LPSN - LivePerson: Limited Catalysts At This Point

2023-04-26 03:59:20 ET

Summary

• LivePerson, Inc. is a leader in using artificial intelligence and chatbots to modernize sales and customer support.
• LPSN management is looking to expand the company's focus beyond contact centers and services and move into marketing and sales within its customer base.
• LivePerson's unique messaging data accumulated over the years gives it an advantage in terms of richer datasets and better human intent analysis.
• LPSN's shift towards a more SaaS-based model could be challenging in the near term, but it is necessary to centralize the focus on the core business and drive profitability to stabilize its cash position.

Thesis

LivePerson, Inc. ( LPSN ) is a leader in using artificial intelligence and chatbots to modernize sales and customer support. However, LPSN's shift towards a more SaaS-based model could be challenging in the near term. However, it is necessary to centralize the focus on the core business and drive profitability to stabilize its cash position. The core business is facing macro, and the revenue growth has been decelerating over the recent quarters. Investors should wait for potential improvements in the first quarter of 2023.

Post Q4 Outlook

LPSN reported revenue of around $122 million, lower than the company’s low-end of their guidance of $124.5 million. For the fiscal year 2023, LPSN forecasted a decrease in revenue growth of around 16.5% YoY, which includes a reduction of about $70 million in non-core revenues. This drop is due to Covid testing and professional services, Gainshare Labor, and pandemic-driven variability. LPSN management's guidance for EBITDA (FY23 EBITDA margins of around 5.5% at mid-pt.) reflects their focus on profitability and their B2B core business. While the reorientation towards a more SaaS-based model might be challenging in the short term, it is necessary for LPSN to concentrate on its core business, enhance profitability, and stabilize its cash position. By doing so, management can start to pay off their considerable convertible debt exposure, which amounts to around $737 million as of 4Q22. LPSN's core business is facing macroeconomic and self-inflicted headwinds, and investors will likely wait to see potential improvement in 1Q23 before investing. More clarity on the factors driving revenue growth for the B2B core business following numerous acquisitions would be beneficial.

AI and automation powers differentiated technology

Businesses are always seeking more efficient and cost-effective ways to handle customer interactions, particularly in sales and support scenarios. Early attempts involved the use of voice recognition to eliminate the need for pressing buttons on telephones, followed by chat windows on websites to communicate with customers. Nowadays, messaging is the preferred medium for users, encompassing both text messaging and rich communication services ((RCS)) like Facebook Messenger and iMessage. Companies are exploring ways to automate communication through messaging channels, and this is where LPSN has made a significant contribution. By leveraging the vast dataset of customer conversations they have amassed through their web-based chat support service, LPSN has been able to develop AI-powered chatbots. This, in turn, has given LPSN a competitive edge, as no other firm seems to possess a similar dataset.

Moreover, LPSN has acquired VoiceBase and Tenfold, which has expanded its ability to apply AI to more use-cases and connect with more third-party and legacy systems. These acquisitions have also added to LPSN's analytics capabilities. Given the current macro environment, which favours platform solutions over point solutions, organizations are consolidating their spend. LPSN's progress in this area could improve its value proposition and help it secure larger deals. LPSN is looking to expand its focus beyond contact centers and services and move into marketing and sales within its customer base.

Overall, LPSN's unique position as a pioneer in this field highlights the potential of using AI-powered chatbots to revolutionize customer interaction in the messaging era.

Growth de-acceleration & Operating Losses

In June 2016, the company launched LiveEngage, its conversational commerce platform, and began its transformation from a legacy web chat provider to its new position as an innovator in conversational commerce. Revenue has continued to accelerate from there on, and the company targeted a 25% long-term revenue growth rate. However, over the course of the last year, there have been a couple of notable management changes, and the company has changed its strategy of pursuing aggressive growth by pulling back on sales hiring. The growth trajectory has also been hampered by government policy changes and a fall-off in the Gainshare business . The company’s growth profile has fallen from over 20s% rev growth to a single-digit growth rate in 2022 and is still losing money at the operating income line.

$60B Potential Market

Traditionally businesses have relied on 1-800 numbers and contact centers to be the main point of contact with consumers. Over the years, consumer behaviour has changed with regard to the ease and effectiveness of reaching businesses. More than 90% of day-to-day conversations occur in messaging platforms like Facebook, iMessage, and WhatsApp. Conversational commerce aims to have a continuous conversation with customers where brands can reach customers in the everyday messaging interface they use, leading to faster and more efficient customer service as well as more effective and higher conversion rates on commercial intent interactions. LivePerson sizes its potential market opportunity at $60B, providing the breakdown from both a go-to-market and product strategy standpoint.

Valuation

LPSN stock is currently trading at a significant discount to its historical multiple as well as sector median . The company’s closest group of peers includes [[FIVN ]], [[ZEN]], [[RNG]], and [[TWLO]], all of which are trading at a higher multiple than LivePerson, Inc. These companies have higher projected growth rates and positive operating margins, which is not the case with LPSN. I expect the near-term revenue growth deacceleration and operating losses to cause a continued discount to LPSN’s valuation until there is further acceleration in the top line or operating leverage that gets the company back to profitability and demonstrates the potential for long-term attractive margins. Hence, I currently remain on the sidelines and do not have a price target on the stock currently.

Competitive Landscape

LivePerson operates in a highly competitive market that includes legacy contact center providers, CRM providers, smaller AI startups, and potential competitors such as Facebook and Google. Genesys is LivePerson's largest competitor, with Salesforce increasingly seen in deals. Twilio is also present in the market but is viewed more as an API for engineers to integrate. LivePerson's key differentiating factor over the competition is the messaging data it has accumulated over the last two decades, which allows for better human intent analysis and richer datasets.

The Contact Center Application market was estimated to be worth approximately $28 billion in 2022. The top two players were Genesys and NICE. While Genesys has a long history in providing contact center hardware/software for on-premise use cases, it has been acquiring next-generation and cloud assets like Interactive Intelligence in recent years. However, it is not known for its omni-channel customer care solutions. NICE, on the other hand, comes from the workforce optimization segment and acquired InContact to enter the cloud CCaaS segment. However, it is also not considered a strong player for omni-channel customer care capabilities.

Five9 is the fastest-growing enterprise CCaaS vendor and has acquired omni-channel customer care technologies over the years. It also hired the former head of AI from Cisco to focus on developing artificial intelligence capabilities. However, unlike LivePerson, which is focused on conversational commerce through chatbots and related technology, Five9 is more focused on creating operator assistance solutions. These are artificial intelligence systems that listen to live contact center calls to help automate a contact center agent's set of tasks. While they could expand into the conversational commerce segment in the future, that does not appear to be a near-term priority.

Final Thoughts

LivePerson, Inc. is a leader in using AI-powered chatbots to modernize sales and customer support. Its unique position as a pioneer in this field highlights the potential of using AI-powered chatbots to revolutionize customer interaction in the messaging era. However, LPSN's growth trajectory has been hampered by government policy changes, a fall-off in the Gainshare business, and a shift towards a more SaaS-based model, which could be challenging in the near term. During a recent LPSN call, investors were disappointed to learn that the size of the company's core business was smaller than anticipated, with projected B2B recurring revenue for FY23 expected to be between $334-$347 million. Additionally, the company's guidance for core business growth in FY23 of 0% to 4% YoY was slower than what investors were hoping for. Therefore, I remain on the sidelines and recommend a hold rating on LPSN stock.

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