Liveperson Inc Q4 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson’s Fourth Quarter 2020 Earnings Conference Call. My name is Matt, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from LivePerson will conduct a question-and-answer session and conference participants will be given instructions at that time. To give everyone the opportunity to participate, please limit yourself to one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mrs. Idalia Rodriguez. Please go ahead.

Thank you, Matt. 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 and the comments made during the 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 press release and 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?

Thanks, Idalia. Thank you for joining LivePerson’s fourth quarter 2020 earnings call. We had an awesome quarter with records across revenue, profitability, and customer wins. LivePerson delivered one of the strongest quarters in our history. Revenue for the quarter was $102.1 million, making Q4 our first $100 million quarter. Year-over-year growth for the quarter was 29%, which exceeded the high end of our guidance range and marked our third consecutive quarter of 25% plus revenue growth. For the full year, we grew revenues 26% year-over-year, exceeding our long-term growth of 25%. Our continued focus on internal automation and enhanced financial discipline also increased our operating leverage. Q4 adjusted EBITDA of $18.2 million or 18% margin exceeded the high end of our guidance range and translated to a second consecutive quarter of hitting the Rule of 40. We ended Q4 with 10 seven-figure deals, a new record four of which were new logo wins. We have seen the return of momentum in new logo acquisitions with new logo annual contract value doubling year-over-year, which is complementing our strong growth within our existing customer base. Before going deeper into the key wins of the quarter, I'd like to take a step back and share a few thoughts on what is driving our success. Four years ago we shifted our strategy to focus on Conversational AI and automation. The rise of AI represents one of the greatest leaps forward in technology across all industries. Because of its contribution to our success and its central role in the strategies we're executing against, I'd like to unpack what AI really means to us. When we speak about AI, there are several dominant categories. There's robotics from companies like Boston Dynamics, GPU makers like Nvidia, and software companies like Google, Microsoft, and Amazon, that make AI technology and general-purpose tool sets that can be applied to things like image processing and autonomous vehicles. In simple terms, AI enables the processing of outcomes and goals at scale, beyond what a single or multitude of human brains can do in any normal capacity. AI starts with having a very large set of unique data. Our data set is unequivocally one of the largest for consumer engagement interactions in the world. Analyzing that data set, which in itself we had to develop a set of powerful tools, allowed us to think exponentially about what big processes and challenges we can solve that exist between a brand and its consumers. For example, on average, 30% of the conversations that happened with a telco or credit card issuer around bill pay; therefore, we created an AI to automate bill pay which can deliver tens of millions of dollars in savings for a company. In order to deliver scaled automations like the bill pay example across tens of millions of transactions a month that ride on our platform, we had to do things like build our own NLU, which is a process that interprets human language in a unique setting like customer care. Then we had to build the tools to extract, analyze, and annotate the data to make the data rich. As we just announced yesterday, we launched AI annotator, which takes normal contact center agents and puts them in the middle of the automation by enabling them to enhance and tag conversational data sets. We take all that rich data and we have the tools to create them what we call consumer experiences, or what are known as chatbots. Finally, we created a world-class business messaging platform to deliver those automations to numerous endpoints. Overall, nearly 70% of our messaging conversations rely on this AI technology stack. Over the past four years, we have built a lot of intellectual capital and filed nearly 100 patents from a team that includes some of the best data science and engineering talent in the world. A four-year lead, our data set, talent, intellectual property, and vision make us definitely unmatched against any competitors in the contact center space and also against the likes of Google, Amazon, and Microsoft when it comes to Conversational AI. Volume on the Conversational Cloud skyrocketed during Black Friday and Cyber Monday, with peak conversation volume growing 200% year-over-year. Our latest global survey in September of 2020 revealed that 85% of consumers worldwide want the ability to message with brands, up from 65% the previous year, and 