Q3 2023 LivePerson Inc Earnings Call
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Yeah.
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Good afternoon, ladies and gentlemen, thank you for standing by.
Welcome to life classroom so.
Third quarter 2023 earnings conference call.
My name is Denise and I will be your country operator today.
At this time, all participants are in listen only mode.
After the prepared remarks management team from life classroom will conduct a question and answer session.
Participants will be given instructions at that time.
To give everyone the opportunity to participate please limit yourselves 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. Please go ahead Sir.
Thank you Denise joining me on the call today is John Collins interim CEO.
Oh, Hey.
Note that during today's call, we will make forward looking statements, which are predictions projections and other statements about future results. These statements are based on our current expectations and assumptions as of today November eight 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 the comments made during this conference call, that's one and as well as in 10-K 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 a reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release.
The press release and the supplemental slides, which include highlights for the quarter are available on the Investor Relations section of life persons website.
That I will turn the call over to John John.
Thank you Chad.
Thank you all for joining us today.
I'll begin with a brief recap of recent changes to the business followed by an update on strategy and customer wins and conclude with a discussion of third quarter financials and guidance.
Several years ago Black person envisioned that asynchronous messaging and AI powered automation would become the channels of the future for customer service and support I'm.
Time savings convenience and dynamic digital content messaging, a superior consumer experience to voice AI.
AI powered automation enables cost effective scalability for the enterprise we embrace this vision reply from the business and emerged as a leading provider of asynchronous messaging and conversational AI for many of the world's largest enterprises.
Today life person is arguably the most scaled provider with messaging and AI powered automation for customer service and support we believe our current growth and profitability do not reflect the market opportunity.
During the pandemic, we made several opportunistic investments into non core business lines have reduced our focus and ability to allocate resources effectively.
Recognizing the need for change we began a multi quarter restructuring process last year that included shuttering or divesting noncore businesses and right sizing our cost structure, which enabled why person to returned to profitability last quarter.
Since last quarter, we have refocused the company on our core strengths.
We have delivered a meaningful return on investment to our enterprise customers by enabling them to efficiently shift legacy voice interactions to digital channels and AI powered automation.
Based on projections available from Gartner and Forrester the combined market for conversational AI in customer service and support are estimated to grow approximately 20% year over year and 'twenty 'twenty four.
Considering the demonstrable return on investment our customers are realizing and growing traction, we're seeing with generative AI, which I'll elaborate on shortly.
We are well positioned to meet this growing demand.
Our return to core strengths embraces the key reasons large enterprises continue to choose life person as a trusted partner.
Including our enterprise proven platform is workspace and open architecture for third party out extensive voice of the customer dataset unified voice messaging analytics managed services for enterprise digital transformation and guardrails for human in the loop feedback that enable safe and secure adoption of generative yeah.
Because of these platform strengths and the demonstrable return on investment that they unlock for our customers.
Shifting legacy voice interactions to messaging and AI powered automation continues to be the most compelling market opportunity for life person.
<unk> growing traction with dinner day is also driving increased platform usage, new logo acquisition expansions and renewals.
To elaborate briefly on that trend as a reminder, we launched a suite of generative AI enhancements to the platform in may, including voicemail, which meaningfully enhanced our ability to ship legacy voice interactions into digital channels and AI powered automation.
Since then we've seen many of our customers leverage voice AI for precisely this use case validating the continued consumer preference for digital channels over legacy voice.
For example, a large hospital customer who was an early adopter of horse AI is using voice automation to deflect 40% of voice calls domestic which meaningfully reduces cost and time to resolution.
This AI is also delivering a return on investment and applications that directly interface with the customer, including our customer using voice automation to call leads from ceara M asking a series of questions and so meaning the next best action and.
In aerospace customer is also using voice automation integrated with large language models to help customers find and purchase relevant tools and components.
In addition, we're seeing strong adoption for internal use are generally they are including co pilot, where agent assist which improves productivity and summarization, which reveals actionable insights for optimizing customer service experience and cost efficiently scaling service interactions through automation.
In terms of new deals were generative AI was the central and the third quarter, we signed a seven figure new logo and a seven figure renewal.
