Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's Second Quarter 2020 Results Conference Call. My name is Rachel 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 from LivePerson will conduct a Q&A session and conference participants will be given instructions at that time. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Matthew Kempler, the company's Senior Vice President of Finance and Investor Relations.

Please go ahead, sir..

Thanks very much. Joining me on the call today is Rob LoCascio, LivePerson's Founder and CEO; and John Collins, our Chief Financial Officer. 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 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 in the comments made during this conference call and in 10-Ks, 10-Qs and other reports we filed 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 this release and supplemental slides, which include highlights for the quarter are available in the Investor Relations section of LivePerson's website.

With that, I'll turn the call over to Rob..

Thanks, Matt. Thank you for joining LivePerson's Q2 2020 earnings call. Q2 is one of the strongest and best executed quarters in our history. Revenue was $92 million and widely outpaced our guidance on a sharp acceleration to 29% year-over-year growth.

Revenue upside flow directly to the bottom line as we generated adjusted EBITDA of $9 million at a 10% margin. This marks not only a return to profitability, but also our first double-digit margin in three years.

Our Q2 2020 is the outcome of a strategy that was put in place over three years ago around a vision of a world shifting to conversational commerce.

What we experienced this quarter is not an anomaly, it is a clear beginning of a dynamic dramatic shift that is happening to the retail and care worlds that will be powered by digital AI based conversations.

With Live voice agents, still in work from home mode and overall capacity around 60% to 70% of what was available pre-COVID, there is a rush to the door to automate conversations at scale. At scale, we will end up automating I think around 80% of end-to-end conversations on our platform. And today, we already have customers that are on this path.

If you take a step back and ask the question, what is the advantage of speaking to a live agent over an automated agent, there is really one answer. If a brand has legacy back end systems, but for some reason cannot be accessed by a machine through APIs, then a human is need to manually access those systems.

COVID has accelerated the brands need to open those back-end systems because automation is filling in for the reduced capacity that happened when agents were sent home, and could not take voice calls in their homes for technical or security reasons.

Strategically, the market is coming to us at an accelerated rate and over the next 24 months, we will see a more pronounced shift from voice to messaging and automation. Already nearly 70% of messaging conversations on our platform rely on some form of automation.

Our capacity to power this type of AI automation at scale starts with the most competitive advantage we have in the market, which is the accumulation of data -- our dataset with more than a billion conversations across verticals, geographies and use cases. We are now rapidly expanding that dataset.

In the second quarter alone, we ingested over 100 million individual messages a month into our intent analytics engine up from just a couple of million a month at the year-end 2019. We use that data to develop services and algorithms that automate conversations at scale.

In fact between December 2019 and June 2020, our customers had doubled the number of monthly conversations on our platform that were powered by bots and automation.

Equally important, nearly 50% of the conversations that were powered by LivePerson bots were fully autonomous, meaning they required no human intervention and that is up from 25% at the start of 2019; where are these automations are covering simple or complex use cases, the fact of the matter is that they are providing an enormous benefit to our customers by eliminating wait times for their consumers and removing human capital costs from the contact center.

We believe that AI is going to win the day in the conversational commerce space. We have built a powerful set of tools to lead this market. Today, we are announcing the general availability of our newest platform called The Conversational Cloud. This platform combines all of our AI tools and will solidify our platform strategy in the AI space.

The Conversational Cloud has four core foundational components, intent manager, conversation builder, functions and intent analytics. Let me do a deeper dive into a few of the key parts of the platform. The key to AI is being able to identify what we call intents or the phrases from which the consumer expresses their goal.

We recently developed a powerful tool called Intent Manager, which enables the machine to recognize intents real-time at every step in the conversation, so they can be classified and prepped for automation. We augment this with new capabilities in our live agent workspace, that enables agents to tag intents during live conversations.

And once intents are identified, they are moved to Conversation Builder, where bots are then created.

Conversational Builder change the paradigm for bot development by creating a low code scripting environment that empowers technologists as well as non-technical people like contact center agents to easily build, deploy and manage automated conversations at scale.

The Conversation Cloud was in beta over the past several months and during COVID, we saw a dramatic increase in the use of intent manager and Conversation Builder by our enterprise customers. The other power tool is called Functions.

Functions enables developers to connect third-party systems and data sources and also enable custom development, real-time actions between systems. Functions is at the core of scaling high quality automation because it enables complex back-end transactions to tie into the conversations.

The Conversational Cloud platform was organically built from the ground up and all the components are seamlessly integrated and work with LiveEngage, which as you all know is our leading messaging platform. Our recent sales activity validates the undeniable march towards automation adoption and a need for the conversational Cloud.

Q2 was among our strongest quarters ever for signed contract value. Highlighted by the signing of 7 seven-figure [ph] deals and several instance where opportunities closed in weeks instead of months.

We also continue to see adoption curves compress as customers first sought to triage the COVID-19 crisis and then began shifting to a more strategic view of how they want to operate in the new normal. A prime example is the seven-figure up-sell we signed with one of the 25 largest banks in the world.

Like many customers, this leading brand was overwhelmed when the crisis hit, and agent capacity plunged and wait times on the 800 number of skyrocketed.

They turned to us for guidance and we quickly went into action, helping them more than triple the number of agents on messaging and move towards a 10-fold increase in platform volumes, but the crisis mitigated we announced strategic discussions that we expect or is on another seven-figure up-sell as the company adopts a plan to become a true conversational bank by expanding automations and going wider on messaging.

Another great example is a win with the leading Italian broadband provider that nearly tripled volumes on our platform during the crisis as it moved from voice to messaging and AI in order to better serve consumers.

