LivePerson Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's 3rd Quarter 2023 Earnings Conference Call. My name is Danae, and I will be your conference operator today. At this time, all participants are in listen only mode.

Operator

After the prepared remarks, the management team from LivePerson will conduct a question and answer session and conference participants will be given instructions at that time. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Danae. Joining me on the call today is John Collins, Interim CEO and CFO. Please note that during today's call, we will make forward looking statements, which are predictions, projections and other statements about future results. These statements are based on our current expectations and assumptions as of today, November 8, 2023, 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 in the comments made during this conference call as well as in 10 ks, 10 Qs and other reports we file from time to time with the SEC.

Speaker 1

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 the press release and the supplemental slides, which include highlights for the quarter, are available on the Investor Relations section of LivePerson's website. With that, I will turn the call over to John.

Speaker 1

John?

Speaker 2

Thank you, Chad, and thank you all for joining us today. I'll begin with a brief recap of recent changes to the business, followed by an update on strategy and customer wins and conclude with a discussion of Q3 financials and guidance. Several years ago, LivePerson envisioned that asynchronous messaging and AI powered automation would become the channels of the future for customer service and support. Time savings, convenience and dynamic visual content make messaging a superior consumer experience to voice, while AI powered automation enables cost effective scalability for the enterprise. We embrace this vision, replatform the business and emerged as a leading provider of asynchronous messaging and conversational AI for many of the world's largest enterprises.

Speaker 2

Today, LivePerson is arguably the most scaled provider of messaging and AI powered automation for customer service and support, but we believe our current growth and profitability do not reflect the market opportunity. During the pandemic, we made several opportunistic investments into non core business lines that reduced our focus and ability to allocate resources effectively. Recognizing the need for change, we began a multi quarter restructuring process last year that included shuttering or divesting non core businesses and rightsizing our cost structure, which enabled LivePerson to return to profitability last quarter. Since last quarter, we have refocused the company on our core strengths, those that have delivered a meaningful return on investment to our enterprise customers by enabling them to efficiently shift legacy voice interactions to digital channels and AI powered automation. Based on projections available from Gartner and Forrester, the combined markets for conversational AI and customer service and support are estimated to grow approximately 20% year over year in 2024.

Speaker 2

Considering the demonstrable return on investment our customers are realizing and growing traction we're seeing with generative AI, which I'll elaborate on shortly. We are well positioned to meet this growing demand. Our return to core strength embraces the key reasons large enterprises continue to choose LivePerson as their trusted partner, Including our enterprise proven platform, agent workspace and open architecture for 3rd party AI, extensive voice to customer dataset, unified voice and messaging analytics, managed services for enterprise digital transformation and guardrails for human in the loop feedback that enable safe and secure adoption of generative AI. Because of these platform strengths and the demonstrable return on investment that they unlock for our customers, shifting legacy voice Interactions to messaging and AI powered automation continues to be the most compelling market opportunity for LivePerson. Significantly, Growing traction with genera dotai is also driving increased platform usage, new logo acquisition, expansions and renewals.

Speaker 2

To elaborate briefly on that trend, as a reminder, we launched a suite of generative AI enhancements to the platform in May, including voice AI, which meaningfully enhanced our ability to shift legacy voice interactions into digital channels and AI powered automation. Since then, we've seen many of our customers leverage voice AI for precisely this use case, validating the continued consumer preference for digital channels over legacy voice. For example, a large hospital customer who was an early adopter of voice AI is using voice automation to deflect 40% of voice calls to messaging, which meaningfully reduces costs and time to resolution. Voice AI is also delivering a return on investment in applications that directly interface with the end customer, including a customer using voice automation to call leads from CRM, asking a serious questions and determining the next best action. An aerospace customer is also using voice automation integrated with large language models to help customers find and purchase relevant tools and components.

Speaker 2

In addition, we're seeing strong adoption for internal use of generative AI, including CoPilot or Agent Assist, which improves Productivity and summarization, which reveals actionable insights for optimizing customer service experience and cost efficiently scaling service interactions through automation. In terms of new deals where generative AI was essential, in the Q3, we signed a 7 figure new logo and a 7 figure renewal. And early in Q4, we signed a 7 figure expansion with 1 of the world's largest banks. We're also observing increase in platform uses attributable to generative AI, reinforcing that the renewed focus on our B2B core strengths, coupled with strategic investments in generative AI, have strongly positioned us to meet accelerating enterprise demand for digital transformation and AI powered automation. As for overall customer wins, we signed a total of 50 deals in the Q3, including 4 7 figure deals, 3 of which were new logos, 31 expansions and renewals and 19 new logos overall.

