Q2 2022 LivePerson Inc Earnings Call
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Good afternoon, ladies and gentlemen, thank you for standing by welcome.
Welcome to life Christmas Sticky 2022 earnings conference call.
My name is Claudia can typically 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 life Kristin will conduct.
Chinooks fishing and conference participants will be given instructions at that time.
To give everyone the opportunity to participate to limit yourself to one question and one follow up.
As a reminder, this conference is being recorded and now I'd like to turn the conference over to Mr. Chad Cooper.
Our vice President of Investor Relations. Please proceed.
Okay.
Thank you Claudio and good afternoon, everyone and thank you for joining us today on the call with me are Rob Locascio like persons founder and CEO and John Collins, Chief Financial Officer. Please.
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.
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.
Conciliation with 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 like persons website.
And with that I'll turn the call over to Rob Rob.
Thanks, Chad.
For joining <unk> second quarter 2022 earnings call in Q2, we generated revenue of $132 6 million.
non-GAAP gross margins were up 500 basis 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.
This year, we made a commitment to prioritize profitable growth I'm pleased to report we are delivering margin expansion faster. Thanks Pat.
Through a combination of Opex discipline.
Proving 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 and drive high gross margins strong operating margins and high quality revenue growth in the short term will be intentionally trading some lower margin top line revenue for substantial sustainable near and long term margin.
Expansion in growth our goal is to achieve best in class operating and financial models, which would be near or above the 80% gross margin and mid teens or better operating margins.
Credibly proud of the agility and innovation that allowed us to rapidly respond to the needs of our clients in the market and to drive growth during the past two years with the pandemic.
But as pandemic driven trends normalize we are laser focused on a more repeatable on high margin growth engines as the.
The industry leader in conversational AI and messaging.
The 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 achieved measurable ROI apart form has reduced our brands customer care cost by up to 50% while.
<unk> 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 task, we help our brands optimize their engagement with their consumers throughout the customer lifecycle.
We're proud to consistently deliver measurable ROI 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.
First on three key actions to optimize profitable revenue growth new logo growth.
<unk> within <unk>.
Existing accounts and partnerships and opening our AI. So they can be accessed on other third party platforms.
So let's start with new logos.
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% year over year and 73% increase sequentially.
These new logo wins are green shoots, indicating that our enterprise sales force, who are returning to historical rates productivity. After change in field leadership. We made early this year and made great progress at generating new land and expand opportunities second, we're leveraging and extending our existing customer relationships by both cross selling and up selling.
And we're seeing strong adoption of multiple AI and automation products.
In Q2, we continued 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 are continuing our partnership momentum to lock expanded in indirect revenue opportunities. We added 15 unique partners in Q2, and this channel produced nine new logo deals a few weeks ago, we announced new partnership with slowness.
Technology is focused technology company has been focused on improving business process for large enterprises.
Our joint offering called contact center conversation mining combines the omnichannel conversational analytics from voice space.
Customer journey mapping and back office execution management some slowness.
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 in London during the quarter.
Pre pandemic.
Rents were a key element to our go to market strategy and we've historically accelerate our sales cycles, because they educate brands about the power of conversational commerce and AI generally through our existing client sharing their real world outcomes in aggregate to Q2 events directly influenced over $50 million pipeline.
From a product perspective, we are capturing incremental scalable revenue opportunities by opening up our platform. This will enable brands, whose agents primarily use a third party CRM to have conversations with consumers driven by our conversational cloud.
This has historically been a pain point for brands has been a key component of our product roadmap, our acquisitions of voice space and 10 fault accelerated this initiative.
He says is being integrated into the core analytics of our platform and 10 fold is driving the overall go to market probably work with CRM and other enterprise technology platforms or <unk>.
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 clout with voice base for digitizing the voice channel. So we can extend the benefits of our conversational AI platform Intuit.
This enables brands to not only meet consumers on voice.
If that 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 the customers 10 fold in voice based both play key roles in the strategy have enabled us to extend these capabilities to voice providers like a buyer.
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 recognized <unk> ability to deliver tangible value even as current economic conditions are driving brands to assess cost savings consolidate technology stacks and de prioritize all projects that do not have direct.
On savings or revenue growth.
These are some of the most innovative brands in the world and 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 kind of a 104 deals in the quarter.
