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LivePerson Inc. (NASDAQ:LPSN)

Q1 2011 Earnings Call

May 2, 2011 5:00 pm ET

Executives

Robert LoCascio – CEO

Tim Bixby – President and CFO

Analysts

Richard Baldry – Signal Hill Group LLC

Nathan Schneiderman – Roth Capital

Richard Fetyko – Merriman Curham Ford

Brad Whitt – Gleacher & Company

Mike Latimore – Northland Securities

Craig Nankervis – First Analysis

Jeff Van Rhee – Craig-Hallum Capital

Operator

Good evening. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the LivePerson First Quarter 2011 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to present your presenters, Robert LoCascio, Chief Executive Officer and Tim Bixby, President and Chief Financial Officer. Mr. Bixby, you may begin your conference.

Tim Bixby

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

These statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. 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 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 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 and talking about the company’s financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the investor relation section of our website.

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

Robert LoCascio

Thanks, Tim. Good afternoon, everyone and thank you for joining us. I'm happy to report that our business had a very strong quarter. We generated $30.4 million in revenue, which is a 1% increase from the prior quarter and a 20% increase from the prior year. Earnings came in better than our guidance with a record EBITDA of $0.16 per share and adjusted net income of $0.09 per share.

Before I review the details of our ongoing operations and new areas of potential growth, I want to update you on our overall strategy. 2010 was a transformation year for LivePerson as we reexamined our products, processes and values. The entire company came together to identify our core values and establish a common mission that would guide our decisions and strengthen our value proposition in the marketplace.

Our mission is to create meaningful connections between businesses and their online customers. This is something we have been doing since the company was founded and is one of the main drivers of our success.

Today, our proprietary [ph] chat helps 8,500 companies make meaningful connections with their customers in a way that delivers significant value to their business by increasing conversion rates on their website and dramatically increasing customer satisfaction rates. Our success to date has been driven by our leadership in intelligent real-time chat, which were created by combining chat with a sophisticated behavioral targeting engine.

Last year, we began to invest in ways to leverage our leadership in intelligent chat and expand it into new products. Our behavior then processes enormous amount of data near 100% of the visitors on our customers' website. Though, we process and analyze all of this traffic, chat is typically used by less than 2% of these visitors.

We have the opportunity to engage in much greater portion of website visitors beyond those in need of chat assistance through a broader set of engagement tools. Our goal now is to leverage our behavioral intelligence and data capabilities and provide a platform that will enable companies to intelligently gauge their consumers wherever and however they want to connect in the cloud whether it’s on or off the website and with or beyond chat.

Today's customer is a connected customer and companies need to be able to interact in real-time with their customers on mobile devices, social networking sites and on their own website in a more holistic and unified way. Our goal now is to provide the technology to help engage the connect customer in real-time. As a company, we have identified several priorities that guide our business decision and will help us achieve the strategic goal of providing a platform for intelligent engagement.

Our key priority is to keep increase the value of each monthly visitor we monitor. As I mentioned, we only touch about 2% of all the visitors on our customers' websites. So both engage and generate value from a broader set of visitors beyond the 2% through chat. To accomplish this, we are working to create other products and make our behavioral intelligence available to third-parties so they can build applications to help our customers engage more consumers on their website and through other channels in new and innovative ways.

The next priority is to invest in intelligent real-time products. Our ability to process and analyze hundreds and millions of unique visitors per month and tens and millions of chats per month in a secure and reliable way is one of our greatest assets.

Turning visitors into buyers can only be effectively done in real-time. And we tend to provide the strongest platform, the best set of tools for real-time intelligent data driven engagement.

The next priority is in delivering our products in a more frictionless way. In order to scale our goals to an even greater degree globally and into new marketplaces, we will continue to deliver our products in the cloud with the goal of increasing ease of distribution deployment and driving greater operating leverage on our resources.

The last priority ties into our mission. Continue to have our people provide meaningful connections with our customers in order to ensure the strength of our overall business and our recurring revenue model.

As our company has grown, we now play key roles in expert to our customers and how they can drive more value in higher conversions on their website. We will continue to leverage this expertise as we roll out new products and partner offerings and provide our customers with the personal connection that they need in order to be successful.

I want now to move from our strategic goals to speaking about some of the things we have been doing with our products and customers in the quarter. As I mentioned before, this year we are focused on delivering a set of new intelligent engagement products to our customers.

We're already seeing some new, exciting results from our recent activity in Q1. We are answering the Beta phase for LP marketed products and are making good progress as we have signed four large customers for paid Beta tests, we expect to have a few more signed shortly.

Healthy market is an application that delivers personalized contents like coupons to an online visitor. And our goal is to enable our customers to reach and monetize a much larger portion of visitors hopefully, well beyond the 2% reached through chat by leveraging current code and rules on sites with no agent labor required.

