LivePerson Inc (LPSN) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Third Quarter 2021 Earnings Conference Call. My name is Hector, and I will be your conference operator today. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Ms. Idalia Rodriguez. Please go ahead.

Thank you, Hector. Joining me on the call today is Rob LoCascio, LivePerson's Founder and CEO; and John Collins, Chief Financial Officer.

Please note that during today's call, we will make forward-looking statements, which are predictions, projections and other statements about future results. These statements 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 and the comments made during this conference call and in 10-Ks, 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. Both this press release and supplemental slides, which include highlights for the quarter, are available in the Investor Relations section of LivePerson's website.

And with that, I'll turn over the call to Rob. Rob?

Thanks, Idalia. Thank you all for joining LivePerson's Third Quarter 2021 Earnings Call. I'm thrilled to report strong results for the third quarter.

Revenue was in the top half of our guidance range and increased 25% year-over-year to $118.3 million. Our adjusted EBITDA of $6.9 million at 5.8% margin was also in the upper half of our guidance range and reflects planned investments in the business. And as I will discuss more in a moment, during the quarter, we also signed the largest contract in LivePerson's 20-year history of being public.

Reflecting on what we've achieved, I'd like to note that in 2019, we put out a long-term target to grow at 25% in 2021. We exceeded that target in 2020, a full year ahead of schedule have now grown at 25% or greater the sixth quarter in a row. While we continue to focus on adding more quota-carrying capacity and evolving our strategy for Conversational AI and Voice. We're very focused on creating the next set of foundational layers that will enable us to become a multibillion-dollar revenue company within the next several years.

What powers our big ambitions is our singular focus on being one of the leading AI companies in the world. The raw material to AI leadership is a rich data set. This provides a foundation to build a very powerful platform to deliver high-quality automated conversations.

In this quarter, we hit a new milestone of 1.5 billion conversations on our platform, demonstrating the breadth and depth of our data assets and further strengthening our moat for delivering high-quality Conversational AI. In the world of AI, the holy grail is to have a machine learn and then correct itself without human intervention. And we are now about 12 months out from having self-healing AI on our platform. This is where the bot knows that it's not delivering a positive experience with the consumer, and then we'll make some small talk and then take a different path to correct the conversation. The bot uses historical conversational data to learn and correct itself, and this is why our massive data set is so important to our platform vision.

As our innovation continues at a very high pace, we need to match that with sales and marketing capacity. During the height of the pandemic in 2020 and into the beginning of this year, we focused most of our field resources on the demand of our installed base. The installed base continues to take most of our capacity, which is a really good thing, but we must continue to ramp additional capacity so we can go after new logos and opportunities.

We hired Tony Owens as our President of Worldwide Field Operations at the beginning of Q3. He was previously the President of Americas for Salesforce. And he is building momentum and adding new hires and leaders. We're attracting top leadership talent and scale focused roles across the company, like Mary Fratto Rowe, our new Executive Vice President for Customer Success. Mary previously held executive leadership roles at Yext and Salesforce and has proven track record in scaling businesses and customer-facing operations, reports to Tony, who shares with Mary the experience of being a leader at Salesforce when they were growing at a very high rate.

Our field leaders stand alongside our outstanding tech leadership including Andrew Hamel, who joined us 2 years ago from Amazon, where he led the development of Tier 1 services and tech initiatives related to Amazon's core search platform and other machine learning powered experiences. The past 2 years at LivePerson, Andrew has worked closely with our technology and field teams on critical cross-functional initiatives, supported our ongoing build-out of world-class AI team and focused on key strategic and operational goals. With Andrew's technology strength and focus on scaling operations and innovation, we're confident that we have the right team to capture the go-to-market and innovation opportunities ahead of us.

You may have heard me speak about wanting to kill contact center voice when we first launched our messaging platform 4.5 years ago. I still don't believe in traditional contact center voice platforms, cloud or no cloud, as they are perpetuating the old customer care model that is expensive and creates a poor consumer experience.

In this day and age, contact center agents are mostly used because the brand does not have an interface or API between the legacy back-end system and the consumer intent. Voice is the most natural interface for people to express their intent. And our goal is to give every brand their own voice AI system to deliver beautiful high-quality conversational automation. High-quality conversations require the machine to have a real-time understanding of consumer sentiment and other markers of conversational quality and also deep integration into legacy back-end systems. This is why we recently acquired VoiceBase and Tenfold. These acquisitions will dramatically accelerate our vision to have our AI-based services span across the channels customers care about, inclusive of voice and messaging.

As we bring together the expertise and technology of our 3 organizations, we'll create a unique unified, deeply integrated voice Conversational AI to our platform. VoiceBase, a world-class voice analytics platform for the enterprise built on advanced speech recognition technology that transforms voice conversation into easily interpreted data and actionable insights.

By unifying it with LivePerson's Conversational AI, we expect to give brands unparalleled visibility into customer intent, sentiment, frustrations and successes for a much wider set of conversations across both messaging and voice channel as well as traditional third-party contacts in our systems. Connecting messaging and voice data insights makes it easier to improve customer experience and cover sales opportunities and understand agent productivity and utilization.

Tenfold is a leading enterprise-grade customer experience integration platform, enabling enterprises to modernize customer experience tools without having to replace legacy back-end systems. Beyond legacy integrations with Tenfold, LivePerson's messaging will be available to agents embedded in their CRMs with legacy voice agent desktops or even in the brand's proprietary contact center systems. This will provide unparalleled flexibility for brands to work with any voice vendor and complement live versus messaging by enhancing agent experience and productivity.

