Liveperson Inc Q2 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Second Quarter 2020 Results Conference Call. My name is Rachel and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management from LivePerson will conduct a Q&A session and conference participants will be given instructions at that time. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Matthew Kempler, the company's Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Thanks very much. Joining me on the call today is Rob LoCascio, LivePerson's Founder and CEO; and John Collins, our 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 and are subject to risks and uncertainties. Actual results may differ materially due to various factors, including those described in today's earnings press release in the comments made during this conference call and in 10-Ks, 10-Qs and other reports we filed 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 earnings press release. Both this release and supplemental slides, which include highlights for the quarter are available in the Investor Relations section of LivePerson's website. With that, I'll turn the call over to Rob.

Thanks, Matt. Thank you for joining LivePerson's Q2 2020 earnings call. Q2 is one of the strongest and best executed quarters in our history. Revenue was $92 million and widely outpaced our guidance on a sharp acceleration to 29% year-over-year growth. Revenue upside flows directly to the bottom line as we generated adjusted EBITDA of $9 million at a 10% margin. This marks not only a return to profitability, but also our first double-digit margin in three years. Our Q2 2020 is the outcome of a strategy that was put in place over three years ago around a vision of a world shifting to conversational commerce. What we experienced this quarter is not an anomaly; it is a clear beginning of a dynamic dramatic shift that is happening to the retail and care worlds that will be powered by digital AI-based conversations. With live voice agents still in work from home mode and overall capacity around 60% to 70% of what was available pre-COVID, there is a rush to automate conversations at scale. We will end up automating around 80% of end-to-end conversations on our platform. Today, we already have customers who are on this path. If you take a step back and ask the question, what is the advantage of speaking to a live agent over an automated agent, there is really one answer. If a brand has legacy back-end systems, but for some reason cannot be accessed by a machine through APIs, then a human is needed to manually access those systems. COVID has accelerated the brands' need to open those back-end systems because automation is filling in for the reduced capacity that happened when agents were sent home. Strategically, the market is coming to us at an accelerated rate and over the next 24 months, we will see a more pronounced shift from voice to messaging and automation. Already nearly 70% of messaging conversations on our platform rely on some form of automation. Our capacity to power this type of AI automation at scale starts with the most competitive advantage we have in the market, which is the accumulation of data—our dataset with more than a billion conversations across verticals, geographies, and use cases. We are now rapidly expanding that dataset. In the second quarter alone, we ingested over 100 million individual messages a month into our intent analytics engine, up from just a couple of million a month at the year-end 2019. We use that data to develop services and algorithms that automate conversations at scale. In fact, between December 2019 and June 2020, our customers had doubled the number of monthly conversations on our platform that were powered by bots and automation. Equally important, nearly 50% of the conversations that were powered by LivePerson bots were fully autonomous, meaning they required no human intervention and that is up from 25% at the start of 2019. Where these automations are covering simple or complex use cases, they are providing an enormous benefit to our customers by eliminating wait times for their consumers and removing human capital costs from the contact center. We believe that AI is going to win the day in the conversational commerce space. We have built a powerful set of tools to lead this market. Today, we are announcing the general availability of our newest platform called The Conversational Cloud. This platform combines all of our AI tools and will solidify our platform strategy in the AI space. The Conversational Cloud has four core foundational components: intent manager, conversation builder, functions, and intent analytics. Let me do a deeper dive into a few of the key parts of the platform. The key to AI is being able to identify what we call intents or the phrases from which the consumer expresses their goal. We recently developed a powerful tool called Intent Manager, which enables the machine to recognize intents in real-time at every step in the conversation, so they can be classified and prepped for automation. We augment this with new capabilities in our live agent workspace that enables agents to tag intents during live conversations. Once intents are identified, they are moved to Conversation Builder, where