LivePerson, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's second quarter 2023 earnings conference call. My name is Shamali, 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 from LivePerson will conduct a question-and-answer session, and conference participants will be given instructions at that time. To give everyone the opportunity to participate, please limit yourself to one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President, Investor Relations.

Thank you, Somali. Joining me on the call today is Rob Lacascio, LivePerson's founder. and 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, August 8th, 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. We assume no obligation to update any forward-looking statements. Also during this call, we will discuss certain non-GAAP financial measures. The 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 Rob. Rob?

Thanks, Chad. Thank you, everyone. Before John discusses our results for the quarter, I'd like to speak to the leadership announcement the company made today. Are you aware we announced a month ago I would be stepping down as CEO of LivePerson later this year after more than 25 years at the helm? Since then, a search has been underway to identify LivePerson's next CEO. And as the search progresses, the board believes now is the right time to make a transition of my role as CEO. In light of this, John Collins will take over as interim CEO. He will also continue to serve as CFO and will benefit from the ongoing support of LivePerson's finance team during this time. In addition, I will assume the role of special advisor through year end to help facilitate a smooth transition. On a personal note, I recruited John in 2019 can assure you that he's the right person to step into the CEO role on an interim basis. As you'll hear from John in just a moment, he's committed to ensuring the company continues to execute as we launch our new generative AI products and platforms. Indeed, I am confident that John working alongside management with the board's support and active oversight will advance the company's strategy to drive profitable growth and enhance value for shareholders. As the founder of LivePerson, I'd also like to extend my gratitude to the exceptional team of employees who make what we do possible. Thanks for their outstanding work and passion they display every day. LivePerson is at the forefront of our industry, and I know they'll continue to drive our success. And with that, I'll turn the call over to John to go into more detail on the business and discuss our second quarter results. John?