This customer launched automations across both care and sales, citing that the combination of AI over messaging creates a new paradigm to customer relationship management. As our used cases expanded, they noted a reduction in phone call volumes, quicker response times for clients and the highest NPS scores, we've seen in the last six months.

NPS represents how well the customer feels about the brand.

In the second quarter, we also opened up the government vertical, working with one of our partners to sign a first state -- US state contract faced with unprecedented call volumes as unemployment spiked, the state quickly moves to help its constituents by deploying web messaging and voice-to-messaging deflection.

Within just the first weeks more than 30% of the volumes have shifted from their 800 number to messaging and messaging agents managed conversations at a two times to three times productivity of voice agents. Now the state is building out automations, deploying proactive messagings for direct outreach to impact its citizens.

Finally, I'd like to hide our groundbreaking work with Foodservices where Chipotle, one of the largest quick service restaurant chains of the world launched Pepper, a conversational AI customer to take orders directly through Facebook Messenger, we're seeing a lot of action from traditional or other traditional brick and mortar stores where they want to provide contactless commerce, curbside pickup and virtual store agents.

It's actually an area that retail wasn't a core area for us, but we've seen tremendous amount of demand now in that area as consumers can't walk in stores, we're creating now the flows to create that experience at least they can come and get stuff delivered to their cars and curbside pickup.

In addition to successfully or closing out opportunities in our pipeline in Q2, we also created and progressed our sales pipeline at a rapid pace, leveraging the powerful combination of a matured direct sales force, a new partner channel and effective digital marketing engine.

We're still testing and learning, I can confidently state that our go-to-market teams have adapted well to this new virtual selling world.

For example, in place of our in-person customer marketing summit in Q2, we launched series of more targeted virtual events, each hosted by a flagship brand demonstrating thought leadership in conversational commerce, where we had initially planned for one of these summits per brand, the guests list were oversubscribed requiring us to host multiple encore events.

With record Q2 results in the background, elevated platform volumes and a very healthy pipeline of opportunities to pursue, we are entering the second half of 2020 in a strong position, and are raising guidance accordingly. We are now targeting 2020 revenue in a range of $357 million to $361 million, which is 22% to 24% year-over-year growth.

Likewise, our success in capturing operating efficiencies through internal automations and tightened controls is creating a more scalable financial model where we can continue to invest in key growth drivers while still enabling revenue upside to flow to the bottom line.

As a result, we are increasing our adjusted EBITDA guidance to a range of $16 million to $19 million, which is a marked improvement from breakeven guidance at the start of the year. To highlight the quarter's key accomplishments, the second quarter once again proved the adaptability and strength of our business model.

In an uncertain macroenvironment LivePerson is in a desirable position of raising revenue guidance and once again, increasing our profit target.

This improving outlook isn't simply fortuitous, it is the result of LivePerson setting a long-term strategy and vision around conversational commerce and AI and then investing in and executing on its strategy to put our company in the right place at the right time with the right platforms.

I also firmly believe that the inflection we are seeing and the shifts that are now happening in the contact center are going to be permanent. Once brands capture the lower cost, improve customer experience and increase scalability of automation they are unlikely to backtrack to expensive, inefficient physical labor and voice calls.

With that, I'll turn the call over to John to provide an operational update and more color on our guidance.

John?.

Thanks, Rob. I too couldn't be more pleased with how well LivePerson adapted to the new environment and capitalize on the demand inflection for our Conversational Cloud. LivePerson sharply accelerated revenue growth and delivered better than planned profitability and cash generation, as the company executed on all key facets of its business.

We built even stronger relationships with our customers by expertly guiding them through the crisis and helping them to maintain business continuity through a combination of AI and messaging. This strategy drove the revenue retention rate above our target range of 105% to 115%.

We increased and progressed the sales pipeline by successfully adapting our go-to-market strategy to virtual selling and enhancing our partner channels. As Rob stated contract values signed in the quarter were among our highest ever.

We enhanced operational leverage through increased efficiencies from automation and healthy rigor around expense controls and we dropped the majority of incremental revenue straight to the bottom line. This resulted in a $15 million year-over-year increase in adjusted EBITDA in the second quarter.

We seamlessly transition to work from home organization, maintaining strong productivity and alignment across regions and teams. The adaptability of our people and business model helped us capitalize on the opportunities that drove record results in the second quarter.

As for those results, accelerated adoption trends for messaging in conversational AI increased revenue to a record $91.6 million, which was nearly $8 million above the midpoint of our prior guidance range.

Approximately 60% of the upside was fueled by our gain share models, which as a reminder, are typically the first contract types to monetize increased usage of our platform. The remaining 40% came from higher overages, favorable timing of contract signings, the consumer business and various other revenue streams.

In terms of growth, revenue accelerated 29% year-over-year, nearly doubled the rate of the second quarter last year and up 17% sequentially. B2B revenue grew 30% year-over-year and consumer grew 24%. Within B2B hosted software grew 35%, while services grew 4%. The US grew 44% year-over-year and accounted for 65% of revenue.

International grew 8% year-over-year and accounted for 35% of revenue. From an industry perspective, consumer and retail followed by technology, financial services and telcos made the strongest contribution to year-over-year growth. However, we saw increased demand across the board.

All of our verticals reported higher monthly volumes in June than pre-pandemic. We signed 7 seven-figure deals in the second quarter and then 134 deals in total. Consistent with the strategy discussed in the prior call, in the second quarter, LivePerson continued to prioritize helping existing customers successfully navigate the pandemic.

