LivePerson [LPSN] Conference call transcript for 2022 q2
2022-08-08 23:46:03
Fiscal: 2022 q2
Operator: Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to LivePersonâs Second Quarter 2022 Earnings Conference Call. My name is Claudia Gandit, and I will be your conference operator today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. Iâd now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President of Investor Relations. Please proceed.
Chad Cooper: Thank you, Claudia. Good afternoon everyone, and thank you for joining us today. On the call with me are Rob LoCascio, LivePersonâs Founder and CEO; and John Collins, Chief Financial Officer. Please note that during todayâs call, we will make forward-looking statements which are predictions, projections, and other statements about future results. These statements are based on our current expectations and assumptions as of today and are subject to risks and uncertainties. Actual results may differ materially due to various factors, including those described in todayâs earnings press release and the comments made during this conference call and in 10-Ks, 10-Qs, and other reports we file from time-to-time with the SEC. We assume no obligation to update any forward-looking statements. Also, during this call, we will discuss non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are included in todayâs earnings press release where applicable. Both the press release and supplemental slides, which include highlights for the quarter, are available in the Investor Relations section of LivePersonâs website. And with that, I will turn the call over to Rob. Rob?
Rob LoCascio: Thanks, Chad. Thank you for joining LivePersonâs second quarter 2022 earnings call. In 2Q, we generated revenue of $132.6 million, non-GAAP gross margins were up 500 basis points sequentially, and our adjusted EBITDA was at the top end of our guidance range at negative $5.5 million, a $12 million improvement sequentially. Weâre still on track to deliver positive EBITDA on cash flow by year end. Early this year, we made a commitment to prioritize profitable growth. Iâm pleased to report, we are delivering margin expansion faster than expected through a combination of OpEx discipline, the improving productivity of our salesforce and focusing on more high margin revenue. We continue to make substantial changes to strengthen our P&L by focusing on the most differentiated high value components of our business with the greatest capacity to drive high gross margins, strong operating margins, and high quality revenue growth. In the short term, weâll be intentionally trading some lower margin top-line revenue for substantial, sustainable near and long-term margin expansion and growth. Our goal is to achieve best-in-class operating and financial models, which would be near or above 80% gross margin and mid-teens or better operating margins. Incredibly proud of the agility and innovation that allowed us to rapidly respond to the needs of our clients in the market and to drive growth during the past two years of the pandemic, but as pandemic driven trends normalized laser focused on our more repeatable and high margin growth engines. As the industry leader in conversational AI messaging, we provide AI-powered customer engagement solutions to thousands of companies, including 450 enterprise brands worldwide, among them many of the worldâs leading consumer businesses. Our solutions help brands cut costs while improving consumer experience and achieve measurable ROI. Our platform has reduced our brandâs customer care costs by up to 50% while increasing customer satisfaction equally important. Our commerce solutions have increased annual sales by hundreds of millions of dollars for some of our customers. We do not simply automate labor intense tests. We help our brands optimize their engagement with their consumers throughout the customer life cycle. Weâre proud to consistently deliver measurable ROI to brands through our care and commerce solutions. Weâre also excited about new applications and our Conversational Cloud technology, including moving into voice and into expanding our healthcare vertical, which Iâll touch on in a moment. First on three key actions to optimize profitable revenue growth, new logo growth, expansion within existing accounts and partnerships, and opening our AI, so they can be accessed on other third-party platforms. So, letâs start with new logos. Weâre seeing progress with our quota carrying reps and continue to expect them to be productive with bookings in Q4 and contributing to revenue in 2023, and beyond. In Q2, we delivered the most new logo wins weâve had since 2020. We won 45 new logos in the quarter, which was a 55% year-over-year and 73% increase sequentially. These new logo wins are green shoots indicating that our enterprise salesforce are returning to historical rates of productivity after a change in field leadership, we made early this year that made great progress at generating new land and expand opportunities. Second, weâre leveraging and extending our existing customer relationships by both cross-selling and upselling, and weâre seeing strong adoption of multiple AI and automation products. In Q2, we continue to see robust platform usage with overall Conversational Cloud messaging volume growing 32% year-over-year, and AI-based messaging conversations growing 20% year-over-year. Third, we have continued our partnership momentum to unlock expanded and indirect revenue opportunities. We added 15 unique partners in Q2, and this channel produced nine new logo deals. Few weeks ago, we announced new partnership with Solunus, a technology has focused â technology company has been focused on improving business process for large enterprises. Our joint offering called Contact Center Conversation Mining combines the omnichannel conversational analytics from VoiceBase and customer journey mapping and back office execution management from Solunus. Iâm also happy to note that Q2 marked the return of our in-person executive community events with extremely successful events held in New York and London during the quarter. Pre-pandemic these events were a key element to our go-to-market strategy and weâve historically