LivePerson, Inc. (NASDAQ:LPSN) Q3 2022 Earnings Call Transcript

LivePerson, Inc. (NASDAQ:LPSN) Q3 2022 Earnings Call Transcript November 7, 2022

LivePerson, Inc. misses on earnings expectations. Reported EPS is $-0.56 EPS, expectations were $-0.07.

Operator: Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to LivePerson’s Third Quarter 2022 Earnings Conference Call. My name is Ryan and I will be your conference operator today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I’d now like to turn the conference call to Mr. Chad Cooper, Senior Vice President, Investor Relations. Please go ahead sir.

Chad Cooper: Thank you, Ryan. Joining me on the call today is Rob LoCascio, LivePerson’s Founder and CEO and John Collins, Chief Financial Officer. Please note that during today’s call we will make forward-looking statements which are predictions, projections, and other statements about future results. These statements are based on our current expectations and assumptions as of today, November 07, 2022, and are subject to risks and uncertainties. Actual results made differ materially due to various factors including those described in today’s earnings press release and in the comments made during this conference call as well as in 10-Ks, 10-Qs and other reports we file from time to time with the SEC. We assume no obligation to update any forward-looking statements.

Also, during this call we will discuss certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is included in today’s earning express release. Both the press release and the supplemental slides, which include highlights for the quarter are available on the investor relations section of LivePerson’s website. With that, I will turn the call over to Rob. Rob?

Rob LoCascio: Thanks Chad. Thank you for joining LivePerson’s third quarter 2022 earnings call. I’d like to start off with an overview of the quarter. In Q3, revenue grew 9.5% year-over-year to $129.6 million and adjusted EBITDA of $9.1 million moved into positive territory. Our non-GAAP gross margins were 74% up 200 basis points year-over-year. A few weeks ago, we hosted one of our customer events in San Francisco where many of our largest brands and key prospects were in attendance. Our partners and customers at Google, Verizon, Virgin Media, Priceline, and Elements Health gave tendency a private view into AI powered digital customer engagement journeys and strategies they have implemented with LivePerson to date. These events offer us a clear lens into our customers thinking and help inform our product roadmap in the future.

There were three broad strategic themes that were validated by our largest brands at the event that I want to share with you. First, I was struck by the fact that meeting after meeting, our customers told us that they now consider us a tier one provider. The CTO of one of the largest airlines in the world told me that out of their thousands of systems that they have in their company, that there’s only a small group that are considered tier one, including the reservation system, and that we are now one of those systems. Where we now seeing enterprise customers shifting 30%, 40%, 50% of contact volume to us, we really validate what no other company has done in our space. We took something that for 50 years was ingrained in people that we need to pick up the phone, the call brand for customer care, and we create a clear alternative to traditional voice.

Being considered a tier one provider serves as a validation of how we execute it against our long-term vision, become the mission critical customer engagement partner for brands across a multitude of industries. Brands now trust their businesses to us more than ever before. We expect this trend as well as conversational volumes to both continue to grow in the months and years ahead. This new reality is an exciting opportunity that brings heightened responsibility and expectations. One highlight when we release our voice — one highlight when we release our voice this year, there’ll be a voice AI enabling consumers to converse with a machine through natural language of a curiously human experience. Second, brands have validated our vision for how the use of AI and automation in the enterprise.

Our brands are adopting AI thanks to our tools and expertise and continuing to build their teams and AI specialists to support the prominence of the function across their business. As discussions we had with one of our major banking brands exemplifies this trend, they’re seeing increased value in our platform as they deploy additional automation. For them, an increasing number of brands LivePerson is much more than a chat-bot company that helps them connect to multitude of channels, our leading AI, automation and product roadmaps are helping them innovate and operate the most sophisticated AI driven digital customer engagements in the markets today. Finally, brands want us to be the platform where they integrate key systems that create a unique, powerful customer engagement hub.

One of our largest telco customers is using our platform as that central hub, creating integrations with other digital legacy systems in order to deliver a rich consumer engagement experience. The acquisitions of Tenfold and Voice Base are part of this long term strategy to move us into the central role. Also want to know that Google joined us on the main stage of our conference to highlight our partnership around conversational commerce use cases, which focus on the work we’re doing together to unlock the opportunity for conversational ads and search. We’ve already kicked off engagements with several of our enterprise customers that are seeing really compelling results in conversion rates. We expect to have more exciting updates with this partnership as we move from beta to general availability with Google in the coming quarters.

So on all, it was a terrific event and strong validation of our AI driven approach and the product roadmap for us to continue to build on as a tier one platform to serve as a central customer engagement hub with the world’s leading brands. Now let’s dive deeper into our results for the quarter. As we outlined in our Q4 call with the changes in the market, we focus during fiscal year 2022 on three actions to optimize faster revenue growth. New logo growth expansions with existing customers and our strategic partnerships initiatives opening our AI so it can be exist on other platforms and strengthening the AI platform to drive enhanced value to customers. While we do not divulge bookings numbers, I would like to highlight that we have a strong booking score in Q3 evidence, our newer quota carrier reps are starting to gain traction.

