Liveperson Inc Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Fourth Quarter 2021 Earnings Conference Call. My name is Rob, 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 Richard Gu, Senior Vice President, Investor Relations and Strategic Finance. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining us today. On the call with me are 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 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 this conference call and 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 non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are included in today's earnings press release where applicable. Both the press release and supplemental slides, which include highlights for the quarter, are available in the Investor Relations section of LivePerson's website. And with that, I will turn over the call to Rob.

Thanks, Richard. Thank you all for joining LivePerson's fourth quarter 2021 earnings call. I'm really pleased with our fourth quarter performance, which capped a strong finish to the year. Q4 revenue was within the upper half of our guidance range and grew 21% year-over-year to $123.8 million. Our full-year 2021 revenue grew 28% to $469.6 million, which is a record high in our company's history and a major milestone for LivePerson. Our Q4 adjusted EBITDA loss of $4.4 million was much better than our midpoint of guidance of $19.5 million as we are very focused right now on profitable and leverageable growth. For the full-year of 2021, we achieved an adjusted EBITDA of $29.1 million, which equates to a 6.2% adjusted EBITDA margin. Our performance demonstrates the strength and momentum of our core conversational AI platform as we continue to execute our strategy of becoming one of the leading AI and automation companies in the world. COVID was an unprecedented event bringing on both opportunities and challenges for companies worldwide. We took advantage of the demand surge during COVID with our flexible Gainshare model, as well as valuable learnings from our COVID testing business, which allowed us to make further inroads in the healthcare sector. In the meantime, we are carefully navigating the nuanced economic environment in 2022 by continually focusing on our core business and other growth areas by strategically deploying capital to drive clear and profitable growth while working closely with our customers. In Q4, we continued to see robust platform usage with Conversational Cloud volume growing 44% year-over-year for AI-based conversations and 28% year-over-year for total messaging conversations. Throughout the quarter, we saw strong traction for land and expand and upsell deals among our enterprise installed base, especially in the U.S. In the U.S., the top e-commerce platform signed an eight-figure TCV deal with LivePerson. This was an increase in ARR by 7x over the past three years. What makes this deal notable is VoiceBase, which we recently acquired was also able to sign one of its largest deals with the same customer. We are really optimistic that the synergies between our platforms will drive future incremental value. One of our notable new logo wins during the quarter was with a credit card issuer that provides branding credit cards for approximately 150 retailers around the world. This seven-figure win will help improve the customer experience for their private label credit card clients. Our automation capabilities were key to this win as well as our ability to integrate messaging capabilities directly within their apps, rather than requiring them to run sensitive conversations through third-party channels. Some of our international markets gained momentum in Q4. We are pleased with the progress we made in the UK and signed with the three largest utility companies in the country as a seven-figure new logo deal for Gainshare, which is also partner-led. Virgin Media O2 continues to transform their entire digital footprint within their services and commerce business and as a testament to the power of our AI capabilities. APAC saw new logos in the education telco verticals, and we also signed a renewal with one of the largest retailers in the world through one of our channel partners in Latin America. By working with LivePerson, they are leveraging AI and automation to reduce operating expenses and transition from voice to messaging. This brand is on the forefront of innovation and has improved their sales conversion rate by 3x to 4x by offering grocery shopping via WhatsApp and proactive messaging for tracking and delivering conversational AI technology. In Q4, we expanded our relationship with one of the largest cryptocurrency exchanges, and this brand began their journey with LivePerson by using our toolsets like Intent Manager and Conversation Builder to ramp up automations and high volatility in the crypto space has driven increased usage of our platform. Our solution enables agents to resolve customer questions quickly and efficiently, and they are migrating volumes away from an incumbent CRM provider that handles email and online ticketing. Since we began working together last December, this brand has increased our annual spend with us by nearly 400%, indicating their reliance upon and trust in our solution. Reflecting on our product strategy, we originally launched messaging 4.5 years ago. We were the first company to do that with a focus on customer engagement and the name of the platform originally was LiveEngage. Two years ago, we evolved LiveEngage into the Conversational Cloud with a clear vision to power entire businesses around conversational AI and conversational commerce beyond customer engagement and care. Last week, we launched our new branding and positioning called Curiously Human to reinforce the