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LivePerson, Inc. (NASDAQ:LPSN)

Q4 2013 Results Earnings Conference Call

February 12, 2014; 05:00 p.m. ET

Executives

Robert LoCascio - Chairman & Chief Executive Officer

Daniel Murphy - Chief Financial Officer

Analysts

Michael Nemeroff - Credit Suisse

Shyam Patil - Wedbush Securities

Brian Schwartz - Oppenheimer & Co.

Brad Sills - Maxim Group

Mark Schappel - Benchmark

Mike Latimore - Northland Capital

Jon Hickman - Ladenburg

Jeff Van Rhee - Craig-Hallum

Operator

Good afternoon. My name is Sara and I’ll be your conference cooperator today. At this time I would like to welcome everyone to the LivePerson, fourth quarter 2013 earnings 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. Mr. Daniel Murphy, CFO and Robert LoCascio, CEO, you may begin your conference.

Daniel Murphy

Thanks very much. Before we begin, I'd like to remind listeners that during this conference call comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from the actual future events or results.

These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we undertake no obligation to inform you if they do.

Results that we report today should not be considered as an indication of future performance. Changes in economic business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

For a 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 when 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.

Now, I’d like to take a few minutes to review the results for the quarter and the year before turning the call over to Rob. And before we get started, I wanted to mention that we are changing our usual order. I’ll start off by reviewing the financial and operational highlights, then Rob will discuss the go-forward vision for LivePerson.

2013 was an important year for LivePerson as we took the first steps in bringing our multi-channel digital engagement platform to market. We made several important changes around people, product and processes, all of which have put us in a stronger position to execute on the strategic goals in 2014.

We are pleased to end the year on a solid note. During the fourth quarter, all our top and bottom line financial metrics were within our guidance range, with revenue and adjusted EPS coming in at the high end of that range.

Fourth quarter revenue was $47 million, B2B revenue was $43 million and revenue from our consumer operations was $3.9 million for the quarter. For the year total revenue was $177.8 million, B2B revenue was $162.7 million and our consumer segment generated $15.1 million.

Its important to note for the full year 2013 our B2B revenue excluding the small business segment grew 18% over 2012 as mid-market enterprise revenue grew at a faster pace than our small business and consumer segment.

Fourth quarter bookings came in at $10 million, which compares to $8.7 million in last year’s fourth quarter and was in line with last quarter’s record of $10.2 million. Approximately 86% of our overall bookings came from existing customers, as we continue to strengthen relationships within our existing customer base.

During Q4 we signed our biggest North America mid-market deal to-date and in Q3, as a reminder, we signed our largest deal in Europe. LivePerson defines bookings as mutual contractual commitments from new or existing customers and excludes non-recurring revenue. This metric generally represents contracts with committed to current subscription fees, but does not capture usage or performance-based contracts.

In late 2013 we began rolling out our cost per engagement pricing model, which is a departure from our historical pricing model that’s charged by seat and functionality. The cost per engagement model was a recurring revenue model that was based on usage tiers or bands of engagement.

As an example, a customer will pay a fixed price for a certain number of engagements. An engagement can be a chat, a piece of content, a click-to-call, a video interaction or any type of engagement that our platform offers. The value to the customers is that they immediately have access to entire feature set of the platform and our goal is to have a more frictionless way to grow an adoption of the LiveEngage platform.

As we continue to take our multi-channel digital engagement strategy out to the market, we are starting to see those early investments made in people and process pay off. In 2013 we started the year with 39 customers spending more than $500,000 on an annualized run rate and we ended the year with 48 customers spending more than $500,000 on an annualized run rate. In addition, we now have 26 customers spending more than $1 million annually.

We signed a record of 187 deals in the quarter which compared to 163 last quarter, and so our larger percentage of those deals come from existing customers, as we continue to penetrate our strategic accounts at a deeper level. We added 31 new enterprise and mid-market clients in the fourth quarter. The average deal size for all deals was $53,000; the average deal size for new customers was $44,000, while the average for existing customers signing up for an up-sell or expanded business was $55,000.

Similar to our booking metric, this metric generally represents contracts with committed to current subscription fees and does not capture usage, one-time or performance-based contracts. Customer attrition for enterprise and mid-market accounts averaged 1.7% per month during the fourth quarter, which is consistent with the average from the previous three quarters and its small business attrition rate averaged 2.6% per month, which is also consistent with the average in the previous three quarters.

