LivePerson CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: LivePerson, Inc. (LPSN)
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LivePerson, Inc. (NASDAQ:LPSN) Q3 2010 Earnings Call Transcript November 4, 2010 5:00 PM ET


Tim Bixby – President and CFO

Robert LoCascio – Chairman and CEO


Richard Baldry – Signal Hill Capital

Nathan Schneiderman – Roth Capital

Richard Fetyko – Merriman Capital

Brad Whitt – Gleacher & Company


Good afternoon. My name is Keisha and I will be your conference operator today. At this time, I'd like to welcome everyone to the LivePerson third quarter 2010 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to today's host, Mr. Tim Bixby. Sir, you may begin.

Tim Bixby

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. The internal projections and beliefs upon which we base our expectations today may change overtime and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission. Also, please note that on the call today, we will discuss some non-GAAP financial measures in talking about the company's financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting Investor Relations section of our website.

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

Robert LoCascio

Thanks, Tim. Good afternoon, everyone and thank you for joining us as we review our third quarter business results.

The second half of our fiscal year is off to a great start. Revenue increased 27% year over year to $28.2 million. This represents 7% quarterly sequential growth.

EBITDA per share for the quarter was $0.14, in line with our guidance for the quarter of $0.13 or $0.14 per share. EPS for Q3 was $0.05, a bit better than our guidance range of $0.03 to $0.04. Tim will provide more detail on this shortly.

We saw acceleration within our B2B business this quarter and signed 18 new names, including some of the leading online retailers, financial institutions and telecommunication providers. The team generated (inaudible) million, which represents a 29% year-over-year increase and 7% sequential quarter-over-quarter increase.

Our enterprise business grew 9% sequentially and we began to see the Asia-Pacific, a new region of focus, contributing to revenue growth. The North American team had a particular strong quarter and we anticipate this momentum to continue into Q4.

Activity in Europe continues to expand and we achieved the second best bookings quarter ever in that region. This is a positive sign given the traditional summer holiday slowdown.

Revenue was primarily driven from customer expansion within the enterprise group as well as new name accounts in the midmarket segment. We saw several of our larger accounts expand beyond their initial sales deployments into service deployments. This is a trend we typically see in our larger accounts.

We have also increased our efforts in France, where we now have a local sales office, as well in Germany and anticipate seeing the pipeline build in these countries. We continue our expansion efforts in the Asia-Pacific region and just last week announced a channel partnership with Engage.

Engage is an Australia based customer contact solution business established in partnership with the Clemenger Group, the largest communications group in Australia and New Zealand. More details on the partnership with Engage will be provided by Tim.

Revenue from our small business team came in at $6.3 million, up 3% sequentially from Q2. Growth continues to be driven by both new accounts, as well as expansions within existing accounts. We believe future growth will also be driven by the introduction of a new mobile application that will enable small businesses to chat with customers on the go.

Midmarket generated revenue of $1.9 million in Q3, which represents 5% quarter-over-quarter sequential growth. The team added several new names within the quarter and continued expansion efforts within the existing accounts.

The midmarket pipeline looks strong as we head into the fourth quarter. One of our new midmarket customers,, a global hosting leader is using our new premier offering as well as our integration.

According to the company, the integration process was easy and swift and has enabled them to gather more value from their data. The company informed us that they had used several different chat systems over the years, but that LivePerson's solution is by far the most effective.

The consumer team generated $3.6 million in revenue in Q3, up from $3.4 in Q2. This represents 15% annual growth and 5% quarter-over-quarter growth. We recently updated our homepage at and the new homepage now includes both information on the B2B and B2C offerings.

I'd now like to provide an update on our platform business and specifically how we are leveraging our presence in Israel to grow and expand our application offerings. We have always maintained a significant presence in Israel, having completed three acquisitions of Israeli based companies over the last ten years. Today we have nearly 300 employees near Tel Aviv, including our R&D, customer support, small business sales and network operation teams.

We believe our presence in Israel gives us a unique ability to embrace the vibrant technology market in order to drive adoption usage of our platform. In fact, this coming Sunday, November 7, we are hosting a large event in Tel Aviv where we will introduce our platform and partner program to the local technology and business community.