It was deployed in alpha phase on our consumer website in the fourth quarter and demonstrate double-digit conversion lift meaning we observed more than 60% lift in conversion improvement with no decrease on average order value.

We're on track with our rollout plan that we outlined last call as we are embedded for the second quarter, and we will release the product into GA in the second half of the year.

With the release of our platform, we developed a set of APIs, enabled third parties to build applications and leverage our real-time data and intelligence to deliver a new set of products to our customers. We recently started our developer program as Q1 – as Q1, we have about 1,200 developers registered in our developer community. More than a dozen customers are now using paid third-party apps or build their own apps to expand their intelligent engagement capabilities to other channels of communication such as mobile devices and social media.

One such partner is Demandbase, a provider of website conversion optimization solutions. Demandbase provides visitor intelligence capabilities to our customers, chat agents so they can see valuable company level data about the consumers they are chatting with.

Additionally, customers can write rules in our intelligence later to further segment users based on this data. Our internal labs team has also been working on developing applications off the platform and are seeing some early successes. They built some very interesting innovations to support our core products and launch a tool in March called analytics-driven engagement or ADE.

ADE creates an updates the business rules using the customer's web analytics data captured by Google analytics and in the future amateur [ph] to drive collective chat invitations. ADE improves invitation acceptance rates and makes the chat program more dynamic by refreshing business rules regularly to reflect actual visitor behavior.

This innovation originated from someone who works in our small business professional services team, and we have 11 customers already paying to use it. And we see a lot of interest, especially in the small business and mid-market segments of our business.

Finally, I would like to mention that we’re in development with the transcript analysis product that we expect to introduce since second half of the year. This product will deliver real-time marketing intelligence from the unstructured information captured from the chat conversations. Some of our big name customers have already expressed high interest in the product.

Now, we talked about the innovations in our products and platform activities, I like to review the performance of our core chat product. Our core business performed very well last quarter. We achieved a high-end of our guidance range with $30.4 million in revenue.

We saw further expense in our customer base with an additional – addition of 12 new enterprise and mid-market customers, all segments of business contribute to the top line growth with revenue from business operations increasing by 22% as compared to the first quarter of 2010.

Overall, revenue for our enterprise business increased 2% over the last quarter and grew 22% as compared to the prior year. We had strong bookings in Q1 totaling $3.7 million. We signed several major financial services organization, a software and information technology services company, had a major upsell of one of the largest makers of security software for computers.

We also expanded with a PFP customer in the teleco space. In Europe, we signed one of the largest independent investor managers in the U.K., expanded with a major teleco company in that region. Mid-market finished the strong part with key customer signings. We expanded with a major retail customers also one of the Beta users for LP marketer.

We signed a deal with major reseller, a leading provider of banking platforms for regional banks and credit unions, where they will offer a chat as part of bundle offering of their core products to the customer base. In our small business, group revenue grew 11% year-over-year from Q1 of 2010 increased 3% from Q4 of 2010.

Average monthly attrition in Q1 ended at 2.2% of revenue which is a 15% improvement over the 2010 average of 2.6%. This is primarily due to improved sales and delivery methodologies of our small business product.

Our small business has been important – has been an important early driver for our platform business as they sold 13 API adapter packs during the quarter. The most common use cases are for extensions of LivePerson core chat offering to our chat API and integration with partner apps.

We're making strong and steady progress in Asia-Pacific market which we just entered last year. Our first and largest customer in the region signed an agreement to increase their total investment in LivePerson and we also signed a large financial service company in the region.

Our consumer business had a very solid quarter and delivered $3.7 million revenue in line with Q4 of 2010. It increased our new customer acquisition in Q1 due to promotional campaigns implemented through a new billing system that was put in place last year. And we expect the consumer business to generate almost $4 million in cash flow this year. So it's definitely now a strong contributor to the overall cash flow of the company.

I would like to now turn to some of the activities that each office is doing in their local community. Building meaningful connections in the communities we live in is very important to our employees and really resonates with our core value of helping others.

Investments we make in our local communities are also driven by our mission of building personal and meaningful relations that we believe will create a positive and lasting impact in the lives of others and our own. We already planned our 11th Annual Sitting NYC event this fall.

Last year, we provided Turkey dinners for over 8,000 families in need and we will be again doing this in Thanksgiving which will be a special day for many local families here in New York. Our London office is gearing up for a big charity event in June, where all proceeds will benefit the Naomi House hospice for which they take care of terminally ill children.

And another project that we're really excited to support is an Israeli Arab diversity of workplace initiative led by the Israeli President, Shimon Peres. Other major U.S. tech companies with offices in Israel are also part of this amazing initiative including Google, Microsoft and IBM.

The idea of being meaningfully connected is a very powerful one and is something that I would like one day to see so our company known for globally. It is a value that we can bring uniquely to the world as a company and as individuals through our products and our relationships.

