LivePerson, Inc. Q3 2009 Earnings Call Transcript

Nov. 7.09 | About: LivePerson, Inc. (LPSN)

LivePerson, Inc. (NASDAQ:LPSN)

Q3 2009 Earnings Call Transcript

November 5, 2009 5:00 pm ET

Executives

Tim Bixby – President and CFO

Robert LoCascio – Chairman and CEO

Analysts

Nathan SchneidermanRoth Capital Partners LLC

Richard Fetyko – Merriman Curhan Ford & Co.

Brad Whitt – Broadpoint AmTech

Mike Ratamore [ph]

John Hickman – MDB Capital Group

Craig Nankervis – First Analysis

Richard Snidely [ph]

Operator

Good afternoon. My name is Eli, and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson third quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to Tim Bixby. Sir, 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 overtime, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance.

Changes in economic, business, competitive, technological, regulatory, and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission.

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

And now, I would 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. We are excited to report that during the third quarter of 2009, we generated revenue of $22.3 million, up 15% from a year ago, and up 8% sequentially as compared to the second quarter of 2009. EBITDA per share came in at $0.12, above our guidance range of $0.08 to $0.09 per share, EPS was $0.05, and also exceeded our guidance range of $0.01 to $0.02 per share.

Tim will provide more detail on that shortly. We are pleased with our third quarter results from each business unit, especially given the challenging macroeconomic environment. It's a testament to the underlying strength of our teams, the relevance of our products intake on our environment and the leverage in our business model.

Within our business operations, enterprise revenue was up 11% sequentially and grew 15% as compared to the prior year, while our small business group’s revenue increased 4% sequentially and 14% from the prior year. We are pleased to see that the second half of this year is shaping up to be very strong for our B2B product lines. The macroeconomic pressure on retailers and their offline businesses seems to be forcing them to be more aggressive with their online investments, and LivePerson continues to be the direct beneficiary of this trend as we signed two of the largest retailers in the US during the quarter.

While our revenue split continues to be dominated by financial services, telecommunications, and technology companies, we have begun to see stronger pipeline activity interest in both the retail and the healthcare verticals. Retail has fairly established for us, representing about 50% of our enterprise revenue, but the increased interest in our success in signing very large retailers recently is a very positive sign for the upcoming quarters.

Healthcare is starting to become an emerging growth vertical for us, with more customers and prospects looking towards LivePerson to helping manage providing information to their users and in generating business online. Both of these verticals should continue to show good results for us over the upcoming quarters. In Q3, we added more incremental revenue than we did in the previous three quarters combined, and we expect sequential growth for Q4 to exceed 6% as we continue to execute on our strategic plan.

As in the prior quarters, the enterprise group focus on expansion opportunities in the US and in Western Europe, expanding the pay-for-performance model globally and continue the expansion in our three strongest industry verticals of telecommunications, financial services, and online retail. Our small business group increased revenue by 4% sequentially and 14% as compared to the prior year. Our key metrics of new sales and attrition have returned to their historical levels, and we continue to dominate in this market, and as more and more small businesses move online, we are strongly positioned to grow.

The consumer group had a very strong quarter and we accomplished our goal of generating cash flow during each month of the quarter. We generated approximately $150,000 in cash in the quarter from the consumer business. The consumer group’s revenues increased 9% sequentially, this was significantly higher than the 3% to 4% guidance we gave in the second quarter. We continue to generate a lot of activity with new core categories of personal advice, programming, education and tutoring, and we will remain focused on these key categories in the upcoming quarters.

Our ability to generate cash flow of steady revenue growth is driven by our ability now to maximize our marketing buys within search, media and affiliate networks. Our EBITDA margin year-to-date exceeds 23%, and we generated nearly $60 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.

Thanks for your time, and now, I will turn the call over to Tim. Tim?

Tim Bixby

All right. As Rob said, the third quarter was very strong. Revenue increased 8% sequentially to $22.3 million, as a result from a 3% sequential growth rate in the second quarter. EBITDA per share reached $0.12, well above our guidance range of $0.08 to $0.09, EPS was $0.05 a share, also well above our guidance range of $0.01 to $0.02 per share. Within our enterprise group, we signed 43 enterprise deals in the quarter, again a very strong showing up from 40 in the prior quarter.

