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spk07: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to LivePerson's second quarter 2022 earnings conference call. My name is Claudia Guentert, 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 team for LivePerson will conduct a similar session, and the conference participant 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, and I'd like to turn the conference over to Mr. Chad Cooper, Senior Vice President of Investor Relations. Please proceed.
spk05: Thank you, Claudia. Good afternoon, everyone, and thank you for joining us today. On the call with me are Rob Lacascio, 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'll turn the call over to Rob. Rob?
spk02: Thanks, Chad. Thank you for joining LifePerson's second quarter 2022 earnings call. In 2Q, we generated revenue of $132.6 million. Non-GRAP gross margins were up 500 basic points sequentially, and our adjusted EBITDA was at the top end of our guidance range at negative $5.5 million, a $12 million improvement sequentially. We're still on track to deliver positive EBITDA and cash flow by year end. Earlier this year, we made a commitment to prioritize profitable growth. I'm pleased to report we're delivering margin expansion faster than expected through a combination of OPEX discipline, improving productivity of our sales force, and focusing on more high-margin revenue. We continue to make substantial changes to strengthen our P&L by focusing on the most differentiated high-value components of our business with the greatest capacity to drive high gross margins, strong operating margins, and high-quality revenue growth. In the short term, we will be intentionally trading some lower margin top-line revenue for substantial, sustainable near and long-term margin expansion and growth. Our goal is to achieve best-in-class operating and financial models, which will be near or above 80% gross margin in mid-teens or better operating margins. Incredibly proud of the agility and innovation that allowed us to rapidly respond to the needs of our clients and the market and to drive growth during the past two years of the pandemic. But as pandemic-driven trends normalize, we're laser-focused on our more repeatable and high-margin growth engines. As the industry leader in conversational AI and messaging, we provide AI-powered customer engagement solutions to thousands of companies, including 450 enterprise brands worldwide, among them many of the world's leading consumer businesses. Our solutions help brands cut costs while improving consumer experience and achieve measurable ROI. Our platform has reduced our brand's customer care costs by up to 50%, while increasing customer satisfaction. Equally important, our commerce solutions have increased annual sales by hundreds of millions of dollars for some of our customers. We do not simply automate labor-intense tasks. We help our brands optimize their engagement with their consumers throughout the customer lifecycle. We're proud to consistently deliver measurable ROI to brands through our care and commerce solutions. We're also excited about new applications and our conversational cloud technology, including moving into voice, and into expanding our healthcare vertical, which I'll touch on in a moment. Focused on three key actions to optimize profitable revenue growth, new logo growth, expansion within existing accounts and partnerships, and opening our AI so that it can be accessed on other third-party platforms. So let's start with new logos. We're seeing progress with our quota-carrying reps and continue to expect them to be productive with bookings in Q4 and contributing to revenue in 2023 and beyond. In Q2, we delivered the most new logo wins we've had since 2020. We won 45 new logos in the quarter, which was a 55 percent year-over-year and 73 percent increased sequentially. These new logo wins are green shoots indicating that our enterprise sales force is returning to historical rates of productivity after a change in field leadership we made early this year and made great progress at generating new land and expanding opportunities. Second, we're leveraging and extending our existing customer relationships by both cross-selling and upselling, and we're seeing strong adoption of multiple AI and automation products. In Q2, we continue to see robust platform usage, with overall conversational cloud messaging volume growing 32% year-over-year, and AI-based messaging conversations growing 20% year-over-year. Third, we have continued our partnership momentum to unlock expanded and indirect revenue opportunities. We added 15 unique partners in Q2, This channel produced nine new logo deals. A few weeks ago, we announced new partnership with Solonis. Technology has been focused on improving business process for large enterprises. Our joint offering called Contact-Centered Conversation Mining combines the omni-channel conversational analytics from VoiceBase and customer journey mapping and back-office execution management from Solonis. I'm also happy to note that Q2 marked the return of our in-person executive community events. with extremely successful events held in New York and London during the quarter. Pre-pandemic, these events were a key element to our go-to-market strategy, and they've historically accelerated our sales cycles because they educate brands about the power of conversational commerce and AI, generally through our existing clients sharing their real-world outcomes. In aggregate, the Q2 events directly influenced over 50 million pipeline. From a product perspective, we are capturing incremental scale world revenue opportunities by opening up our platform. This will enable brands whose agents primarily use a third-party CRM to have conversations