accelerated our sales cycles because they educate brands about the power of conversational commerce and AI generally through our existing clients sharing their real world outcomes. In aggregate, the Q2 events directly influenced over 50 million pipeline. From a product perspective, we are capturing incremental scale world revenue opportunities by opening up our platform. This will enable brands. Those agents primarily use a third-party CRM to have conversations within consumers driven by our Conversational Cloud. This has historically been a pain point for brands has been a key component of our product roadmap. Our acquisitions of VoiceBase and Tenfold have accelerated this initiative. VoiceBase is being integrated into the core analytics of our platform and Tenfold is driving the overall go-to-market probably work with CRM and other enterprise technology platforms. Weâre unifying our voice strategy from a standalone business unit to an integrated part of our broader portfolio. This provides a clear value proposition for our sales people as voice becomes a key channel within our Conversational Cloud. With VoiceBase, weâre digitizing the voice channel so we can extend the benefits of our conversational AI platform into it. This enables brands to not only meet consumers on voice, if that their preferred channel, but also extract AI-powered insights from this traditionally analog channel in real time. These insights can also be analyzed post conversation to help brands better serve their customers, Tenfold and VoiceBase, both play key roles in the strategy of enabled us to extend these capabilities to voice providers like Avaya, Cisco, Genesys to just name a few. As I turn to some of our top customer wins in the quarter, Iâd like to highlight how each reflects, how brands recognize LivePersonâs ability to deliver tangible value. Even as current economic conditions are driving brands to assess cost savings, consolidate technology, stacks, and deprioritize all projects that do not have direct impact on savings or revenue growth. These are some of the most innovative brands in the world. Theyâre working with us to cut costs while simultaneously improving the customer experience through automation and AI. We signed five seven figure deals and achieve the total deal count of 104 deals in the quarter. Utilizing our rich data set, we also are able to target vertical industries with repeatable AI and automation strategies. In Q2, we signed one of the largest new logo deals in our history with Capitec, the largest retail bank in South Africa with approximately 19 million consumers Capitec originally came to us from initial use case with VoiceBase. However, weâre able to show them that they could go further automating their customer experience over WhatsApp, as well as take advantage of the power of VoiceBase for real time insights into their consumers experience and banking operations. This is seven figure three-year deal, even more importantly provides us with a referenceable customer in an important new geography with a new use case. This is a great example of our new logo initiatives and rich product synergies. Following last yearâs acquisitions, driving revenue expansion. As we execute on our plan of profitable growth. We also won a large multi deal with Canadaâs largest bank being selected over two of our major competitors. The client chose LivePerson for our ability to reduce the cost of servicing customers and open the virtual doors of the bank to new account growth by managing the entire consumer journey by our messaging, AI and automation. On the renewal front, we signed a large two-year extension with one of our major airlines using LivePerson first platform technology. This customer makes it easy for travelers to begin conversations on their app and directly from Apple Business Chat, SMS, IVR deflection, QR codes within airports and social media. We also signed a multi-year renewal agreement with Verizon. Verizonâs been a client for us for three years. They started with messaging for customer care and sales. And now theyâve expanded to leverage our AI as well. In Q2 our GainShare division signed a three-year seven figure automation as a service contract with the largest automation OEM, automotive OEM finance companies in the world. This deal is great example of the type of higher margin contract structure for prioritizing going forward with the GainShare offerings. This brand wanted to transition from a 100% voice agent call center environment into AI-driven digital first contact center with the goals of supporting their consumers through automation while reducing OpEx and increasing CSAT. And finally, weâre making excellent progress on our healthcare strategy, which is one of our largest verticals behind telecom and financial services. And itâs one of our fastest growing. Weâre working towards delivering a very scalable solution for the healthcare market, especially around using machine learning and Conversational AI for improving patient experience and outcomes. This is a big opportunity and we are in a good strategic position to go after it. Specifically related to our Wild Health acquisition, the group is performing very well and is ahead of their revenue plan. And in Q2, we sign deals with Spartan Race and USA Boxing to bring our AI and telehealth capabilities to their athletes as their official healthcare partner. As I mentioned at the top of the call, we continue to execute on our profitable growth plan announced at the start of the year and weâre ahead of schedule delivering results faster and previously forecasted. As we embarked on these initiatives, we have found other areas of the business that we can further improve our margins and profitability and lay the groundwork for future growth. While some of these initiatives are anticipated reduced total revenue in the near term, as we deprioritize lower margin, non-repeatable areas of the business. We continue to expect to generate positive and free cash flow in the fourth quarter position as well for profitable growth in 2023 and beyond. And with that, let me now turn the call over to John to discuss the detailed financial results and our revised outlook for the rest of the year. John?