And we have said of new deals, we signed 13 new names, new customers, almost double the count from the prior quarter, and pricing in terms of annualized revenue per dealer ASP was up significantly, from $65,000 in the second quarter to about $95,000 in the third quarter. New deal pricing, that is deals to brand new customers, was again also very strong at an average of $175,000 in Q3, this was up 50% as compared to the prior quarter. We believe the cause of this is attributable to larger companies becoming more responsive to our online conversion results and the documented outcomes we can provide to them. As a result, they are willing to commit to higher investments from day one of LivePerson deployment, rather than increasing investment more gradually overtime. While we don’t expect this very high average deal price in the quarter to become the absolute norm going forward, this still is a very strong sign for the existing pipeline and is reflected in this quarter’s performance.

From a product perspective, during the quarter, we were benchmarked from a prospective enterprise customer for performance against the direct competitor of ours. The test results showed that our performance on page load time speeds in a real world deployment and this is a critical performance metric in the host of software world. Our performance was more than five times better than our competition, five times faster, and this was the deciding factor in the customer selection of LivePerson to replace this competitor. Our experience in large-scale deployments as well has enabled us to achieve these levels of performance on the most important metrics to our customers.

And now, we will talk a little bit about the breakdown on the bookings in the quarter, as we have volume in the past. About 25% of the bookings were to brand new customers in terms of revenue, and about 75% existing customer expansions. About 75% of the bookings in the quarter were sales, proactive sales related deployments and about 25% of the bookings were customer service related deployments.

We have good news also on the attrition front. Enterprise attrition greatly improved for the third straight quarter, dropping from 2.7% in the fourth quarter to 2.2% in Q1, 1.8% in Q2, and 1.4% in Q3. Also on this metric within our small business group, we have seen a similar improvement, from 3.3% monthly attrition in Q1, improving to 2.6% in the third quarter.

As Rob mentioned, the consumer group generated positive cash flow every month during the quarter. This is a major milestone since we acquired Kasamba in 2007. We achieved 8% sequential revenue growth for the consumer group. This (inaudible) on a very strong Q2 with 14% sequential growth. The growth in both quarters was driven primarily by higher average fees per minute charged by experts. Our enterprise sales team headcount remains at 17 and will likely increase by 2 to 3 over the next two quarters. With growth opportunities in both the US and Western Europe, looking promising for us. With a much stronger growth this quarter and the pipeline we see in the fourth quarter, we are nearing sales capacity with our enterprise sales team and this is a good thing. This is why we are expanding the team now.

We plan to expand also into the mid-market, with the hiring of additional inside sales capacity also during the first half of 2010. In terms of our revenue split from outside the US, primarily in the UK, about 25% of our revenue comes from non-US territories. And now, I will review some of the cost lines. In summary, overall revenue grew 8% to $22.3 million; enterprise revenue grew 11% sequentially; small business, 4% sequentially; and the consumer revenue growth rate was 8% sequentially.

Our overall gross margin improved to just about 75% for the quarter, and this is in line with our expectations both for the third quarter as well as for the full year. Operating expenses were slightly lower than expected, primarily in the G&A line, as we have kept headcount very tightly and checked across the company, actually we have not added any net headcount to date since the beginning of the year, though we have been active in replacing normal attrition for employees.

Most of the revenue increase of our expectations fell to the operating income line, and this is what allowed us to exceed our previous guidance. The result was EBITDA per share of $0.12 and GAAP EPS of $0.05 per share, both well above the guidance range. Operating cash flow is strong in the quarter. We generated $4.3 million of cash from operations. This was partially offset by some CapEx, about $800,000 related to capital expenditures in the quarter.

Our total cash balance as of the end of the third quarter is $36.5 million, and this is a $5.2 million increase from the prior quarter. The cash receivable increased in line with our increasing revenue and stands at $10.4 million. This was up slightly relative to revenue from the second quarter but is in line with where we were in the first quarter of this year. Global headcount in total is 366, and that is the same as it was at the beginning of the calendar year.