within consumers driven by our conversational cloud. This has historically been a pain point for brands and has been a key component of our product roadmap. Our acquisitions of VoiceBase and Tenfold have accelerated this initiative. VoiceBase is being integrated into the core analytics of our platform, and Tenfold is driving the overall go-to-market, probably work with CRM and other enterprise technology platforms. We're unifying our voice strategy from a standalone business unit to an integrated part of our broader portfolio. This provides a clear value proposition for our salespeople as voice becomes a key channel within our conversational cloud. With VoiceBase, we're digitizing the voice channel so we can extend the benefits of our conversational AI platform into it. This enables brands to not only meet consumers on voice, if that's their preferred channel, but also extract AI-powered insights from this traditionally analog channel in real time. These insights can also be analyzed post-conversation to help brands better serve their customers. Tenfold and voice-based both play key roles in the strategy and have enabled us to extend these capabilities to voice providers like Avaya, Cisco, Genesis, to just name a few. As I turn to some of our top customer wins in the quarter, I'd like to highlight how each reflects how brands recognize life versus ability to deliver tangible value, even as current economic conditions are driving brands to assess cost savings, consolidate technology stacks, and deprioritize all projects that do not have direct impact on savings or revenue growth. These are some of the most innovative brands in the world. They are working with us to cut costs while simultaneously improving the customer experience through automation and AI. We signed five seven-figure deals and achieved a total deal count of 104 deals in the quarter. Utilizing our rich data set, we also are able to target vertical industries with repeatable AI and automation strategies. In Q2, we signed one of the largest new logo deals in our history with Capitec, the largest retail bank in South Africa with approximately 19 million consumers. Capitec originally came to us from an initial use case with Voicebase, however, we're able to show them that they could go further automating their customer experience over WhatsApp, as well as take advantage of the power of voice-based for real-time insights into their consumer's experience and banking operations. This is a seven-figure, three-year deal. Even more importantly, it provides us with a referenceable customer and an important new geography with a new use case. It's a great example of our new logo initiatives and rich product synergies following last year's acquisitions, driving revenue expansion as we execute on our plan of profitable growth. We also won a large multi-deal deal with Canada's largest bank, being selected over two of our major competitors. The client chose LivePerson for our ability to reduce the cost of servicing customers and open the virtual doors of the bank to new account growth by managing the entire consumer journey via messaging, AI, and automation. On the renewal front, we signed a large two-year extension with one of our major airlines. Using Liferay's platform technology, this customer makes it easy for travelers to begin conversations on their app and directly from Apple Business Chat, SMS, IVR deflection, QR codes within airports, and social media. We also signed a multi-year renewal agreement with Verizon. Verizon has been a client for ours for three years. They started with messaging for customer care and sales, and now they have expanded to leverage our AI as well. In Q2, our gain share division signed a three-year, seven-figure automation as a service contract with the largest automotive OEM finance companies in the world. This deal is a great example of the type of higher margin contract structure for prioritizing going forward with the gain share offerings. This brand wanted to transition from 100% voice agent call center environment into AI-driven digital first contact center with the goal of supporting their consumers through automation while reducing OPEX and increasing CSAT. And finally, we're making excellent progress on our healthcare strategy, which is one of our largest verticals behind telecom and financial services, and it's one of our fastest growing. We're working towards delivering a very scalable solution for the healthcare market, especially around using machine learning and conversational AI for improving patient experience and outcomes. This is a big opportunity, and we are in a good strategic position to go after it. specifically related to our wild health acquisition. The group is performing very well and is ahead of their revenue plan. And in Q2, we signed deals with Spartan Race and USA Boxing to bring our AI and telehealth capabilities to their athletes as their official healthcare partner. As I mentioned at the top of the call, we continue to execute on our profitable growth plan announced at the start of the year, and we're ahead of schedule, delivering results faster than previously forecasted. As we embarked on these initiatives, we have found other areas of the business that we can further improve our margins and profitability and lay the groundwork for future growth. While some of these initiatives are anticipated to reduce total revenue in the near term, as we de-prioritize lower margin, non-repeatable areas of the business, we continue to expect to generate positive free cash flow in the fourth quarter, positioning us well for profitable growth in 2023 and beyond. And with that, let me now turn the call over to John to discuss to detail financial results and a revised outlook for the rest of the year. John?