These 2 strategic acquisitions open up new horizons for us. First, they make it possible for brands to have complete visibility intelligence across conversations, the messaging and voice and deliver them with AI and automation. They also bring voice intelligence and AI technology to support LivePerson's upcoming voice capabilities within our world-class conversational cloud. All told, we expect VoiceBase and Tenfold to accelerate our strategy in helping brands create high-quality engagements within their customer conversations in every channel, including voice. We anticipate bringing AI-powered voice offerings to the market in the first half of 2022.

Returning to our third quarter results. The metrics reflect a very positive growth trajectory. We signed 7 7-figure deals in the quarter as well as an 8-figure expansion, the long-standing customer, one of the biggest telcos in the United States. I'm proud to say this renewal, our fourth with this customer is the largest contract in LivePerson's history. This brand was one of the first to share our vision for messaging, and we're excited to continue partnering with them.

Our vision of putting AI at the center of scaling conversational commerce also continues to be validated as we saw customer adoption of AI continue to drive platform usage in the third quarter. Volume on our Conversational Cloud continues to rise, increasing 5% sequentially and 18% year-over-year to a new high watermark, while total AI-enabled volume increased 50% year-over-year. Messing volume is particularly increased -- has particularly increased 40% year-over-year as we accelerated migrating customers away from traditional synchronous chat into asynchronous messaging experience that better fit today's customer preferences.

Among the many interesting items in Q3, I'd like to highlight some trends we saw in health care. Back in 2019, we set our sights in health care as a key new vertical. Today, we have partnerships with several big customers in the industry. In Q2, we signed the first phase of a new contract, one of the 10 largest health care companies in the world. The brand plans to improve consumer experience and agent efficiency by using web and in-app messaging to serve its customers, currently driving 250 million calls per year into its call center. They also plan to lead straight to automation, leveraging our Conversational AI tools to create a highly scalable self-service journeys.

There's another trend in health care around testing. Brands all across the industry are looking for a solution to manage COVID-19. With spreading variants in the Biden administration's vaccine and testing mandate, testing is becoming an even more routine part of daily life. We continue to see a major opportunity for our conversational AI and testing, an opportunity that is already evident in BELLA Health.

LivePerson is helping brands deal with the challenges of bringing employees back to the office through BELLA Health, which is already being used by 25,000 employees at 750 locations around the U.S. With our turnkey technology testing solution, we can source, deliver and help manage workplace rapid testing programs, all powered by a very supportive Conversational AI. All of these trends in health care show our potential in this vertical, which has a very large TAM.

Third-party research estimates that American telehealth market is expecting to grow to over $43 billion by 2026 at a CAGR of over 28%. As evidenced by BELLA Health, AI is critical for any strategic initiative to scale in the health care space. At LivePerson, we have both the flexibility and AI expertise to quickly capture the massive opportunity here. We're allocating more technology and go-to-market resources in health care as a result.

I'd like to highlight a new customer in the retail vertical, one of the largest sporting goods retailers in the world signed a 7-figure multiyear deal in Q3 and recently launched our Conversational Cloud to enhance the sales experience. We started with web messaging and automation and plan to expand to additional messaging channels as well as expanding further into commerce.

This brand will also be using our Maven Pay platform. We use our tech to make it easier to secure and seamless for customers to make payments directly within messaging conversations. Maven Pay contains conversational commerce within the conversation itself rather than making customers go outside the messaging interfaces to complete their transactions. Our success and experience with large retailers, along with our innovation, automation and AI capabilities helped us seal the deal to transform their digital channels and accelerate growth.

In addition to exciting new customers in key verticals, we're also seeing continued strength in our relationship with our longtime customers, many of which expanded their partnerships with LivePerson in Q3. These deals also point to an important trend, customer brand that signed with us for our strong customer care solutions are increasingly moving into commerce with us as well.

In a post-pandemic world, we expect brands move away from just coping with the crisis toward long-term planning for digital transformation, shifting volume to messaging and automation as soon as possible. They will increasingly bring care and commerce journeys together to let customers enjoy natural conversational experiences, carrying context and continuity across all channels.

Let me shed some light on this theme with our existing customers. Additional notable win in the quarter is our strategic multiyear expansion with another long-term customer, The Home Depot, the world's largest home improvement retailer. Over the course of our tenure partnership, we worked together to continue to increase The Home Depot's messaging volume on our Conversational Cloud. This renewal was fueled by the growing volume and our proven ability to help drive revenue and reduce operational expense for the brand.

As our strategic partnership grows, we plan to continue to support Home Depot's focus on digital customer experiences, using automation to drive more efficiency and scalability and offering industry-leading shopping and customer service experiences on channels, including web messaging, SMS, Apple Business Chat and Google Business Messages.

We also expanded in Q3 with one of the largest beauty and cosmetic companies in the world. We've implemented automations driving a conversion rate up to 22% on their website and are continually leveraging our AI tools and sales and marketing solutions to streamline the shopping experience for online and mobile consumers.

And another win for the quarter, we expanded our 10-year-plus long relationship with one of the world's largest entertainment and media companies for a 7-figure ACV multiyear contract. We're helping them unify the consumer journey across channels by shifting calls to messaging and power their in-app experience. Over the long term, our predictive analytics are expected to help them diagnose the health of their conversations and our Proactive Messaging and embedded commerce capabilities are expected to help them reengage and take payments in seamless in-app experiences.