bots are then created. Conversation Builder changes the paradigm for bot development by creating a low-code scripting environment that empowers technologists as well as non-technical people, like contact center agents, to easily build, deploy and manage automated conversations at scale. The Conversational Cloud was in beta over the past several months and during COVID, we saw a dramatic increase in the use of Intent Manager and Conversation Builder by our enterprise customers. The other powerful tool is called Functions. Functions enables developers to connect third-party systems and data sources and also enables custom development, facilitating real-time actions between systems. Functions is at the core of scaling high-quality automation because it enables complex back-end transactions to tie into the conversations. The Conversational Cloud platform was organically built from the ground up and all the components are seamlessly integrated and work with LiveEngage, which as you all know is our leading messaging platform. Our recent sales activity validates the undeniable march towards automation adoption and a need for the Conversational Cloud. Q2 was among our strongest quarters ever for signed contract value, highlighted by the signing of seven seven-figure deals and several instances where opportunities closed in weeks instead of months. We also continue to see adoption curves compress as customers first sought to triage the COVID-19 crisis and then began shifting to a more strategic view of how they want to operate in the new normal. A prime example is the seven-figure upsell we signed with one of the 25 largest banks in the world. Like many customers, this leading brand was overwhelmed when the crisis hit and agent capacity plunged, and wait times on the 800 number skyrocketed. They turned to us for guidance and we quickly went into action, helping them more than triple the number of agents on messaging and move towards a ten-fold increase in platform volumes. Now, the state is building out automations, deploying proactive messaging for direct outreach to impact its citizens. Finally, I'd like to highlight our groundbreaking work with Foodservices where Chipotle, one of the largest quick-service restaurant chains in the world, launched Pepper, a conversational AI customer to take orders directly through Facebook Messenger. We are seeing a lot of action from traditional or other brick-and-mortar stores where they want to provide contactless commerce, curbside pickup, and virtual store agents. It's actually an area that retail wasn't a core area for us, but we've seen a tremendous amount of demand in that area as consumers can't walk in stores. We're creating flows to create that experience so they can at least come and get stuff delivered to their cars and curbside pickup. In addition to successfully closing out opportunities in our pipeline in Q2, we also created and progressed our sales pipeline at a rapid pace, leveraging the powerful combination of a matured direct sales force, a new partner channel, and an effective digital marketing engine. We're still testing and learning. I can confidently state that our go-to-market teams have adapted well to this new virtual selling world. For example, in place of our in-person customer marketing summit in Q2, we launched a series of more targeted virtual events, each hosted by a flagship brand demonstrating thought leadership in conversational commerce. With record Q2 results in the background, elevated platform volumes, and a very healthy pipeline of opportunities to pursue, we are entering the second half of 2020 in a strong position and are raising guidance accordingly. We are now targeting 2020 revenue in a range of $357 million to $361 million, which is 22% to 24% year-over-year growth. Likewise, our success in capturing operating efficiencies through internal automations and tightened controls is creating a more scalable financial model where we can continue to invest in key growth drivers while still enabling revenue upside to flow to the bottom line. As a result, we are increasing our adjusted EBITDA guidance to a range of $16 million to $19 million, which is a marked improvement from breakeven guidance at the start of the year. To highlight the quarter's key accomplishments, the second quarter once again proved the adaptability and strength of our business model. In an uncertain macroenvironment LivePerson is in a desirable position of raising revenue guidance and once again increasing our profit target. This improving outlook isn't simply fortuitous; it is the result of LivePerson setting a long-term strategy and vision around conversational commerce and AI and then investing in and executing on its strategy to put our company in the right place at the right time with the right platforms. I also firmly believe that the inflection we are seeing and the shifts that are now happening in the contact center are going to be permanent. Once brands capture the lower cost, improved customer experience, and increased scalability of automation, they are unlikely to backtrack to expensive, inefficient physical labor and voice calls. With that, I'll turn the call over to John to provide an operational update and more color on our guidance.