spk13: In the second quarter, we continued to execute on the plan we announced on our fourth quarter call to adopt a balanced approach to profitability and growth. Revenue grew by $2 million sequentially to $132.6 million, or 11% year-over-year, and within our guidance range. Despite the lower revenue, adjusted EBITDA increased by $12 million sequentially, matching the top end of our guidance range. The improvement in adjusted EBITDA was driven by a $9.7 million sequential reduction in operating expenses, which exceeded the top end of implied guidance. The cost reductions were associated primarily with post-M&A integration and consolidation, non-quarter-carrying sales and marketing, and research and development. Reduced costs, coupled with the wind-down of COVID-19 testing, drove expansion in non-GAAP gross margins from 69% to 74% sequentially, which also exceeded the top end of our guidance. We expect continued gross margin expansion for reasons I'll discuss in a moment. This year, during the last two quarterly calls, we were focused on adapting our operating model to ensure a sustainable framework for profitable growth in a post-pandemic world. To this end, optimizing our cost structure will continue to be a primary strategic imperative for the remainder of 2022 in order to position the company to deliver long-term profitable growth and to generate positive cash flow throughout 2023. In addition to expense reductions, we have begun purposefully eliminating low-quality sources of revenue in order to further enhance the overall of the P&L. While we expect both the magnitude of the expense reductions and the elimination of low-quality revenue to impact near-term growth, we are confident that these will set a long-term foundation for best-in-class gross margin, significant free cash flow generation, and a return to the Rule 40 framework. Before proceeding with the standard financial update, I'd like to elaborate on the largest sources, of low quality revenue that we've begun to purposely wind down. Last quarter, we shared two significant changes impacting our revenue stack. First, COVID-19 testing revenue would be minimal in the second quarter and would roll off of the P&L entirely going forward. Second, we converted over 90% of our gain share revenue from variable to recurrent, secured primarily by multi-year contracts that increase revenue stability and transparency. Approximately half of this revenue is high margin revenue derived from scalable usage of the conversational cloud. The other half is low-margin revenue derived from agent labor that we supply to our customers via contractual arrangements with BPO partners. Consistent with our goal to optimize the overall of the P&L, we have begun eliminating this labor-based revenue from both our sales pipeline and existing customer agreements, which we expect to contribute to a temporary slowdown in revenue growth in the second half of 2022. While turning down growth to creative revenue sources is never an easy decision, This move will simplify the business model, materially expand our gross margin, and enable us to focus management and resource allocation on our most strategic and scalable sources of revenue growth, such as automation and messaging. In the second quarter, Gantier represented 11% of total revenue, which was in line with the expectations we set previously. However, going forward, we expect this percentage to contract as we wind down labor-based revenue. Over the long term, we expect these and related changes to the business model to drive expansion of non-graph gross margins to at least 80%. Turning to our reporting segments for the second quarter, within total revenue, B2B grew 12% year over year. Hosted software was approximately unchanged year over year, and professional services grew 95% year over year. Within revenue from hosted software, lower revenue from gain share and COVID-19 testing offset increased revenue from other customers relative to the comparable period last year. As a reminder, COVID-19 testing was expected to be minimal in the second quarter and going forward. In terms of professional services, recall that PS revenue declined 3% year-over-year last quarter because several large projects pushed into the second quarter. This dynamic is driving the substantial year-over-year increase. The largest PS project relates to the eight-figure healthcare deal we signed last quarter and is focused on automation as a service for healthcare delivery companies. Graphic perspective, U.S. revenue grew 12% year-over-year and represented 68% of total revenue, while international revenue grew 9% year-over-year and represented 32% of total revenue. Finally, revenue from the consumer segment declined 7% year-over-year, which was a function of a hard comparison to pandemic-driven growth in the second quarter last year. As Rob mentioned, we signed five seven-figure deals in the second quarter, two upsells and three new logos. RPO increased 18% year-over-year to $409 million, and net revenue retention was just below our target range of 105% to 115%, driven primarily by lower variable revenue and labor-based down sales in the gainshare portfolio. Consistent with the strategy for gainshare that I described a few moments ago, we expect modest pressure on net revenue retention in the short term, given last year's large revenue contributions from variable revenue and labor-based gainshare customers. Average revenue per user improved to $660,000, up 23% year-over-year. Total messaging volume on the conversational cloud increased 32% year-over-year, and AI-powered messaging volume increased 20% year-over-year. Our strongest verticals this quarter were retail, financial services, and telecommunications. In terms of new logos, we signed 45 in the second quarter, which was an increase of 55% year-over-year and 73% over the first quarter. The traction in new logo acquisition validates the progress we've made on rebuilding the foundation of our guided market motions. including the strategic focus on acquiring new logos. Considering our robust ability to rapidly expand with our base, which has been a primary growth driver over the last two years, new logos represent an exciting leading indicator of future expansion in revenue. As discussed last quarter, integrations with strategic partners is another foundational component of our scalable sales motion going forward. By increasing the breadth and simplicity of open APIs and third-party integrations, We're ensuring that customers on other platforms have rapid and seamless access to LivePerson's best-in-class capabilities across automation, messaging, omnichannel conversational analytics, and other unique innovations that