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In keeping with my goal of writing more often, I’ve decided to publish my preliminary research about stocks I have yet to make up my mind about. This is the first time I’m doing so, and this article is about an interesting small-cap stock that came up on my insider buying screen.

LivePerson (NASDAQ:LPSN) is a small software-as-a-service (SaaS) company providing a unique product to web merchants. In ecommerce, a surprisingly high proportion of customers who spend time putting multiple products into their shopping carts end up abandoning the transaction, sometimes because they could not find the answer to the one last nagging question they had before they commit to the purchase.

LivePerson does one thing only, and does it well. Its Timpani software identifies potential leads, initiates a live chat with outsourced agents for screening, and then seamlessly transfers converted customers to in-house sales agent. A record of the entire conversation is kept, and the system integrates with existing CRM software, allowing the new customer’s info to be fed directly into major CRM software.

LivePerson has two versions of the same basic software, Timpani for large corporate customers, and LivePerson Pro for small and medium businesses (SMBs). LivePerson claims that as much as 20-40% of customers identified by its software end up completing the transaction, and that the ROI on its product is spectacular. The pricing structure is a monthly fee, plus a fee per interaction. There are also professional fees for the initial implementation, as well as training, business consulting and analysis.

LivePerson is the largest player in this field, with over 6000 clients (none making up more than 10% of revenues), including Fortune 500 companies such as Microsoft, Intel, Apple and Verizon. Over the years, LivePerson has aggressively acquired its competitors, and the only competitor of note left appears to be Instant Service (with some 300 clients). Note that I do not consider CRM companies like SAP (NYSE:SAP), Oracle (NYSE:ORCL) and RightNow (NASDAQ:RNOW) Technologies to be competitors, since none of the major CRM companies offer a comparable product.

The drawback of this business model is that live chat is labor-intensive, and only large corporations can afford to staff a sales department specifically to cater to web transactions. Accordingly, LivePerson reports that the fastest growth in revenue is occurring with large corporations. Unfortunately for LivePerson, such clients have more stringent data encryption and business analysis needs, and while professional fees from them are higher, some of that is eaten up as labor costs required to service these clients. Take-up rate among SMBs is much lower.

Perhaps in part to solve this problem, LivePerson acquired Kasamba in 2007. Kasamba is an Israel-based website that facilitates live online interactions between its large stable of experts and users. Users who require information that other websites such as Wikipedia cannot provide can turn to the 30,000 experts on Kasamba, and pay a low fee (from 17 cents to $20 per minute) to get individualized answers via chat. Kasamba takes a 30% cut of the fee.

A major stream of revenue appears to be derived from online psychic readings, which have led to some complaints about the quality of of the experts on Kasamba. However, I think that the true value of Kasamba to LivePerson is that its “experts” who earn cash working part-time on the web could one day become part-time sales personnel for SMBs which cannot afford to shell out for their own sales staff.

Despite its low profitability, I find LivePerson interesting because it has an obviously useful product with strong barriers to competition, it is heavily owned by management and insiders, and its stock price has recently sunk to historic new lows. The algorithms it uses to identify potential leads and the servers and software necessary to run this analysis continuously in real-time on the many visitors to a web site are not trivial to replicate.

The closest analogy may be the algorithms that Google (NASDAQ:GOOG) uses to determine which ads to place on which sites to bring in the highest amount of revenue. Despite years of research with its Panama project, Yahoo (NASDAQ:YHOO) has conceded that it brings in only 30-60% of what Google brings in per ad. Furthermore, being the largest player in the field means that LivePerson has a large trove of data from many ecommerce sites to work with, and can continually test new algorithms to produce better software.

LivePerson’s products are a natural fit for many CRM software, making it a possible acquisition target for companies such as SAP and Oracle. The main problem with this business model appears to be a lack of scale. LivePerson does not yet have enough clients and transactions to cover administrative and R&D expenses. A large proportion of web transactions occur through major etailers such as Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) (although better search service from Google allowing users to locate products on sale on obscure websites may change that in the future), and these companies seem to be determined to stick to a self-service user model, preferring to cede users with higher conversion costs to other sites.

In an upcoming article, I will delve into the financials of LivePerson’s business model, and try and come up with a value estimate.

Source: LivePerson: Niche Product in Ecommerce