Speaker 2

Enterprise bookings were up sequentially with total bookings approximately consistent with the 2nd quarter. In terms of trends, LivePerson continues to be a platform of choice for financial services. In the Q3, we signed 2 large credit unions has new logos, 1 with over 300,000 members and assets totaling $5,000,000,000 We also signed a key financial services Expansion and renewal, including a 7 figure upsell with a leading Australian bank and 2 partner led expansions with a large European based multinational bank and a leading South African digital bank. As I mentioned a moment ago, one of the world's largest banks recommitted to LivePerson early in the Q4, Signing a 4 year 8 figure TCV renewal, including a 7 figure upsell to leverage recently launched generative AI capabilities alongside expanded adoption of the wider platform. In the Q3, we also signed a 7 figure new logo win to power our conversational marketplace and renewals and expansions with a leading cruise line and an amusement park and entertainment business.

Speaker 2

Notably, We continue to see strategic renewal, expansion and new logo wins against strong competition in the Q3, including against Salesforce, Cisco, Genesis and Google Dialogflow. Looking to build on this go to market momentum, I want to note that our in person executive events have historically accelerated the sales cycle with customers and prospects. Next week, on November 14, we will be hosting more than 1,000 people at a hybrid in person virtual customer event called Spark, during which we will unveil our new conversational intelligence suite, which includes ReportCenter, Analytics Studio and our latest LLM powered innovation, Generative Insights. Before moving on to our Q3 financials, I also want to provide an update on our partner strategy and its impact on our go to market motion. As CIOs drive transformational initiatives across the enterprise, they are challenging strategic partners like LivePerson to build an open and flexible architecture.

Speaker 2

We built our platform to be agnostic to the source of AI and develop leading AI orchestration capabilities across the customer service suite. LivePerson's open platform lets brands seamlessly couple our conversational insights, AI and agent engagements with channels, AI and automation from key partners like Meta, Apple, Amazon, Microsoft and Google. This is a powerful solution that enables LivePerson to capture greater enterprise volumes by providing differentiated cross platform orchestration for consumer interactions. To further extend our open We launched the partner marketplace in the Q2 of this year, which gained meaningful momentum in the Q3 when we closed a 7 figure deal with a new partner that enables real time expected to drive 5,000,000 annual proactive engagements for the bank. And a large telco adopted our affinity integration and is already seeing 1,000,000 in incremental monthly revenue, we monetize through a revenue sharing agreement.

Speaker 2

In addition, innovative systems integrators and BPOs are positioning LivePerson as the center of a digital first architecture to accelerate migration from legacy contact center vendors and as an alternative to voice centric CCaaS providers were not optimized for asynchronous operations. In the Q3, we partnered with a top 5 global consulting firm on AI focused services programs for 2 of Australia's largest telcos totaling 7 figures in value. And as mentioned earlier, multiple leading international banks also expanded their business through partners. Given market trends and momentum in our partner ecosystem, we plan to continue strategic investments into partners and integrations to fuel growth going forward. As for Q3 financial results, total revenue was $101,300,000 at the top end of our guidance range.

Speaker 2

As discussed last quarter, we expected a high 7 figure revenue contribution from Medicare reimbursement in the Q3. This value was approximately 7,000,000 B2B core recurring revenue was 84% of total revenue and non GAAP gross margin improved approximately 400 basis points sequentially to 77.9%. Adjusted EBITDA of $10,600,000 was consistent with the expectations we set last quarter, landing above the midpoint of our guidance range. Turning to our standard financial reporting segments. Within total revenue for the Q3, revenue for B2B declined 4% year over year and revenue from hosted software declined 16% year over year.

Speaker 2

As discussed in prior quarters, the primary drivers of these declines were the wind down of non core business lines, including COVID-nineteen testing, gainshare labor and pandemic driven gainshare variable revenue. Normalizing for these business changes, total B2B core revenue declined 1%, while B2B core recurring revenue within hosted grew 4% year over year, driven by upsells with existing customers. Professional services revenue declined 49% year over year, driven by the completion of the engagement with the Claret JV in the Q1. Excluding revenue from the Claret JV, professional services revenue declined 10% year over year, driven by a one time fee from a major telco customer in the Q3 of last year. With the wind down of non core business lines, including revenue related to the declared JV, gainshare labor and pandemic driven gainshare variable revenue.