improve customer engagement and reduce reliance on human agents. As Rob mentioned, we recently announced a strategic technology partnership with Solonis to integrate conversational analytics into its data processing and execution management platform. In addition, contact center operations that primarily depend on third-party CRM platforms can now leverage messaging and automation capabilities through scalable integrations with the conversational cloud. Of course, VoiceBase and Tenfold are at the core of this strategy. Moving down to P&L, adjusted EBITDA was at the top end of our guidance range at a loss of $5 million in the quarter. The upside, as previously described, was driven by solid execution on our profitable growth, including expense reductions, which are part of a broader restructuring plan, focused on the following areas, post-M&A, integration and consolidation, non-quarter carrying sales and marketing, and research and development. Turning to full-year success, with a focus on adapting the business model for sustainable and profitable growth, we are making trade-offs that will slow growth in the short term in order to materially improve our unit economics, profitability, and overall financial profile in 2023 and beyond. Critically, these moves will also enable us to focus strategy and resource allocation on scalably delivering the automation, messaging, and related customer engagement outcomes that set LivePerson apart from other platforms. As a result, we are revising down our guidance for revenue to $507 million to $518 million, or 8% to 10% year-over-year growth. As for full-year guidance on adjusted EBITDA, despite the lower revenue, we remain committed to generating positive adjusted EBITDA in the year and positive free cash flow in the fourth quarter. These outcomes are made possible by swift and thoughtful decisions in the first and second quarter to right-size our expenses. I think it would be helpful to recap how execution on our profitable growth strategy has manifested in our results and expectations. When we initially sent guidance for the full year, we expected a loss of $10 million in adjusted EBITDA at the midpoint, which implied $560 million in operating expenses. Last quarter, we improved the outlook to $550 million positive in adjusted EBITDA, implying $550 million in operating expenses. By reaffirming guidance for adjusted EBITDA in the range of $1 million to $10 million, or a margin of 0% to 2% for the full year, the implication for operating expenses is approximately $507 million at the midpoint. Committed execution on our profitable growth strategy is transforming our business model to generate meaningful profit in cash in 2023. As I discussed earlier, the elimination of low-quality revenue coupled with continued optimization of our cost structure are expanding our gross profit margins. Our initial guidance for non-GAAP gross profit margin for the full year 22 was 67% to 70%. We raised that guidance to 70% to 72% last quarter, and we are raising it again to 72% to 74% for the full year 2022. In the long term, we expect continued expansion of non-GAAP gross margin to at least 80%. For the third quarter, given the purposeful P&L optimizations, we are driving together with continued ramping of our sales force We expect revenues to be in the range of $120 million to $123.6 million, or 1.8% to 4.5% year-over-year. As for adjusted EBITDA in the third quarter, our guidance range is $0 to $4.3 million, or 0% to 3%. We're also expecting non-GAAP gross margin in a range of 72% to 74%. Before taking questions, I'd like to quickly emphasize several key themes for 2022. and how continued execution on our profitable growth strategy will position us for 2023. We have made strong demonstrable progress on rebuilding our sales motion, including a 73% sequential increase in new logo acquisition. We've also taken concrete steps to expand our partner strategy and open the platform to create new sources of indirect revenue and ensure our best-in-class customer engagement solutions are driving differentiated outcomes in the wider CX ecosystem. Consistent with our previously announced profitable growth plan, and the goal to further strengthen our P&L for the long term. We are continuing to optimize our cross-structure and purposefully trading some long-term lower quality revenue for stronger financial profile with sustainable higher margin revenue in 2023 and beyond. Collectively, solid execution on our profitable growth strategy is transforming our business model, positioning us to generate meaningful cash in 2023, expand non-GAAP gross margins to a best-in-class long-term target of at least 80%, and focus resource allocation on more strategic, differentiated, and scalable sources of revenue growth. And with that, operator, we can proceed to Q&A.
spk07: Thank you very much, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. Again, if you'd like to ask a question, please press star then one. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from Arjun Bhatia from William Blair. Please proceed with your question, Arjun.
spk11: Yes, thank you. John, can you just help us understand maybe how much of the revenue reduction that we're seeing in the full year guide is coming from reducing investments that you're making versus eliminating some of the lower margin revenue that you're talking about, like the labor portion of game share revenue?
spk13: Yeah, for sure. So first, just given the magnitude of that change, I want to emphasize that our proactive strategy to strengthen the P&L is playing a large role. We have a medium to long-term goal to generate 80% gross margins, as I described in the prepared remarks, and we want to do that through highly scalable and repeatable software revenue derived from what we do best, which is, of course, AI automation messaging. And in order to get there, Eliminating the lower quality revenue we described, specifically that labor-based piece in the gainshare portfolio is key. That equates to approximately half of the revenue change. The other half of the change is associated broadly with the continued ramp of our newly hired sales force and broadly rebuilding the go-to-market momentum following the leadership transition that we previously discussed. I think to reiterate some of the key measures that we've made is the new logo acquisition. The 73% increase sequentially is a very strong leading indicator of the additional build, rebuilding of momentum that we had lost previously that we are gaining back now. And while new logo acquisitions represent a lower near-term revenue goal or revenue contribution, in the long term, they're the fuel that our sales force uses for expansion.