The goal of this event is to recruit talented innovators and developers to build applications on our platform. We view this event as a strategic opportunity to grow and expand our platform business and partner program. The event will include discussions around the future of real-time web innovation and technology entrepreneurship.

These discussions will be led by some of the world's leading technology visionaries, including Yossi Vardi, legendary Israeli based investor and entrepreneur and Jeff Pulver, an internet visionary. We anticipate over 100 startups and entrepreneurs will attend the event and participate in our interactive discussions.

The event will also showcase some of our initial Israeli based partners who developed a next generation of online applications for mobile, social and video interactions. We look forward to hosting the local community at this event.

Beyond our efforts to recruit developers and partners in Israel, we have seen traction amongst our customer base and adoption of our mobile offerings and application interfaces. In fact, one of our largest online retailers has taken our mobile interface and developed an iPhone application in-house. The application launched last week in the Apple App Store. We are optimistic that this will initiate further success in their business.

Another customer, EMO [ph] Travel, has introduced an iPhone application powered by integrated mobile solution partner, Air2Web. The application allows members of the military to make discounted travel reservations and in-flight bookings in real time via chat on a mobile device. With this application, military personnel and their families can now finalize hotel reservation, schedule ground transportation, make changes to their tickets due to delays or chat in flight.

To further strengthen our ties to the important Israeli based technology market, we have begun pursuing a dual listing on the Tel Aviv Stock Exchange. We believe that a local presence in this important technology market can increase our exposure to Israeli based technology investors and also to potential business development opportunities.

Now I'd like to discuss how we're creating more value and meaning within our local community. LivePerson is all about building deeper connections and it's our mission and at the heart of what we do. We create platforms in technology and enable our customers to connect with their customers in a more meaningful and relevant way. And we are creating an internal culture that's all about connection through helping others and personal ownership.

Another example how LivePerson builds connections is through our community outreach efforts. Nine years ago, we started a nonprofit organization called Feeding NYC. Feeding NYC's mission is to supply complete Thanksgiving dinners to families in shelters throughout New York City's five boroughs during the Thanksgiving holiday season.

In 2001, we supplied meals to 40 families and over the years, the effort has really taken off and last year we fed 2,250 families across the city. This year, we have teamed up with Robin Hood Foundation, a leading New York City based non-profit to provide and deliver means to more than 8,000 families in need.

We invite you to join our community outreach efforts this holiday season and help us achieve our goal. The actual volunteer programs where we pack the meals and then hand deliver them to families will take place on Tuesday, November 23. We’re also hosting a fundraiser event at Hudson Terrace on Tuesday, November 18. And you can visit the website for more details.

Finally, I want to highlight an important executive transition taking place at LivePerson. As you saw in today's press release, our President and Chief Financial Officer, Tim Bixby will be leaving LivePerson after more than 11 years of service. Over the coming months, Tim and I will work together with the Board of Directors to identify a new CFO and effect an orderly transition. Tim remains fully engaged in operations during this transition and we expect the process to be smooth and efficient.

Tim is a great personal friend and has been critical to our success at LivePerson over the past 11 years. We are deeply appreciative of his contributions and wish him the best in the future. Among his many achievements, Tim has built and maintained a stellar financial and accounting organization at all levels and we are fortunate to have a strong and stable team in place to support the company during this transition and into the future.

We have posted a video on YouTube at MyLivePerson with Tim and I speaking about the transition. And you can check it out if you want to get further information. Thanks for your time.

Now I would like to turn the call over to Tim who will provide more details on our Q3 financial performance. Tim?

Tim Bixby

Thanks, Rob. And I appreciate the kind words and we want to acknowledge that we are undergoing a significant transition over the next several months. And I think it speaks to how we work to run our company and work together to give as much transparency as we can to our shareholders and to our employee base. And that's what we aim to do with you during this transition.

While there's no perfect time or great time to leave what has been a fantastic opportunity for me here at LivePerson, there is a best time, if such a transition has to take place and that time is when a company is on very firm financial footing, growing very quickly, highly profitable and with a terrific amount of opportunity in front of us. And LivePerson, without question, falls into that category.

So I look forward to working through this transition process in partnership with Rob and the team here, as well as our Board of Directors. And we'll be here to see it through, through the end of the first quarter.