And early in the fourth quarter, we signed a seven figure expansion with one of the world's largest banks. We're also observing a sequential increase in platform usage attributable to generative out reinforcing that the renewed focus on our <unk> core strengths, coupled with strategic investments and generative AI has strongly positioned us to meet accelerating enterprise.
Demand for digital transformation and AI powered automation.
As for overall customer wins, we signed a total of 50 deals in the third quarter, including four seven figure deals three of which were new logos 31 expansions and renewals in 19, new logos overall as far as bookings were up sequentially with total bookings approximately consistent with the second quarter.
In terms of trends Lypressin continues to be a platform of choice for financial services in the third quarter, we signed two large credit unions as new logos, one with over 300000 members and assets totaling five doing.
We also signed a key financial services <unk>.
Expansion and renewal, including a seven figure upsell and with a leading Australian bank and to partner led expansions with a large European based multinational bank and a leading south African digital bank.
As I mentioned, a moment ago, one of the world's largest banks recommitted to life person early in the fourth quarter, signing a four year eight figure T C D renewal <unk>.
<unk> seven figure upsell to leverage recently launched generative AI capabilities alongside alongside expanded adoption of the water platform.
In the third quarter, we also signed a seven figure new logo win to power, a conversational marketplace and renewals and expansions with leading cruise line and an amusement park and entertainment business.
Notably, we continued to see strategic renewal expansion and new logo wins against strong competition in the third quarter, including against Salesforce, Cisco Genesys and Google dialogue flow.
Looking to build on this go to market momentum I want to note that our in person executive events have historically accelerated the sales cycle with customers and prospects next week on November 14th we will be hosting more than 1000 people at a hybrid in person virtual customer event called spark.
During which we will unveil our new conversational intelligence suite, which includes report center analytics studio and our latest Oh powered innovation generous insights.
Before moving onto our third quarter financials I also want to provide an update on our partner strategy and its impact on our go to market motion.
As Cio's drive transformational initiatives across the enterprise they are challenging strategic partners like life person to build an open and flexible architecture.
We built our platform to be agnostic to the source of AI and develop leading AI orchestration capabilities across the customer sort of suite.
Life persons open platform less brand seamlessly coupled our conversational insights AI and agent engagements with channels AI and automation from key partners like meta Apple Amazon, Microsoft and Google.
This is a powerful solution that enables life person to capture greater enterprise volumes by providing differentiated cross platform orchestration for consumer interactions.
To further extend our open platform, we launched the partner marketplace in the second quarter of this year, which gained meaningful momentum in the third quarter. When we closed a seven figure deal with a new partner that enables real time personalization via third party CDP integration.
A large bank adopted our Salesforce marketing cloud integration, which is expected to drive 5 million annual proactive engagements for the bank.
And a large telco adopted our affinity integration and is already seeing millions and incremental monthly revenue, which we monetize through a revenue sharing agreement.
In addition, innovative systems integrators and details are positioning wise person as the center of a digital first architecture to accelerate migration from legacy contact center vendors.
And as an alternative to voice centric seek AST providers were not optimized for asynchronous operations.
In the third quarter, we partnered with a top five global consulting firm on AI focused services programs for two of Australia's largest telcos totaling seven figures and value.
And as mentioned earlier multiple leading international banks also expanded their business through partners.
Given market trends and momentum in our partner ecosystem, we plan to continue strategic investments into partners integrations to fuel growth going forward.
As for third quarter financial results total revenue was $101.3 million at the top end of our guidance range.
Discussed last quarter, we expected a high seven figure revenue contribution from Medicare reimbursement in the third quarter. This value was approximately 7 million.
<unk> core recurring revenue was 84% of total revenue and non-GAAP gross margin improved approximately 400 basis points sequentially to 77, 9%.
Adjusted EBITDA of $10 6 million was consistent with the expectations, we set last quarter landing above the midpoint of our guidance range.
Turning to our standard financial reporting segments within total revenue for the third quarter revenue for <unk> declined 4% year over year and revenue from hosted software declined 16% year over year.
As discussed in prior quarters. The primary drivers of these declines were the wind down of noncore business lines, including COVID-19 testing against your labor and pandemic driven variable revenue.
Normalizing for these business changes total BTB core revenue declined 1%, while <unk> core recurring revenue within hosted grew 4% year over year, driven by Upsells with existing customers.