And finally I want to take a minute to introduce our new CFO, Dan Murphy, who is here today with us for the first time. I'm happy to welcome Dan to the LivePerson family. Dan is an accomplished finance and accounting executive with over 20 years of experience and he brings additional and relevant experience in data intelligence and interactive businesses. He spent most of this career with Thomson Reuters where he led several business including the $1.6 billion sales marketing and services organization.

This is a very exciting time for LivePerson as we continue to make progress expanding our company into some new product areas and as we take hold in creating a culture of meaningful connections. I’d like to especially thank Tim Bixby my good friend and CFO and President of LivePerson for the past 11 years who is with us today for his last call. Through Tim's leadership and dedication LivePerson has come a long way. We’ll really miss him and on behalf of the entire staff of LivePerson we wish you the best of luck.

So now, I would like to turn the call over to Tim who will highlight our financial results. Tim.

Tim Bixby

Thank you so much Rob for the kind words as well. And I would also like it take the opportunity to welcome Dan Murphy to the team, so welcome aboard, Dan.

I am happy to report as Rob did as well, we delivered strong performance in the first quarter hitting our revenue expectations and exceeding our profit guidance. We expanded our developer network and made a good progress against our now product launch timeline. Revenue in the quarter increased 20%as compared to the prior year in what is traditionally the slowest growth quarter due to seasonality for LivePerson.

Our EBITDA margin expanded fully 200 basis points as compared to the fourth quarter, which is great progress and more than 400 basis point versus a year ago to more than 28%, demonstrating the continuing opportunity for leverage that we have in our cost structure. Customer retention continues to be strong at more than 93% for enterprise accounts, up time again exceeded four nines, 99.99% plus while small business attrition rates improved in the quarter.

First quarter revenue increased 1% sequentially to $30.4 million. EBITDA per share for the quarter was $0.16, which is the new high for the company as Rob mentioned. This is an increase of 33% as compared to 12% per share in the first quarter one year ago. First quarter EPS is $0.06 a share up $0.02 per share from the first quarter of 2010 and adjusted net income was likewise up $0.02 per share as compared to a year ago.

Revenue from our business operations as Rob mentioned was 22% higher than the first quarter a year ago and a 2% sequential increase. While revenue from our consumer operations was $3.7 million in line with the prior quarter and up 6% versus the prior year quarter.

Bookings were solid in the quarter, especially given the record level that we achieved for bookings in the fourth quarter at $3.7 million, which is down slightly from the first quarter of 2010. It's important to note that if we normalize bookings by looking at Q4 and Q1 combined, the average booking amount for the quarter – for the combined quarter averages out to about $5 million per quarter, which is 15% above the bookings run rate from Q1 through Q3 of 2010. So it's important to sort of normalize those two quarters to get a real picture of the amount of business that we're bringing in and signing.

We signed 12 new larger clients in the first quarter. We signed 72 total deals including new customers and upsells to existing customers. Our pay per performance pricing models continues to be a solid contributor for revenue in the quarter, generated 17% of total enterprise revenue, this is in line with prior quarters, increasing also nearly 20% as compared to the prior year.

PFP is currently growing at the same right as the core enterprise business but it does have the potential to exceed that rate in the second half of the year as we have seen in the prior couple of years, as we've gotten the PFP program up and running. I’ll now give you a feel for the average selling price for the different types of deals that we provide metrics on. So for all deals combined our average deal size was $52,000 for new customer’s only average selling price was $65,000 these are all annualized figures.

Existing customers only upsell averaged $50,000, proactive sales and marketing deals only $53,000 and customer service deals only about $47,000. So the net of all that is just about all of the business in the quarter was within a fairly tight range, which is sort of an interesting as compared to prior quarters and a good indicator of the strength of the business.

In terms of the breakdown between new and existing customers about 20% of the booked revenue was a result in the quarter of business with new customers and 80% for the balance from existing customer expansions. This is just a slight shift from 10% new, 90% existing in the prior quarter. If we breakdown the booked revenue between sales and service about 80% of the bookings was driven by primarily sales oriented deployments whereas 20% came from customer service, again, just a slight shift from 90%, 10% that we saw in the prior quarter.

Enterprise attrition ended the quarter at about 1.8% per month and does look improved today from that rate in the first part of the second quarter. Attrition by customer account is well less than this as we have seen in the past at about 0.6% per month and small business attrition improved quite a bit, about 15% as rob mentioned.

Our spilt of revenue coming from outside the U.S. remains steady at about 22% of our revenue with the U.K. portion of that being the largest making up about 12% of the total revenue for the company. And our vertical revenue breakdown was essentially unchanged as compared to the prior quarter with financial services at 22% of revenue, telecommunications at 32%, retail at 14%, tech hardware and software combined at about 14% and all other at about 18% and the trend there continues to be a slight shift towards the all other category, which means we're making good progress in the verticals outside of the four largest verticals as the company continues to grow.