Strong performance is what LivePerson has been about for a long time and I think the third quarter was no exception. The third quarter came in at the upper end of our guidance range for revenue, as a matter of fact and it puts us on very solid footing to deliver the kind of revenue acceleration we've seen in the second half of prior years.

We now have visibility into the fourth quarter and we can see that sequential growth will likely exceed the third quarter's excellent performance, leaving us well positioned to exceed our revenue guidance for the year.

We'll give increased growth expectations in a moment in a little more detail, after we review some of the key performance metrics for the quarter. Specifically, as Rob mentioned, third quarter revenue increased 7% sequentially, which is a nice uptick from the first half to $28.2 million. And this is a 27% increase as compared to the prior year.

EBITDA, per share for the third quarter, was $0.14 and that's compared to $0.12 in the third quarter a year ago and as Rob mentioned, at the upper end of our own guidance range. Third quarter EPS was $0.05 per share and that's above our guidance range of between $0.03 and $0.04.

Adjusted net income finally per share was $0.09 and that was above our guidance range of $0.07 to $0.08 per share. If we look at each of the business segments, revenue from our business operations for the third quarter was $24.2 million. This was a 29% increase as compared to the third quarter a year ago and a 7% sequential increase as well as compared to the second quarter of 2010.

Revenue from our consumer operations for the third quarter was also up to $3.6 million and this is a 15% year-over-year increase and represents a 5% sequential increase from $3.4 million in the second quarter.

Overall, in our enterprise and midmarket groups, we had record bookings this quarter. Bookings in the quarter increase 7% sequentially and was up 15% as compared to a year ago. In terms of a dollar number overall bookings for the quarter was $4.6 million.

We signed 18 new larger clients in the third quarter and this was from a customer count in line with the second quarter; however, we signed 94 total large deals in the quarter between enterprise and midmarket and this is out fully 45% from 65% in the second quarter.

Top-line growth within our business operations for the quarter was again, driven by a combination of new customers and existing customer expansions. And our pay-per-performance part of our enterprise business continued to be a solid contributor to revenue and is continuing to generate about 17% of total enterprise revenue. And we'll probably finish the year in the fourth quarter at about 18% of enterprise revenue.

In terms of average deal sizes, we saw a continuation of a trend we saw last quarter of a much higher number of deals and a lower average deal size and that really speaks to the success of our midmarket group coming on line and closing a good number of deals in their target price range.

Average overall deal – average of all deals selling price was $50,000. The average for new customers in the quarter was $58,000. For existing customers the average was $47,000. And then the average for proactive sales deals was $58,000 and the average for customer service deals about $30,000 so a fairly tight range around the different types of booked deals in the quarter.

In terms of a couple of the other breakdowns that we typically give, the split between bookings of new customer business as compared to existing customer expansions was 25% of the bookings from new customers and about 75% of the revenue bookings from existing customer expansions. This is just a slight change from the 37%, the ratio last quarter.

And in terms of sales versus service-focused bookings, about 80% of the revenue booking in the quarter was related to sales, primarily to sales focused deployments and about 20% relative to customer service. This is a big swing back to what is a normal historical range, skewed toward sales deployment, sales and marketing deployments, last quarter was 50-50 and that was a bit of an outlier as compared to the last several quarters.

Moving now to attrition, always a good indicator of the health of the business, our enterprise attrition for the third quarter improved again from 1.6% down to 1.3%, as compared to the second quarter. And small business attrition also improved slightly, down to 2.6% from 2.7% in the second quarter.

Our small group on their own delivered 3% sequential growth as compared to the second quarter. And our split of revenue coming from outside of the U.S., which is primarily for us – primarily in the U.K. but also just about every other country in the world, about 22% of our revenue came from outside the U.S., and the U.K. makes up a significant portion of that 22%. About 12% of our total revenue comes from the U.K. area.

Our vertical revenue breakdown was similar to prior quarters with a slight change in Telco strengthening a bit. Telecommunications about 32% of our revenue; financial services 23%; technology, hardware and software related about 14%; online retail about 15% and all other combined about 16% of our revenue.

