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LivePerson, Inc. (NASDAQ:LPSN)

Q1 2010 Earnings Call Transcript

May 5, 2010 5:00 pm ET

Executives

Tim Bixby – President and CFO

Robert LoCascio – Chairman and CEO

Analysts

Richard Fetyko – Merriman Curhan Ford & Co.

Brad Whitt – Broadpoint Capital

Mike Latimore – Northland Capital

Nathan Schneiderman – ROTH Capital Partners

Jeff Van Rhee – Craig Hallum

Craig Nankervis – First Analysis

Operator

Hello, my name is Don and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson first quarter 2010 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 turn the call over to Tim Bixby. Please go ahead.

Tim Bixby

Thank you 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 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 news 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. On April 7, we reached our 10th anniversary as a publicly traded company on NASDAQ. Historical reference, and if you have not been following our stock for the entire 10 years, our lowest closing price was $0.11 a share back in 2001. And we recently hit our original high [ph] price of $8.

The difference is that we went public at $8 in 2000, and had 6 million in annual revenue. In the first quarter of this year we generated $6 million alone. So, let us say, what a difference 10 years makes, right. So, we have had our shares, ups and downs, and ups, and I like to thank everyone who has been part of our journey. And now I would like to for the 40th time speak about the quarter.

We had a great quarter with year-over-year revenue increasing 27% from Q1 2009 to 25.3 million. All segments of the business including our mid-market team contributed to top line growth again this quarter. And we believe we will continue to see contributions from all business segments in the coming quarters.

EBITDA per share for the quarter was $0.12 in line with our guidance for the quarter of $0.11 to $0.12 per share, and EPS for Q1 was $0.04, slightly above our guidance of $0.02 to $0.03. EBITDA margin for the quarter was 24%, and we generated more than 6 million in EBITDA for the quarter, and have a cash balance as of the end of the first quarter of $51 million, up from $46 million in Q4.

Tim will provide more detail on this shortly. Our enterprise group had solid performance again this quarter, and grew 26% as compared to the same quarter of the prior year. Our pay-for-performance business model continues to be a consistent contributor for top line growth, and contributed over 17% of the enterprise revenue. Under this model, we were able to deliver a very strong ROI for our customers, which is why pay-for-performance continues to be very successful.

The enterprise customer mix continues to remain a balance of telecommunications, retail, financial services, technology, health care and travel providers. We did start to see more deals come in from Europe this quarter, particularly in the financial services and telecommunications sectors indicating our investments in this region are continuing to bear fruit.

The enterprise team is now focused on a targeted list of very large named accounts, and we moved the lower end of that pipeline down to the new midmarket group. We therefore expect to see a smaller number of new names for this group from larger ASPs. During the quarter, we signed 10 new enterprise customers and the pipeline looks strong heading into Q2.

Our small business group did exceptionally well this quarter and increased revenue by 5% sequentially quarter-over-quarter. This is due to continued investments in sales and support, as well as initiatives we have undertaken to improve customer utilization of our products. These initiatives have helped to reduce attrition rate significantly year-over-year. We believe we will continue to see steady growth in this market segment as the economic environment improves, and as more of the individuals and small businesses turn to the web as a way to create new income streams.

Our new midmarket team started to ramp up during the quarter and focused on growing existing accounts, as well as uncovering new opportunities in the retail, financial services, technology, education, and telecommunication market sectors. The team conducted over 20 transactions in the first quarter, signing four new customers and expanding business within 16 accounts. The pipeline for Q2 looks strong and consists of a balance between both new and existing accounts. So we're confident that we made the right decision to invest in this market segment.

The consumer group continued to grow generating revenue of 33.5 million in the first quarter. This represents a 37% revenue increase as compared to the prior year. Now this business is profitable and stable within the core categories of personal health, we are exploring opportunities for growth in other categories including tutoring and text support.

We are actively evaluating and analyzing the potential of several categories to determine what strategies and programs we can implement in order to capitalize on the market potential.

Now, I would like to spend a little time talking about new product initiatives as we are about to transform the way we bring new applications to market. With our upcoming software release, we are transitioning to an open platform architecture, which will give us far greater flexibility to evolve and transform our core chat, intelligence and data offerings. For the first time, third parties will have the ability to develop new applications for our customers by leveraging our platform. This initiative will speed time to market of new applications and features in order to meet the growing demands of our diverse customer base.

It will also give us the ability to go after some large market opportunities around data and content. We are currently working with a number of partners to develop applications on the platform, and customers have expressed great enthusiasm for the initial apps. We believe that this indicates pent-up demand for the types of applications we will be rolling out to the marketplace. We will continue to actively engage with customers and the crew [ph] development partners to build applications on our platform with the goal of extending the reach and capabilities of our core offerings.