broader power of our platform and provide digital experiences that feel more human because they understand, connect, and deliver better outcomes for brands and consumers. Over the past four years, we have made tremendous progress in developing our conversational AI platform. By the end of the year, we should be at a place where our automations will have the ability to self-heal, which is a North Star for any AI platform. This will give us the ability to generate a large scale of interactions on our platform in both messaging and upcoming voice channels. Over the past five years, we've built a $0.5 billion business in the enterprise customer engagement space. However, the Conversational Cloud was really designed to be a powerful cloud platform for many different industries. We expect 2022 to mark the next leg of our strategy with the delivery of our voice AI capabilities across the entire platform, and we will now start expanding into our third largest vertical, which is healthcare. In 2020, the U.S. spent approximately 20% of its GDP on healthcare. The healthcare industry is going through a major technology change, and we see conversational AI playing a meaningful role in that change. Over the past two years, we have been going deeper into the healthcare space with the signing of some of the largest insurance providers. We've also been working with one of our largest and long-standing U.S. banking customers, who asked us to build an AI that could deliver in-home rapid antigen COVID testing with high efficacy as they were having major issues with business continuity. We created that offering almost two years ago, servicing over 35,000 employees and administering nearly 4 million tests in two years. One of the benefits of entering the COVID testing market was our work with many of the world's leading diagnostic testing companies, and building relationships with scientific and medical experts. We believe there is a massive opportunity beyond COVID testing and taking in-home testing specifically around genomics and combining it with AI analytics and conversational AI experiences to ultimately deliver precision medicine to a broad segment of the population. We are starting the development of this healthcare offering with a recently signed eight-figure deal to build our conversational AI service on the Conversational Cloud that delivers a series of consumer diagnostic testing experiences. We are excited about this new opportunity and our ability to go deeper into a vertical is already providing us with a lot of profitable and leverageable growth. There is plenty of room for growth in the enterprise segment, especially given our strength and relationships with our customer base. Our core enterprise business saw continued momentum in Q4 with seven seven-figure deals as well as strong renewals and expansions. Revenue retention was once again within our target range of 105% to 115%, marking the 18th consecutive quarter that revenue retention was within or above our target range. Average revenue per customer or ARPU was up 31% year-over-year, driven primarily by sustained installed base expansions for our business. With our recent acquisitions of VoiceBase and Tenfold, we have an even greater opportunity to catalyze the upsells and cross-sell as we stay focused on weaving voice into our AI offerings. This year, we will put a renewed focus on profitable and leverageable growth by strengthening our balance sheet and sticking with a framework that has enabled us to navigate being a public company for over 20 years. In Q4 alone our EBITDA number was $15.1 million better than our midpoint of our guidance as we controlled spending in the core business to align with revenue growth rates. Although we started ramping up resources in Q3, we decided during Q4 that there was no need to reach 200 quota-carrying reps, and the necessary supporting personnel to achieve our goals. We decided to return the global field operation to a path that we were on early last year around driving leverageable growth. As a note, the person who was running our global field operation during that time and for the prior two years, Manlio Carrelli had to take an unexpected leave last June. Fortunately, Manlio returned a few weeks ago and we feel that he is a better fit to continue down the path we are on and growing our revenues with real leverage. As a reminder, under Manlio, we hit four consecutive quarters of the Rule of 40 and he oversaw the exceptional growth rates for the prior three years. In 2021, we achieved record topline growth of 28% surpassing our previous record in 2020. We drove total messaging volume growth by nearly 50%, all while maintaining solid EBITDA margins. Looking ahead to 2022, we are going to take this time to focus on our foundations of strengthening our business model while preparing for our next phase of exponential growth. Therefore, our focus for the year will be in the following three areas: First, we are going to focus on balancing growth with a strong bottom line and build a deeper foundation for profitable and leverageable growth. Second, on the platform side, we will deliver our new voice AI capabilities, which will expand our overall TAM and will also deliver on our AI capabilities to get one step closer to our vision of automation being Curiously Human. And third, we will expand into our next big vertical of AI-based healthcare with this new eight-figure deal and our vision around the Conversational Cloud powering healthcare experiences. Last but not least, I'd like to thank all of our employees for their hard work in making 2021 a great year, and for making 2022 a really important foundational year. With that, let me now turn the call over to John to discuss the financials and our guidance.