The 2013 Pay for Performance generated approximately 14% of total annual enterprise revenue and 8% of total annual revenue. The revenue breakdown by industry verticals is consistent with prior quarters. Telecommunication is made up of 30%; financial services, 26%; retail approximately 13%; technology 13%; and other at 17% for the quarter.

Revenue coming from outside of the U.S. was approximately 31% of total revenue with the U.K. representing our largest concentration outside of the U.S. This compares with 26% in the fourth quarter of 2013.

During the quarter we continue to market progress growing our footprint in new markets and regions, as global expansion is an important part of our overall strategy. We expanded into three new markets during Q4, buying channel partners in Mexico, Hungary and Italy. We’ve already seen revenue from these partnerships, including working with one of the largest banks in Italy that are setting up a purely web-based bank. This is in addition to creating a presence in Germany, Japan and the Netherlands during 2013.

Fourth quarter gross margins came in as anticipated at 76%, which is the same as the fourth quarter of 2012, and compares to 77% in the third quarter of 2013. In Q3, we began to amortize the purchased intangibles related to the Amadesa acquisition, and in Q4 of 2013 we had our first full quarter of purchased intangible amortization from the Amadesa acquisition.

We ended the quarter with a cash balance of approximately $92 million, which compares to $77 million in the third quarter. In addition, we had approximately $1.4 million in capital expenditures for the quarter related to servers, computers and the build out of office space.

Fourth quarter accounts receivable came in at $29.5 million and at 58 days our DSO metric for the fourth quarter returned to more normalized levels. We had an adjustment to our tax rate due to the expansion of international operations, and the impact of transfer pricing allocations to those foreign operations. Therefore, our effective tax rate for the quarter was a negative 38% and a positive 15% for the full year.

From a bottom line perspective, our fourth quarter adjusted net income per share was $0.06; GAAP loss per share was $0.01; and adjusted EBITDA per share was $0.10. For the full year adjusted net income per share was $0.21, GAAP loss per share of $0.06 for 2013 and adjusted EBITDA per share of $0.34 for 2013.

That covers the highlights for the quarter and the year. Now I’d like to discuss the financial expectations for the first quarter and full year of 2014.

During 2014 we’ll continue to invest in the business and the roll out of the LiveEngage platform. Our current expectations for Q1 2014 were as follows: Revenue of $46.5 million to $47.5 million; adjusted EBITDA of $0.07 and $0.09 per share; adjusted net income of $0.04 to $0.06 per share; and GAAP EPS loss of $0.04 to $0.02 per share, with a fully-diluted share account of approximately 55.6 million.

Current expectations for the full year 2014: Revenue of $199 million to $204 million; adjusted EBITDA of $0.37 to $0.41 per share; adjusted net income of $0.21 to $0.25 per share and a GAAP EPS loss of $0.11 to $0.07 a share, with a fully diluted share account of approximately $56.2 million.

Other full year 2014 assumptions include: Amortization of intangibles of approximately $4 million; stock compensation expense of approximately $14 million; depreciation of approximately $10 million; and an effective tax rate of approximately 23% producing a potential benefit.

Capital expenditures were approximately $11 million and we expect gross margin on a GAAP basis to be approximately 76%, but as a reminder our cost of goods solid continues to be sensitive to foreign currency fluctuation. Furthermore, as a percent of revenue for the year, we anticipate sales and marketing to be approximately 37% of revenue, G&A approximately 22%, and R&D to be approximately 20%.

That covers all the operational and revenue highlights. Now I’d like to turn the call over to Rob who will provide insights around the market and LivePerson’s strategic direction. Rob.

Robert LoCascio

Thanks Dan, and I’m really excited about the things that are going on at LivePerson, especially we saw 2013 with LiveEngage rollout and we are seeing now our bookings getting stronger during the later half of last year.

I really want to take the opportunity to speak about what’s going on in digital commerce and how we are playing into that in our vision here at LivePerson. It sort of became to clear to me recently, when you look at digital commerce, it really hasn’t fundamentally changed since the ‘90s. When you think about it and basically a website just like it was back then, it’s a webpage, its text, its got a top navigation and some pictures and really nothing more.

And when you think about other things digital like music or movies or health and the wearable and how we’re monitoring our homes and how we’re navigating in our cars with GPS, it’s an extraordinary progress that e-commerce has basically been stuck. And some statistics to kind of reinforce that, which is about 7% of overall commerce right now in the world is based on digital and the rest is still offline. Its growing only around about 11% a year and most importantly and we always get the stats, only about 2% of the people actually visit a website will become a paying customer.