Over time, we anticipate a robust driving LivePerson ecosystem, where we are customers and third party developers can share applications and development ideas about one another that live within the LivePerson community. Some of the initial applications are planned to include those from mobile interactions and social networking, enhanced visitor engagement and real-time intelligence as well as business application integrations.

The apps will be available over time in the LivePerson application marketplace, which we expect to open in the coming weeks.

The culmination of years of work, our upcoming release represents a milestone for the company, and I'm very excited about the possibilities this transformation will create for LivePerson, as well as our customers, partners and the application development community.

As with our new technology initiatives, over the past year we have started to think about how we could better manage the human side of our business to support future growth. Because we are a dynamic company spanning many territories, cultures and languages it is critical for us to ensure we have a common operating system, with which our people execute and deliver solutions to the market. Maintaining consistency as we grow well will enable us to realize the full potential of our brand value, and capitalize on growth opportunities for the business.

As such, we have formalized a set of core values or guiding principles that will help us drive corporate culture and business strategies moving forward. We have two simple, yet equally important core values that we believe are at the heart of what it means to be a LivePerson. The first one is be an owner [ph] and the second one is help others. There is a delicate balance between these two values, and our goal is to create culture that fosters the creative and entrepreneurial spirit to drive innovation as being an owner, while creating a culture of people helping one another to succeed. Help is also a very special core value to us because it is at the heart of what our technology enables with our customers.

We believe that if everyone in the company can operate under the common set of values and we will have the foundation place for the organization to go realize its full potential and grow. And we want to just talk about this a little bit because there will be a lot of things externally to the company about our core values, and we wanted to share this with our shareholders so you have some context of what being an owner and helping others means.

In closing, we started the year off with a solid performance. As we look ahead to Q2, our pipeline looks strong, particularly within the enterprise and new midmarket segments. We have opened up our platforms that we can bring new innovations to market quicker, and last but not least we are refining the way we act and think as an organization so we can reach our full potential. We believe we will continue to see positive results from the changes we are implementing within our organization, as well as at the product level and that these changes will deliver more value to our customers, as well as sustaining our business over time.

Thanks for your time, and now I would like to turn the call over to Tim. Tim.

Tim Bixby

Thanks, Rob. I will give a little more detail on the financials and operations and then we will take questions at the end of the call.

First quarter revenue increased 2% sequentially to $25.3 million, which is a 27% year-over-year growth rate. EBITDA per share for the first quarter was $0.12, compared to $0.11 per share in the first quarter a year ago. This is right in line with our guidance range of $0.11 to $0.12 as Rob mentioned, while first-quarter EPS was $0.04 a share, which exceeded our guidance range of $0.02 to $0.03.

Revenue from our business operations for the first quarter was nearly $22 million, which is a 26% increase as compared to a year ago, 2% sequential increase of a pretty stellar fourth quarter. Revenue from consumer operations for the first quarter was $3.5 million, a 37% annual increase. Top line growth within all of the business operations for the quarter was again driven by a combination of new customers and existing customer expansion for renewals.

We signed 10 new enterprise clients in the first quarter 2010, which is a good strong start to the year, and as Rob mentioned, our PFP, our pay-for-performance business continued to be a consistent contributor to enterprise revenue hitting about 17% of total enterprise revenue. The program has been very successful as customers are continuing to see impressive ROI numbers. One of our leading telecommunications customers under this program has seen a 400% ROI, which they have spoken about at recent industry events. While ShopNBC has realized a nearly 300% ROI on their deployment. Both customers are very pleased with their partnership with LivePerson, and both have spoken as I mentioned at recent events supporting their internal ROI.

In terms of our overall deal break down within the enterprise, we saw deal sizes consistent with the recent improvement we have seen over the last couple of quarters. Our average deal size for all deals was $72,000 annualized revenue, for new customers $105000, for existing customer expansions about $65,000, proactive sales deals averaged about $105,000 in the quarter, while customer service deals averaged about $45,000.

In terms of the breakdown between business from new added customers, as compared to the existing customer expansion that split was about 25% driven by new customers and 75% driven by existing customer expansions. Last quarter that was about 35% new, and so that was a good showing for existing customers expanding.

In terms of the breakdown between primarily sales focused deployments as opposed to customer service deployments, about two thirds of the new bookings in the quarter was driven by sales, proactive sales deployments while a third was driven primarily by customer service. This split last quarter was about 80% sales. This clearly indicates that our customer service portion of our business continues to do well and actually showed an uptick since the fourth quarter.

In terms of attrition measurement, which we look at at both the enterprise, larger companies and small businesses, the enterprise was in line with the average for all of 2009 at about 1.6% monthly attrition rate. And our small business attrition rate continued to ending the first quarter at 2.4%, and this is about a 17% improvement as compared to the prior year's average rate of about 2.9%.