spk11: Understood. That's helpful. And then I think, Rob, one of the things that you mentioned as a goal of yours going forward is to open up your AI and provide access to it to third parties. Can you just help us understand how those partnerships would work in practice and how you would be able to monetize some of the, you know, providing some of your technology? What's the plan on that front?
spk02: Yeah, the part, obviously, that's the very high-value part of our platform is our AI and automation technologies. Today it runs solely on our messaging platform and soon to be voice. But what our customers want is sometimes they've got voice investments and other platforms they're running, but they want our AI running on it. So we want to kind of free it from our own walled garden and then move it out into the ecosystem of other CRM players and other contact center software and do those integrations. Tenfold, the acquisition allows us to do a fair amount of that. Like we now can take our agent console and it's sitting in Salesforce. Like our messaging console now can sit within Salesforce if someone's a Salesforce user. So we're kind of out of place in the evolution of the market to be much more platform-centric than product-centric, and that's what we're doing. Then the other part is we do run other AI on our platform, as we've been doing for years, but we don't allow our automation tools, like our analytics tools, to optimize those AI. So we'll also be doing that, whether it's Google Dialogflow or Lex or Watson, they can use all of our tool sets on the analytics side to optimize those bots too. So we're becoming more of a hub for the AI, and that's where we're moving with our investments this year.
spk14: Okay, got it. Perfect. Thank you.
spk07: Thank you. The next question comes from Zach Cummins from B Riley Securities. Please proceed with your question, Zach.
spk10: Yep. Hi, good afternoon. Thanks for taking my questions. Yes, John, can you talk about if there's been any sort of changes to the commission structure for the Salesforce now that you're really prioritizing higher margin revenue sources? So I'm just kind of curious if any sort of changes on that front to incentivize the behavior.
spk13: Broadly, I think we would want to ensure that our reps are made whole during the year despite the change in strategy for the lower margin gain share piece of the portfolio. So That's something we're evaluating, but we would ensure that the overall structure is fair and equitable for everyone.
spk10: Got it. And another question for me is really just around the net revenue retention number for the quarter. I mean, I think you touched on this a little bit in your script, but can you give us a sense of maybe some of the factors that drove that slightly below your targeted range of 105 to 115? Yeah. In fact, the
spk13: variable revenue from game share and some labor-based revenue that we slowed down and some that was a downfall where the primary in the aggregate primary contributors to the uh myths of the range of 105 115 i'll note though that even with those factors we're still 100 uh net revenue retention understood well thanks for taking my questions and uh best of luck in the coming quarter
spk07: Thank you. The next question comes from Samad Samana from Jefferies. Please proceed with your question, Samad.
spk00: Hi, this is Mason on for Samad. Thanks for taking our questions. I wanted to circle back to your guidance. Can you help us understand what you're embedding from a macro perspective? Are you assuming the environment stays the same? It's worse or perhaps improves from what you were expecting previously?
spk02: Yeah, I mean, right now, it's kind of hard to tell for us because of the rebuild that we have, you know, change in leadership back to, you know, the person who ran it for many years. So I can't really tell you whether there's a macro impact or not. I mean, the new logos is a good green shoot that the team is starting to really perform. There's a lot of land and expand in there. So there's smaller deals, but they're, they're, they're landing and they're going to grow. But it, it, we can't see it right now. Our value proposition is cost takeout. Like the Salonis, if you know Salonis, they're all about cost takeout too. And so we formed this partnership with them because that's kind of what the world wants right now. And especially contact center labor, it can be, you know, in some cases the big brands have 40,000 people on payroll and there's an opportunity to really, you know, change the cost structure
spk00: using ai and automation so but it's hard to tell for us just because of the the building up of our sales force so i think in a couple quarters we'll know you know where we stand with that on the macro side understood there and then on rp percent this quarter but that was down a little bit from from where you were tracking previously to talk about kind of the factors impacting this and where you stand on that ela to cpi transition
spk13: Yeah, I think ARPU is in a range we would expect considering, you know, as I described in the guide, in the build-to-guide, there is some step down from customers that were previously contributing to that value, namely the larger customers in our Gainshare portfolio. In terms of ELA to CPI, we're tracking pretty close to where we were last quarter. We didn't have a very large number to convert this quarter. So that's around 70%. And I would expect it to be in that ballpark in Q3 as well.
spk14: Understood. Thanks for taking our questions. Yeah.
spk07: Thank you. The next question comes from Peter Levine from Evercool. Please proceed with your question, Peter.
spk12: Great. Thanks for taking my question. I guess, Robert, John, if you look at the top of the funnel, Were you not as successful at converting leads or adding leads at a similar level versus kind of expectations or plans?