<unk> are rich dataset, 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 Cabot Tech the largest retail bank in South Africa, with approximately 19 million consumers.
<unk> originally came to us from initial use case with voice space. However, we're able to show them that they could go further automating the customer experience over whatsapp as well as take advantage of the power of voice space for real time insights into the consumer's experience and banking operations.
This is a seven figure three year deal even more importantly, it provides us with a reference customer and an important new geography with a new use case.
It's a great example of our new logo initiatives enriched product synergies following last year's acquisitions driving revenue expansion as we execute on our plan on profitable growth.
Also won a large multi deal deal with Canada's largest bank being selected over two of our major competitors.
The client chose lie person for our ability to reduce the cost of servicing customers and opened the virtual doors of the bank to new account growth by managing the entire consumer journey, our messaging AI and automation.
On the renewal front, we signed a large two year extension with one of our major airlines using.
Using <unk> platform technology with customer makes it easy for travelers to begin conversations on their app and directly from Apple business chat SMS AVR deflection QR codes within airports in social media.
We also signed a multiyear renewal agreement with Verizon Verizon has been a client for ours for three years, they started with messaging customer care and sales now they expanded to leverage our AI as well.
In <unk> in Q2, our gain share division signed a three year seven figure automation as a service contract with our largest automation OEM 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 <unk>.
SAP.
And finally, we're making excellent progress on our health care strategy, which is one which is one of our largest verticals behind telecom and financial services and it's one of our fastest growing <unk>.
Working towards delivering a very scalable solution for the health care market, especially around using machine learning and conversational AI for improving patient experience and outcomes.
The 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 rates in USA boxing to bring our AI and telehealth capabilities to their athletes as their official health care.
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 reduced total revenue in the near term as we de prioritize lower margin non repeatable areas of the business. We continued to expect generate positive EBITDA and 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 the detailed financial results and our revised outlook for the rest of the year John .
Thanks.
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.
<unk> 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 EBITA 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 quota carrying sales and marketing and research and development reduce 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 guide.
We expect continued gross margin expansion for reasons I will discuss in a moment.
This year, yes.
During past two quarterly calls we are focused on adapting our operating model to ensure a sustainable framework for profitable growth in a post pandemic world. So this and 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 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 search.
We will set our long term foundation for best in class gross margin significant free cash flow generation and a return to the rule of 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 purposefully 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.
We converted over 90% of our gain share revenue from variable to recurrent secured primarily by multiyear contracts that increased revenue stability and transparency.
Approximately half of this revenue is high margin revenue derived from scalable usage of the compensation of club.
The other half is low margin revenue derived from agent labor that we supply to our customers via contractual arrangements with P. P O 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 'twenty two.
While turning down the gross accretive revenue sources in Denver and 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 <unk> 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 to the business model to drive expansion of non-GAAP gross margins to at least 80%.
Turning to our reporting segments for the second quarter within total revenue <unk> grew 12% year over year hosted software.
There was approximately unchanged year over year and professional services grew 95% year over year within revenue for most of the software lower revenue from gained 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 project relates to the eight figure health care deal, we signed last quarter and it's focused on automation as a service for health care 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 isn't it finally revenue from the consumer segment declined 7% year over year, which was a function of a hard comparison, which a pandemic driven growth in the second quarter last year.
As Rob mentioned, we signed five seven figure deals in the second quarter to ourselves and three new logos ARPA 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 base down cells and the gain share ports.
Palio.
Consistent with the strategy for gain share 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 contribution from variable revenue and labor based into your customers.
Average revenue per user improved to 660000 up 23% year over year total messaging volume on the conversational cloud increased 32% year over year.
I'd messaging volume increased 20% year over year, our strongest verticals this quarter, where retail financial services and telecommunications.
In terms of new logos, we signed 45 in the second which was an increase of 55% year over year and 73% over the first quarter, the traction and new logo acquisition validates the progress we've made on rebuilding the foundation of our go to market motion, including the strategic the strategic focus on acquiring new logos.
Considering our robust ability to rapidly expand 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.
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 API is on third party integrations, we're ensuring that customers on other calls so have rapid and chemo Saks last July 1st and best in class capabilities across automation messaging Omnichannel conversational analytics.
Another unique innovations that improve customer engagement and reduced reliance on human Asia.
