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LivePerson, Inc. (NASDAQ:LPSN)

Q4 2010 Earnings Call

February 10, 2011 5:00 PM

Executives

Tim Bixby – President and CFO

Robert LoCascio – Chairman and CEO

Analysts

Richard Baldry – Signal Hill Capital

Nathan Schneiderman

Richard Fetyko – Merriman Capital

Brad Whitt – Gleacher

Jeff Verney – Craig Hallum

Michael Latimore – Northland Capital

Craig Nankervis – Craig Nankervis

Jay Freedman – Crystal Rock

Michael Latimore – North Capital

Operator

Good afternoon. My name is Arona and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson Fourth 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)

And with us today we have Mr. Tim Bixby, President and CFO; and also Mr. Robert LoCascio, CEO.

Thank you. Mr. Tim Bixby, you may begin your conference.

Tim Bixby

Okay. Thank you very much. Before we begin, I would like to remind listeners that during this conference call the 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. The 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 when talking about our 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 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. I’m excited to report that 2010 was one of LivePerson’s best years in terms of growth, profitability and overall operational execution. All segments of the business contributed to topline growth in 2010 with revenue increasing by 26% for the full year.

We continue to focus on driving both profitability and growth, while investing and delivering increased value to our customers. The positive trend in online commerce coupled with the growth of social media has made the Internet a place where people are creating more meaningful connections with each other and businesses. Companies are using our products to continue those meaningful connections with consumers on their website.

These industry trends are positive indicators for our business going into 2011. We had a strong fourth quarter with a 21% year-over-year growth rate and 6% quarter-over-quarter.

We also had very strong bookings in Q4 of approximately $6 million, which is a 60% increase from Q4 of 2010, we also started expansion in the Asia-Pacific region. During the year, we signed a largest telecom company in Australia, Optus, as well as a top Australian bank and a major airline in the region. We also signed a large bank in Singapore, and a major online travel company in Hong Kong. The 2010 launch of our mid-market group delivered strong performance in the year and even exceeded our 2010 revenue goals.

We expect this group to be a key growth driver into 2011. We had some exciting customer wins in this market segment including a multi-year deal with a leading online social gaming company in which our product integration with salesforce.com was key to winning this deal. We also signed Sierra Trading Post a major outdoor retailer, as well as a leading global provider of semiconductors for business and consumer products, and a global top 10 insurance company. At the same time, we achieved expansion with several existing customers including a top energy provider, and with Concur a leading SaaS expense management provider.

Our small business group increased revenue by 4% sequentially quarter-over-quarter, and 16% as compared to the prior year. Our consumer group grew by 9% year-over-year and more importantly increased operating profit from breakeven in 2009 to a 25% EBITDA margin in Q4, which is consistent with the overall margins of our business. It’s worth noting that we’re seeing increased interest in the education category on the consumer site.

2010 was a foundational year for expanding our business as we made investments in people, processes and product. We provisioned two new data centers in Europe, strengthening our base for business expansion in EMEA market. One of the core assets of our data center is the ability to hold crucial data in a more secured way. This is a key reason many of our largest corporations in the world like financial services companies trust LivePerson as their preferred solution provider.

In 2010, we completed over 180 customers security audits with a 100% pass rate.

We also opened a new office in San Francisco putting us near the hub of U.S. Technology companies and logical location that builds stronger connections with Silicon Valley community, and our overall employee base grew by 25% during 2010.

I’m going to list some of our major accomplishments in 2010, but one I’m particularly proud of is that we were able to maintain best-in-class operating margins, while making these investments around our products and our people. We’ll continue the same operating philosophy in 2011 as we did in 2010, but we target to maintain the current operating margins while investing and growing the business to the next level.

Our core business remains strong and continues to grow providing us with some really unique opportunities to further strengthen our core and add new products and services to our customers in 2011. We monitor score and provide intelligence for nearly 100% of the traffic on many of our customers’ website, yet we engage only about 2% of that traffic today with our current real-time products. So we’ve been asking ourselves, how can we leverage the power of our real-time intelligence platform to help our customers reach the remaining 98% of the visitors.

In the last year, we rearchitectured our platform, so that other applications could be built on top of it in addition to chat. Through these new applications, we’re creating an opportunity to monetize a much larger percentage of website visitors.

This year we will launch our next product, a content application that will leverage our real-time intelligence platform in new ways. So we want customers to deliver targeted content to their website visitors in real time, providing opportunities to engage and connect with a broader segment of visitors well beyond the current 2% who require human assistance through chat.

One of our first use cases for this application will be on-site couponing. Using our real time intelligence our customers will be able to segment certain site visitors to receive a chat, and other visitors to get coupons. We currently expect to release the beta version of this application in the first half of this year and GA will be in the second half.

As many of you know, we added APIs to our platform in 2010 to allow third parties to develop applications using our real time intelligence. We began building our developer network at the end of 2010, we’ve seen great interest from a number of developers. We kicked off our development program initiative in November chaired by industry leaders and LivePerson experts and we are starting to see our first third party applications being used by our customer base today. Many of the first applications are around video, mobile and social.

Our goal is to develop a few new core applications internally and where there are more niche opportunities we want to have those filled by third parties.

So to recap, our successful chat application as you state to engage about 2% of the web traffic that we monitor. We now intend to layer new application on top of our existing platform to enable our customers to engage a much broader set of web visitors beyond the 2% who chat. All leveraging existing infrastructure that we have built to support our current set of core products. We look forward to executing on this strategy and delivering new products and services to our customers in 2011. I want to congratulate our entire LivePerson team on a great 2010, which laid the foundation for a great year, an exciting year ahead.

With that, now let me turn it back to Tim for a more detail look at the numbers. Tim?