In terms of how our customer breakdown by revenue improved over the quarter, we saw a number of customers at a revenue run rate above $1 million, increased by $1 million. It was $13 million in the second quarter, now $14 million in the third quarter and for those above $0.50 million per year increased from $28 last quarter to $30 in the third quarter.

And we also would like to highlight in the fact we have one customer that's generating an annual revenue run rate of over $9 million per year and that's a pretty significant milestone for the company.

Our consumer group continued to increase cash flow this quarter. Revenue for the third quarter was $3.6 million, a 15% increase as compared to a year ago. And the revenue improvement was driven primarily by higher minute volumes, so a greater number of minutes of expert advice and then some of the increase due to a high average commission due to mix coming to LivePerson. Revenue outlook for the full year is tracking slightly higher than 90 days ago and that's really due to the stronger results in the third quarter, so good progress in the consumer group.

In terms of the detailed breakdown on the P&L lines, our gross margin improved just slightly to 73% in Q3. That really indicates to us that the gross margin trough has likely been reached. As you know, we've been investing pretty significantly over the past several quarters in the expansion of our U.K. hosting facility, which supports our EMEA business, our business out in Europe, primarily outside the U.S.

And that investment is now coming online in terms of an expanded hosting capability. And the impact on gross margin has really flattened out and increased revenue and now you're seeing dropped to an improved gross margin. Total company headcount overall increased from 452 at June 30 to about 468 as of September 30. That's expected to increase to about 475 by year-end.

Our enterprise sales team headcount is currently unchanged versus last quarter at 22, although we may bring in one more rep prior to the end of the year on this team. As Rob mentioned, we do continue to – our expansion efforts in the Asia-Pacific region. We announced a partnership, as you hopefully saw recently with a company called Engage based in Melbourne. Engage will act as our direct sales channel for LivePerson in the region with initial sales efforts to focus on Australia and New Zealand.

And the combined solution of LivePerson's intelligent online engagement technology and Engage's customer contact solutions, we think we'll really change the way folks in that region are able to interact with companies online and are looking forward to further success from this group.

Demand in this region is growing primarily within the financial services and telecommunication sectors. And some of the largest providers in these two verticals in this region have already begun using our technology and this really syncs up with what we've seen historically as we grew in the U.S. and also in the U.K. and into Western Europe.

In terms of a cash balance, we ended the quarter with a cash balance of $50.4 million. That's as compared to $52.8 million as of June 30. Used up some cash in terms of working capital. You'll see the detail in the press release as well as forthcoming in our 10-Q.

Accounts receivable, one driver that we would like to highlight, up quite a bit from the prior quarter to $16.8 million. As a result, our days' sales outstanding, our DSOs, are running about 54 days for the quarter. And this is really driven primarily by the increase in receivables related to some larger PFP customers. Though we're clearly focused on minimizing the increase in receivables, we don't currently see any material change in our collection risk solely due to the AR increase.

As you know, during the second quarter, we implemented a share repurchase program, which enables us to purchase up to $10 million worth of shares. And to-date, in the year we've purchased about – a little more than $3.6 million worth of shares at an average price right around $6.80. So from a cash flow perspective, that is a – one item that certainly impacts our cash balance, but we think is obviously a good investment and a good use of our cash at the price ranges we were able to conduct transactions.

Following, we'd like to give our initial views on the fourth quarter for the first time and update the full year based on that fourth quarter guidance. So for the fourth quarter, we expect revenue in the range of between $30.1 million and $30.3 million. We expect EBITDA between $0.15 and $0.16 per share. We expected adjusted net income per share between $0.08 and $0.09. GAAP EPS we expect to come in between $0.04 and $0.05. And fully diluted share count we expect to be right around $53.5 million shares fully diluted.

If we combine this expectation with our actual results year-to-date, we expect to see a full year revenue number of between $110.0 million and $110.2 million. We expect EBITDA between $0.50 and $0.51 per share, adjusted net income between $0.30 and $0.31, GAAP EPS between $0.16 and $0.17 per share. And fully diluted share count for the full year, we expect to be right around or just above $53 million shares.

There's a couple of other assumptions that we'd like to share with folks to help you think about the fourth quarter and beyond. I think an effective tax rate of approximately 37% is what we expect to see, which is slightly – a slight improvement from what we saw coming into the first half of the year.