75% say they are more likely to make purchases if they can browse and get answers over messaging. The shift in consumer behavior is a tailwind that we expect will only intensify over the next few years, driving a shift in traditional retail shopping, web, and ad-based e-commerce to Conversational Commerce. In fact, we're seeing a massive opportunity ahead with retail brands that want to use the Conversational Cloud to drive incremental sales and revenue. I’ll illustrate with a few examples of our big wins in the quarter. One of our notable new logo wins is a multi-year deal with one of the world's largest cryptocurrency exchanges, marking a strong entrance into this rapidly growing segment. Their platform hosts millions of users with billions of trades globally. As they ramp their business, the use of human agents to answer questions has become untenable. Previously, customers were using a system from one of the leading CRM providers with a focus on using email and online ticketing as a primary communications channel. The inefficiency of such a system created a ton of operational issues that resulted in tremendous customer frustration. They became a customer because they are aligned with our vision of AI and are able to see how they can quickly ramp up automations using our toolset like content manager and conversation builder. Another notable win during the past quarter is a strategic multi-year multi-million dollar agreement with William Hill Group, a global top five gaming company with millions of consumer interactions per year. With William Hill, we’re implementing to expand the Conversational Cloud platform across the company's key brands including William Hill and Mr. Green. The deal was closed within three months. The goal of LivePerson is replacing a legacy platform and quickly revamping the consumer experience. It will take advantage of LivePerson’s customer service, sales, and marketing solutions, including our highly differentiated two-active product and messaging capabilities. With William Hill on board, three of the top global sports booking and gaming companies are now LivePerson customers. Another exciting win in Q4 is with one of the world's top COVID rapid antigen in-home testing companies. We were introduced to this opportunity through one of our existing banking customers who is seeking a scalable testing solution to safely bring back its employees, its branch employees, and trading floor employees back to work. We developed an AI powered conversational experience that guides an employee to take the test, analyze the results, and generate a health pass. So the employee can go back to work with a high level of efficacy. This was a seven-figure deal secured within a record 11-day sales cycle as part of a number of offerings we have created for COVID-19 including ones around vaccinations which we are deploying with state governments. In addition to the robust momentum in new logos, we also signed multiple expansion deals with existing customers in the last quarter. Our top five US airlines signed an upsell in an effort to consolidate their tech stack and add our social media capabilities to their messaging agent repertoire. This airline represents the first flagship brand to leverage our new platform’s social messaging capabilities to communicate with consumers across platforms like Twitter, Facebook, and Instagram. Partners continue to be a key part of our go-to-market strategy especially around new logos in 2021. The highlight of our partnership expansion in Q4 was with IBM Global Business Services. LivePerson and IBM will work together marketing and delivering AI-based solutions to clients across industries, strengthening our go-to-market reach. In fact, three of our key 2020 wins were facilitated by this partner. Infosys joined LivePerson last quarter in a first-of-its-kind 360-degree channel partnership. We are seeing great progress during the quarter. We developed a strong pipeline for the Conversational Cloud with Infosys’ client base. We're working closely with key vertical groups within Infosys including consumer retail, logistics, finance services, and the PMT Group. Looking ahead to 2021, we'll be extending our focus to go after retail and commerce opportunities and we'll continue to build out several key areas of our platform including payments, social media, product and messaging, and AI-based consumer intelligence and targeting capabilities. We see the potential for sales and marketing in these cases to more than double as brands look to enhance traditional advertising and shopping experiences. Our latest estimate suggests the Conversational Cloud is already supporting approximately $5 billion in annual transactional value and we're just getting started. Finally, given the success of gain share and our partner network and the renewed momentum in new logo acquisitions, we’re making strategic investments to continue accelerating growth from these go-to-market channels. And with that, I’ll turn the call over to John to provide an operational update and more color on our guidance. John?