Finally, evidence of our strength of our long-term relationships can also be found in our Gainshare offering. In Q3, we launched a strategic playbook for Gainshare customizing it around brands desired outcomes. One of our biggest Gainshare customers is one of the world's largest home improvement retailers, and they've been leveraging the program and our expertise for everything from automation to deployment to agent training. Within a year, we've seen the automation rate go up to 60% of all conversations. We trained 600 messaging agents during the pandemic to support the brand, saving the retailer an estimated $100 million in expenses. Simultaneously, we built and scaled their personalized connections with consumers doubling their average online shopping cart value and generating more than $520 million in incremental revenue in the year. We strongly believe this tremendous success can be replicated across other brands.

A notable Gainshare deal in Q3 was our expansion with ANZ Bank, 1 of the 3 largest banks in Australia. ANZ aims to drive higher percentage of digital transactions over the next 12 months, and our team plans to help manage mobile app messaging and accelerate automation across the banking platform. As a long-standing customer, ANZ trust LivePerson for our comprehensive Conversational AI capabilities, our ability to provide the right talent and our expertise to help upskill their workforce, enabling them to transform to a digital focus first on customer care moving forward.

In closing, LivePerson is very well positioned for continued strong growth. With great execution, our team continues to focus on go-to-market initiatives and capitalize on the demands in the market. We have a tremendous market opportunity with only 20% messaging penetration to date. Moreover, we see the opportunity to expand our current TAM through the deployment of Voice AI and automation technologies within our platform.

Our acquisition of Tenfold and VoiceBase is the first step to realize this massive opportunity. And given our proven ability to execute, we believe that we will continue to achieve strong results in Q4 and meet our 2020 growth target.

With that, I'll turn the call over to John to provide more color on our financial and guidance. John?

Thank you, Rob. The [third quarter of 25 or greater] revenue growth with both revenue and adjusted EBITDA exceeding the midpoint of our prior guidance range. While we continue to deliver results, the central theme of the third quarter was executing on the investment strategy that we expect to unlock new vectors of growth in 2022 and beyond.

First, we deployed some of the capital we raised last year to acquire VoiceBase and Tenfold, which represent strategic assets that will accelerate our technology and go-to-market road maps. Second, we built both the recruiting machine necessary to accelerate hiring in our go-to-market organization and the support infrastructure and repeatable processes that will guarantee meaningful returns on our investments. And third, we deepen our relationships with strategic partners in health care to advance our vision for AI and automation to transform the industry.

In terms of progress on our go-to-market investments, we ended the third quarter with 96 quota carriers. And as of November 1, we have 115 quota carriers. While the organic increase was light in the third quarter, we did not expect a linear trajectory to our target of 200 quota carriers by the end of the first quarter of 2022.

During the quarter, our primary focus was on increasing recruiting capacity and processes necessary to achieve our targets. To build on Rob's description of our strategic acquisitions, note that we estimate the addressable market for automated speech recognition or ASR and speech analytics alone to be at least $5 billion and growing at a 30% compound annual growth rate. Further, we estimate that most of our installed base of brands, which employs approximately 500,000 voice agents, users or is in the market for ASR and speech analytics, which creates glide path to near-term revenue synergies.

Acquiring VoiceBase and Tenfold was also central to our AI strategy. ASR and speech analytics and a broad spectrum of voice integrations enable automated intent resolution and novel AI capabilities by leveraging what is currently the largest repository of customer service data voice. In addition, deep out-of-the-box API integrations into CRM's Business Intelligence Systems and a range of service and customer support systems allows us to capture contextual data and deliver seamless workflow automation, generally, robust data capture and access to rich back-ends like this are the bedrock of a great AI.

In terms of market dynamics, while brands are broadly migrating to cloud offerings, the motion is complicated by legacy infrastructure and compliance as well as high switching costs. As a result, brands are looking for plug-in solutions that drive improvements to the consumer experience and offer cost savings and greater ROI without ripping and replacing their legacy telephony systems.

In combination, VoiceBase and Tenfold are responsive to these market dynamics and increased demand by brands for consolidation and a single pane of glass. AI and messaging, coupled with robust data capture and deep API integrations throughout the communication and service tech stacks, enable the compression of disparate workflows into a unified agent experience. These embedded agent experiences in third-party systems such as CRMs, service systems and other proprietary applications are an expected capability for omnichannel CCaaS and increasingly pure-play messaging, yet few vendors offer robust offerings today.

Strategically, these dimensions of value where we see the immediate and disruptive opportunity with the combination of LivePerson, VoiceBase and Tenfold. And from an economic perspective, seamlessly integrating with all voice systems opens the revenue aperture to the full range of customer interactions.

In terms of inorganic revenue in 2021, as fourth quarter transactions, we expect the positive impact from VoiceBase and Tenfold to be significantly less than 1% of LivePerson's sole revenue. Note that we will provide additional financial details and 2022 guidance on our fourth quarter filings. With that strategic overview, I'll transition to our quarterly financial metrics.

In the third quarter, total revenue grew $118.3 million, up approximately 25% year-over-year and within the top half of our guidance range. Upside in the quarter was driven primarily by professional services and continued demand for rapid at-home COVID-19 testing, both of which were partially offset by expected seasonality in Gainshare, which was 13.2% of total revenue.