As Rob mentioned, our SMB business had a strong start for the year and delivered 5% sequential growth as compared to the prior quarter. The split of revenue coming from outside the US is right around 24% of our revenue that is in line with the last couple of quarters. And about half of that is driven by the United Kingdom, and the rest of that the rest of the world territories.

In terms of our revenue activity in the enterprise broke down across industry verticals, financial services increased slightly to about 23% of overall revenue, telecommunications company were consistent with prior quarters at about 30%, as were retail and technology both at about 15% of our revenue.

In terms of the sheer size of customer, we continued to succeed with increasing the size of our largest customers. In fact, we now have 11 customers, for $1 million in annualized revenue. That is up from 10 in the prior quarter, and we have 26 customers that are now above $0.5 million per year in annualized revenue, and that is up 2 from 24 last quarter. So we continue to see good progress from those metrics.

In terms of our consumer group operations, we continue to generate positive cash flow for the quarter. Revenue for the first quarter was up year-on-year about 37%, with slight growth versus the prior quarter as well, and we continued to see higher average fees per minute charged by experts driving this increase.

In terms of gross margin for the overall business, we saw gross margin decrease about 1.7% from the prior quarter, came in right around 74%. Our cost of goods increased in line with our plan, which entails a certain level of new investment as we detailed last quarter. And particularly in the gross margin line we have added spending to support expanded hosting capacity in a new co-located facility to support our strong pipeline of potential new business, as well as strong year-to-date booking results in the UK and into the European territory.

We are also expanding US hosting capacity to support our increasing number of large visitor volume enterprise customers. The cost of the related capacity increase has a greater impact on gross margin in the first quarter due to seasonally slower sequential revenue growth that we have seen in past years. We actually saw a similar decline in gross margin two years ago, as we transitioned our US hosting infrastructure to a wholly owned network. This transition was followed by steadily improving gross margins each quarter as the expanded within that more efficient network.

We have now begun that same process this year within our UK hosting facility, and that facility supports essentially all of our business outside of the US. The rest of the operating expenses in the first quarter were right in line with our plan and our guidance. We had increased investment primarily related to more aggressive hiring in all areas of the company, but with particular focus on sales, R&D, analytics and hosting infrastructure.

Total headcount for the company increased from 390 at the beginning of the year to 438 at the end of the first quarter. It is an addition of about 48 heads. And the breakdown of that increase is about 50% within our technology area, R&D resources; about 40% sales and marketing; and the remainder about 10% in areas of support.

Our enterprise sales team headcount is unchanged from the prior quarter, but we continue to recruit fairly aggressively for open positions in this group. As Rob mentioned, our new midmarket sales group ramped up nicely and got up to speed in the first quarter. We have added three sales reps into this group to date, and a head of the group in selling as well. With training complete, they have begun generating growth for this market segment.

As we mentioned on the previous call, this group will continue to focus on deals that range from about $30,000 to about $60,000 per year, and this is primarily telemarketing focused sales team.

We ended the quarter with a cash balance of just over $50 million, as compared to about $46 million at the end of 2009. Our accounts receivable balance was up sequentially to $12.6 million. Our day sales standing, DSOs, is about 45 days, up a bit from Q4, but fairly consistent with the year ago where the first quarter shows a slightly higher number in that metric.

As we get into Q2, the aggressive investment plan that began in Q4 of 2009 continues. Hiring in the area of R&D, sales and marketing, product marketing, professional services will continue in line with our plan, as well as the expansion of the hosting facility that I mentioned. These investments will support growth in existing and new markets, as well as deliver new value added products and services for our customers that leverage our new open platform technology.

We are also increasing our full-year revenue guidance based on the positive results in the first quarter, and the strength of the existing pipeline that will support growth in the second and third quarters and throughout the remainder of the year. Given the pace of our continued investment and the increase in the share account that we saw in the first quarter, we are reiterating our bottom line guidance for the full year in line with the expectations that we gave last quarter.

And now I will give a little more detail on the specific guidance expectations for the second quarter, which we are providing for the first time, as well as an update on the full year. For the second quarter, and this detail is also available in the press release that we put out earlier today, second quarter we expect revenue of between $26.1 million and $26.5 million, EBITDA per share of between $0.10 and $0.11, adjusted net income per share of between $0.06 and $0.07, and GAAP EPS of $0.02 to $0.03. We expect a slightly higher fully diluted share count in line with what we saw in Q1. This is primarily driven by an increase in our share price and that we estimate to be about 52.5 million for the second quarter.

For the full year 2010, we are increasing our revenue expectations to a range of $107 million to $109 million, and the remaining bottom-line expectations remain the same as provided previously, EBITDA between $0.50 and $0.52 per share, adjusted net income between $0.30 and $0.32, and GAAP EPS of $0.16 to $0.18. And I would note that these represent higher expectations, but on a per share basis in line with our prior guidance. So the absolute number will be higher in line with the increased revenue.