Tim Bixby

Great. Thanks, Rob. The fourth quarter capped a very strong year for LivePerson both in terms of strategic accomplishments and financial metrics. Sequential revenue growth in the fourth quarter nearly matched the third quarter strong result at 6% sequential revenue growth and 21% growth as compared to the fourth quarter of 2009. As Rob mentioned, we had record bookings in the fourth quarter and very strong cash flow from both the quarter and the full year.

More importantly then the short-term financial results, however, the beginning of the year is a good time to take stock of our longer term success and future trajectory, and the opportunity is ahead for LivePerson. We continue to be the market leader in our sector, far out of any competitor in enterprise class deployments. We continue to generate revenue growth and an operating margin at the top of the range of the most successful SaaS leaders, even while investing in new applications to bring to our more than 8,500 customers.

In January alone, more than 1.3 billion online sessions were captured and analyzed in real time by our proprietary rules engine in analytical tools. In a world of just more than one billion Internet users, we will analyze more than 15 billion user sessions this year alone, with this level of interaction continuously growing at a rate of more than 20% per year. We see opportunity ahead both in the core business of existing revenue streams where we will expand our sales capacity by at least 20% this year on top of a more than 60% increase over the last year-and-a-half as well as in the new applications coming to market that Rob has outlined.

Customer retention continues to be very strong at more than 93% for enterprise accounts, up time exceeds four nines, 99.99%, and our core business excluding investment in new initiatives continues to generate an EBITDA margin of better than 30%. With this foundation in place, we’ve combined core profitability with steady investment in the future where we expect to engage a greater proportion of the billions of interactions with our online customers.

Let’s review some of the metrics that give us confidence in our outlook, of which we are quite proud. For the full year, we achieved revenue of nearly $110 million, fully 4% better than our initial guidance from 12 months ago. As a result of this accelerating growth through the course of the year, we increased our revenue guidance three times during 2010.

While fourth quarter revenue fell slightly short of our most recently revised guidance range by about $200,000, EBITDA per share hit a new record along with net income was right within our guidance range. The revenue shortfall in the quarter was a result of slightly lower than expected PFP revenue related to holiday sales patterns for one of our PFP customers. We since seen fairly steady PFP revenue growth and feel that overall the PFP model continues to be a very strong and growing revenue driver into 2011.

Fourth quarter revenue overall increased 6% sequentially to $29.9 million and increased 21% as compared to the prior year. EBITDA per share for the fourth quarter was $0.15 as compared to $0.14 per share in the fourth quarter of ‘09, while fourth quarter earnings per share was $0.05, which was at the upper end of our guidance range.

Adjusted net income per share was $0.09 also top of our guidance range. Revenues from business operations for the fourth quarter was $26.2 million. This is a 23% increase as compared to the fourth quarter of 2009 and a 7% sequential increase as compared to the third quarter of 2010.

Revenue from our consumer operations for the fourth quarter was $3.7 million. This is a 9% year-over-year increase from $3.4 million in the fourth quarter of ‘09 and was up 3% sequentially from $3.6 million in the third quarter.

Full-year revenue was up 26% to $109.9 million. Revenue from business operations for the full year was up 27% to $95.7 million, while full-year consumer revenue was up 19% to $14.2 million.

Full-year EBITDA per share was $0.51 as compared to $0.47 in 2009. Adjusted net income per share was $0.30 as in the prior year. While GAAP EPS was $0.18 in 2010 as compared to $0.16 in 2009.

As Rob mentioned, bookings increased significantly to a new high of $6.1 million in the fourth quarter. This represents a 33% increase from just the third quarter and a 60% increase from the prior year fourth quarter. Full-year bookings in 2010 were also very strong at approximately $19 million, which is a 57% increase from the prior year, full-year figure. We signed 14 new larger clients in the fourth quarter, several of which are highlighted in the press release from today. We signed 88 total new enterprise and mid-market deals in the quarter.

As you can see from the higher bookings, average deal sizes were also up across the board in the quarter and we pulled in a couple larger than average deals, among them the largest up sell to an existing client that we’ve ever done. Pay per performance continue to be a solid contributor as we mentioned and generates about 17% of total enterprise revenue both in the full year and in the fourth quarter.

Following on the average deal sizes that we experienced for our fourth quarter bookings, the average deal size for all deals was $70,000. For new customers signing up for an initial deployment, the average was $53,000, existing customers signing up for an up sell or expanded business was $72,000, proactive sales deals only about $78,000 and customer service only deals about $34,000.

The breakdown of enterprise bookings in revenue terms was about 90% existing customer expansions and this was really driven by the large – the one-time very large deal that was in existing customer up sell. And about 10% to brand-new customers.

The breakdown between sales and customer service was about 90% weighted on a revenue basis towards sales deployments and 10% towards customer service little more heavily skewed towards sales in the prior quarter, which was about 80-20.

Enterprise attritions ended the year on a positive note, ended the quarter at about 1.6% and actually looks improved to date in Q1. This is a very conservative measure of attrition in terms of revenue dollars. If we look at attrition by customer count, it’s significantly less than this, at about 0.6% per month. Small-business attrition was unchanged at about 2.6% per month.

Our split revenue coming from outside the U.S. was unchanged from the prior quarter as – primarily business in the U.K. remained steady at about 22% of revenue, with the U.K. portion of that making up about 12% of that. This will begin to shift as our Asia-Pacific region comes on line and continues to grow.

Revenue in our overall from Asia-Pacific region in 2010 was just under $1 million, and is expected to continue on that growth path now that our established selling partner at Melbourne, Australia is up and running, and as Rob mentioned, we’ve experienced some nice wins and a growing pipeline in the second half 2010.

The revenue in our verticals was unchanged in terms of ratio, financial services making up about 23%, telecommunications at the top 32%, and retail and technology each making up about 15% of our revenue base in the quarter. In terms of the scope of our customers, we continued to make good progress of making large customers even larger. As of the end of the year, we had 16 customers over the $1 million annualized revenue mark. This was up from 14 in the prior quarter. Maybe (ph) about 33 in total about 0.5 million that’s up from 30 in the last quarter.