Speaker 2

Net revenue retention was below our target range of 105% to 115%, but up sequentially consistent with previously set expectations. We continue to expect sequential improvement in net revenue retention in the 4th quarter. RPO decreased 27% year over year to 313,000,000 due primarily to completing the professional services engagement for the declared JV. For the Q3, ARPC grew 13% to 595,000 driven in part by upsells from our largest customers. In terms of guidance, for revenue in the full year 2023, we are maintaining our midpoint of $394,000,000 but narrowing the range to $389,000,000 to $399,000,000 this range is exclusive of the $7,200,000 contribution from Kasamba in the Q1 of this year.

Speaker 2

Inclusive of the Q1 revenue contribution from Kasamba, we expect 2023 revenue to range from $396,000,000 to $406,000,000 As for B2B core recurring revenue, we expect it to equal approximately 86% of total revenue consistent with previously set expectations. For full year adjusted EBITDA, we are maintaining our midpoint of $25,500,000 but narrowing our range to $22,000,000 to $29,000,000 The implication for revenue in the 4th quarter is a range of 89 $700,000 to $99,700,000 The sequential decline in revenue is primarily attributable to the one time medical reimbursement we recognized in the 3rd quarter. We expect B2B core recurring revenue to equal approximately 89% of total revenue in the 4th quarter. As for adjusted EBITDA the Q4, we expect a range of $0,000,000 to $7,000,000 To conclude, our results today demonstrate another quarter of consistent with prior guidance. Notably, we have right sized our cost structure, returned to profitability and effectively reallocated people and capital to drive growth from our B2B core platform, which has a strong record of delivering meaningful return on investment to our enterprise customers by enabling them to efficiently shift legacy voice interactions to digital channels in AI powered automation.

Speaker 2

Strategic investments in generative AI and our partner, Ecosystem, have meaningfully contributed to new logo wins, expansions and renewals in the last two quarters. And as discussed, this trend is continuing in the Q4. Looking forward, Thanks to the commitment and innovative work of the entire LivePerson team, we are well positioned to meet accelerating customer demand for digital transformation and AI powered automation. And with that, I think we can open the line for Q and A. Operator?

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star key. Now. The first question that we have comes from Ryan MacDonald from Needham and Co.

Operator

Please go ahead.

Speaker 3

Thanks for taking my question and congrats on a solid quarter here. John, I'm just curious, you talked about some of the vertical strength in the quarter and Good to see sort of financial services and some nice telco deals. But as you look across the verticals and sort of willingness Sort of demand for the new AI solutions, how much comfort are you seeing in terms of adoption at this point This is more of just being in the evaluation phase. And as you think about that within the competitive dynamic, do you think that's helping or hurting the business at this point? Thanks.

Speaker 3

Yes.

Speaker 2

Hey, Ryan. I think as I discussed in the prepared remarks, we are seeing real Net new economics from generative. We're signing new logos and retaining business and expanding business because of the new capabilities that we have with Generivea and in relation to the third parties that we're working with, Some of those relationships that are driving 7 figures of value this year are directly related and even solely related to generative AI applications. So it's much more than just testing at this stage.

Speaker 3

Super helpful. Maybe just as a follow-up, I'm interested to hear about the Spark event coming up next week and sort of the new unveiling of the new suite here. When should we expect in terms of the rollout time frame for the new suite after you introduce it next week? Thanks.

Speaker 2

Yes. We expect some of these products to be GA at the event. And so it will be an exciting time to see How customers can leverage those and again generally available in November.

Speaker 3

Excellent. Thanks again for taking my questions.

Operator

Thank you. The next question we have comes from Peter Levine from Evercore. Please go ahead.

Speaker 4

Great. Thanks for taking my questions here. Maybe the first one. John, can you maybe talk to us directionally about net retention or even gross retention mid market and below and how that differs

Speaker 2

Yes, we have refocused the business And in a lot of ways on the core and the essence of that core is really our enterprise base. So we're talking here Kind of mid 6 figure and above type customers with thousands of seats. As we go down market to the lower end of mid market and small business, We have strategically placed less focus there just given resource constraints. And so NRR or GRR both are lower At that end of our customer base and the enterprise.

Speaker 4

Thanks. And then, I guess, the follow-up to Ryan's question around, I think the monetization of these new Gen AI products is, how much of the products are would you view as More of a retention tool versus like an ARPU uplift? Or is it the reverse where you can actually get higher ARPU from these customers? Just obviously given the competitive landscape and where this market is going, curious to know how your pricing or how your customers are actually doing it?