Based on the results here today and our view of the pipeline and expectations for the coming quarter, we are increasing our fourth quarter and full-year guidance for revenue, EBITDA, adjusted net income, and for GAAP net income as follows. In the fourth quarter, we expect between $23.4 million and $23.7 million and we expect EBITDA per share between $0.10 and $0.12. Adjusted net income per share for the quarter, we expect between $0.06 and $0.07, and GAAP earnings per share of $0.03 and $0.04.

We also estimate that our fully diluted share count for the fourth quarter will be approximately 50 million. This will imply stronger results for the full year, and as a result, we expect revenue of between $86.1 million and $86.4 million. This is up from the previous range of $84 million to $86 million. We expect now EBITDA per share of between $0.42 and $0.44 per share, and this is an increase from the $0.36 to $0.38 per share previously. We expect adjusted net income per share of $0.26 to $0.27 for the full year. This is up from $0.22 to $0.24 previously, and we expect GAAP earnings per share of between $0.13 and $0.14. This is up from $0.07 to $0.09 previously. And for the full year, we expect fully diluted share count of approximately 49 million shares.

There is a couple of other assumptions that we can share with you to aid your analysis of the company. Our book tax rate will remain essentially unchanged at about 45%. However, our cash tax rate based on higher income projections for the year will decrease to about 25% for the full year, and this is a decrease from our prior estimate of 40%. GAAP gross margin, we expect to continue at this current of about 75% and the cash gross margin of about 78%. Sales and marketing, we expect to run approximately 30% of revenue in Q4 and the full year. G&A, approximately 16% of revenue; R&D about 14% of revenue; and in terms of non-cash adjustments, we expect depreciation for the full year of $3.3 million; amortization intangibles of approximately $2 million; and non-cash stock compensation expense of approximately $4.7 million.

Finally, on the capital expenditure front, we expect to stand between $7 million and $8 million for the full year. This is a decrease from our original expectation for the year of between $7 million and $9 million, and we should come in near the lower end of that range. We are on track to deliver revenue at or better than the high end of our previous revenue guidance, and annual growth of approximately 15% and to double EBITDA to more than $20 million, and adjusted net income to more than $12 million as compared to last year.

We have continued to invest in our business that deliver both revenue growth and significant margin gains without dramatic cost cutting, as many other companies have been forced to do over the past 18 months. As compared to a peer set of public hosted software companies, we are growing as fast as most, and we are more profitable than most, yet we have evaluation that is 50% less on a multiple of revenue or multiple of profit basis, and that’s why we are very that you joined us today to share some of the terrific results we have achieved here to date and hear our confident and optimistic view of the coming quarters.

That covers our operational highlights, and we would now be happy to take any questions you may have. Operator, Eli, if you could rejoin us?

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Nathan Schneiderman.

Nathan Schneiderman – Roth Capital Partners LLC

Hi Rob and Tim, thanks very much for taking my questions. Congratulation, nice job on the quarter, great results. Handful of questions for you, the consumer business finally cash flow positive every single quarter, which is excellent news. Do you believe that, that business will remain cash flow positive on a monthly basis going forward, and then can you share with your medium-term and longer-term views on operating margin for this business, where do you think it logically goes to?

Robert LoCascio

Yes, we want to keep it, I think we turned a quarter on in Q3 every month generating cash and we want to maintain that going forward. So, yes, we will continue on generating cash in growing that business. And the operating margins are pretty much equal to the operating margins the quarter, so in the 70s percent gross margins. So, we are going to maintain and we are not adding a tremendous amount of headcount right now to the business. So, we will just sort of continue growing it out, and we are doing I think really well on the marketing side right now and getting real traction in the market.

Nathan Schneiderman – Roth Capital Partners LLC

Your gross margin, it sounds like will be similar to your main business, but what do you think on the operating margin side for the consumer business group?

