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Executives

Tim Bixby – President and CFO

Robert LoCascio – CEO and Chairman

Analysts

Richard Baldry - Canaccord Adams

Richard Fetyko - Merriman Curhan Ford & Co.

Bradley Whitt - American Technology Research

Nathan Schneiderman - Roth Capital Partners LLC

[Bill Balken - Unidentified Firm]

[Jordan Benchay - Unidentified Firm]

LivePerson, Inc. (LPSN) Q2 2009 Earnings Call August 4, 2009 5:00 PM ET

Operator

Good afternoon. My name is Josh and I will be your conference operator today.

At this time I would like to welcome everyone to the LivePerson second quarter 2009 financial results. (Operator Instructions)

Mr. Bixby, you may begin your conference.

Tim Bixby

All right. Thanks very much.

Before we begin, I would like to remind listeners that during this conference call comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission.

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

And now I'd like to turn the call over to LivePerson's Chief Executive Officer, Robert LoCascio.

Robert LoCascio

Thanks, Tim. Good afternoon, everyone, and thank you for joining us.

During the second quarter of 2009 we generated revenue of $20.5 million, up 11% from a year ago and up 3% sequentially as compared to the first quarter of 2009.

EBITDA per share came in at $0.09, above our guidance range of $0.06 to $0.08 per share.

EPS was $0.02 and also exceeded our guidance range of zero to $0.01 per share.

Tim will provide more detail on the financials shortly.

We are very pleased with our second quarter results from each business unit, especially given the challenging macroeconomic environment. It's a testament to the underlying strength of our teams, our product lines and our overall business model.

Within our business operation, Enterprise revenue was up 2% sequentially and grew 11% as compared to the prior year, while our Small Business group revenue increased 1% sequentially and 14% from the prior year.

We believe that our overall addressable market remains large for our B2B products. According to our estimates we currently serve more than 300 of approximately 3,000 potential Enterprise customers and more than 8,000 of approximately 200,000 potential SMB customers. We're seeing growing interest and lead flow as compared to the past several quarters and are confident that the second half will reflect at least some of this macro environment improvement.

For the Enterprise group we're starting to see some substantial sales activity as companies look to expand their online sales and marketing efforts. We're even for the first time seeing big box retailers begin to evaluate using our real-time solutions for their websites.

During the latter half of Q2 we saw our sales pipeline and bookings start to expand. In Q3 we expect to add more incremental revenue than we have seen in the past three quarters and expect sequential growth for this group to exceed 7%.

As in the prior quarters, the Enterprise group focused on expansion opportunities in the U.S. and in Western Europe, expanding the pay-for-performance model globally, and continued expansion in our strongest industry verticals of telecommunications, financial services and online retail.

Our Small Business group revenue grew by 1% sequentially and 14% as compared to the prior quarter. We saw higher than normal attrition rates during the quarter due mainly to the effects of the economic environment affecting small businesses; however, we believe there's a sizeable opportunity in this market and we're going to expand our investments in this business over the next six months. Specifically, we're going to expand our focus on the mid-market segment. This move will complete the overall product offering that bridges all companies from the smallest SMB companies to the world's largest enterprise companies.

The Consumer group has a great quarter and made significant progress in increasing revenue and reducing the cash burn rate. The Consumer group's revenues increased 14% sequentially. This was significantly higher than the 6% to 8% guidance we gave in the first quarter. We continue to generate a lot of activity within the core categories of personal advice, programming, education and tutoring, and we will remain focused on them in the upcoming quarters. And although consumer spending is down in the offline world, consumers still seem very interested in getting real-time advice from experts.

Our Sun Microsystems Java.com deployment continues to do well and is now generating annualized gross revenue exceeding $150,000. This gross revenue is shared between Sun, the experts themselves, and LivePerson.

And finally our EBITDA margin year-to-date exceeds 23%. We generated nearly $10 million in EBITDA since January 1st. This operating leverage, coupled with our focus on executing on our overall strategy of providing real-time services to businesses and consumers, enables us to drive strong performance as we enter the second half of the year.

So thank you for your time and now I'd like to turn the call over to Tim.