In fact, we achieved the highest booking number since Q1 of 2021 after netting out the COVID testing revenue. Starting with customer wins and logo growth, we signed seven figure deals and achieved a total deal count of 86 deals in the quarter. As brands look for strategic partner for AI powered digital customer engagement, they’re increasingly recognizing LivePerson expanded value proposition. This holds true even under the current economic conditions because they recognize the cost savings they can achieve with our platform. As I turn to some of our top customers wins for the quarter, some of which include the most innovative brands in the world. Let’s start with new logos. We want 29 new logos in the quarter. While the number of new logo deals is down year over year, the dollar bookings on the new logos is up 20% year over year.

Additionally, the number of enterprise new logos up 14% year over year. These new logo wins provide the foundation for the upsells of tomorrow and are and are excited to have these customers on board. They expand our presence in the market and bring us the opportunity significant expansion dollars. While the largest new logo wins the quarter was Money Mart and operating unit of Momentum Financial Services Group and an alternative lending provider operating across North America. In addition to being an amazing new brand for LivePerson in just 59 days after signing with us Money Mart was able to launch an entire digital service servicing strategy that included messaging, automation and agent workspace call to messaging, deflection and voice base — for voice based AI analytics.

Another large new logo win was a three-year seven figure TCV deal with UK’s largest auto insurance provider and they have over 14 million members. They plan to use our software to offer messaging with automation and IVR deflection so that they can reduce costly phone calls and improve customer satisfaction. This is a year-long RFE process where we beat a number of other vendors in the healthcare vertical. We signed a new logo deal with a provider of public healthcare programs. Our tenfold integration platform gives their sales and service reps the full context of each customer in real time. This enables their agents to quickly identify who’s calling members or providers to deliver the best customer experience, while also reducing our handle time quickly, creating new cases and ensuring analytics are captured back into the E R P and CRM systems.

It’s also interesting to note that we partner with one of our channel partners, which enable us to avoid a lengthy procurement process. Expect this new partner who is a heavy Cisco partner will open the door to jointly pitching a new set of logos and potential customers and partners. We also had a strong quarter with upsell and renewals. Our growth reflects the trends brands moving into us being a tier one provider. Chipolte the largest fast cash dining chain by sales in the us, renewed and expanded ponds partnership with us. This deal highlights the power of LivePerson’s combination of best in class AI, cloud profit form, and expertise in professional services. Chipolte leverages a concierge bot named Pepper to support its 3000 US restaurant locations, helping them deliver curiously human feeling and personalized experiences on a national scale.

I’m also happy to announce a two year renewal and expansion with the real our second largest deal in the quarter, the real renewed as an automation as a service customer as we continue to deliver an enormous amount of value in designing and executing the customer strategic roadmap for conversational AI and conversational commerce achieved a renewal upsell with the top US based insurance company. This insurance company is focused on digital customers journeys and expanding their current success in automation to new lines of business like roadside claims. Also in the healthcare vertical, we signed a seven figure multi-year renewal with the largest Fortune 20 payers in the us. We established a relationship about 18 months ago and just one line of business on web messaging.

We’re now deploying our platform in the remaining six lines of business include additional messaging channels like in app, Apple Business Chat, and Google Business messaging. And finally, we signed a renewal in the world’s largest cosmetic company. They are looking to expand their digital footprint, invest in deflection activities around voice to messaging and improve personalization on their brands websites. We are deployed in 60 of the companies, 37 brands and will continue to use us for both customer care and commerce. As we discussed recently, we’re working on a greater open platform strategy to address what we see as a larger incremental addressable market opportunity for us by our customers, partners, third party developers and internal teams.

This will enable acceleration of new areas within our customer base. As an example, JR voice base transcription product is currently available across several third party marketplaces including Twilio’s Flex Marketplace while or in early in its development. We’re encouraged by the fact that revenue from voice base product on Twilio has grown more than a hundred percent in the past six months with no direct sales or marketing investment. In Q1, we plan to launch versions of the LivePerson app marketplace and build on the pipeline momentum from Solonus and Affinity who jointly uncover nearly 20 opportunities for us in Q3, helping to contribute to our pipeline in Q4 as we eye a formula launch for the app market marketplace in the next three to four months, we have a strong pipeline of rev share program partners, including Tealium, Medallia and Quantum Metric.

