Earnings Call Transcript - LPSN Q1 2020

Operator, Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's first quarter 2020 earnings conference call. My name is Ian. 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 asking one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Matthew Kempler, the company's Senior Vice President of Investor Relations. Please go ahead, sir.

Matthew Kempler, Senior Vice President of Investor Relations

Thanks very much, Ian. Joining me on the call today is Robert Castillo, LivePerson's founder and CEO, and John Collins, our Chief Financial Officer. Please note that during today's call, we will make forward-looking statements, which are predictions, projections, and other statements about future results. These statements are based on our current expectations and assumptions as of today and are subject to risks and uncertainties actual results may differ materially due to various factors including those described in today's earnings press release in the comments made during this conference call and in 10-Ks, 10-Qs, and the reports we filed from time to time with the SEC. We assume no obligation to update any forward-looking statements. 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 in the Investor Relations section of LivePerson's website. With that, I will turn the call over to Rob.

Robert LoCascio, CEO

Thanks, Matt, and thank you for joining LivePerson's Q1 2020 Earnings Call. LivePerson delivered strong first-quarter results and will continue with strong results into Q2. Despite macro uncertainties that emerged starting in the first quarter, revenue was in the top half of our guidance range and increased 18% year-over-year to $78.1 million. Our adjusted EBITDA loss of $4.6 million was $2.8 million better than guidance, and LivePerson ended March with $171 million in cash, a decrease of only $5 million over the past quarter. As we highlighted on the last quarter's call, one of the key reasons we promoted John to CFO was his ability to leverage automation, increase productivity, and capture cost savings. I'm glad to see that John has really hit the ground running. We started off very strong. I'm proud of the strong execution of my team, especially in a world that we're dealing with today over the past few weeks and all the changes, obviously, to protect the health of our employees, restricted travel, and we brought all of our employees into a work-from-home situation. Although the new normal work-from-home has required some adaptation, being a digital business that runs in the cloud meant that we had very few changes in how we operate daily. I'm also proud of the fact that we were chosen by Fast Company as the third most innovative AI company in the world. Also, Forrester placed us in the upper right quadrant as a leading company in its new report on the New Wave: Digital-First Customer Service Solutions. This just solidifies the great work that our product teams have been doing in extending LivePerson, not only having the best messaging platform but also being one of the leading AI companies now in the world. We've been planning for a future where voice contact centers go away and are replaced by messaging-based digital conversations powered by AI and humans. We expect that it will take five to ten years for traditional call centers to disappear. Over only a three-week period in March, the majority of call centers are now closed. Although many call center agents have shifted to work from home, we estimate that the industry is only at about 50% capacity. For those that are working remotely, answering a voice call in your home presents a plethora of challenges. As shelter-in-place was called in March, conversations on LiveEngage surged by approximately 20% month-over-month, and we're continuing to see growth off that new base. Put that into context, in all of 2019, our conversations, including both messaging and chat, were up about 21% year-over-year, with messaging volumes being up at a far greater rate. When office workers went remote, the corporate world turned to Zoom and other video conferencing platforms to maintain productivity and keep operations running. Contact center agents, which typically represent the largest portion of the employee base for banks, telcos, healthcare, or insurance companies also need a cloud-based offering to work remotely. LiveEngage is filling that void, helping leading brands maintain business continuity and stay connected with their consumers by rapidly transitioning to remote work and increasing staff efficiencies with messaging and AI. Of all my years of running the company, I have never seen such demand increase on the usage side and demand for the company. There definitely was a significant shift with what's happened in the last couple of weeks. Many brands have been scrambling to hold on to their voice contact center agents, and however, there are major challenges to having an agent at home taking voice calls. Some popular contact center geographies like India and the Philippines, the agents, they don't work and live in homes where they have bandwidth and reliable connectivity to the Internet. In some cases, they even try to put them in hotel rooms. Even those with connectivity need a cloud-based solution and then they need to invest in high-quality headsets and laptops, and all of that has been happening over the last couple of weeks. Even if the brand got the agent in the home to answer calls, there are children, dogs, and other noises of a normal home. Additionally, there are concerns about data privacy. If the agent is talking on the phone and discussing a consumer's private banking information, that sensitive information is being shared with others in the home. All of these issues are resolved by having an agent at home messaging. It's quiet, personal, in the cloud, and allows for the scalability our customers are looking for. Once again, that was what drove that massive surge in volume month-over-month. The staffing challenges and capacity issues we see are now everywhere. Whether it's your favorite bank, airline, or retailer, what you're seeing on their websites or in their apps is, if you call us, you're going to be on hold for a long time. Even my bank, which is Chase, they are not a customer of ours yet, but they have up on the website, 'Our call centers have limited hours temporarily, and we are experiencing high call volumes.' So you think about how long can a bank go without answering its phones? Not too long. But that's been the rush to the LiveEngage platform. Even some of our customers tried to keep contact centers open with