If we look at individual customers in terms of the revenue breakdown, we now have 20 customers that are generating revenue to us over the $1 million revenue per year mark. This is up from 16 in the fourth quarter. We have 32 that are above $0.5 million per year this is versus 33 last quarters, so a very minor shift there. And as – in the prior quarter we had one customer over $10 million per year and two above the $5 million run rate and that's in line with what we saw the prior quarter.

The consumer group continue to improve cash flow this quarter, revenue was at – was up to $3.7 million. The driver of the revenue growth versus the prior year was volume primarily. So in the past several quarters when we've experienced growths in revenue in the consumer group, we see it primarily driven by pricing. This quarter we actually saw a nice uptick in the volume of minutes billed as compared to the prior year. The commission rate, which is the portion of the revenue that LivePerson keeps, was up slightly but the main driver was volume.

EBITDA margin for consumers as Rob mentioned is very strong running at about 30% of revenue. Our gross margin overall for the company in the quarter was right around 73%, up just a few basis points versus the prior quarter and the prior year and we expect that to continue roughly at that level in the coming quarters. Total company head count increased from 400 to 72 at the end of the year, to 495 at the end the first quarter and we're right around that level today. Just up a couple heads from the end of March.

We're slightly behind our hiring plan for Q1 for April, but we’ll make up some of that shortfall over the next couple of quarters. The profit guidance – to our guidance in the quarter was driven by slower than planned hiring as we mentioned, as well as less than planned none personnel related spending primarily in the G&A and the sales and marketing areas. R&D is essentially on track in terms of overall spending and overall pace of hiring.

But we did have these favorable variances in the first quarter we expect to offset most of that with greater spending as we bring on planned head count in the three quarters such that our full year profit outlook is essentially unchanged from our guidance from 90 days ago. We ended the quarter with a cash balance of $67.1 million, up from $61.4 million at the end of the first quarter. We had strong cash flow in the quarter from operations somewhat offset by the higher level of receivables and we also had significant cash inflows related to some option exercises in the quarter.

Accounts receivable, metric we’re watching very closely increases as compared to the fourth quarter where we had a very nice result, is running at about 58 days in terms of our DSO metric, at about $19.6 million. This level is a little bit above our target range given the higher proportion of our business with larger accounts and the level of pay per performance revenue that impacts our AR a little bit disproportionally to our revenue. It's important to note however that roughly 90% of our receivables to arrive from blue chip global corporations with very strong payment and credit standings.

Our bad debt risk and profile continues to be very prong with minimal to no bad debt exposure historically. We continue to focus resources on maintaining DSOs in the target range. We also would highlight that our target range and our current range is better than nearly all of the comparable public SaaS leaders that we track. Following we want to give you our first view of guidance for the second quarter and reaffirm the full year guidance.

In the second quarter we expect to see revenue between $31.3 to $32.8 million, we expect EBITDA between $0.13 and $0.15 per share, adjusted net income between $0.06 and $0.08 per share, GAAP, EPS between $0.04 and $0.05 and fully diluted share count of approximately $55.5 million for the quarter. Our full year guidance is changed from the prior quarter. Revenue of $133 to $136 million and EBITDA of $0.60 to $0.63 per share adjusted net income of $0.33 to $0.36 per share. GAAP earns EPS of between $0.20 and $0.22 and fully diluted share account of approximately $56 million.

A couple of other assumptions that we think you’ll find helpful is modeling the business for the rest the year and effective tax rate of about 36%, cash tax rate of the same it was slightly higher than that in the first quarter, but we anticipate that as in past years that will normalize somewhat over the remainder of the year. Capital expenditures unchanged from our prior guidance, we expect to hit about the $8.0, about $8 million level for the year. We expect GAAP gross margin of about 73% which corresponds to a cash gross margin of about $0.4 better, about 77%.

We expect sales and marketing as a percent of revenue to be approximately 31% in Q2 and about 30% for the full year, G&A about 15% of revenue in Q2 and coming down to about 14% for the full year. R&D running consistently we expect to be about 15% of revenue in both second quarter and the full year. Full year depreciation we expect to be $8 million roughly. Full year amortization intangibles just above $1 million and full year stock compensation expense we expect to be about approximately $6 million.

That's it for the operational review. I would also take the opportunity to thank the Board of Directors and the employees and especially Rob for giving me the opportunity for what I think has been an outstanding run of 11 or so years with the company. And we feel we're in great hands working through a transition handing over the financial operations and a great team to Dan Murphy. And we're glad you're all onboard to be with us on the journey. So that covers all of the highlights for the quarter.

And now, we’d like the operator if you can rejoin the call and give instructions for the Q&A, we’d be happy to take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Baldry.