Rob mentioned, we recently announced a strategic technology partnership with us to integrate conversational analytics into a data processing and execution management platform. In addition, contact center operations that primarily dependent on third party CRM platforms can now leverage messaging and automation capabilities through scalable integrations with the conversational cloud of.
Of course voice based in central are at the core of this strategy.
Moving down the P&L adjusted EBITDA was at the top end of our guidance range at a loss of five 5 million in the quarter the upside.
Christa 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 and post M&A integration and consolidation non quota carrying sales marketing and research and development.
Turning to four years with a focus.
On adapting the business model for.
Profitable growth.
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 scalable delivering the automation messaging and related customer engagement outcome that set <unk> apart from other platforms.
As a result, we are revising down our guide.
For revenue from two 507 million to $518 million or 8% to 10% year over year growth.
As for our 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, It's a right sized 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 set guidance for the full year, we expected a loss of $10 million adjusted EBITDA at the midpoint, which implied covenants here.
Operating expenses last quarter, we improved the outlook to five <unk>.
Positive adjusted EBITDA, implying partnerships and operating expenses now by reaffirming guidance for adjusted EBITDA in the range of 1 million to $10 million for a margin of zero to 3% 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 Jen.
Meaningful profit and cash in 2023.
As I discussed earlier, the elimination of low quality revenue, coupled with continued optimization of our cost structure, our expanding our gross profit margin.
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're raising it again to 72% 74% for the full year 2022.
And the long term, we expect continued expansion of 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 $223 6 million or one 8% to four 5% year over year.
As for adjusted EBITDA in the third quarter, our guidance range is zero to $4 3 million.
What percent of treated.
We're also expecting non-GAAP gross margin in a range of 70% to 74%.
Before taking questions I'd like to quickly emphasized several key themes for 2022 and continued execution on our profitable growth strategy will position us for 2023.
We have made strong demonstrable progress on rebuilding our sales motions, 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 and the wider CRT 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 cost structure and purposefully trading some.
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 <unk>.
Resource allocation of more strategic differentiated and scalable sources of revenue growth and with that operator, we can proceed to Q&A.
Okay.
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 Keith Chris Star and one on your telephone keypad.
Information tone will indicate your line is in the question queue.
Do you mean.
And two if you would like to remove your question from the queue.
Again, if you'd like to ask a question Keith Chris Scott.
Lynn one.
For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Yes.
Yeah.
Yeah.
The first question comes from Arjun Bhatia from William Blair. Please proceed with your question.
Okay. Thank you.
John can you just help us understand maybe how much of the revenue reduction.
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 were talking about like the labor portion of gain share revenue.
Yes 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 behalf.
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 derive from what we do best which is of course.
Automation messaging and in order to get there.
Emanating to lower quality revenue we described.
Specifically that labor base case, and the gain share 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.
No.
In order I think to reiterate some of the key measures so that we've made.
The new logo acquisition now 73% increase sequentially.
<unk>, a very strong leading indicator.
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 time that fuel our salesforce uses for our cash.
Understood that's helpful and then.
Rob one of the things that you mentioned Ah as.
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.
How you would be able to monetize.
Some of the you know providing some of your technology, what's the plan on that front.
Yes.
Obviously, that's still very high valued part of our platform as our AI and automation technologies today. It runs solely on our messaging platform and soon to be voice.
What our customers want and sometimes they've got voice investments in other platforms. They are running.
One 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 allowed the acquisitions allows us to do a fair amount of that like we now can take our agent console and it can be it's sitting in salesforce like our messaging console now can sit within salesforce, if someone's at Salesforce user.
So.
A place in the evolution of the market to be much more platform centric then.
Product centric.
And Thats what were 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 those AI. So we'll also be doing that whether it's Google dialogue flow or lax.
Our Watson they can use our all of our tools on the analytic 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.
Okay got it perfect. Thank you.
Okay.
Thank you <unk>.
This comes from Zach Cummins from B Riley.
Please proceed with your question Zach.
Yes, hi, good afternoon, thanks for taking my questions.
Yes, John .
Can you talk about if theres been any sort of changes to the commission structure for the sales force 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.
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 a piece of the portfolio. So that's something we're evaluating but we would ensure that.
The the overall structure is fair and equitable for everyone.
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.
Okay.
Yes.
Thank you.
Variable revenue from gain share and some labor base revenue.
That we slowed down and some that was down so we're the primary in the aggregate primary contributors to the.