Thanks, Rob. By many measures, the macro environment in 2021 was even more dynamic than in 2020. While macro forces had a derivative impact on our business, which I’ll elaborate on shortly, our capacity to innovate and adapt presented us with novel opportunities, particularly in the domains of commerce, healthcare, and financial services. All in, revenue for the full-year grew to $469.6 million or 28% year-over-year and adjusted EBITDA was $29 million or 6% margin. In the fourth quarter, revenue was up $123.8 million or 21% year-over-year and in line with the midpoint of our guidance. Our fourth quarter adjusted EBITDA loss of $4.4 million was a meaningful improvement relative to the approximate $19.5 million loss we had previously expected as we turned our focus to profitable and leverage growth. The EBITDA improvement was a function of moderating the go-to-market investment strategy we formulated in the second quarter of 2021. As Rob described, this strategy was premised on the traditional view that a dramatic increase in quota-carriers is necessary to accelerate revenue growth. After two quarters of aggressive hiring in an increasingly expensive and fickle market, we assessed that continuing at the same pace would likely overextend our P&L. As a result, we tapered the hiring of quota-carriers, reaching a total count of 144 as of February 15, an increase of 30 since we last reported on the metric in the third quarter earnings call. We see a more leverage and scalable opportunity to accelerate growth that focuses on two key foundations of our business, platform innovations and strategic partnerships. We have already extended our platform to serve as the AI and communication rails for new business lines beyond customer service, such as commerce and AI-assisted healthcare. We are also gaining traction with expanding the strategic technology and go-to-market partnerships that Tenfold and VoiceBase previously established with leading CRM and customer experience platforms. The strategic fit of LivePerson's best-in-class platform for messaging and AI-driven automation is clear and compelling and unlocks the potential to materially increase the scalability of our partner network. In terms of new business lines built in our platform, we have already made go-to-market traction in AI-assisted healthcare. As Rob just noted, we closed the largest deal in LivePerson's history to improve access to a wide range of healthcare testing, unrelated to COVID-19. This opportunity would not have been possible without the relationships and technology we built to deliver COVID-19 testing, which itself was an opportunity we attribute to our innovation-first philosophy and versatile platform. Before providing a detailed financial update, I'd like to take a moment to elaborate on a few macro themes that have altered our outlook for 2022. First, as discussed in prior quarters, we previously expected Gainshare revenue, which is driven primarily by commerce use cases to hold at approximately 15% of total revenue. In the fourth quarter, we observed that pandemic-specific shopping trends began to normalize within the Gainshare portfolio, specifically in the home improvement space, including the type and frequency of purchases and a more balanced interest in physical in-store experiences. We attribute these trends to vaccine effectiveness, less severe COVID-19 variants, and general societal acceptance of living in a pandemic. As a result, Gainshare revenue was only 11% of total revenue in the fourth quarter, and we now expect it to be 10% to 12% of total revenue in 2022. This change alone translates to a 5 to 6 percentage point reduction in 2022 revenue growth relative to prior expectations. Despite the shift in consumer behavior, Gainshare platform usage is still approximately 2x its pre-pandemic levels. The clear value of the Gainshare strategy, particularly in the domain of automation, has enabled us to convert 90% of Gainshare revenue into contractually committed recurring revenue and expand the business globally with several new logo wins in EMEA and APAC. As I alluded to a few moments ago, government policies in managing the pandemic have also shifted, particularly as they relate to the responsibilities of employers to test employees. In the second and third quarter, mandatory testing in 2022 looked like a virtual uncertainty, but this view rapidly reversed in January when the U.S. Supreme Court struck down OSHA's testing mandate. As a result, we do not expect to close new logos for COVID-19 testing or renew the testing deals we closed in 2021, other than our strategic relationship with Citi. This new outlook translates to approximately a 4 percentage point reduction in 2022 revenue growth relative to prior expectations. Note that we never viewed AI-assisted testing, as limited to COVID-19 use cases. While we would have preferred to avoid the negative impact in 2022 revenue growth, we view the impact as inherently short-term. The technology we developed is now serving as the foundation for a healthcare testing platform that is far broader in scope and scale, worth eight figures in committed revenue over the next five years. From our vantage point, COVID-19 testing essentially funded the development of an exciting new vertical that sits on top of the Conversational Cloud, promising to revolutionize access to the vital data needed for scalably personalizing healthcare. Turning to our reporting segments. Within total revenue, fourth quarter B2B revenue grew 21% year-over-year, while revenue from hosted software grew 17% year-over-year. Professional services grew 42% year-over-year and the consumer segment grew 21%. From a geographic perspective, U.S. revenue grew 27% year-over-year, and international revenue grew 12%. We continued to both retain and grow our relationships with existing brands. As Rob shared earlier, a key theme in the fourth quarter was extending our partnerships with many long-standing customers. We signed seven seven-figure deals in the fourth quarter, four of which were expansion. Consistent with this theme, revenue retention was once again within our target range of 105% to 115%, marking the 18th consecutive quarter that revenue retention was in or above this range. Average revenue per customer was up to $610,000, up 31% year-over-year driven primarily by sustained expansion in our base. Total billable volume in the Conversational Cloud increased 13% year-over-year. Messaging was 28% on top of an exceptional base in 2020. AI-powered messaging volume increased 44% year-over-year. In terms of usage and revenue trends per vertical while growth in retail moderated, we continue to see accelerating growth, especially in financial services and healthcare. As for the contributions from new acquisitions, VoiceBase and Tenfold are opening the door to new strategic relationships for the delivery of messaging in AI in addition to voice. By wrapping these capabilities into a unified agent experience that brands can rapidly deploy, thanks to deep integrations with the dominant CRM customer experience and IT systems, we are well positioned to scalably accelerate revenue growth. In addition, with double-digit new logo wins in the fourth quarter, the e-bot7 team is meaningfully expanding our market share in Germany, a highly strategic territory for growth in EMEA. Moving down to P&L. Adjusted EBITDA in the fourth quarter was a loss of $4.4 million, which again was a $15.1 million improvement relative to the midpoint of our previous guidance. This improvement reflects the shift in our go-to-market investment strategy that I discussed earlier. In terms of cash, we closed the fourth quarter with $522 million of cash and cash equivalents on the balance sheet, a decrease of $111 million from the third quarter, which was driven primarily by M&A activities followed by our go-to-market investments. In terms of guidance, we expect the evolving macro environment, especially consumer shopping behavior in our Gainshare business and government policy on COVID-19 testing to have a short-term impact on our revenue growth in 2022. When coupled with fewer incremental quota-carrying reps, the aggregate impact on revenue growth in 2022 is approximately 10 percentage points relative to our prior expectations. Accordingly, for the full-year 2022, our guidance range for revenue is $544.8 million to $563.3 million or 16% to 20% year-over-year growth, and our range for adjusted EBITDA loss is $20 million to zero or a margin of negative 3.7% to 0%. As for the first quarter of 2022, our guidance range for revenue is $124.6 million to $126.8 million or 15.5% to 17.5% year-over-year growth. And our guidance range for adjusted EBITDA in the first quarter indicates a loss of $26.1 million to $21.8 million or a margin of negative 21% to negative 17.2%. Before taking questions, I'd like to summarize several strategic themes for 2022. We are focused on leveraged and scalable opportunities that will enable us to more optimally balance profit generation with growth acceleration. To this end, we've built an innovative healthcare vertical on top of the Conversational Cloud and signed our largest deal in our history to scale personalized healthcare with AI. Through recent acquisitions, we've combined voice, messaging, and AI into a unified agent experience and widened the aperture for the data capture necessary to deliver Curiously Human digital experiences. These acquisitions have also diversified our go-to-market strategy through strategic partnerships that we can leverage, leveraging deep existing integrations to deliver messaging and AI in addition to voice. With the rapid expansion of new verticals and use cases, long-standing top-tier brands driving usage growth year-over-year and the integration of new platform capabilities such as voice, we have a solid foundation to sustainably reach our long-term goals for growth and profit. And with that, operator, we are ready to proceed with questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Peter Levine with Evercore. Please go ahead with your question.