So when you think about also the online experience, its still fundamentally is inferior to experience that we get when we shop at a store in our neighborhoods or offline. So I’ve been kind of thinking lately like what’s attributing this, what’s driving this lack of innovation and space and when I break it down, I think one of the main things we are seeing right now is ‘search.’

When you look at search and its basic proposition in the past, it was awesome and it was about organizing the world’s information and when there are all these websites and we need to find them, going to a search engine helps us find it. And then they made advertisement transparent and measurable, but there was some really, I think unintended consequences that we are living with today in the e-commerce space and there these rules, that search created and that is that a website should be a lot of text, a lot of pictures, navigation and its really made the digital shopping experience for the consumer a challenging experience.

So with search, when you think about it you get efficiency that its driven and these rules make search very powerful. Its very hard to find something on a website, so you go to search to find something deeply embedded in a website and I think when you think of that, the results basically today is that advertisers are paying more for the same clips that they were paying for in the past. They are not getting any more conversions; they are not getting more leads and its becoming a very challenging and frustrating situation. I see this with our customers.

As a matter of fact, eBay last year published a really great report that I would recommend to read it. Its entitled ‘Page Search Effectiveness, a large scale filed experiment’ and what they found is when they went ahead and they started to shut down different keywords, and they ended up shutting down most of them, they spent $51 million a year, the impact was less than 3% of the traffic that comes from Google will go down, they lost basically 3% of traffic.

Furthermore the data that we see in the industry today and we capture this data also, is about 60% to 70% of the traffic that comes from search bounces off the first page and you pay for that traffic, but the consumer never even made it to the website. So the eBay research, and there’s a quote from that, and the quote is ‘Our brand keyword experiment shows that there is no short-term value in brand keyword advertising. The results and arguments suggest that the efficacy of SPM is weak and a conclusion that is likely to apply to other large brands that has together spent billions of dollars a year on the internet marketing.'

So if a brand can no longer find more qualified traffic we search, then I believe the answer to that lies is the one-on-one experience that the brand can provide to the consumer, whether onsite in mobile or social and that’s really the heart of the LivePerson strategy.

So the strategy of LivePerson is really broken into two parts, and those are the following: The first one is, we want to really enable the brand to create a direct relationship with their customers. They don’t need to think like Google. We see that when a consumer chats with the brand, they have a meaningful connection and it drives the conversion or it driver a higher customer satisfaction.

We know on average, 25% of those people who chat will turn into a sale, and this is really the foundation of a long-term relationship between the brand and the consumer. And when you look at commerce, is really, put it into a triangle. At the bottom of the triangle is discounts; its sort of the one click shopping, the overnight shipping, it’s the commodity of shopping. In the middle of that triangle is a large selection.

At the top of that triangle is the emotional connection that we have with the brand, and when you think about the emotional connection, its really why we spend the money we do on Apple products of Nike products, we buy the emotion. And so that emotion is really the second thing that we are trying to drive.

When we drive that, we really drive that, we really drive that by enabling a real time connection between the brand and the consumer and drive that by reducing the need for the consumer to search for products; that when they come to a website through intelligence and through the behavior of the consumer, we can make offers to them, we can customize what they are seeing on the website and we can provide the consumer with the product that they want. In the future I see is that they don’t have to search any more and when they want something through our technology, we can deliver it to them, we can deliver that product or service.

And the third part is really, and namely the consumer to have that direct connection with the brand, whether they are in social or they are mobile. They are everywhere now. They don’t always go through websites. So our technology is really about proactively engaging them wherever they are and that’s the heart of really what we’re doing with the LiveEngage Platform.

Now the conversations that happened between the brand and the consumer are powerful and today we actually generate 22 million chats a month. So there’s 22 million people in the world that are chatting through our system and getting help or making a sale or asking a question, and each month I sort of picked some transcripts and take a look at them and they are interesting.

I mean I saw one last quarter, which I thought was fascinating. Its between a soldier in Afghanistan and one of our larger flower retailers and this person was trying to buy a gift for a birthday for his wife and you watch this conversation and you can see the connection. Its not just about, hey, I want to buy flowers and what’s the cheapest price. It’s the conversation and the help that this operator gave this soldier and ultimately that person bought and ultimately that wife received those flowers, and it’s a very powerful thing to see. It’s a foundation for the long-term relationship.