Richard Baldry – Signal Hill Group LLC

Thanks. I was hoping you could expand a little bit on the Beta program for the LP marketer so the types of customers that are the early signed on, what types of scale you think those Betas [ph] will come and sort of, what they're targeting are looking out for, positive results out of those things. Just any more of the Beta, flush it around that. Thanks.

Robert LoCascio

Yeah. There's one big financial software company, big retail company, so it's kind of fits what our general segments are right now and until we go live which we haven't gone live yet. We’ll go live in this quarter with them, I don't have many details on how big they can be, so we just need to get through the Beta [ph], the first part is just sign them up and we're seeing some good traction there across all the segments so.

Richard Baldry – Signal Hill Group LLC

Thanks.

Operator

Your next question comes from the line of Nathan Schneiderman.

Nathan Schneiderman – Roth Capital

Hi, Rob and Tim. Thanks for taking my questions and Dan welcome aboard.

Dan Murphy

Thank you.

Nathan Schneiderman – Roth Capital

I thought actually I’ll just throw one out to Dan. Maybe you could speak with us about your decision to come to the company and what do you see as the biggest maybe low hanging fruit opportunities on the strategic side, as well as the financial side. And to what extent were you involved in the guidance for this quarter?

Robert LoCascio

That’s funny. We told Dan we’re like Dan, don’t talk on the call.

Nathan Schneiderman – Roth Capital

I am sorry.

Robert LoCascio

He’s ready to go so –

Tim Bixby

As far as guidance absolutely none. You know, as far as low hanging fruit I think it's way too early for me to even offer up an opinion, but as far as my backgrounds Thomson Financial Marketing Technology Solutions introductor and you know the things that got me excited about joining are the people, the opportunity and the direction that the business is going. So I’m looking forward to joining Rob and the team and it should be fun.

Nathan Schneiderman – Roth Capital

Okay. Welcome aboard. Back to Rob, I guess assuming that you – you do about the mid-point of the guidance you’ve laid out for the second quarter that would be about $62.5 million – $62 million for the first half the year, I am curious is that slightly below what you had envisioned back when you originally gave guidance for the full year about three months ago or – or not?

And I am just wondering if perhaps we miss modeled the business or the business is off to a little slower start at the beginning of the year than we thought because the guide is a little below consensus on revenue for Q2.

Robert LoCascio

Yes it’s sort of like the way we always see the business, which is a little bit lower in the first half and you know things pick up in the second half. So, it’s pretty much within the range. So, you know, that’s how we look at it right now.

Nathan Schneiderman – Roth Capital

Okay. A question on the Verizon relationship, in particular, and there was a disclosure in the press release that you had some existing customer business with Verizon. I was just curious if that was incremental to the discussion you had last quarter, and maybe if you could speak to kind of the nature of the increased business there and is it P for P or is it something else?

Robert LoCascio

Yes. It was an upsell. You know, we’re looking at expanding in the pay-for-performance area with them right now, but, you know, we are – we think obviously they’re a very big customer, very big telco but it was just an upsell from last quarter. So they are doing well right now.

Nathan Schneiderman – Roth Capital

Okay. Thank you very much.

Operator

And your next question comes from the line of Richard Fetyko.

Richard Fetyko – Merriman Curham Ford

Good evening, guys. Just to expand on the prior calls conversation regarding guidance. You know at $6.2 million bookings in the fourth quarter I would have thought at that combined with some strong bookings in the prior quarter would have, at some point, flown through the first half 2011 revenue and it doesn’t seem like a big lift in some of the growth rates or – or at least in dollar terms certainly.

I am just curious if there is a bigger lag between bookings and billings than historically or your tranche seems to be stable so you are not churning off more customers or revenues than in the past. So I am just curious if there is anything changed there and the bookings level in the first quarter seems a little weakfish relative to the last seven quarters seems lower since basically the prior six quarters.

Just curious if – I mean I know there is some lumpiness in the bookings, but do you expect the bookings to ramp up higher considering you’ve added more sales people in the last 12-months?

Robert LoCascio

So I’ll take a shot at several of those. In terms of the guidance shake-out for the course of the year I think it’s similar what we have seen in prior years which is a stronger second half than the first half and it’s sort of holding steady. A couple of notes on the bookings and the guidance and how they interact, so our bookings, as you recall, only represents enterprise and mid-market booked agreements, booked contracts that are contractual.

PFP is not captured as part of that because that’s performance driven. Small business is not captured there because that kind of ebbs and flows within the course of business, but is not long-term contractually driven. And then the consumer business, what we are seeing is, though year-on-year growth is quite steady we are sort of seeing that flat to slightly up in Q1 and Q2, and so the net of all that is I think is you get this what appears to be slightly, you know, lesser increase going into the second quarter, but none of those are really anomalies.

It’s more of just how – sort of the nature of how our bookings are captured between the different revenue streams. Enterprise attrition I think was – it was fairly low in Q4, a little bit higher in Q1. That provides a little bit of an offset. And then the overall bookings transition, I think, a couple deals especially the largest deal we did in Q4 better moved to Q1 we would be here talking about, you know, $5 million average booking rate, which I think is quite strong.