Thanks, Rob. Before elaborating on the key themes and results of the quarter, I'd like to take a moment to acknowledge and thank Rob for the incredible company he's built over nearly three decades. I've worked alongside Rob for the last four years, and personally, he's been a friend and a mentor, and I look forward to his continued support. Turning to the quarter, I'll begin with a business and strategy update, followed by a discussion of the financials. Last quarter, we launched an expansive set of generative AI-powered products across the conversational cloud. These products provide a significant uplift to agent efficiency and enable automation to operate on the long tail of consumer intent. Using generative AI, we are also automating previously manually intensive labor to accelerate time to value for customers. We also launched Voice AI, which meaningfully extended LivePerson's automation products to the voice channel, opening the door to approximately 70% of the conversations currently taking place between consumers and brands. This significantly expands our serviceable market. The intent of Voice AI is not to compete with incumbent voice solutions, which focus on the needs of agents in synchronous contact center operations. but instead to shift traditional voice calls, including those trapped in the IVR, into an AI-powered automation flow, which we see as the future of customer service. In the second quarter, 38% of our top enterprise brands experimented with voice AI, which was the highest rate of usage for a new product that we've seen in recent years. Similarly, 24% of top enterprise brands began using a wider range of automation products enhanced by generative AI. Overall, these are early indicators of expansion and are encouraging and driving an increase in starting pipeline for the fourth quarter relative to where we started the third. More generally, now that we support voice interactions and leverage generative AI to address a virtually limitless range of intent, as opposed to the handcrafted automations for the top 10 or 20 in past years, our customers can efficiently automate up to an estimated 75% of their aggregate conversational volume. This is well above the estimated 25% that we observed on the conversational cloud today. So at a high level, that's a potential market opportunity for us that's three times today's recurring revenue, just from expanding within our existing base of customers. As for customer wins, we signed a total of 69 deals in the second quarter, including three seven-figure deals, all of which were new logos, 36 expansions and renewals, and 33 new logos overall. It's worth noting that new logo deal values were significantly up sequentially and the highest value in the last four quarters. In addition, the renewals included multiple seven-figure deals and one eight-figure deal in our media vertical. In terms of trends, it's clear that LivePerson has become the platform of choice for conversational banking. Within financial services, we've consistently renewed and expanded our base and won large new logos across the U.S. and internationally for the past few quarters. including one of the largest banks in the world in the second quarter. All new logo wins in financial services represent multi-year contracts and suggest a clear trend that retail banking is rapidly becoming digital first and conversational. These customers need solutions that deliver in-app messaging that complies with onerous information security requirements. In addition, they leverage a range of differentiated live person products, including social, proactive messaging, and of course, AI-powered automation. In almost every case, These companies have large pre-existing commitments to solutions from Salesforce, Amazon, Genesis, Microsoft, and others. But they see our platform, our security and compliance framework, and most importantly, our expertise and demonstrated business outcomes as the trusted best-in-class partner to deliver true digital and automation transformation at scale. Pacific Financial Services wins included one of the largest banks in the world, as I mentioned, a Fortune 25 company. that selected LivePerson to power automation and digital transformation, even with a large pre-existing investment in both Genesis and Salesforce. A major European digital-first bank also chose LivePerson among a long list of competitors to power in-app, web, and social messaging based on our track record of delivering better business outcomes for other leading digital-first banks. As mentioned earlier, renewals and upsells in financial services were strong in Q2. representing six of our top 10 renewals for the quarter, including Honda Capital America, one of the largest captive auto finance companies. Three other notable expansions, including a Global 500 Canadian Realty Bank, the largest retail bank in Australia, and a Fortune 100 life insurance company. Again, all multi-year with meaningful revenue expansion. Other notable deals in the second quarter included an eight-figure ACV renewal with a leading audio entertainment company in North America, and a large healthcare win, for automated patient scheduling and engagement. We were selected over Salesforce based on our ability to drive tangible business outcomes. The healthcare industry is accelerating adoption of conversational AI, and we are well positioned as they have similar needs to financial services for a trusted, secure, and proven platform in a highly regulated industry. We also recently announced the launch of LivePerson Marketplace, a hub for cutting edge integrations that extend the capabilities of LivePerson Conversational Cloud. With an array of apps built by LivePerson and our trusted partners, LivePerson Marketplace empowers businesses to unlock the full potential of AI-powered conversations at scale. The debut of LivePerson Marketplace represents a major milestone in our commitment to an open platform that powers better digital conversations for the world's top brands. We're excited to introduce this dynamic ecosystem to even more powerful integrations for businesses working with us and our trusted partners. which included Adobe, Cisco, Medallia, and many others. Turning to the quarter and our financial results, consistent with the expectations that we set last quarter, the right-sizing of our cost structure, divestiture and wind-down of non-core business lines, and a renewed focus on the B2B core led to an inflection point for LivePerson's P&O. In the second quarter, we generated $12.8 million of adjusted EBITDA and positive free cash flow, flipping from a loss to a profit and surpassing our prior guidance. The upside in profitability relative to guidance was the result of an accelerated reduction in gainshare labor expenses, better than expected execution of the restructuring plan, and the timing of certain variable expenses, primarily marketing and cloud spend, that we still expect to occur in the second half of 2023.

Total revenue in the second quarter was $97.5 million, which was just above the midpoint of guidance.

B2B core recurring revenue was 89% of total revenue, which was also ahead of our expectations. Non-GAAP gross margin improved 600 basis points sequentially to 74%, driven primarily by a reduction in gainshare labor expenses. Significantly, we also improved our financial position by eliminating a multi-year $120 million contingent earn-out payment for wild health, $40 million of which was previously accrued for potential payment in 2023. We did this in exchange for an immediate payment of $12 million and certain rights if a sale of wild health were to occur in the future. Turning to our standard reporting segments, within total revenue for the second quarter, revenue for B2B segment declined 21% year-over-year, and revenue from hosted software declined 14% year-over-year. As discussed last quarter, the primary drivers of these declines are the wind-down of non-core business lines, including COVID-19 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 3% year-over-year. Professional services declined 43% year-over-year, driven by the completion of the engagement with the Clare JV, which, consistent with expectations discussed last quarter, did not contribute professional services revenue in the second quarter. Excluding revenue from the Clare JV in both periods, professional services revenue grew 5% year-over-year. From a geographic perspective, U.S. revenue declined 24% year-over-year, and international revenue declined 13% year-over-year. Again, the primary driver for these declines was the wind-down of non-core business lines. On a normalized basis, we would have seen the U.S. closer to flat year-over-year with slight declines in international. Net revenue retention was below our target range of 105% to 115%, but up sequentially, consistent with expectations. We continue to expect sequential improvement in net retention in the third quarter. RPO decreased 20% year-over-year to $326 million, due primarily to the completion of professional services for the Claire JV. Due to the wind-down of non-core business lines and their impact on key operating metrics, average revenue per customer, based on total revenue, declined 4% year-over-year to $635,000. In order to provide a more consistent and meaningful measure of ARPC, we expect to calculate this metric using only B2B core recurring revenue going forward. which is consistent with the revenue base for calculating net revenue retention, as we discussed last quarter. So for the second quarter, ARPC, based on B2B core recurring revenue, grew 14% year-over-year to $575K.