Fully diluted share count for the full year we estimate to be about 53 million. Of course that is driven to some extent by the share price over the remainder of the year. Other assumptions that make it useful in analyzing the business for the second quarter and the remainder of the year, our effective tax rate, we continue to expect approximately 40%. And a cash tax rate of slightly less about 35%, and for those of you modeling cash flow for the year, that cash tax rate modeled out to about $5 million expected cash expense for the year.

GAAP gross margin we expect for the full-year about 73%, and a cash gross margin backing the non-cash cost would be about 77%. Our sales and marketing expense up somewhat as a percent of revenue in line with our investment plan at approximately 32% of revenue, G&A approximately 16% of revenue, and our research and development costs at about 15% of revenue.

Depreciation for the full year, we continue to expect approximately $6 million, amortization of intangibles approximately $1.5 million, and non-cash stock comp expense of approximately $6 million for the full year.

An in closing, I would like to join Rob and thank you for joining us on the first earnings call of 2010. We are really pleased to share these results with you. We look forward to providing updates on our open platform initiative, and the new applications it will enable for our customers on our next quarter call. As Rob mentioned, our application marketplace and developer community will open soon. Please look for our announcements over the coming weeks as the new applications become available.

That covers the operational and revenue highlights for the first quarter of 2010, and now if we could ask the operator to rejoin the call and give instructions, we would be happy to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Richard Fetyko with Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

Good evening guys.

Robert LoCascio

Hi, Rich.

Tim Bixby

Hi, Rich.

Richard Fetyko - Merriman Curhan Ford & Co.

A couple of questions, could you give us the total number of enterprise deals that you could get to the bookings on a consistent basis?

Robert LoCascio

Yes, the total number for the quarter was 55, and that compared to I think was 56 for the prior quarter, so, right in line in Q4. Other than the last Q4 that the strongest number we have seen of any quarter in the past two or three years.

Richard Fetyko - Merriman Curhan Ford & Co.

All right. And with respect to the second quarter, the EBITDA guidance you have given seems like you were guiding for sequentially slight decline in EBITDA or am I doing the math incorrectly. And if you're guiding for slight decline in EBITDA just curious why?

Tim Bixby

Yes, it is -- there is two things happening there. In absolute terms it is a slight decline. It is a little exacerbated by a higher share count than previously expected. This is in line both with our plan and what we have seen in prior years. Our second quarter EBITDA tends to be the narrowest of the year. And that is driven by a couple of things that are consistent year-to-year.

The sequential growth tends to be a fair bit stronger in the second half of the year as compared to the first half. And we also historically have analyzed salaries in competition across the company, which represents a pretty significant proportion of our expenses, which are salaries, and that takes effect in the beginning of the second quarter. And that coupled with our investment plan gives us the tightest range between revenue and EBITDA for the quarter. So that is in line with what we would expect to see. Then our guidance and our expectation is that that would expand over the course of the rest of the year.

Richard Fetyko - Merriman Curhan Ford & Co.

Got you. I mean you added about 48 people in the quarter?

Tim Bixby

That is right.

Richard Fetyko - Merriman Curhan Ford & Co.

Now, how do you expect the pace of hiring to continue during the rest of the year relative to the first quarter?

Robert LoCascio

It is quite frontloaded and again last year, we were very conservative on hiring, and went 10 or 11 months, and keep the headcount essentially flat. But in prior years where we have been in growth mode, the first half of the year is when you want to get folks in, so you can see benefit during the course of that year.

So the pace will continue at a fairly aggressive pace in the second quarter, and we would hope to have not all of the hiring done, but a good proportion of the year’s hiring done by early in the third quarter. We would expect to end the year based on our current plan at right around 500 in terms of overall for company headcount at year end.

Richard Fetyko - Merriman Curhan Ford & Co.

I see. And then is the stronger US dollar playing any role in terms of -- what role does it play I guess in terms of your guidance for the second quarter?

Robert LoCascio

We have seen little currency impacts in the last several quarters. We have a significant amount of our cost structure, about a third in the Israeli shekel. Those rates have been fairly steady. There has been a little bit of fluctuation, but right now we don't see -- we also can't predict future rates, but we haven't seen a major negative or positive impact due to currency. Our revenue line is primarily dollars, and so it is really only a cost impact for us.

Richard Fetyko - Merriman Curhan Ford & Co.

Okay. Thanks. Now that I have gotten some of the housekeeping questions out of the way, just one sort of strategic, just curious with the opening of the platform what verticals or types of applications do you foresee having the most interest in extending your platform?

Robert LoCascio

Right now, there is -- you know, the low hanging fruit applications are where people, companies can take our chat application, and extend it out beyond the website. So, that is where the first ones will come like mobile. We have developed a way to integrate chat into a twitter feed. So, if you are a customer and someone twitting about you and saying something negative or positive, you can set keywords. We can drop a chat or real-time chat into the middle of that as a retweet [ph]. So, social networking, mobile, also the low hanging fruit and then things with content and data would be sort of the next play analyzing the chat transcripts and all the behavioral data we collect, and so there are some things that, but basically I would say mobile and social is the start.