We have one customer over the $10 million run rate at this point. And we have two above $5 million. And that’s a pretty significant shift at that range as compared to the prior quarter. We continue to be really pleased with our ability to land and expand large accounts. In fact, our top 10 accounts currently in terms of revenue flow have grown on average more than 400% over the past three years.

This really speaks, I think, to the significant growth potential we have within our already active customer base. As mentioned, the consumer group continued to improve their cash flow this quarter. Revenue for the fourth quarter was up 9%. Fees per minute, while commission rates were also up. But most notably, EBITDA margin for our consumer operations improved dramatically from breakeven in 2009 to about 15% over the full year of 2010, and as Rob mentioned, reached 25% in the fourth quarter of 2010 which really puts it right in line with the overall operating margin of LivePerson as a whole – our gross margin for the year finished at about 73%, and that’s fairly flat, fairly steady over the course of the year.

As Rob mentioned, our head count increased by about 25% and ends the year at about 472 people. The 100 plus people we added during the year were primarily in the areas of technology, hosting, R&D and Q&A, engineering, about 45% of those added heads, while sales and marketing was the next largest making up about 25% of the increase.

We plan to add about 135 people in 2011 with a continued focus on product innovation and sales capacity expansion. We expect to add 5 to 10 reps in enterprise and mid-market during 2011. This will expand the team of 27, we have currently selling to our largest accounts.

We ended the quarter with a cash balance of about $61.4 million, as compared to 50.4 as of September 30, 2010. We had strong cash flow from operations, trimmed accounts receivable and also had significant cash inflows related to option exercises in the quarter.

Accounts receivable improved by more than 10% as compared to the prior quarter and it’s tracking back quite nicely toward our historical range after a bit of a spike in Q3, due to slower collections from a couple of customers. And the hiring out of a new and highly sophisticated general ledger system that’s now fully implemented in our U.S. headquarters.

Now, I would like to talk a little bit about our first view on financial expectations for the first quarter 2011, as well as the full year that we’re in now. In the first quarter, we expect revenue of between 30 and $30.5 million, EBITDA between $0.12 to $0.14, adjusted net income between $0.06 and $0.08, GAAP EPS of $0.04 to $0.05, fully diluted share count of approximately 54.5 million shares.

For the full year, we currently expect revenue of between 133 and $136 million. EBITDA per share of $0.60 to $0.63, adjusted net income per share of $0.33 to $0.36, GAAP EPS of $0.20 to $0.22, and a fully diluted share count of approximately $65.5 million. A couple of other full year assumptions that we are expecting currently. We expect an effective tax rate of approximately 36% and a cash tax rate right in line with that. In 2010, we actually had a favorable cash tax rate of about 25%, which was better than our earlier expectations.

Capital expenditures for 2011, we expect to be in line with 2010 at about $8 million and that will bring that percentage rate down as revenue continues to grow and we hold that capital expenditures line relatively steady – we expect gross margin on a GAAP basis of about 73%, sales and marketing in Q1 and the full year of approximately 30%.

And G&A and R&D both at approximately 15% of revenue both in the first quarter and over the course of the year. Depreciation for the full-year, we expect approximately $8 million, amortization of intangibles approximately $1 million for the year, and stock compensation expense, we expect it be approximately $6 million for the full-year.

That covers all the operational revenue highlights, and now if the operator could rejoin the call. We’d be happy to take any questions from folks participating.

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions) Your first question will come from Richard Baldry, Signal Hill Capital.

Richard Baldry – Signal Hill Capital

Thanks. Could you talk a little bit about the linearity in the quarter in terms of signings sort of and maybe what you’re seeing early into ‘11?

Robert LoCascio

As in past quarters, past fourth quarters we see a pattern where it’s a little bit stronger in October, November and little bit lighter in December. As you know the pattern assigned doesn’t have any impact on how we recognize the revenue. The larger deals that really drove the bookings were effective for only a portion of the quarter. And so on a dollar basis they we probably weighted a little more to the second part of the quarter.

Richard Baldry – Signal Hill Capital

And may be looking through receivables a bit I know it come up last quarter and part of that was attributable to the pay for performance side of the table, for that pulling almost about even in the quarter. Can you talk about any other components in there and whether we should expect to see it come down kind of early in ‘011?

Robert LoCascio

Our target is to get it in our historical range on an absolute basis is far better than the average SaaS player. But for us, it did spike up a little bit midyear. We’re about halfway back to that historical range which is about a 10% improvement in terms of DSOs.

Our target is to get it back in that historical run rate. The reality is that as these customers, we talked about a little bit these $5 million and $10 million customers, it’s not so much driven by the type of customer, whether it’s traditional model or PFP, but rather just beside and scope of the deployments. Large companies tend to pay a little bit slower, it’s a source of cash flow and so there’s folks that are compensated on slowing down payments. So I think we’re doing a pretty good job on that in terms of the sequential guide at the low end it would be, theoretically could by roughly flat.

Just want to know what components may be either one time or seasonal that would come down that would leave the recurring more predominantly recurring part of the business, having to offset that to hit the low end of the guide versus kind of the upper end. And then lastly maybe something on the comparative environment, what one year former competitions getting themselves open to one of the largest software players, whether you think that competitive environment has kind of eased, and what you see heading into ‘011? Thanks.

Tim Bixby

Sure. So I’ll take the first, first one first and then hit the competition. So actually want to hit the competition first?

Robert LoCascio

Yeah. So on the competition side.

Tim Bixby

On the competition side, one of the competitors ATG got acquired by Oracle. And so, the stuff we’ve been reading and talking, we obviously talk to people that we actually have some x employees here.