Note that these revenue sources, namely AI-assisted health care testing, professional services and Gainshare tend to exert pressure on gross margins. While we were in line with our expectations for the third quarter, we expect slight but continued margin compression for the full year, driven primarily by continued COVID-19 testing and front-loaded investments across our Gainshare portfolio.

On the latter point, note that we expect to ramp costs faster than revenue in the initial phase of a new contract or existing customer expansion due to the need for infrastructure integration and agent training. Over time, accelerating rates of automation have proven to expand margins.

Turning to our reporting segments. Within total revenue, the B2B business grew 26% year-over-year, while the hosted software segment grew 25%. Professional services revenue grew 27% year-over-year and the Consumer segment grew 16%. From a geographic perspective, U.S. revenue grew 37% year-over-year, and international revenue grew 5%. Note that international growth was impacted by hard comparables in the third quarter of 2020, upsells that rolled overage volume into 12 months plus contract periods and a large delayed deal in EMEA that we expect to close this month.

Expanding on go-to-market capacity in our international theaters is a key strategic focus within our broader go-to-market investments and was also one of the primary motivations for the e-bot7 acquisition. We see a significant opportunity to take market share in the region, particularly in the mid-market, and its inaugural quarter as part of the LivePerson family. The e-bot7 team delivered double-digit mid-market SMB new logos. We expect material revenue synergies from this acquisition to continue.

As we continue training the e-bot7 team to sell the Conversational Cloud to its enterprise customers. Further, we're also extending the e-bot7 product suite to deliver instant automation for downstream customers of our partner marketplaces. We continue to both retain and grow relationships with our existing brands.

As Rob said earlier, a key theme of the third quarter was the extended partnership with many long-standing customers. 6 of the 7-figure deals this quarter were multiyear expansions with existing customers, which we see as a strong testament to the staying power of our platform. Consistent with this theme, revenue retention was once again within our target range of 105% to 115%. Marking the 17th consecutive quarter, revenue retention was within or above this range.

Average revenue per customer was $570,000, up 34% year-over-year, driven primarily by continued expansion from care to commerce, which translates to increased platform usage for both our CPI and Gainshare business models. Total billable volume on the Conversational Cloud increased 18% year-over-year and 5% sequentially in the third quarter, reaching a new record high in advance of our seasonal peak later this quarter.

AI-powered messaging volume increased 60% year-over-year and accounted for 75% of all messaging. We have also seen significant growth from large existing accounts over the past 24 months. For example, volume for our top 20 brands increased 25% year-over-year and 175% over the third quarter of 2019.

With the majority of our top 20 now on CTI or Gainshare pricing models, we are benefiting from a tighter connection between usage and revenue. While we're pursuing many new sources of growth, we continue to capitalize on opportunities within our installed base of brands, a trend we expect to accelerate with VoiceBase and Tenfold now on board.

In terms of usage and revenue trends by vertical, we continue to see significant growth within retail financial services and increasingly health care. As for new logos, while we saw a slight sequential increase over the second quarter, new logos are lower year-over-year. Once again, the go-to-market investments we made in the third quarter, which will continue into 2022 are laying the foundation for materially accelerating new logo acquisition.

Moving down the P&L. Adjusted EBITDA in the third quarter was $6.9 million or 5.8% margin, which reflects the sizable go-to-market investments we made during the quarter. As for the balance sheet and cash flow highlights, we closed the quarter with $633 million of cash and cash equivalents, a decrease of $32 million from the second quarter, which was driven by the use of cash for planned investments and the e-bot7 transaction.

In terms of guidance, with the third quarter results landing in the upper end of our range and solid execution on our strategy, we are raising 2021 revenue guidance to a range of $468 million to $471 million or 27.7% year-over-year to 28.5% year-over-year. Relative to previously issued guidance of $464 million to $471 million or 26.5% to 28.5% year-over-year.

Our revenue guidance range for the fourth quarter is $122.2 million to $125.2 million or 19.6% to 22.6% year-over-year. We are also updating our 2021 adjusted EBITDA guidance to a range of $11.9 million to $16.3 million or 2.6% to 3.5% margin. This is from a range of $14.8 million to $22.8 million or 3.2% to 4.8% margin. The revision primarily reflects incremental operating expenses for VoiceBase and Tenfold and acceleration of our go-to-market investments. Fourth quarter adjusted EBITDA loss is expected to be in a range of negative $21.7 million to negative $17.3 million or negative 17.8% margin to a negative 13.8% margin.

Before taking questions, I'll summarize several key themes of the quarter and our strategic positioning for future growth. In the near term, the acquisition of VoiceBase and Tenfold create glide path to new logo acquisition and expansion within the base. They seamlessly integrate voice, messaging and back-end systems to deliver a unified agent experience, and they generally expand our AI platform's ability to deliver personalization at scale. The organic go-to-market investments we initiated in the third quarter will continue through the first of next year and set us up to accelerate new logo acquisition with a focus on the mid-market.

Care and commerce are now viewed as 2 sides of the same coin, and our goal is not to sell one without the other. Further, diverse and rapidly expanding uses of the platform, driven by advances in AI and automation have made it stickier than ever, which is a key factor in securing the largest 8-figure deal in our history and 6 7-figure multiyear expansions within our base. These use cases are also extending our reach within high-growth verticals, especially health care, where we strengthened our relationships with key partners to share our vision for AI to transform the industry.