Tim Bixby

It will fund it near, you know, keep it cash flow positive, but it’s – see what they did operating margins, because we wanted he taking the money and putting it back into the business and growing the business where we see opportunities. So, I would just say single digits for now.

Nathan Schneiderman – Roth Capital Partners LLC

Okay. And then, overall on operating margin, you had obviously excellent results at close to 24% pro forma, I think that may have been the best results I have ever seen, at least (inaudible) what are your thoughts on operating margin from here as you continue to see the revenue increase sequentially, do you continue to get some sequential improvements in operating margin, or will investments take that down somewhat?

Robert LoCascio

We have begun to, I think using headcount is a good proxy, as we have begun to expand our investment in people. That’s obviously where you are making long-term commitments as opposed to shorter-term sales and marketing investments. So, we have begun that process and we see headcount expanding going forward in areas where there is ROI, where there is people building products. So, you are going to see it in sales and marketing and product and R&D. So, we will still expect to get leverage out of the cost of goods line and we will bit of leverage on the G&A line. So, I think in terms of how all of that will net out in the margins, I would expect slightly less improvement over the next couple of quarters than we have seen in the past couple of quarters, because we have seen some nice surges in that as a result of revenue growth and fairly flat spending. But that being said, our business, if you get strong continued revenue growth, it does show up in the margins.

Nathan Schneiderman – Roth Capital Partners LLC

Okay. Great. And final question for you, in recent quarters, you have given us the number of customers contributing at least a million annually, and I believe it was 10 last quarter. I was curious if you could give us an update there. Thanks very much.

Robert LoCascio

There’s 11, so we have added one more over the 1 million mark.

Nathan Schneiderman – Roth Capital Partners LLC

Okay. Thank you.

Robert LoCascio

You bet.

Operator

Your next question comes from the line of Richard Fetyko.

Richard Fetyko – Merriman Curhan Ford & Co.

Good evening guys.

Robert LoCascio

Hi Richard.

Richard Fetyko – Merriman Curhan Ford & Co.

I was curious with respect to the strong bookings you have seen in the third quarter, if any of that is sort of catch-up sales, that were pushed out in the first half of ’09, do you get the sense of that potentially the case or not? And then, Tim, what’s the impact of a weaker dollar, a fair amount of your expenses are in Shekel, so curious if you could review that for us as well?

Tim Bixby

So, on the first one, I think we are – we looked at bookings as an indicator of future quarters, and if you sort of look at actual books quarter one, two and three, and then expect it for Q4, you see a fairly steady improvement and that suggests to us that it’s a relatively small amount of catch-up in the numbers. So, it’s a little early to see into Q1 at this point, I am not giving guidance for next year till the next call. But so far, all the indications are we are back to a more normalized bookings rate, and that it’s not dramatic and I guess it’s not the catch-up I guess as you may call it. On the exchange rates, we are very close right now, a little bit better than our planned exchange rate. So, in the first two quarters of this year, we were fairly favorable, meaning the exchange rate moved in our favor and gave us a little bit of a tailwind. In the third quarter, it was a very limited effect, so no negative impact but not a dramatic positive impact. And that’s what we see so far in the fourth quarter as well.

Richard Fetyko – Merriman Curhan Ford & Co.

Great. And on other one, with respect to source of new revenue, I understand that you are seeing the existing customers sign up for new deals, but are you seeing actually existing customers also add additional seats, because there was some attrition right earlier this year and late last year with respect to that, you know, sort of seat attrition, are you seeing them, we are seeing the attrition decline, are you seeing your customers actually add seats to the deployments that they have existing in place?

Tim Bixby

Yes, definitely. To hit these levels of sequential growth rates, we have to see growth from existing customers and that’s why a significant proportion comes from those existing customers, and that’s exactly what they are doing. They are expanding seats in existing deployments, or they are adding new deployments either in new product lines or new territories, sometimes it’s territories domestically, sometimes, it’s across the globe, but in both cases, it’s quite a bit of growth from existing customers. Another thing we have seen more frequently or some more frequently in the third quarter a larger proportion of our growth came from pay-for-performance performing at a high level. So, at a little less than half of the growth in the quarter came from pay-for-performance deals where as we expect, if we perform better faster, revenues goes up better faster, and that’s really the goal of being in the pay-for-performance market. And then we also saw in terms of over-hedge or activity based fees, those are also quite high in the quarter as well, and the net of all those pushed us above our expected guidance range.