And also, before I do that, we're doing something a little different. If you go to YouTube, if you type in MyLivePerson you'll see there's a category now and we're going to be posting some sort of commentary on the quarter and we'll have that up in about an hour. But until that time let me pass it over to Tim.

Tim Bixby

Okay. Thanks, Rob.

We'll get into a little more detail on the financials and talk about our guidance for the third quarter and for the rest of the year.

As Rob mentioned, the second quarter revenue came in nicely with 3% sequential growth to $20.5 million. It was our 31st consecutive growth quarter. This is an improvement in the sequential growth rate up from 2% sequential growth that we saw in the first quarter.

We again performed well on expense management and generating cash flow from operations. EBITDA per share came in above our guidance range of $0.06 to $0.08 per share at $.09 per share. EPS was $0.02 per share, also $0.01 above our guidance range of between zero and $0.01 per share.

If we combine and look at the first half of the year, Q1 and Q2 combined, EBITDA is nearly tripled as compared to the same period in the prior year and this continues to provide us with financial flexibility to manage in a strengthening economic environment. We continue to be vigilant in managing cash and expenses, but we do have plans to expand resources and investment that have a clear ROI, particularly within sales and marketing efforts.

Within our B2B Enterprise group we signed 40 new deals in the second quarter, again, a very strong showing and up from 33 in the prior quarter. We signed seven new names; that was down slightly from the prior quarter. But the first and second quarters together are right on the same rate of new adds as we saw a year ago in the first half of last year.

Pricing in terms of annualized revenue per deal in Enterprise was up from the first quarter to about $65,000. This is up from about $50,000 in the first quarter. New deal pricing, that is, new customers, was strong at an average of about $115,000 annualized.

About 70% of the new bookings in the quarter in the Enterprise came from existing clients expanding. Among these were some of our most established clients. We see this as a sign and some real hard data that larger enterprises are beginning to increase investment in provable ROIs. We see it in the actual growth results in Q2 as well as the expected growth in Q3. We also can see it in booked business in Q2 and booked business today in Q3 that will begin to impact the financial results in the third and fourth quarter and beyond.

We're also seeing larger deals in the pipeline than we have seen for the past nine months. For LivePerson this means deals with monthly recurring revenue of between $15,000 and $40,000 or annualized revenue of between $200,000 and $400,000.

A breakdown of the Enterprise's group's deal splits for bookings follows: As I mentioned, 30% of the bookings were new customers, new adds, while 70% were expansion of existing customers. About 90% of the new bookings in Enterprise were sales and marketing driven business as opposed to the 10% driven by customer service focus. Average Enterprise deal size overall, $65,000, as I mentioned.

Enterprise attrition improved for the second straight quarter, dropping from 2.7% in the fourth quarter to a little under 2.2% in the first quarter and now to 1.8% in the second quarter. Attrition with our Small Business customers is running a bit higher than historical norms at a little above 3% and this suggests to us a slower recovery for small businesses as compared to Enterprise and Enterprise attrition.

The Consumer group made nice progress this quarter, as Rob mentioned. We're very close to our goal to be cash flow breakeven, having burned just about a little over $50,000 in the month of June as compared to twice that in March.

We also posted 14% sequential growth in the quarter, the strongest quarter to date within the Consumer operation. We expect continued growth going forward in the 3% to 4% sequential range. Third quarter, as you may recall, is typically a seasonally slower revenue quarter due to reduced education and tutoring revenue during the summer months.

Our Enterprise sales team headcount remained at 17. It will likely increase by 1 or 2 over the next two quarters as we continue to review the pipeline and expansion opportunities for the second half of the year.

The breakdown of our revenue in terms of geographic regions remains unchanged, about 25% of revenue comes from outside the U.S. And, again, this is primarily in the United Kingdom, but also territories beyond the U.K.

Financial services as a percent of the revenue base remained the same at about 25%; however, in telecommunications companies it increased from about 25% of overall revenue to about 30% today. Retail remains static at 15%, technology the same at 15%, and all other made up the remaining 50% of our overall business.