We see partnerships as a major untapped growth lever for LivePerson and are dedicating appropriate resources to this very scalable opportunity. Finally, I’d like to also take the opportunity to talk about our new Chief Marketing Officer, Ruth Zive. Ruth is a three time enterprise software CMO, most recently serving a CMO of a chat bot company called Ada, where her leadership helped transform the company through triple digit growth. At LivePerson Ruth’s priority is to grow scalable, measurable, and predictable world class demand generation while driving operational rigor. So we want to welcome our Ruth to the team. We’re really excited to have her here. As I mentioned at the top of the call, we continue to execute our profitable growth plan announced at the start of the year, and we’re on track to deliver double-digit adjust adjusted EBITDA margins in Q4 and sustain these margins with a focus on free cash flow in 2023 and beyond.

And with that, let me now turn the call over to John to discuss the detailed financial results. John?

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John Collins: Thank you, Rob. In the third quarter, we continue to advance the profitable growth plan we launched the start of this year. To that end, revenue grew 9.5% year-over-year to $129.6 million, which was an improvement relative to the expectations we’d set last quarter. The upside relative to prior guidance was primarily driven by wild health continued overperformance and by the accelerated timing of upsells and professional services deliverables. The net effect of revenue upside and continued cost reductions translated to $9.1 million in adjusted EBITDA. Non-GAAP gross margins of 74% were at the top of our guidance range and attributable to cost reductions and the focus on scalable high margin sources revenue. In order to close out the year with a balanced approach to profitability and growth, we continue to optimize our cost structure in the third quarter.

Restructuring during the third quarter is expected to reduce our expense run rate exiting the year by significantly more than the actions we’ve taken in the first half of the year, advancing our goal of double digit just EBITDA margin and positive free cash flow for 2023. For perspective on the pace and magnitude of the P&L transformation year to date, note that when we launched our profitable growth plan at the start of a year, we were burning well over $30 million in free cash flow per quarter and forecasting that number to grow. Over the medium to long term, we expect these cost reductions coupled with the emphasis on scalable high margin revenue sources to better align sales and marketing, research and development and general and administrative expenses with best in class industry benchmarks.

Turning to our reporting segments for the third quarter within total revenue, B2B grew 10% year over year. Revenue from hosted software was down 4% year over year, and professional services grew 92% year over year To elaborate on the underlying business drivers consistent with the expectations we shared last quarter, COVID 19 testing revenue from our longstanding enterprise customer city dropped to zero in the third quarter, excluding the impact from covid 19 testing revenue and pandemic driven variable revenue. B2B grew 25% and hosted software grew 12% year over year. As for professional services, continued high growth was attributable to the eight figure healthcare deal we signed in the first quarter, which is focused on automation as a service for healthcare delivery companies.

We expect elevated PS revenue to continue in the fourth quarter. From a geographic perspective, US revenue grew 12% year over year and represented 69% of total revenue. While international revenue grew 4.5% year over year and represented 31% of total revenue. Finally, revenue from the consumer segment increased 3.7% year over year. In the third quarter, we continued to build on our go to market momentum. Our platform’s ability to increase operational efficiency and reduce costs is resonating with both our customer base and new logos, especially in the present macro environment. In addition, as Rob described, customers are increasingly viewing AI and automation as fundamental to delivering a seamless and personalized digital experience across the consumer journey.

From this perspective, our customers are looking to us as a strategic long term partner and tier one service provider, which we expect will drive growth and usage of our platform in the future. Today we facilitate and manage approximately one billion conversational interactions each month, making us one of the most scaled conversational AI platforms in the world. And to this end in the third quarter, we signed seven, seven figure deals, four expansions, and three new logos. Note that cross-selling voice base was once again a key part of the value proposition that landed one of the seven figure new logos. While a while the aggregate number of new logo deals was down year over year. Aggregate new logo deal values were up 20% year over year driven by a 14% increase in the number of enterprise new logos.

Considering our focus on the enterprise, we see these results as indicators that we continue to ramp reps and rebuild go to market momentum. Enterprise new logos typically result in a higher initial deal value and greater strategic expansion opportunities translating to significantly higher lifetime value relative to new logos down market more broadly in terms of aggregate deal value across both new logos and expansions in the base. The third quarter was our strongest sense, the first quarter of 2021, normalizing for the impact of covid 19 testing. RPO increased 16% year over year to four 31 million driven by several large enterprise renewals and upsells. Average revenue per customer improved 675,000 this quarter or improved 2 670 5,000 this quarter, up 18% year over year.

Conversational cloud messaging volume grew 25% year over year and AI based messaging volume group 11% year over year consistent with expectations we shared last quarter, net revenue retention was just below our target range of 105 to 115% attributable primarily to lower pandemic driven variable revenue from gain share and lower revenue from City’s COVID 19 testing program. In terms of guidance, we expect continued outperformance by wild health and elevated professional services in the fourth quarter. Considering those expectations coupled with more upsells and early renewals in the third quarter than previously expected, we are raising revenue guidance for the full year. We now expect revenue in a range of 517 million to 521 million or 10% to 11% year for year growth and improvement to the midpoint of approximately 6 million.