Richard Fetyko - Merriman Curhan Ford & Co.

All right. Thanks guys.

Operator

Your next question comes from the line of Brad Whitt with Broadpoint Capital.

Brad Whitt - Broadpoint Capital

Hi guys. Thanks for taking my questions, and (inaudible).

Robert LoCascio

Thanks.

Brad Whitt - Broadpoint Capital

Nice uptick in that deferred revenue, Tim is there anything different you are doing from a billing perspective there, is it just mostly set up fees or?

Tim Bixby

No, that is primarily a first-quarter phenomenon. We had a little bit greater proportion of annual deals that are tied to the calendar and hit in the first quarter. So there is no major changes in how we are operating billing, but that is a phenomenon we have seen in prior years in the first quarter.

Brad Whitt - Broadpoint Capital

Okay. So, are you primarily able to collect money upfront? I know for your SMBs it is pretty much month to month, all right?

Tim Bixby

Yes, the number is relatively small and so shifts in it maybe appear outsized, but the vast majority of our customers do pay each month as we bill for the searches that we provide in services.

Brad Whitt - Broadpoint Capital

So, very few pay for you upfront?

Tim Bixby

That is right.

Brad Whitt - Broadpoint Capital

Okay. That is then okay [ph]?

Tim Bixby

Correct.

Brad Whitt - Broadpoint Capital

And then the -- I guess, Rob, you had talked about opening the platform for new apps, are there any apps that you are building internally that you are expecting to impact this fiscal year or next fiscal year?

Robert LoCascio

We built apps for iPhone, Blackberry SMS gateway instant messengers. So, we actually did -- we have lab group that did the internal development of that. And we developed this twitter integration, where we can pop a chat into a twitter.

So what we're really looking at in the first set of apps is to drive usage of our chat. So a lot of our customers take even our telco customers, a lot of their customers are on an iPhone, and they are having an issue, and when they hit call and they go right to a phone call.

So, we want them to do is hit chat with me, and go into chat and drive more volumes. So we didn't put anything obviously in the numbers about any of this, but we should see some volume increase in chats, which usually drives revenue.

Brad Whitt - Broadpoint Capital

Okay. That is helpful, and Tim it looks like to me if my calculation is correct, kind of the implied bookings here, it looks like it was pretty consistent with the fourth quarter?

Tim Bixby

Little bit ahead of the fourth quarter, and almost as strong as the third quarter, which was our strongest quarter on record. So, just strike math it is about 4 million versus 3.8 in Q4. And remember that bookings number on a relative basis is directionally correct, but does not capture any of the ongoing activity in PFP or small business, but from a metric standpoint that is correct.

Brad Whitt - Broadpoint Capital

Okay, and then final question on PFP at 17% of the enterprise business, based on your pipeline and may be customers you signed recently, where did you see that going maybe by year-end…?

Robert LoCascio

It is kind of holding pace with the B2B growth or the enterprise growth, which is quite strong now. So it really outpaced the enterprise growth, and we had a couple of slower growth quarters last year in a tougher macro environment. Now, it seems to be more in line. So I think by year-end it will probably be right around that same level. If I am wrong on that, it would be stronger. The bias is definitely positive in that group. So it could be a little higher, the net 17%, but I would expect it right in that range.

Brad Whitt - Broadpoint Capital

Okay. That is helpful. Thanks for taking my questions, and thanks for getting the press released out so early this time. That is helpful.

Robert LoCascio

You bet. Sense of humor today [ph].

Operator

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

Mike Latimore - Northland Capital

Hi, good evening. Nice quarter. Tim, or you both, maybe you gave us some color already, but were you able to break out enterprise versus midmarket versus SMB revenue?

Tim Bixby

We didn't break that down, and we are considering what we want to do with that over the course of this year and right now we're going to stick with the breakdowns provided historically. You know that group is getting up and running, but there is some business that is still transitioning between those groups. So, we want to give you sort of color on how they are doing and ramping up. There are three reps. They are doing well and they are growing. But we're going to hold off for one or two more quarters before we introduce new metrics on that group.

Mike Latimore - Northland Capital

Perfect. And on the bookings number being a little ahead of fourth quarter, if you go back, you know, sort of on average the last few years, is the first quarter tending to be a little seasonally weaker than fourth quarter booking traditionally?

Robert LoCascio

It varied. If you look at the last two years, last year I think was probably the tougher scenario on just about every count, and so the first quarter was weaker than the others by a factor, by a factor of 3 I think versus the best quarter. You know, more normalized year if you go back to 2008, it was a little more in balance. So this quarter versus 2008, we are up about 30% versus the first quarter.