Great. Thanks for taking my question. So three months ago, you gave us an initial guide for 2022, 27% growth confidently with an exit growth rate of 30%. You highlighted some of the headwinds that are now 10%, or chopping off $45 million of the guide. So just curious to know, when did this all start coming to a head? And then second, I mean, did your close rate from opportunities you had, or did the grid rates against competitors change at all over the past couple of months?

Hey, Peter. I'll start first with some context. I would say during the third and fourth quarter, we began to reassess our quota-carrying hiring plan. It became clear to us during that time that many new quota carriers wouldn't be conducive to scalable and profitable growth. In a thrown-body approach, that problem is a traditional method that tends not to scale very well. In today's market, it is also an extremely expensive path to growth, and we didn't want to lose sight of the value of profit and scalability, especially when evaluating the best path to our long-term ambitions. To recap, there were three primary factors impacting our guidance right and outlook for 2022. Part of that is pure quota-carriers as we described. The big contributors there are really the change in consumer behavior, shopping behavior in the Gainshare portfolio, and the COVID-19 testing, which we didn't expect to suddenly be cut off through government policy. Collectively these factors, as you rightly recited, accounted for a 10 percentage point reduction in our year-over-year outlook. But I want to emphasize that we do see more scalable and leverage opportunities for growth. I want to reiterate what those are. Again, the COVID-19 business wasn't one and done. We transformed that business into a long-term healthcare play, built on AI-assisted testing that extends well beyond COVID-19 to enable precision medicine at scale. This deal itself brings more sustainable revenue growth and better margins going forward. We are also just beginning to effectively cross-sell with VoiceBase and Tenfold, including signing an eight-figure deal with a mutual customer. We think expanding the technology and go-to-market partnerships as I described in the prepared remarks will give us more leverage in our go-to-market motion.

And then maybe just want to follow-up. Obviously, slowing down the quota-carrying rep hiring, is that an indication that there's just not enough demand to go around, or customers perhaps maybe going with the CCaaS or CPaaS vendors that I know somewhat providing more of a platform with voice, digital, and chat? Just curious to know kind of your take on that and then…

No, I don't think it's about that.

Go ahead, Rob.

Yes. I don't think it's about that. I think we just looked at it as the expense of that and the environment we're working in today. We would burn a lot of cash this year with the hope that by the end of the year, all that would ramp and be scaled. We felt getting to where we are at the 144 is a good place to kind of stop and look at where we're going. We also have some other opportunities like – the healthcare opportunity came out. We’re hoping to close that, it closed, and it opens up a big opportunity for us with a deal behind it. So we just want to be measured in how we run the company in this environment. This will be our trough in EBITDA right now because we did do a bunch of hiring and we had the acquisitions at the end of last year, but we're going to start to then move the EBITDA number up. We just feel like where we are right now, we'd rather focus on being more measured about how we run the company versus just like filling it with a lot of people. And then the expense of that hits, and so it's not as much the demand, although new logos is still something that we definitely have to do better at; the base is doing really well. I mean, we're expanding, and they love the product, so we're not seeing a shift in the competition. We definitely have to get back into the new logo motion. Especially with what we're doing with marketing and face-to-face events really propelled us here. So that's really what's happening today, but we just felt as a leadership team, it's better to be prudent with everything that's happening in the market.

That's right, Rob. I would just underline in response to a question you had, Peter, that the close rates, renewal rates and expansion within the base were all in line with what we've seen throughout 2021. Again, I'd point to the solid net retention figure that we cited; 18th consecutive quarter in our target range there.

