Q3 2023 LivePerson Inc Earnings Call
Participants
Chad Jonas Cooper; SVP of IR; LivePerson, Inc.
John Deneen Collins; Interim CEO, CFO, Principal Executive Officer & Principal Financial Officer; LivePerson, Inc.
Jeffrey Van Rhee; Partner of Institutional Research & Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Mark William Schappel; MD; Loop Capital Markets LLC, Research Division
Peter Marc Levine; Analyst; Evercore ISI Institutional Equities, Research Division
Ryan Michael MacDonald; Senior Analyst; Needham & Company, LLC, Research Division
Zachary Cummins; Equity Research Analyst; B. Riley Securities, Inc., Research Division
Presentation
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Third Quarter 2023 Earnings Conference Call. My name is Dinee, and I will be your conference operator today. (Operator Instructions) 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.
Chad Jonas Cooper
Thank you, Dinee. Joining me on the call today is John Collins, Interim CEO and CFO. Please note that during today's call, we will make forward-looking statements, which are predictions, projections and other statements about future results. These statements are based on our current expectations and assumptions as of today, November 8, 2023 and are subject to risks and uncertainties.
Actual results may differ materially due to various factors, including those described in today's earnings press release and in the comments made during this conference call as well as in 10-Ks, 10-Qs and other reports we file from time to time with the SEC. We assume no obligation to update any forward-looking statements.
Also during this call, we will discuss certain non-GAAP financial measures. 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?
John Deneen Collins
Thank you, Chad, and 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, LivePerson envisioned that asynchronous messaging and AI-powered automation would become the channels of the future for customer service and support. Time savings, convenience and dynamic visual content make messaging a superior consumer experience to voice, while AI-powered automation enables cost-effective scalability for the Enterprise. We embrace this vision, replatformed the business and emerged as a leading provider of asynchronous messaging and conversational AI for many of the world's largest enterprises.
Today, LivePerson is arguably the most scaled provider of messaging and AI-powered automation for customer service and support. But 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 that 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 non-core businesses and rightsizing our cost structure, which enabled LivePerson to return to profitability last quarter.
Since last quarter, we have refocused the company on our core strength. Those that 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 markets for conversational AI and customer service and support are estimated to grow approximately 20% year-over-year in 2024. 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 strength embraces the key reasons, large enterprises continue to choose LivePerson as their trusted partner, including our enterprise-proven platform, agent workspace and open architecture for third-party AI, extensive voice of the customer data set, unified voice and messaging analytics, managed services for enterprise digital transformation, and guardrails for human in the loop feedback that enable safe and secure adoption of generative AI.
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 LivePerson. Significantly, growing traction with generative AI 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 voice AI, which meaningfully enhanced our ability to shift 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 voice AI is using voice automation to deflect 40% of voice calls to messaging, which meaningfully reduces costs and time to resolution.
Voice AI is also delivering a return on investment in applications that directly interface with the end customer, including a customer using voice automation to call leads from the CRM asking serious questions and determining the next best action. An 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 of generative AI, including Copilot or 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, where generative AI was essential, in the third quarter, we signed a 7-figure new logo and a 7-figure renewal. And early in the fourth quarter, we signed a 7-figure expansion with one of the world's largest banks. We're also observing a sequential increase in platform usage attributable to generative AI. Reinforcing that the renewed focus on our B2B core strengths coupled with strategic investments in 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 4 7-figure deals, 3 of which were new logos, 31 extensions and renewals, and 19 new logos overall. Enterprise bookings were up sequentially with total bookings approximately consistent with the second quarter.
In terms of trends, LivePerson continues to be a platform of choice for financial services. In the third quarter, we signed 2 large credit unions as new logos, one with over 300,000 members and assets totaling $5 billion. We also signed a key financial services expansion and renewal, including a 7-figure upsell with a leading Australian bank and 2 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 LivePerson early in the fourth quarter, signing a 4-year 8-figure TCV renewal, including a 7-figure upsell to leverage recently launched generative AI capabilities alongside expanded adoption of the wider platform.
In the third quarter, we also signed a 7-figure new logo win to power a conversational marketplace and renewals and expansions with a leading cruise line and an amusement park and entertainment business.
Notably, we continue to see strategic renewal, expansion and new logo wins against strong competition in the third quarter, including against Salesforce, Cisco, Genesys and Google Dialogflow.
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 14, we will be hosting more than 1,000 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 LLM-powered innovation, generative insights.