And now to sort of run through a few more details on the financial results. As Rob mentioned, we grew 3% sequentially to $20.5 million. Enterprise revenue in the second quarter increased 2% sequentially. As compared to the prior year quarter Enterprise was up 11%, Small Business up 14%, and Consumer up about 3% versus a year ago.

Gross margin overall was 75% for the quarter, in line with our full year expectations. And operating expenses were slightly lower than expected, primarily in the G&A line as we've kept headcount tightly in check and actually have not added any net headcount to date this year. The result of this cost containment was EBITDA per share of $0.09, EPS of $0.02 per share, both $0.01 per share better than our guidance range.

Operating cash flow was strong in the quarter. We generated $5.7 million of cash from operations. This was partially offset by capital investment of about $2.8 million, again, relating primarily to the continued build out of our backup posting facilities within a co-location environment.

Total cash reserves for the company increased to $31.3 million, up from $28 million in the prior quarter. And accounts receivable declined as a percent of revenue to 38% of quarterly revenue, down from 46% in the prior quarter, and this gave us a DSO measurement improvement from 72 days in the prior quarter to just 61 days in the second quarter.

Global headcount is currently at 360 and that is down from 366 at the beginning of this year.

Now let's turn to an update of our guidance, a first look at guidance for the third quarter and an update of our guidance for the full year that was previously given.

We expect in the third quarter revenue of between $21.3 and $21.8 million, EBITDA per share of $0.08 to $0.09, adjusted net income per share of $0.05 to $0.06, and GAAP EPS of between $0.01 and $0.02. Fully diluted share count assumption supporting these numbers is approximately 49 million shares on a fully diluted basis.

We're reiterating our full year revenue guidance and we are increasing our expected bottom line EBITDA, adjusted net income and EPS for the full year, so we currently expect to see approximately 15% annual growth on the top line for the year and we remain in the range of $84 to $86 million on a full year basis. We are increasing our guidance for EBITDA per share to a range of between $0.36 and $0.38 per share. We are increasing our adjusted net income per share guidance to a range of between $0.22 and $0.24 per share. And we're increasing our guidance for GAAP EPS for the full year to a range of between $0.07 and $0.09 per share.

Other assumptions that may be useful in analyzing the business for the third quarter and the full year - a share count of about just under 49 million; a book tax rate of 45%, and this is a decrease from our prior guidance of 55% and this decrease is driven by a recalculation of effective tax rate based on a higher estimated income before taxes for the full year; a cash tax rate assumption of approximately 40% is appropriate; a GAAP gross margin in the third quarter and fourth quarter going forward of about 75% and a cash gross margin of 78%; sales and marketing approximately 33% of revenue; G&A approximately 18% of revenue and R&D at approximately 16% of revenue are good rough ranges to use to support the guidance for the remainder of the year.

Depreciation for the full year should total approximately $4 million, amortization of intangibles for the full year approximately $2 million, and stock compensation expense for the full year should total approximately $4.6 million.

Again, for the full year we repeat our prior guidance related to capital expenditures to be in a range between $7 and $9 million for the full year.

EBITDA for the first half, as Rob mentioned, was $9.5 million. This is more than 2.5 times the prior year's first half EBITDA, which was $3.7 million. I think with strong bookings, a strengthening Enterprise pipeline, a significantly lower consumer cash burn rate and a refocused Small Business group, we're well positioned for the remainder of 2009 and we are, as we mentioned, seeing a return to ROI-driven buying decisions. This marks a change from the higher levels of cost-cutting scrutiny we increasingly experienced from our Enterprise customers and prospects over the preceding nine months. In these decisions we do well as our ability to drive measurable conversion rate improvements are well documented across many of our industry verticals

That really covers our operational highlights and now if we could ask the operator to rejoin the call and give instructions for Q&A, we'd be happy to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

In the past you've talked a little bit about what I guess you'd call a pay-for-performance model where you partner with another firm to provide the headcount behind the technologies for some customers. Is that one of the reasons that teleco picked up in the quarter and could you maybe give a little bit more of an update on that part of the model?