Thanks, Rob. I too couldn't be more pleased with how well LivePerson adapted to the new environment and capitalized on the demand inflection for our Conversational Cloud. LivePerson sharply accelerated revenue growth and delivered better-than-planned profitability and cash generation as the company executed on all key facets of its business. We built even stronger relationships with our customers by expertly guiding them through the crisis and helping them to maintain business continuity through a combination of AI and messaging. This strategy drove the revenue retention rate above our target range of 105% to 115%. We increased and progressed the sales pipeline by successfully adapting our go-to-market strategy to virtual selling and enhancing our partner channels. As Rob stated, contract values signed in the quarter were among our highest ever. We enhanced operational leverage through increased efficiencies from automation and healthy rigor around expense controls, and we dropped the majority of incremental revenue straight to the bottom line. This resulted in a $15 million year-over-year increase in adjusted EBITDA in the second quarter. We seamlessly transitioned to a work-from-home organization, maintaining strong productivity and alignment across regions and teams. The adaptability of our people and business model helped us capitalize on the opportunities that drove record results in the second quarter. As for those results, accelerated adoption trends for messaging in conversational AI increased revenue to a record $91.6 million, which was nearly $8 million above the midpoint of our prior guidance range. Approximately 60% of the upside was fueled by our gain share models, which, as a reminder, are typically the first contract types to monetize increased usage of our platform. The remaining 40% came from higher overages, favorable timing of contract signings, the consumer business, and various other revenue streams. In terms of growth, revenue accelerated 29% year-over-year, nearly doubled the rate of the second quarter last year, and was up 17% sequentially. B2B revenue grew 30% year-over-year and consumer grew 24%. Within B2B, hosted software grew 35%, while services grew 4%. The US grew 44% year-over-year and accounted for 65% of revenue. International grew 8% year-over-year and accounted for 35% of revenue. From an industry perspective, consumer and retail, followed by technology, financial services, and telcos, made the strongest contribution to year-over-year growth. However, we saw increased demand across the board. All of our verticals reported higher monthly volumes in June than pre-pandemic. We signed seven seven-figure deals in the second quarter and a total of 134 deals. Consistent with the strategy discussed in the prior call, in the second quarter, LivePerson continued to prioritize helping existing customers successfully navigate the pandemic. The focus on securing our base yielded a high return on several key dimensions. Conversation volumes and LiveEngage increased by more than 40% since the pandemic began in March with bot-based conversations upgraded by 50%. Revenue retention for enterprise and mid-market customers exceeded our target range of 105% to 115%, trailing 12-month ARPU increased by greater than 25% year-over-year to a record $395,000. Existing customer deal counts increased nearly 30% year-over-year driven by doubling in the number of enterprise deals signed. As for new logos, a 35% year-over-year decline in closed deals was in line with our expectations. Although we brought in a number of high-profile new logos, including a multi-billion dollar beauty retailer, a Fortune 500 consumer packaged goods company, and a top 10 automotive OEM. Our focus in the second quarter was on helping existing customers navigate the crisis. Looking ahead to the third quarter, with our customer base confident and secure, considering the strong pipeline generated in the second quarter, we anticipate a rebound in new customer activity. Moving on to the bottom line, as with revenue, adjusted EBITDA of $9.3 million exceeded the midpoint of our guidance range by nearly $8 million, reflecting the adaptability and scalability of LivePerson's operating model. The profit upside was fueled by the combination of strong revenue outperformance along with rigorous expense discipline and efficiencies driven by internal automation. The strong execution also carries through to cash generation and we ended the quarter with a cash balance of $173 million, up $2 million from the prior quarter. As I engage more closely with my colleagues across the business, it reinforces my confidence that there is meaningful room to build on this performance over the intermediate to long term. As previously discussed, Rob brought me in two quarters ago to modernize the CFO role by applying the lens of data science to our operations. My key focus areas are automating repetitive low-value work and leveraging AI to enhance decision-making under uncertainties. We are steadily progressing with initiatives that are moving entire production efforts from internal teams to field support, accounting, and FD&A. For example, we recently delivered systems in financial planning, commission calculations, and product pricing and sales proposals that not only enable us to scale more efficiently, but also give people back their time to focus on creative and strategic work, and in the case of our sales team, more selling. A valuable byproduct of these new connected systems is clean, standardized, and readily accessible operational data. This data feeds more sophisticated algorithms that enhance the quality and timeliness of actionable information, which supports decision-making and increases the predictability of our business. For example, we have built predictive algorithms that can forecast quarterly contract signings and per rep quarter attainment more accurately than our financing field work. Such tools give us the ability to plan and react far more nimbly than we have been able to in the past. With this positive backdrop, let's turn to the outlook for the remainder of the year. For the third quarter, we anticipate revenue in the range of $92 million to $93 million, representing 22% to 24% year-over-year growth. For the full year 2020, we are raising guidance to a range of $357 million to $361 million or 22% to 24% growth, up from previous guidance of $340 million to $355 million or 17% to 22% growth. The upward revision of revenue guidance reflects the combination of strong year-to-date contracts signed, better than expected conversational volumes on our platform, and a robust pipeline entering the second half of 2020. We continue to balance our enthusiasm for what we see as a demand inflection for our platform with a healthy respect for evolving macro uncertainties. As for profitability, while most companies view investing in growth and driving higher margins as mutually exclusive, I think we're in a position to do both. We've made rapid and meaningful progress on the automation front and raised the bar for budgetary vigilance without reducing investments in core growth drivers, including AI, product innovation, go-to-market capacity, and platform infrastructure. As a result, we are guiding for third quarter adjusted EBITDA in a range of $5 million to $6 million. For the full year 2020, we anticipate adjusted EBITDA in a range of $16 million to $19 million, up from prior guidance of $3.5 million to $10.5 million. We also continue to target cutting cash burn in half in 2020 and ending the year with a minimum of $135 million of cash on hand.