Before moving on to 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 CIOs drive transformational initiatives across the enterprise, they are challenging strategic partners like LivePerson 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 service suite. LivePerson's open platform lets brands seamlessly couple 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 LivePerson 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 7-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 Afinity integration and is already seeing millions in incremental monthly revenue, which we monetize through a revenue-sharing agreement. In addition, innovative systems integrators and BPOs are positioning LivePerson as the center of a digital-first architecture to accelerate migration from legacy contact center vendors and as an alternative to voice-centric CCaaS providers who are not optimized for asynchronous operations. In the third quarter, we partnered with a top 5 global consulting firm on AI-focused services programs for 2 of Australia's largest telcos, totaling 7 figures in 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 and 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. As discussed last quarter, we expected a high 7-figure revenue contribution from Medicare reimbursement in the third quarter. This value was approximately $7 million. B2B 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 B2B 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 non-core business lines, including COVID-19 testing, gainshare labor and pandemic-driven gainshare variable revenue.
Normalizing for these business changes, total B2B core revenue declined 1%, while B2B core recurring revenue within hosted grew 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 Claire JV in the first quarter. Excluding revenue from the Claire JV, professional services revenue declined 10% year-over-year driven by a onetime 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 was the wind down of non-core business lines, including revenue related to the Claire JV, gainshare labor and pandemic-driven gainshare variable revenue. Net revenue retention was below our target range of 105% to 115%, but up sequentially, consistent with previously set expectations. We continue to expect sequential improvement in net revenue retention in the fourth quarter. RPO decreased 27% year-over-year to $313 million due primarily to completing the professional services engagement for the Claire JV.
For the third quarter, ARPC grew 13% to $595,000 driven in part by upsells from our largest customers.
In terms of guidance, for revenue in the full year 2023, we are maintaining our midpoint of $394 million, but narrowing the range to $389 million to $399 million. This range is exclusive of the $7.2 million contribution from Kasamba in the first quarter of this year. Inclusive of the first quarter revenue contribution from Kasamba, we expect 2023 revenue to range from $3 million to $406 million. As for B2B 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 $25.5 million, 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. The sequential decline in revenue is primarily attributable to the onetime medical reimbursement we recognized in the third quarter. We expect B2B 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 $0 million to $7 million.
To conclude, our results today demonstrate another quarter of execution, consistent with prior guidance. Notably, we have rightsized our cost structure, return to profitability and effectively reallocated people and capital to drive growth from our B2B 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 in generative AI and our partner system have meaningfully contributed to new logo wins, expansions and renewals in the last 2 quarters. And as discussed, this trend is continuing in the fourth quarter.
Looking forward, thanks to the commitment and innovative work of the entire LivePerson 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. Operator?
Question and Answer Session
Operator
(Operator Instructions) The first question that we have comes from Ryan MacDonald from Needham & Co.
Ryan Michael MacDonald
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 deals. But as you look across the verticals and 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?
John Deneen Collins
Yes. Brian, I think as I discussed in the prepared remarks, we are seeing real net new economics from generative AI. We're signing new logos and retaining business and expanding business because of the new capabilities that we have with generative AI. And in relation to the third parties that we're working with the partnership strategy that we have, some of those relationships that are driving 7 figures of value this year are directly related and even solely related to generative AI applications. So it's much more than just testing at this stage.
Ryan Michael MacDonald
Super helpful. And maybe just as a follow-up. I'm interested to hear about the Spark event coming up next week and sort of the new -- unveiling of the new suite here. When should we expect in terms of the rollout time frame for the new suite after you introduce it next week?
John Deneen Collins
Yes. We expect some of these products to be GA at the event. And so it will be an exciting time to see how customers can leverage those and again, generally available in November.
Operator
The next question we have comes from Peter Levine from Evercore.
Peter Marc Levine
Maybe the first one, John, can you maybe talk to us directionally about net retention or even gross retention, mid-market and below and how that differs from the enterprise if you're seeing any...
John Deneen Collins
Yes. We have refocused the business in a lot of ways on the core and the essence of that core is really our enterprise base. So we're talking here kind of mid 6-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 NRR or GRR, both are lower at that end of our customer base in the enterprise.
Peter Marc Levine
And then I guess the follow-up to Ryan's question around, I think the monetization of these new GenAI products is -- how much of the products would you view as more of a retention tool versus like an ARPU uplift? Or is it the reverse where you can actually get higher ARPU from these customers? Just obviously, given the competitive landscape where this market is going. Curious to know how you're pricing or how your customers are actually doing it?
John Deneen Collins
Yes. It's a mix for sure. I mean to some extent, we've had some customers that renewed or expanded 2 years ago during the height of the pandemic and had very large volume expectations that, as we've discussed in prior quarters, weren't necessarily being met this year, hence, some of the headwind to NRR.
However, with generative AI, we're starting to see those customers reaccelerate their overall volume because the use cases are so compelling. So to some extent, it's 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 like copilot and summarization.
Peter Marc Levine
Perfect. And if I could squeeze one final one in. I know you haven't guided to calendar '24. But directionally, when does the model kind of trough out and we can see -- start to see revenue reacceleration?