spk02: No, I don't think it's about the top of the funnel. Like we were saying, you know, it's been a rebuild. We lost a lot of our capacity during when we had the leadership change last year. So when we look at the bookings capacity, it's definitely a build. It was trending nicely and then it went down and now it's trending back up. I don't think it's top of the funnel. And we started the marketing events, which definitely created some closes in the quarter that we saw in the new logos. But it's a build. I mean, we're rebuilding a lot of what was kind of unbuilt. But I don't see anything on the top of the funnel right now. And we had very good attendance to the events. So we're seeing demand for what we're offering in the market.
spk12: Then you prepared, Mark, you kind of mentioned voice as a preferred channel for customers. You know, can you kind of outline to us what differentiates your voice contacts in our offering versus what's in the market today? You know, when that product will go GA, I believe you said, if I missed it on the call, sorry, but I think you said the second half, but any updates on when that product goes live and kind of what differentiates you versus some of the competition out there?
spk02: Yeah, I don't think voice is a preferred channel. It's still the largest channel, but it's predominantly non-digital. And so most of the world, whether it's contact center or digital heads at the companies, want to convert as much analog into digital as they can. So as we know, messaging still as a growth channel is still the growth engine over voice. What that said is voice, people still want to sometimes talk to and you know, to a machine like an Alexa type thing. And so we're already out in beta. There's a handful of customers using our voice AI platform. And by the, you know, we said second half of the year, we'll have it out in GA and Q4 will be when it hits a GA. So what makes it different is that when you create an automation on our platform, you can deliver it through any endpoint, including a voice endpoint. And so you kind of write once and deploy. And then with VoiceBase, which is a very powerful product, and it competes with the likes of other voice analytics, but it's very powerful. We also can do the voice analytics around how is that automation performing. And even today, our guys, our sellers are baking in the VoiceBase into sales. opportunities because it's the start of a relationship on the voice side. We can analyze the voice channel and see how it's performing, and then we can layer in our voice automation and then live agent. We're not trying to become a CCaaS player, and so we want to do voice automation, and then we do have live agent abilities to take a voice call, but we'll also be integrating into all the major voice platforms, and you also can bring your own voice or we'll have voice on the platform also if you don't have your own voice. But we're more or less looking to integrate into all the voice platforms that are there, but you get a single way to make an automation and deploy it to all endpoints, whether it be messaging or voice.
spk01: Okay, thank you.
spk07: The next question comes from Jeff Henry from Craig Hallam Capital Group. Please proceed with your question, Jeff.
spk03: Great. Thank you. A couple for me. Just guys, on the retention, maybe you could address the retention rate X gains here. I'm curious what you saw there. And then secondly, on the AI messaging, it looks like the AI messaging volumes were down a bit last quarter and then down even sequentially on an absolute basis this quarter. And help me sort of contrast that with what I think most people believe in that your leadership around the AI capability. So why are volumes down there?
spk13: Hey, Jeff, I'll start with the retention question.
spk14: X gain share, we'd be in the range is the short answer.
spk06: Okay.
spk14: And your other question was on volumes. Yeah. Yeah.
spk13: I'll start there. So typically following the first quarter, we do have our kind of seasonal law there before it picks up again in August, September. um and and reaches our seasonal peak in in the fourth quarter so i we don't there's some slight variation there we don't see uh anything in the trends that would suggest a problem though it's more or less consistent with uh how things have trended seasonally in the past yeah like we see i would add also that the Sorry, Rob. Add one more piece here. That is that we have automated volumes at a very high percentage of total messaging. So the pace at which that continues to grow will lessen over time, naturally.
spk03: Okay. And then on the rep count, I need a little clarification there. I guess we had a Q420 at 80 reps yesterday. I think in Q421 you said you were around 144 and you were going to stop there. You went through the sales leadership change, but I think at that time the expectation was that you'd see some leadership churn, but you probably retained a lot of those guys. So just the comments around sort of not having capacity and not having ramped reps at this point. Where are you in terms of rep count? And then just kind of recap that chronology for me if I have that wrong.
spk14: Yeah, the rep count is pretty much where it was last quarter, but
spk02: At the end of last year, beginning of this year, we overturned reps. Even though we added more reps, we lost a lot of season reps during the past leadership. That's basically where we see then a buildup of capacity than where we were. If we kept all those old reps that were already baked in, we'd probably be at a different bookings number during the quarter, but because we have a lot of new reps. They're just building up. Now they're showing new logos, which is good. So they're showing that, and there's a little bit more than 50% of them all had a deal so far this year, so that's good. So we're seeing some good, once again, green shoots on these reps starting to come out. On the losing of the leadership, we kept our regional leaders, and then we hired a new set of leaders below them. in North America. So we have that leadership team. The leadership team below the main leaders are new, and they were put in Q1. So they're also coming up to speed, and then they have their reps under them. But the actual leadership team that's running that was the one that was there previously.
spk03: Okay, I'll leave it there. Thank you.
spk07: Thank you. The next question comes from Ryan McDonald from Needham. Please proceed with your question, Ryan.