Richard Fetyko – Merriman Curhan Ford & Co.

Got it. All right, thanks.

Operator

Your next question is from the line of Brad Whitt.

Brad Whitt – Broadpoint AmTech

Hi guys, thanks for taking my questions. Looking at the two big retail deals, Rob, you said you had in the quarter, just curious whether you started recognizing revenue in the third quarter, or whether that should come in future quarters?

Robert LoCascio

That comes in future quarters.

Brad Whitt – Broadpoint AmTech

Okay. And also I was curious about the healthcare vertical, if you can give us any more color how healthcare customers might use your product?

Tim Bixby

Healthcare is an interesting one. It’s a combination of both information and actual transactions. So, if you ate an apple, it’s primarily, I am asking about the product and buying a product. With healthcare as often is not, it will be just, I want to contact these entities and get information about my coverage, my potential coverage, healthcare options, those kinds of things. So, it’s an interesting combination of both sort of sales and service learning, it’s just these companies are facing much more online activity, people are much more comfortable, and in many cases more comfortable being anonymous and getting information about medical issues and very personal issues anonymously rather than on phone. So, there is in some cases a chat preference. These companies are getting more comfortable with the security. They know Citibank, Bank of America and companies like that look us and are confident in our security, and so these companies, it has to satisfy HIPAA and other pretty extreme regulations, are getting much more comfortable that our hosted solution works well, and that’s why we are seeing some new names in this area.

Brad Whitt – Broadpoint AmTech

Okay. And just I am clear on, I mean, this was a rather large sequential increase in revenue for you guys this quarter, is there some – you mentioned revenue share being half of the, I don’t know if that was half of the increase or half of the upside, maybe you can get some clarification on that, but is there some one-time items in there that we should not expect to repeat, or is this potentially something that we would see going forward?

Tim Bixby

No, there is no real one-time events in there, things, again because of our model, some of this began to click in Q2, but you just don’t see it in the recognized revenue until Q3. And so, that’s why I think we captured much of the upside, but not a 100% in our guidance. Our pipeline and activity and activity to date in the fourth quarter, all very strong indicators that it was not a one-off. Our guidance and expectations as always is takes into account possible plusses and possible minuses in Q4. And so, that’s why our guidance is a little less than the actual in Q3, but in terms of what we saw at this point of last quarter, it’s very much in line with what we are seeing quarter-to-date this quarter.

Brad Whitt – Broadpoint AmTech

Okay. Great. Thanks for taking my questions.

Tim Bixby

Thanks Whitt.

Operator

Your next question is from the line of Mike Ratamore [ph].

Mike Ratamore

Good evening, a very nice quarter. On the consumer business, Tim, did you say that the main reason it grew was the experts are charging higher fees, was that the main reason?

Tim Bixby

There’s three pieces to the revenue line to sort of drive it. There’s the actual amount of activity, so whether it’s minutes or sessions that’s volume. There is the price that the expert charges to the consumer and that’s set and determined by the expert, although there are things we can do to influence that and support that. And then the third is the proportion of the feedback received and we obviously set that price, that proportion of commission that we keep, and that is we raised that in February, and have not raised materially since then. So, all three of those are contributing. So, volume, price and then the fee structure that we charge. The primary driver in the third quarter has been the price that the experts have charged. So, that was a more stronger driver than the other two in the third quarter.

Mike Ratamore

So, that becomes a specific vertical as more pronounced. I think you talked that they were slow this quarter, because of less tutoring, or was there another vertical that kind of kicked in here?

Robert LoCascio

On the personal category, (inaudible) the health and wellness categories and the Java programming category, so are just driving more traffic. Sometimes, we are driving more traffic so there is lot more demand. Demand, it could push the experts to move up pricing against that demand, because their time is basically how much time they want to put into it and I think a lot of people were in chat with them to opt their pricing accordingly. So, a little bit of that.