So you’re right in that the lumpiness can drive the quarters around a little bit.

Richard Fetyko – Merriman Curham Ford

Thanks. If we sort of look at the full year guidance of $133 million to $136 million in revenues, I mean is there – considering the first half the year what could happen or needs to happen for you to hit the high end of the revenue guidance?

Tim Bixby

I think the variance in the range is really driven by the usual upside performers. So, if we are able to generate from new products and revenue right now we’re really not banking on that. We don’t have that any of that baked into the guidance that would certainly push us towards the higher end of the range.

PFP performance is always a potential for more variable up performance in Q3 and Q4, and we are modeling the consumer business essentially flat to slightly up for the year, and so if we replicate prior years where we have seen, you know, 5% to 15% sequential growth in that business that would definitely push us to the top end of that range.

There’s definitely three or four levers that would move us to the top.

Richard Fetyko – Merriman Curham Ford

Got you. Thanks, guys.

Operator

And your next question comes from the line of Brad Whitt.

Brad Whitt – Gleacher & Company

Hey guys. Tim, you commented on this, but can you just give us – remind us of your definition of bookings?

Tim Bixby

Yeah. Bookings are contracts that are signed, which means our enterprise customers and our mid-market customers sign long-term agreements, one-year terms or greater, and we annualize the monthly recurring revenue represented in those deals. And we include both upsells, incremental revenue from an upsell, as well as a 100% of the revenue from a new – a new deal.

If we have a recurring revenue renewal where there’s no upsell, no incremental revenue, we would count that as zero in the bookings number.

Brad Whitt – Gleacher & Company

Okay. I think that’s – that’s a big difference from a lot of companies because you’re not counting just a regular renewal – if there’s no upsell involved.

Tim Bixby

Yes. There are – there are some companies that will count that but because – we don’t.

Brad Whitt – Gleacher & Company

Okay.

Robert LoCascio

Yes. We don’t.

Brad Whitt – Gleacher & Company

Okay. Can you give us some more color looking all these accounts receivable, looks like it’s up 55% year-over-year and almost 20% sequentially, which is obviously much faster than your revenue growth. Can you help us understand that a little better?

Tim Bixby

Yes. Quarter to quarter it’s – you know we had a significant drop from Q3 to Q4, so, I think again if we normalize it, it is – it is certainly increased as two things have increased. One, a greater proportion of our revenue driven by large sort of blue chip enterprise accounts as well as by pay-for-performance.

So larger companies pay us a lot more money. We’ve got two customers of $5 million a year, one of those $10 million a year. On the downside, they pay more slowly and we have longer collection terms – longer receivable terms with those customers. Pay-for-performance is the second item because we book – recognize pay-for-performance revenue net of costs that go through to the labor partners, our receivables can overstate what that number is, and as pay-for-performance has grown that number has gone up.

So the number has increased, it’s increased for reasons that are good and tied to the growth of the business and are not tied to any greater concern about the collectability of those receivables.

Brad Whitt – Gleacher & Company

Okay. And just so – clear the – so these three large customers, one that – two of them that are $5 million run rate and one that’s $10 million customer, are you paying – are those being billed monthly or –

Tim Bixby

Yes.

Brad Whitt – Gleacher & Company

Okay. And then getting back to the – to the revenue acceleration that’s kind of built into the guidance for the second half of the year on a percentage basis it should be comparable what you did last year, but the actual revenue amount would obviously be more because you’re working up a larger base. What is it that’s going to be different in the second half of this year versus last year that’s going to give you that incrementally more revenue? I think – is there more pay-for-performance customers?

Tim Bixby

Yes. I think there’s just – there’s kind of more of everything. So more pay-for-performance customers, a couple more that sort of fall into that high-end category where our largest customers are PFP customer. We’ve got a couple who now – couple more who sort of fall into that category of potential high growers.

We’ve got more business coming from new geographical territories, so more opportunity coming in Western Europe and the Asia-Pacific region. That’s new as compared to a year or two years ago. We’ve got an established mid-market team that’s been in place for a year. A year ago, that team was just getting up and running and was quite, was just getting out of the gate and getting warmed up.

And we have an opportunity with some of the newer products, although we’re not taking that into the guidance, but that certainly is helping with conversations with larger customers, and so there’s some sort of overflow value of that as we go out and try to drive more business in the second half.

Brad Whitt – Gleacher & Company

Okay. Thanks for taking my questions. I appreciate it.

Tim Bixby

Thanks, Brad.

Operator

And your next question comes from the line of Mike Latimore.

Mike Latimore – Northland Securities

Hi. Good evening. What was the final sales headcount at the end of the quarter?

Robert LoCascio

I’m sorry? You broke up a little bit there.