The focus on securing our base yielded a high return on several key dimensions. Conversation volumes and LiveEngage increased more than 40% since the pandemic began in March with bot-based conversations upgraded in 50%.

Revenue retention for enterprise and mid-market customers exceeded our target range of 105% to 115%, trailing 12-month ARPU increased greater than 25% year-over-year to a record $395,000. Existing customer deal counts increased nearly 30% year-over-year driven by doubling in the number of enterprise deals signed.

As for new logos, a 35% year-over-year decline in closed deals was in line with our expectations. Although we brought in a number of high-profile new logos, including a multi-billion dollar beauty retailer, a Fortune 500 consumer packaged goods company and a top 10 automotive OEM.

Our focus in the second quarter was on helping existing customers navigate the crisis. Looking ahead to the third quarter with our customer base confident and secure and considering the strong pipeline generated in the second quarter, we anticipate a rebound in new customer activity.

Moving on to the bottom line, as with revenue, adjusted EBITDA of $9.3 million exceeded the midpoint of our guidance range by nearly $8 million, reflecting the adaptability and scalability of LivePerson's operating model.

The profit upside was fueled by the combination of strong revenue outperformance along with rigorous expense discipline and efficiency is driven by internal automation. The strong execution also carries through to cash generation and we ended the quarter with a cash balance of $173 million, up $2 million from the prior quarter.

As I engage more closely with my colleagues across the business, it reinforces my confidence that there is meaningful room to build on this performance over the intermediate to long-term. As previously discussed, Rob brought me in two quarters ago to modernize the CFO role by applying the lens of data scientists to our operations.

My key focus areas are automating repetitive low value work and leveraging AI to enhanced decision-making under uncertainties. We are steadily progressing with initiatives that we're moving entire production effort from internal teams and field support, accounting and FD&A.

For example, we recently delivered systems in financial planning, commission calculations and product pricing and sales proposals that not only enables us to scale more efficiently, but also give people their time back to focus on creative and strategic work, and in the case of our sales team more selling.

A valuable byproduct of these new connected systems is clean standardize and readily accessible operational data. This data feeds more sophisticated algorithms that enhance the quality and timeliness of actionable information, which supports decision-making and increases the predictability of our business.

For example, we have built predictive algorithms that can forecast quarterly contract signings and per Rep quarter attainment more accurately than our financing field work. Tools such as these gives us an ability to plan and react far more nimbly than we have been able to in the past.

With this positive backdrop, let's turn to the outlook for the remainder of the year, For the third quarter, we anticipate revenue in the range of $92 million to $93 million, representing 22% to 24% year-over-year growth.

For the full year 2020, we are raising guidance to a range of $357 million to $361 million or 22% to 24% growth up from previous guidance of $340 million to $355 million or 17% to 22% growth.

The upward revision to revenue guidance reflects the combination of strong year-to-date contract signed, better than expected conversational volumes on our platform and a robust pipeline entering the second half of 2020.

We continue to balance our enthusiasm for what we see as a demand inflection for our platform with a healthy respect for evolving macro uncertainties. As for profitability while most companies view investing in growth and driving higher margins as mutually exclusive, I think we're in a position to do both.

We've made rapid a meaningful progress on the automation front and raised the bar for budgetary vigilance without reducing investments in core growth drivers, including AI, product innovation, go to market capacity and platform infrastructure. As a result, we are guiding for third quarter adjusted EBITDA in a range of $5 million to $6 million.

For the full year 2020, we anticipate adjusted EBITDA in a range of $16 million to $19 million, up from prior guidance of $3.5 million to $10.5 million. We also continue to target cutting cash burn in half in 2020 and ending the year with a minimum of $135 million of cash on hand. I'll close by summarizing a few key points about the business.

LivePerson is benefiting from a demand inflection as leading brands leverage our platform and expertise to power remote agents in automation. Our growth trajectory has improved.

We outperformed second quarter expectations and raised revenue guidance for 2020 due to the combination of a surge platform volumes, compress adoption curves for our technology and strong go-to-market execution. We've also accelerated our path to profitability and sustainable cash generation.

The early, but impactful progress we've made on automating G&A and sales support functions has helped us scale efficiently, raise profit guidance consecutively and plot a long-term course to reduce G&A expenses to single digit percentage of revenue. With that, I'll hand the call back over to the operator to take your questions..

[Operator Instructions] We do have a question from Siti Panigrahi. You're now live..

Hi, this is [indiscernible] in for Siti. I just wanted to ask about sales reps from last year could have almost doubled the number of sales reps, why don't you talk about the capacity to ramp so far, where your expectations of the sales reps saw productivity as in the second half? Thank you..

Sure. So in terms of [indiscernible] carriers, we are flat relative to last quarter in enterprise and expect to approximately remain around that number throughout the remainder of the year. On terms of their ramped ability, as we previously called out, we have about 80% of our, the capacity we had in 2019 ramps as of the end of the second quarter..

Thank you..

Next one on the line is Arjun Bhatia from William Blair. You are now live..

Thanks for taking my question and congrats on the great quarter. John, maybe this one's for you, the full-year guidance calls for additional upside in the second half of the year relative to what you have previously thought and the range is also meaningfully narrowed.

Can you maybe just give us a sense for where you're seeing the most increased visibility that gives you confidence in that guide, relative to what you knew 90 days ago? And how much of that is -- are you counting on the momentum of gained share continuing versus some of the overages and upsells and contract values that are going to take place in the second half?.