Before providing an update on guidance, I want to address a change to the expected revenue mix in the third quarter.

As you may recall, we deferred revenue recognition of certain revenue attributable to wild health in the fourth quarter of 2022 because Medicare reimbursement for services rendered was suspended pending further review. We now expect that the review will be completed and that we will recognize the corresponding revenue in the second half of the year, likely in the third quarter. In terms of full year 2023 guidance, for total revenue, we are maintaining the midpoint of $394 million, but narrowing the range to $388 to $400 million. Note that this range excludes 7.2 million contribution from Kusama in the first quarter of this year. As for the B2B core, we expect recurring revenue to be approximately 86% of total, which remains consistent with what we discussed last quarter. Inclusive of the Kusama contribution in the first quarter, the new range for total revenue is 395 to 407 million. For adjusted EBITDA in full year 23, we are raising guidance to a range of 19 million to 32 million, or $25.5 million at the midpoint, which represents a $2 million increase over the prior guidance midpoint of $23.5 million. As for the third quarter, we are guiding revenue to a range of $97 to $101 million, and we expect B2B core recurring revenue to be approximately 85% of total revenue. The sequential decline in the percentage of B2B core recurring revenue relates to the anticipated revenue related to Medicare reimbursements that I mentioned just a moment ago. As for adjusted EBITDA in the third quarter, we are guiding to a range of 5.9 to 12.9, or a midpoint of 9.4 million. To conclude, we have right-sized our cost structure and launched generative AI enhancements across the conversational cloud, which are showing early indications of robust adoption. With voice AI, LivePerson has become an omnichannel platform for customer service automation and gained access to approximately 70% of conversations taking place between brands and consumers. Access to traditional voice conversations significantly expand our serviceable market at a time when our AI-powered automations can address a virtually limitless range of consumer intent. These significant developments, coupled with our extensive enterprise customer base, puts us in a position of strength to accelerate automation of the contact center, delivering better business outcomes and profitable growth.

And with that, Operator, let's open the line for Q&A.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate a line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, to give everyone the opportunity to participate, please limit yourself to only one question and one follow-up. Our first question comes from the line of Daniel Wang with Mizuho Securities. Please proceed with your question.

Hey, thanks for taking my question. Can you just provide some color about how you're thinking about the wild health business going forward and perhaps some detail around the conversations in restructuring the earn-out provision? Thanks.

Sure.

We shared last quarter that we expect strong growth in wild health, and we continue to expect strong growth Keep in mind, though, we have observed some increased timelines for certain wild health business lines owing to the highly regulated nature of healthcare. However, again, we expect strong growth to the business in 2023. As it relates to the structuring in past quarters that we consolidated redundant organizations within go-to-market, namely customer success and our reps and account organization. And so we now have a more streamlined flow there. In addition, we were able to, with the new generative AI capabilities and where we saw the product going, wind down some of our legacy products we were supporting, which allowed us to reduce costs on that side of the house as well. And of course, there's a large amount of cost savings tied to the reduction of gainshare labor that was necessary expense to support the gainshare business.

As you know, we have wound down the majority of that business line. Okay.

And just, I guess, can you talk a little bit more on voice AI and maybe what makes it unique relative to some of the other existing conversational AI solutions out there?

Yeah, voice AI for us, again, is opening up a new channel for the first time for live person to deploy automation where the vast majority of conversations are taking place today. And I think what differentiates live person is its enterprise readiness, its existing back-end integrations, the flows for the contact center operation that have been honed over decades. And installing the voice AI within that wider ecosystem is what makes it a powerful solution, much more powerful than simply tapping in API from open AI without all of that other infrastructure behind it.

And our next question comes from the line of Jeff Van Re with Craig Hallam Capital Group. Please proceed with your question.