So what that implies for the rest of the year, I will sort of believe up to you, but it was, I think we were pleased to see it come in line with what we thought was a really strong fourth quarter. So I think that is one of the reasons we were comfortable enough to increase the overall revenue guidance for the year by a little bit.

Mike Latimore - Northland Capital

Right. And then just in terms of some of the verticals, I know you had won a couple of big box retailers in the third quarter, can you talk a little bit more about that vertical, did you still see strong prospects there?

Robert LoCascio

Yes, the pipeline has a number of those guys. They are the big gorillas, and each of our reps has one or two of that sized customer and they are in their sites. They are a little tougher to knock out as we don't see them every quarter. But with the results we see with the big guys we have signed so far, and Home Depot has always been a really strong customer for us, and we would hope to be able to sign some more of those over the course of this year.

Mike Latimore - Northland Capital

Okay. Just last question, you talked about where the expense growth was in the quarter, but it looks like G&A was up the most in terms of just I guess absolute percent, what was going on in the G&A expense line?

Robert LoCascio

In -- as compared to a year ago or compared to…

Mike Latimore - Northland Capital

The fourth quarter.

Robert LoCascio

The bulk of the activity there is a little bit of expanded hiring just to support the overall growth of the company. And then some just sort of general overhead expenses. I don't think there was any one thing that really jumped out in that area.

Mike Latimore - Northland Capital

So, no real one-time item in there or anything?

Robert LoCascio

No, I think it is probably a bigger step up that we will see in subsequent quarters. Again a lot of the sort of one-time salary adjustments, I guess would qualify one time per year, and those hit effective in the earlier part of a year.

Mike Latimore - Northland Capital

Okay, great. Thanks.

Operator

Your next question comes from the line of Nathan Schneiderman with ROTH Capital Partners.

Nathan Schneiderman - ROTH Capital Partners

Hi, Rob and Tim, thanks very much for taking my questions. I wanted to start off with some follow-up questions on bookings, when you talk about a bookings number what is the typical duration of that?

Robert LoCascio

Over deals in the enterprise, we are focused on the enterprise deals. We don't count small business deals because there are quite a few of those that are at smaller revenue points. So, enterprise deals are typically one year deals. Occasionally they can be two or three year commitments, but the bulk of them are one year commitments.

Nathan Schneiderman - ROTH Capital Partners

Was there any change in duration if you look at this bookings number of approximately 4 million versus recent quarters like last quarter or it is staying approximately the same?

Robert LoCascio

In terms of the length of the contracts that folks…

Nathan Schneiderman - ROTH Capital Partners

Yes, in other words, was it a very healthy bookings number because the duration of the contract extended or is it pretty apples-to-apples when you look at it?

Robert LoCascio

It is definitely apples-to-apples. Its average price is a little bit higher, and the absolute number of deals was obviously quite high at 65, 66.

Nathan Schneiderman - ROTH Capital Partners

Okay. And just to clarify on the raised revenue guidance, do you feel that the strong bookings number alone gives you that confidence or are you kind of highly dependent on what you are seeing in the pipeline?

Robert LoCascio

Well, the two biggest drivers of the year are actual results in Q1, because you get 4 quarters of that impact and then bookings in Q2, you get three quarters of that. And so we go from knowing not much about the year in February to knowing quite a bit about the year today. And so it is not -- it is a pattern that we have seen in prior years, you know the combination of the two, but certainly Q1 coming in right in line or at the higher end of our expectations. It takes a lot of the uncertainty out of the year, because it does have a disproportionate impact on the full year.

Nathan Schneiderman - ROTH Capital Partners

Okay, great. And Rob, a few questions for you related to the new products, I understand the open platform is going to be available shortly, but when would you expect general availability on some of these other product lines like some of the data and the content products?

Robert LoCascio

Pieces of it will come out in this quarter, and then we will keep more rolling forward. I wouldn't expect anything significant in data until Q4, because there is a bunch of other stuff we could do on the targeting side with that, but you are going to see like the mobile apps and I think it will come right away, when we release the open platform in a couple of weeks, and some of the social networking apps. And then there is an open API. So, developers can just basically create apps on top of it.

The first set of developers will be really our customers. So, our customers what we found, why we did this is that because we got over 80,000 customers, they all have such diverse needs, and there is pent-up demand to do all sorts of interesting things will our applications that we normally can't develop for that large group. So we tend to develop for high end or the very large customers.

So in this way it frees and we will get a lot more momentum and a lot more usage of the platform. But we will start delivering applications immediately with the release of the open platform.

Nathan Schneiderman - ROTH Capital Partners

Got it. And in the past you have talked about applying your proactive technology in some areas outside of chat, what is your sense of the timeframe to deliver solutions in that area?