Sure. So with regard to gain share, it's definitely a key component, about 60% of the upside is due to our gain share models, and as discussed last quarter, the gain share models enable us to recognize revenue almost immediately as volume increases. So we kind of expected some of that as volumes continue to increase during the second quarter.

Over time of course though we expect elevated volumes to translate into upsells for other contract types. With regard to the remaining balance, the 40% of upside is really tied to a variety of different dimensions, including overages and other contract types, the timing of bookings in the quarter, the consumer business and other revenue streams..

Got it, thanks. And then Rob maybe this one is for you.

But the launch of The Conversational Cloud, can you just maybe give us kind of the objectives of that? Is it to democratize AI so the customer service agents can use it and introduce more automation into messaging volumes than there is today? just give a sense for what's different and what the main objective of launching this business solution?.

Yes. So when we look at LiveEngage, LiveEngage is really about messaging and the messaging endpoints like Facebook Messenger and Apple Business Chat and voice to messaging, so we have that. But what we're seeing is there is a lot of, a lot of focus on how do we automate conversation.

So we built a set of services and put them together in The Conversational Cloud, which include Intent Manager, which is a new service to ingest transcript data and then basically automate looking for intents and goals of consumers and then once again you can democratically talk about -- democratizing bot building with conversation builder.

So -- and then there is the functions capability to integrate into the back-end systems and that pretty much gives you what you need to really scale automations, whether you're technology group or you're an agent group and so we put it together in one single platform with one single unified experience.

So you can create an intent and then intent flows straight into conversation builder and then it's launched, and then you can analyze that conversation in the automation of it. So the idea was to really take a harder position on AI and automation and then separate out the Live Agent tool set, which is really a lot about LiveEngage..

Perfect, thank you and congrats again..

Thank you very much..

Next one on the line is Peter Levine from Evercore. You are now live..

Great, thank you for taking my questions and congrats on a great quarter. So just two from me.

So the seven-figure deals upgrade you had in the quarter, so how do those deals come about? How long were they in the -- I mean how long was this deal cycle -- or how long -- when did these deals really -- is a pipeline and was it more upgrades towards higher usage or was this kind of these companies deploying messaging across other business units?.

Sure. So it's kind of a mix of all of the above. Certainly our strategy is to land and expand these big accounts. And so for the seven-figure deals within the existing base that's precisely what's happening.

In some cases we are renewing at higher baselines of volume, in other cases, we're adding additional products from The Conversational Cloud and as you said, expanding into new departments and verticals within the enterprise..

Great. And then maybe just to piggyback off the last question, can you maybe just talk about how you're going to monetize Commerce Cloud? Is it -- is it a per rep seat charge, just curious to know how that differs from customers on LiveEngage? Thank you and congrats on the quarter..

So currently we have certainly room to move with our pricing structure. But at the moment, it's not a per seat sort of structure, it's more of a cost per interaction structure. So it's driven by increased usage, right.

And we have -- obviously, there is great demand among the customers to tap into various databases, the API to use our functions as a service product feature and these have a charge associated with those as well. So it's really usage-based model, not a seat-based model..

Thank you..

Next one on the line is Richard Baldry from ROTH Capital. Please limit to only one question and one follow-up. You are now live..

Thanks. I wanted to note that, it took you 7.5 years from your IPO to increase revenue to the same amount, you did in the last 90 days.

So against that backdrop of sort of curious, what are the challenges to rapid scaling in a remote working environment? So there's not as much face-to-face as their challenges to hiring educating, can you may be talk about what you see in that given what looks like a pretty strong acceleration to your growth?.

So, if I unfold that a little bit. First is, we are not going to return to offices. So we have decided as a company to change how we're working and obviously, it's working quite well for us. So when we look at sales activity and marketing activity on the last quarter's call, I said I wasn't sure how things would play out.

Our marketing events, the face-to-face events mean a lot and then they drive a lot of deals closed. But we are seeing is that the demand for our products and our platforms, it's just outweighing the need to be face-to-face and we have such good referenceable customers in our base. As you know that they're doing webinars for us and stuff like that.

So we feel very good about where we are and this concept of -- I don't want to say distributed work forces, because we've been distributed, we've been globalized since 2000, Israel was our tech up at one point, but we're just thinking of working at different way. We can go after, different set of employees. We can go after different set of customers.

I don't know, things are just moving quite well for us, so we figured, let's continue operating in this mode and I think you're going to see a lot more innovation on the marketing side also moving forward because we don't have the face-to-face, we're learning a lot about how we can really engage our prospects.

And as you remember, we, at the end of last year we went into a partner-focused strategy and that's played very well because our partners have their customer basis and we're able to access them. So I think strategically we just kind of nailed it on the go-to-market with partners and the right product mix.

So, the launch of The Conversational Cloud, it's all kind of playing out. So....

A follow-up on that change and how things have to be done. When you look into the pipeline, have you seen any noticeable names that might have been people you wanted to get into, but were maybe resistant prior, but recognizing that things are changing or willing to open their doors like, have you seen some early indications of that success? Thanks..

Yes. The thing that's just been very exciting is retail. And retail was never really a place for us to play because it's usually low-margin products, and they don't want to put labor in it.

So now that we come to the table with automations and people don't go to stores, they can enter stores as much, there is like a whole transformation of the retail world. We've been piloting with one of our big box home improvement companies, one of our customers of virtualization of their stores.

So there's a store in New York, now you can walk into, every product there is a QR code, you hit the QR code with your phone and you start messaging in automation or remote agent who is offshore, who is actually in the Dominican Republic and they are servicing a store in New York.