Mike Ratamore

Okay. And then, what do you expect the headcount to be by year-end, end of the fourth quarter?

Tim Bixby

It will be, we don’t have a hard metric forecast on this, but based on our plans right now, I can see adding in the range of 15 and probably, and probably we have an aggressive goal and it takes a little longer to hire people. So, that’s probably at the top end of the range.

Mike Ratamore

Right. Okay. And I think historically your enterprise and small business segments grew at about the same rates, do you think that – could you see that occurring again or are some of the enterprise deals is getting so big, the enterprise should sort of always grow faster than small business going forward?

Tim Bixby

I think they will definitely have – it will be certainly possible if they both grow at the same rate, and within the same ranges, not exactly every quarter together, but in line with each other. What we are seeing now is a little bit bigger gap between the two than we have seen in the past and that I believe is because the small business attrition rates are recovering a little more slowly than the enterprise attrition rate. I think that’s just a lot of pressure still on small businesses to do anything, to get loans, to fund money, to hire people, all of those things and it’s going to take a little bit longer I think for those to recover to their historical rates.

Robert LoCascio

But the market size on the small businesses you are talking about, let’s say, it could be 200,000 or 300,000 in small businesses that are potential targets for us where in the enterprise, it’s about 3,000 customers. So, I really believe the small business has a fairly significant opportunity to grow greater than it is and we are going to actually fund some more headcount in there and we are going to be focusing on what we call mid-market segment. So, we are going to start split out small business from mid market and break the team so they will have more focus, because we think there’s a lot of deal flow in those areas. So, I think next year, we should see a lot more trajectory in this part of our business.

Mike Ratamore

Great. And just last question, in terms of the number of customers that want to click-to-chat and click-to-call at the same time, have you seen that sort of percent or percent of pipeline change much out here?

Tim Bixby

It hasn’t moved significantly. Usually a customer has a preference of one versus the other, but we always work to provide both. Many times it’s used click-to-call and click-to-chat as an escalation path, chat being the initial communication methodology then escalating into voice if it’s a higher value customer. But not a big shift in what we have seen over the past several quarters.

Robert LoCascio

Yes, and I think ultimately, although we have click-to-call in our product lines and email knowledge base, we always need with chat just because from our cost perspective, the business gets leverage on the operator, so they can chat with one or three people simultaneously versus when it goes to a call, you are not going to get any real skip. So, although click-to-call, I think was more fashionable I feel like, the last two years, but I think when the buyers come down to it, they have 800 numbers, and so they can utilize all the 800 numbers, but it doesn’t get the real efficiency like chat does.

Mike Ratamore

Okay. Thank you.

Operator

Your next question is from the John Hickman.

John Hickman – MDB Capital Group

Hi, can you hear me?

Robert LoCascio

Hi John.

John Hickman – MDB Capital Group

Hi, could you talk, you know, the consumer, it looks like the consumer side kind of really fagged this quarter, can you talk about the competitive environment in that sector, other expert sites or where all their people get. I guess you could go Website by Website, but do you run into other competitors, do you?

Robert LoCascio

There is ever major vertical, so from tutoring and spirituality to psychology, there is a niche competitor who has adjusted offering in that segment, and we will compete with them directly in that segment. A lot of the competitors do click-to-call. So, they are using audio of voice as a method of delivery versus chat. So, I think in the marketplace, we have the largest community of experts that are charging for their advice and who is doing with chat, and we do offer some voice within the platform and there is an email component where they can trade emails back and forth and the expert can charge a one-time fee for emails, answering emails. So, I think it’s the platforms are more comprehensive and then we are not niche. We are broader in how we go to market in the different expert segments that we are in.

John Hickman – MDB Capital Group

Okay. And then, are you seeing anything new on not the consumer side, but the enterprise side, doing a new competition or anything that’s different this quarter than any other time?