Tim Bixby

Yes, it is a real driver behind both the telco percentage of business and pay-for-performance. I think it's continuing to do well. We're actually seeing among our top five customers by year end we anticipate one or more of those may be a pay-for-performance customer, so that's really a testament to how well that's working. We're also continuing internal investment in that group; we'll be adding at least one more and potentially two more headcount to support that expansion. So things definitely continue to go according to plan and continue to expand there.

Richard Baldry - Canaccord Adams

And you've in the past talked about customers [break in audio] over certain break points per year [break in audio] over half a million or over a million. Do you have those numbers you can share again?

Tim Bixby

Yes. We're going to give a little less detail on that because it was becoming a little bit - as those numbers got large it became a little cumbersome we're going to clean it up and give a number of $1 million. So the number of customers over $1 million of annualized revenue last quarter was eight and this quarter it increased to 10. So we're going to try and keep it to that metric going forward just to give you some flavor for it but keep it a little less complicated.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

A couple of questions with respect to your guidance for the full year. It assumes a revenue acceleration in dollar and growth terms for the third and fourth quarters. I'm just curious what level of confidence and visibility you have in that? It sounds like the activity in your pipeline and the size of deals has increased but any other sort of light you could shed on your visibility and confidence in the acceleration of revenue growth in the second half of '09?

Robert LoCascio

Yes, I think there's two things we can point to. One is, as you know, we can see increases that are essentially booked and scheduled out beyond the coming quarters, so some of the growth in the third quarter was actually booked and scheduled in Q4 last year or Q1 of this year, and so some of this is not new information for us; it's just new because we're giving Q3 guidance for the first time.

And then the second piece is just normal visibility. Now we're far enough long that we can see the vast majority of activity we expect to happen in Q3. And so the pipeline looks strong; the percentage, the sort of absolute number of deals that are in that higher price point, that $15,000 per month and up, is several deals. That's new as compared to the last nine months. And so those are the kinds of things that have changed in a real way - real bookings and real scheduled deals that support the expectations for the second half.

Richard Fetyko - Merriman Curhan Ford & Co.

You mentioned sales cycles have improved. Are they back to sort of the historical normal levels perhaps in early '08 or late '07 or they're still elongated relative to those levels?

Robert LoCascio

Okay, I'll clarify that a little bit. The sales cycles have not dramatically changed in terms of their length. What has changed is what we saw over the previous nine months was quite a large increase of scrutiny on just the sheer dollars. And so when companies came up for renewal there was some downward pressure not on pricing but just on usage. So where in the past customers licensed at a certain level they would typically renew at the level or something higher.

That was a phenomenon we saw changing in the latter half of last year where people were really looking hard at cost cutting. So that phenomenon has now seemed to slow in sort of heading towards zero and heading back the other way, and that's really what's driving the improvement. So people more focused on expansion, more investment and that's driving the dollars up, but the length of the sales cycles has not changed too dramatically.

Richard Fetyko - Merriman Curhan Ford & Co.

And then lastly, with respect to the mid-market sort of expansion or initiative you have to penetrate some of the mid-market accounts, what kind of accounts are we talking about? I thought you sort of covered the full spectrum of companies out there already with your services, so I'm curious about the deal sizes that you think you can generate in the mid-market and also does the product need to change, the sales approach, what kind of competition do you face there?

Robert LoCascio

Yes. We traditionally have done a good job across the spectrum, but there's this growing customer base that sort of falls between how we execute and sell on the SMB, which is predominantly online, and how we sell on the Enterprise, which is traditional cold calling or outbound telemarketing and then follow it up with a high-end account executive.

So there's sort of a mid-market where we would have more of a telemarketing organization and going after companies that would spend somewhere between $30,000 and $60,000 a year and that's definitely in the middle of Enterprise and above the SMB.

So we're going to take sort of a hybrid approach of what we do with SMB so there'll be an online sales team, but there's going to be a telemarketing team and they're going to do a lot more outbound and stuff like that. We're seeing a lot of lead flow right now and sometimes these leads get caught between the two groups and they're not handled properly 100%. Sometimes they're sold into a small product or they're pitched such a big product that they can't afford it. So we think there's a real opportunity here right now to go after this.