With these new growth vectors, our 2022 targets are well within reach and represent only the beginning of a new phase of AI-led growth. Operator, with that, we're now ready to take questions.

(Operator Instructions) Our first question comes from the line of Sterling Auty with JPMorgan.

So you covered a lot in a short amount of time, and thank you for that. But I just want to make sure I have a really good understanding. So the voice AI solutions that [you released] the first half. Specifically, what are the use cases? Is it customer support? Is it sales? What are the initial use cases you're going to start with?

It will be customer support and sales. I mean it's riding off the same rails as the messaging platform. So the same AI capabilities. So we can go after both. So we're not -- we can do one of the -- a lot of our volume right now is still customer care on the messaging side, and we've been going into commerce over the last couple of quarters. So I would probably reflect that.

That makes sense. And my one follow-up would be still on this topic. Just after you made the acquisition, when you had some initial contact with your customers, what was the initial reaction? Do you think you're going to have interest in terms of getting those first couple of lighthouse accounts that you'll need to be able to drive traction?

Yes. I mean 2 interesting things. One is actually the company's VoiceBase and Tenfold got calls from their existing customers about each other's products like, oh, you're going to integrate these 2, which was kind of interesting. And then also, we've been starting to talk to our customers about adding voice in the platform and have been talking about why these will accelerate the go-to-market and the product depth. So yes, but actually, the interesting one was actually we heard from the companies themselves about their existing base.

What this allows us to do is the rich conversations will require back-end integration is what we do with our messaging today. So this Tenfold gives us an ability to do that and get into CRM systems and everything else in a much deeper way. We can also take our capabilities and put them inside their current CRM systems and ride our messaging and voice platforms inside those. So that's that one. And then VoiceBase base is about understanding really what's going on in the conversation in real time so that the automation can know if it's doing a good job or a bad job and all the analytics around that. So it really allows us to complete what we know it takes to create rich conversations. Most conversations were used to and what they'll call Voice AI is not conversational. It's more command based or it's linear structures, press 1, press 2, press 3, which are IVRs. We're really building a true conversational AI system, which I think is unique in the market.

Our next question comes from the line of Arjun Bhatia with William Blair.

This is Chris on for Arjun. So I get that you mentioned hiring isn't linear in terms of hiring new reps. But so far, you've hired about -- a little over 30. Where are these reps coming from? And what gives you confidence in your ability to hit the 200 target on time?

Yes. The reps are coming from a wide range of SaaS companies today in the open market. In addition to third parties that we've partnered with, some of whom have dedicated practices just for LivePerson to scale up our recruiting machinery.

Great. And then in terms of acquisitions, so you had the 2 this quarter, the one last quarter, seems like mostly kind of technology and tuck-ins, but you still have over $600 billion on the balance sheet -- or $600 million on the balance sheet. How are you thinking about your approach to M&A going forward as a long-term growth driver?

We see it as a means to execute on the strategy in a shorter distance. So in the case of VoiceBase and Tenfold, we get a technology acquisitions that will accelerate our going into the voice AI space. But e-bot7 is more about we want more feet on the street and capacity in Europe, and we know it's a big market. So we keep looking at sort of those 2 continuums of technology and feet on the street. I wouldn't expect a giant acquisition. We don't need -- we built everything ourselves that we need, and we're filling in some of the pieces to accelerate our go-to-market, but we're not looking to do anything like a big step change in acquisitions, but we're using it to just accelerate what we already are doing organically.

Our next question comes from the line of Peter Levine with Evercore.

So the first question is your bookings and pipeline commentary sound bullish, ARPU is up. But I look at deal count metrics, they're trending downward. And I look at that with the current rep count you have today. So I guess if you look out, call it, 12 months from today? Like how do you get leverage? I mean where does the leverage come from? Like how are you tracking rep productivity? I'm just trying to kind of bridge the gap between, I think, your commentary and then looking at the deal count metrics.

Yes. Peter, I think with regard to rep productivity, there's a lot of packaging and pricing that we're working on internally so that we have playbooks repeatable processes that our existing reps and the new ones that we're onboarding can just go out and execute against. And we think that, that repeatable sort of playbook will allow us to bring reps to productivity faster and also ensure that our products are hitting the market in the same way every time with customers. We have very strong value propositions that are resonating with existing customers and a lot of surface area in the platform today, but we need to package and price it in a way that is -- resonates with customers. And that's something that we're working on as we speak, in addition, of course, to ramping capacity.

Okay. And then I apologize if I missed it, I jumped on later, is revenue was down sequentially. I think it was like 1%. So curious to know what the dynamics there were.

Yes. I mean what we're -- we had a couple of large deals that were slated for the third quarter that pushed into the fourth -- and then we had some seasonal -- expected seasonal headwinds with Gainshare that will reverse course into tailwinds in the fourth quarter.

Perfect. Can you quantify the deals that got pushed out?

I'm sorry. Say it again.

Can you quantify the deals that got pushed out, meaning, hey, if they closed in Q3, this is what we would have looked at?

Yes. They were both large 7-figure deals.

Our next question comes from the line of Ryan MacDonald with Needham & Company.

This is Alex on for Ryan. And I was hoping you can give us some information on how the migration of the ELA contracts to the CPT contracts are going? I remember last quarter, the migration looks like it was around 45% with an end goal being around 70%. Where are you at in the process?

In the third quarter, we reached about 58%. So we're on target for...

And then can you give us...

What we had previously guided being in the ballpark of 70% by the end of the year.