So we've got -- and we've been running it for a couple of months and it's been doing very well. Consumers love it. They don't have to go face-to-face with somebody works in the store. We're doing pick up at the curbside with this technology too. So, I think the retail for us is something that is really exciting.

Obviously, Chipotle, we announced what we're doing with them. So there's a lot of action in there right now, more than we've had in the past because of the dislocation of that business and they're looking for something to change the game..

Thanks, congrats, Rob..

Thanks a lot. Thanks..

[Operator Instructions] Next one on the line is Steve Enders from KeyBanc. You are now live..

Hi, great, thanks guys. I just wanted to get a better understanding of what you're seeing on the gain share side of the business and how you are incentivizing reps to push more and more of these agreements? It seems like they are accelerating exciting revenue for you..

Yes. So, maybe I can break out gain share a little bit, it used to be something different in the past than what it is in the present and I think it's going to unfold that.

The gain share business is really way for us to go into a customer and say, look we have agent capacity, so we bring a partner who has live agents, but -- and we'll handle all messages right off the bat, so we can get up very quickly and we use our platform the best. But actually what's very interesting is, we're not competing as like a BPO.

We're trying to get labor business. Our goal is to take that labor and this is very specialized labor that we've trained and they work on automations.

So if you look at all the gain share programs, we have, the goal when we walk indoors [ph] like, look we're going to automate 80% of these flows, but it starts with human agents taking the messages and learning about the intents and then using toolset to automate. So we have a huge competitive advantage.

We start out, let's say at an equal rate of a BPO on a cost per message, but we'll drive the cost down over 24 months to half that price and then over 36 months, a quarter of the price, because we'll automate it and then we're getting more volume and so that's what's exciting about it because it fits to our strategy.

We're not looking for live agents here. They are only being used to create automated conversations..

Okay, great. That's helpful. And then just want to get a better sense of it does sound like you guys are saying, quite an uptick in usage.

Just trying to get a better sense of what you're seeing from customers coming back to the table and beginning to renegotiate some of those contracts and better handle some of that uptick and usage that you have seen, when we start seeing that flow to more revenue?.

So we highlighted a couple of I think key wins in the prior quarter and that general trend has continued and that is, we've historically had enterprise license agreements that are essentially all-you-can need contracts from a usage standpoint and we've been rolling those over into cost per interaction contracts in over the course of upselling those customers.

And so, given the increased baseline in volumes, we've had a lot of success in that particular strategy. On top of that, of course, we have many in the base on CPI contracts today and they were renewing at higher baselines of volume as you might expect, considering the volume increases that we've telegraphed..

Okay, great, thanks. That's really helpful..

Next one on the line is Jeff Van Rhee from Craig-Hallum. You're now live..

Great, thanks. I'll add my congrats. A couple from me guys.

To the new deal flow, I think you had messaged you kind of hit your head down on dealing with existing customers and migrating existing customers, can you dive into that just a little more precisely, kind of how it progressed month-by-month from sort of pre-COVID read on through to where we are now in terms of just exactly what was going on in those new deals? Were the deals moving at normal pace? Was it just a function of you looking elsewhere and now refocusing back on those deals? Just trying to better understand the underpinnings of your expectations for those deal counts to come back?.

Hey, Jeff. So the story is really what we described in the prior call and that is that we had an intentional strategy to focus on the base. As I described in my prepared remarks, we needed, there was a need for us to help guide them through the crisis to maintain business continuity and high levels of customer service.

And I think it's important to note that that strategy really drove a 30%, sort of a 25% increase in ARPU and higher revenue retention than our target range of 105% to 115%. So, I'd also add that existing customer deals were up 30% year-over-year as a result of that strategy.

So we're really, I would say a strong quarter on a lot of dimensions related to deal counts. With regard to new logos, we had some strength in various verticals and retail, I would say is clearly one of those for the reasons that Rob described in the prepared remarks and an answer to a prior question.

I think considering the sort of secure base we have now and the amount of ground we've covered already in addition to the pipeline we generate in the second quarter and the amount of movement, there has been in that pipeline that we would expect new logo activity to pick up meaningfully in the third quarter.

As to your question on, whether things were slow, I would say, certainly there is -- there were slow, but not canceled and some new logo deals were certainly pushed into the third quarter, which is another reason why we have increased confidence that new logo activity will pick up at that time..

Okay.

And one just brief follow-up, the gain share, where is it now as a percent of revenues and just have a sense of magnitude, roughly how many customers are on those kinds of programs, [indiscernible] your programs?.

It's about 15% of revenue at the moment and I would say generally dozens of customers..

Dozens. Got it, okay. Thanks for taking my questions..

Next one on the queue is Mike Latimore from Northland Capital. You are now live..

Thanks. Yes, awesome quarter.

I guess just two things, one is, can you quantify maybe how much the pipeline has grown since the start of the year? And then two, you've mentioned partners a few times, maybe give a little more color on how partners are contributing to the bookings in pipeline now?.

Yes. So pipeline growth entering the second quarter was -- as we previously described, close to a record. And we've continued to develop a really strong pipe throughout the quarter in addition to progressing that pipe as previously described. So we're really happy with the health of the pipeline at the moment..

Great.

And then, on partners; can you talk a little bit, how are they contributing to bookings in the quarter and the pipeline?.

Yes. They really contributing on two different dimensions. So one would be, we have obviously a lot more boots on the ground through the partner network and that's allowing us to tap into those partners existing base of customers. They are also helping us importantly on professional services work today.

So that's part of the strategy that we have to get leverage on the model through partners, both additional reps in the field and support for the low margin professional services work that we've historically had to do ourselves..

Did they drive any of the big deals in the quarter?.