social distancing, which is running at about 30% to 50% capacity, not a sustainable model for running a contact center with physical distancing in those centers. Are we successfully powering these virtual workforces of messaging today? I believe the best solution is not to bring the agents back online at all and just replace them with AI-based solutions. This is where we see the greatest demand in our business right now. We have been preparing for this shift and focusing our product resources and building powerful AI-based tools like intent analyzer, Conversation Builder, and intent analytics. All the awards we've won recently just reinforce our focus on AI. I want to illustrate the path to the future of Conversational Commerce and highlight one of our customers who is one of the largest telcos in Australia. We signed this customer after they came to the T-Mobile Summit in the fourth quarter of 2018 in Charleston. They quickly embraced both messaging and the operating model of a team of experts in which a group of agents owns the P&L for a fixed group of customers. Now this was all made possible because of the asynchronous capabilities of messaging and LiveEngage. Today, already, over 50% of their entire contact volume is on messaging. Now, because of COVID, they are virtualizing all the front end, which includes service, sales, and even their retail agents. They are now targeting 80% of all customer contacts to be on messaging, leaving only 20% in voice. The goal is to automate the majority of those conversations in messaging. An article was written by the person who runs all of consumer experience, which came out a couple of weeks ago, stating they will not be returning to physical contact centers but will maintain the virtualized workforce concept. These types of transformations are taking place across our entire customer base. For instance, European airlines saw a 900% year-over-year spike in messaging in March and reported that messaging agents were 3.5 times more efficient than voice agents while delivering a 95% customer satisfaction rate. One of our retail customers doubled their labor hours on messaging in one week, onboarding new agents in less than 48 hours, 95% of whom were working from home, but they also built automation to address their top 10 coronavirus-related intents and quickly achieved nearly a 50% containment rate. One of our banking customers tripled the number of messaging agents on LiveEngage, removing the call button from their Android and iOS apps. They then deployed LiveIntent, our AI operations platform that tracks in real-time all the reasons consumers are reaching out to a brand and how well that brand is handling those intents. Once armed with this data, they turned to Conversational Builder and rapidly built automation. We've observed growth in the use of our AI tools, especially Conversational Builder, to rapidly build conversations. Some customers used other AI technologies for some larger tech companies, but we made it very easy for our platform to scale those automations and respond to market changes. There are many more examples I can share about how all this is fueling the usage on our platform and how we've compressed down years of go-to-market into months. The immediate benefits from the demand specifically in our usage-based models like gain share are now expected to increase more than 50% year-over-year in the first half of 2020. We are also seeing brands rapidly embrace automation to address the imbalance between fewer agents and more inbound conversations. Nearly 100% of our enterprise messaging customers are now using our automation platform, and approximately 80% of the messaging conversations in March relied on automation, up from 57% just in January. Given our long-term contracts with enterprise customers, not all of this usage immediately translates into short-term revenue, but it's a strong leading indicator of future upsells, renewals, and overages. When we look to the second half of 2020, we are balancing the enthusiasm we have for our role as beneficiaries of these massive industry changes with the potential macro environmental risks, the unknowns. Ultimately, we think it will take at least a few months until anyone has a clear view of how the effects of the coronavirus pandemic will play out in the global economy. Therefore, we are maintaining the high end of our guidance range at 22% growth, but we're going to widen it slightly to bring our lower end of our guidance to 17% to accommodate some of the uncertainties of the current environment. The benefit of being a public company that has been running for 20 years gives us a perspective on how to navigate through macro environmental changes. We have experienced the dot-com bubble and 9/11, and we got through the Great Recession. What we see is the flexibility in our cloud-based recurring revenue model is powerful at this point. I spoke about the vision of using AI and automation even in our own operations, which is why I brought John in. As a result, we are on a path toward enhanced profitability and cash generation while continuing to invest in our core growth drivers of AI, sales capacity, and product innovation. Therefore, we are raising our full-year guidance for adjusted EBITDA to a range of $3.5 million to $10.5 million from the previously issued guidance of negative $3 million to $3 million. John will go through more details about this. In closing, over the last 20 years, LivePerson has successfully navigated past macro shocks. We are rapidly applying past lessons learned to the current environment. This adaptability, combined with the strength of our business model, has enabled us to raise profit guidance and target strong revenue growth in 2020 despite potential economic headwinds. We are seeing strong usage trends on our platform as brands turn away from voice and close their contact centers. We expect this to represent a permanent shift as our platform enables brands to rapidly virtualize the contact center work-from-home, making agents more efficient and providing unlimited scalability with automation. Companies like Zoom and Netflix are transactional beneficiaries of how shelter-in-place is changing our daily lives. As users download their apps, it shows in the results, and we believe LivePerson is a transformational beneficiary. Our customers are embarking on generational shifts that will materialize in our results for years to come. We will emerge from the COVID pandemic a much stronger company. So with that, I'll turn the call over to John to provide an operational update and more color on our guidance.