No change in our expected cash tax rate, right around 35%. GAAP gross margin in the fourth quarter we expect to continue right around the 73% level. And this results in a cash gross margin of approximately 77%.

We also expect sales and marketing in the fourth quarter right around 30% of revenue level. G&A expense at approximately 15% of revenue and our R&D expenses in the fourth quarter at approximately 13% of revenue. Full-year depreciation, we expect to be about $5.5 million. Full-year amortization of intangibles about $1.5 million and full-year non-cash stock compensation expense approximately $5 million.

And that covers the operational and revenue highlights. And now if we could ask the operator to rejoin the call and give instructions for Q&A, we'd be happy to take any follow-up questions that you have.

Question-and-Answer Session


(Operator Instructions) And your first question comes from Richard Baldry with Signal Hill Capital.

Richard Baldry – Signal Hill Capital

Congrats on a great quarter. Year-to-date, each of your sequential growth comparisons has been up versus the year-ago performance, sort of curious about the Q4 guide that would imply something in the sort of a low $2 million, maybe slightly below the year before. Were there any one-time sort of revenue hits in Q4 a year ago that we should understand as maybe one of the factors driving that versus just a conservatism that allows for some upside? Thanks.

Robert LoCascio

Yes. I think that's a fair assumption. There were a couple of one-time things. If you look back at our guidance a year ago and compare that to our guidance now, I think you'll find a closer similarity than comparing the actuals a year ago to the guidance this time.

The one outlier I think a year ago that we saw was a pretty strong surge during the fourth quarter of consumer activity, consumer traffic, which drives higher fees for us and a higher chat volume, all of which, for some of our customers, drives higher usage fees.

And then we also saw a pay-for-performance result in Q4 tied in part, due to these higher traffic levels and higher close rates to outperformance. I think the number was about $0.50 million of revenue that exceeded our guidance in Q4 a year ago.

So that's not something we typically build into the guidance but certainly something we could experience this year depending on how the holiday season shapes up from a consumer perspective.

Richard Baldry – Signal Hill Capital

Thanks. And maybe on your largest customer, since they're obviously a meaningful part of revenue, could you talk a little bit about sort of qualitatively that customer in terms of the length of time you've dealt with them, whether that's a long-term master services agreement that has some predictability, stability to it, maybe what protocol they're in, so we can kind of judge the health of their end market, et cetera. Thanks.

Robert LoCascio

We've had that customer for about five years and they are in Telco space. And they are a pay-for-performance customer and so they're fairly predictable. And so we continue to grow and continue to expand. And so we – the revenues feel, I think very stable and predictable.

Tim Bixby

Yes. It's certainly fair to describe them as blue chip, very large and very active in the internet very focused on incremental sales and have been a good partner and willing to bring us in as a real strategic partner to drive revenue for them.

Richard Baldry – Signal Hill Capital



Your next question comes from Nathan Schneiderman with Roth Capital.

Nathan Schneiderman – Roth Capital

Hi, Rob and Tim. Thanks very much for taking my questions. Tim, sorry to hear that you're leaving, but I was hoping you might take advantage of the opportunity to share with us your decision and why you want to leave now.

Tim Bixby

Sure. So, you know, it's a gradual steady process that we're going through. I'm not walking out the door tomorrow to go someplace. We have, I think, looked out over the next couple of years and looked at where the company is going and what the company needs.

I've been here for 11 years, which has gone very quickly, but in the internet world is an extraordinarily long period of time. So while there's never a perfect time, especially with that length of tenure to leave, when such a transition is right for the individual, which it is for me at this point, the time to do it is when things are very steady, strong, growing and profitable and that's why we felt that approaching it now is really the right thing for the company.

One thing you all know, having tracked the company, is that we're growing quickly. We're heading above $100 million. We expect continued growth in the future. And the needs for the financial organization will just become more and more rigorous and challenging with a great opportunity. And that's a great opportunity for someone, but it didn't 100% sync up with where I see myself in sort of five years and it felt like now is a good time to work through an orderly transition.