And today when we see things like that, two weeks ago I was down with one of our large banking customers in front of 60 of their executives. There’s this channels they have, on one side we are the bank and they know the value of a mortgage or a car loan and this is very important.

On the flipside the digital people are thinking, they just want to make this easy; just get people to fill out an application. What we’re seeing today is a conversation between both groups saying, we want to have a lifetime of value with our customers, we want to create a way in which when they start with a checking account that we stay connected with them, so when they go for a mortgage, they come back to us, and that really can only be done through digital engagement.

And what we are seeing is more and more brands now are looking to change the game. Its not about buying more keywords or doing more traditional advertising; its about doing things in which they can really engage their consumers on that one-on-one relationship.

So I really feel LivePerson, its an outstanding position now to lead the change in digital commerce and I’m excited that we really have the right platform and we are going to have a new version coming out this year. We are very excited about it. We have the right team of people here now. We have great leaders, we are really out now executing in 2014 and we have a clear strategy on how to driver our company to the next level, to really provide a way in which our customers can innovate with us and make a change in the way they are doing digital commerce today.

So with that I want to thank you and I want to hand it back to the operator and we can rejoin and open it up for Q&A. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Nemeroff with Credit Suisse.

Michael Nemeroff - Credit Suisse

Hey guys, thanks for taking my questions. Just, wanted to ask about the visibility on the revenue guide into 2014. How does that look right now? If you could give – maybe Dan give us maybe a percentage of what you are looking at as kind of guaranteed revenue or comfort in that 2014 estimate. And then also maybe if you can just give us a sense of how that may play out in terms of linearity over the next couple of quarters?

Robert LoCascio

So as far as a view into the revenue for 2014, we have a pretty good view into the revenue of 2014. There is a step that I talk about and the underlying business in mid-market enterprise is actually growing quite well. Small business is lagging a little bit and as we look towards 2014, we see strong robust growth in that underlying mid-market enterprise portion of our business. And Mike, I’m sorry, can you give me the second part of your question.

Michael Nemeroff - Credit Suisse

Yes Dan, in terms of linearity of how we should expect that revenue to come on in the quarter. Anything, different in terms of linearity from what it’s been previously.

Robert LoCascio

Now I don’t think there’s anything majorly different. As we talked about before in our sales organization, we’ve got a good second half of the year as far as bookings are concerned. We may have invested a lot in the business and we expect on a go forward basis for them to continue to be able to drive bookings in growth in the business.

Michael Nemeroff - Credit Suisse

And then also if I may, what percent of your mid market customers have been touched with the new platform and could you give us a sense of what percent have been converted so far and how you expect that conversion rate to improve over the course of the year.

Robert LoCascio

Sure. So for the LiveEngage platform, a small percentage of the mid-market customers have been touch with LiveEngage. As far as looking out forward for the rest of 2014, we’ll start to move customers over and actually Greenfield customers in 2014 from a mid-market perspective, and I would expect that to happen in the back half of 2014 and a little bit more earnest than it is today.

Michael Nemeroff - Credit Suisse

And is that about, the back half of 2014 is that still the expectation for when the large enterprise customers are going to start to see, to be touched by the new product.

Robert LoCascio

Sure. We would expect new enterprise retail customers to go on to the LiveEngage platform and we have some certainly large enterprise customers and we’ll take them on a case-by-case basis, but we’d expect them to be on the back half of 2014 and into 2015.

Michael Nemeroff - Credit Suisse

Great. So Rob in listening to your prepared remarks and about the strategy that you’re putting forth for the quarter, so chat was the genesis of the company and the core. Just help us understand what types of new products you could bring to market to fill out some of the, some of what you were talking about in your prepared remarks and some of the new products that you are think about or the direction of where you would like to take some of those products in the future.

Daniel Murphy

Yes, it’s really, when you look at the LiveEngage Platforms, its got chat now, video, voice and it’s got the content targeting. We also have all the data and analytics tagging off it, where you could take a chat transcript and analyze it to voice customers and all that.

So we got the platform. It’s really about now when we implement a customer, we can have different ways in which we’re engaging consumers. So we can say, consumers in the bi-flow, okay offer them a piece of content, offer them a product. Okay they are in that, now offer them a chat to get them to convert. So there is more reference here to do it and then we could also, in social and mobile engage the consumer.

So there’s going to be no more – there’s no really new products we need. It’s the LiveEngage platform has them in it fully integrated and its just getting our customers now to move. But the core business, the chat business is growing. There is a big shift still going on in the contact centers from voice to chat. It’s happening, I think there’s conversation about it, and there’s bigger deals we are doing now with it.