Thank you for taking my questions.

Thank you. Our next question is from the line of Steve Enders with KeyBanc. Please proceed with your questions.

Hi. Great. Thanks for taking the question. I guess I just want to clarify. I mean, it sounds like I'm interpreting this right. It seems like there is a more difficult hiring environment than maybe you've expected happening in 4Q, and that is kind of what led to the slowdown there. Is that kind of the right way to frame it?

Yes. The environment – it's definitely – we have people who – there's crazy things going on right now on hiring, and there's an inflation in salaries, and we would rather focus on the people that are at the company and basically focus on making them successful. So that's really what we're trying to do here. We got 144, we feel like that's enough right now, and let's focus on making them successful.

Okay, got it. That's helpful. And then just on the shift in the go-to-market strategy and the investment for 2022. I guess, I just want to get a better sense of how is the go-to-market changing to go after this new AI-assisted healthcare opportunity that you're talking about in terms of building out the partner strategy in some of those end channels. How does that kind of shift? And then also, I guess on top of that, as you think about the other area investments with the cross-sell or some of those newer voice solutions. How is that also kind of changing the go-to-market and partner strategy?

Yes. First, I'll start with the voice. The acquisitions that we did are really great, and especially there's one, Tenfold, which has a very strong partner sell, and we can embed ourselves in CR – we can embed our agent consoles and our technology inside of CRM systems and all of this in a very deep way. So they're seeing some really good traction there, and then we've had cross-sell opportunities with them. So I feel like we did good acquisitions. Now we're integrating them technically, and it's going well. Once again, we spent a fair amount of money on those guys, and we want to ensure we can integrate them in a way that we can get the power of our vision, which is voice AI and changing the game on voice AI. The second part on the healthcare is that the COVID testing business enabled us to build this platform. From that, we can now – we have a broader vision around delivering testing in a more comprehensive way, and just maybe—probably most people don't know, billions and billions of dollars went into the testing world in the last two years. All these COVID testing companies have a bunch of other tests. We're about to gain access to a lot of tests to check for cancer and various other things in our lives. What we found is that these companies don't have a really good way to deliver that software; they're not good at that. So the platform we built for our COVID testing is seeing application in a wider healthcare opportunity, and we are able to sign an eight-figure deal, a very large one, which is a five-year deal to deliver on something broader. So we're really excited about that. I think this vertical can be as big as the customer engagement vertical, and we are going after it very aggressively, obviously with revenue behind it. The fact is that our platform wasn't built just for customer engagement. That is a big part of our business. We're going to continue focusing on it, even though we're not happy with some of the macro side. But it is a platform to do conversational AI, and we can apply it to other things. We always envisioned applying it to other things, and this is our second thing. It's exciting because it has real revenue behind it.

Okay. That's helpful. Just quick clarification for John, just RPO is down quarter-over-quarter here. Is there any dynamic with Gainshare that's happening here? What is leading to a decline there?

Yes. I would say RPO was slightly down. I think it's about 2% quarter-to-quarter, but it's up 27% year-over-year. This is in part a function of just extended renewal processes with several large customers. Signing those deals coupled with the eight-figure deal that we've just done this quarter would definitely expand or improve upon that metric going forward.

Okay. Perfect. Thanks for taking the questions.

Thank you. Our next question is from the line of Jeff Van Rhee with Craig-Hallum. Please proceed with your question.

Okay. Several for me, I guess, on VoiceBase and Tenfold. What did they contribute in Q4, and what are you assuming for the 2022 numbers?

Yes. Jeff, in Q4, low single digits in terms of contribution percentage points. For the full year 2022, what we're looking at mid-to-low single-digit contribution for those assets. But I want to emphasize, though, that we're only really just beginning in terms of integrating the technology and turning on those partnership capabilities. As we highlighted, we signed an eight-figure deal with a mutual customer. The real leverage point we get with those newly acquired assets is that they can help bring the value of LivePerson anywhere—all the messaging, AI automation should be consumable within the desktop experience of choice for a customer, whether that's Salesforce, ServiceNow, or Microsoft, etc., which adds leverage to our go-to-market motion by not limiting the value of our platform only to those who work within the LivePerson workspace. We think this opens up new opportunities for joint distribution, product innovation, and general scale. We're only just beginning there.

Let me just make sure I got that right. Low-to-single for Q4, but mid-to-low single for the year for all of 2022?

Correct.

Maybe you could just expand on that. I mean, the combination, the two, I believe was about $250 million purchase price. And you're talking, if I'm – assuming I'm hearing you right, $5 million for 2022?

No. So percentage point contribution to our total revenue base. With regard to the purchase price, remember that a substantial sum is contingent consideration tied to revenue earn-out.

Okay. All right. So call it 25-ish, and I can do the math there. Okay. That's helpful. So if I take that out, then we're looking at roughly, 13% organic embedded in the 2022 guide, and the rep counts going from 81, I think in August to 144 now. So I guess, help me understand how 13 is happening. I mean, I get the sort of the change in shopping behavior, sort of get the COVID testing, but virtually every data point around messaging is dramatic growth. So this kind of goes to some of the other questions; is there competitive loss going on? I guess just more clarity there is desperately needed here?

