LivePerson, Inc.
Q4 2023 Earnings Call Transcript

Published: 28 Feb 2024

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Fourth Quarter 2023 Earnings Conference Call. My name is Deny, 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 over to Mr. Jon Perachio, Senior Director, Investor Relations. Please go ahead, sir.

[Jon Perachio:]

Thank you, Deny. Joining me on today's call is John Sabino, CEO; and John Collins, CFO and COO. Please note that in today's call, we'll 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, February 28, 2024, 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 with the SEC. We assume no obligation to update any forward-looking statements. Also, during this call, we'll discuss certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release. Both the press release and the supplemental slides, which include highlights for the quarter, are available on the Investor Relations section of LivePerson's website. With that, I will turn the call over to John.

[John Sabino:]

Thank you all for joining us today. I am excited to lead LivePerson as its new CEO. The past 20 years of my career has been focused on leading organizations through challenging transformations and unlocking growth through operational excellence, product alignment and focused go-to-market execution. My experience in scaling software adoption for customers and, in turn, driving significant double-digit improvements in renewals, product consumption, expansion and new logo acquisition is directly aligned to my priorities for LivePerson in the short term and the long term. We are refocusing our go-to-market strategies, product development and strategic partnerships to unlock a new phase of growth. In the 50 days since joining LivePerson, my focus has been on assessing how our company operates and engages with customers and aligns its product development efforts to meet the needs of the market. As part of this process, I've had many conversations with the management team, Board members, employees, investors and with dozens of customers. What I've discovered from all of these interactions validates my hypothesis for joining the company. We have a tremendous opportunity with the products we provide, the customers we serve and the market we compete in. This is because we have three fundamental strengths

[John Collins:]