Professional services revenue declined 49% year over year, driven by the completion of the engagement with the clear J D. In the first quarter, excluding revenue from the JV professional services revenue declined 10% year over year, driven by a one time fee from a major telco customer in the third quarter of last year.
From a geographic perspective U S revenue declined 20% year over year, while international revenue declined 3%.
Again, the primary driver of these declines with the wind down of noncore business lines, including revenue related Sinclair, JV, Daventry labor and pandemic driven fincher variable revenue.
Net revenue retention was below our target range of 100, and 515 per cent, but up sequentially consistent with previously set expectations. We continue to expect sequential improvement in net revenue retention in the fourth quarter.
<unk> decreased 727% year over year to $313 million due primarily to completing the professional services engagement for the clarity.
For the third quarter RPC grew 13% to 595000, driven in part by Upsells from our largest customers.
In terms of guidance for revenue in the full year of 2023, we are maintaining our midpoint of $394 million, but narrowing the range to 389 million to 399 months. This range is exclusive of the $7 2 million contribution from Cassandra and the first quarter of this year.
Inclusive of the first quarter revenue contribution from Cassandra, We expect 2023 revenue to range from 396 million to 406 months.
As for BTB core recurring revenue, we expect it to equal approximately 86% of total revenue consistent with previously set expectations.
For full year adjusted EBITDA, we are maintaining our midpoint of 25, and a half million dollars, but narrowing our range to 22 million to $29 million.
The implication for revenue in the fourth quarter is a range of $89 7 million to $99 7 million.
Sequential decline in revenue was primarily attributable to the onetime medical reimbursement, we recognized in the third quarter.
We expect <unk> to be core recurring revenue to equal approximately 89% of total revenue in the fourth quarter.
As for adjusted EBITDA in the fourth quarter, we expect a range of zero to $7 million.
To conclude our results today demonstrate another quarter of execution consistent with prior guidance, notably we have right sized our cost structure returned to profitability and effectively reallocated people and capital to drive growth from our BTB core platform, which has a strong record of delivering meaningful return on investment to our enterprise customers.
By enabling them to efficiently ship legacy voice interactions to digital channels and AI powered automation.
Strategic investments and generally I and our partner ecosystem have meaningfully contributed to new logo wins expansions and renewals in the last two quarters and as discussed this trend is continuing in the fourth quarter.
Looking forward, thanks to the commitment and innovative work of the entire life person team, we are well positioned to meet accelerating customer demand for digital transformation and AI powered automation.
And with that I think we can open the line for Q&A.
Peter.
Thank you Sir.
Ladies and gentlemen, we will now be conducting a question and answer session.
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The first question, we have comes from Ryan Macdonald from Needham and co. Please go ahead.
Alright, Thanks for taking my question and congrats on a solid quarter here John I'm just curious.
You talked about some of the vertical strength.
In the quarter and.
Good to see sort of financial services, and some nice telco deal, but as you look across the verticals.
Sort of willingness.
Sort of demand for the new AI solutions, how much comfort are you seeing in terms of.
Adoption at this point versus more of just being in the evaluation phase and as you think about that within the competitive dynamic do you think that's helping or hurting the business at this point. Thanks.
Yeah, Hey, Brian.
As I discussed in the prepared remarks, we are seeing.
Real net new economics from generally they are where we're signing new logos and retaining business and expanding business because of the new capabilities that we have regenerative there and in relation to the.
Third parties that were working with the partnership strategy that we have.
Some of those relationships that are driving seven figures of value. This year are directly related and even solely related to generative AI application. So it's much more than just testing at this stage.
Super helpful and maybe just as a follow up I'm interested to hear about the spark of that coming up next week and some of the new and valuable new suite here.
What should we expect in terms of the rollout time frame for the new suite. After you introduce it next week. Thanks.
Yeah, we expect some of these products to be G E. At the event and so it'll be an exciting time to see.
How customers can leverage those and.
Again generally available in November.
Excellent. Thanks again for taking my questions.
Thank you.
Next question, we have comes from Peter Levine from Evercore. Please go ahead.
Great. Thanks for taking my questions here.
Maybe the first one John can you maybe talk to us directionally about net retention or even gross retention you know mid market and below and how that differs from the enterprise.