John Collins: In the second quarter, we continue to execute on the plan. We announced on our fourth quarter call to adopt a balanced approach to profitability and growth. Revenue grew by $2 million sequentially to $132.6 million or 11% year-over-year. And within our guidance range. Despite the lower revenue adjusted EBITDA increased by $12 million sequentially matching the top end of our guidance range. The improvement in adjusted EBITDA was driven by a $9.7 million sequential reduction in operating expenses, which exceeded the top end of implied guidance. The cost reductions were associated primarily with post M&A integration and consolidation non-quarter carrying sales and marketing and research and development reduced costs coupled with the wind down of COVID-19 testing drove expansion in non-GAAP, gross margins from 69% to 74% sequentially, which also exceeded the top end of our, we expect continued gross margin expansion for reasons Iâll discuss in a moment. This year discuss during last two quarterly calls, we are focused on adapting our operating model to ensure a sustainable framework for profitable growth in a post pandemic world. To this end, optimizing our cost structure will continue to be a primary strategic imperative for the remainder of 2022, in order to position the company to deliver long term profitable growth and to generate positive cash flow throughout 2023. In addition to expense reductions, we have begun purposefully eliminating low quality sources of revenue in order to further enhance the overall of the P&L. While we expect both the magnitude of the expense reductions and the elimination of low quality revenue to impact near term growth. We are confident that these - will set a long term foundation for best in class gross margin, significant free cash flow generation, and a return to the Rule 40 framework. Before proceeding with the standard financial update. Iâd like to elaborate on the largest sources of low quality revenue, that weâve begun to purposefully wind down. Last quarter, we shared two significant changes impacting our revenue stack. First COVID-19 testing revenue would be minimal in the second quarter and would roll off of the P&L entirely going forward. Second, we converted over 90% of our gain share revenue from variable to recurrent secured, primarily by multi-year contracts that increased revenue, stability and transparency. Approximately half of this revenue is high margin revenue derived from scalable usage of the conversational cloud. The other half is low margin revenue derived from agent labor that we supply to our customers via contractual arrangements with BPO partners. Consistent with our goal to optimize the overall of the P&L. We have begun eliminating this labor based revenue from both our sales pipeline and existing customer agreements, which we expect to contribute to a temporary slowdown in revenue growth in the second half of 2022, while turning down growth, accretive revenue sources in Denver and easy decision. This move will simplify the business model materially, expand our gross margin and enable us to focus management and resource allocation on our most strategic and scalable sources of revenue growth, such as automation and messaging. In the second quarter GainShare represented 11% of total revenue, which was in line with the expectations we set previously. However, going forward, we expect this percentage to contract. As we wind down labor based revenue. Over the long term, we expect bees and related change to the business model to drive expansion of non-GAAP gross margins to at least 80%. Turning to our reporting segments for the second quarter within total revenue, B2B grew 12% year-over-year â hosted software was approximately unchanged year-over-year and professional services grew 95% year over year within revenue from hosted software, lower revenue from gain share. And COVID-19 testing offset, increased revenue from other customers relative to the comparable period last year. As a reminder, COVID-19 testing was expected to be minimal in the second quarter and going forward. In terms of professional services, recall that PS revenue declined 3% year-over-year, last quarter because several large projects pushed into the second quarter. This dynamic is driving the substantial year-over-year increase. The largest PS project relates to the eight figure healthcare deal we signed last quarter and is focused on automation as a service for healthcare delivery companies. Traffic perspective, U.S. revenue group, 12% year-over-year, and represented 68% of total revenue while international revenue grew 9% year-over-year and represented 32% of total revenue. Finally revenue from the consumer segment declined 7% year-over-year, which was a function of a hard comparison to pandemic driven growth in the second quarter last year. As Rob mentioned, we signed five seven figure deals in the second quarter, two upsells and three new logos. RPO increased 18% year-over-year to $409 million and net revenue retention was just below our target range of 105% to 115%. Driven primarily by lower variable revenue and labor based down sales in the GainShare portfolio. Consistent with the strategy for GainShare, that I described a few moments ago. We expect modest pressure on net revenue retention in the short term. Given last yearâs large revenue contributions from variable revenue and labor based GainShare customers. Average revenue per user improved to 660,000 up 23% year-over-year. Total messaging volume on the Conversational Cloud increased 32% year-over-year and AI-powered messaging volume increased 20% year-over-year. Our strongest verticals this quarter were retail, financial services and telecommunications. In terms of new logos, we signed 45 in the second quarter, which was an increase of 55% year-over-year and 73% over the first quarter. The traction in new logo acquisition validates the progress weâve made on rebuilding the foundation of our go-to-market motion. Including the strategic focus on acquiring new logos, considering our robust ability to rapidly expand with our base, which has been a primary growth driver over the last two years. New logos represent an exciting leading indicator of future expansion in revenue. As discussed last quarter, integrations with strategic partners is another foundational component of our scalable sales motion going forward. By increasing the breadth and simplicity of open APIs and third party integrations, weâre ensuring that customers on other have rapid and seamless access to LivePerson best-in-class capabilities, across automation, messaging, omnichannel, conversational analytics, and other unique innovations that improve customer engagement and reduce reliance on human agents. As Rob mentioned, we recently announced a strategic technology partnership