Thank you, Rob. We closed 2020 with exceptional business and financial performance, surpassing previous records across several key metrics in the fourth quarter including revenue and profit, the quantity of seven-figure deals, average revenue per customer, and billable platform usage. We exceeded the high-end of our guidance range for the top and bottom line once again, demonstrating our ability to enhance operating leverage while aggressively growing the business. Overall, these results reinforce our position as a clear market leader for Conversational AI and demonstrate the ease with which our platform can be adapted to meet accelerating demand across a broad spectrum of use cases, industries, and geographies. Building on the latter point, the world has been undergoing a steady digital transformation for decades, but the pace of that transformation, as we've all observed, accelerated significantly in 2020, including usage of the Conversational Cloud. The agility of our platform and developer tools enabled our largest enterprise customers to expand from saving costs and enhancing customer service experiences to generating new revenue streams from Conversational Commerce. In total, as Rob mentioned, we estimate that the gross value of commerce on our platform has increased from several hundred million to approximately $5 billion in 2020. With our long-term vision taking shape and significant forward momentum, I'm excited to expand on our 2020 results and plans for the year ahead. Before shifting to the fourth quarter numbers, I think it would be helpful to put our 2020 results into perspective. On the fourth quarter call one year ago, we issued guidance of 21% at the midpoint for full year 2020 revenue growth and reaffirmed our long-term plan to reach 25% in 2021. With that context top of mind, exceptional execution by teams across the company drove 2020 full year revenue to $367 million or 26% year-over-year, surpassing even our long-term growth expectations one year in advance. As I alluded to a moment ago, customer expansions into Conversational Commerce drove the bulk of that upside. In the fourth quarter, total revenue grew 29% year-over-year to $102 million, exceeding our previously issued guidance of $98 million to $100 million or 24% to 25% year-over-year. As Rob mentioned, the fourth quarter marked our third consecutive quarter of revenue growth at 25%-plus and our first quarter to exceed $100 million. Unpacking the upside, continued momentum in new logo demand, leverage from our partner network, and over performance by our consumer segment all contributed materially to those results. In terms of new logos, annual contract values approximately doubled across the board on a year-over-year basis, driven by a corresponding doubling in enterprise new logo counts. The success we've had with new logos in the third and fourth quarters is strong evidence that we're seeing a resumption of normal new logo pipeline growth. The continued success of our partner strategy also merits highlighting. Partners have materially enhanced our operating leverage by multiplying our feet on the street and establishing a robust ecosystem of systems integrators. In the fourth quarter, this strategy contributed to two seven-figure deals, bringing the total to 10 and breaking our previous record for seven figure deals in a single quarter. Within total revenue, B2B, hosted software, and consumer segment all grew 29% year-over-year. Gain share performed in line with expectations at 15% of revenue. From a geographic perspective, US revenue grew 37% year-over-year and represented 63% of total revenue. International grew 18% year-over-year and represented 37% of revenue. Significantly, we continue to build momentum in EMEA with contract signings growing over 50% year-over-year in the fourth quarter. Average revenue per customer grew 35% year-over-year reaching a new record of $465,000. Revenue retention continues to surpass the high-end of our target range of 105% to 115%. In terms of industry trends, year-over-year growth was led by retail and consumer, followed closely by financial services and technology. Retail and e-commerce as an industry within retail and consumer was also the fastest growing in terms of billable platform usage, driven by demand for conversational commerce and incremental revenue we generate for our customers. Overall billable platform usage continues to accelerate in 2021, nearing the high watermark set during the fourth quarter seasonal peak when volumes were up 200% year-over-year. Turning to the bottom line, fourth quarter adjusted EBITDA was $18 million or 18% margin and exceeded the midpoint of our previously issued guidance by $8 million and marks the third consecutive quarter of double-digit margin. We also operate at the Rule of 40 for a second consecutive quarter. Overall margin expansion was driven by top line performance, increased budgetary discipline, and internal automation which reduced hiring requirements throughout internal operations. Approximately half of the upside above our previous guidance was a function of delayed investments in R&D and go-to-market capacity that we are accelerating in early 2021. For the full year, adjusted EBITDA in 2020 was $38 million translating to a 10% margin. In terms of free cash flow, we improved cash burn by $98 million year-over-year, burning only $8 million for the full year. Compare that to our original plan to cut cash burn by $50 million in 2020. We also materially strengthened our balance sheet by raising $518 million in zero-interest convertible notes maturing in 2026. Turning to the full year guidance, we closed 2020 with exciting forward momentum, giving us confidence that we'll continue to accelerate growth. As a result, our guidance range for 2021 revenue is $458 million to $466 million or 25% to 27% year-over-year. Our guidance range for adjusted EBITDA is $33.5 million to $41.5 million or 7% to 9% margin. Note that as we guided during the third quarter call, we expected full year margin in 2020 to be approximately 8% due to planned investments in go-to-market capacity and product development. Those are key growth drivers and as such, we are accelerating those investments in the first quarter. This is the key reason we expect similar margin for the full year 2021. In terms of go-to-market capacity, we are presently working to increase quota carriers from approximately 80 to 110. As for the first quarter of 2021, our guidance range for revenue is $103 million to $104 million or 32% to 33% year-over-year. Finally, our guidance range for first quarter adjusted EBITDA is $5 million to $7 million or 5% to 7% margin. Before taking questions, I’ll briefly reiterate several key factors underpinning our success in 2020 and expectations for the year ahead. Platform usage continues to accelerate with 2021 levels already approaching the fourth quarter seasonal peak. We broke our previous record for seven-figure contract signings in the single quarter. New logo contract values doubled year-over-year and are once again materially contributing to our growth. Our strategy to enhance operating leverage on the expense side through internal automation and on the go-to-market side through our partner network are both exceeding expectations. And perhaps most importantly, our vision for conversational commerce has taken root across the market, and we expect our platform sales and marketing capabilities to continue driving upside in 2021.