John Collins, Chief Financial Officer

Thanks, Rob. As Rob shared, LivePerson had a strong first quarter and is executing well in this new environment. We are tightly managing the bottom line while actively positioning our product development and go-to-market organizations to support customers during the crisis. Combined, these dynamics are accelerating the adoption of our platform and our path to profitability. My commentary will center on a review of the first quarter, how the coronavirus is factoring into our revenue growth outlook, and our strong execution on initiatives to enhance productivity, profitability, and cash generation. Starting with the first quarter, revenue increased 18% year-over-year to $78.1 million. We were pleased to land in the upper half of our guidance range despite the difficult environment. B2B revenue increased 18%, and consumer grew 15%. Within B2B, hosted software grew 18%, while services grew 14%. The U.S. grew 26% year-over-year and accounted for 62% of revenue. International grew 6% year-over-year and accounted for 38% of revenue. We signed two seven-figure deals in the first quarter, totaling 130 deals, an increase of 10% year-over-year. Existing customer deal counts increased 42%, while new deal counts fell 15%. Deal counts reflect several stalled sales cycles in March, particularly for new logos, as contact centers went into crisis mode and focused on triaging operations rather than deploying platforms. However, we have already closed several of these delayed deals in addition to a seven-figure upsell in the first weeks of April. As Rob detailed, our platform can bring immediate benefit to brands struggling to respond to the crisis with a virtual workforce. To maintain business continuity with remote agents and address broken call queues, leading brands are rapidly adding new messaging endpoints, shifting agents to LiveEngage, expanding use cases, and widely embracing automation. In turn, conversation volumes surged 20% month-over-month in March, and we are continuing to build off that base. From an industry perspective, volume increases were led by financial services, followed by consumer retail, and then telecommunications. Retail and e-commerce within consumer retail is the fastest-growing sub-industry. Rising demand translated into a continuation of the strong trends we've been seeing in key metrics. ARPU, for example, increased greater than 20% to approximately $365,000. Revenue retention for enterprise mid-market customers was once again within our target range of 105% to 115%. Moving on to the bottom line, the adjusted EBITDA loss in the first quarter of $4.6 million was better than our guidance of $6.7 million to $8.2 million. We also executed well on the balance sheet, bringing DSO down from the 100 days we reported in the fourth quarter to 72 days at the end of the first quarter, which is back in line with our historical average. We ended March with a cash balance of $171 million, only a $5 million reduction from last quarter. The improved loss in the first quarter represents steps taken by LivePerson to accelerate its path to profitability and cash generation while continuing to invest in the core growth drivers of sales capacity, AI, and product innovations. In total, we are on track to reduce our 2020 expenses by $7.5 million to $16.5 million. Where we fall on the expense savings range will align closely with where we land within our revenue range for the year. Approximately one-third of the savings will be from lower travel and entertainment and marketing spend as travel was halted and events turned digital. Approximately two-thirds of the savings are tied to lower planned headcount, which has two primary dimensions. First, we slowed recruiting in non-growth areas like G&A, deferred some innovation spend, and consolidated overlapping marketing and professional services teams. Second, since I joined LivePerson in October, I've been streamlining operations through automation, and we are seeing some of the results of this work as our data science and engineering teams have already introduced nearly a dozen tools that increase productivity by enabling our teams to do more with fewer people. New automations are wide-reaching, ranging from pricing and commissions calculators to pipeline analytics and cash reconciliation. Although we are hyper-focused on prudently reducing spend, I want to reemphasize that our