with Solunus to integrate conversational analytics into its data processing and execution management platform. In addition, Contact Center operations that primarily depend on third party CRM platforms can now leverage messaging and automation capabilities through scalable integrations with the Conversational Cloud. Of course, VoiceBase and Tenfold are at the core of this strategy. Moving down the P&L adjusted EBITDA was at the top end of our guidance range at a loss of $5.5 million in the quarter. The upside as per described, was driven by solid execution on our profitable growth plan, including expense reductions, which are part of a broader restructuring plan focused on the following areas, post M&A integration and consolidation, non-quota carrying, sales and marketing and research and development. Turning to full year with a focus on adapting the business model for and profitable growth. We are making offs that will slow growth in the short term, in order to materially improve our unit economics profitability and overall financial profile in 2023 and beyond. Critically, these moves will also enable us to focus strategy and resource allocation on scalably, delivering the automation messaging and related customer engagement outcomes that set LivePerson apart from other platforms. As a result, we are revising down our guidance ranges for revenue from to $507 million to $518 million or 8% to 10% year-over-year growth. As for full year guidance on adjusted EBITDA, despite the lower revenue we remain committed to generating positive adjusted EBITDA in the year and positive free cash flow in the fourth quarter. These outcomes are made possible by swift and thoughtful decisions in the first and second quarter to right size our expenses. I think it would be helpful to recap how execution on our profitable growth strategy has manifested in our results and expectations. We, when we initially set guidance for the full year, we expected a loss of $10 million adjusted EBITDA at the midpoint, which implied $560 million in operating expenses. Last quarter, we improved the outlook to positive and adjusted EBITDA implying in operating expenses. Now by reaffirming guidance for adjusted EBITDA in the range of $1 million to $10 million weâre margin of zero to 2% for the full year. The implication for operating expenses is approximately $507 million at the midpoint. Committed execution on our profitable growth strategy is transforming our business model to generate meaningful profit and cash in 2023. As I discussed earlier, the elimination of low quality revenue coupled with continued optimization of our cost structure are expanding our gross profit margin. Our initial guidance for non-GAAP gross profit margin for the full year 2022 was 67% to 70%. We raised that guidance to 70% to 72% last quarter, and we were raising, it began to 72% to 74% for the full year 2022. In the long-term, we expect continued expansion of non-gross margin to at least 80%. For the third quarter, given the purposeful P&L optimizations. We are driving together with continued ramping of our sales force. We expect revenues to be in the range of $120 million to $123.6 million or 1.8% to 4.5% year-over-year. As for adjusted EBITDA in the third quarter, our guidance range is $0 million to $4.3 million or to 3%. Weâre also expecting non-GAAP gross margin in a range of 72%, 74%. Before taking questions, Iâd like to quickly emphasize several key themes for 2022 and how continued execution on our profitable growth strategy will position us for 2023. We have made strong demonstrable progress on rebuilding our sales motion, including a 73% sequential increase in new logo acquisition. Weâve also taken concrete steps to expand our partner strategy and open the platform to create new sources of indirect revenue and ensure our best-in-class customer engagement solutions are driving differentiated treated outcomes in the wider CX ecosystem, consistent with our previously announced profitable growth plan and the goal to further strengthen our P&L for the long-term, we are continuing to optimize our cost structure and purposefully trading some term lower quality revenue for stronger financial profile with sustainable, higher margin revenue in 2023 and beyond. Collectively solid execution on our profitable growth strategy is transforming our business model, positioning us to generate meaningful cash in 2023, expand non-GAAP growth margins to a best-in-class long-term target of at least 80% and focus resource allocation on more strategic, differentiated and scalable sources of revenue growth. And with that operator, we can proceed the Q&A.
Operator: Thank you very much, sir. First question comes from Arjun Bhatia from William Blair. Please proceed with your question Arjun.
Arjun Bhatia: Yes. Thank you. John, can you just help us understand maybe how much of the revenue reduction that weâre seeing in the full year guide is coming from reducing investments that youâre making versus eliminating some of the lower margin revenue that youâre talking about? Like the labor portion of GainShare revenue?
John Collins: Hi, Arjun. Yes, for sure. So first â just given the magnitude of that change, I want to emphasize that our proactive strategy to strengthen the P&L is playing a large role. We have a medium to long-term goal to generate 80% gross margins, as I described in the prepared remarks. And we want to do that through highly scalable and repeatable software revenue derived from what we do best, which is of course, AI automation messaging. And in order to get there, eliminating the lower quality revenue we described specifically that labor based piece in the GainShare portfolio is key that equates to approximately half of the revenue change. The other half of the change is associated broadly with the continued ramp of our newly hired sales force and, broadly rebuilding the go-to-market momentum following the leadership transition that we previously discussed. So in order, I think to reiterate some of the key measures though, that weâve made is the new logo acquisition, 73% increase sequentially is a, a very strong leading indicator of the additional build, rebuilding of the momentum that we had lost previously that we are gaining back now. And while new logo acquisitions represent a lower near term revenue goal or revenue contribution for in the long term, theyâre the fuel that our sales force uses for expansion.
Arjun Bhatia: Understood. Thatâs helpful. And then I think Rob, one of the things that you mentioned as, a goal of yours going forward is to open up your AI and provide access to it to third parties. Can you just help us understand how those partnerships would work in practice and how you would be able to monetize some of the, providing some of your technology? Whatâs the plan on that front?