No, again, renewal rates are strong, expansions are strong, close rates are strong. By that, I mean in line with 2021. There is an element of conservatism here. We don't have a lot of good reasons not to be conservative at the moment. And of course, we hired a lot of heads, and we need to ramp. So that will take place this year and we're focused on integrations and again, scalable sources of revenue growth, profitable sources of revenue growth. That will take some time this year to build out, but I think it holds a lot of promise for this year and the years to come.

Yes. On the sales side, just to revisit, I think you mentioned Manlio, just a little more clarity. I mean, obviously he departed; he's back. What does that mean? What does that mean for Tony Owens? What does that mean for the direction of the sales organization?

Yes. So Manlio is taking over the organization. Tony is turning into a consultant to the company. Manlio, he had a real personal issue last year that caused him to leave, and we had to find someone else. But he was the one who architected all the marketing and sales activity and all the growth you've seen. Luckily he was able to come back. So three weeks ago, he came back, and he's culturally aligned. He did such a great job. We didn't think we would get him back from some personal issues, but everything is fine. He's back. He just stepped in, and he knows the team, and we're excited to have him. He is very focused on leverageable growth, and it's not about hiring a ton of people and overstaffing in a traditional model. He has a different way of executing, which we showed over the last couple of years. We're excited to have him. As I said, Tony will continue on; he's got a consulting agreement and is continuing as a consultant to the company where we need him to help us.

Okay. One last, if I could sneak it, in COVID testing for 2021, what was it as a percent of revenues or dollars?

In terms of COVID testing for the full year, Jeff?

Yes.

That would've been kind of low to mid single-digit percentage point again.

Okay, great. Thank you for taking my questions.

Thanks, Jeff.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good evening. I have a couple of follow-ups to some of the questions that have been asked. I want to maybe zoom out. A few years ago, the company said that they wanted to double headcount in quota-carrying reps to 200. That was in 2019, and it didn't happen then. Now you guys announced this on the earnings call for 2Q, so late August, and between late August and now you've decided that the traditional model of 200 reps ramping up significantly doesn't work. I guess, where I'm confused is, when you were making the original decision both in 2019, and now again, it was just in August. Who made the decision at the time to go to 200, and what about that industrial logic broke down?

Well, it was the previous – Manlio came back, and we looked at it, and we just didn't like what we wanted to do. I think the cost of that right now would be extraordinary. The risk of that on the business is just not worth it. We have other opportunities, especially in the mid-market. We ended up developing a new offering to the mid-market that doesn't require a bunch of humans. Originally, the previous plan was we were going to hire a big mid-market team and do all that. We actually built a platform that connects Shopify and can take small businesses to mid-markets and automate conversational commerce experiences with one click. It's not a human-based system. We built it over a year. A fair amount of headcount would have gone into mid-market. We don't need that right now; we've built a platform to service them. We already have about 700 customers on this platform called Maven. It's in the market already for the last couple of months. We felt that's a better way to do it. If we went ahead and did everything that was in the previous plan, we could burn $100 million in cash, and we just don't think that's prudent in the environment we're looking at today. I don't think shareholders want that, and neither do we. We have a better way to service markets. We aim to use technology to service them. The healthcare play also enables us to do something in a market that we feel is also a good use of resources. So why double or triple down in one area and put the risk of burning that type of money when we can invest that capital in a different way that we think can yield better returns? We have a portfolio we're looking at as we run the business. So that's really it. Yes, in 2019, same thing; we looked at the headcount, but today it's also just an expensive environment to hire into. We're going to deploy that capital in other areas.

Understood. And then maybe a follow-up. If I just go back and think about the last few quarters, it seemed much more about investing for growth, and I think it clearly resonated this quarter that the profitable growth is the pivot point. I know you've given EBITDA guidance for 2022, but can you expand on what profitable growth is? Should we start to think about free cash flow becoming positive this year or growing to positive in the next couple of years? Just how should we measure the company against the profitable growth you are talking about?

Yes. I'll take that, Samad, and maybe provide just a little context on how the quarter – how we expect the quarter and first quarter and the rest of 2022 to progress given the fully loaded costs of the acquisitions we made in the fourth quarter, and the hiring that we did despite the flow down there. We will expect a large loss in the first quarter that will improve each quarter thereafter, turning significantly positive in the third quarter and fourth quarter. In terms of cash flow generation, I don't expect a large number in 2022, but that is an intention of ours as we look forward into 2023.

Thank you.

Again, of course, I'd just add that we're also part of this analysis we did on our go-to-market investments with the Rule of 40 quarters that we put up over 2020 and the first half of 2021. We think that's just a cleaner, more scalable way to manage the business.

Thank you. I appreciate you taking my questions.

Our next question comes from the line of Ryan MacDonald with Needham & Company. Please proceed with your question.