And obviously Oracle I think is more focused on their converse platform, and that is very minimal part of the acquisition. So actually, I think it’s a great opportunity for us, because I don’t think Oracle reps are going to be selling a chat product versus they’re looking at how do they leverage more data into their database using the commerce platform. So I think it creates more opportunities for us at least today.

And then in terms of the seasonal flow from Q4 to Q1, historical patterns continue, where Q4 is quite strong. Pay-for-performance is strong in the fourth quarter and then there is sort of a reset with holiday sales that are in first quarter and then begin to build up over the course of the year.

One sort of nice offset is that we have signed another larger customer to a pay-for-performance model, which will start to gear up end of Q1 into Q2. And so that’s the kind of change that might be a difference as compared to last year. So those are the primary ones, the rest I think, it’s just normal seasonal flow, stronger growth in the second half, slightly slower in the first half and then ramping up again in Q2 and Q3.

Richard Baldry – Signal Hill Capital

Thanks.

Operator

Your next question will come from Nathan Schneiderman.

Nathan Schneiderman

Hi, Rob and Tom, thanks very much for answering my questions, taking my questions. Curious if you could just talk in a little more detail, just on the quarter reported. You mentioned that there was a slight issue with one of the PFP customers from the revenue flow, you’re expecting for that. I was hoping you could elaborate on that?

Robert LoCascio

So, as you know PFP is based on the revenue flow from customer sales for those accounts and we forecast internally a slightly higher sales amount and that drives our fees almost directly. Holiday seasons drive a lot of consumer activity, telco is the dominant fourth quarter holiday for us within our PFP operations, although we do some retail accounts. This is really one account where we’re a little more optimistic based on prior history, but it turned out to be just a couple of hundred thousand dollar shift in revenue that didn’t come in Q4. Overall, as you know, PFP is a pretty significant proportion of revenue and this is pretty tiny shift in what is overall a pretty big piece of business for us.

Nathan Schneiderman

Okay. And then just a clarification question on your guidance, I was curious, in your 2011 revenue guidance, how much of that revenue includes your new couponing solution, what’s your assumption there? And also on the EPS side I was curious how much of your investment in the solution you feel is hurting your EPS for 2011?

Tim Bixby

We have essentially no revenue in the guidance, we’ve put something greater than zero but sort of inconsequential levels of revenue for the new. The focus is really to get people to see the product, test the product, and so to gather data and get feedback. That’s really the goal. All the expenses of course related to that are built into the guidance and that’s what’s enabling us to move quickly on it, but it’s really all about getting data. And then as soon as we get data then we’ll really start to move things as quickly as we can.

Robert LoCascio

As I said in my – when I was talking, the interesting thing about these products and also the products from third parties is that they’re sitting on an infrastructure that has already been created. So they are on the same infrastructures our cap using same data intelligence and the rules and everything.

So there was a cost obviously that we – last year and into today about building them with people, but the actual – once we deliver the product a lot of that revenue should drop to the bottom line, because it’s not incremental cost to deliver coupon, a coupon looks like an invitation of chat except it’s not going to be connected to a chat. So I think that’s interesting about getting real leverage on our platform even with the third parties and what we’re seeing today, the stuff they’re building is just leveraging what we have, so revenues share we’ll do with them once again are incremental dollars to the bottom line.

Nathan Schneiderman

Great. And final question area for you, it sounds like you had a very exciting existing customer expansion, you’re referencing it as your largest ever. If I recall right, that customer of yours last quarter that you’ve mentioned scale to be in neighborhood of an eight figure customer, that was an existing customer as well, so does this customer you now referenced for Q4 leapfrog to that customer?

Robert LoCascio

It doesn’t – Leapfrog, but certainly narrowed the gap.

Nathan Schneiderman

Okay, is it in the same vertical as that other customer?

Robert LoCascio

Yes.

Nathan Schneiderman

Thank you very much.

Operator

Your next question will come from Richard Fetyko of Merriman Capital.

Richard Fetyko – Merriman Capital

Good evening guys. A couple of questions. With respect to the big upsell, just curious if you could elaborate on that. What solution did you upsell or what constituted that upsell? And then with respect to the couponing product, are you – when you say it’s in beta, is it being tested with customers right now with how many and or how long has it been in test mode?

Robert LoCascio

So on the first one on the upsell, the crux of the expansion was really much more significant deployment across an existing customer. So long time customer, good success with our proactive engagement product, primarily selling subscription services, a good mix of their overall services to consumers and an expansion where we moved from being partly deployed within their company to a much more significant deployment, probably not or definitely not tapped out in terms of how large a customer can be someday, but definitely a big win for the enterprise team.

We’re also – have an opportunity we lost – beginning an opportunity with – that same customer in the Pay-for-Performance model. So it’s really showing how one customer is not limited to one billing model and not limited to, not capping out in terms of the revenue potential.

Richard Fetyko – Merriman Capital

And with respect to the couponing product?

Robert LoCascio

Yeah, so we just came out an alpha with it, which was on our side, on our consumer side was using it, and they saw about a 60% lift in sales with the coupons. So we got very good data and results and now the product owner (ph) is out with the sales team and they are signing up the beta customers and then they’ll go live shortly.

And then we’ll have the results from beta.

We are charging a nominal fee for the beta customers. So they’re serious – customers to be a part of it. The interesting thing about the coupon product is, it’s delivering content. So there’s some of these cases where it’s pure out couponing. And there are some cases where they want to use it for just segmenting a customer and giving them a different message, like a welcome message or a different experience.

And the interesting thing is that it’s the same market or buyer who uses our chat product. So they’ve been saying to us, look, you’re monitoring all of our traffic and yet we can only touch 2% with chat, why don’t you give us other things to touch the other parts (inaudible) one customer Jerry Rig the proactive window, the invitation window to just be coupons and one of the large big box retailers. And so from that, that’s how we came to the conclusion of let’s put this product out in the market, leveraging what they’re already using, so it’s fairly exciting.