investments in growth and innovation continue. Forrester just released a report that recognized LivePerson's leadership in digital-first customer service solutions, which is clear evidence of the payback we are seeing in our product investments. Likewise, we will continue to strengthen our go-to-market machine. For example, in EMEA, we recently brought on a talented new sales leader who previously ran the EMEA service cloud team for Salesforce. Turning to the second quarter, we entered April with a strong sales pipeline. We're executing our strategy to add scale to our market reach beyond direct selling capacity by strengthening our partner channel. We are building a solid pipeline with existing partners like TTEC and DMI and recently closed two new arrangements, one with a global top 10 digital consultancy and another with a multibillion-dollar BPO. Accounting for year-to-date contract signings and the strong volume trends we are seeing within our usage-based offerings, we expect second quarter revenue in a range of $83 million to $85 million, up 17% to 20% year-over-year and approximately 8% quarter-over-quarter. We are targeting adjusted EBITDA in the range of $1 million to $2 million, bringing us to profitability one quarter earlier than anticipated. When we look out to the remainder of 2020, we are encouraged by the elevated use trends in our business, our ramping partner activity, and the broad-ranging discussions we're having with our customers. LivePerson's ability to help leading brands succeed in this challenging new environment has opened the door to customers embracing transformation at a faster pace than ever before. We also recognize, of course, that there are macro risks stemming from the coronavirus pandemic that could potentially impact our business, sales cycles, and customer attrition, particularly with new logos and small businesses. In an effort to balance these uncertainties with the positive trajectory we are seeing in our year-to-date results, we think it's prudent to widen our 2020 revenue guidance range to $340 million to $355 million from the previous guidance of $350 million to $355 million. Taking into account the spend initiatives outlined above, we are positioned for improved profitability in 2020, even if our conservative growth assumptions play out. For the full year 2020, we're targeting adjusted EBITDA of $3.5 million to $10.5 million, up from previous guidance of a loss of $3 million to positive $3 million. We are also targeting a total cash burn of less than $50 million in 2020, which would have us end the year with at least $130 million of cash on hand. Please refer to our press release and supplemental earnings materials for more detailed guidance. I'll close by summarizing a few key points about our business. Despite the current macro uncertainties, LivePerson's resilient and adaptable business model has enabled us to raise profit guidance and target a 2020 revenue growth that is at least as strong as in 2019. We are successfully streamlining operations and driving enhanced productivity through automation, and these initiatives are accelerating our path to sustainable cash generation. The investments we've been making in product development and our go-to-market strategy are not only accelerating growth but solidifying our industry leadership, a view now validated by Forrester, a leading third-party research firm. So with that, I'll hand the call back over to the operator for your questions.

Operator, Operator

Our first question is from Raimo Lenschow with Barclays. Your line is open.

Mohit Gogia, Analyst

Thanks for taking my question, and congrats on a really solid quarter. My first question is for Rob. Just continuing on the market opportunity here. You guys are obviously capitalizing on this opportunity; it's getting more recognition among the industry analysts, and we can all see that. I'm just wondering, in this world where people are working from home, you alluded to messaging volumes going up just because contact centers are realizing voice is not the ideal medium. I'm just wondering how you see the market gaining more traction among the customers. You talk about shorter deal cycles as one proof point that alludes to it now getting more and more mind shift. Can you talk about the longevity and also the phase of market evolution that this pandemic might provide you? And then I have a follow-up question for John.