They're definitely driving deals. This quarter, not -- they're not responsible for the 7 seven-figure deals that we discussed..

All right. Thanks..

Next one on the queue is Sterling Auty from JPMorgan. You are now live..

Hi guys, this is Matt on for Sterling. Thanks for taking the question.

So in terms of the cost savings on the EBITDA margin, how much of the cost savings from lower expenses do you think you're going to reinvest in the business and I'm really asking in context of the previous 7% to 10% EBITDA margin guide? How do you think about the next couple of years out in terms of the EBITDA from where it finished this quarter?.

Well, we won't be commenting on a couple of years out or 2021 during this call, but I think it's implied in our guidance that there is some reinvestment back into the business that we're contemplating in the third quarter given the step down in adjusted EBITDA relative to the second quarter.

And as I had previously suggested, some of that is going to support our infrastructure. After all, we have record volumes on the platform and those continue to be strong, and so there is a need to reinvest to ensure stability and that we have a high level of service for our customers.

We're also investing in kind of the core growth drivers of the business, which include engineering, science and go-to-market capacity. But again I would say that the magnitude of that investment is reflected in the guidance..

Got it. And then one follow-up for me.

In terms of the 50% of conversations that are now fully automated, how much of the ARPU increase is coming from customers adopting more automation?.

So in terms of ARPU, it's obviously driven by the base and as we've said, the base is adopting automation at really unprecedented levels relative to our history. So clearly that is driving increased ARPU..

Got it, thanks guys..

Next one on the line is Koji Ikeda from Oppenheimer. You are now live..

Hey, guys, congratulations on a really, really great quarter. I just wanted to ask a little bit on the back-office automation strategies. It sounds like they are really beginning to take hold out there, especially in the finance department, automation and with our sales department automation too.

I was wondering if you could provide any high-level commentary on how we should be thinking about the ability to productize those back-office automation technologies and when we could start seeing those being introduced to the market?.

Hey, Koji. So I would love to give you an answer on that and it's certainly on our radar. But it's not something we're prepared to put a timeline on at the moment..

Okay, got it. And then, just one follow-up from me. During the quarter, you did talk about some contract renegotiations.

I was wondering if you could put a magnitude on the upside of the contract renegotiations in the quarter due to customers that were may be coming up or bumping up against the overage threshold this quarter versus maybe years past? Thank you for taking my questions..

Yes, the short answer to that question is that there is a distribution, right and summer falling throughout the distribution this quarter and that would include in the seven-figure range..

Next question is from Jonathan Kees from Summit Insights Group. You are now live..

Hello, can you hear me?.

Yes..

Okay, super. Didn't think you could for a second. I'll add my kudos to the results to the great quarter. I wanted to ask first kind of I guess a follow-up. Last quarter you talked about your SMB business about 15% of your revenues there was afflicted by the COVID.

I guess with this quarter you're seeing, you're seeing strength across all verticals, all industries here.

I wonder if you can give some more color in terms of that, especially for the afflicted industries they are back to normal, are they -- have they normalized in terms of their spending patterns? It's seemed that they have rebounded and that the bottom has been reach and that it's been improving every month, but just, yes, some more color in terms of the impacted industries from COVID?.

Yes. So I think the one thing that we've recognized was, we didn't have to talk about customer is not paying us or customers defaulting or they're going out of business and I mean this may be bold statement by -- if they're on our platform, it means there in the future of trying to transform their business anyway.

So I think even the airlines that we have on our platform they're doing a lot of work on the platform now and to automate and change the game.

So unlike other platforms where I think they are kind of the past of how you engage with the consumer, the ones that are on our platform, they're paying us, and even if they're SMB, they want to have this relationship and create these conversations at scale -- some scale, and have a deeper relationship.

And we're even -- we're investing in some more platform capabilities in the SMB area because we see this group really want to get close to their customers, especially if they have stores and stops and people are now walking into the local stores. They want to have a conversation with them and stay connected beyond the website and a physical store.

So, I just think we are seeing good stuff up right now across the board and people on our platform are just transitioning, their businesses as they're transforming..

Okay, all right. And I think that was helpful when you said they are not asking for payment deferrals like in the previous quarters. So that's great. My follow-up, I guess is also relate to last quarter. You brought in a new one, EMEA had from sales force. You talked about for this quarter, International grew 8% year-over-year.

Just wondering like when you expect international to start picking up, it's decreased last quarter in terms of year-over-year growth when you see the impact in terms of the new EMEA head and the efforts there?.

I mean, they did a very good job. Sorry, John. Go ahead..

No, go ahead, Rob..

No, John. You go first..

Yes. Bookings were actually ahead of schedule in EMEA, while there is a slight step down in revenue, we expect that given the changes that the new leader is making some additional capacity, we have onboarded that, that we're going to see the results of that investment play out over the next couple of quarters..

Okay, great. That was helpful. All right. Thanks gentlemen..

Thank you..

Next one the queue is Zach Cummins from B. Riley FBRs. You are now live..

Yes. Hi, good afternoon. Congrats on a strong quarter and thanks for taking my question.

Focusing on the uptick you've seen in conversational volume of 40%, since the onset of the pandemic, can you give us some insight into expectations for conversational volume as we go into the second half of the year? And Rob, can you talk about maybe investments needed to be made in hosting capacity for this uptick in volume?.

Yes. So we continue to see growth. So growth continues up week-over-week, month-over-month, so we have that massive 40% and then we're continuing to grow not at that rate, but still going up quite nicely. We are looking to add public cloud capacity. As you know, we run our own cloud around the world because of security of data and all that.