Richard Fetyko – Merriman Capital

All right, thanks. That’s all I had.

Operator

Our next question will come from Brad Whitt, Gleacher.

Brad Whitt – Gleacher

Hey, guys. Thanks for taking my questions. Tim, did you have a CapEx number for the quarter?

Tim Bixby

About $2 million, which takes us to 8 million for the full year.

Brad Whitt – Gleacher

Okay. And would you – it looks like your free cash flow is lagging your adjusted net income, how would you expect that to trend moving forward?

Tim Bixby

It should sink on annual basis with this year. It tends to be back loaded in the year. We’ve seen that pattern for a couple of years, but overall the full year number should kind of track to what we saw in 2010, I think the ratios are pretty accurate.

Brad Whitt – Gleacher

Okay. And Rob, the coupon solution sounds a lot like a product that I actually thought you already had. A couple years ago, you used to talk about it. I believe there was a telco in Canada that was doing something like that. Can you just explain to us the differences or whether that product just to get off the ground, couple of years ago?

Robert LoCascio

Yeah. Couple of years ago, we tried to – without using really the rules in intelligence of taking the invitations and making them something of content base system, but we really never developed it out, because part of it we’re very focused on the product chat, from a sales guy’s perspective, they found, look, that’s a low-hanging fruit and that was the greatest opportunity. Today, what’s happening is because we penetrated a lot of large customers.

Now, when you even look at the sales guys, they’re saying, okay, there is opportunity in here now. I penetrate a customer, I’ve expanded the chat, now I want another offering to go beyond that and our customers also want that offering. So I think part of it was probably timing. Part of it was building out the product to have all the features that you need to deliver content. And those are things that we didn’t have in our chat product, which we have today.

Like one of those things is frequency cap. So we can say when somebody hits the website, give him a coupon twice, maybe they see the coupon and go to – they turn to a page, it goes away. Okay, show it to them twice – don’t show it to them four times. In the chat product, an invitation goes out, it’s out and it stays there. And so these are things that they wanted and things that we had to build out, so that’s what we’ve done.

Brad Whitt – Gleacher

Okay. That’s helpful. And, Tim, it sounds like your attrition did well in the fourth quarter. Is that the kind of the rates you’re assuming going forward in your fiscal year ‘11 guidance?

Tim Bixby

Yeah, we’re assuming no real change versus those rates, they actually are a little bit better than that, so far in the first quarter but the guidance is built assuming that they’ll track as they have historically.

Brad Whitt – Gleacher

Okay. And also looking at your – the AR, is there anything that has changed in your billing cycle? Are you still primarily billing monthly, quarterly – how do you normally bill in your customers now?

Tim Bixby

Yeah, it’s – the vast majority are billed monthly. We have a small number of accounts with relatively larger dollar amounts that pay quarterly and a couple that pay a year in advance, but those amounts are in aggregate are relatively small.

Brad Whitt – Gleacher

Okay. That’s all I have. Thanks for taking my questions.

Tim Bixby

Thanks, Brad.

Operator

Your next question will come from Jeff Verney, Craig Hallum.

Jeff Verney – Craig Hallum

Several questions. First, maybe, Tim, can you just – on the pay for performance, in terms of building out the model, how have you modeled the go-forward quarter for pay for performance and the year, in two respects, maybe for the year just in a percent of revenues, but maybe more qualitatively, it didn’t meet your expectations in Q4. How do you build an outlook for Q1?

Tim Bixby

Well, I think we’re certainly factoring in Q4. But remember the overall trend for 2010 was well ahead of our expectations. So Q4 isolation we got a little ahead with the forecast, but the full year we’ll end up – we probably ended up 20% or 15% ahead of our expectations from the beginning of the year.

So it is kind of following or actually exceeding our expectations to that extent when you look at the full year.

In 2011, we guide for the year as we have I think previous quarters, which is we assume we’re a little more conservative on the upside, because that’s where PFP can really over-deliver. And on the downside, sort of we have a decent amount of visibility in line with our core business. So surprises will be unlikely on the downside and a little more likely than traditional models on the upside, that’s kind of how we built it in for rest of the year.

Jeff Verney – Craig Hallum

Do you have in mind the percent of revenues?

Tim Bixby

I think it will be steady or slightly up. It shouldn’t decline unless we have a sort of unexpected revenue upside elsewhere in the business, then it could stay steady, but overall I think this 17% – 18, 19, 20 is probably as high, it would get without absolutely any other major changes in the business.

Jeff Verney – Craig Hallum

Okay. And then on the consumer side you call that it was in – around EBITDA improvement. As it relates to the top line, just help me get a sense of what you are thinking in ‘11 for the consumer business. It looks likes this year, the year over year growth decelerated as you progress through the year into Q4. Just give your comment on maybe revenue in Q4 relative to expectations for consumer, but maybe if you could touch on that as well as your thoughts for ‘11 in terms of growth there.

Robert LoCascio

We were modeling a little growth – right now we said that’s – it’ll probably be flat, because we’re optimizing for cash flow in that business right now. They do have some opportunities, but we basically set out our goal to optimize for generating more cash. That business pretty much is driven on FCM and driving leads. So if you cut back on your spelling in FCM, then there is going to be direct impact on growth. But, like I said we’ve decided let’s optimize for cash flow in that business and give it a little more breathing room and let it be accretive to the business. And that’s kind of the goal right now.

Jeff Verney – Craig Hallum

What would drive that – a change in that strategy in terms of convincing you it’s worth investing more there?