So the core is still growing and wrapping around that is video; I see video coming on now. People want to do video and I see integration of voice and the content. So we have all those channels, it’s just about what’s the new cases in which to do it.

Michael Nemeroff - Credit Suisse

Great, thanks very much for taking my questions.

Robert LoCascio

Thanks Michael.

Operator

Your next question comes from the line of Shyam Patil with Wedbush Securities.

Shyam Patil - Wedbush Securities

Just a few questions. In terms of the new platform and I understand there’s some migration process, how do you guys think about when that will start being reflected in the growth rate? Do you think that’s more likely to happen in ’15 and ’16 after you’re mid and larger enterprise customers are rolled out or do you think its potentially thoughtful to have it in the back half of ’14. How you guys think about that?

Robert LoCascio

Well, I mean the small business is already on that platform and now we are moving to mid-market. As a reminder there’s not that much migration into the platform. They log in, they can get the core chat product and then everything else is there. So it’s a question of selling. Like on the enterprise we are presenting the features of LiveEngage. We are doing new cases around video integrations and voice integrations and chat and content. So there isn’t much of a migration with that side, just in a few cases we are implementing and we can do that today.

On the low end its like its max, its just moving them through, getting the small business to go from chat and use more features. It’s much more of a marketing effort, because we don’t have a sales team that calls on 6,000 small businesses. So that’s really where its more of a marketing effort, on getting them to use more than one of the products, which is primarily chat.

And looking whether its Q4 or Q3, Q2, I think right now everyone’s focused on it. It’s where the organization is behind. So inside of saying okay, its out in the latter half, I think we’re going to go quarter-to-quarter and you’ll see, okay here’s the results we’re showing. So far, obviously our customers want it, it allows them to get access to much more products, it’s a much more – it’s a better way for them to strategically engage their customers online.

Shyam Patil - Wedbush Securities

Great and in terms of kind of the break-up between B2B and consumers in ’14, should we think of consumer being relatively flattish and kind of B2B kind of the majority of the growth?

Daniel Murphy

Yes, I would expect consumer to be somewhat flat and the growth coming from B2B, that’s correct.

Shyam Patil - Wedbush Securities

Great, and then just a couple of house keeping things. I missed it if you mentioned on call, but what was the mid-large enterprise revenue growth in the quarter. I think you typically gave us sequential growth rate there. And then on he PFP side, how did the 8% of total revenue compare to expectations and how are you guys thinking about that kind of in ’14?

Daniel Murphy

So the underlying mid market enterprise growth rate is 18% and that’s a year-to-date number and that’s excluding small business, so that was the growth rate from a B2B portion. And as far as PFP and the 8%, PFP is an important piece of what we’re trying to do on a go forward basis and it’s a model that we used for certain kind of customers and works well. So we’re still excited about it and we’re continuing to push the PFP model out to our customers.

Shyam Patil - Wedbush Securities

Great, thank you.

Operator

Our next question comes from the line of Brad Sills with the Maxim Group.

Brad Sills - Maxim Group

Hey guys, thanks for taking my question. Rob, you mentioned analytics and kind of that list of the other offerings outside of chat. Can you just comment a little bit on how those pipelines there are shaping up? Are you getting more interest there? It seems to me like you get a customer that’s coming to analytics. They are committing to the bigger platform and running reporting on that. So, just curious, some color there please?

Daniel Murphy

Yes, so it’s a couple of million dollars business right now. Its growing very nicely. I mean we have a customer that’s close to they were less than $1 million on the platform at Telco using it for basically two parts. One is analyzing the transcripts to better operator, even the voice operator, so they are using us as a training tool and on the flip side they are using a prepared marketing intelligence, what are they hearing from the customers? What product lines, pricing, all of that.

So the heart of those transcripts is a very powerful set of information, the conversation. So in the enterprise, its driving bigger deals as its making the customer much more sticky, because they are getting value out of that data that we collect and we format.

Brad Sills - Maxim Group

Got it, great. Thanks, that’s helpful. And then any comment on LP market. I know its not part of these bundled offerings, but just a qualitative discussion or color around where you’ve seeing adoption there with marketers, in running promotions via the chat connection.