But we need to supplement our clouds with public clouds. And we'll be choosing one of the big public cloud providers shortly. And then we'll get more capacity because, we -- to ramp at the level that we're seeing, ordering a hardware and putting it into cages and everything, it's just not efficient.

And we want more flexibility to handle the spikes we're seeing. What's very interesting in the spikes we're seeing, they're very different than the past and this goes back to automation.

Basically our customer in the past would sign up and say, I'm going to put 1,000 agents on your platform, we know 1,000 agents can generate X volume, but today, they get our platform and I saw this there's a customer down in South America, who is a logistics company, I don't even, I don't know who they are.

It's not a known name to us, but they're a mid-sized level logistics company in South America and their volume is in the top 10 or so of our volume, because they're running a tremendous amount of automations around shipping. And so they don't have a live agent tool. They just have a bot agent pool and it's driving so much volume on our platform.

So what's happening now is, whether it's a large telco or mid-market doesn't matter, they drive these huge spikes in traffic. And we don't have a lot of ways to control it and we don't want to obviously put a cap on it. So we're focused on be able to spike capacity with that.

So in the next quarter or so, we'll be talking about what we want to do with public cloud capacity and adding it in and then we'll add it in and then I don't -- we're not going to do a massive migration, putting everyone on that.

But we'll add it in and then start migrating customers on to that or pieces of their business on to that, as we move forward..

Understood. That's helpful.

And then just the other question for me is, can you talk about some of the opportunities into these newer verticals? I mean, specifically on the government side with you breaking into there with a new Statewide Contract?.

Yes, I mean, they're obviously between unemployment insurance and there's a lot going on with COVID still testing and government. And they had to fire up these contact centers and they tried to do with human labor, and they just can't -- they can't hire people quick enough.

So, with one of our big partners, we fired up with one of the states on the Northeast, their whole response to unemployment benefits. And so, I think we're going to be we'll be doing a lot more with this partner in that area, and we're seeing more demand around used cases like that. So that's quite exciting.

Like I said, the retail vertical is going quite well right now. Telco verticals -- the telcos are really doing quite amazing work on transitioning a lot of their volume into automation.

So we're seeing that with our large telco customers, but sort of across the board, there's a lot of interesting use cases that we're doing right now around different verticals..

Great. Well, thanks again and congrats on strong quarter..

Thanks a lot..

Next one on a queue is Mark Schappel from Benchmark. You are on live..

Hi, good afternoon. Nice job on the quarter..

Thank you, Mark..

My question for you.

Following up in the prior question on your international business, is the slower growth you're seeing overseas due to just internal operational issues you're having or is Europe just behind the curve on messaging and automations?.

Yes. We just felt it was a leadership issue and things got a little slow over there. But it's not - the demand in that market over in Europe, Asia. Now we also have feet on the ground in South America. But the new head over there, they exceeded their bookings numbers for Q2. So it came in and I think he's going to have -- it is an impact player.

But no, Europe's not behind, in some cases Europe's way ahead of us, because there's a lot more competition in markets. Like telcos in Europe, there's a lot more telcos competing, versus we've got now three in the US. So there's a lot of like, they always want to beat each other out in the last five years, I've seen a huge shift.

So we should start seeing in the upcoming quarters a return to growth there. And obviously the U.S. market is growing above 40% and they're doing very, very well. But we should see the same sort of growth, I'd like to see the same growth over in Europe and beyond..

Okay, great.

And then shifting gears a little bit, with respect to the Conversational Cloud platform that was announced, it sounds like there's some meaningful customer benefits in the solution, but what are the benefits to LivePerson per se?.

Yes. The benefits are the win -- the win in conversational commerce, which is our strategy, which is we believe that commerce will transition from e-commerce, the conversational commerce, that will be driven by automation, and the scale of automation. It will not be driven by human agents messaging and chatting.

And so for us, it allows us to tap the volume that's out there, I can talk about retail, like we're tapping volumes of conversations in retail that we weren't really after before, but that will move from e-commerce to conversation commerce. So that's what's it's going to do. This is what we saw in the quarter.

It drove really the results we saw in this quarter and it's going to drive the future of our strategy. So it's basically what I say is the foundation for -- again this is a multi-billion dollar business in revenues..

Great. Thank you. Appreciate it..

Thank you..

For the next question, we do have Ryan MacDonald from Needham & Company. You are on live..

Hi, this is Alex on for Ryan. A few weeks ago, the company discussed moving away from office centric workplace. And you mentioned that it costs approximately $10,000 per employee per year to be in a traditional office.

So what percent of the workforce do you expect to remain working from home and then how should we think about those cost savings going forward?.

So yes, so just to put some color around it. Out of our 1,200 or so employees, half already working in their home before pre-COVID. These are field facing people. And so there's about 600 that were working in offices. And we spend about $10 million a year on -- $10 million to $12 million a year on office space.

We are now working through with -- as group internally of employees that are working to create the frameworks for operating in this environment without physical office space. Now, well, probably, we're going to push down a certain amount of money into employee's hands, and then let them to decide what they want to do.

Like they may as a group, maybe six of them want to get together and for the next six months, they're going to have an office that we work or something like this for maybe one person says, I want to work three days a week in some sort of physical location and then I want to be in my home.

And that's where I think it's going to be it's much more of a flexible environment for people to work. But we're working on that right now. So I don't think 100% of the cost savings will come back. Right now, we want to take that budget and put it in the hands of our employees to just operate the best they can be and it's challenging still.