We will now begin the question-and-answer session. Our first question will come from Richard Baldry with ROTH Capital. Please go ahead.

Thanks. Given your growth is accelerating beyond and faster than you had expected. Could you talk a bit about the status of your organic growth engines? And I heard the 80 grows to 110 figure for headcount but how do you feel about how mature that group you've gotten is? Do you feel like there's some catch-up to do because deals have outperformed you faster than you thought? Is there something that would spur early year growth given outperformance you had sort in the second half of 2020? Thanks.

Thanks, Richard. Yeah, I mean we feel good about the current team. Obviously, they performed very well last year. Remember we did a lot of hiring of that team the year before. It takes six months or so to get them up to capacity. So the team we have is, I feel, very strong and seasoned, and now we're ready to add another group to expand because of the demand in the market. As you know, also we have partners, so we got very focused on partners last year, and that's also showing good results especially on the new logo side. So I think we feel good about the current team. The leadership is doing a great job, and we just see this demand out there right now that we want to be able to go out and land and sell.

In addition, Richard, I would add that from a productivity perspective, measured in terms of revenue per rep, we've seen that increase every quarter in 2020, and that's driven by automations that allow reps to focus more on selling and less on data entry and pipeline analysis. In addition, we have fully automated an accurate bookings prediction model that allows management to course correct early in the quarter and optimize the playbook with machine prescribed actions that increase our win probabilities. With that machine starting to take shape, we have confidence to continue increasing our go-to-market capacity.

Okay. And can you maybe look at the partnership side a little deeper about how that works in terms of economics maybe and how far the partners can take you through a sales cycle and or even into an implementation deployment cycle? So how much burden is on you guys versus them? And what's the rewards to kind of keep them motivated? Thanks.

Yeah. So in terms of the economics, we typically will have a presale of credits to the partner that the partner receives a discount. They then resell those to their installed base. In terms of later questions on who does most of the work upfront? Right now we're putting most of our professional service work through these partners. Our goal is to put all of our professional service work, especially for those industries which we’ve established a playbook into the hands of our partners. So right now, there's a healthy balance between LivePerson helping with implementation and the partners running with that themselves. Our goal is for the partners to be fully self-service on our platform to serve those end customers.

Great. Thanks, and congrats on a great close to the year.

Our next question will come from Zach Cummins with B. Riley. Please go ahead.

Hi, this is Danny asking on behalf of Zach. Could you comment on any changes you've observed in the messaging landscape, particularly with competitors like Zendesk increasing their focus on AI? I understand you started your investments early, but could you share your thoughts on the competitive environment?

Yeah, I mean we pioneered the business messaging platform four years ago. We released it, and our pure messaging platform is the best in the world. The AI capabilities, as I explained, because as you scale conversations, what customers want is automation. Many of them are treating messaging as a channel and yet the majority of the interactions they have, for instance, on this cryptocurrency exchange, one of the largest in the world, depend on our platform. They're mostly strong with ticketing and email, and they've recently added messaging capabilities. But if you look at a customer like that that has millions and millions of conversations they need to power, they can't rely solely on humans doing messaging and some base-level automation. They want to create an asynchronous communication strategy with messaging, but they want all the power to automate those conversations at scale. That’s really where we’re winning the business and we're unmatched because of our data set and all the IP we have on that side, and we continue to invest tens of millions of dollars into it every year. So we've got a strong leadership position right now, but I expect a lot more to come in. Messaging is hot. We knew that years ago when we went into the business, and we made a big bet on messaging, but now it’s really attracting a lot of interest and there are many more companies entering. Most are targeting small businesses and market stuff like SMS, but when it comes to real scaled automation where the real value is, we are owning that area.

Got it. Thank you. And I was wondering if you could speak about some of the opportunities that you're seeing outside your core verticals?

Yeah, I mean that's really interesting. So just this year, I mentioned that we have retail sales and marketing, where we've laid a lot of groundwork in care operations, and we will certainly continue our work in that area. We're seeing a lot of opportunities in retail, especially as it transforms due to changes in stores. There's just a real focus on digital, and we have one of the biggest jewelry companies in the world doing amazing things. I saw their CEO on a show last quarter and talk about how their whole online business is booming, and we’re powering that. So we see a lot of opportunity on the retail side. I talked about our gaming side, and in this cryptocurrency exchange there’s a company for COVID testing in-home that has come to us, and one of the largest banks wanted to bring branch employees back to work. We developed an AI-powered conversational experience that guides an employee to take the test, analyze the results, and then generate a health pass. We built all the connective tissue for that and it launched last week. We’re seeing cool things going on right now that we can power because it’s really tied to AI and automation, some through messaging. This year is going to be interesting, especially on the retail side.

Got it. Thanks for the color and congrats on the quarter.

Our next question will come from Arjun Bhatia with William Blair. Please go ahead.

I was wondering if you could share a little bit about some of the early success you may have seen with rolling out the payments offering and then if you can give any color on when we might expect to see that play into revenue? Thanks.

We're currently observing positive engagement with the platform. While we haven't provided specific guidance on how this will affect our revenues this year, we plan to share more details and examples in the next quarter since the platform usage is strong. Our overall commerce strategy begins with payment solutions, which is why we are focusing on retail opportunities within the Conversational Commerce sector this year. As we acquire more customers in this space, we'll discuss how our payment platform is contributing to growth, and we are quite optimistic about it.

Awesome. Thank you. And then I just wanted to check in to see if you could have some color around where you stand on the migrating customers to CPI contracts and if you've experienced any pushback on that so far?

Hey Arjun, it's Chris. No pushback on that front. We migrated about 15% of the base in 2020, which was ahead of what we expected, and we have about two-thirds up for renewal in that respect in 2021.

Awesome. Thank you and congrats again on the quarter.