I think a lot of it has to do with on the Internet right now there's a lot of small businesses that have graduated up to being mid-market businesses and they're selling specific products but they're generating leads from Google and all that and they want a more sophisticated tool but at a good price, like $3,000 to $6,000 a month. So that's what we're looking at.

Richard Fetyko - Merriman Curhan Ford & Co.

And the product, does that change?

Robert LoCascio

It'll be predominantly just - it's taking - it doesn't change. All of the products are off of a single code base, and so we're going to package it a little bit differently. And it'll have everything in it, so it'll have chat, e-mail, voice, and the proactive capabilities, so it'll look like the product suite; it'll look like the high-end SMB product that we sell today, which is our Timpani product.

Richard Fetyko - Merriman Curhan Ford & Co.

Is the competition in this tier of the market different from the other two?

Robert LoCascio

No, it's the same competition. It's just we look at it as opportunity. We're seeing, like I said, a lot more lead flow. The competitors will be the same, but we're going to be much more focused on it and, like I said, have a little bit of a different approach to more like an outbound telemarketing group, someone who's been in sales, let's say, five years or so, so it's more like a mid-level salesperson.

Operator

Your next question comes from Bradley Whitt - American Technology Research.

Bradley Whitt - American Technology Research

Rob, on the Consumer business, nice sequential uptick this quarter. I'm just curious as to how much visibility do you have on that business quarter to quarter and what gives you confidence it's going to grow 3% to 4% sequentially in Q3 when I think you said there would be some negative seasonality?

Robert LoCascio

We're already seeing the seasonality because it's when school's out our tutoring area really goes down significantly. It shaves about $100,000 a month off of revenues so we really sort of see that in the numbers.

We have a lot of visibility because about 80% of revenues is existing customers, so 80% of our revenues come from the base and then 20% is just the new customers on top of that, so we have a pretty good handle on that business.

It's been pretty resilient, as you can see, even in the face of slow consumer spending for many things.

Bradley Whitt - American Technology Research

And, Tim, just curious about any impact from the shekel this quarter since you gave guidance last. I haven't been tracking it.

Tim Bixby

In the second quarter it's been slightly favorable impact but not so significant that we talked about it. In Q1 you might remember it was a pretty strong impact. Q2 is immaterial to slightly positive.

Bradley Whitt - American Technology Research

And also how much of the increase in the EBITDA and EPS guidance is just attributed to the lower tax rate?

Tim Bixby

Well, on the EBITDA, EBITDA is before taxes and so the majority of it is from operating changes. On a rounding basis the tax is not a huge impact. EBITDA basis, it's partially just taking credit for Q1 and Q2 and then assuming a flow-through impact from some of the increase in revenue in the second half of the year.

I think there's some - as always there's some favorable that could come in, cause those numbers to be a little bit higher, but that goes both ways so I think the middle to high end of those ranges are pretty good.

Bradley Whitt - American Technology Research

And just so I'm clear on the guidance and your visibility, it looks like Q4 you're expecting probably the strongest sequential increase you've had in six-plus quarters, so are you saying the majority of that business has been booked already or is it stuff that you see in the pipeline that will book between now and then and allow you to start recognizing revenue?

Robert LoCascio

It's not a majority of it that's been booked, but I would say a significant proportion and in line with what we've seen in prior years is booked versus anticipated. So part of the implication for Q3 and Q4, some of it is timing, so something that might go live in September might hit October and vice versa and that's why the full year number we're still comfortable with and makes sense. But there could be still some flux between Q3 and Q4.

But I would say our confidence is as high as it has historically been when we give those ranges.

Operator

Your next question comes from Nathan Schneiderman - Roth Capital Partners LLC.

Nathan Schneiderman - Roth Capital Partners LLC

Rob, both of you referenced several times in your presentation strength in bookings and some improvements in the pipeline, but I was hoping maybe you could maybe try to quantify that for us a little bit maybe in terms of how that's improved on a percentage basis quarter-over-quarter, year-over-year, something just to help us gauge that.