Okay. Great. And then could you give us a little bit more color on any sort of things you want to point out international?

Sure. I mean I think in my script, we talked about some headwinds in the EMEA region. One of the large deals I mentioned a moment ago was in that region. We also had overages, if you recall, within our CTI contracts when the ceiling is hit, customers going to overages, we had overage revenue roll into longer-dated upsells. And so that's good for us long term. But in the quarter, it means less revenue. So that was another headwind during the quarter. I would say though, generally, while we had some headwinds in EMEA, the APAC region was well above our internal expectations.

Our next question comes from the line of Siti Panigrahi with Mizuho.

Just a follow-up to your earlier comments on the deal slip. Did you say that you already closed that?

One closed, one to be closed this month.

Okay. And then when you look at your guidance, kind of midpoint implies 21% for Q4. What are the assumptions there? Do you see any kind of Gainshare further slowing down or any other factors we are factoring in, in your guidance?

Certainly, being a variable source of revenue and to some extent, campaign-driven during the seasonal peak, there'll be some variance in Gainshare, but we expect, as I said, upside there as we move forward relative to Q3.

Okay. And then, Rob, a question on competition. If you see right now, this multichannel communication kind of fitting up like you see Twilio trying to get into this space? And also Microsoft talking about that as well there also have their contact center. So how do you see this competitive landscape evolving this post pandemic?

Yes. I mean the way I see it is that we still have the best asynchronous messaging platform because we built it, now it's 4.5 years of technology. And let's consider that surface area, which is we want everyone in the world to have that platform. And then on top of that, we're riding our AI automation capabilities, our connected tissue to other third-party end points, social outbound. Now we have outbound marketing campaigns, payments. And so the way I look at it is, I think, we're going to be much more aggressive in the market on the messaging platform now. We're kind of crossing the chasm, shall we say, from early adopter to general demand. And so I think we can be more aggressive and just seed that, seed that into also the mid-market where we haven't really played because we have so many demands in the enterprise.

What we see is like Twilio is more of a -- it's more for the engineering side of a company where they take APIs and they're crafting together, ours is always delivering outcomes. We don't just deliver the technology side, we're delivering an outcome of a sale or a reduction in service costs through automation. And our AI capabilities is really where we're very, very different from everyone in the market. So I think there's going to be a lot more aggressive behavior on our side, on the pure messaging on the asynchronous side, while we capture value -- continued value in our AI capabilities and all the capabilities that ride on top of the messaging platform.

And now voice will also become surface area of communication that we're going to get out there. And we don't have a voice platform in the market where we're going to, and we're going to -- we're attacking it from a very different perspective than the normal cloud voice offerings for traditional voice enterprise companies. So obviously, there's a lot of movement in our market. But once again, we're playing to our strength of AI and automation, which is makes us unique.

Our next question comes from the line of Mike Latimore with Northland Capital Markets.

Can you just think of the 2 separate volume growth numbers? You had 18% growth on the platform and 40% in messaging, I guess, I would have thought those would be a little closer together.

The volume -- so as you may know, right, the chat volume is continuously declining and being replaced by messaging volume. The numbers that we called out in the prepared remarks concern primarily automation of that volume, in other words, AI-driven conversations, which were up 60% year-over-year.

Okay. And then with regard to the voice technology, as you think about the opportunity in voice, how much of the voice platform does a VoiceBase get you versus something else you may want to add over time?

I mean we've been building the core of the voice platform organically internally. So that it's native to our automation capabilities. So that's one part. The VoiceBase gives us another level of what we need is analytics and real-time insight into what's happening in the voice channel so that the automation performs at a very high rate. And then Tenfold gives us integrations into traditional legacy systems. So that we can make the conversation handle things like if someone says, I want to pay a bill, it's going to hit a billing system and then they're going to have a conversation around the bill. We need to get data out of that legacy system. So it really -- it sort of finishes making -- giving us the capabilities to have very, very rich conversations and then they're riding on our platform and they're using all of our AI technology to create bots and all that, and that's the stuff that we do very well. So I mean we are pretty excited about this.

The goal of the voice platform is to stick it in front of IVRs, and basically be there before you hit a traditional IVR. We do have agent capabilities in it. So if a live agent is needed, you can route on the platform to a live agent and they'll take a voice call. We're also delivering it as BYOC, which is bring your own carrier. So if you look at Amazon Connect, like today, you have to use them as a carrier. And even telcos have to use like their carrier service and they pay for that. So all of our telco customers all -- someone has their own carrier service. They can wire it in. So -- and we're going to be very aggressive on the voice side. Like once again, we look at a surface area and then we have all our automation capabilities versus it's our core. And so I think you'll see a different dynamic in the market as we -- and we're investing a lot of money in this. So it's not an add-on for us. It's a surface area like messaging.

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

First on VoiceBase and Tenfold, you're going pretty quick on this what you're expecting in terms of the contribution on revenue and EBITDA for Q4. And can you put -- just put it in a broader context, how big there, how many heads and what you're thinking in the out year?

Yes. Jeff, in the prepared remarks, I said that the contribution to 2021 would be significantly less than 1% of total revenue. So I think like low single-digit millions across both assets. In terms of size, VoiceBase is around 40 people and Tenfold closer to 80.

Okay. And roughly, what were they growing? What was the trajectory they were on?

They're both pretty high-growth startups. So kind of high double digits.

Okay. Fair enough...

Yes, accretive to LivePerson in terms of growth.