spk09: Hi, thanks for taking my questions. Rob, or John, first one for you. You know, as you think about ramping reps, can you talk about what the expectation is in terms of sales cycles or what they've historically trended as? And then, you know, is there any – are you seeing anything in pockets with – whether it be in EMEA or APAC – of an elongation of those sales cycles? I know you're, I understand that you've got new reps that are ramping, but just curious, I guess, how those sales cycles and those time to productivity are trending versus historical, you know, expectations and whether or not the macro could be playing any role in that.
spk02: Yeah, I mean, there's... Yeah, I think it's broad.
spk14: Go ahead, Rob.
spk02: I was going to say they're, we look at about, we model a nine-month sales cycle It could go out a little bit longer now. Once again, it's hard to tell on the macro just because, just to be transparent, just because of when you're ramping a bunch of new reps, you know, and they came in at the end of last year, beginning of this year. It's hard to see with the macro, but I'm assuming it's playing into something. I mean, it would be foolish to think the macro doesn't play into slowing down sales cycles and elongating sales cycles. But once again, we're just monitoring, like, how well do these reps, like, the new logo count, once again, shows, okay, these reps are starting to deliver, you know, more than 50% of them have at least one deal under their belt. So it's just hard for us to tell cycle yet. I think by Q3, Q4, we'll understand a little bit better and then understand the macro impact. What's happening in the macro, just on the enterprise side, is... There's a lot of layoffs going on in the enterprise customer base. They're restructuring. And what they're restructuring around is cost savings, obviously. So once again, we're trying to play into what automation does. And that's where we're really going. But once again, I think we need a couple of cores to see if there's a macro impact on what's going on in the enterprise with the restructuring. But as you can see, we signed... We even had renewals in some of our very large enterprise customers like Verizon and stuff. So, you know, so far, I feel pretty good about that. But I assume there'll be an impact somewhere. It's just, once again, with a bunch of new reps, a little hard to tell.
spk09: Understood. Thanks for the color there. And then on the gross margin trajectory, can you give us a sense of the timeline it will be required to sort of get that labor component of the gain share revenue out of the P&L, and then how quickly you think you can start progressing to those 80% plus target margins? Is this a fiscal year 23 expectation, or is this more of like a 24-25 expectation? Thanks.
spk13: Yeah, so the gross margin expectation in that 80% range would be not just 2023, a little bit longer term broadly, the way we're thinking about it now, but in terms of your first question on the lower margin gainshare components, we're executing swiftly on that in the back half of 2022 and probably at least the first quarter of 2023. Thanks, Dr. Keller.
spk14: I'll hop back into the queue.
spk01: Thank you. The next question comes from Siti Panagrahi from Mizo.
spk07: Please proceed with your question, Siti.
spk08: Thanks for taking my question. I just wanted to dig into the third growth driver you talked about today, that opening your platform to third parties. Could you dive a little bit more? I understand you have partners from Tenfold and VoiceBiz, but is it something you're opening up your AI messaging and then Who are the CRM vendors right now you're targeting to be a partner? Because my understanding, a lot of CRM has this solution messaging, so that will be helpful.
spk02: Yeah, so obviously we just put into Salesforce the app stores and integration of our messaging platform into it. What you find is it's not a channel of communication if you look at messaging at its core. It's a way to operate the business in a digital way. So, yes, if you treat it as a channel and communication, it becomes like chat. And we used to be in the chat business. But messaging provides really this digital connection to the consumer. You can be proactive over it. There's a bunch of technology around asynchronous operations. And that's where we really shine. With that said, you know, we know over time messaging, it may become like chat. It's not there right now. We knew that from six years ago when we launched it, and that's why we got heavy into AI four and a half years ago and automation. The value of it is, and if I can step back for a second, when you look at the contact center, the care software business, and you add up Genesis and Five Nines and everyone else in there, it's about a $10 billion TAM if you add their revenues. But if you step back, there's close to $40, $50 billion in labor. And so it's not about the software. It's really about how do you take the pot of money that's in labor and move that and take that and automate that. And that's the value that it provides. If we deliver messaging and have a human behind it, we are not reaching the goal. And so that's what most of these companies are doing. They're providing their platforms and basically you just put more humans on it and it costs you the same amount of money. Where the world is shifting is how do we take these agents and automate them? Even the game share part of our business where we provide labor and we do automation as a service is a very high value thing. That's why we got into it. Where we take the labor, where we make them bot builders. So that's the pot of money we're going after. And that's why we look at this TAM as like a $60 billion TAM, but the majority of it is getting rid of the labor. And that has to be the number one thing. So if you look at most of the CCAS players today, and whether hosted or on-prem, they're primarily human agents. And that's going to change radically over the next couple of years. And that's where we're positioning ourselves. The second part is, We may not care about messaging long-term, as in somebody may choose some other platform, but they're going to run our AI on it. And that's the value in, once again, getting rid of the human labor. So that could be our goal. Six years ago when we launched the platform messaging, we always said we wanted to kill voice and make a channel shift, which we've done a pretty good job at. But obviously our goal is to get rid of the humans and the human labor behind it. There's no value in that today. And that's where the majority of our investments have been in the last four and a half years. So I think that that's where we'll continue to operate. That's why we want to take our AI and move it off of our platform and let it run in many different platforms.