Rob LoCascio: Yes, the part obviously thatâs the very high valued part of our platform is our AI and automation technologies. Today, it runs solely on our messaging platform and soon to be voiced, but what our customers want is sometimes theyâve got voice investments and other platforms theyâre running and they, but they want our AI running on it. So we want to kind of free it from our own walled garden and then move it out into the ecosystem of other CRM players and other contact center software. And do those integrations, Tenfold allow the acquisition, allows us to do a fair amount of that. Like we now can take our agent console and it can be â itâs sitting in salesforce, like our messaging console now can sit within salesforce if someoneâs a salesforce user. So weâre kind of at place in the evolution of the market to be much more platform centric than product centric. And thatâs what weâre doing then the other part is we do run other AIs on our platform as weâve been doing for years, but we donât allow our automation tools like our analytics tools to optimize those AI. So weâll also be doing that, whether itâs Google Dialogflow or Lex or Watson, they can use our, all of our tool sets on the analytics side to optimize their, those bots too. So weâre becoming more of a hub for the AI and that, thatâs where weâre moving with our investments this year.
Arjun Bhatia: Okay. Got it. Perfect. Thank you.
Operator: Thank you. The next question comes from Zach Cummins from B. Riley Securities. Please proceed with your question, Zach.
Zach Cummins: Yes. Hi, good afternoon. Thanks for taking my questions. Yes, John can you talk about if thereâs been any sort of changes to the commission structure for the sales force, now that youâre really prioritizing higher margin revenue sources? So Iâm just kind of curious if any sort of changes on that front to incentivize the behavior?
John Collins: Broadly. I think we would want to ensure that our reps are made whole during the year despite the change in strategy for the lower margin GainShare piece of the portfolio. So thatâs, thatâs something weâre evaluating, but we would ensure that the, the overall structure is fair and equitable for everyone.
Zach Cummins: Got it. And another question for me, is really just around the net revenue retention number for the quarter. I mean, I think you touched on this a little bit in your script, but can you give us a sense of maybe some of the factors that drove that slightly below your targeted range of 105% to 115%?
John Collins: Yes. In fact, the variable revenue from GainShare and some labor based revenue that we slowed down and some that was a downfall were the primary in the aggregate primary contributors to the myths of the range of a 105% to 115%, Iâll note though that even with those factors, weâre still a 100% net revenue retention.
Zach Cummins: Understood. Well, thanks for taking my questions and best of luck in the coming quarter.
John Collins: Thanks, Zach.
Operator: Thank you. The next question comes from Samad Samana from Jefferies. Please proceed with your question Samad.
Unidentified Analyst: Hi, this is Nathan on for Samad. Thanks for taking our questions. Wanted to circle back to your guidance. Can you help us understand what youâre embedding from a macro perspective? Are you assuming the environment stays the same its worse or perhaps improves from what you were expecting previously?
John Collins: Yes, I mean, right now itâs, itâs kind of hard to tell for us because of the rebuild that we have, change in leadership back to, the person who ran it for many years. So I canât really tell yet whether thereâs a macro impact or not. I mean, the new logos is a good green shoot that the team is starting to really perform. Thereâs a lot of landing and expand in there. So theyâre, theyâre smaller deals, but theyâre landing and theyâre going to grow. But itâs, we canât see it right now. Our value proposition is cost takeout, like the Solunus, if you know, Solunus. Theyâre all about cost takeout too. And so we form this partnership with them because thatâs kind of what the world wants right now. And especially contact center labor. It can be, in some cases the big brands have 40,000 people on payroll, and thereâs an opportunity to really, change the cost structure using AI automation. So, but itâs hard to tell for us just because of the, the building up of our sales force. So, I think in a couple quarters weâll know where, where we stand with that on the macro side.
Unidentified Analyst: Understood. And then on â this quarter, but that was down a little bit from, from where you were tracking previously, just talking about kind the factors impacting this and where you stand on that ELA to CPI transition?
Rob LoCascio: Yes, I think ARPUs in a range we would expect considering, as I described in the guide in the build to guide, there is some step down from customers that were previously contributing to that value. Namely the larger customers in our GainShare portfolio. In terms of ELA to CPI, we weâre tracking pretty close to where we were last quarter. We didnât have a very large number to convert this quarter. So thatâs around 70% and I would expect it to, to be in that ballpark in Q3 as well.
Unidentified Analyst: Understood. Thanks for taking our questions.
John Collins: Yes.
Operator: Thank you. The next question comes from Peter Levine from Evercore. Please proceed with your question, Peter.
Peter Levine: Great. Thanks for taking my question, I guess. Robert, John, if you look at the top of the funnel, were you not as successful at converting leads or adding leads at a similar level versus kind of expectations or plans?
Rob LoCascio: No, I donât think itâs about the top of the funnel. Like we were saying, itâs been a rebuild, we lost a lot of our capacity during, when we had the leadership change last year. So when we look at the bookings capacity, itâs definitely a build, it was trending nicely and then it went down and now itâs trending back up. But I donât think its top of the funnel. And we did, we started the marketing events, which did definitely created some closes in the quarter that we saw in the new logos. So but itâs a built, I mean weâre rebuilding a lot of what was kind of unbuilt, so itâs but I donât see anything on the top of the funnel right now and we have very good attendance to the events. So weâre seeing demand for what weâre offering in the market.