Nathan Schneiderman – Roth Capital

Okay, got it. That was helpful. If I heard you correctly that your one biggest customer now is generating more than $9 million or about the $9 million per year level. What – did that – was that a major step function up from where that customer was last quarter? Did that customer, in particular have much to do with this increase in AR at this quarter?

Tim Bixby

It's been more gradual. I mean, that metric we like to share, obviously, as much as we can with folks, so they can get a view into the size of our customers. But we're also conservative because customer revenues can fluctuate up and down overtime. So it has been a gradual ramp, but that – you know, reaching that level is pretty significant. So we felt it's important to, sort of, share that information with folks.

Our largest customers are tied typically to our largest receivables, so those tend to go hand in hand. It's not always the exact same one in number 2, number 3, number 4 slots but they certainly go hand in hand.

And the key thing is that our analysis of bad debt and collectability has really not changed at all. So accounts receivable is really the timing and big companies are typically good payers, but they can be slightly slower payers.

Nathan Schneiderman – Roth Capital

Can you – just on this $4 million sequential increase in AR, I guess your explanation was it did have to do with your pay for performance customer or customers. But could you explain this in more detail? Are they effectively being billed in arrears for monies owed to you or is this an in advance kind of billing? Or maybe you could just explain it because I've never seen the AR take such a sequential jump and I just want to make sure I understand the dynamics.

Tim Bixby

Yes. So there's two things happening. One is, there was an increase in the quarter in general AR overall, so only a portion of the increase would I ascribe to P – the PFP impact. So there were a couple of other customers who are in the traditional billing model whose AR increased.

That being said, there is one unique aspect of our pay for performance from an accounting standpoint that I will note, which there's quite a bit of disclosure in our filings. But there's a concept where we bill a customer, for example, in the pay for performance model, $10 for services that we provide to them along with our labor partner, if we pass through, for example, $5 of the $10 to a labor partner for providing the labor, we only recognize the remaining $5 as our net revenue.

And so you do get an anomaly where receivables can move more quickly than revenue because of that net revenue accounting methodology. So that is unique and as it grows, that can be a greater swing, quarter-to-quarter. But we expect that in the fourth quarter that number will come to a more reasonable level and we're certainly focused on that.

Nathan Schneiderman – Roth Capital

Okay. Thank you very much.


Your next question comes from Richard Fetyko with Merriman Capital.

Richard Fetyko – Merriman Capital

Hey, just to follow up, Tim, on that – you saying that on the accounts receivables you are book – you are reflecting gross revenues versus the P&L on an only net revenues?

Tim Bixby

Yes. Solely for that – the PFP based revenue, so it's just a subset of the enterprise revenue.

Richard Fetyko – Merriman Capital

Okay. Enough on that topic. Curious on the Asia Pacific, you know, you're going with a partner there. Is that a strategy for that region that you will continue? And I assume this is not an exclusive or is it with the Engage partner?

Robert LoCascio

Today it is exclusive and in certain countries like Australia and New Zealand. And that's our first countries that we've entered with them. And so we decided to work on partnerships first because, as you know expanding into countries is an expensive endeavor, so we said let's try out certain countries, English speaking countries first and then let's expand from there.

So far we've seen some very good results with them. We want to continue to expand with them. And then we will evaluate somewhere next year about shall we build, facilities there and actually expand with our own employee base. And that's something we'll look at next year.

Richard Fetyko – Merriman Capital

Okay. And how does that partnership work in terms of revenue recognition, revenue share? And what other responsibilities do you take on in terms of customer support, if there are?

Tim Bixby

So the way that's working is they're frontline on sales and support and then we support them from the U.S., from all our territories really on sort of second and third line support. But they're our direct sales folks on the ground, they're our direct professional services folks on the ground. And we share revenue with them. We recognize net revenue and then they get a revenue share from everything that they sell.

Richard Fetyko – Merriman Capital

And the pricing and the recurring nature of that revenue is unchanged from your normal course of business?

Tim Bixby


Richard Fetyko – Merriman Capital

Got it. And then with respect to, sales obviously, that's sales and therefore, bookings drive your growth. I was just wondering why not get more aggressive on expanding an enterprise sales force to accelerate that growth in 2011 and beyond or is that the plan? Are you just having a hard time finding the right candidate? It seems like, you know, there's an opportunity to be more aggressive.