Daniel Murphy

Sure. So Brad we look at LP Marketer as content and that’s part of the platform and we are actually pretty excited it being part of the platform. But its actually made the adoption of content for our customers that much easier. I mean that’s part of the goal of the platform, is to make it frictionless for our customers to adopt our new offerings and our features and functionality. So content is part of the LiveEngage platform and the increased usage out of the small business customers has been very strong. So we’re excited about the content portion being part of the platform.

Robert LoCascio

And interesting enough, we entered as you guys know the Japanese market a quarter or so ago and actually the lead product there is content. So our first customers have been only content and now they are putting chat on. So it’s a great way to enter different markets. We can enter new markets with customers. We are testing our performance-based model with that, so there’s some interesting stuff that we can do with content, definitely a great pillar of the platform.

Brad Sills - Maxim Group

Great, thanks guys.

Operator

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz - Oppenheimer & Co.

Yes, thanks for taking my questions here this afternoon. A couple of questions on the quarter. Dan, I believe in your commentary you mentioned that you had a large deal in North America in the quarter. I was wondering what percentage of the booking came from that deal?

Daniel Murphy

I thought I’ll take it off line, but it was a mid market deal and was actually a nice sizable deal for our mid market business. I was just highlighting that its – mid market, and we are making traction in mid market. Its a nice sized deal for the fourth quarter.

Brian Schwartz - Oppenheimer & Co.

Okay, and then again on the quarter, one metric that I was curious to get a little more color with on the new customer add, it looks a little bit softer than what I had expected given the additional capacity and I was wondering if you feel that possibly those larger customers are waiting on the next generation platform and the demand is being pent up right now, where possibly we could see almost a super product cycle happen when you do get that LiveEngage platform deployed in the up market.

Daniel Murphy

So, the customers aren’t waiting for the new platform. What actually happens in the fourth quarter Bryan is we got the opportunity to sell more into those existing customers and that’s what we took advantage of. We got some great strategic customers on our roster and so if you look at our bookings, about 86% I think I said was related to existing customers. So we had the opportunity to sell more into our existing customers as they geared up to the fourth quarter and into 2014.

So not disappointed in the number of new logos. Its actually pretty exciting and some of those logos are great customers, so I don’t think there’s been a decision point waiting for the new products. We’ve been out there actively selling to mid market enterprise customers and closing deals and we’re excited about the opportunity.

Brian Schwartz - Oppenheimer & Co.

That’s a real help. I appreciate that color. Last question for me, just on the strategic, maybe looking a little bit longer term out. If I look at the guide that you’re giving today for 2014, on the top line, the growth rate, it looks to me like it's still being impacted somewhat by the platform, by the LiveEngage rollout platform. So I'm wondering if it's possible to look beyond that? If it's possible to look over the medium term, and what do you guys think is the right kind of growth rate for the business? Does it get back into the high teens, can it get back past 20%, what type of scenarios would that have to occur? And just trying to figure out how you guys are thinking about the process when you look at your medium term plan. Thanks.

Daniel Murphy

Well, honestly I think above 20 is the minimum. I think 20 should be the low watermark and then they should work from there and the development you’ve done on the platform and what we’re doing now and a lot of it has to get dealt in.

The bookings, obviously in the last two quarters the bookings have been our best two quarters ever and I think that’s a future indicator of some success, obviously the success we are having on ramping a new team, especially on the enterprise side. We’ve got some good growth rates there, 178% in market enterprise. So I’d like to get it above that 20 and the platform also gives the way to get customers up much quicker, get them to go deeper with more product, so that’s – we didn’t develop the platform to give us something less than that and that’s really what we’re focused on.

Brian Schwartz - Oppenheimer & Co.

Thanks Rob. If I could just ask one more follow-up as a potential catalyst. Its also listed on the investment front that you have slowed down the sales hiring here this year, but it looks like the productivity has picked up here in the second half. Its certainly a good trend there. I’m wondering where you think we are in terms of the curve on the productivity gains here for the sales forces. Do you think there is potential here for more improvement to come in 2014? Thanks.

Daniel Murphy

Yes, I mean I really think we’re at – not that I think. If I look at the numbers they are about – I think there’s about 50% or 60% capacity right now. So we got 30%, 40%, 50% more capacity in the current team, that’s why we want to sort of like obviously focus on getting the pipeline to grow, getting more teams out there and stimulating more within that capacity and that’s really the focus of this year. So there’s I think a lot more capacity that we can get out of this current team.

Brian Schwartz - Oppenheimer & Co.

Thanks Dan and Rob for taking my questions at that point.