Our next question will come from Mohit Gogia with Barclays. Please go ahead.

Hey guys. Thanks for taking my questions, and I'll offer my congrats on a really strong end to the year here. So my question is on the land and expansion motion. I mean it's great to see that the new logo ads are sort of like I think it was mentioned that it's back to pre-pandemic levels. And obviously the new logo ACV doubling game is quite a good parameter. My question was on the expansion, which I think you have been coming ahead of the target range here for the last few quarters, right? And if you look into 2021 and beyond, I was wondering if you can talk with the sustainability here. I mean obviously we know that COVID accelerated the secular adoption, but it just woke customers up to the reality here, right? So if you can speak to the sustainability of growing that usage, growing that expansions, and retention among the customers in 2021 and beyond, it would be very helpful, and then I have a follow-up question.

Sure. The way we see it is that the pandemic was kind of a forcing function for adopting digital solutions, and because, as we discussed, automation is so key to powering those digital solutions at scale, it really is very sticky. In a post-pandemic world or years from now, when you built a machine to solve a problem for a customer or a brand and it does so effectively at a high level of customer satisfaction, you're not going to reverse and put that problem back into the hands of human labor, which is more expensive and less efficient for that problem that you've solved. From that standpoint, our automation and our increased usage are highly sticky. On top of that, I would say that from an expansion perspective, we’re only penetrated today, lastly the beginning of last year, we were penetrated into our base in terms of the fraction of total conversations across voice messaging and chat that we service on the platform approximately 10%. Our latest estimates have that number more in the range of 15% to 20%, again on average across our entire base. So, that leaves a lot of room for further expansion.

That's very helpful. I just wanted to follow up on the earlier CPI question. Can you provide an estimate of when you will move these customers to the CPI contract? What changes do you anticipate in terms of customer spending? That's all from my side.

It varies, of course, but typically we see upsell. There are some where there's an initial period of lighter revenue coming off, and then as they ramp into the high end of the usage that we've contracted with them, we see better results in the form of upsell and outages. But in general, these are upsells that take place, and to cite an example from last year very rapidly, we converted a topping from any latest CPI contracts, and within just a couple of months, we had a seven-figure upsell because of how much volume they routed to our platform. So in general, it's a very good tool for ourselves.

Thank you. Congratulations, that's a great quarter, but also I just want to dig into the guidance; very impressive guidance for 2021. So you talked about ELAs converting to CPI contracts. But what are your other assumptions in terms of that when you guided 25% to 27%, mainly gain share? Do you expect that to be at this 15% level? And then what sort of trends are you seeing on those CPI contracts coming up for renewal in terms of growth coming from there?

Sure. As you've pointed out, gain share is certainly part of the equation as a variable source of revenue. We don't have as much visibility into it as we do with recurring revenue, but nonetheless we have a large pipeline that we're chasing right now. Another core factor here are all the new use cases that have been driving revenue for us in 2020. We're expanding on those use cases in almost every industry, which again is a major factor. Overlaying that is commerce, conversational commerce, and our vision for that, as I said, is truly taking root in the market and the demand for our solutions. The demand that consumers have to simply have a conversation with friends before they purchase a product is driving adoption of the platform. It's driven by the consumer and the incremental revenue we generate for our customers. Because of those trends, we have confidence that we will continue to accelerate from where we were.

Okay. And then on the investment side, you talked toward that go-to-market investment. So are you planning to add more headcount in quota carrying sales rep or is there any other areas you're investing?

So yeah, we obviously we've got partners. We have our direct sales quota carrying reps. We have part of our business cohort we’ve started calling marketplaces where we are working with partners that already have a bunch of merchants, a bunch of small businesses. We have put an overlay on top of that and we can fire up thousands of small businesses on to our platform. So, there are areas that we're investing in those key areas today. But those are the three areas that we're looking at. John, if you want to expand on that?

Sure. I would say that there are, as we highlighted throughout the remarks, there are certainly folks on AI and we're making some significant investments there. Not to get too technical, but management is an area of focus for us, as is natural language generation, which we think collectively will dramatically enhance the consumer experience and our overall automation capabilities. We're also focused on making implementation faster and easier both for us and for our partner network. That includes or necessitates the addition of many more out-of-the-box integrations for the enterprise.

That's good. Just wanted to clarify also what sort of efficiency you're seeing in terms of leveraging data, and also any kind of benefit from now that you're working from, you know, remote working permanently?

We're being more efficient by working from home and not traveling, which was part of our sales strategy. Sales cycles have shortened since face-to-face meetings aren't always necessary. We're noticing significant efficiencies in marketing and travel, and we're also reevaluating our sales approach. Our sales representatives are now using video more frequently, and we’re exploring various methods to maintain engagement with prospects and customers. Previously, our approach heavily relied on large conferences and direct sales requiring travel, but this year may look different and could continue in this manner moving forward. We're enhancing our platform to make it more self-service, allowing customers to use it without needing our assistance for implementation or problem-solving. We've demonstrated that we can effectively operate remotely and scale our business. Currently, we're in a good position and plan to continue this way, having transitioned away from physical offices. We're in the process of developing a new work model that won't involve returning to traditional office settings.