John Deneen Collins
Yes. Obviously, we'll have more to share on 2024 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 of that momentum in go to market. Clearly, the metrics have been sequentially improving over the last 2 quarters, and I expect that general trend to continue.
Operator
(Operator Instructions) The next question we have comes from Zach Cummins from B. Riley Securities.
Zachary Cummins
Can you just walk us through some of the assumptions for your Q4 revenue guidance? I know have some Medicare payments that likely are not going to be occurring again in Q4, but just curious on assumptions for both revenue and adjusted EBITDA guidance?
John Deneen Collins
Yes. 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 trend, the general trend of stability being 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.
Zachary Cummins
Understood. And I know there was a question around kind of the potential time line to 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 GenAI side?
John Deneen Collins
Yes. I think we've done the hard work, right? We've had a essentially ongoing restructuring since Q1 of 2022 culminating in a large event. And Q1 of 2023, we've wound down the non-core business lines, and 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 top line 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 2 quarters and that we expect that to continue.
So broadly speaking, I think the cost structure is 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.
Operator
The final question we have comes from Mark Schappel from Loop Capital Markets.
Mark William Schappel
John, I was wondering if you could 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?
John Deneen Collins
Yes. We're holding quota carrier head count flat, and these are all ramped quota carriers quarter-over-quarter. We're seeing, 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. And so broadly speaking, there's indicators that 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 our partner ecosystem, which is adding tangible impact.
So broadly speaking, I think productivity is improving. Our efficiency with respect to marketing spend is improving as well, and we have slightly -- again, slightly more pipeline entering the fourth quarter than we did entering the third. So indicators are positive here.
Mark William Schappel
Great. And I realize WildHealth is less of a focus these days. So I was wondering if you could just give us an update on that business in the quarter and just your general thoughts on how you view the business?
John Deneen Collins
Yes. As we've discussed previously, WildHealth is a valuable asset to LivePerson, but not necessarily strategic to its core and is run on a stand-alone basis at this time. I don't have further updates beyond what I had provided previously for WildHealth growth, which has moderated relative to the expectation we had very early in the year when we first launched 2023, but remain consistent with the expectations we set last quarter.
Operator
The next question we have comes from Jeff Van Rhee from Craig-Hallum Capital Group.
Jeffrey Van Rhee
John, on WildHealth, just I guess 2 option questions. One, what was the margin on that business? What was the impact from a gross margin 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?
John Deneen Collins
Yes, Jeff. So the -- as you -- just to recap, we took all of the expense for the WildHealth-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 onetime Medicare reimbursement, which we recognized $7 million in the third quarter. So that moved the needle for gross margin up by 1 to 2 points. So as we think about gross margin on a normalized basis, it would be within 76% to 78% that we expect broadly for the business in the fourth quarter, independent of the WildHealth contribution.
Jeffrey Van Rhee
Okay. Very helpful. And then on the retention, I know the goal is 105% to 115%. Maybe just expand on that a bit. I mean, how close are you to 100% why are you below 100%? Where are customers going if they're leaving? Is it just less usage? Just maybe a little expansion on the retention, where you are, where you're going and why we're where we are now?
John Deneen Collins
Yes. I think a lot of reasons for why we are at where we are the moment. A lot of it relates to defocusing and the restructuring wind down of noncore and just a lot (inaudible) that fortunately, isn't the rearview mirror now, and we're rebuilding go-to-market motion, and I think the indicators are positive, as I mentioned previously.
To be more specific, a lot of the NRR 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, as I mentioned in relation to the question earlier, there is a blended NRR that we're reporting here, which includes some of the lower end of the market that we service, lower end of mid-market and 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 NRR would be much closer, if not within the range that we have, but the wider blended rate is still below that 105% target. Again, though, we expect sequential improvement moving forward.
Jeffrey Van Rhee
And just one follow-up 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?
John Deneen Collins
I think we'll be fully through that transition by first or second quarter of next year, Jeff.
Jeffrey Van Rhee
Okay. And then if I could -- just one last one, sorry. On bookings, I know last quarter, you said it was the best bookings quarter, I believe, since early '22. If I caught it on this call, you said this was up sequentially from that number. How were the bookings this quarter relative to expectations relative to a year earlier, and I know it's a multipart question, but the customer count is down. Do you think that's going to continue and you're just going to post bigger deals? Or do you expect that to reverse?
John Deneen Collins
Yes. A couple of clarifications. So in the prepared remarks, I said that overall bookings were consistent -- approximately consistent with last quarter, but enterprise deal values were actually up sequentially. So despite the lower deal counts, again, emphasizing the strategic focus on our enterprise customer base, we did increase overall ACV sequentially while bookings were approximately the same.
Operator
Ladies and gentlemen, we have reached the end of our call today. Thank you for joining us. You may now disconnect your lines.