I'll close by summarizing a few key points about the business. LivePerson is benefiting from a demand inflection as leading brands leverage our platform and expertise to power remote agents in automation. Our growth trajectory has improved. We outperformed second quarter expectations and raised revenue guidance for 2020 due to the combination of a surge in platform volumes, compressed adoption curves for our technology, and strong go-to-market execution. We've also accelerated our path to profitability and sustainable cash generation. The early but impactful progress we've made on automating G&A and sales support functions has helped us scale efficiently, raise profit guidance consecutively, and plot a long-term course to reduce G&A expenses to single-digit percentages of revenue. With that, I'll hand the call back over to the operator to take your questions.

We do have a question from Siti Panigrahi. You're now live.

Hi, I just wanted to ask about the increase in sales reps from last year. Could you discuss your capacity to ramp up so far and your expectations for sales rep productivity in the second half? Thank you.

Sure. In terms of carriers, we are flat compared to last quarter in enterprise and expect to remain around that number for the rest of the year. Regarding their ramp ability, we noted earlier that we have about 80% of our capacity from 2019 ramps as of the end of the second quarter.

Thank you.

Thanks for taking my question and congrats on the great quarter. John, maybe this one's for you, the full-year guidance calls for additional upside in the second half of the year relative to what you have previously thought and the range is also meaningfully narrowed. Can you maybe just give us a sense for where you're seeing the most increased visibility that gives you confidence in that guide relative to what you knew 90 days ago? And how much of that is are you counting on the momentum of gained share continuing versus some of the overages and upsells and contract values that are going to take place in the second half?

Sure. With regard to gain share, it's definitely a key component; about 60% of the upside is due to our gain share models, and as discussed last quarter, the gain share models enable us to recognize revenue almost immediately as volume increases. So we expected some of that as volumes continue to increase during the second quarter. Over time, of course, we expect elevated volumes to translate into upsells for other contract types. With regard to the remaining balance, the 40% of upside is tied to a variety of dimensions, including overages and other contract types, the timing of bookings in the quarter, the consumer business, and other revenue streams.