Daniel Murphy

Thanks Bryan.

Operator

Your next question comes from the line of Mark Schappel with Benchmark.

Mark Schappel - Benchmark

Hi, good evening. Thanks for taking my question. Robert I was wondering if you could just give us an update on where your platform deployment times are? I believe they were down to about 90 days last quarter and I was wondering if you are still at that level or if they have compressed a little bit further?

Daniel Murphy

No, we’re happy with where they’re going. They are still around the 90-day level, but we’re happy with where they are and I think they are going in the right direction. So I think that’s going very well and again, part of the goal of LiveEngage is to create a frictionless on boarding process and that’s going in the right direction as well.

Mark Schappel - Benchmark

Okay, thanks. And then Robert, as LiveEngage becomes a greater part of your sales process rather than just selling single product chat. I was wondering if you could just give us an idea of whether your seeing a different competitor set?

Daniel Murphy

Not today. I mean I think the LiveEngage platform, we continue to perhaps see improvement. As people give us a huge job in the market and we’re going to redefine what this business is all about and we did that back in 2007 with the launch of the proactive chat and what LiveEngage will give us and what we’re seeing is its a better way to create a digital commerce experiences. Its busted; I see it and I see the frustration in our customers and if we can give a way in which they can really create that relationship with their own consumers and create a much more exciting way that the consumers can buy and get support, that’s really what our goal is here. So that’s what we’re focused on.

Mark Schappel - Benchmark

Okay, thank you.

Operator

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

Mike Latimore - Northland Capital

Yes, thank you. So how many quota carrying sales people do you have right now?

Robert LoCascio

We have 49 quota carrying sales people in the mid market enterprise.

Mike Latimore - Northland Capital

Okay, and I guess the plan is to leave it at that level until the capacity gets to 100% as well. Is that right or your going to add some…

Daniel Murphy

We’ll add some, but it won’t be as much as we have in the past. We’ll add some of the (inaudible). We made a goal to put more dollars behind marketing and put a little bit more at the structure around the sales organization and make them more effective, but we’re opportunistic that we’ll have sales people.

Mike Latimore - Northland Capital

Okay. And I know the minority of bookings were with new customers this quarter, but are all those new customers that were in bookings, are they all going on LiveEngage?

Daniel Murphy

I couldn’t understand…

Robert LoCascio

Are they going on LiveEngage?

Daniel Murphy

Are we going on LiveEngage. Yes, some of the customers are going on LiveEngage, absolutely.

Mike Latimore - Northland Capital

Okay, alright. And then you mentioned 22 million chats per month. Do you recall what that is? Its kind of a year-over-year growth rate?

Robert LoCascio

15 million last year, its 15 million last year, so we’re up from 15 to 22.

Mike Latimore - Northland Capital

Yes, thank you.

Daniel Murphy

Thank you.

Operator

Your next question comes from the line of Jon Hickman with Ladenburg.

Jon Hickman - Ladenburg

Hey, thanks for taking the call. Rob, could you refresh our memory about when you anniversary the Pay for Performance customer that went away last year.

Daniel Murphy

We talked about it on our Q1 call and they went away in Q2 of last year.

Jon Hickman - Ladenburg

Okay, so could you estimate how much? I mean without the loss of that one customer that decided go in-house, your growth rate would be a little bit bigger this year, wouldn’t it?

Daniel Murphy

Sure. I mean if that customer didn’t go away, absolutely. We have a little bit more attrition than we expected in the first quarter of last year. If that didn’t happen, of course our growth rate would have been higher.

Jon Hickman - Ladenburg

Okay. As far as the small businesses go, the growth rate there, is that a function of adding more small business customers or getting them to take more product than just chat?

Daniel Murphy

It’s a combination of the two, right. Its adding more customers and its actually giving them more product than just chat and that’s part of the goal of the platform as we talked about before pushing in some opportunity for them use content, use chat, use push a call and video, etcetera. Use a platform and so that opportunity is there for the small business customers, to use more and add more customers.

Jon Hickman - Ladenburg

So how does the small business customer even know that they got video or co-browse or whatever?

Daniel Murphy

When they log into the system they get a new interface and so in that interface they can see the different products that are there and then there is marketing efforts and sales efforts behind it to get those businesses, to use those different functionalities. So if they are a high-end small business, they have a sales person who calls them up, takes them through the system. If they are smaller, then they are going to get marketing messages, there’s webinars and seminars, that type of thing.