Robert LoCascio

I think one of the data points we give is the average number of deals and the average size of the deals. So if you look just on that basis, 40 deals, average price point of about 65, that gives you an implied bookings for us of about $2.6 million. And that's not an absolute number but that's a good guidepost, a good metric to use. And that's up about 60% from Q1, so I think that's probably the best indicator of the real improvement because those are actual booked deals.

Some of that revenue hits the P&L in Q3, some in Q4, so it's not a direct quarter to quarter correlation, but that I think is the clearest signal that things are improving.

Nathan Schneiderman - Roth Capital Partners LLC

And then just on your references to a build in the pipeline, any kind of math you can do for us there to help us scope that?

Robert LoCascio

Well, I think the average price is certainly going up per deal and that's supported by the fact that we're again seeing a return to the $15,000, $20,000, $30,000 RMR deals, a higher proportion of those. And we also see, if you sort of look down the names of the companies in the pipeline, the kinds of names of companies that we think have real growth potential, so household names with big online businesses that we think can expand. So comparing that to a company that might start at $20,000 and stay at $20,000 forever, that's a real strong indicator also of longer-term growth.

Nathan Schneiderman - Roth Capital Partners LLC

Shifting gears to the Enterprise business, that seemed to come in at the low end of expectations so I'm just curious what you think happened as the quarter played out, what happened relative to what you were expecting to happen there or why you feel that came in at the lower end.

Robert LoCascio

I think it's mostly timing. I mean, you'll notice if you sort of flow through our guidance you'll see the full year hasn't changed much, the Enterprise number hasn't changed much, but you can see these shifts quarter to quarter. We'll see the same thing in Q3 and Q4. You can't always get it down to the exact month, but it came in right within the range that we gave so I don't think there was any one particular driver I would point to that drove that.

Nathan Schneiderman - Roth Capital Partners LLC

On the Consumer business I know that you have a goal to get to a breakeven to profitable level and you came pretty close in the month of June but I'm wondering do you feel you'll be at that level in July or what month would you expect to actually turn that business profitable?

Robert LoCascio

Yes, I think right now we're just maintaining sort of this - I think $50,000 plus or minus is good for this business right now because, for instance, we had the ability to buy some media on a cheaper rate and so we pay out now for those clicks and those conversions and then they come over about a year, we have a lifetime value that we achieve and that's why we spent a little bit ahead. So it'll be $50,000 plus or minus until the end of the year and depending on how we want to allocate those dollars, if we get better deals or if we don't we'll just save the money and tuck it in.

Nathan Schneiderman - Roth Capital Partners LLC

You gave us SMB churn stats of I believe a little over 3% on a monthly basis, but what would that have been last quarter and last year?

Robert LoCascio

That's higher than it has been historically. Historically it's been sort of below the 3% range, 2.5% to 3% range. It's definitely spiked up a little bit in the past couple of quarters and that's something that we're obviously very focused on right now.

Part of that in some ways can be favorable in that if you bring in more companies that test that can create lead flow but it can increase your attrition rate so you don't want that to continue too long. But I think we're making some changes in that group to sort of reinvigorate the growth and I think the second half should definitely show some improvement.

Operator

(Operator Instructions) Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

It looks like cash is at an all-time high and you've been a pretty strong generator over recent quarters so could you maybe re-visit the concepts of acquisitions, maybe also a buyback. kind of done lightly to approach that kind of recently, sort of an outlook kind of intermediate term on the balance sheet?

Tim Bixby

Yes, I think we're definitely at a nice pace at adding cash to the balance sheet every quarter. I think the $20 to $30 million range has historically been where we feel comfortable. The repurchase is still in place. [Break in audio] have any, you know, specific plans at the moment for deals or repurchases but it's definitely something we look at.

Those are the three areas we really focus on - capital expenditures, where we're investing in things that'll drive future operating improvement, we're adding new people in the second half of the year that we think can expand our sales and marketing efforts, but also we'll continue to look at the repurchase and at M&A opportunities. Historically M&A's been fairly opportunistic in terms of the use of cash versus stock and combinations, but that's definitely something that gives us flexibility, to have a little more cash on the balance sheet.