Robert LoCascio

They are working out some interesting things about integrating the actual platform and taking the platform and allowing third parties use that. So there are something we are working on, but I got to see it and you know our strategy is optimized there. And just –

Jeff Verney – Craig Hallum

Okay. Last one, I will let somebody else jump on the – just in terms of the leverage last year, was that a heavy investment, your yearly ramp sales among other things. This year, you are guiding to similar conditions as you look out on your longer-term modeling, how do you think about the expansion of margins over the next two three years.

Robert LoCascio

It’s interesting. I get obviously asked this question all the time. And when I look at our margins today, we have the best margins in software as a service industry. And we know those are strong and healthy and we also want to grow our business as much as we can, because there’s a great opportunity especially in the intelligence data space. And so it’s an interesting question. As I’ve said to other investors, I want to maintain margins, we don’t want to – and some companies have done this. They’ve decelerated margins and they take and they use that investment. As a company, we want to do something different. So we want to maintain the margins we have today and we want to go for it.

And we want to go for a bigger possibility of building a much bigger company higher growth rates. So I think we’re taking, I think the most balanced approach and it’s a better approach than any one has out there. I’ve seen SaaS companies – our growth rate take it down to 5% operating margins and everyone’s like okay, that’s fine. We’ve guaranteed very high operating margins and we’re going to maintain them. But I also want to take this company and we are – I think really at the beginning of something great.

And if you look at all the data, all the intelligence, all these 8,500 customers we’ve only started really I think getting into opportunities and we have one product chat, and we have some voice that touches 2% of that traffic. So that’s kind of the philosophy we have today it could change. If we say wow! We’re just – we’re taking growth rates up at another level and as a company we don’t need the money, we’ll put it back in. But today we want to maintain our operating margins, that’s the most important thing.

Jeff Verney – Craig Hallum

Got it. Thanks.

Operator

Your next question will come from Michael Latimore on Northland Capital.

Michael Latimore – Northland Capital

Thanks. Hey, just on the customers those who are large up sell. You said that they, obviously had a large order but they also added PFP was – I guess was most of the – I imagine most of the order was in under your standard pricing model, and the PFP is a small part of their new initiatives?

Robert LoCascio

PFP is in all in the future. So we’ll all be Q1, Q2 and forward and up sell was Q4 event.

Michael Latimore – Northland Capital

And that customer – do you envision the PFP segment of that business, a large segment of their revenue streams or is that going to be kind of a small minority?

Robert LoCascio

I think it will increase probably like the other PFPs. This is another telco that has new product, that they’re selling and it’s kind of similar to other PFPs and other products from our telcos. And that probably could follow some more suits to some of our other large PFP. So I think it is a pretty interesting opportunity for us.

Michael Latimore – Northland Capital

Okay, great. And then, historically, you’ve talked about business intelligence applications is being the revenue product area. I mean, now looking at all the transcripts so forth, is that something you’re going to have this year as well.

Robert LoCascio

Yes, so we’re actually out right now. Putting these types of products to our customers, some with third parties, some internal, but yeah, we’re going to go after this portion of the data. The date is when you read these transcripts and we have 10 million a month. And as Tim said, we got 1.1 billion sessions that we monitor also visitors. When you combine this data and you look at behavior and we monitoring the behavior of consumers on the Internet, what products they’re looking at, what keywords they came from, how much they’re spending on a site basis. It’s an extraordinary amount of data and it has a lot of intelligence. And so, we are really focused now on shifting this company to being known as a data intelligence company that has products like chat that drive more data and more intelligence and more conversion, more usage of that data intelligence. So that’s the strategy that we’re going after today.

Michael Latimore – Northland Capital

Yeah. And just on the – in the fourth quarter results, gross margin was down a little bit sequentially, was there some incremental hosting investments there and also G&A was up a fair amount sequentially? Was there any kind of one-time items there?

Robert LoCascio

In the hosting, it can’t be sort of chunky, I mean we were kind of finalizing the last steps on the UK expansion that where most of the implementation happened at the beginning of the year, but that was the primary driver of the hosting increase. We would expect the gross margin to be fairly steady state going forward with some potential for improvement. G&A, one-timer, we had a one-time expense related to severance costs for myself. And so that is something that won’t recur in the first quarter, so there is a little bit of a spike for that.

Michael Latimore – Northland Capital

And then just last question, you may have given it. But what’s the gap between enterprise and mid-market and SMB in terms of revenues?

Robert LoCascio

We don’t give that exact breakdown, but it’s in line with what we’ve seen historically. We don’t give that exact number, but it still sort of follows the two-thirds enterprise and midmarket, one-third small-business break down.

Michael Latimore – Northland Capital

Yeah. Okay. Thank you.

Operator

Your next question will come from Craig Nankervis, First Analysis.

Craig Nankervis – Craig Nankervis

... much. Good afternoon. Congratulations on the great bookings results. I wonder if we could start just on sort of the sequential performance in Q4 versus the year-ago sequential performance, maybe particularly on the enterprise side. You had such a big jump in Q4 ‘09 from Q3 and you know that jump was maybe half of that or so in this quarter. Is there any other common charge we beyond what we proved so far that sheds light on the different ways the two Q4s played out?

Robert LoCascio

Well, it was – there was a difference. It was probably more like 70 or 75%. So it was a little bit smaller. A year ago, it was an extraordinary jump, the PFP customer. One customer really expanded and simultaneously a really strong holiday season hit, at the same time with some unique products were available in the market, a lot of really positive things happened simultaneously a year ago. I think this year I think probably reflected what we’ve seen in other years, which is really strong among the strongest of the year, but the year-on-year comparison was a little tougher, because of a year ago.

Craig Nankervis – Craig Nankervis

And then can you just review how the head count – the hires in 2010 versus your original plan in 2010? Where that came out? Did you meet your goal or just can you review where you came out with that please?