Tim Bixby

I think we continue to just execute it and I think we own a lot of the chat market and whether it’s small business or it seems very large, especially the large implementation. I think it’s very hard for companies that have included chat as a check the box to compete where we made that a strategic implementation. We made it strategic to our marketing department, and this is something we set out to do four years ago, and I think we have executed really well on making chat going from being a very tactical use for support to being a strategic use for our marketing department to drive sales. And I think we are just clearly showing that, where it’s a real product in itself it’s a real business, and that allows us to continue to gain momentum over the guys we just have in there as a feature.

John Hickman – MDB Capital Group

Okay. Thanks.

Operator

Your next question is from Craig Nankervis.

Craig Nankervis – First Analysis

Yes, thank you. Good afternoon and congratulations on a nice quarter. A handful of questions, on the geometrics, you know, we had a spike here and you talked them maybe not necessarily being sustainable, would you think that some of these geometrics will fall sequentially here in the current quarter, maybe we start there?

Tim Bixby

So, a couple of notes just on the kinds of metrics that we report on. So, average deal size overall for the enterprise has tracked historically in mid-60s. It went as low as 50 in the first quarter, which was a tough quarter and then in Q3, it was 95. So, pretty dramatic uptick. And if you go back even further, you will see deal sizes again in sort of 60 to 70 range. So, I think what we are seeing is almost with our question to return to those historically, you know, the steady historical rates. The 95, I think we have only exceeded once in three years, and so that’s why we are not quite prepared to say that, that’s the new standard going forward. But we are certainly well above where we have been for several quarters and almost back to historical norms.

Craig Nankervis – First Analysis

The split between your bookings, your enterprise books, I think for a while has significantly favored the sales side, but we had a little bit more proportion this time on the customer service, this 75 and 25, is there any commentary about that, do you think this is maybe how your pipeline is starting to play out and you might see more of that type of split or any comment on that?

Tim Bixby

I think again, it’s in a reasonable historical range. I don’t think it indicates any long-term shift in the business. I think it’s more in contrast always on Q4 and Q1, which I think which is really dramatically unique quarters from just about every measure, and that really drove things much more in proportion towards the sales deals, which is a very high ROI and in Q4, people are very focused on maximizing revenue on their Website, customer service is more of a long-term focus decision for these companies. So, I would expect the split to sort of stay in that range whether it’s 25% customer service, 20, 30, that range I think is sort of the normal you should expect.

Craig Nankervis – First Analysis

Okay. And on your investment and headcount adds, and you really not have added net adds year-to-date at least through Q3, can you just talk about that a little bit in terms of not adding in Q3 and now you are going to add in Q4, was there a particular reason that you held off in Q3?

Tim Bixby

No, nothing has shifted, there is a lag time between when you decide to make hires and you start to make hires obviously. So, these decisions that were made probably beginning in late Q2 to begin to make hires, letting people feel more free to invest money. People are seeing the opportunity, the folks who were closest to the revenue opportunities are really the folks who drive this. They bring in recommendations, they say, I can use people here, and that’s how these things change. That’s a very different thing when we heard six months ago from the same folks. So, it’s not a black and white decision you make, but it has been gradually moving more towards the bias of increasing over the past three or four months. Outside of sales, it’s slightly different, because it’s not a direct ROI, but we have product opportunities where most of the skills we have announced, but there are places we see opportunities where we have to bring in new skills. So, that’s where we will be investing in incremental headcount within our product and R&D groups.

Craig Nankervis – First Analysis

Okay. I appreciate that. I may have missed it, but did you offer color on your deal sizes sort of that you are looking at in your pipeline versus I think there was particular commentary 90 days ago about how the deal sizes had sprung back and increased, is there any new color sequentially on that front or can you confirm that they continue to be up there?

Tim Bixby

I think they continue to be strong. So, I think we spoke about it a quarter ago, because it was a pretty dramatic shift after two or three quarters of a tougher pipeline environment, and that’s why we really wanted to call it our last quarter and say, look, this is real, you can see it, and we want to make sure people understand that. I don’t think we are returning back to anything that is less attractive. We are seeing plenty of opportunities now.

Craig Nankervis – First Analysis

Okay. And then lastly, is there any color on your data warehouse data or any commentary around that, are you disclosing it all when you might have that commercially available, just anything on that subject?