Okay. Great. Thank you.

Our next question will come from Sterling Audy with JPMorgan. Please go ahead.

Hey, guys. This is through on behalf of Sterling. I was wondering if you could clarify the commentary around the $5 billion of annual transactional value. Is that the GMV equivalent moving across the platform, or what is that exactly?

Yeah, that’s correct, it’s GMV.

Yeah, so that’s the GMV.

Our next question will come from Ryan MacDonald with Needham & Company. Please go ahead.

Good evening, everyone. Thank you for answering my questions, and congratulations on a great quarter. Rob, I am interested in your thoughts on the sales cycles continuing to shorten. Do you think this trend is more due to increased end market demand or improved sales productivity? Also, I've noticed your success beyond the traditional customer service applications. Do you believe we are reaching a point where there is greater awareness and understanding in the end market regarding the various uses of Conversational AI? Thank you.

We have seen some very short sales cycles, particularly among companies looking for large-scale automation. One significant company in the cryptocurrency exchange sector is experiencing rapid growth and urgently needs automation. The importance of messaging as a delivery method cannot be overstated, and there is a noticeable maturity in how businesses view this approach. When we launched four years ago, T-Mobile was our sole customer actively using business messaging. Since then, the perspective has shifted, and it is now widely accepted as the preferred method for brands to communicate with consumers. The next challenge is implementing this at scale and identifying the appropriate automation tools. Our toolkit has enhanced significantly, allowing us to provide rich solutions. For instance, we recently introduced an agent annotator feature that assists agents in preparing data for automation rather than just taking messages. This improvement has led to the rapid launch of products, such as the antigen in-home test, within weeks, thanks to our robust toolkit. The market is evolving quickly, and I anticipate a year full of interesting use cases as automation and AI continue to gain traction across various industries.

Excellent. And as a follow-up, more general housekeeping. I think historically as we've looked out over the past few quarters, you've talked about total deal counts and the mix between new versus existing. Obviously, you saw some very strong metrics and the seven-figure deals. But could you provide the total deal counts and the mix between new and existing?

Yeah, I'll provide maybe some high-level color in that regard. I would say that while deal counts overall were down, I think it's important to take a step back and consider our broader results. The significant beat we had in the top line and bottom line is because of the deals we did close. While smaller in number, those deals were far greater in value. For example, as I think we've mentioned already, we closed 10 seven-figure deals in the fourth quarter, and four of those were new logos. Overall average new logo contract values doubled on a year-over-year basis. That’s exactly the trend we want to see in our new logo business. Within enterprise, however, new logo counts also doubled on a year-over-year basis. We're seeing a lot of positive indicators of demand from that perspective as well as, of course, the top line metrics that we've reported.

Excellent. Clearly some great momentum in the business. Congrats again. Thank you.

Our next question will come from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Hey everyone. I have a couple of questions, and I'll start with you, Rob. I'm interested in the competitive landscape as you target smaller enterprises. When does Zendesk's messaging capability become sufficient for customers to consider the offerings of CCaaS providers that incorporate different levels of messaging? At what point do customers decide they need a platform that enables them to engage in highly innovative projects, requiring robust tools instead of just accepting a good enough solution as part of a larger suite? Additionally, since your deal sizes are increasing, are you noticing improved win rates at the higher end of the market, while seeing a decline in win rates or customer interest as you move down market?

No, I don't think so. We've launched a marketplace platform that enables us to engage with thousands of companies. For example, we are working with the largest Yellow Pages in the UK, which hosts a multitude of digital properties featuring tens of thousands of small businesses. We developed this platform to help those businesses create conversational experiences with automation. This system goes beyond simply allowing a plumber to take messages; it allows customers to message the plumber for information like opening hours, and then it connects them to a live person. I don't see this as any different; it is the automation capabilities that are critical. Smaller businesses also want to automate, but they often face challenges. Their messaging platforms aren't very efficient and don't scale well. Our journey to reach this point took time, but we believe we have developed a world-class messaging platform, complemented by powerful tools. We're focused on expanding our product features and we're seeing interest from social media companies that are looking to enhance their messaging capabilities, prompting us to add social features as well. We have a dedicated team working on this, and we aim to transition business from those social platforms into a cohesive consumer agent experience. The final piece is adding voice capabilities, which we plan to address, potentially integrating an Alexa-style voice interface into our platform. I wouldn't be surprised if we introduced something like that, as we aim to automate this volume effectively. Automation is key for us.

Would that be related to the voice capability that you're currently developing? I suppose that's the question.