Robert LoCascio

Q3, we will open up an API for those engines, and so that people can develop applications of those engines, and the behavioral targeting aspects. We will extend it beyond chat and we are going to add the ability to target couponing and landing pages in general marketing campaigns. And so starting in Q3 that API, the APIs that are now around the chat application, getting access to the chat transcripts, and being able to pull some of the data, so you could do data analysis of the traffic on your website.

Nathan Schneiderman - ROTH Capital Partners

Okay. And final question for Tim, when you start introducing these new products, the new APIs and the new product areas like data and proactive outside of chat. If there is going to be a difference in that direct applied, and can you just describe how that might work from your track point of view on your product? Thanks very much?

Robert LoCascio

Yes, it is little -- it is premature I think to talk about retroact. We are certainly open and focused on innovative business models on the new platform as well as very cognizant of the fact that we have recurring revenue stream. And that is important to the company and important to investors. And so that is really the best guidance we can give at this point in this topic.

Tim Bixby

I think what is interesting from a company perspective, is we have such a diverse way in which we have revenue. We got the consumer revenue; we got a cost practice issue, which paid for performance. We have a recurring revenue model. We have professional services. So, we are managing the business that gives us a lot of flexibility, and so I think going forward we will probably see more of the transactional base where we get some sort of cost for acquisition, cost per click, cost per 1000 CTM. And that is sort of where we will move the business.

To give a little context, we sent out a really -- it took about a year, and didn't talk too much about it during that time until we could bring something really tangible, but what we have created now is something that I think will be setting a foundation for the next five years of growth.

Five years ago we created proactive chat, and we sort of game changed the basic chat market and that took us from 20 million or so, we are 100 million now. And now we have set the next level of technology to go from here to the next set of goals. So I think it is -- I think it really gives a lot of flexibility getting there.

Nathan Schneiderman - ROTH Capital Partners

Thanks very much.

Robert LoCascio

Thank you.

Operator

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

Jeff Van Rhee - Craig Hallum

Great, thanks. Several questions guys, just maybe you could have attacked the consumer side of the business, certainly through the past year you harvested some higher rates. As you look forward through the remainder of 2010 year, how do you think about growth here? Have we seen all of the benefits from those rate increases that we really need to drive growth units, or how should we think about that?

Robert LoCascio

Yes, well, we have a couple of levers. One is, we can move rates up and we have (inaudible) which will do that. We can obviously drive minutes. So you put the two triggers. We have a billing system coming out that it took about a year and development, and so that is coming out in a few weeks and that is going to give us a lot of flexibility in the consumer group to change pricing. So when you hit the website, let us say you came from a different campaign, we can give you 20% off your first chat. Do you like one-time $10 couponing? It gives us a lot of flexibility.

So I think going forward we will see a little bit of -- some more changes in this because we have a lot more flexibility with the billing system.

Jeff Van Rhee - Craig Hallum

Are you assuming sort of within apples-to-apples, I know you talked about expanding into some new markets, but within existing markets can you give me a sense of what kind of gross improvement you are thinking about in terms of minutes?

Robert LoCascio

I mean, I don’t -- I will give it when we deliver the results around different minutes. Essentially each vertical, has obviously a different average minute, and a different average when it comes to what our experts are charging. Spirituality is still one part personal advice. So that is where a lot of the (inaudible) fees, but the other ones are different, but I would like to see how they play out as we go forward. Like text support and tutoring we think could be good categories.

Where we are today at last year, we just wanted to stabilize the business and get cash flow going. And now we're really retrenching and saying, okay, we want to expand now into other categories. The other part is the billing system was something that our B2B customer wanted in order for them to utilize experts on their side because they wanted to be able to do couponing, and you get the first 10 hours for free, and we will bundle it with a software package. So we're going to have a lot more flexibility going forward.

Jeff Van Rhee - Craig Hallum

Okay, and just a couple of other quick ones, Tim, just still unclear in terms of the guidance, certainly you raised the revenue picture but reiterated on the earnings side, if I heard you right were you saying the only variation there is share count. So, essentially when we are get done doing the models here, we are not -- there were no incremental net operating expenses here added, compared to maybe your expectations last quarter?

Tim Bixby

No, no. I would like to clarify that. So some of the impact is due to share count, but we are giving expectation that our spend rate will be slightly higher. So that it will come from both share count and increased expenses. Our bias here is definitely towards investment and you know we're still early enough in the year, where costs in Q3 and Q4 are quite a ways in the future, whereas revenue we tend to have a better view of the pipeline. So, you would expect to have, or I would expect you to end up with a model that shows a higher expense rate, but that the per share numbers that we expect to see should come right in line with where we were a quarter ago.

Jeff Van Rhee - Craig Hallum

And the incremental relative to last quarter regardless of the dollar amount, where is that focused?

Tim Bixby

Primarily in the non- G&A. So that tends to scale, and most of our hiring focus is in the other three line items, R&D, sales and marketing and hosting. And so that is where I think we want to maintain a little flexibility, because the reality of the market right now is we have a lot of opportunity. We are seeing better and better people in our recruiting efforts, and so we want to be able to take advantage of that, and a strong cash balance as we see the rest of the year play out.