Mess of the range of 100, 515% I'll note, though that even with those factors were still 100%.
Net revenue retention.
Understood well, thanks for taking my questions and best of luck in the coming quarter.
Yeah.
Thanks, Eric.
Thank you. The next question comes from some much mono from Jefferies. Please proceed with your question too much.
Hi, This is mason on for <unk>. Thanks for taking my questions I wanted to circle back to your guidance can you help us understand what you're embedding from a macro perspective.
Given the environment stays the same it's worse or perhaps improve from what you were expecting previously.
Yeah.
Yes, I mean right now.
It's kind of hard to tell for us because of the rebuild that we have.
Change in leadership back too.
<unk> rented for many years.
So I can't really tell you whether there is a macro impact or not I mean, the new logos.
Good Green shoots that the team is starting to really perform theres a lot of land and expand in there. So there are smaller deals, but they are there.
Lending and Theyre going to grow.
But we can't see it right now our value proposition is cost take out like the salone as you know <unk>.
Bonus.
They are all about cost takeout too and so we've formed this partnership with them because thats kind of what the world wants right now and especially contact center labor.
It can be in some cases, the big brands have 40000 people on payroll and there is an opportunity to really.
Change the cost structure, using AI and automation. So it's hard to tell for us just because of the building up of our sales force. So I think in a couple of quarters, we'll know where we stand with that on the macro side.
Understood there and then on <unk>.
2% this quarter, but that was down a little bit from from where you were tracking previously just talk about kind of factors impacting this and where you stand on that DLA to CPI transition.
Yes.
Yes, I think our food and our in our range, we would expect considering.
As I described in the <unk>.
And to build the guide there is some step down from customers that were previously contribute to that value, namely the larger customers in our venture portfolio in terms of latest 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%.
I would expect it to be.
In that ballpark in Q3 as well.
Understood. Thanks for taking my questions.
Yeah.
Thank you. The next question comes from Peter Levine from Evercore. Please proceed with your question Peter.
Great. Thanks for taking my question I guess.
Robert Jonathan If you look at the top of the funnel, where you not as successful at converting leads or adding leads at a similar level versus kind of expectations or plans.
No I don't think it's about the top of the funnel.
Like we are saying it's been a rebuild we lost a lot of our capacity during when we had those leadership change last year. So when we look at the bookings capacity. It's definitely a built it was trending nicely amendment went down and now it's trending back up.
But.
I don't think its top of the funnel and we did we started the marketing events, which definitely created.
Some closes in the quarter that we saw in the new logos.
So.
But it is built I mean, we're rebuilding a lot of what was kind of unbuilt.
So it's.
But I don't see anything on the top of the funnel right now and we had very good tenants to the events.
So we're seeing demand for what we are.
What we're offering in the market.
And then your prepared remarks, you kind of mentioned voice as a preferred channel for customers.
Can you kind of outline to us what differentiates your voice contact center offering versus what's in the market today.
<unk>.
When that product will go G. A 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 in kind of what differentiates you versus some of the competition out there.
Yes, I don't think voices 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.
As a growth channel is still the growth engine over voice.
With that said as voice people still want to sometimes talk to two machine like an Alexa type thing and.
So where we're already out in beta as a handful of customers using our voice AI platform.
Bye.
We said second half of the year, we will have it out in <unk> in Q4 will be when it hits at GAA. So it 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 rate once and deploy and then and then with voice space, which is a very powerful product.
And it competes with the likes of other voice analytics, but its very powerful we also can do the voice.
Analytics around how is that automation performing and even today. Our guys are sellers are baking in the voice space into sales.
Opportunities because it's the start of our relationship on the voice side, we can analyze the voice channel and see how it is performing and then we can layer in our voice automation and then live agent, we're not trying to build become a <unk> player.
So we can we wanted to voice automation and then we do have live agent abilities to take a voice call, but we will also be integrating into all the major voice platforms and you also can bring your own voice or will 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 to all endpoints, whether it be messaging or voice.
Okay. Thank you. The next question comes from Jack Henry from Craig Hallum Capital Group. Please proceed with your question.
Great. Thank you a couple for me just guys on the retention maybe you could address the retention rate ex gained share I'm curious what you saw there and then secondly on the AI and messaging it looks like your messaging volumes were down a bit last quarter, and then down even sequentially on an absolute basis. This quarter and just help me sort of contrast that with.