Thanks, John. I'm excited to partner with John on the path ahead and I share the Board's confidence that his leadership and go-to-market expertise are a powerful complement to LivePerson's leading digital products and Fortune 500 customer base. The rapid growth in our market coupled with repeated validation of our product by our customers, investors and by third-party research, makes it clear that LivePerson has a compelling growth opportunity, following the rebuild of its sales and customer success motion. Before I share an update on the quarter, I'd like to emphasize a few broader themes for 2024. First as we have discussed in our guidance in place, we are at the beginning of a multi-quarter rebuild. While we are already observing a positive operational impact from recent changes to our go-to-market motion, considering the length of our sales and renewal cycles, it will take time for these changes to translate into significant improvements to key financial metrics. As John mentioned, and I'll discuss further in the context of guidance, the past lack of focus in multiple strategic pivots caused disruption to our sales and rental cycles, which is reflected in our guidance for the first quarter and the full year 2024. Second, deleveraging our capital structure represents a strategic imperative for the company. Our leverage ratios have been friction in our go-to-market motion and we need to ensure our customers have confidence in LivePerson as a long-term strategic partner in their transformation. To this end, we plan to settle the $73 million balance of the 2024 notes maturing later this week, using cash from the balance sheet, and we expect to share more on our plan for the 2026 notes soon. The third and final thing, I'd like to emphasize before moving forward with the quarterly updates, relates to transparency in the business. Considering the divestiture and wind-down of noncore business lines over the last year and the multi-quarter rebuild we have just embarked on, we recognize the need for additional specificity on key performance indicators and revenue segmentation to better measure our progress. As I'll elaborate on shortly, we are now providing a value for net revenue retention and for B2B core recurring revenue. Regarding Wild Health, we are actively marketing a sale of the business, which is the only noteworthy noncore asset remaining and we are now providing the revenue contribution from that business. With that, I'll proceed with the quarterly update. We signed a total of 62 deals in the fourth quarter, 46 expansions and renewals, including three seven-figure deals and 16 new logos. Total bookings were the highest since the third quarter of 2022, up 33% year-over-year and 27% sequentially. Continued momentum within the financial services vertical was the primary driver of the fourth quarter's strong results. We signed renewals with one of the world's largest banks, a large UK financial services provider, a growing US credit card issuer, a major US credit union and a large Australian retail bank. All five deals included material expansions two in the seven figures and one in the eight figures in terms of ATP. In addition, we acquired a new logo in a leading personal loan provider through our partner network, which will equip over 2,000 contact center agents with an integrated voice experience through Tenfold, a business we acquired in 2021. Other selected deals included in a new logo win through a partner with a major telecom services provider in Southeast Asia, a renewal with a leading UK connectivity provider and a new logo with a globally recognized designer. These deals also underscore the momentum we continue to build with our SI partner network. Three of our top five new logo deals in the quarter were driven by partners and we moved three partners from on-demand usage arrangements to fully committed contracts with our voice-based analytics product, which was integrated into LivePerson's core product following an acquisition in 2021. In addition to expanding our reach and efficiency through our SI partners, we are also actively building deeper technology integrations with voice providers. Considering cross-channel orchestration and analytics are among LivePerson's greatest strength, it is clear that these integrations will enable our customers to seamlessly shift voice conversations to the most appropriate digital channels, accelerating time to value and obviating the need for costly high-risk re-platforming strategies. As for our fourth quarter financial results, total revenue was $95.5 million above the midpoint of our guidance. Note that Wild Health contributed $3.4 million to total revenue in the fourth quarter, inclusive of approximately $2 million received through Medicare reimbursement, which was consistent with the expectation we set last quarter. Adjusted EBITDA for the fourth quarter was $3.7 million, slightly above the midpoint of our guidance. In terms of our reporting segments, within total revenue for the fourth quarter, Hosted Services was $78.6 million, down 7% year-over-year. Within Hosted, B2B core recurring revenue was $83 million, up 2% year-over-year driven by customer expansions. Professional Services revenue was $16.8 million, down 41% year-over-year, driven by the completion of the engagement with the Claire JV in the first quarter. Excluding revenue from the Clear JV, professional services revenue improved 8% year-over-year, again, driven by customer expansions. From a geographic perspective, US revenue was $68.3 million and international $27.2 million or 72% and 28% of total revenue, respectively. For the fourth quarter, ARPC was $610,000, up 12%, driven in part by expansions with our largest customers. Net revenue retention was 95% in the fourth quarter compared to 98% in the third quarter and two consecutive quarters of sequential improvement. Considering NRR is a new disclosure, we have provided values for the last five quarters in the supplemental materials on our Investor Relations website. Finally, RPO was $317 million in the fourth quarter, which was a slight sequential improvement over the third. In terms of guidance for the first quarter, we expect revenue to be in the range of $79 million to $83 million. Note that this is a sequential decline of approximately $15 million at the midpoint from the fourth quarter which, as discussed, is primarily driven by customer cancellations. While we previously expected to repeat the relative success of the fourth quarter, after further evaluation and discussions with catering customers, it has been clear that the lack of a robust customer success motion has increasingly turned down-sells into cancellations. Note that down-sells due to condemned normalization and the onetime Medicare reimbursement of approximately $2 million also contributed to the sequential revenue decline. B2B core recurring revenue is expected to be approximately 92% of total revenue in the first quarter, and adjusted EBITDA for the first quarter is expected to be in the range of negative 2% to positive 2%. And again, the sequential decline here from the fourth quarter is attributable to the same factors driving the decline in revenue. For the full year, we expect revenue to be in the range of $300 million to $315 million. This range is heavily impacted by the concentration of cancellations in the first quarter, which have full year revenue impact. Considering the focus and substantial resources we are committing to our customer success motion, now and moving forward, we expect to reduce the impact of cancellations and down-sells in subsequent quarters. As for B2B core recurring revenue, consistent with the first quarter, we expected to be approximately 92% of total revenue for the full year. We expect full year adjusted EBITDA to be in the range of $15 million to $26 million, and we expect the B2B business to be free cash flow positive for the full year. And with that, I'll turn the call back to John for his final comments, before we proceed with Q&A. John?

[John Sabino:]

Thanks, John. While there are areas of our business we need to address to improve the renewal challenges we are looking at in the first quarter, we are taking action. We're improving the capital structure, strengthening our team, implementing new operational strategies and refreshing go-to-market and product integration and orchestration. Looking forward, I want to thank the LivePerson team for their commitment to this journey. What we are striving to accomplish is achievable. And with a focus on executing the plan we laid out today, LivePerson can begin on a path to profitable growth. With that, let's open the line for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions] The first question we have comes from Jeff Van Rhee from Craig-Hallum Capital Group. Please go ahead.

[Jeff Van Rhee:]

Thanks. Two quick ones, and then one a little more in depth. I missed the bookings growth commentary. John, could you just repeat that?

[John Collins:]

Hey Jeff. Sure, thanks. So, with regard to total bookings in the fourth quarter, we were up 33% year-over-year, 27% sequentially, and it was the highest bookings quarter since the third quarter of 2022. That was the comments in the prepared remarks.

[Jeff Van Rhee:]

Got it. And then I guess you gave the revenue on WildHealth, can you share the EBITDA contribution?

[John Collins:]

It's a negative value. And again, we are actively marketing the sale of that business and expect to have more to share in that sense very soon.

[Jeff Van Rhee:]

Okay. I'll come back to that later. Okay. So to the big issue, obviously, not every day you see a recurring model miss by 25%. This issue that you're talking about, I mean you got to expand on this. What did you not know that you suddenly found out about customer satisfaction or usage of the product that was that dramatic and that sudden? I mean with a recurring model, obviously, you see the usage of your platform. Yes, help me understand the suddenness and the magnitude is something rarely seen here.