Speaker 2

Yes, it's a mix for sure. I mean, to some extent, we've had some customers that renewed or expanded 2 years ago during the height of the pandemic and had very large volume expectations that as we've discussed in prior quarters weren't necessarily being met this year, hence some of the headwind to NRR. However, with generative AI, we're starting to see those customers reaccelerate their overall Volume, because the use cases are so compelling. So to some extent, it's helping in that regard. But as I mentioned in response to an earlier question, It's also driving net new business.

Speaker 2

And so that is taking the form of new volume on the platform that's facing the end customer, but also internal use cases to increase internal agent productivity, like Copilot and summarization. Perfect. And if I

Speaker 4

could squeeze one final one in. I know you haven't guided to calendar 2024, but directionally, when does the model kind of trough out We can see start to see revenue reacceleration. Thank you.

Speaker 2

Yes. Obviously, we'll have more to share on 2024 And when we print the Q4 and come back on this call in February. Broadly speaking though, I think we're beginning to see Rebuild of that momentum in go to market. Clearly, the metrics have been sequentially improving over the last two quarters, And I expect that general trend to continue. Thank you for taking my questions.

Operator

Thank you. The next question we have comes from Zach Cummins from B. Riley Securities. Please go ahead.

Speaker 5

Hi, John. Thanks for taking my questions. Can you just walk us through some of the assumptions for your Q4 revenue guidance? I know you have some Medicare Payments that likely are not going to be occurring again in Q4, but just curious on assumptions for both revenue and adjusted EBITDA guidance?

Speaker 2

Yes. Hey, Zach. So we do have potentially some Small amount, dollars 1,000,000 to $2,000,000 worth of additional Medicare payments that may come through in the Q4. We also are monitoring the timing of delivery of certain larger professional services engagements. And then as is typical in the Q4, it is our peak season for most customers.

Speaker 2

And so we tend to have higher reserves during that peak season. Conservatively speaking, we have a wider range there. But given the trend, the general trend of stability being very high and improving sequentially over time. We don't necessarily expect those reserves, but is some conservatism built into the range for that reason as well.

Speaker 5

Understood. And I know there was a question around kind of the Potential timeline to see a trough in the top line of the business, how are you thinking about just managing margins here over the next I know you've done a great job of really rationalizing costs in the last few quarters. So what is your approach to balancing that profitability versus continuing to invest in some of the strong demand you've seen on the Gen AI side?

Speaker 2

Yes. I think we've done the hard work, right. We've had Essentially ongoing restructuring since Q1 of 2022, culminating in a large event in Q1 of 2023, we've wound down the non core business lines and most of that is behind us now. So I think we're in a good position in terms of the cost structure to try to improve profitability through top line growth. And as I mentioned before, while we're not ready to guide 2024, I think it's important to understand that we've had improvement over the last two quarters and that we expect that to continue.

Speaker 2

So broadly speaking, I think the cost structure is in a reasonable place after a lot of hard work And we're now refocused on the core to drive top line to improve profitability.

Speaker 5

Understood. Well, thanks for taking my questions and best of

Speaker 1

luck with the rest of the year.

Speaker 2

Thanks, Zach.

Operator

Thank you. The final question we have comes from Mark Schappel from Loop Capital Markets. Please go ahead.

Speaker 2

Hi, thanks for taking my question. And John, I was wondering if you

Speaker 4

could just give us a brief update on how you think the sales force Is progressing here, particularly given the earlier restructuring and strategy changes over the past year?

Speaker 2

Yes. We're holding quota carrier Headcount, flat and these are all ramped quarter carriers quarter over quarter. We're seeing, as I alluded to in the last call, Some increased qualified pipeline entering the 4th quarter relative to what we had entering the 3rd quarter. And so broadly speaking, there's indicators that we're rebuilding that go to market momentum and I highlighted some of that in Prepared remarks both in terms of trends in Financial Services, but also within our partner ecosystem, which is Adding tangible impact. So broadly speaking, I think productivity is improving.

Speaker 2

Our efficiency With respect to marketing spend, it is improving as well, and we have slightly again, slightly more pipeline Entering the Q4 than we did entering the 3rd. So indicators are positive here. Great. Thanks. And I realized wild health It's less of a focus these days, but I was

Speaker 4

wondering if you could just give us an update on that business in the quarter and just your general thoughts on how you view the business?

Speaker 2

Yes. As we've discussed previously, Wild Health is a valuable asset to LivePerson, but not necessarily strategic to its core and is run on a standalone basis at this time. I don't have further updates beyond what I had provided previously for Wild Health's growth, which has moderated relative to the Expectations we had very early in the year when we first launched 2023, But remain consistent with the expectations we set last quarter. Okay. Thank you.

Operator

Thank you. The next question we have comes from Jeff Fundery from Craig Hallum Capital Group. Please go ahead.