Jon Hickman - Ladenburg

Okay. And how many small business do you have right now? I thought it was around 8,000. Is that still..?

Daniel Murphy

Yes, there’s probably 7,500 small business customers.

Jon Hickman - Ladenburg

Okay, thank you. That’s it from me.

Daniel Murphy

Thanks Jon.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee - Craig-Hallum

A couple of questions from me. First, just in terms of drivers of the difference in growth rates between SMB Rob, maybe you could just expand on SMB versus enterprise and the difference in growth.

Daniel Murphy

Yes, so the enterprise mid market grew about 18% last year. Excluding the small business it grew at…

Robert LoCascio

Small business was about 1% growth.

Jeff Van Rhee - Craig-Hallum

Right. Yes, I guess what I was asking is just the fundamental, the dynamics that drive that disparity in growth rates.

Daniel Murphy

Yes, so there’s some changes we’ve made there now with leadership. We’ve taken a much more aggressive approach on marketing with the LiveEngage Platform. So we’re very focused on getting those small business growth rates back up and so there’s a focus on it right now. Its predominantly a marketing effort here. Your generating leads, more marketing than where the enterprises is actually up and you call on customers and do a lot more teller operations, but the small business is much more of a marketing effort, webinars, seminars again, tradeshows and that’s how they go about their lead growth.

Jeff Van Rhee - Craig-Hallum

Okay, great. And I guess early on as you’ve laid out the vision of the LiveEngage platform, a big part of it is to drive the stickiness as you enhance all these various features. As you’ve gotten a little bit of experience behind you on the SMB side, I guess two questions. One, your seeing the number of interactions and how they are sort of adopting. Very clearly you’re seeing how they are adopting your platform. I wonder if you could give any comment or any color around what your experiencing there so far.

And along those same lines, the SMB churn you’ve commented, its clearly one of the ancillary benefits you expect. Do you expect to see that come down? What’s the reasonable timeline to see that starting to flow through the churn numbers?

Robert LoCascio

Yes, I would expect a reasonable timeline to see that flow through the churn numbers is the back half of 2014. We’re excited about the LiveEngage Platform and the customers that are on it and we’re seeing good quality uses come from a good number of customers and so its exciting. We’re getting a lot of great feedback and that helps us to continue to enhance the products with – enhance the LiveEngage platform with features and functionality. So we expect it in the second half of 2014.

Jeff Van Rhee - Craig-Hallum

Okay, great. And the last one from me then, in ’14 I think you had said previously ’14 was all about farming. What does that look like and what are the goals for that?

Daniel Murphy

Yes, on the enterprise side we have so many enterprise customers and so we even bifurcated the sales team, so we got a hunter/farmer model now and that there’s so much opportunity within that core base and they are looking for more and we do envision like the bigger deals we see with the numbers and are becoming much more strategic. So we need those farmers to go in. There’s multiple decision makers now, because there’s bigger deals at stake and that will be on the enterprise.

First of all the enterprise right now has what they need. They got the different product sets. They’ve got a strategy, they’ve got their customer plans and now they got a lot of new reps, they are coming up to speed and are starting to build those relationships and starting to do that farming and that’s the focus of the team. So I expect to see some good things from them this year and that’s what we’re really excited about.

Jeff Van Rhee - Craig-Hallum

Okay. Yes, and I guess the last one for me, then. With respect to the bookings, I know you don't guide to the bookings, but clearly in the guided revenue is an implicit thought around bookings. I realize pay-for-performance and some other segments don't get caught in the bookings numbers, so it isn't always a perfect reflector of what you expect on revenue growth.

With that said, can you narrow it all or give us a resemblance of how you are thinking about bookings even within a wide range, what you think the bookings growth should look like or any color there would be helpful.

Robert LoCascio

So Jeff, as you know we don’t guide for booking growth, but Rob talked a little bit about capacity not trending in the sales organization and as you look as far as 2014, we’re excited about taking advantage of some of that capacity and continuing to expand our relationships with existing customers and new customers, so.

And you’re right, bookings doesn’t take into account small business or Pay for Performance, but we think there is opportunity there and we think there is capacity there and we are looking to continue to grow the business.

Jeff Van Rhee - Craig-Hallum

Yes, fair enough. Thank you.

Operator

At this time there are no further questions. Presenters, do you have any closing remarks?

Daniel Murphy

No. Thank you operator and we’ll see you on the Q1, 2014 call. Thank you.

Robert LoCascio

Thank you.

Operator

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

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