Hi. Thanks for taking my question. Rob, let me just help us understand the AI for healthcare opportunity a little bit more. Obviously, we've seen the emergence of precision medicine with vendors that are using AI and taking patient data to combine that with testing data to drive better outcomes. Are you intending to offer the test yourself, or are you intending to sell the platform into the testing providers and then trying to add the value there? And then it's obviously a very new vertical, are you confident in the updated outlook for profitability that you're appropriately accounting for, one in the R&D, but two, then go-to-market investments that are going to go into this sort of completely new area? Thanks.

Yes. I think we're definitely covering the investments for this year because we built – we kind of got free funding out of it through our COVID-19 build. So the last two years, I mean, all the money we made, we piled back into building this platform on top of the Conversational Cloud, but you're absolutely right. We're moving towards a world in healthcare in which we're going to uncouple all the data that's vital for scalably personalizing healthcare. The testing data will need to be unified, we aren't going to make tests, obviously, we're partnering with testing companies. But that testing data has to get onto a single platform. There has to be a way that people take those tests. That is what we did with BELLA Health. We have real expertise we gained over 24 months. You're right. Next step is determining who uses that testing, that's called precision medicine. That area will see some significant movements for us, providing guidance through genomics and blood tests to tell people how to improve their lives based on an individual basis. The biggest problem with that is humans; it doesn't scale because it's very expensive, mostly for athletes and CEOs and others with money. We believe there's a way to scale that through conversational AI experiences. We see those two parts together, the ability to do testing and integrate the testing data. People can truly own their data. Secondly, recommendations will help individuals get to where they want to go; this can seriously disrupt the market. Like I said, we've spent two years building and understanding the testing companies and I feel okay, we did really well with the COVID testing balanced with this technology. It's time to move beyond COVID because I think it's a very up-and-down market as we saw with the revenues, and now we're trying to expand and open up a more sustainable flow, which has real legs. This year, most of it's a build, but there's some revenue stream associated with it as our partner moves forward along that. We will continue to explore joining both with our corporates and, similarly, the same way before we worked with the large bank to bring their employees back to work. We see a path to drive this into the corporate world to benefit our clients. There’s a real opportunity here.

Helpful. Maybe just a follow-up for John on the Gainshare commentary. You mentioned 2022 would see between 10% and 12% revenue. Should we take that to mean that volumes are just naturally lighter, but customer retention has remained strong, or are you actually seeing customers churn off because they don't need to push excess traffic – inbound traffic to LivePerson moving forward?

No. It's definitely the former. We have a very strong customer retention within the Gainshare portfolio. We have one large customer in the Gainshare portfolio. That's a home improvement retailer. The shopping trends I cited predominantly affect that phase. I would note, though, that this customer still has 2x its pre-pandemic usage of the platform. While these trends have caused growth to slow, clearly, it's not the case that the customer is churning or that there's not still value in the Gainshare offering. I would also say that the Gainshare business aside from this customer continues to grow. Given the strong value proposition of automation, we've transformed the majority of the variable revenue into recurring revenue and signed new logos internationally for the first time. The business is growing stronger overall.

Thanks for the color.

Thank you. Our next question is from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Hi. This is Chris on behalf of Arjun. Thanks for taking the question. I wanted to dig in a little bit on some of the ARPU growth that you've seen over the last year. I just kind of wanted to get a sense of the composition between, is that primarily coming from volume expansion or is it driven by a shift from chat and messaging? So it's kind of a follow-up, understand that messaging is premium price relative to chat. So could you give us a sense for what the pricing difference is there? Thanks.

Sure. So ARPU is definitely a function of volume expansions with our largest customers. New use cases and automation are the key drivers of those volume expansions and the primary reason for the continued increase in ARPU. In terms of chat, there's very little chat still on the platform, and we've shifted over 90% of it into messaging. So there's little effect from that area of the platform on ARPU today.

Got it. Thank you. And then just to shift gears a little bit, just to touch on the voice offering. I know you mentioned kind of coming more into the market later this year. Have you got any – just curious what you're hearing from your beta customers so far, and if you've come around on a strategy for monetizing that it'll be a unit of volume, and then if there's any assumption of contribution to revenue in 2022 from voice? Thank you.

Yes. So we're not up on beta yet. It'll be coming shortly. There's very low contribution because we're going to be delivering towards the second half of the year, the platform. But we see there is definitely demand. We went into it because we aim to automate voice calls like we automate messages at high quality. It's an integrated experience between messaging and voice and an integrated agent desktop; we know it will have a lot of value. Having Tenfold and VoiceBase also gives us the product build-out to do the backend integrations and the quality to examine the quality of voice surrounding voice analytics, and that's appointed voiced. So we just haven't put a lot of contribution in; there's a potential upside there. We’re just being conservative. Same thing – it’s similar to what we're doing with the reps. Even though we have a lot more reps right now, we just don’t need to overextend ourselves, and we feel like we’ll be conservative. We’ll ramp, and there’s some upside there, but we’re just thinking it best to hold steady.

Great. Thank you for taking my questions.

Thank you.

Our next question comes from the line of Zach Cummins with B. Riley. Please proceed with your question.