Got it, thanks. And then, Rob maybe this one is for you. But the launch of The Conversational Cloud, can you just maybe give us kind of the objectives of that? Is it to democratize AI so the customer service agents can use it and introduce more automation into messaging volumes than there is today? Just give us a sense for what's different and what the main objective of launching this business solution?

Yes. So when we look at LiveEngage, LiveEngage is really about messaging and the messaging endpoints like Facebook Messenger and Apple Business Chat and voice-to-messaging; we have that. But what we're seeing is there is a lot of focus on how do we automate conversation. So we built a set of services and put them together in The Conversational Cloud, which include Intent Manager, which is a new service to ingest transcript data and then automate looking for intents and goals of consumers, and then once again, you can democratize bot building with the conversation builder. The Functions capability also integrates into the back-end systems, and pretty much gives you what you need to really scale automations, whether you're in the technology group or you're an agent group. We put it together in one platform with one unified experience so you can create an intent that flows straight into conversation builder, and then it's launched; and you can analyze that conversation in the automation of it. The idea was to take a harder position on AI and automation and then separate out the live agent tool set, which is about LiveEngage.

Perfect, thank you and congrats again.

Great, thank you for taking my questions and congrats on a great quarter. So just two from me. So the seven-figure upgrades you had in the quarter, how do those deals come about? How long were they in the pipeline? And was it more upgrades towards higher usage, or was this kind of these companies deploying messaging across other business units?

Sure. It's a mix of all of the above. Certainly, our strategy is to land and expand these big accounts. So for the seven-figure deals within the existing base, that's precisely what's happening. In some cases we are renewing at higher baselines of volume, and in other cases, we're adding additional products from The Conversational Cloud and expanding into new departments and verticals within the enterprise.

Great. And then maybe just to piggyback off the last question, can you talk about how you're going to monetize Commerce Cloud? Is it a per rep seat charge? Just curious to know how that differs from customers on LiveEngage? Thank you and congrats on the quarter.

So currently we have room to move with our pricing structure. But at the moment, it's not a per seat sort of structure; it's more of a cost per interaction structure. So it's driven by increased usage, right. We have, obviously, great demand among the customers to tap into various databases, the API to use our functions as a service product feature, and these have a charge associated with those as well. So it's really a usage-based model, not a seat-based model.

Thanks. I wanted to note that it took you 7.5 years from your IPO to increase revenue to the same amount you did in the last 90 days. So against that backdrop, I'm sort of curious, what are the challenges to rapid scaling in a remote working environment? There isn't as much face-to-face; are there challenges to hiring and educating? Can you maybe talk about what you see in that given what looks like a pretty strong acceleration in your growth?

So, if I unfold that a little bit, first is we are not going to return to offices. So we have decided as a company to change how we're working and obviously, it's working quite well for us. When we look at sales activity and marketing activity on the last quarter's call, I said I wasn't sure how things would play out. Our marketing events and face-to-face events mean a lot and drive a lot of deals closed. But we are seeing that the demand for our products and our platforms is outweighing the need to be face-to-face, and we have such good referenceable customers in our base. As you know, they're doing webinars for us and stuff like that. We feel very good about where we are, and this concept of—I don't want to say distributed work forces because we've been distributed, we've been globalized since 2000—but we're just thinking of working a different way. We can go after a different set of employees and customers. Things are moving quite well for us. So we figured, let's continue operating in this mode, and I think you are going to see a lot more innovation on the marketing side moving forward.

A follow-up on that change and how things have to be done. When you look into the pipeline, have you seen any noticeable names that might have been people you wanted to get into, but were maybe resistant prior, but recognizing that things are changing or willing to open their doors like—have you seen some early indications of that success? Thanks.