spk08: Yeah, I know. Thanks for that color. And then, John, follow up to your commentary. And thanks for that color on gross margin. But if I look at EBITDA margin, you kept it same to your prior guidance. when should we think about EBITDA margin expansion and how much is it? Is it mostly when you see the revenue ramp up, when we should see if that's going to float the margin or any cost cutting you're going to do and any kind of, without guiding, like help us understand how the EBITDA margin expansion we should think going forward.
spk13: Yeah, I think if you look at the implied guide on operating expenses, the overall cost structure of the organization is improving markedly. And to sense for where we're going, we think, as Rob described, this can allow us to produce double-digit margins at least next year, for the full year, in addition to very healthy free cash flow. So that's the path we're on and the one we started earlier in the year.
spk14: Great. Thank you.
spk07: Thank you. The next question comes from Ryan McWilliams from Barclays. Please proceed with your question, Ryan.
spk04: Thanks for taking the question. Just to follow up on the last question, John, while things might look different now, given you're exiting some of the lower quality revenues, how do you think about the normalized financials of this business? And, you know, as we're working through our model, any guidance on how we could think about revenue growth expectations for next year? Like, could we expect to see improvement off the implied revenue growth rate exiting the fourth quarter?
spk13: Yeah, I think it's interesting, actually, to take a look at the business on a normalized basis without, let's say, the pandemic-driven COVID-19 testing and the pandemic-driven gain share that helped benefit growth over the last two years. If we normalize for that, meaning remove its impact from last year and remove its impact from this year, for the second quarter, we'd be mid to high teens, for example. And for the full year, we would also be mid to high teens. So I think that's a good way to think about our core business and growth potential moving forward into 2023.
spk04: Excellent. And then, Rob, I'd love to hear your thoughts around the agreement and partnership with Starboard that was announced in the quarter. What are some of the goals of the new operating committee that was announced as part of the agreement? Just love to hear your opinion there. Thanks.
spk02: Yeah, we obviously made an agreement with them, and we are going to put a new board member on, and then they're going to put three people that we can select from. So we're going to put one of their people, and we're going to start interviewing both people. So that's... what we're going to do, and then we have one of our board members retire. I'm not sure for the operating committee. I mean, we haven't defined it yet. I guess when we get together, we'll do that. We're just working on interviewing and try to find great candidates for the board.
spk04: Appreciate the color. Thanks.
spk07: Thank you. We have reached the end of our call today. I'll now turn the call to Robert Lacascio for closing remarks. Thank you, sir.
spk02: Thank you so much for listening today. And I wanted to just reflect a little bit on what we're trying to do with the P&L. Back in the dot-com era, we were one of the few survivors, and we made some radical changes. Some of you were shareholders back then. And we went from burning a lot of cash to profitability in a matter of three quarters. And that saved us. And we've been looking at the business as a leadership team. And what we're looking to do now is we feel like growth is important. Obviously, we're a growth company, and this is a growth market. But I think one of the lessons we've looked at and learned is about growth on top of a P&L that doesn't, you know, generate cash flow is not really a great company. And we've generated cash for 20 years. That's how we got here. So, you know, we talk about it, even though we're taking down top line revenue and we could just hold on to that revenue and keep it going. We just felt it's time to kind of cut it loose and move forward because this is a huge opportunity for us. As you can see, all the new logos and stuff, but putting revenue on a weak company will not make for a long-term value. So as shareholders, we're all aligned with just making this a strong company. And when you look at even a lot of the peer set in cloud today, and when you look at the P&Ls, they're all not so great. And we just don't want to be a part of that. And we want to strengthen this up. So we're going to make some broad changes to the company, continue to do what we've done. I think you'll see a different company on the other side of this. And over the next two quarters, we're going to focus on delivering those type of results. And the leadership team at the company is really focused on this because we know we have this giant opportunity. Conversational AI is one of the biggest transformational technologies. But once again, we chased a lot of revenue you know, during COVID like everyone did, but it's time now to just work on revenue that can help us build a stronger company in the future. So I want to thank everybody in the company. And also I'm looking forward to, you know, we're going to add these two new directors, one from Starboard, one from us, and looking forward to also adding new blood on the board.
spk14: And with that, thank you. And we'll see you next quarter.
spk01: Thank you very much for this conference. You may disconnect your lines at this time. And thank you very much for your participation.
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