[John Sabino:]

John Collins, do you want to start with just from November to now, and then I'll jump in with what I'm seeing since joining for Jeff.

[John Collins:]

Sure. So Jeff, when we last spoke, we were in the midst of successfully executing the strategy in the fourth quarter, which closed better than we had actually expected. And given those data points, we expected to carry that momentum forward to the first quarter. The first quarter has been very fluid. We're observing customers providing significantly shorter notice of intent to cancel than we've observed historically. And as we discussed in the prepared remarks, we're seeing previously expected down-sell risk manifest as accumulations. And the full year guide clearly reflects the renewal dynamics we're observing now in the first quarter. And obviously, with the investments we're making in customer success, we expect to mitigate that risk going forward but the guide does reflect what we're seeing in the first quarter. And I think to elaborate a bit it's become clear to us that, from further discussions with customers, the absence of a robust customer success motion is a primary reason for the lack of meaningful lead time to address cancellation risk and to see lack of value by certain customers. And so, even in some cases, we're observing customer cite a lack of specific capabilities that our product actually has today including certain integrations and multi-channel support. And again, from our perspective, this underscores the importance of a robust success function and our confidence that the investments we're making here will lead to a meaningful turnaround.

[Jeff Van Rhee:]

And is there…

[John Sabino:]

I was going to say.

[Jeff Van Rhee:]

Yes, sorry. Go ahead, John.

[John Sabino:]

I’ll answer really quick. Great to have a chance to chat with you today. Most renewal cycles that you'll see start nine to 12 months out. And that's precisely when there were some challenges within the company, some corporate instability, the financial profile. So when these decisions were being analyzed by our customers, it's a ways out. And this is where a CS function, that is engaging with your customers, moving the customer through a prescriptive value path on what they should be doing with your product and helping them grow and expand really needs to be taking place. And that's one of the things that I've identified since coming to the company that we really have to strengthen that motion. So, if we look at what we're doing now in the reset, this is to ensure that we can be strong in this area going forward. So, it really does have to do with that renewal cycle and some of the buying that was done during the pandemic. With us remaining as in some cases a point solution rather than a true platform digital conversation solution really does point back to these challenges we have around the customer success motion in the company and I'm confident we can turn that around and we're already starting on it.

[Jeff Van Rhee:]

Okay, great. I'll leave it there. Thank you.

[John Sabino:]

Thanks Jeff.

[Operator:]

Thank you. The next question we have comes from Siti Panigrahi of Mizuho. Please go ahead.

[Unidentified Analyst:]

Hey, it's actually Dan on for Siti. I think John you hinted out a in the last answer but maybe can you just elaborate on what exactly drove the renewal challenges over the past year or so? I guess what specifically was hindering your success with the renewals in the past? And what are some of the steps you're taking to address those issues?

[John Sabino:]

John do you want me to take a jump at that and then you can talk to the history? So, I've been talking with a number of customers many that are staying with us and some that have actually left. And what I'm seeing is that the cancellations that we see really had to do with LivePerson and the way that we were supporting and engaging with our customers. In many cases, we were just providing core messaging support when in fact the platform can do a lot more than that. And that's where our customers are looking for more. In the cases where we just are a point solution, there's an opportunity for a voice provider and others that are extending into the digital space to provide a good is good enough capability in the digital space. And so where this customer success motion is critical and what we need to work on going forward here is establishing truly the integration and orchestration enabling conversations across the entire enterprise, which is what customers who are moving into a digital transformation are looking for. And those are the ones that are staying with us and expanding. And so we have to bring that to more of our customers than just an isolated view here and there. It has to be a much more structured way to engage with them. John Collins if you want to add anything on the history what you saw prior to me joining I'm happy to have that commentary.

[John Collins:]

No, I think your answer captures most of the history. As you said the motions that we're seeing manifest and cancellations today began nine to 12 months ago.

[John Sabino:]

Yes. Thank you for the question Dan.

[Operator:]

Thank you. [Operator Instructions] The next question we have comes from Zach Cummins of B. Riley Securities. Please go ahead.

[Zach Cummins:]

Yes, hi. Good afternoon. Welcome aboard John and thanks for taking my questions. My question is really geared towards potential changes towards your pricing and packaging for some of your solutions. Can you talk about maybe some of the issues you saw with the old go-to-market motion and maybe what are some easier kind of blocking-and-tackling things that can be done to improve that here over the next couple of quarters?