Great. I have several. John, just on the refreshments on the wild health, what's the revenue impact expected there then for the second half, the catch-up revenue?

We haven't put a number out, Jeff, but I would say relative to the commentary in the prior quarter where we said there was a likely doubling in wild health's core business, I would just narrate that expectation. It's still possible, but there's work to do, and as I said, some timelines have been elongated.

Um, maybe, maybe I didn't phrase it real well. You had mentioned that, um, some of the revenue recognition around Medicare was delayed and it was going to come in the second half. And I just, I think you did share how much Medicare revenue was delayed last year. I'm just asking for a refresher there.

Yeah, we didn't share the exact value last time. Uh, however, we did say it was high single digit millions.

High single. Okay. Um, helpful. And then, um, In terms of the sales org, where are we now in terms of sales reps and just in terms of retention of reps, specifically the churn versus involuntary churn of the sales team? Just give us sort of a state of affairs with the sales org.

We've come down from Q1, which was approximately – 69 to closer to 60 now, and we're staying steady at that level.

And I would also add, though, that the 60 we have today approximately are fully ramped reps.

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

Hi, good afternoon. Thanks for taking my question. John, can you walk me through kind of the puts and takes from kind of your updated view for adjusted EBITDA? Were there some expenses that were kind of delayed and expected to occur now in the second half of the year?

Yeah, sure. If we just look at the numbers, we beat the first half by roughly 11, 12 million. Of course, two of that is flowing through to the new guide. About four of that, maybe a little more, relates to the timing of marketing and cloud spend. And then we have a range of more miscellaneous increased expenses, including targeted investments in product and engineering, and some tied to the CEO transition. So when I factor all that in, we end up with what I think is a reasonable guide for just EBITDA for the remainder of the year.

Understood. And then just one quick follow-up around kind of the voice AI product. I mean, can you talk about just the go-to-market strategy in terms of how you're looking to get into the door with customers? Is it really just approaching some of your major existing enterprises and trying to expand channels there or what's really the strategy to drive adoption of voice AI?

Yeah, certainly. Um, there is, as I said, in the prepared remarks, the, uh, Voice AI has the largest, the fastest adoption that we've seen in recent years of a new product launch. And I think that there's a trend in the industry shifting towards channel consolidation where customers are seeking more unified interface encompassing voice messaging and social channels for efficient consumer engagement. And LivePerson has, I think, the best in class messaging and automation product. And demand for voice AI and social is certainly accelerating. And again, our value proposition is not to compete with the incumbent solutions, but to shift the mindset to what we think is the future. And that's a more automated flow than all the tooling that's currently available by the incumbents for more synchronous voice operations.

So we think that's really the advantage in addition to that enterprise readiness that I described earlier.

And as a reminder, if anyone has any questions, you may press star one to join the question and answer queue. Our next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Hi, this is Chris on for Arjun. Thanks for taking the question. So it's good to hear that NDR has improved sequentially in the quarter. Do you think this is an inflection point for this metric? And if so, what's behind the change?

Sorry, you were referring to net revenue retention? That's right, yeah.

Yeah, I think there's a lot of increased momentum coming off of the product launch in addition to, as I described, strong trends in our financial services, vertical, that are showing through. And then, of course, it's also tied to You know, we just came out of a restructuring. We were restructuring for a lot of 2022, and that's a distraction. And, of course, Q1 was the main event.

Now that we're on the other side of that, we're focused on execution, and I think that's going to show through in the results.

Got it. It's kind of a nice segue into my next question. So talk a bit about some of the success you've been seeing in financial services. Is this due to a specific go-to-market initiative or focus for your sales team, or are you just kind of naturally finding a good fit in some of the more highly regulated industries?

Of course, we have many go-to-market strategies, plays that we're executing against, but I think the traction we're seeing with financial services is, one, it's very organic, and two, financial services has been a mainstay of our customer base for years. many, many years. It's among the largest across the industries that we service. So a lot of ripe opportunity there. And I think it's also, as we've described, the focus on enterprise readiness, on ensuring that we take information security seriously and that there's sufficient guardrails for the kinds of products that this highly regulated industry wants to deploy.

And we have reached the end of the question and answer session, and this also concludes today's conference call. Thank you for your participation. You may now disconnect your lines at this time.