Yes. The thing that's just been very exciting is retail. And retail was never really a place for us to play because it's usually low-margin products, and they don't want to put labor into it. Now that we come to the table with automations, and people don't go to stores as much, there is a whole transformation of the retail world. We've been piloting with one of our big box home improvement companies, one of our customers, virtualization of their stores. There’s a store in New York where every product has a QR code; you hit the QR code with your phone and you start messaging an automation or remote agent who is offshore, actually in the Dominican Republic, servicing a store in New York. We've been running it for a couple of months, and it's doing very well. Consumers love it. They don't have to face-to-face with someone who works in the store. We're doing pickup at the curbside with this technology too. A lot of action in retail right now, more than we've had in the past because of the transformation of that business and their need for something to change the game.

Hi, great, thanks guys. I just wanted to get a better understanding of what you’re seeing on the gain share side of the business and how you are incentivizing reps to push more and more of these agreements? It seems like they are accelerating exciting revenue for you.

Yes. So, I can break out gain share a little bit; it used to be something different in the past than what it is in the present and I think it's going to unfold that. The gain share business is really a way for us to go into a customer and say, look, we have agent capacity, so we bring a partner who has live agents, and we'll handle all messages right off the bat, so we can get up very quickly and use our platform the best. But what's very interesting is we're not competing like a BPO. We're trying to get labor business. Our goal is to take that labor, which is specialized labor that we've trained, and they work on automations. If you look at all the gain share programs we have, the goal when we walk in is to automate 80% of these flows, but it starts with human agents taking the messages and learning about the intents and then using our toolset to automate. We have a huge competitive advantage. We start out at an equal rate of a BPO on a cost per message, but we'll drive the cost down over 24 months to half that price, and then over 36 months, a quarter of the price because we'll automate it and then we're getting more volume. That's what's exciting about it because it fits our strategy. We're not looking for live agents here; they are only being used to create automated conversations.

So we highlighted a couple of key wins in the prior quarter, and that general trend has continued. We historically had enterprise license agreements that are essentially all-you-can-need contracts from a usage standpoint, and we have been rolling those over into cost per interaction contracts while upselling those customers. Given the increased baseline in volumes, we've had a lot of success with that strategy.

Great, thanks. I'll add my congrats. A couple from me, guys. Regarding the new deal flow, I think you had messaged you kind of hit your head down on dealing with existing customers and migrating existing customers. Can you dive into that just a little more precisely, kind of how it progressed month by month from sort of a pre-COVID read on through to where we are now in terms of just exactly what was going on in those new deals? Were the deals moving at a normal pace? Was it just a function of you looking elsewhere and now refocusing back on those deals? Just trying to better understand the underpinnings of your expectations for those deal counts to come back?

Hey, Jeff. The story is really what we described in the prior call—that there was an intentional strategy to focus on the base. We had a need to help guide them through the crisis to maintain business continuity and high levels of customer service. That strategy drove a 30% increase in ARPU and higher revenue retention than our target range of 105% to 115%. Existing customer deals were up 30% year-over-year as a result of that strategy. With regard to new logos, we had some strength in various verticals and retail; I'd say we are clearly one of those for the reasons Rob described.

Thanks. Yes, awesome quarter. I guess just two things: one is, can you quantify how much the pipeline has grown since the start of the year? And then two, you've mentioned partners a few times; maybe give a little more color on how partners are contributing to the bookings in pipeline now?

Yes. Pipeline growth entering the second quarter was close to a record, and we've continued to develop a really strong pipeline throughout the quarter in addition to progressing that pipeline. So we're really happy with the health of the pipeline at the moment.

Did they drive any of the big deals in the quarter?

There’s definitely driving deals in the quarter. This quarter, they're not responsible for the seven seven-figure deals that we discussed.

Hi guys, this is Matt on for Sterling. Thanks for taking the question. So in terms of the cost savings on the EBITDA margin, how much of the cost savings from lower expenses do you think you're going to reinvest in the business? I'm really asking in the context of the previous 7% to 10% EBITDA margin guide. How do you think about the next couple of years out in terms of the EBITDA from where it finished this quarter?