Robert LoCascio

We didn’t meet our goal, so we set out to hire more people. And then we cut that back about midway through, so about 30%. We shaved off, what we’re supposed to hire and plan, so there is a reality to it. Even we have a plan now, we have some hires in for January and we’re not there yet. So it’s hard to hire good people and we also have to backfill people that are leaving. So I’m not sure if it’s a traditional metric yet, but we came up about 30% because we said we don’t want to shut these people and we don’t need them right now, and we wanted to sort of maximize for the bottom line and also for what we think would be good for the business.

Craig Nankervis – Craig Nankervis

And then, Rob, well, I have you. On the new products, the new product delivery plan for this year: at first after hearing your prepared remarks, I sort of got the impression that you’re planning to come to market to make generally available essentially one product line or one product capability, which is the couponing. But now I hear based on the previous question, you’re also likely to come to market with some chat transcripting analytics. So – and my question is what are the products, how many products, new products whatever type they may be, do you plan to be delivering by the end of this year?

Robert LoCascio

That’s a good question. So there are what I’ll call core products and then there is also like the couponing product is important, because today we know one of the limitations on taking the traffic and then engaging it is a human being, and chat you have to have a human being. And there is a limitation to the types of products that we can go after. Some products – margin to put a human being in it, they may not be able to be staffed. So that was one part, so we want to solve that one with use the engine to deliver other things that don’t need a human being. Okay, that’s a big that is big 50% of the other the challenge of a human being, being involved with the chat.

The other things are called potentially small, we think they are small incremental revenues and some of those like the transcript, there’s some other data products we’re looking at, there’s partner products with mobile and there is a social integration with Twitter now. All those things are bringing incremental revenue, but I think they are a step below these two cores which one is engage chat, engage non-chat, it’s very binary. And then the other ones are take the data and enhance it and do interesting things with it.

So I could think those are smaller portions and they may only be good for the four or 500 large customers we have in mid-market customers versus the base of 8,500, where these other two products will go after 8,500.

Craig Nankervis – Craig Nankervis

Okay. But the products for the smaller portion of your customers, your largest customers, they will potentially see multiple new products available this year.

Tim Bixby

Exactly. And what – if I look at what’s happening today, if you’re a customer of ours, we start to go out about two weeks ago. There is one group that’s going out and talking about intelligence and transcripts. And how we can give you better marketing intelligence. There’s another group that’s going out run by a former person who comes from salesforce.com and runs our apex change and he’s out there with partners and saying what’s your mobile strategy, what is your social strategy, because we’ve got partners that can enhance that with things that they build on top of the, on the platform, so those are the two things.

Then we have another group that’s basically looking at our chat process and say that things is really taking it, it continues to grow at a nice rate, but can we enhance it? And so, we have someone who’s rightly focused on getting more put through on chats so we can increase the amount of chat volume, which should drive more revenue.

So there’s like – there’s these street buckets right and enhance the core and let’s do more at the core on chat, take the data that’s coming off of it and build products and then what if third parties com connectors which are going to take real-time and enhanced of your website social, mobile, we have an integration with the video provided to drive videos on your website for explaining about products, so that’s the three buckets right now.

Craig Nankervis – Craig Nankervis

Okay, all right. I appreciate you taking us through that. And then, I guess maybe there is no new news here, but just to confirm that there is no –there is no update on your offering on Tim’s transition on the CFO front, is that right, there is no comment whatsoever?

Robert LoCascio

Yeah. The only comment is where we have a retained search firm, one of the big ones. We’ve started to see candidates; Tim’s involved with that, including obviously numerous people in the company. And so it’s I think going as expected.

Craig Nankervis – Craig Nankervis

So does that mean the timeline is unchanged versus previously as far as you can tell?

Robert LoCascio

Yeah. Yeah, timeline is unchanged.

Craig Nankervis – Craig Nankervis

Thank you very much.

Operator

Your next question will come from Jay Freedman, Crystal Rock. Mr. Freedman, your line is open.

Jay Freedman – Crystal Rock

Hi, can you hear me okay?

Robert LoCascio

Yes.

Jay Freedman – Crystal Rock

Thanks for taking the question. Can you expand a little bit more – or I’m going to ask another question related to the data test, how many – how broad do you expect the beta to be? How long do you think it’s likely to go? And then I have another follow-up to that?

Robert LoCascio

We’re going to put 10 to 15 customers in beta of the couponing product. We’re using the word couponing, so everyone understands it. It can do other things besides couponing, but let’s call it the couponing product. So put 10 to 15 customers in there from each of three segments, mid-market, small business and enterprise, then we’ll go through I would expect about a 30-day to 60-day period with them to optimize for the results that we saw in alpha. The other part of it that we’re gathering is there is other used cases beyond couponing. And so we’re getting all that feedback that goes back to the product group so they can enhance that the offering around what other things they may want to do with it. And so that’s the first part of it.

Jay Freedman – Crystal Rock

What percentage of clients do you think that might be of potential interest, it seems obviously more like retail product and customer service product?

Robert LoCascio

No, I think it’s a broad group of customers that can use it. Look our data in our intelligence drives a very high conversion rates for chat and they know that because that’s why they pay us a lot of money.

And they want to do other things with those customers. The challenge right now and we all know it, when I arrive at a website today as a consumer, I may have a lot of money to spend, but I’m treated equally to someone who may not have a lot of money to spend. And it’s a very frustrating thing from a consumer’s perceptive because you want to be treated differently. And what we’re now – what we’ve been doing is really empowering the site to treat people, specific types of people about 2% of the traffic differently, and hold their hand and get them over the line to buy.

This allows the site really to say, okay, what are the people do we want to touch, I can give this person a hello, a personal hello, I can give this person a dollar coupon, I can give this person $0.50 off. And all the data intelligence we captured, which is, hey, person has been here before. This person came from this very valuable keyword. This person has a geo-location from New York. This person has been on a competitor site, because we can see the last referral URL, which could be a competitor’s URL and all of that allows now the site to be empowered to say let met treat somebody differently. So, it’s – I won’t say it’s for really we’re going out to the base and we’ll see where we go – we will introduce to the base.