Sure. And sorry, again, just a repeat on the rep count, did you say 200 by Q2 is the target?

Correct. End of Q1.

Okay. Okay. And what are you assuming in terms of ramp for productivity for those reps?

The strategy to ramp productivity?

No. I mean time line from hiring to productivity.

Yes, 9 months is the target. Could be as much as 12 months, but 9 months is our target.

And then we're firing up -- we're going to be firing up a mid-market group now. And so the time to market will be shorter for the mid-market reps and we'll have a mid-market product and then we'll take our platform and we're -- or we've already been preparing it for that. So that will have a little bit of a shorter distance than the enterprise ones.

Okay. And one last for me then the COVID testing, I think, you called it out last quarter as an unusual got a big chunk of revenue. How did the COVID testing trend sequentially?

Yes. Sequentially, it was similar to the third quarter and definitely a component of our upside this quarter.

Our next question comes from the line of Steve Enders with KeyBanc.

Just to start with Andrew coming on as CTO, is there any kind of change in the focus of the product or the tech stack going forward that you will be still having greater focus on here?

Yes. I think it's really about Tony and Andrew working together. We have a lot of capabilities in the platform now. So as you know, we've been selling it as sort of, call it, flat menu where you get access to the entire platform and you're paying cost per interaction. But we have so much in the platform now that we're going to be packaging it a little differently and sort of, we call it bite sizes for use cases or entry points into sales, service or marketing or retail. And then Andrew is aligning to that because that's a focus area to also follow that packaging and how we want to bring it to market so we can get greater scale on usage of the platform. So that's one part.

We're obviously migrating the GCP because we run our own clouds right now, but for scale, we're migrating. So he's focused on that, on scale and stability. And so those are the key areas that he's in. And then the last part is, as I mentioned, it's not insignificant, and that's what I want to talk about is we're about 12 months out from self-heal -- the bot can self-heal. And the AI capabilities around that is we all talk about machine learning but we actually are going to be in a place we can see it, that the machine will heal itself. It will -- no, it's not answering questions correctly. That came out in Q4. We have a measurement called [Max]. It can do like small talk, hey, hang on a second, and we have that coming out in Q4. And then it will go ahead and based on previous data will then correct itself and bring the conversation somewhere else. And the goal here is our biggest bottleneck, let's say, humans. Humans making bots and humans tuning bots. So we want to basically get the machines to do as much as we can in making the bot, tuning it and scaling. And so he'll be focused on bringing that and the focus of that.

Okay. Great. Really helpful. I think you mentioned there that there are some new packaging coming and kind of rightsizing, rightsizing some of those initiatives. I guess how is that kind of augmenting the go to market as you think about it as you particularly hire these new reps in the next 6 months or so?

Give the new reps a dependable and repeatable playbook, right, for certain customer profiles. So they're able to have kind of a purpose-driven approach to produce outcomes for customers. And that's a little bit distinguished from the selling motion today, which is predominantly in the enterprise. And there's just a lot of capabilities to bring to market. And there's -- because it's the enterprise, there's a desire to kind of put it all out there. We're taking a more methodical approach, more purpose-driven approach to deliver outcomes for the specific size, companies in the mid-market that are in a certain sort of phase of their customer service or in the case of commerce. That just gives our reps a faster path to productivity when pricing and packaging aligned with customer needs.

And it's a natural progression because over the last 4.5 years, we sold a lot into, I'll call the early adopter, which is a very much -- it's a missionary sale. It's -- these are people who have a vision like we had, like, if you remember, T-Mobile was our first customer out of the gate 4.5 years ago, and they had a vision that we did how to transform customer care. So when you have visionaries buying, it's a different sale than when you have just rank and file marketers and heads of care, they need things in a much more simple way because they're not buying on vision, they're buying on outcomes. So they want to see, hey, if I'm a marketer, I don't want to see the whole platform. Just give me everything that's going to help me as a marketer make better marketing outcomes. And so that's why we're going to be packaging down. And the platform does do retail marketing sales and service. So it's got a lot in it right now and then all the channels. So just -- we produced a lot of tech. And so it'll just make it easier for our reps. Then we also can verticalize the reps. There's a lot more we can do with them as we go to market.

Our next question comes from the line of Samad Samana with Jefferies.

I guess I'm going to ask -- I'm going to zoom out here a little bit and ask maybe a high-level question. I guess I'm trying to reconcile the benefits of something like COVID testing and elevated messaging volumes, et cetera, but then growth kind of also flowing back into the mid-20s, and I understand the headwinds related to Gainshare. But I guess I'm just trying to understand like industry demand and the tailwinds we're seeing on the messaging side and yet growth slowed again for the second consecutive quarter and this time actually on a slightly easier comp. So I'm just trying to maybe reconcile those 2 about like how we should unpack the parts that have slowed down and why beyond just Gainshare? Because if I took out the COVID testing, it would seem like the -- that's something that it would be even slower. So just maybe help me think about that.

Samad, if you recall from the first quarter and the second quarter, we had 1 in the first quarter, easy comps since our growth was quite high. In the second quarter, we had pulled in some revenue actually, and that was related to the AI-assisted health care testing business. And so given that unexpected revenue and again, well in excess of our original guidance from the first quarter, it's kind of inevitable that we would eventually decelerate because we've pulled in some of that health care-related revenue. Relative to the second quarter, as I said, health care testing was approximately the same, but obviously, a bigger base of revenue, all right? And so that's really the dynamics that are in play in terms of the deceleration coming off of the second quarter into the third.