No, I think we'll discuss that further and include it in the prepared remarks. We're exploring different options and already have connections to existing voice platforms, like Amazon Connect, through our integrations. However, we aim to expand our capabilities. Our engineering team, led by Alex, our CTO, has been focused on these core engineering initiatives since I introduced the concept three years ago, envisioning a future where we could power such solutions. I believe we are now in a position to start exploring this further, and we'll share more details when we have them.

Sure. I want to briefly discuss a couple of other points. Rob, in that context, we had a great quarter and excellent results, so there’s no negativity around that. However, the decline in deal counts raises the question of how you see them performing in 2021. Should we anticipate growth in both expansions and new logos, with the total deal count beginning to increase? What are your thoughts on this?

Yeah, I mean, we got very focused on the enterprise, and you know I'd expect deal counts to go up, but we don't really focus on it. We focus on our overall revenue and our mix. If I take the marketplace concept, that counts as one customer in an instance, but actually there are 10,000 businesses powered on our platform with that one agreement. I don’t know how we will look at the business; we will look at it from the bookings and the revenue impact of that, and we look at our overall mix, obviously where we are still skewed towards high-end mid-market and enterprise; that's our sweet spot. That's because that's where the volume is. I think these marketplace concepts will really fire up eventually if we return to reporting on the individual businesses that are part of those, like the Yellow Pages or something else. We’ll see. But I feel good about where we are with the revenue mix.

Okay. And last, I guess just can you put a little finer point on the bookings? I mean our appeals are somewhat helpful; deferred not so much. Nothing really tells a holistic view. You talked about new contract values up to X and deal counts up, but it's not a holistic bookings number. Can you tell us something more about the total value of bookings in the quarter or that give us a percentage year-over-year or maybe a little more qualitative?

I'll take that, Jeff. So one, I would say you're right; deferred is not an optimal proxy for bookings or demand generally because of variance in contract structures and timing of invoicing and the like. We had several, I should say, large deals in the fourth quarter for which we didn't receive cash in advance, right? That means there's a direct impact to deferred revenue. I think a better metric is that we did increase 21% sequentially from that perspective. But even that just doesn't include the benefit of gain share because that's all contingent revenue. When you think about it from that perspective, we have really strong indicators for the demand that we're generating and the momentum we’re trying to yield with it.

Our next question will come from Brett Knoblauch with Berenberg Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my questions. Maybe just one for Rob as you look down maybe three or four years, do you envision, I guess LivePerson to be a Conversational AI as a service provider where you have whole businesses being built on top of your AI? I think what you're doing in the fintech space is a great example with the Body Bank. But do you think that is going to be a meaningful driver or development over the next four or five years, and I guess just how should we think about that?

I hope to one day see a vision realized in five years where we can provide a trustworthy AI solution for homes that simplifies people's lives. It would function like an Alexa but with a more caring touch. You mentioned our work with Bella, a bank built on our platform, showcasing our ability to create compassionate and reliable AI. Bella, which also handles payments, demonstrates the potential of our technology. We’re gaining insights from this initiative and see healthcare, banking, and insurance as significant markets to build upon. Our general-purpose AI will fulfill important user needs, from buying a car to checking health or securing a mortgage. We have a strong dataset that reveals how people seek loans, and that insight is invaluable. I envision making impactful strides in urgent commerce, similar to Amazon's Alexa, Facebook's messaging services, or Google's offerings. We have the data and are developing our solutions methodically with a broad vision. We raised $500 million because we recognize this as a multi-billion dollar opportunity, aiming for far more than just incremental enterprise deals. As time progresses, the benefits of our investments will become evident. We're confident in our leadership position and have dedicated significant effort over the last four years. We are competing effectively with major players like Google and Facebook, hiring top talent due to our strong business model. I'm genuinely excited about our journey, especially after 25 years of developing this company, as it feels like we’re just getting started.

I also am excited and maybe just one question for John. When you look at your 2019 Investor Day, you guys said 2018 revenue was about 60-some percent of it coming from large enterprise. Could you maybe find an update on that? How should you think of the mix now given you guys have tended to gravitate toward the higher end of the spectrum?

Brett, we're a little above that figure now, but it's maybe 10 points above that figure, 5 to 10, so we're still predominantly enterprise, but it's not overwhelming. We have a large base in the small business segment which is around 15% of revenue and the mid-market which is another 15% or so. So we're approaching about 70% for enterprise.

Our next question will come from Peter Levine with Evercore. Please go ahead.

Hey, sorry about that. Great. Thanks for taking my question. Maybe just one for me. Are you guys going after new buyers within an organization meaning guys think about the use cases with messaging across the company you would think opens up your wallets? Are you guys going after so just curious to know how much of your enterprise deals that you won in Q4 and then throughout calendar 2020 was kind of department driven versus a mandate from the C-suite? I'm curious to know how that mix shift has trended these past 12 months. Thanks.