Jay Freedman – Crystal Rock

The value, you add when on existing product is relatively easy to measure. This feels like it’s going to be somewhat more difficult to measure. Can you step back and take me out a year or two and say, yes, if works? Is this going to double your value to a client or triple your value to a client or make it 20% more?

Robert LoCascio

Triples it, that’s my goal. No, I mean...

Jay Freedman – Crystal Rock

How are you going to price it?

Robert LoCascio

Okay. So we’re going to price it on a – there is a base fee and then there is a more of a performance based model like a CPM, a CPC model. So like Pay-for-Performance, these are really good models that are aligned with our customer, we can capture greater value long-term. And these are marketing conversion products. So that’s where we’re going to – that’s the pricing model that will go out on the product.

Jay Freedman – Crystal Rock

So, as you put pencil to white piece of paper, do you think this has an opportunity to be as big or significantly larger than your existing business?

Robert LoCascio

I – we believe when – it’s obvious, obviously we talked to our customers about this. When there is no human involved, so if you don’t have labor, they can offer it to everybody if they want to. So the cost to them in offering and it’s just like a marketing campaign in essence, when they’re buying keywords on Goggle, they can offer the keyword, they can offer an advertisement to everyone, but they got to pay for that click or on that network they got to pay for view on a CPM basis.

So, they know – they can send it out to everyone, they’re going to pay us for. So they’re going to be have to be very targeted with the product and smart with product when they use it only targeted some customers that they can get value.

The good thing is our engine, our engine takes out a lot of a guessing work, a lot of the guesswork we are segmenting already. Every 100% of the consumers on the website actually get scored by us. So everyone gets a score and 10 out of 10s gets the chat, and maybe the 9 out of 10s gets a coupon, the 8 out of 10 gets a different coupon and the 1 out of 10s get just a welcome page. And so that’s the unique thing. Most of the systems that people are using don’t have the intelligent data on them. It’s like you can A, B test something, I can give someone landing page, and I give some one another landing page, but truly segmenting customers based on the behavior and targeting for conversion is what makes us unique.

Jay Freedman – Crystal Rock

It sounds a lot like they’re predictive analytics we’ve been hearing a lot about. Are you doing all of this internally or are you using any outside companies to help you?

Robert LoCascio

Yeah. We are predictive analytics that we have built, so we’ve got two sets of analytics. One is, we’ve got predictive analytics where all the data comes in, and actually real time it builds the rules on the fly. And that’s – we already have that obviously in our system, it’s driving our chat. Then you can manually set up based on the data your own sets of rules, and that’s the same with this product. We are doing some interesting stuff, where we’re going to do in the interface of the product is almost the use cases. So instead of the predictive analytics just rolling out, you can say like, one use case that we know is backing out of shopping carts, so it’s like back out of a shopping card, definitely give them this. So you can say, backing off a shopping card has been here before has a product about $500, (inaudible) given definitely coupon. So we’re building a web based interface, it’s a lot easier-to-use.

Jay Freedman – Crystal Rock

And one last one, sorry, meaningful revenue contribution should be expected later in the year?

Robert LoCascio

Right now we’re not baking anything into the guidance. What we’ve given here is really our – it’s our core chat business, which is healthy and doing great. And once we get through the betas, we’ll start modeling revenue, so we don’t want to put anything in the model with hope. We only want to put in the model where we think we can deliver based on what we know.

Jay Freedman – Crystal Rock

Okay. But just from the timing you suggested, it feels like the middle of the year is when you would hope to have something to start going out more broadly.

Tim Bixby

Yeah, on the coupon product, yeah. And the other ones, we’re starting now.

Jay Freedman – Crystal Rock

Okay, super. Thank you very much for taking the questions.

Tim Bixby

Thank you.

Operator

Your next question will come from Mike Latimore, North Capital.

Michael Latimore – North Capital

In the fourth quarter, were there over fees or they similar to prior fourth-quarter contributions?

Robert LoCascio

Yes, not a big difference, not really as much of a drive of variability as they used to be in earlier years for the company. I think –

Michael Latimore – North Capital

And then on the small business market, is there anything that you’re focused on there to drive growth in the small business market this year?

Robert LoCascio

Yeah. I think we’re really focused on partners and integration, and we’re seeing both mid-market and small business – more of a focus on combinations of products, and so I think that’s an area where were – it’s not just small business, actually we’re going to bring across the board where we’re getting a little more pick up there. But that’s really a good intermediate business that keeps out all of the other smaller players from getting any more traction, and we do very well, it’s growing nicely. But that’s more of a higher margin and slightly slower growth business, and we’re managing it.

Michael Latimore – North Capital

I guess the last just on, you own a number of large retailers at the end of 2009, any update on kind of new Big Box Retailers as an opportunity?

Robert LoCascio

We picked up one specialty retailer in the fourth quarter, sort of a smaller one, not quite as big as those. But we’re seeing some really nice movement with some new applications with Home Depot. We picked up an online retailer, clothing retailer that you’re probably familiar with. So there’s still a couple of 800-pound grill is out there that we’re working on, but I think we’re making good progress in vertical overall.

Tim Bixby

It’s still around – we need – Amazon. We got to get Amazon thus by – so this is – we start to list it, there’s still fair amount of customers out there to go after so.

Michael Latimore – Northland Capital

Okay, fair enough. Thanks.

Robert LoCascio

Thanks, Michael.

Operator

Your next question will come from (inaudible).

Unidentified Participant

That’s all just answered. Thanks.

Tim Bixby

Okay. Thank you.

Operator

And at this time there are no further questions.

Robert LoCascio

Thank you, everyone. We will see you next quarter.

Operator

And this concludes the call. You may disconnect.

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