And then I would add that if I could go back in time, which obviously I can't I probably would have opened up hiring and opening up our investments in September of last year. We were head down on just satisfying our base, and there was a lot of demand in the base, as you know. And that actually continued in Q1. It continues now. Our growth in usage keeps going up. And so it would have been smart to open up our marketing spend and our sales head count. We have similar marketing spend and sales head count going back to '19 today. So that's a -- now we've opened it up. Obviously, we're doing everything we can now. And so if you think about the opposite way, if we start to add a ton of new logos and business, which we will, on top of what we're just doing on selling predominantly the base with upsells, you've got a different profile.

So I think looking at the business over 25 years, like it's a series of S curves. Like you have the demand happening, and then you kind of hit this place where you're like, oh, we've got to make another change to create the second S curve. And I think we've written the S curve of messaging quite well. And now we're doing things like adding capacity, packaging, all the things we need to do to sort of create this -- the next S curve to take us on the next level of growth. But think about as we had new logos right now. You can see there's still anemic. The growth rates would be significantly different than even the mid-20s.

And Samad, I'd also add that we are predominantly an enterprise business. And with the enterprise, there's lumpy revenue. But we've also opened up a few new verticals in really big ways. And we've had more growth than expected. And so that will come into a quarter unexpectedly. And you see that manifest in these in the deceleration from the first half into the second half. But taking a step back from there, we're still guiding acceleration from last year, and the top end of our guidance is 28.5%. So even though it's coming in a little lumpy across the quarters, it's still a really solid year of growth.

Understood. And then maybe, John, just to ask you a question, what did e-bot add into 3Q? I think, added. I think the deal closed in July, if I remember correctly. I don't know if I heard that of the cloud projects, if it's already been asked.

Yes. I mean very, very tiny amount of revenue. We're not talking 7 figures here.

Okay. Okay. And then maybe just one more question, I apologize for slipping in a third one. Just as I think about the existing sales head count and obviously, the big ramp that's coming, can you just remind us maybe are -- how should we think about -- is there going to be incentive structures around -- Rob just mentioned new logos and that they were anemic. And how should we think about maybe incentives around driving new logo growth? And is that something that is already in place for the existing sales reps? And how should we think about kind of the priorities as you add new reps as well?

Yes, they'll be predominantly focused on that. But we also know that within our base, there's a lot more we can do with our largest customers because -- and the account coverage model will change for us because we need some more head count in our base, too. So the incentive structure most of these people come in will be hunting new logos in new areas. The other thing is that we are -- we're upping our marketing. So marketing has been fairly flat. It's going up considerably in Q4 because the front line, the pipeline needs to grow, we can't just have reps and mean they need the pipeline to go.

We're also starting to reinstate. If you remember, face-to-face events were really our weapon in marketing. And especially early adopter, people want to see, hey, this is a new technology. I'm seeing big brands having successes. They're talking in a room. They seem really excited. There's a great -- I want to be a part of that. So we are bringing back as COVID sort of dissipates one of our key weapons, which is the live events. And we've been doing these small dinners. So that's starting to pick up, too. So hopefully going into next year, we have that as a continued way to grow the marketing side.

Our next question comes from the line of Zach Cummins with B. Riley.

John, you touched on this a little bit in the script, but can you just go through some of the drivers for the lower gross margin performance that you're guiding to in Q4? I'm assuming that's partially driven by M&A, but just giving a little more insight into that would be helpful.

Yes, maybe a little from M&A, but I think that the bigger sources there are the AI-assisted health care testing business, professional services and Gainshare. All 3 of those business lines have lower margin profiles. And the -- on the health care side, it's just a new business, right? And so we're trying to take share and the economics will improve as that business matures.

In terms of Gainshare, we're investing in our current customers. And any time we have a new contract or an expansion, there's a need to onboard additional agents, train those agents and often deliver integrations in order to stand up to customer or execute on the expansion. So all of those are reasons that the gross margins would compress. And on the Gainshare side, of course, that's temporary. It's the upfront cost. And then over time, as automations accelerate, we've proven, right, the ability for that business to expand margins in very meaningful ways.

Understood. And just a final question for me. In terms of your 2022 growth targets, maybe can you just give us a little more insight into what's baked in those? I mean do you have to hit your, I guess, pace of hiring for new sales and marketing reps in order to hit that FY '22 growth guidance?

No, we don't have to hit our target exactly in order to hit the 27% that we put out there in the third quarter. There's a large number of factors that go into that guide and -- some of them are in health care, for example, where we continue to make expansions and deepen relationships with strategic partners that see our vision. Our partner network continues to ramp and is helping to accelerate deals. Obviously, the go-to-market capacity is part of it, but so is the packaging and pricing. So we have a lot of vectors of growth that are going to contribute to that as well.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Robert LoCascio for closing remarks.

Thank you. In closing, I just wanted to also mention we were recently named 1 of the top 100 most loved workplaces in the U.S. by Newsweek. And today, we were named to Inc. Magazine's Best led companies list. And I want to thank everyone on the team at LivePerson for all their hard work and for being recognized as one of the best places in the world to work. And we have so much more to do, and it's great to be on this journey with everyone. As a shareholder myself, obviously, I'm really proud of the work we're doing here and of the future that we're creating.

So with that, thank you. Enjoy the holidays. We won't see you until next year. And thank you.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.