What I think most people believe and that Youre leadership around the AI capabilities, so wire volumes down there.
Hey, Jeff I'll start with the retention question ex gained share we'd be in the range is the short answer.
Okay.
Okay.
And.
Yeah.
Your other question was on volumes.
Yes, yes, yes.
This breakdown.
Yeah I'll start there so it typically following the first quarter, we do have our kind of seasonal wall there before it picks up again in August September .
And reaches our seasonal peak in the fourth quarter. So we don't there is some slight variation there we don't see.
Any seeing and the trends that would suggest a problem though.
It's more or less consistent with how things have trended seasonally in the past.
Yes, like we see I would add also that.
Sorry, Rob.
Add one more piece here.
We have automated volumes at a very high percentage of total messaging.
The pace at which that continues to grow will lessen over time naturally.
Yeah.
Okay and then.
<unk>.
On the Rep count.
Need a little clarification, there I guess, we ended Q4 'twenty at AED reps I think in Q4 'twenty. One you said you were around 144 youre going to stop there you went through the sales leadership change, but I think at that time, the excellent expectation was that you'd see some leadership churn, but you're probably retain a lot of 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 the chronology for me if I have that wrong.
Yeah.
Yes, the rep count is pretty much where it was last quarter, but during at the end of last year beginning of this year. There was a lot we overturn reps so even though we added more reps.
We lost a lot of seasoned reps during the past leadership.
So.
So that's basically where we see then a buildup of capacity.
Then where we were if we kept all those old reps that were already baked in we probably beat.
Probably we'd be in 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.
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 we didn't on the 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 <unk> main leaders are new and they were put in in Q1. So they are also coming up to speed and then they have their reps under them.
The actual leadership team that's running that was the one that was there previously so.
Yeah.
Okay I'll leave it there thank you.
Okay.
Thank you. The next question comes from Ryan Macdonald from Needham. Please proceed with your question Ryan.
Hi, Thanks for taking my questions.
John first one for you.
As you think about ramping reps can you talk about what the expectation is in terms of sales cycles or what they have historically trended as and then is there any are you seeing anything in pockets with it whether it be in EMEA or APAC.
<unk> of those sales cycles, and I know you 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 expectations, and whether or not the macro could be playing any role in that.
Yes, I mean, there I think this is Bob.
Go ahead Rob.
I'm going to say there.
Look at about not we model in nine months 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.
And they came in at the end of last year beginning of this year, it's hard to see what 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 elongated sales cycles.
But.
Once again, we're just monitoring like how well do these reps like the new logo count once again shows the case. These reps are starting to deliver 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.
On the enterprise side is.
There's a lot of layoffs going on in the enterprise customer base their restructuring.
And with their restructuring around is cost savings obviously, so once again, we're trying to play into what automation does.
And that's that's what we're really going but once again I think we need a couple a couple of quarters to see if there is a macro impact on what's going on in the enterprise with the restriction, but as you can see we sign.
We even had renewals in some of our very large enterprise customers like Verizon and stuff.
So so far I feel pretty good about that but I assume there'll be an impact somewhere.
Once again with a bunch of new reps, a little hard to tell.
Understood. Thanks for the color there and then on the gross margin trajectory can you give us a sense of the timeline at all 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 getting to the progressing to those 80% plus target.
<unk> is this.
Fiscal year 'twenty, three expectation or is this more like a 2425.
Expectation thanks.
Yeah, so the gross margin expectation in that 80% range.
B 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 gain share components, we're executing.
Swiftly on that in the back half of 'twenty, two and probably at least the first quarter of 2023.
Thanks for the color I'll hop back in the queue.
Thank you. The next question comes from <unk> <unk> from Mizuho. Please proceed with your question.
Thanks for taking my question I, just wanted to dig into the third growth driver you talked about today is that opening your platform.
To talk about it.
Could you dive a little bit more I understand that you have partners from 10, four and voice space, but is this something that you are opening up your messaging and then who are the CRM vendors right.
Right now we're targeting to be a partner, but it's my understanding part of CRM has this solution messaging so that would be helpful.
Yes so.
Obviously, where we just put into the into Salesforce, the app stores and integration of our messaging platform into it.
Fine is most.
It's not a channel communication if you look at messaging at its core it's.