If you are seeing in short hair.
Yeah, we we have refocused the business and in a lot of ways on the core.
Since of that core is really our enterprise base.
So we're talking here kind of mid six figure and above type customers with thousands of seats as we go down market to the lower end of mid market and small business. We have strategically placed less focus there just given resource constraints and so N. R. R. R. G are both are our lower.
At that end of our customer base in the enterprise.
And then.
I guess the follow up to Ryan's question around I think the monetization of these new Gen AI products as you know how.
How much of the product or would you view as more of a retention tool versus like an RPM uplift or is it the reverse where you can actually get higher ARPA from these customers just obviously given the competitive landscape, where this market's going curious to know how your pricing or how your customers are actually doing it.
Yes, it's a mix for sure I mean to some extent we've had some customers.
That renewed or expanded two years ago during the height of the pandemic and had very large volume expectations that as we've discussed in prior quarters werent necessarily being that this year and some of the headwind to enter our however, with generative AI, we're starting to see those customers reaccelerate there.
We're all volume because of the use cases are so compelling so to some extent it is helping in that regard, but as I mentioned in response to an earlier question. It's also driving net new business and so.
That is taking the form of new volume on.
The platform that's facing the end customer, but also internal use cases to increase internal agent productivity.
Copilot and summarization.
Perfect and if I could squeeze one final one in I know you haven't guided to calendar 'twenty four but directionally.
When does the model kind of trough out and we can see you'll start to see revenue reacceleration. Thank you.
Yeah, obviously, we will have more to share on 2024.
And when we print the fourth quarter and come back on this call in February broadly speaking, though I think we're beginning to see a rebuild that momentum and go to market clearly the metrics have been sequentially improving over the last two quarters and I expect that general trend to continue.
Thank you for taking my questions.
Thank you ladies and gentlemen, just a reminder, if you would like to ask a question. Please press star and then one no.
The next question we have comes from that Kieran shouldn't be any securities. Please go ahead.
Hi, John.
Thanks for taking my questions can you just walk us through some of the assumptions for your Q4 revenue guidance I know you had some Medicare payments that that likely are not.
Can it be occurring again in Q4, but just curious on an assumptions for both revenue and adjusted EBITDA guidance.
Yeah exactly.
So we do have potentially some.
Small amount $1 million to $2 million worth of additional Medicare.
Payments that may come through in the fourth quarter. We also are.
Monitoring the timing of delivery of certain larger professional services engagements and then as is typical in the fourth quarter. It is our peak season for most customers and so we tend to have higher reserves during that peak season conservatively speaking.
We have a wider range there, but given the trends the general trend of stability being a very high and improving sequentially over time, we don't necessarily expect those reserves, but there's some conservatism built into the range for that reason as well.
Understood and I know there was a question around kind of the potential timeline does see a trough in the top line of the business. How are you thinking about just managing margins here over the next several quarters I know you've done a great job of really rationalizing costs in the last few quarters. So what is your approach to balancing.
That profitability versus maybe continuing to invest in some of the strong demand you've seen on the <unk> side.
Yeah, I think we've we've done the hard work right. We've we've had a essentially ongoing restructuring since.
Q1 of 2022, culminating in a in a larger than in Q1 of 2023, we've wound down the non core business lines and <unk>.
Most of that is behind US now so I think we're in a good position in terms of the cost structure to.
Try to improve profitability through topline growth and as I mentioned before while we're not ready to guide 2024, I think it's important to understand that we've had sequential improvement over the last two quarters and that we would expect that to continue so broadly speaking I think the cost structures in a reasonable place after a lot of hard work.
And we're now refocused on the core to drive top line to improve profitability.
Understood well, thanks for taking my questions and best of luck with the rest of the year.
Thanks, Ed.
Thank you.
Final question, we have comes from Mark Shaw from loop capital markets. Please go ahead.
Hi, Thanks for taking my question and John I Wonder if you just give us a brief update on how you think the sales force is progressing here, particularly given the earlier restructuring and strategy changes over the past year.
Yeah, we were we're holding our quota carrier headcount flat and these are all ramped quota carriers are quarter over quarter.
We're seeing as I as I alluded to in the last call.
Some increased qualified pipeline entering the fourth quarter relative to what we had entering the third quarter.