Mike Latimore – Northland Securities

What was the final sales headcount at the end of the quarter?

Robert LoCascio

In terms of the reps it’s unchanged versus last quarter. So it – five mid-market reps and 23 accounting executives and private [ph] candidates.

Mike Latimore – Northland Securities

Okay. And is part of the investments over the next three quarters, are you looking to add more to that headcount?

Robert LoCascio

Yes. Those – both of those headcount lines should increase to now at the end of the year, yes.

Mike Latimore – Northland Securities

And I guess just on the – the bookings growth, again, you know we’re talking kind of 15% bookings growth that you normalize over a couple quarters. You know, it’s a fair amount sort of below the – I think the sales headcount growth – can you help me understand what’s the, sort of, how you think about you know sales headcount growth versus bookings growth?

Robert LoCascio

Well, it’s – again, because bookings only represents a subset of the business, you know, it’s not always going to track exactly, but as new reps sort of ramp up and get the full productivity we would expect those numbers to fall more in line. We are focused on PFP customers in that our largest deal in Q4 was a customer who now may become a strong PFP customer.

So I don’t know that, you know, in any give quarter you will see it exactly map to the sales capacity or the growth in the sales team, but directionally, you know, in the second half we should see them track more closely.

Mike Latimore – Northland Securities

Okay. And then just o on the Verizon addition in the quarter, you know, expanded biz with Verizon, I guess you mentioned around pay-for-performance. I think on the last earnings call you had talked about Verizon in the pay-for-performance realm, are you launching with a new product there or what – can you help me understand the expansion on pay- for-performance there because you had talked about that in the last quarter as well in your guidance?

Robert LoCascio

We’re going after their normal wireless business and then they also have iPhones and other stuff. So we’re just taking the core business what they do today.

Mike Latimore – Northland Securities

Great. And then on the – in terms of the head of sales, I know, you’re looking for some potentially new head of sales. You know I guess any thoughts on the timeframe for that?

Robert LoCascio

We have a – a firm that’s been doing the search and they’re just starting. So, you know, you hope to get it within 90 days, maybe a little longer, but we are just starting the process. So we’ll know shortly.

Mike Latimore – Northland Securities

Great. This is my last question. I know you’re coming out with your couponing service later this year. When will you have something around mobile couponing?

Robert LoCascio

You know, once we get the – we’re looking at mobile across all the products. So we have mobile chat already and so we’re already starting to look at it. I would think this year we would, you know, look to have some sort of offering, but the first thing we want to do is just get the core part out which is just the on-site part and then we will look at the mobile pieces to because most – I think when you look at it our biggest opportunity is still within the website. Our customers are only generating 1%, 2% conversion of their overall traffic, so there is still a huge amount of opportunity within going after website, traffic before you even touch mobile, so.

Mike Latimore – Northland Securities

Got it. Great. Thanks a lot.

Operator

(Operator Instructions). Your next question comes from the line of Craig Nankervis.

Craig Nankervis – First Analysis

Thank you very much. Really, most of my questions have been asked. I guess, just to go back over a couple items on the DSO side. I mean, this is an area that you had specifically been focused on addressing, though, it went the other direction than hoped.

Do we just sort of infer for that – infer from that that it's really very hard to – for you to control that, what is the conclusion on that?

Robert LoCascio

I think the conclusion is, we should – now, that we've got customers that are getting up into over $5 million and we're getting a fair amount of them. I think we should conclude that, maybe, the new normal is a little higher than the old past where we are much more than mid-market small business focused, which is for instance, if you're small business customer you don't pay us, we actually can – we'll pop up the win and shut you down. But if you are late and you're a very large customer, we're not going to pop up onto your operator screens, if you don't pay us we're going to shut you down.

Craig Nankervis – First Analysis

Right.

Robert LoCascio

So, because it's just normal terms of service and they're late and everything, so, I think as we get larger customers, we should assume DSOs may go up more towards the industry average than what we've seen in the past, where it's more of a mid-market small business. That's my guess, but that's the focus now.

Craig Nankervis – First Analysis

Okay. And then just to sort of – can you talk about – well, on the bookings involved and the fact that you had the head of sales sort of leave in the same quarter where we get a little bit lighter bookings, we thought. Can you just talk about where the organization is with the existing sales leadership and the transition there sort of operating without the head of sales? Is there any color that might be reasonable to give us a little insight about the whole sales management side of the organization?

Robert LoCascio

Yeah. First of all, I don't think the bookings number is a reflection of the sales leadership, so and as we have seen in the past, quarter-by-quarter things go up a little bit, they go down a little bit. And, so, I know we're always heroes when things go up and we're not heroes as things go down, but it's-quarter-by-quarter view, so we don't see it as a huge problem and it's definitely not related to any leadership issues.