Speaker 6

Great. Thanks. John, on Wild Health, just I guess 2 offshoot questions. 1, What was the impact from a gross margin? I imagine that was highly profitable revenue.

Speaker 6

And then somewhat of a tail to that question is, how are you thinking about gross Margins for Q4.

Speaker 2

Yes. Hey, Jeff. So the as you just to recap, We took all of the expense for the Wild Health based Medicare revenue that didn't occur in Q4. And in Q3, we don't have that expense. So there is clearly a bump to non GAAP gross margins as a result of One time Medicare reimbursement, which we recognized $7,000,000 in the 3rd quarter.

Speaker 2

So that moved the needle for gross margin up by 1 to 2 points. So as we think about gross margin on a normalized basis, it would be within 76 to 78% that we expect broadly for the business in the Q4 independent of the Wild Health contribution.

Speaker 6

Okay, very helpful. And then on the retention, I know the goal is 105 to 15. Maybe just expand on that a bit. I mean, how close are you to 100? Why are you below 100?

Speaker 6

Where are customers going if they're leaving? Is it just less usage? Just maybe a little expansion on the retention, where you are, where you're going and why we're where we are now?

Speaker 2

Yes. I think A lot of reasons for why we are where we are at the moment, a lot of it relates to a defocusing And the restructuring wind down of non core and just a lot of Tumor that fortunately has been the rearview mirror now and we're rebuilding That go to market motion and I think the indicators are positive as I mentioned previously. To be more specific, A lot of the NRR headwind relates to lower volumes coming off the forecast from the pandemic that are renewing now rather than full on cancellations moving elsewhere. And then I think with regard to the Expectations moving forward. As I mentioned in relation to a question earlier, there is a blended NRR that we're reporting here, which includes Some of the lower end of the market that we service, lower end of mid market and Some of those customers are not really where we're putting a lot of support at the moment.

Speaker 2

And so if we were to isolate the enterprise customer base, That NRR would be much closer, if not within the range that we have, but the wider blended rate is Still below that $105,000,000 target. Again, though, we expect sequential improvement moving forward.

Speaker 6

And just one follow-up on the volumes for post pandemic volume resets. I mean, is there a way to quantify like what percent of the contracts are reset to Rational volume levels for what they're actually consuming as opposed to pandemic, how far through that transition are we?

Speaker 2

I think we'll be fully through that transition by 1st or second quarter of next year, Jeff.

Speaker 6

Okay. Okay. And then if I could just one last one, sorry. And on bookings, I know last quarter you said it was the best bookings quarter, I believe since early 2022. If I caught it on this call, you said this was up sequentially from that number.

Speaker 6

How were the bookings this quarter relative to expectations, Relative to a year earlier and I know it's a multipart question, but the customer count is down. Do you think that's going to continue and you're just going to post bigger deals Or do you expect that to reverse? Yes.

Speaker 2

A couple of clarifications. So in the prepared remarks, I said that overall bookings were Approximately consistent with last quarter, but enterprise deal values were actually up sequentially. So despite the Lower deal counts, again, emphasizing the strategic focus on our enterprise customer base. We did increase overall ACV sequentially, while bookings were approximately the same.

Speaker 6

Okay. I'll leave it there. Thank you. Thanks, Jeff.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our call today. Thank you for joining us. You may now disconnect your lines.

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Key Takeaways

  • After multi-quarter restructuring and divestiture of non-core businesses, LivePerson returned to profitability in Q3 with non-GAAP gross margin up ~400 bps to 77.9% and adjusted EBITDA of $10.6 million, above guidance midpoint.
  • Strong traction in generative AI and messaging: voice AI has helped deflect 40% of calls to messaging for a large hospital, and the company signed multiple 7-figure AI-driven new logo, renewal and expansion deals in Q3 and early Q4.
  • Q3 bookings included 50 deals—4 seven-figure agreements (3 new logos), 31 expansions/renewals and 19 new logos overall—with notable wins in financial services and telecom against competitors like Salesforce and Cisco.
  • Reported revenue showed a 4% YoY decline in B2B and 16% drop in hosted software due to winding down non-core lines, though core B2B recurring revenue grew 4% and ARPC rose 13% to $595k; net revenue retention remains below target but is improving sequentially.
  • Q4 guidance narrowed to $89.7 million–$99.7 million in revenue (reflecting the absence of ~$7 million in Medicare reimbursements) and $0–$7 million in adjusted EBITDA; full-year revenue midpoint remains at $394 million.
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Earnings Conference Call
LivePerson Q3 2023
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