Broadly speaking there are indicators that where we're rebuilding that go to market momentum and I highlighted some of that in the prepared remarks, both in terms of trends in financial services, but also within within our partner ecosystem, which is adding adding tangible impact so broadly speaking.
Productivity.
It is improving our efficiency with respect to marketing spend is improving as well and we have a slightly again slightly more pipeline entering the fourth quarter than we did entering the third so the indicators are positive here.
Great, Thanks, and I realize white house, there's a less of a focus these days. So I was wondering if you just give us an update on that business.
In the quarter and just just just your general thoughts on how you view the beauty business.
Yeah as we've discussed previously what health.
<unk> is a valuable asset to life person, but not necessarily strategic to its core and is run on a standalone basis at this time.
I don't have further updates beyond what I had provided previously for white house growth, which as moderate moderated relative to the expectations. We had very early in the year. When we when we first launched our 2023, but remain consistent with the expectations we set last.
Score.
Okay. Thank you.
Thank you.
Next question, we have comes from Jeff Sutton from Craig Hallum Capital Group. Please go ahead.
Great. Thanks.
John Wilder help just.
I guess to ask your questions. One what was the margin on that business what was the impact from a gross margin of imagine that was.
Highly profitable revenue and then.
Somewhat of a tail to that question is how are you thinking about gross margins for Q4.
Yeah, Hey, Jeff So the as you have just to recap we took all of the expense for the Wild health based Medicare revenue that didn't occur in Q4 and in Q3, we don't have that expense. So there is clearly a bump to non-GAAP gross margins as a result of that one time.
Medicare reimbursement, which we recognized $7 million in the third quarter. So that moved that moved the needle for gross margin up by a one to two points. So as we think about gross margin on a normalized basis, it would be within 76% to 78% that we expect.
For the business in the fourth quarter independent of the White House contribution.
Okay.
Helpful and then.
On the retention I know the goal is one of five to 15.
Can you just expand on that a bit I mean, how close are you to 100. If you know why are you below 100, where a customer is going if they're leaving it's just less usage just maybe a little expansion on the retention, where you are where you're going and why were where we are now.
Yeah, I think there's a lot of reasons for why we are where we are at the moment.
A lot of it relates to <unk>.
De focusing and the restructuring wind down of noncore.
And just a lot of time all that unfortunately isn't the rearview mirror now and we're rebuilding it.
That go to market motion and I think the indicators are positive as I as I mentioned previously to be more specific a lot of the <unk> headwind relates to lower volumes coming off the forecast from the pandemic.
That are renewing now rather than full on cancellations moving elsewhere.
And then I think with regard to the expectations moving forward.
And as I mentioned and in relation to a question earlier there is a blended in or are that we're reporting here, which includes some of the lower end of the market that we service.
The lower end of mid market and some.
Some of those customers are not really where we're putting a lot of support at the moment and so if we were to isolate the enterprise customer base that that enter our would be much closer if not within the range that we have but the wider blended rate is still below that one five target again, we expect so.
Central improvement moving forward.
And just one follow up on the on the volumes of the post pandemic volume resets I mean is there a way to quantify like what percent of the contracts are reset to rational volume levels for what they're actually consuming as opposed to pandemic how far through that transition are we.
I think it will be fully through that transition by first or second quarter of <unk>.
Next year Jeff.
Okay. Okay, and then if I could just one last one sorry, I'm I'm bookings I know last quarter. You said it was the best bookings quarter I believe since early 'twenty two I I, if I caught it on this call. You said this was up sequentially from that number.
How old are the bookings this quarter relative to expectations are relative to a year earlier and I know, it's a multi part question, but the customer count is down do you think that's going to continue and you're just going to pose bigger deals or do you expect that to reverse.
Yeah, a couple of clarification. So in the prepared remarks, I said that overall bookings were consistent approximately consistent with last quarter, but enterprise deal values, where were actually up sequentially. So despite the lower deal counts again.
<unk> the strategic focus on.
Our enterprise customer base, we did increase overall HCV sequentially, while bookings were approximately the same.
Okay I'll leave it there thank you.
Thanks, Jeff.
Thank you.
Ladies and gentlemen, we have reached the end of our call today.
Thank you for joining US you may now disconnect your lines.
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