For the full year adjusted EBITDA, we are reaffirming our previous guidance range of $1 million to $10 million. The wide adjusted EBITDA range at this time in the year reflects the potential for continued revenue upside from wild health and elevated professional services and the potential for lowering operating expenses from additional p and l optimizations. The implication for revenue in the fourth quarter is a range of $124.5 million to $128.7 million, or approximately one to 4% year to year. The expected sequential decline in revenue is primarily attributable to early upsells with one time components that were pulled forward into the third quarter from the fourth quarter, and attributable to the less, the less predictability of the magnitude of continued upside from wild health and accelerated professional services deliverables in the fourth quarter.

As for adjusted EBITDA in the fourth quarter, we expect a range of 14.9 million to 24 million or 12 to 19% margin to the midpoint of revenue guidance. Finally, we are expecting non-AP gross margins to be in a range of 72% to 74%. Before taking questions, I’d like to emphasize several key themes for 2022 and how solid execution on our profitable growth strategy is positioning us for 2023. In the third quarter, we continue to observe indicators of increasing sales momentum, including 14% year VR increase in enterprise new logos, and a 20% year VR increase in aggregate new logo deal values. We also expanded within our customer base, which increasingly regards us as a long term strategic partner and tier one service provider on a level we haven’t seen in the past four quarters.

Critical inputs to those results were increased traction with strategic sales and technology partnerships and robust cross-selling of products within our installed base from newly acquired assets. This sales momentum coupled with the optimization of our cost structure and a focus on scalable high margin sources of revenue reflect durable changes to our operating model that position us to generate double digit adjusted EBITDA margins and positive free cash flow in 2023. And with that operator, we can proceed to q and a.

Q&A Session

Operator: Thank you ladies and gentlemen. At this time we will be conducting a question-and-answer session. Our first question comes from the line of Ryan MacDonald from Needham. Please go ahead

Ryan MacDonald: questions and congrats on a nice quarter here. Maybe we start with just the guidance and just can you provide a bit more color and help us understand the one-time components you discussed from some of the early pull forwards that that came into Q3 that we won’t see repeated in 4Q?

Rob LoCascio: Hi, Ryan. Yeah, those one-time components relate to an acceleration of recognition revenue for usage true ups. So in other words, the customers who we renewed and upsold early in the third quarter were well ahead of the usage that was contractually committed and so needed to essentially raise the overall cap. And that was the nature of the episode going forward and accelerated recognition in the third quarter.

Ryan MacDonald: Yeah, that makes complete sense. All right, thanks for clarifying that for me. And then, it’s great to continue to see some of the early, I guess, performance from Wild Health. Can you just of us understand as where that’s coming from, whether it’s sort of on the B2C side or in the B2B initiative. And then as that business continues to grow as a mix of revenue, I think you called out sort of overperformance there could create some wider variability on the adjusted EBITDA performance. Can you help us sort of sync up what success and Wild Health translates to in terms of adjusted EBITDA or could we see downward pressure I guess.

Rob LoCascio: Go ahead, John.

John Collins: I was just going to make a comment on adjusted EBITDA, just on that specific financial point. I think broadly, as we discussed previously, Wild Health has a lower overall gross margin, but we have now greater insight into ways we can expand that gross margin to be more consistent with LivePerson’s target over time. So we don’t expect it to necessarily get worse, but to improve over time.

Rob LoCascio: And then we’re seeing — we’re seeing good traction on the B2C side right now and some B2B, but there are a number of people signing up for the service. And then also we’re onboarding medical professionals on the overall platform. So it’s a sort of a combination of both right now.

Ryan MacDonald: Excellent. Maybe just one more from me, just on broader rep productivity, it’s good to see some of the gains there and improvements despite sort of a uncertain macro environment. I’m curious as you’re looking out into, in planning for 2023, can you talk about how you’re feeling about sort of sales quo capacity at the moment in quota coverage and how we should think about sort of incremental investments on the sales head count? Thanks.

Rob LoCascio: Yeah, Ryan, I think that where we stand today, we do continue to see progress on ramping the reps we have. We have more ramping to go as we exit the year and think about 2023. Big picture, we started 2022 with mid-fifties numbers in terms of total ramp reps, and we think that number will be mid-18 as we start the year in 2023 with a healthy number who are on ramp shortly thereafter. And in terms of No, I just think investments will flow in 2023 in light of a broader overall profitable growth framework right. We have certain targets for overall free cash generation and EBITDA margins and we’ll make investments accordingly.

Ryan MacDonald: Excellent. Thanks for the color.