[John Sabino:]

Yes, I'm glad you asked the question because I do want to elaborate on this. This is one of the things that I observed as soon as I stepped into the company both in talking with our customers, looking at third-party information that we have from investors and consultants. And I do believe that historically LivePerson made it a little bit difficult to do business with us. We either sold or engaged with our customers more on a selling of functionality or capability than truly providing a full solution set that enables a digital transformation. So going forward, our intent is to package our capabilities and our pricing and packaging around enabling customers to use the full suite of products and capabilities that we have today. This is what we know customers want. This is what we know retains customers and helps them expand. And what I've observed in my 50 days from some of our larger customers and the ones that are having a great experience with LivePerson is that that is how they're using the product. So our pricing and packaging needs to make it easier to get that off the ground from the very beginning. Lastly, I'll point back at the CS motion. Once you've sold to a customer in that way, it's imperative that you walk them through that value path of how to leverage the whole platform. And so we're going to engage it on both fronts, pricing and packaging to make it easier to buy the full suite and get the most value out of it and a CS team that acts in a much more consultative way, leading a customer through a digital transformation for their conversations than just looking at product feature and functionality. Both of those things together really should help us out in the marketplace.

[Zach Cummins:]

Understood. That's helpful. And my one follow-up question is really just around the cost structure. Can you talk about where you sit right now in terms of head count? And any potential changes that you need to make to execute on this multi-quarter transformation for the business?

[John Collins:]

Yes I'll start with that one. Zach, as you know, we've gone through more than a year of more or less continuous restructuring. We've taken additional costs out of the business in the first quarter. And I think we have a reasonable cost structure given the guide that we have today. And we're obviously very conscious of the capital structure and the need to produce cash. And we'll be continuously reevaluating our performance on top line and what that might imply for the cost structure. But at this moment in time we feel that we have a reasonable balance and we have our sort of heads down to execute on the go-to-market side of the equation as described on this call.

[Zach Cummins:]

Got it. Thanks.

[Operator:]

Thank you, Zach. The last question we have comes from Arjun Bhatia of William Blair. Please go ahead.

[Unidentified Analyst:]

Hi. This is Chris on for Arjun. And thanks for taking my question. One of the first things I want to touch on was -- so looking at the transformation plan, there's a lot of pretty significant operational strategic changes. There's been a number of changes at the senior management level over the past couple of quarters. Kind of want to get an understanding for what your approach is to help get everyone within the organization realigned around some of these new priorities and surely you executed on this plan successfully?

[John Sabino:]

Yes. So what I've laid out today really is in line with what I have seen in the past. And this really is around operational go-to-market, which is what is being impacted today. So I'm confident that the transformation plan that we've laid out today for everybody will return us back to growth. And these problems are very solvable. Again, they are all about our go-to market. And we already started bringing in leaders that we know can help us in scaling on that side. And the leadership team, we have today really is aligned on where we need to go. And we since the 50 days of joining the company came together to actually put together the strategy to execute with details behind the plan that I've laid out here. Additionally, as with all transformations, it's about your communication strategy, setting your targets and your metrics and your systems and data to align to that and that's the operational improvements that I've already mentioned in my prepared remarks that we're moving against. So we are executing a classic transformation strategy that really has to do with setting where we're going, clearly communicating it to the customer, bringing in leaders to which I've already spoken to help augment the current team that we have today through that transformation and making sure that we have a robust set of capabilities on reporting, process and operations to ensure that we're moving forward on these transformations. And that's where I'd really like to highlight why I came to this company. These things that need to be improved are the things I've seen in past companies. And over the course of quarters, we were able to make substantial improvements with them that had dramatic improvements to ARR consumption and value with the customer and ultimately new local growth and growth to the company overall.

[John Collins:]

I'd like to add before we move on. We have had, as the investor base and analyst community is very aware, a lot of non-core initiatives over the past few years that have caused substantial distraction to the wider employee base and the leadership team. Over the last six months, however, we have become more focused than ever on the core value proposition this company brings to its enterprise customer base. And I think what we're seeing now in John's plan is that we're putting the meat on the bones of that newfound focus that we already have. So I think the company and the leadership team is very aligned to what we've laid out on today's call, and we're really putting the details in place for execution as opposed to just strategic thinking. So we're in a good place as a company and a team with respect to the direction we're highlighting now

[Unidentified Analyst:]

Yeah. Thank you. That's all really helpful to hear and refreshing. And then one other kind of like logistic question for you, John, what is included in the guidance in terms of contribution from WildHealth to the extent you can share? Thanks.

[John Collins:]

Sure. Very little in the guide from WildHealth. There is a mid-single-digit expectation, low-to-mid-single-digit expectation per full year that would be baked in to the overall full-year 2024 guide. And again, we had last year, just to ensure it's clear, we had an over -- a more than $8 million contribution from Medicare reimbursement that occurred in the second half of 2023 that certainly will not reoccur in 2024.

[Operator:]

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