cash and cash flow, free cash flow, going through 2017, and how we should think about that?

Yes. I mean from our perspective, an operating cash flow, we generated about $25 million this year. I'd expect to do roughly the same, if not slightly better, as we go into next year.

Great. Thanks.

Mike Latimore, Northland Capital

Yes. Hey, guys. This is Nick Altmann on for Mike. Thanks for taking my questions. Just in regards to your relationship with T-Mobile, do you guys have any idea how many T-Mobile subscribers are using their mobile app?

Yes. I can't tell you, but yes we do. So we know exactly. We have all the metrics, so we know what the opportunity is. Right now we're at about, I would say, about 20% of what we could penetrate.

Okay. And then I guess if you could, can you kind of talk about what would be the next steps there in terms of adding more subscribers?

It's just a function of time. We're just-- it's a function of time. You scale at a certain pace with a certain amount of labor. There's sales and there's service use cases that are on the platform. So it's just a function of time. We've moved very quickly where we started to where we are today. And it continues to grow.

Obviously they're a dynamic organization and they're also growing. And it's great to have them as a customer. So it's just a function of time.

Got it, got it. Okay. Thanks.

Mark Schappel, Benchmark

Hi. Good evening. Robert, for you, in your prepared remarks you noted that there may be (inaudible) revenue on the legacy platform by the end of the third quarter here. I was just wondering if you could just clarify your comments around those customers. And are those customers planning to eventually get off the legacy platform? And if so, what kind of timeframe are you looking for?

Yes. Those customers, there's actually one or two enterprises that timing-wise for specific reasons, we are not forcing them that they want to go. They are digitally aligned with us. They're excited about messaging. But there's some timing issues on their side.

And then there's mid-market customers, and there's a partner on there too that needs to be on a feature or a capability in the platform that we're aligning with messaging that we don't have right now in the platform. Because there's so much we're doing to just handle the messaging demand we have. So those are sort of the-- I would say the two big flavors of customers that are on there.

Obviously there's always a risk with revenue not migrating off the platform. We feel like we can migrate that revenue. Like I said, there's a risk that something happens because they're on the old platform. But it's manageable now. It's $10 million out of a $200 million P&L, which is the risk in our business now. And I know we can get a portion of that, if not all of it, back to the LiveEngage platform.

Okay, great. Thanks. And then, Dan, I was wondering if you could just repeat your gross margin expectations for Q1 and for next year.

Sure. Just give me a second. So for Q4 we said we would be at 75% gross margin, Q4 of 2017. I don't think I gave a margin expectation for-- the gross margin expectation for the year is 73.5%, and with the expectation of Q4 is to be at 75% gross margin. And for Q4 of 2016, we're at about 73.5%. So for Q1, I would expect to be in that neighborhood of 73.5%, if not slightly better margin in Q1. And then expect it to be roughly flat into Q2 and then growing on the back half of Q3 and Q4 as we finalize the migration.

Great. Thank you. That's all for me.

And there are currently no other questions in the queue at this time. I will now turn the call back over to the presenters.

So thank you, and we will see you on the Q1 call. Thank you.

Thanks, everybody.

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