Nathan Schneiderman - Roth Capital Partners LLC

And theoretically your fourth quarter implied guidance, it's still relatively flat with pro forma EPS versus your first half, even though the top line stepped up to a pretty incrementally higher level. Could you talk about if there's some areas that by definition need to delever in the second half or whether that's - I'm essentially asking if that's just simply conservative guidance?

Robert LoCascio

Well, there's some specific areas where we expect to increase our investment. We've kept headcount in check; we've actually reduced headcount a little bit net-net overall. And continue to grow, with the stronger Enterprise growth anticipated, hitting the P&L is a lagging indicator, meaning we have to gear up now to support increased growth in the second half, especially as we go into the holidays. So that means two things - we expand our team and our production team that supports customers [break in audio] and so we'll continue to invest in that area. That'll start to hit in the second half.

We're also looking at expanding our sales and marketing, primarily sales resources both in the mid-market, as Rob mentioned, as well as continuing to build out the Enterprise sales team at least, well, one or two over the second half of the year.

So those are the specific investments. We're confident enough in the growth that we're willing to continue to hire in those areas. And then the other piece of it I think is somewhat conservative on some of these things that we don’t control in terms of exchange rates and things like that.

Nathan Schneiderman - Roth Capital Partners LLC

Can you also talk a little bit about the sales capacity concept? With bookings up 60%, like you said, sequentially, how much headroom do you feel like you have there? Is there some point where - and it's not often talked about in this market - but is there a constraint level there and do you really feel like adding only maybe one person to the Enterprise sales side is adequate as you head into the second half and then ready for '10?

Robert LoCascio

There's quite a bit of headroom, I think, in the existing team. So when price points go up and deal sizes increase you can drive a fair bit of growth with no increase in headcount. And so if you factor that in and also look at where people are relative to quota, we probably have as much as 50% untapped capacity in the existing sales team.

Historically if I look back over a couple three years we've booked almost double what we booked in the second quarter in a very top quarter in 2007, for example, with a team that was either the same or maybe one or two smaller. So I think there's plenty of room there.

Operator

Your next question comes from [Bill Balken - Unidentified Firm].

Bill Balken - Unidentified Firm

What are your thoughts on the expert channel that Java is utilizing - where do we go from here, which I find the most interesting part of the expert channel, by the way.

And then secondarily or the second question, can you comment on the earlier reluctance and I guess now the interest out of the big box retailers?

Robert LoCascio

Yes. For the Java one, I agree, I think we've got - and it's only been in the last couple of months that we've really been able to really take that to the next level for many reasons; the implementation, we keep changing things and sort of optimizing it. So I agree with you; I think it shows that businesses - and we have, obviously, 8,000 B2B customers - there's a way to put experts on your website and have them field questions and let consumers pay for those questions. And in Java's case they're able to decrease - normally it would be a cost for them to support those questions and now they've turned it into a revenue stream.

Now I think Stage 1's kind of over and Stage 2 is now let's go out to our base now that we have sort of the model down, and that's what we're doing right now and the sales guys have added it as part of their pitch. So that's that part.

And the second part is the big box retailers, which have I think traditionally been slower to adopt our technology, there's a couple of them in the pipeline and it just seems like everyone else they're focused on increasing conversion rates and they need our products to do it. So, like I said, in the next two quarters I think we'll have a couple of these guys in our customer list and it's exciting for us. It's sort of taking it to a whole other level.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

Tim, what was the CapEx in the quarter?

Tim Bixby

About $2.8 million.

Richard Fetyko - Merriman Curhan Ford & Co.

Could you tell us what you spent it on?

Tim Bixby

That is a year in our hosted server facilities, primarily for backup, the expansion of our backup facility. So we've essentially completed our initial build out of the primary facility and now that's just expanding the growth. But we've sort of moved on to the backup facility as we move and expand that. And then to some extent the data warehouse that we're building, those two capture most of that.

Operator

Your next question comes from [Jordan Benchay - Unidentified Firm].

Jordan Benchay - Unidentified Firm

I have a question with regards to your Enterprise and your Consumer. Do you see one or the other of them being your main driver or leader or do you sort of see them - for your business going forward or do you see them sort of equally?