Jeff Van Rhee - Craig Hallum

Okay, in the direct headcount, you were looking to grow from 17 in Q3 of ’09 if I recall to 31 in Q3 ’10, so I guess the question is are you still targeting 31 by Q3 of this year?

Robert LoCascio

I would -- we are still targeting that I would say by year-end, where I don't think we are adjusting any plans. It is just a question of when you get great people on board. So, I would say we're still on track to that and we will look at that and see where we are in a quarter.

Jeff Van Rhee - Craig Hallum

Okay, and then last one, I will let somebody else hop on; the pay-for-performance has certainly been just a fantastic aspect of the business. And you touched on the ROI, can you talk about as a percent of mix, it has come up dramatically, and understanding no large numbers, but still it seems to be that you are seeing it [ph] to now drop in line with more of the corporate gross average. I mean, what is new in that business. Is there kind of a gap in the pipeline here in terms of new numbers, is it usage, maybe that some of these customers have -- has it some sort of ceiling. Just help me understand that because it has been well above corporate average for a while?

Robert LoCascio

Yes, I don’t think it is so much appears to be dropping. I think it is the rest of the group catching up, and really starting to hit some really nice booking numbers and growth numbers. So, it is more of a good news for the rest of the group is catching up more so than PFP dropping. I think the longer term PFP opportunity is really strong. What happened in every quarter going forward is a little tougher to predict because it is really driven by when and how we deploy, and where you see improvements happening.

So we do not want to give any indication that we don't see you know continuing strength in that business as strong as we have ever seen it, since we started it two years ago.

Jeff Van Rhee - Craig Hallum

Okay, great. Thank you.

Operator

You have a question from the line of Craig Nankervis with First Analysis.

Craig Nankervis – First Analysis

Yes, thanks very much. Nice job, interesting commentary on the R&D side. A couple of questions that I think haven't been asked, one, Rob I'm interested to know you talked about the larger ASPs [ph] in large enterprise deals. Maybe it is deals you have closed or that is deals that are in the pipeline. Can you just elaborate on that a little bit what might be in particular driving the larger ASPs?

Robert LoCascio

It was more of the enterprise team now that used to. As of last quarter, they would go after very high-end customers, and then I call it lower end customers, guys you were spending between 60 and 100 grand a year. And what they have done now, we have taken the 60 and 100 grand and we use that to the midmarket group. And that is focused on that. So what you are going to see from them is we are not including the midmarket, you know, those deals into their pipelines, into their goals. So, they are naturally just going to have a higher ASP for those customers, the remaining customers.

And now they have -- the way the team is structured is that each rep has a name account, and so they are very targeted, very high-end. They are doing a tremendous amount of marketing behind those named accounts. So we can penetrate into user brand named companies. So that sort of implies you will see a higher ASPs, not that the ASPs are growing per se.

Craig Nankervis – First Analysis

It is more a mathematical thing.

Robert LoCascio

It is mathematical thing. So if you saw, hey, there is only 10 deals in enterprise and normally there is more than that. It is because we shifted some of the deal flow into the midmarket, and I want to make it clear about that.

Craig Nankervis – First Analysis

Thank you. And just on the revenue guidance that has been changed, do I understand there is no new product revenue in the guidance, can you just clarify that please?

Robert LoCascio

Yes, there is no new revenue in the guidance. So it is just the existing business. We are seeing it move to the next level of growth.

Craig Nankervis – First Analysis

And Tim, there was a question on G&A, do we consider Q1 G&A to be a new baseline for the rest of the year, is that appropriate to think about it that way?

Tim Bixby

Yes, I'm glad you give me the chance to correct my earlier response. I was combining to questions about the first quarter and the second quarter. The second quarter expense expectation is getting a little bit larger. That is really driven by the compensation adjustments that I mentioned happened annually in the second quarter. First quarter, we spent a little more aggressively in some of our efforts to bring folks in the company together around launching our core value. And so we had a little bit of higher expense rate in Q1, some of which hit the G&A line and that is something that is not something we expect to recur. So it could be a baseline, but that growth from Q4 to Q1 is more of a one-time increase in expenses.

Craig Nankervis – First Analysis

So, it is more or less a baseline is the short answer.

Tim Bixby

Yes, I wouldn't expect significant declines, but the growth rate in Q1 was a bit of an anomaly.

Craig Nankervis – First Analysis

Okay. Those are my questions. I think I'm all set. Thank you.

Tim Bixby

Thank you.

Operator

There are no further questions in queue, sir.

Tim Bixby

Okay, thank you for being on the Q1 2010 call. And we'll see you in Q2.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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Source: LivePerson, Inc. Q1 2010 Earnings Call Transcript
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