Robert LoCascio, CEO

Guys, can you hear me? Can you hear me now? Hello? Perfect. Okay. The work-from-home dynamic and the demand on our platform, with the 20% growth month-over-month, tells a huge story about the need for our platform, which would have taken us a couple of years to achieve. If you annualize that, it takes a couple of years to get that level of growth on our platform. We didn't have to add more agents or make any significant changes; it's just the demand for the platform. This comes from two areas: one is that messaging is the best delivery method for automation; it's the best way to deliver an automation with AI. Initially, there was demand because they couldn't fulfill through voice, and they turned to our platform. The amount of activity in automations that were built was extraordinary. I think this indicates that once all of this is over—I don't believe we're ever getting back to fixed contact centers—brands are looking at how they can engage differently now. This includes the telco in Australia that's fully committed, and many brands are following that lead. So I believe that in the short term, medium term, and even when we get through this, we're poised to capture a lot of the current demand in the market.

Mohit Gogia, Analyst

Understood. And my follow-up question is for John. If you can help us bridge the higher guidance on profitability, that would be great. You mentioned a high end of around $16 million in reduced expenses. Last quarter, you guys also mentioned an incremental $16 million investment in the messaging payments platform. Can you help us reconcile that with what we heard on the fourth-quarter earnings call? Are those investments still on track? Are they incorporated into the new guidance? And also, if you can give us any more granularity on the layers of that $16 million in reduced expenses?

John Collins, Chief Financial Officer

Regarding the expense savings, I'll reiterate that the reductions we're targeting for this year are primarily due to lower travel and entertainment as well as marketing spend, and second, also from lower planned headcount. We've slowed recruitment in non-growth areas like G&A, deferred some innovation spending, and consolidated overlapping marketing and professional service teams. Since I joined LivePerson in October, I've also streamlined operations through automation, and we're already beginning to see the benefits from these tools as they increase productivity.

Operator, Operator

Our next question is from the line of Siti Panigrahi with Mizuho. Your line is open.

Siti Panigrahi, Analyst

Rob, I want to ask how your go-to-market motion changes in this environment. You are expecting some kind of an increase in productivity of sales reps that you hired last year. How does that impact sales productivity in your product areas in this new environment?

Robert LoCascio, CEO

The good thing is there wasn't much change to our go-to-market strategy or even our product. We're executing on what we have implemented since Q4. We're focused on partners; our customer base remains very active, and they need a lot. We're also seeing significant activity with our partner base, as we've discussed in Q4. Overall, not much has changed with our go-to-market approach—the business we have on the base is enough to take us beyond this year. We’re focused on meeting our customers’ demands right now.

Siti Panigrahi, Analyst

A follow-up to John. First of all, congratulations on your first three months as CFO. How has the experience been? You are not expecting COVID-19 or this pandemic, but you've talked about improvements. What’s your expectation for 2021 compared to what you discussed last quarter?

John Collins, Chief Financial Officer

Thank you. For 2021, we expect some continuation of lower travel and marketing spending as we had in 2019, but at more efficient levels given the strength of our partner network. Our focus on profitability and cash generation, which was the core reason I was brought on board, is paramount. Automation will be a critical factor in achieving that mission.

Operator, Operator

Our next question is from the line of Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia, Analyst

Congrats on the quarter. My question is for John. It’s great to hear that your messaging volumes are increasing and adoption rates are accelerating. Can you walk us through how and when this increased usage might show up in the financials, given how your contracts are structured? Is there an opportunity to upsell or expand contracts mid-contract, or will that only occur upon renewal?

John Collins, Chief Financial Officer

It's important to note that the surge in volume highlighted does not immediately translate to revenue across our entire customer base. We have a usage-based model where that would apply, but also long-term contracts, including ELAs, where that wouldn't be true on an immediate basis. However, it is a strong indicator of future increased business, especially within our existing customer base in terms of renewals and upsells.

Arjun Bhatia, Analyst

Got it. A quick follow-up for Rob, you touched on this in your remarks, but the inflexibility of the voice-based call center model is showing up in this environment. I would imagine that new customer interest is increasing from those who don’t have any messaging adopted right now. What can you tell us about how that pipeline is changing and what you're seeing from potential new customers?