Robert LoCascio

Yes. I mean, we'll continue to expand the team, as we're planning right now, for 2011 and looking at what we want to go after. The market is definitely – as I think I said one or two quarters ago, there's definitely demand, where in the past, we were doing a lot of education about chat and about intelligent engagement.

Today, large companies, small companies have to have it and so we're getting a lot of pull into the market. And so we will continue to look at expanding the sales teams and alternative channels. I really think we have to start expanding into channel partners, resellers ISVs and things like that.

Richard Fetyko – Merriman Capital

Yes. Okay. And then lastly, Tim before we lose you, with respect to the EBITDA margins, they've kind of fluctuated last year, this year as well and we're between 20% and 29% even just in the recent quarter, in the first quarter there as 24%, then 20%, now 27%. You know, I guess help us sort of understand what kind of level investment this company will need and what sort of margins, we should see a little more consistent margin levels or what would be the range in the next couple of years?

Tim Bixby

Yes. That's a great sort of a setup question because I did want to highlight for everybody what we've seen in the last couple of years in term of how that margin flows through each of the quarters of the years.

So as you'll note if you look at 2010 and back at 2009, you'll see that the second quarter is our lightest margin, EBITDA margin in terms of both absolute dollars and also percentage. And that's something that makes sense and is by design.

We usually have a slower revenue growth rate in the first half, stronger in the second half of the year. And we also are usually expanding and growing our cost base, our employee base a little more in the first half of the year.

So that's something – while we're not today discussing 2011 and beyond, that's something that you should take into account when you're modeling the business looking forward, that the overall outlook for the year should be consistent with what you think, but that the second quarter should be lighter as a percentage.

It typically delivers about 20% of the full year's profit, whether it's EBITDA or net income or adjusted net income and that's something I would expect that may continue next year as well.

In terms of overall margin, I think the situation tends to be driven by two key things. Key investments in new initiatives and this year we were, pretty clear upfront at the beginning of the year and I think I followed through consistently on our pledge to spend $3 million, $3.5 million on folks to support new initiatives.

And then the second half of the year we typically see revenue uptick and base don our actuals in Q3 and guidance in Q4, that's happening as well. Overall, a 25% EBITDA margin is – continues to be at a very high range of all of the, dozen or so most successful status players and we're very proud of that.

The max we've hit a year ago, hit right around the 30% margin, as you mentioned, 30% EBITDA. So that's really the, very strong performance. 25% to 30% is strong performance and we'll come in February and update you on our outlook for 2011. But we think continuing to balance the growth with the margin improvements will be part of our strategy.

Richard Fetyko – Merriman Capital

All right. Thanks. That's all I had.


Your next question comes from Brad Whitt with Gleacher & Company.

Brad Whitt – Gleacher & Company

Hey, guys. Thanks for taking my questions. Can you talk a little bit about the administrative cost associated with the dual listing? You know, it seems like that could be kind of expensive. And talk about some of the cost benefit analysis you did around that.

Tim Bixby

The costs are pretty light. You know, it's certainly a little more than zero. But one of the things that Israel has done is made it as seamless as possible for U.S. listed companies to list over there. So there's literally no incremental filing requirements other than you have to make sure that our existing filings that hit the SEC and the NASDAQ here end up in the right place in Israel. So they've really focused on making it as seamless as possible.

So the only really incremental overhead is a little bit on the startup, getting folks educated and getting some support on the ground in the time zone there. But within a year it should be pretty minimal overhead.

Robert LoCascio

And where we're looking right now is we're doing a pretty big push in Israel on the developer side and we are now becoming a very large company on the technical – as a technical presence in Israel with 300 people.

And so we decided especially with the platform and the launch of the platform, instead of going to California where we're competing with a lot of platform players, we're basically embracing all the Israeli developers, which are as good as developers in Silicon Valley.

So we're making a push. We want to elevate the company there and our presence and if you're listed, you're then carried in the financial papers there. And so people start to recognize you as a company that's in Israel that's doing great things and we want to raise our awareness there for employees and for getting developers on our platform because we think that will generate value to our customers.

Brad Whitt – Gleacher & Company

Okay. That’s helpful. Thanks a lot guys.