There has only been four guys that have run the sales teams tactically. There is a head of North America, with actually a head of east and a head of west, in North America, there was head of EMEA [ph] who’s been with us five years, head of North America has been with us for close to five years. We have had a small business. He has been with us for about seven. He just took that over two years ago.

So those guys actually run the day to day of that and then we have a head of mid-market, who used to be our head of marketing and he's been at that role since we fired it up close to two years ago. So those guys run it day to day and the previous head of sales is more looking at strategic opportunities and looking global and International expansion, stuff like that. So, I wouldn't infer anything of the bookings being, something related to a problem in sales.

Craig Nankervis – First Analysis

Thank you for that color and that's all I have.

Operator

And your next question comes from the line of Jeff Van Rhee.

Jeff Van Rhee – Craig-Hallum Capital

Great. Thanks. Just a couple of questions. Maybe, in terms of the revenue guidance, maybe you just touched on here. I know you had said in the last call, very minimal expectations doped in for the new product. At the smallest levels, was there any change in terms of what you built into the guidance this year from those new products?

Robert LoCascio

Not yet. I mean, we want to see a little bit more activity and if I could take a step back for a second, is talking about the new products. Even on the board level, we're – when we run through with the board a couple week ago, I think we're really excited here for a couple of reasons and maybe I can talk a little high level.

One is up until last – the end of last year, we were simply focused on delivering chat as a product and in a very short period of time, we architected our entire software to become a platform, which was a major piece of technology that we did last year and very quickly we're starting to monetize. And I think the interesting part about it is, we went out into the world and we said, we've got this platform, we heard a guy from Salesforce.com who was over at AppExchange and he quickly got out there and people heard about us and we already have 14, 15 deals that are paid on products that never existed, as of a quarter ago.

So, I think that's real exciting. The second part is, we internally, we really are fostering a much more – a different culture of innovation and someone who just, basically is a small business, professional services person came up with an idea for taking Google analytics because he saw a lot of small business customers use Google analytics and said, what if we imported that data into our system, would that provide a better source of data kind with our behavioral data and found yes, it did. It increased quick through rates. So that came out of nowhere and they sold – how many of those did they sell in the quarter, Tim?

Tim Bixby

About 15 of those?

Robert LoCascio

15 of those in the quarter, in one quarter. And then, obviously, we have LP market that's coming out. So, I think the important part of this call, is the foot from being a chat company to being putting a platform for intelligence engagement. I'm hoping to hit the high end of the range and we would like to go beyond that. That was the goal. That was the goal.

And I think we've shown in a very short period of time that we've got new stuff coming you have, although that didn't exist three months ago. So that's the part we're excited about here right now and I just want to align the people on the call and the shareholders with that, too. And I think will provide a bigger future.

Jeff Van Rhee – Craig-Hallum Capital

That's fair. As you touched on the bookings number captures part of the revenue flow but not all of it, but it's the part that at least, with some reasonable ability to measure. As you guys think about the year on the bookings front and you compare it to the revenue growth rate, how should we think about it? Is it safe to be thinking of bookings that we can see essentially tracking in line with revenue growth for the year?

Robert LoCascio

Well, I think you have to combine the bookings with the revenue guidance. The reason, we give revenue guidance and the reason our record on revenue guidance is quite strong, is because we are giving you everything we can, around those pieces that aren’t measured as well.

So we're giving you what we can see in trend lines for small business, in consumer operations and PFP. So, I think you have to sort of kind of triangulate between those two, but our revenue guidance is definitely the stronger support in Q3 and Q4, because we can – you can kind of see where we expect bookings to be.

Jeff Van Rhee – Craig-Hallum Capital

Okay. Two other last questions on the G&A front. Tim, I think you mentioned that there were some non-headcount related expenses that pushed up, obviously, the hiring has gone a little slow but what were the non – the headcount related things that pushed?

Tim Bixby

In two areas. So in G&A, we've upped our investment levels in sort of training and support and for both existing in new employees. Those programs and expenses are – didn't start on January 1, but they are kind of getting up and running late in Q1, will flow for the least of the year.

So that's sort of a general overhead expense that didn't hit fully in Q1. And then in the sales and marketing area, some of the advertising tradeshow type areas, we came in a little bit under budget in that category as well and then the rest were pretty small items.

Jeff Van Rhee – Craig-Hallum Capital

Okay. And then the last one, just on the sales headcount, talks on where you within the year direct repays?

Tim Bixby

Right now, we are kind of in line with our regional goal, which I think was – we can see two or three in each of mid-market and enterprise. So that would put us probably, four or five by year end, but that's when we definitely look and measure each month and each quarter, as we go through the year to see where we think that number should go but right now that's what I would see at year end.

Jeff Van Rhee – Craig-Hallum Capital

Okay. Thank you.

Operator

(Operator Instructions). And there are no further questions. Do you have any closing comments?

Robert LoCascio

Yeah. Thank you for being on the call and I will see you with Dan, on the Q2 call. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.

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