Peter Levine: Then you prepared remarks, you kind of mentioned voice as a preferred channel for customers, can you kind of outline to us what differentiates your voice Contact Center offering versus whatâs in the market today? When that product will go, GA, I believe you said if I missed it on the call. Sorry, but I think you said the second half, but any updates on when that product goes live and kind of what differentiates you versus some of the competition out there?
Rob LoCascio: Yes, I donât think voice is a preferred channel. Itâs still the largest channel, but itâs predominantly non-digital. And so most of the world, whether itâs contact center or digital heads at the companies want to convert as much analog into digital as they can. So, as we know, messaging still as a growth channel is still the growth engine over voice. What that said is, is voice, people still want to sometimes talk to a machine like an Alexa type thing. And so weâre already out in beta, thereâs a handful of customers using our voice AI platform. And by the, we said second half of the year, weâll have it out in GA in Q4, weâll be when it hits a GA. So what makes it different is that, when you create an automation on our platform, you can deliver it through any endpoint, including a voice endpoint. And so you kind of write once and deploy. And then, and then with VoiceBase, which is a very powerful product and it competes with the likes of other voice analytics, but itâs, itâs very powerful. We also can do the voice analytics around, how is that automation performing. And even today, our guys, our sellers are baking in the VoiceBase into sales opportunities, because itâs the start of a relationship on the voice side. We can analyze the voice channel and see how itâs performing. And then we can layer in our voice automation and then live agent. Weâre not trying to build, become a CCaaS player. And so we can â we want to do voice automation. And then we do have live agent abilities to take a voice call, but weâll also be integrating into all the major voice platforms. And you also could bring your own voice, or we will have voice on the platform. Also if you donât have your own voice, but weâre more or less looking to integrate into all the voice platforms that are there, but you get a single way to make an automation and deploy to all endpoints, whether it be messaging or voice.
Peter Levine: Okay. Thank you. The next question comes from Jeff Van Rhee from Craig-Hallum Capital Group. Please proceed with your question, Jeff.
Jeff Van Rhee: Great. Thank you. A couple from me, just guys on the retention, maybe you could address the retention rate X GainShare. Iâm curious what you saw there? And then secondly, on the AI messaging, it looks like the AI messaging volumes were down a bit last quarter, and then down even sequentially on an absolute basis this quarter. And to help me sort of contrast that with what I think most people believe in that your leadership around the AI capability. So, why are volumes down there?
John Collins: Hey, Jeff, Iâll start with the retention question. X GainShare weâd be in the range is the short answer.
Jeff Van Rhee: Okay.
John Collins: And your other question was on volumes?
Jeff Van Rhee: Yes. AI messaging volume has been down.
John Collins: We typically â yes, Iâll start there. So typically following the first quarter, we do have our kind of seasonal low there, before it picks up again in August, September, and reaches our seasonal peak in the fourth quarter. So, I â we donât, thereâs some slight variation there. We donât see anything in the trends that would suggest a problem though. Itâs more or less consistent with how things have trended seasonally in the past.
Rob LoCascio: Yes. Like we seeâ¦
John Collins: I would also that, sorry, Rob, add one more piece here. That is that we have automated volumes at a very high percentage of total messaging. So the pace at which that continues to grow will lessen over time naturally.
Rob LoCascio: Yes.
Jeff Van Rhee: Okay. And then on the rep count need a little clarification there. I guess we ended Q4 2020 at 80 reps, I think in Q4 2021, you said you were around 144 and you were going to stop there. You went through the sales leadership change. But I think at that time, the expectation was that you youâd see some leadership churn where you probably retained a lot of those guys. So just the comments around sort of not having capacity and not having ramped reps at this point, where are you in terms of rep count and then just kind of recap that chronology for me if I have that wrong.
Rob LoCascio: Yes. The rep count is pretty much where it was last quarter, but during at the end of last year, beginning of this year, there was a lot of â we overturned reps. So even though we added more reps. We lost a lot of season reps during the past leadership. So basically where we see then a buildup of capacity then where we were, if we kept all those old reps that were already baked in, weâd probably be â we now probably would be at a different bookings number during the quarter, but because we have a lot of new reps theyâre just building up. Now, theyâre showing new logos, which is good. So theyâre showing that and thereâs a little bit more than 50% of them all had a deal so far this year. So thatâs good. So, weâre seeing some good once again, green shoots on these reps starting to come out. We didnât on the losing of the leadership. We kept our regional leaders. And then we hired a new set of leaders below them in that, in North America. So, we have that leadership team, some of the leadership team below the main leaders are new, and they were put in Q1. So, theyâre also coming up to speed, and then they have their reps under them. But the actual leadership team thatâs running, that was the one that was there previously. Soâ¦
Jeff Van Rhee: Okay. Iâll leave you there. Thank you.
Rob LoCascio: Thanks.
Operator: Thank you. The next question comes from Ryan MacDonald from Needham. Please proceed with your question, Ryan.