Tim Bixby

And it also – just one other note, sort of a nice side benefit is it opens up quite a bit of trading hour capacity. So it's not just the Israel, but actually it overlaps – the trading week overlaps quite a bit with European trading hours and so you get that added benefit of the stock is tradable for not 24 hours a day but quite close to the entire week.

Brad Whitt – Gleacher & Company

Do you have a timeframe as to when you think you'll start trading in Tel Aviv?

Tim Bixby

We're working through the process now and it requires some filings. And we're heading in that direction and then we'll put out an announcement when it's pretty much final and ready to go.

Brad Whitt – Gleacher & Company

Okay. And Tim, do you have a CapEx number for the quarter?

Tim Bixby

Yes. CapEx was right around $2 million and I think we'll track us to – for the full year of right around $7 million or so.

Brad Whitt – Gleacher & Company

Okay. And Rob, I'm just curious as to if you're seeing social media, how that may impact your business, where you're – whether you're looking to do any modules to integrate with some of the social media outlets and maybe being able to launch a chat straight from Facebook or something with a customer. I'm just curious as to what your thoughts are around that.

Robert LoCascio

Yes. So we – there is, right now out on our platform area, there is a Twitter integration, so you can literally read all the Twitter feeds. So it sniffs all the Twitter feeds and you can put in keywords as a business owner. And if those keywords come up, let's say somebody is like I want to buy an iPhone or I want to buy whatever, you – we can inject a tweet in there with a link to a chat and that happens automatically.

So I know there are a couple of customers out there that are playing with it, so I think it's definitely something important. I know on Facebook someone put a page up with a chat button in the page, so you can put a link with a chat button in it, but there's not like an integration yet into Facebook, but Twitter there is today.

But I actually think mobile is where we're seeing a lot of focus right now. And we have an API for all the mobile devices. And so our customers are starting to write apps with embedding chat into their own apps. So we have a retailer, a very large retailer, that has a mobile shopping app and they embedded chat into it.

So our strategy is we don't want to write the mobile apps as much as we want to give the API to enable our customers to embed chat or any type of intelligent engagement into their own presence on mobile.

Brad Whitt – Gleacher & Company

Okay. And so that would, I guess, in turn potentially drive more seats from you guys? Is that the way you look at it?

Robert LoCascio

Yes, absolutely. And that's where we're starting to move the business towards is where are all the areas that consumers are having conversations or want to have conversations? And we need – we know we want our chat to be there or our voice to be there or whatever is going to be there.

We did develop a chat – excuse me, a mobile app for operators. And so our small business customers and midmarket customers are starting to use it. If you go to the App Store in Apple, you will see LivePerson. You can download it, put it onto your iPhone and you can literally chat as an operator from your phone. So we are starting to move more into these areas.

Brad Whitt – Gleacher & Company

Okay, great. A final question I guess for Tim, getting back to the AR a little bit, since you are, a good 30 days into Q4. Have you seen that – I mean, have you collected some of the AR? I mean, should we expect the DSOs to go down the next quarter?

Tim Bixby

I mean, it's certainly our target to bring that into a range that we're a little bit more comfortable with in this coming quarter and we've certainly taken some steps towards that. It is pretty typical to collect a fair amount in the early part of the subsequent quarters. That's a normal pattern and we're seeing that this quarter. Also, let me correct. I misspoke from my notes on your CapEx question. CapEx in Q3 was $3.6 million, I gave you the – an earlier number. But the full year number is correct. It's $7 million.

Brad Whitt – Gleacher & Company

Okay. You expect that to go down next quarter?

Tim Bixby


Brad Whitt – Gleacher & Company

Okay. All right. Thanks for taking my questions.

Robert LoCascio

Thanks a lot, Brad.

Tim Bixby

Operator, do we have any more questions in the queue? If we could ask the operator to rejoin the call and check on the Q&A queue, that would be great. Bear with us, folks. We'll work on getting you back into the queue.

Robert LoCascio

Operator, there's people in the queue. Could you put them through for questions? We're going to wrap up the call now, although there's a couple questions in the queue. Somehow, we have lost the operator. And that's been our Q3 2010 call and I will see you and Tim will see you in Q4. Thanks very much.

Robert LoCascio

Have a great one.

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