We won't be commenting on a couple of years out or 2021 during this call, but I think it's implied in our guidance that there is some reinvestment back into the business that we're contemplating in the third quarter given the step down in adjusted EBITDA relative to the second quarter. We will reinvest to ensure stability.

Got it. And then one follow-up for me. In terms of the 50% of conversations that are now fully automated, how much of the ARPU increase is coming from customers adopting more automation?

The short answer to that question is that there is a distribution, right? Some are falling throughout the distribution this quarter, and that would include in the seven-figure range.

Hey guys, congratulations on a really great quarter. I just wanted to ask a little bit on the back-office automation strategies. It sounds like they are really beginning to take hold out there, especially in the finance department, automation and with our sales department automation too. I was wondering if you could provide any high-level commentary on how we should be thinking about the ability to productize those back-office automation technologies and when we could start seeing those being introduced to the market?

Hey, Koji. I would love to give you an answer on that and it's certainly on our radar. But it's not something we're prepared to put a timeline on at the moment.

Hello, can you hear me?

Yes.

Okay, super. Didn't think you could for a second. I'll add my kudos to the results to the great quarter. I wanted to ask first kind of a follow-up. Last quarter you talked about your SMB business about 15% of your revenues was afflicted by the COVID. I guess with this quarter you're seeing strength across all verticals, all industries here. I wonder if you can give some more color in terms of that, especially for the afflicted industries—they have normalized in terms of their spending patterns, and have they rebounded to the point where the bottom has reached?

Yes. So I think the one thing that we've recognized was we didn't have to talk about customer defaulting or going out of business. If they're on our platform, it means they're in the future of trying to transform their business anyway. Even the airlines that we have on our platform are doing a lot of work on the platform now to automate and change the game. Customers on our platform, regardless of their size, want a deeper relationship. We're investing in more platform capabilities in the SMB area because we see this group really wanting to stay connected when people walk into local stores. We should start seeing in the upcoming quarters a return to growth there. The U.S. market is growing above 40%, and they're doing very well. But we should see the same sort of growth in Europe and beyond.

Yes. Hi, good afternoon. Congrats on a strong quarter and thanks for taking my question. Focusing on the uptick you've seen in conversational volume of 40% since the onset of the pandemic, can you give us some insight into expectations for conversational volume as we go into the second half of the year? And Rob, can you talk about maybe investments needed to be made in hosting capacity for this uptick in volume?

Yes. We continue to see growth. Growth continues up week-over-week, month-over-month. We are looking to add public cloud capacity. As you know, we run our own cloud around the world because of security of data. We need to supplement our clouds with public clouds. We don’t want to cap growth; we are focused on being able to spike capacity.

Hi, good afternoon. Nice job on the quarter.

Thank you, Mark.

My question for you: following up on the prior question on your international business, is the slower growth you're seeing overseas due to just internal operational issues you're having, or is Europe just behind the curve on messaging and automations?

We felt it was a leadership issue and things got a little slow over there. The demand in that market in Europe and Asia is quite strong—the new head over there exceeded their bookings numbers for Q2. We should start to see growth over the upcoming quarters.

Hi guys, thanks for taking my call. Hope you all are well. Maybe one for John. Can you talk a bit about the mixing of news? It looks like B2B cloud hosting really accelerated in the quarter relative to services. Is that dynamic something you would expect to continue for the remainder of the year?

Hey, yes, it is because of the strategy we have to get more leverage in the model through partners. We expect that they will handle an increasing size of our professional services work going forward.

Hi, good afternoon. Thanks for taking my question. I was curious if you guys could give me the breakout of hosted services business revenue growth. I'm not sure I saw that in the materials or heard on the call.

With regard to hosted versus professional services, hosted services were up 35% year-over-year. Professional services were up 4% year-over-year in the second quarter.

Next one on the line is Richard Baldry from ROTH Capital. Please limit to only one question and one follow-up. You are now live.

Thank you very much.