Ryan MacDonald: Hi, thanks for taking my questions. Rob or John first one for you, as you think about ramping reps, can you talk about what the expectation is in terms of sales cycles? Or what theyâve historically trended as? And then is there any â are you seeing anything in pockets with whether it be an EMEA or APAC of an elongation of those sales cycles? I know youâre â I understand that youâve got new reps that are ramping, but just curious, I guess, how those sales cycles and those time to productivity are trending versus historical, expectations and whether or not the macro could be playing any role in that?
Rob LoCascio: Yes. I mean, thereâreâ¦
John Collins: Yes, I think â go ahead, Rob.
Rob LoCascio: Iâm going to say theyâre, we look at about nine â we model a nine month sales cycle. It could go out a little bit longer now, once again, itâs hard to tell on the macro, just because just to be transparent, just because of when youâre ramping a bunch of new reps, and they came at the end of last year, beginning of this year, itâs hard to see with the macro, but Iâm assuming itâs playing into something. I mean, it would be foolish to think the macro doesnât play into slowing down sales cycles and elongating sales cycles. But once again, weâre just monitoring like how well do these reps, like the new logo count once again, shows, okay, these reps are starting to deliver more than 50% of them have at least one deal under their belt. So, I â itâs just hard for us to tell cycle yet. I think by Q3, Q4 will understand a little bit better and then understand the macro impact. Whatâs happening in the macro, just on the enterprise side is thereâs a lot of layoffs going on in the enterprise customer base, theyâre restructuring, and what theyâre restructuring around is cost savings, obviously. So once again, weâre trying to play into what automation does. And thatâs where weâre really weâre going. But I, once again, I think we need a couple of quarters to see if thereâs a macro impact on whatâs going on with â in the enterprise with the restruction, but as you can see, we sign, we even had renewals and some of our very large enterprise customers like Verizon and Starz . So far I feel pretty good about that, but I assume thereâll be an impact somewhere. Itâs just â we itâs once again, with a bunch of new reps, a little hard to tell,
Ryan MacDonald: Understood, thanks for the color there. And then on the gross margin trajectory, can you give us a sense of the timeline itâll be required to sort of get that labor component of the GainShare revenue out of the P&L and then how quickly you think you can start getting to the progressing to those 80% plus target margins? Is this a fiscal year 2023 expectation? Or is this more of like a 2024, 2525 expectation? Thanks.
John Collins: Yes, so the gross margin expectation in that 80% range would be not just 2023, a little bit longer term broadly is the way weâre thinking about it now, but in terms of your first question on the lower margin GainShare components, weâre executing swiftly on that in the back half of 2022, and probably at least the first quarter of 2023.
Ryan MacDonald: Thanks for the color. Iâll hop back in the queue.
Operator: Thank you. The next question comes from Siti Panigrahi from Mizuho. Please proceed with your questions, Siti.
Siti Panigrahi: Thanks for taking my question. I just wanted to dig into the third growth driver you talked about today, is that opening your platform to third parties. Could you dive a little bit more, I understand you have partners from Tenfold and VoiceBase, but is it something you are opening up your AI messaging, and then who are the CRM vendors right now you targeting to a partner, is my understanding a lot of CRM has this solution messaging, so that will be helpful?
Rob LoCascio: Yes. So, obviously weâre, we just put into salesforce, the app stores and integration of our messaging platform into it. What you find is most â itâs not a channel of communication. If you look at messaging at its core, it itâs a way to operate the business in a digital way. So yes, if you treat it as a channel and communication, it becomes like chat. And we used to be in the chat business, but messaging provides really this digital connection to the consumer. You can be proactive over it. Thereâs a bunch of technology around asynchronous operations, and thatâs where we really shine. With said, we know over time messaging, it may become like chat. Itâs not there right now, but we knew that from six years ago when we launched it, and thatâs why we got heavy into AI four and a half years ago, an automation, the value of it is an and if I can step back for a second, when you look at the contact center, the care software business, itâs it â and you add up Genesys and Five9s and everyone else in there, itâs about a $10 billion TAM, if you add their revenues. But if you step back, thereâs close to $40 billion, $50 billion in labor. And so itâs not about the software. Itâs really about how do you take the pot of money thatâs in labor and move that and take that and we â and automate that. And thatâs the value that it provides. If we develop â if we deliver a messaging and have a human behind it, we are not reaching the goal. And so thatâs what most of these companies are doing. Theyâre providing their platforms and basically you just put more humans on it, and it costs you the same amount of money where the world is shifting is, how do we take these agents and automate them? Even the GainShare part of our business, where we provide labor and we do automation as a service is a very high value thing. Thatâs why we got into it where we take the labor where we make them builders. So thatâs the pot of money weâre going after. And thatâs why we look at this TAM is like a $60 billion TAM, but the majority of is getting rid of the labor. And that has to be the number one thing. So, if you look at most of the CCaaS players today and whether theyâre hosted or on-prem, theyâre primarily human agents, and thatâs going to change radically over the next couple years. And thatâs where weâre positioning ourselves. The second part is, we may not just, we may not care about messaging long term, as in somebody may choose some other platform, but theyâre going run our AI on it. And thatâs the value and once again getting rid of the human labor. So that could be our goal. If you â six years ago, and we launched the platform messaging, we always said, we wanted to kill voice and make a channel shift, which weâve done a pretty good job at. But obviously our goal is to get rid of the humans, and the human labor behind it. Thereâs no value in that today. And thatâs where the majority of our investments have been in the last four and a half years. So, I think that thatâs where weâll continue to operate. Thatâs why we want to take REI and move it off of our platform and let it run in many different platforms.
