Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Third Quarter 2023 Earnings Conference Call. My name is Deney, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management team from LivePerson will conduct a question-and-answer session and conference participants will be given instructions at that time. To give everyone the opportunity to participate, please limit yourself to one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Deney. 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 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. Reconciliations of GAAP to non-GAAP financial measures is included in today's earnings press release. Both the press release and 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?

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 embraced this vision, re-platform the business, and emerged as the 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 right-sizing our cost structure, which enabled LivePerson to return to profitability last quarter. Since last quarter, we have refocused the company on our core strengths, 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…

[Operator Instructions] The first question that we have comes from Ryan MacDonald from Needham & Co.

Thanks for taking my question and congrats on the solid quarter here. John, I'm just curious, you talked about some of the vertical strength in the quarter and good to see financial services and some nice telco deals. As you look across the verticals and sort of willingness and 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.

Hey, Ryan. 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 seven 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.

So maybe just as a follow-up, I'm interested to hear about the Spark event coming up next week and sort of new unveiling of the new suite here. When should we expect in terms of the rollout timeframe for the new suite after you introduce it next week? Thanks.

Yes, we expect some of these products to be GA at the event. So it will be an exciting time to see how customers can leverage those. And again, generally available in November.

The next question we have comes from Peter Levine from Evercore.

Great. Thanks for taking my questions here. Maybe the first one, John, can you maybe talk to us directionally about net retention, even gross retention mid-marketing below and how that differs from the enterprise? If you're seeing any --

Yes, sure hit there. 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-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. So NRR or GRR both are lower at that end of our customer base than in the enterprise.

Thanks. 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 though 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 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.

Perfect. If I could squeeze one final one in, I know you have been guided to calendar ’24 but directionally when does the model kind of trough out and we can see start to see revenue re-acceleration? Thank you.

Yes, I obviously 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 rebuild of 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.

[Operator Instructions] The next question we have comes from Zach Cummins from B. Riley Securities.

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 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.

Yes. Hey, Zach. 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 are some conservatisms built into the range for that reason as well.

Understood. And I know there was a question around kind of the potential timeline 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?

Yes, I think we've done the hard work, right. We've had essentially ongoing restructuring since Q1 of 2022 culminating in a large event in 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 two quarters and that we expect that to continue. So broadly speaking, I think the cost structure was 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.

The final question we have comes from Mark Schappel from Loop Capital Markets.

Hi, thanks for taking my question. And John, just wonder if you just give us a brief update on how you think the salesforce is progressing here, particularly given the earlier restructuring and strategy changes over the past year?

Yes, we're holding a quarter carrier headcount flat, and these are all ramped quarter 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 and 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, again, slightly more pipeline entering the fourth quarter than we did entering the third. So indicators are positive here.

Great. Thanks. And I realize Wild Health is less of a focus these days, but I was wondering if you just give us an update on that business in the quarter and just your general thoughts on how you view the business.

Yes, as we've discussed previously, Wild Health is a valuable asset to a LivePerson, 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 Wild Health's growth, which has moderated relative to the expectations we had very early in the year when we first launched in 2023, but remain consistent with the expectations we set last quarter.

The next question we have comes from Jeff Van from Craig-Hallum Capital Group.

Great. Thanks, John on Wild Health, just I guess two off-shoot questions. One, what was the margin on that business? What was the impact from a gross margin that was highly profitable revenue? And then somewhat of a tail to that question is, how are you thinking about gross margins for Q4?

Yes, Hey, Jeff. So the, as you 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's clearly a bump to non-GAAP gross margins as a result of that one-time Medicare reimbursement, which we recognize, $7 million in the third quarter. So that moved the needle for gross margin up by 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 broadly for the business in the fourth quarter independent of the Wild Health contribution.

Okay, very helpful. And then on the retention, I know the goal is 105 to 15 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?

Yes, I think the lot of reasons for why we are, where we are at the moment, a lot of it relates to a defocusing and restructuring wind down of non-core, and just a lot of some all that fortunately is in the rearview mirror now, and we're rebuilding that good 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 they're 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 a 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.

And just one follow-up on the volumes, 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 we'll be fully through that transition by first or second quarter of next year, Jeff.

Okay. And then if I could just one last one, sorry. And 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 are the bookings this quarter relative to expectations 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, you're just going to post bigger deals or do you expect that to reverse?

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.

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.