Robert LoCascio, CEO

We have indications of increased interest; we're conducting business continuity workshops. The voice-based systems are less favorable because managing a contact center poses risks, and staying connected with consumers is essential. We held a virtual conference about a week ago with nearly 1,000 participants interested in business continuity in contact centers. Our large enterprises and BPO partners represent about 50% of the agents who never returned to work, and we see that our contrived service levels need to shift toward automation capabilities to ensure we can provide services to our consumers.

Operator, Operator

Our next question is from the line of Samad Samana with Jefferies. Your line is open.

Samad Samana, Analyst

Glad to see the solid business performance, and I hope you and your families are doing well during this time as well. My first question is regarding your vertical exposure. With consumer and retail accounting for about a quarter of revenue and the other verticals as well, what are you seeing through April in terms of trends following worsening employment conditions? How are volumes shaping up in different verticals now that we're in late April and May?

John Collins, Chief Financial Officer

With respect to travel and hospitality, we saw increased volumes. However, it is an area we see potential risk going forward, yet it only represents about 5% of our 2019 revenue. On retail, especially brick-and-mortar retail, there is significant strength right now, and we are witnessing a lot of upside in our usage-based platform.

Operator, Operator

Our next question is from the line of Sterling Auty with JPMorgan. Your line is open.

Sterling Auty, Analyst

You partially answered this, but how have you evolved your go-to-market motion, specifically around marketing and pipeline development, given that you don’t have in-person summits to rely on? What are you seeing in terms of the pace with which deals are moving through the pipeline phases?

Robert LoCascio, CEO

The changes in the macro environment around business continuity and automation are driving different conversations. As noted, we held a virtual conference with close to 1,000 attendees seeking guidance on connecting with consumers. Currently, we are witnessing significant interest in platforms where there is no need to revert to traditional call centers. We can capitalize on this demand through our established customer base, which will drive our growth.

John Collins, Chief Financial Officer

While we are seeing requests for flexible payment terms primarily in small businesses and travel and hospitality, the requests are limited overall and have minimal impact on our revenue exposure.

Operator, Operator

Next, we have a question from the line of Koji Ikeda with Oppenheimer. Your line is open.

Koji Ikeda, Analyst

Congrats on a good first quarter. I want to dig in on the cost savings initiative this year. The additional $7.5 million to $16.5 million in cost savings you mentioned today seems to be largely attributable to the shift to a virtual environment due to the pandemic. Is that the right way to think about it? Additionally, how far along are you in realizing the previously announced $26 million to $32 million in cost-saving efficiencies?

John Collins, Chief Financial Officer

Yes, it's correct to say one-third of savings are attributable to T&E and reduced marketing expenses due to COVID-19. The remaining two-thirds stem from lowered planned headcount as we have streamlined several areas, including G&A and marketing. The savings we targeted previously are being realized as planned through automations that help us achieve efficiency.

Operator, Operator

I don’t see any further questions in the queue. I would now like to turn it back to you, Rob, for closing remarks.

Robert LoCascio, CEO

Thank you, operator. I want to conclude by emphasizing a few key points. The coronavirus has created a new normal for contact centers and brands that relied on legacy voice tech for too long have been unprepared to handle the surge in volumes and transitioning to remote work. LivePerson is truly helping brands to bridge this gap during the current crisis and ultimately transform their operations to prepare for future disruptions. The investments we've made in our conversational platform over the last 24 months have placed us in a unique position to assist brands in navigating this environment because we can facilitate every conversation between consumers and brands, improving efficiency across care, sales, marketing. We have the ability to deploy the automations that fill the capacity gaps left by agents. I've experienced managing through financial crises before, and as a company, we remain deeply committed to growth. We're keen on achieving high growth while getting more efficient in our spending as I've been familiar with for many years. So we look forward to the next quarter and appreciate everyone for your time. As always, stay safe. Thank you.

Operator, Operator

Ladies and gentlemen, we thank you for joining us for LivePerson's first quarter 2020 earnings conference call. This concludes today's call. You may now disconnect.