Yes. Hi. Thanks for taking my questions. Following up on your last commentary. In terms of the reps that you've recently onboarded, I mean, is there really any sort of expectation that you're going to get a contribution from them even towards the back half of this year?

I mean, the original plan was that would be toward the back of the year. We thought about that and we were like, okay, let's just – it’s a lot. By the way, it's not just the reps; there's a supporting group of people who have to support those reps for enablement and lead flow. There are many people that support them. We are trying to accelerate that; our goal is to make those reps successful. We want every one of them to succeed. We don't want to spend more time hiring people. It takes time and focus from the leadership team. We felt that let's take the ones we have and see if we can accelerate their success. If we can get them to their quotas faster, then we're going to be heroes. So we decided to just put a little bit of a pause on that. Once again, in the mid-market, we offer now a product line in the mid-market. We don't need humans to sell in the mid-market small business. We have a product now to go after that that's more automated. But with the enterprise reps, we'll focus on making them successful; we don't want to lose them.

Yes. I think it's important to connect the rep number growth to the productivity growth; you're right, it needs time to translate that into revenue generation.

Understood. And John, can you give an update on the progress that you've made with transitioning from enterprise licenses to CPI-type contracts?

Yes. We essentially reached our goal for 2021. We converted 64%. Our very original goal was 70%, and we brought that down to 66% given later in the year. We are right in line with the original target. One of these, I would note, was the eight-figure expansion with the joint VoiceBase customer. The ability to upsell during these conversions remains very strong. Most of the remainder, to give you a sense of what's to come of these renewals, will be in 2022, with still some to come in 2023.

Understood. And the final question for me is just around the partner side of this, I mean with leaning into more profitable growth now and not just completely hiring direct sales reps. How are you thinking about relationships with partners and ability to expand upon some of those more major partnerships?

I think especially with Tenfold; it's one of the reasons we really wanted to bring them into the company is that most of their selling is that. They've got good leadership over there to do that. We got system integrators and BPO providers helping us. With Tenfold, they have a lot more strategic connections; they onboarded the major CRM players, and I think there will be interesting announcements we’ll make in the next quarter or so about real integrations with them. They have more of a platform strategy. We had more SIs and BPOs; we should see more acceleration there. We're already seeing tremors of that because they're part of our company.

Understood. Well, thanks for taking my questions.

Thank you.

Thank you. And last question is from the line of Siti Panigrahi with Mizuho. Please proceed with your question.

Hi. Thanks for taking my question. This is Alex Kim on behalf of Siti Panigrahi. I just wanted to ask what's been the feedback for the payment solution from the enterprise customer base? Has it been gaining traction? And what are things that can be improved about your current payment solution? Do you plan on implementing any new features to this payment solution? I have a follow-up as well.

Yes. It's out on the market. The mid-market product line is really interesting. This Maven platform that we have for the mid-market is tightly integrated into Shopify and big commerce merchants. In one click, you automatically get all the conversational commerce rails, including catalog search and payment is all in there. We're tokenizing the payment and everything, so that's all in that offering. A lot of volume should come through it there. Our enterprise customers are pursuing this; they get our payment solution inside the messaging channel. We're getting a usage fee for that too, which is also going well. It's more difficult in the enterprise because we need to integrate with their payment gateways. What’s great about the Shopify stuff is that it's using Shopify's payment rails. Once you go ahead and say you want to be a Maven customer, it integrates all the payment and everything with Shopify and everything else. We're quite excited about what we expect there and the volume we think we'll see.

And how much TPV is there today for your payment solution?

I don't have the data on that. I don't have the data.

Okay. No worries. And regarding your VoiceBase and Tenfold product, how much ASP uplift do you see when you cross-sell those products versus your current LivePerson product, and what are the gross margins of those products versus the core LivePerson product?

Hey, this is John. I think it's too early to provide such specific metrics given the very early stages of cross-selling within the VoiceBase and Tenfold installed base. That's something I think we'll be able to expand upon as we progress through the year.

Got it. What are the gross margins of those products like versus the current LivePerson product or the core LivePerson product?

Yes. They are very leveraged businesses like ours, so comparable to our gross margins.

Okay. Got it. Thank you for answering.

Thank you. At this time, we've reached the end of our question-and-answer session for today. I'll now hand the call back to Rob LoCascio for closing remarks.

Thank you, operator. I want to summarize again what we're thinking about in 2022. We really want to look at how to get the leverage off our overall core business. We've got to integrate VoiceBase and Tenfold, but more importantly, we want to bring our voice AI capabilities to market. Regarding our healthcare vertical, I believe this is now our third largest vertical. Our ability to go deeper in it can provide significant options for even better growth beyond what we see in the core. We look at the changes in our business so everyone—indeed, the environment has changed, but we think it’s prudent to drive towards profitability and leverage when it comes to growth and avoid overextending while having a strong foundational year prepping for the next level of growth. I want to thank all of our employees for their hard work in making 2021 a great year and all the hard work we're going to do this year. There’s obviously uncertainty in the world, so everyone stay safe. Thank you. See you next quarter. Bye.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.