Especially people have families and the kids are at home, single people who are in small apartments, but we're seeing a migration right now. Because we made a commitment, this is what I think's important. We made a commitment not to go back to the office. I'll tell you why we did that.

I don't like false hope and telling our employees to hang on for until September, then January. We're not allowing them to make the choice that's best for their life and we found there are people living in cities who would move out of a city and go live somewhere else in the world.

If they weren't thinking we were going to open the office again, and we're not. There is no way to get back unless we have a vaccine. And we're not kidding ourselves about social distancing. So it's opened up a whole world of thought about also recruiting, you can find the best people from different places in the world.

And so I'm pretty excited about it. And it's not really a cost savings measure right now. It's more well probably put a fair amount of that money back into the employees to make this work. And so that's how as shareholders, we should look at it today..

Okay, that makes sense.

And then will that result in any one-time charges for early lease termination?.

Potentially, we're negotiating with our landlords. The good thing is, we don't have -- first of all, it's just to put out that our landlords cannot make our offices safe. And that's the problem that they have built these offices that are not allowing us to come back to work and be safe.

And they're not willing to put money into offices to make them safe, and they will figure it out one day, but today, they just want us to pay and go back and potentially harm our employees, which we're not going to do.

So, we're negotiating with them, but one of the things is, I got personally, we got back in 2001, we were long on real estate and it almost hurt the company -- almost bankrupted the company, and we never went long on real estate since 2001. So we don't have some big tower.

We don't have a lot of exposure with something we built this giant thing, we don't have that. So we're negotiating out of our leases as we speak. But like I said, our landlords cannot provide a safe space and we're forced to go and now to take alternative measures so....

Okay, thank you..

Thank you..

Next one on the queue is Brett Knoblauch from Berenberg. You are now live..

Hi, guys. Thanks for taking my call. Hope you guys are all well. Maybe one for John. Can to talk a bit about the mixing of news? It looks like B2B cloud hosting really accelerated in quarter relative to services.

Is that dynamic something you would expect to continue for the remainder of the year?.

Hey, yes, it is because of the strategy we have to get more leverage in the model through partners. We expect that they will handle increasing size of our professional services work going forward..

Okay, perfect. And then maybe one just on the payment related investments you guys highlighted in February.

Yes, maybe an update there, how is it progressing and what percentage of those investments have been completed in the first half thus far?.

Yes, so we have begun some testing with live customers, with the payments products and we'll be able to release more information as we previously discussed after the third quarter..

Okay, perfect. Thanks so much..

Next one on the queue is Samad Samana from Jefferies. You are now live..

Hi, good afternoon. Thanks for taking my question. I'll echo the strong quarter comments. Most of my questions have been asked, but maybe just a housekeeping one. I was curious if you guys could give us the breakout of hosted services business revenue growth, I'm not sure I saw that in the materials or heard on the call.

And then also just a question kind of similar on the geo side, but slightly different, for the geographies that have started to experience reopening and where people have maybe gone back to work outside of the US in other countries.

Are you seeing any change in customer behavior or moving in and out of the pipeline? Thanks again for taking my questions..

With regard to the latter question, I think in general, the answer is, no. As we've said previously, there's been some friction with new logos that I think we're overcoming now. And as discussed, the pipe that we build in the second quarter and the progress we've seen, gives us confidence that 3Q will overcome those frictions we saw earlier..

And in regards to hosted versus professional services, the hosted services were up 35% year-over-year. Professional services were up 4% year-over-year in the second quarter..

Great, thank you..

There no further question on a queue, you may continue..

Thank you, operator. So I'll end the call by reemphasizing a few key points. Our model is inflecting as leading brands in the world turn to LivePerson to navigate, the massive changes that have happened and our revenue growth is expanding with that change.

Obviously, I think the coronavirus has really exposed the inadequacies of legacy voice contact centers and I've talked about this before. They're like factories, where people sit two feet from each other and get a widget of a call in their ear every five minutes and they're expected to work under those conditions.

And now they can't and they've been sent home. So I think, obviously, our stuff is now the must have and the AI capabilities to automate that is also part of that must have.

We believe that conversational AI is really what's going to win in the market and obviously, we put out our platform now, The Conversational Cloud, to take all of our AI components. It's interesting because ultimately, that platform will not just be about our data set, as in stuff that's generated off a LiveEngage.

Our customers will be able to use The Conversational Cloud as tool sets to power AI's in many different conversations. They may be even using one day, a different messaging platform, and they aren't going to ingest that into our conversational cloud, and then they can build the AI's around that. So, we -- it's a much more open system.

And we have a bigger vision about how AI is going to play in the enterprise. I'm very excited about the impact that John has had in a very short period of time. Many of you knows it was a sort of a risk, putting someone who didn't have a CFO background to that role, but I think he's just done a phenomenal job.

And if you want to, Andreessen Horowitz on the website wrote an article about the CFO role, and the changes that are happening and it's called the CFO in Crisis, and that's the title. And they talk a lot about what that role will be and how it will be data-science driven and analytics-driven.

And I think John has done a great job so far in being an impact player with his team on the automations of many business processes.

And then finally, we've charted through -- we definitely have charted through a very difficult macro environment and I want to thank all the employees for working hard and staying focused, even in work from home and there's massive shift, but staying very focused on delivering our vision, and delivering on our lofty goal of one day owning the conversational commerce space, which as I said is as I think one of the greatest shifts from e-commerce to c-commerce or conversational commerce, which we are definitely just doing an extraordinary job.

And I'm proud of everyone who just executed this quarter. So with that, thank you for your time and we will see each of you in -- hopefully in Q3. Thank you..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..