Tim Bixby

Yes. We started about 24 months ago building a data warehouse to take all the data that we capture and sort of normalize it. So, we can use it for other product lines. So, that’s sort of a tail in on the technical development of that. So, next year, we should see some products and features built around the data warehouse, but we haven’t given any as yet.

Craig Nankervis – First Analysis

And is it in beta now, are you willing to say that or –?

Tim Bixby

Yes. I think the technical side is on, like I said, it’s on sort of the – we don’t start a beta or alpha, because it’s just technology, and we have built it to the customers as product shed. So, it’s kind of pretty – I would say pretty alpha, sort of between alpha and beta.

Craig Nankervis – First Analysis

Thank you very much.

Operator

Your next question is from Richard Fetyko.

Richard Fetyko – Merriman Curhan Ford & Co.

Hi. Just a follow-up question on the product side, just curious if, you know, the existing platform that you have, are any sort of enhancements that you are working on the proactive sales particularly, just with the technology or just kind of status quo there?

Robert LoCascio

Yes. I think there’s a focus right now on the R&D side on sort of two things. One is the data and the assets of the data that we capture right now, and everything around the data warehouse is something that we are, I think interested in, that’s why we made a fairly large investment over the last two years. So, we, for those of you may or may not, we capture a lot of consumer behavior data. So, when you go to one of our customer Websites, we do a lot of tracking around what you are purchasing, where you came from, where you are going, how much you spent, and that data has a lot of value to it. And so, we are going to start to in the future looking how to pick that data and make a real asset out of it.

And we capture right now, we are monitoring about 800 million visitors a month, and we generate about 8 million transcripts of chat a month, which is pretty extraordinary in the amount of data we are capturing. So, like one telco alone, we capture about 25 gigs a day in data. So, there is an asset there. The other thing we are doing is we are working on really our technology and opening up our technology so that our customers are partners can use these assets like data and the transcripts and do a lot more with them. So, we haven’t sort of outlined a product strategy externally yet, and we are working on it internally, but I think in 2010, you guys should look for things around data, around content, more around the analytics areas, and so that will have sort of a push, because our customers find a lot of value in our products in that area, coupled with the chat obviously.

Richard Fetyko – Merriman Curhan Ford & Co.

Thanks, and then actually a follow-up for Tim, the CapEx, low end of the CapEx guidance of 7 million would imply I think around 3 million in the fourth quarter, is that right and if so, what’s that related to?

Tim Bixby

Yes. That continues to be related to co-location, primarily DI at this point, most of the large investments are done in terms of primary, whereas now starting to see increased hardware purchases just for normal growth. So, where we have few quarters of a couple of percentage points of sequential growth, we didn’t have to expand capacity at all, but I think it gets back into a – the other way, see the enterprise group grow 11% a quarter. If you replicate that a couple of quarters in a row, then you are buying a little bit of gear to support that growth. So, most of it will go towards that in Q4.

Richard Fetyko – Merriman Curhan Ford & Co.

Okay. Thanks.

Tim Bixby

Thank you.

Operator

Once again, ladies and gentlemen, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question is from the line of Richard Snidely [ph].

Richard Snidely

I think that was best to me, Rich Sniderman [ph]. Just a real quick one. Last quarter, you gave us the sequential growth in bookings, the percentage growth and I was wondering if you could share that with us this quarter?

Tim Bixby

Sequential growth in bookings, bear with me a second. Yes, last quarter, we gave about 50% growth. This quarter, that comparable number is about 55%. And that really corresponds to the metrics we gave on average deal size and 43 new deals.

Richard Snidely

Okay. 55% sequentially, thanks very much.

Tim Bixby

You bet.

Operator

I am showing no further questions at this time.

Robert LoCascio

Thanks for the call. We will pop up a video again on YouTube in a little bit under Myliveperson, so we did a little commentary last time, and we will do that again, so look for that, and look forward to seeing you guys in the new year. Thank you.

Operator

This does conclude today’s conference call. You may now disconnect.

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