There have been some changes recently. A couple of years ago, our focus was primarily on care, but now we are seeing a significant shift towards IT due to our AI toolset. Companies want to utilize these tools to analyze data, create automations, and implement them. Our platform is being actively used by developers in this context. Additionally, we are noticing more opportunities in marketing and digital areas, especially with digital leaders managing websites and sales. This year, we have emphasized product use cases, but IT has grown to be a significant contributor to our sales, as it serves as a technology platform for various AI and automation applications.

Our next question will come from Steve Enders with KeyBanc Capital Markets. Please go ahead.

Hi, great. Thanks for taking my question. I just wanted to check in; I know you give a little preview a few questions ago, but you're thinking about the cash that you raised and potentially uses of that going forward?

Well, we’re inquisitive. We're looking out in the world, especially on the AI science side. There are some technologies we'd want to buy and get talent. So that's definitely an area for us to look at. The voice stuff is interesting; as I said, more of the Alexa style voice. The interesting thing about voice is not to get too deep. We already have an ancient console; it does everything that you would need as an agent. We could put it in another channel but run it with all of our AI capabilities. This is why I think voice is interesting. There are potentially opportunities there. Organically, there’s just a lot to do. We are a very innovative company. We have a lot of things we want to build. We keep it within reason, obviously, but there's just a lot organically we want to do. We know there are markets we want to open and more technology we want to build. We haven't quite dialed in 100% on what we'll do with the cash, but it's in those buckets we’re looking at.

Thank you, that was very helpful. I wanted to ask about the social media success you mentioned in the quarter. What made the LivePerson platform stand out against competitors in that space?

The big thing is that we have a lot more volume than the social media player would have in the customer. With that volume, they want to integrate, and they want to move all that volume into a single consumer agent experience. They have a set of agents out there that may be on the social platforms, and they got a set of agents; usually we have 10 times the amount of agents on ours, and they're like, 'Can you bring that over?' That's what we did. We got this big airline; there is another big music company, a digital streaming platform, and we're moving pretty hard into that area. There's also a lot of low hanging fruit there. A lot of those guys got acquired by private equity, and they don’t have much innovation; they don’t have a lot of volume. We think there's an opportunity. We've put real focus on the product side, and we expect to pick up more and more of that as we go forward.

Great, thanks for taking my question.

Our next question will come from Ryan Koontz with Rosenblatt Securities. Please go ahead.

Great. Thanks for the question, guys. Could you update on your public cloud migration thoughts there? With sales surging, is that a lower priority for you? How should we think about the impact of that on gross margins over the medium term? Thank you.

Hey, Ryan. It is definitely not a lower priority. We're full steam ahead, and in fact some of the investment we’re making early in 2021 is related to that migration. In terms of margin, we'll have some hit to margin in the early to medium term due to managing two stocks, but I would say once we finish the migration by the end of 2021 going into 2022, we should start to see some expansion in that respect.

Our next question will come from Jonathan Kees with Summit Insights Group. Please go ahead.

Great. Thanks for squeezing me in and taking my questions. So I just have two quick ones. Rob, you talked about at the beginning what AI means to LivePerson. I guess you guys have made a couple of impressive executive hires in Q4, including one from Amazon. He has operations in AI background. According to news reports, he canceled some of the AI projects that you guys were working on for some time. I guess, how does what you said during your prepared remarks was a tweet from before he came in and also said that stuff that he canceled was material in terms of the projects, the AI projects? Thanks.

I’m not sure what you’re referring to. I understand you’re talking about Andrew Hamill, who has a significant role in our AI initiatives. It's fascinating, but I don’t think he would have made any increases since he joined us to support our expansion. He was previously Alex's supervisor at Amazon. However, I’m unclear about the specifics of your question.

Okay.

We are making significant investments in that area. It's strange; I haven’t seen anything in the press, and I find it odd. You can send it to me, and I will review it. Given all our investments, this is the weirdest thing I've ever heard. Let's sort that out first.

We have reached the end of the call today. I would like to turn the call over to Rob LoCascio for closing remarks.

Yeah. The rapid changes in everything that’s happened globally have really accelerated our work on the Conversational Cloud. We had an amazing 2020, and I want to thank everyone in the company who delivered against a tough year in the middle of COVID, rapid changes, and the amount of volume that hit our platform and keeping our platform scaling and delivering all the results and implementations. It was just awesome. I’m really proud of what everyone's done. In 2021, I think it's going to be a great year for us — the continued momentum and the vision we had four years ago. It was actually seven years ago when we delivered the platform; four years ago, we were waiting to see how this thing would take off. We can see that the demand will continue, but the connection to our vision and how we see AI in the world and how that can drive real change in businesses is happening. I look forward to this year and everything we're doing and I will catch you on the next call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.