Siti Panigrahi: Thanks for that color. And then John, follow up to your commentary and thanks for that color on gross margin. But if I look at a EBTIDA margin, you kept it same to your prior guidance, guidance. When should we think about EBITDA margin expansion and how much, is it mostly that when you see the revenue ramp up? When we should see the, if thatâs going to float to margin or any cost cutting youâre going to do? And any kind of without guiding, like help us understand how the margin, EBITDA margin expansion we should think going forward?
John Collins: Yes. I think if you look at the implied guide on expenses, the overall cost structure of the organization is improving marketly. And to sense for where weâre going, we think as Rob described, this can allow us to produce double-digit margins at least next year, for the full year, in addition to very healthy free cash flow. So, weâre â thatâs the path weâre on, and the one that we started earlier in the year.
Siti Panigrahi: Great. Thank
Operator: You. The next question comes from Ryan MacWilliams from Barclays. Please proceed with your question, Ryan.
Ryan MacWilliams: Thanks for taking the question. Just to follow up on the last question, John. While things might look different now, given youâre exiting some of the lower quality revenues, how do you think about the normalized financials of this business? And as weâre working through our model, any guidance on how we could think about revenue growth expectations for next year? Like, could we expect to see improvement of the implied revenue growth rate exiting the fourth quarter?
John Collins: Yes, I think, itâs interesting actually, to take a look at the business on a normalized basis without letâs say the pandemic driven COVID-19 testing and the pandemic driven GainShare that that helped benefit growth over the last two years. If we normalize for that, meaning, remove its impact from last year and remove its impact from this year. For the second quarter, weâd be mid-to-high teens, for example. And for the full year, we would also be mid-to-high teens. So, I think thatâs a good way to think about our core business, and growth potential moving forward into 2023.
Ryan MacWilliams: Excellent. And then Rob, Iâd love to hear your thoughts around the agreement and partnership with Starboard that was announced in the quarter. What are some of the goals of the new operating committee that was announced as part of the agreement? Just love to hear your opinion there. Thanks.
Rob LoCascio: Yes, we obviously made an agreement with them and we are going to put a new board member on, and then theyâre going to put three people that we can select from. So weâre going to put one of their people and weâre going to start interviewing both people. So thatâs what weâre going to do and then we had one of our board members retire. Iâm not sure the operating committee, I mean, we havenât defined it yet. I guess when we get together, weâll do that. Weâre just working on interviewing and try to find great candidates for the board.
Ryan MacWilliams: Appreciate the color. Thanks.
Operator: Thank you. We have reached the end of our call today. Iâll now turn the call to Robert LoCascio for closing remarks. Thank you, sir.
Rob LoCascio: Thank you so much for listening today. And I wanted to just reflect a little bit on what weâre trying to do with the P&L. We that back in the dotcom or we were one of the few survivors and we made some radical changes. Some of you were shareholders back then, and we went from burning a lot of cash to profitability in a matter of in three quarters. And that saved u, and weâve been looking at the business as a leadership team. And what weâre looking to do now is, we feel like itâs growth is important. Obviously weâre a growth company, and this is a growth market, but I think one of the lessons weâve looked at and learned is about growth on top of a P&L that doesnât generate cash flow is not really a great company. And weâve generated cash for 20 years. Thatâs how we got here. So, we talk about it, even though weâre taking down top line revenue and we could just hold onto that revenue and keep it going. We just felt itâs time to kind of cut it loose and move forward, because this is a huge opportunity for us, as you can see all the new logos and stuff, but putting revenue on a weak company will not make for long term value. So, as shareholders, weâre all aligned with just making this a strong company. And when you look at even a lot of the peer set in cloud today, and itâs when you look at the P&Ls, theyâre all not so great. And we just donât want to be a part of that and we want to strengthen this up. So, weâre going to make some broad changes to the company, continue to do what weâve done. I think youâll see a different company on the other side of this and over the next two quarters where weâre going to focus on delivering those type of results. And whatâs in the leadership team at the company is really focused on this. Because we know we have this giant opportunity, Conversational AI is one of the biggest transformational technologies, but once again we chased a lot of revenue during COVID like everyone did, but itâs time now to just work on revenue that can help us build a stronger company in the future. So, I want to thank everybody in the company, and also Iâm looking forward to weâre going to add these two new directors, one from Starboard, one from us, and looking forward to also adding new blood on the board. And with that, thank you. And weâll see you next quarter.
Operator: Thank you very much for this conference. You may disconnect your lines at this time. And thank you very much for your participation.