The way to operate the business in a digital way. So yes, it would be treated as a challenge 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 theres a bunch of technology around asynchronous operations, and that's where we really shine with that.
Said.
No.
We know over time messaging it may become like chat, it's not there right now, but we knew that from six years ago. When we launched it and Thats 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 then you add up Genesis and five nines and everyone else in there it's about a $10 billion Tam.
You add their revenues, but if you step back there is 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 Thats in labor and move that.
And take that and we can automate that and thats the value that it provides.
We develop if we delivered 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 in a cautious same amount of money.
Where the world is shifting as how do we take these agents and automate them.
Even the gained share and 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.
We take the labor when we make them Bob builders. So that's the pot of money, we're going after and that's why when we look at this Tam is this like a $60 billion Tam, but the majority of us get Ingrid is labor and that has to be the number one thing. So if you look at most of the <unk> players today.
And whether hosted or on Prem.
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 we may not care about messaging long term hasnt somebody may choose some other platform, but theyre going to run our AI on it and thats the value and once again getting rid of the human labor. So.
That can 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.
We've done a pretty good job at but obviously our goal is to get rid of the humans and the human labor.
Labor behind it.
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's where we'll continue to operate that's why we want to take Rei and move it off of our platform and let it run in many different platforms.
Yeah, no. Thanks for that color and then John and a follow up to your commentary I know thanks for that color on gross margin, but if I look at the EBITDA margin you kept it Sam.
To your prior guidance when should we think about EBITDA margin expansion and how much is it is it mostly that when do you see the revenue ramp up when we should see them, if that's going to flow to margin or any cost cutting it youre going to doing any kind of.
Without guiding like help us understand how the margin EBITDA margin and expense that we should think going forward.
Yes, I think if you look at the implied guide on that.
The overall cost structure of the organization is improving markedly.
Two.
Sense for where we're going we think.
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 we're that's the path we're on and the one that we started.
Earlier in the year.
Great. Thank you.
Thank you. The next question comes from Ryan Macwilliams from Barclays. Please proceed with your question Ryan.
Thanks, taking the question just to follow up on the last question, John what 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 as we're working through our model any guidance on how we could think about revenue growth expectations for next year like can we expect to see it.
<unk> off the implied revenue growth rate exiting the fourth quarter.
Yes, 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 that helped benefit gross over the last few years, if we normalize for that meaning remove its impact from last year and remember it's in fact from this year.
For the second quarter, we'd be mid to high teens for.
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.
Excellent and then Rob I'd love to hear your thoughts around the agreement and partnership with starboard that was announced in the quarter.
Some of the goals of the new operating operating committee that was announced as part of the agreement just love to hear your opinion there. Thanks.
Yes.
We obviously made an agreement with them.
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.
But we're going to do and then we had one of our board members retire.
Not sure where the operating committee I mean, we have.
To find it yet I guess when we get together, we'll do that we're just working on interviewing and try to.
Great.
That's for the board.
Appreciate the color. Thanks.
Okay.
Thank you we have reached the end of our call today I will now turn the call to Robert Locascio for closing remarks. Thank you Sir.
Yes.
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.
We got back in the Dotcom era, we were one of the few survivors and we made some radical changes some of you our shareholders back then and we went from burning a lot of cash to profitability in a matter of the.
And 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 it's growth is important and 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 it is about growth on top of the P&L doesn't generate cash flow is not really a great company.
We generated cash for 20 years, that's how we got here.
So we talk about it even though we're taking down topline revenue and we can 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 on a week company will not make for a long term value.
No.
As shareholders.
We're all lined with.
Making this a strong company and when you look at even a lot of the peer set in cloud today.
When you look at the P&L.
They're all not so great and we just don't want to be a part of that and we want to strengthen up so we're going to make some broad changes to the company continue to do what we've done.
I think youll see a different company on the other side of this and over the next two quarters, where we're going to focus on delivering those type of results.
And the leadership team at the company is really focused on this because.
Because we know we have this giant opportunity conversational AI is one of the biggest transformational technologies.
Once again.
Takes a lot of revenue.
During COVID-19 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 looking forward to.
We're going to add these two new directors.
One from Star War, one from us.
Looking forward to also adding new blood.
On the board and with that thank you and we'll see you next quarter.
Thank you very much.
This conference you may disconnect your lines at this time and thank you very much for your participation.
Okay.
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Okay.
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