Robert LoCascio

Yes. I see them as - there's a strategy behind the acquisition we did of Cassava two years ago and we're executing on it. More and more of the businesses we're bringing together and ultimately I'd like LivePerson to be known as a brand by consumers where they can, when they see it, whether they get it on a customer's B2B website on our website, that they think I'm going to get the best possible advice, I'm going to get expert knowledge through our system.

It's all part of a bigger strategy of enabling consumers to get expert advice, whether it's from a B2B or an individual expert.

Jordan Benchay - Unidentified Firm

And which do you see growing more going forward or do you see them sort of being the same?

Robert LoCascio

Yes. I think they equally have a lot of room to grow. I mean, we've only got 8,000 customers out of about 200,000 or so on the B2B side. And in the Consumer business we're not known, we're not Twitter. We're not a household name brand. We do a lot of direct marketing to get consumers to our website and they like the service when they get there, but when we step it up and people know about us that's when we know we've really reached our potential. So we've got a long way to go.

Jordan Benchay - Unidentified Firm

What were those numbers that you just quoted for the Enterprise - 800 out of 2,000, is that what you said?

Robert LoCascio

We have 8,000 customers in the Small Business segment and we've got 300 customers on the Enterprise side.

Jordan Benchay - Unidentified Firm

And I think you said out of a potential, was that correct?

Robert LoCascio

Yes, for the 8,000 Small Business it's about 200,000 businesses that are there and in the Enterprise we've got 300 out of what we target about 3,000.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

You guys mentioned the burn in the Consumer segment for the month of June and March. Can you give us the EBITDA burn for the Consumer segment for the second quarter in total?

Tim Bixby

Yes, between $150,000 and $200,000.

Richard Fetyko - Merriman Curhan Ford & Co.

And then just more of a bigger picture question with respect to the [inaudible] that you're implementing or using and the Timpani to [practice] sales product, there's been a fair amount of advancement made in [omni] media, [inaudible] space on the behavioral targeting of ads that improved the performance of those ads [inaudible] whatnot. Is that something you're using, sort of past behavioral data and purchased data from third parties? Is that something you're looking to implement or perhaps you're contemplating developing a new product or a new generation of your product?

Robert LoCascio

Yes. I mean, we've been looking at - I think lately we've been looking at how do we expand the use of our engine, which in real time tracks, monitors and then does a proactive engagement. And we are tracking about 700 million uniques a month, in which about 7 million chats take place. So we have a tremendous amount of data.

The first step is the data warehouse that we're on the tail end of building and the business intelligence about that will give us a lot of insight into what have we got on the data side, and then from there we can decide how are we going to take that data and then expand our business with it.

But there's definitely something interesting in the data when you track that many people and their purchase behavior on some of the biggest websites in the world.

Richard Fetyko - Merriman Curhan Ford & Co.

I would think so. And then the business intelligence, the data warehouse that you're building, is that something that you will make available to your customers as well to gain insight? Will that be part of the existing services or deals or will that be an extra fee?

Robert LoCascio

I think it's three pieces, really. We provide it according to our customers today and I think we will continue to provide that at the current level. And ideally we expect to be at a much more sophisticated level.

There's a second category that's things that we don't and can't do for our customers today that we plan on doing that we think we can generate additional revenue for.

And then the third piece is new business opportunity, new uses for the data, potentially new customers, and that's the most greenfield piece, also with real potential.

So that's how it breaks down.

Richard Fetyko - Merriman Curhan Ford & Co.

And timing on some of these things?

Robert LoCascio

The data warehouse is gearing up now. We'll head towards beta and testing with customers in the second half of this year and then we'll roll that out from there once we're comfortable that the thing is doing what we expect it to do.

Operator

And there are no more questions at this time.

Tim Bixby

Thank you for the call and, as I mentioned at the beginning, if you go to YouTube we'll have up there a couple videos sort of doing a little commentary on the quarter and you can just search MyLivePerson and you'll find the videos there.

So I will see you in Q3.

Operator

And this concludes today's conference call. You may now disconnect.

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Source: LivePerson, Inc. Q2 2009 Earnings Call Transcript
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