LPSN - LivePerson Shows Growth Promise But Operating Results Worsen

• LivePerson recently reported its Q1 2022 financial results, beating revenue estimates slightly.
• The firm provides AI-enhanced conversation messaging technologies to businesses.
• While LPSN has growth potential, its operating losses have widened, so management needs to make meaningful progress toward operating breakeven.
• I'm on Hold for LPSN in the near term until we see evidence of improving operating results.

A Quick Take On LivePerson

LivePerson ( LPSN ) recently reported its Q1 2022 financial results on May 9, 2022, beating revenue estimates and losing less money than previously expected.

The company provides online messaging and communications technologies to businesses and consumers worldwide.

LPSN has a growth story with its recent acquisitions and revenue potential in the conversational AI automation space, but I’m on Hold until we see evidence of better operating results.

LivePerson Overview

New York-based LivePerson was founded in 1995 to provide what it calls conversational commerce software to businesses and consumers.

The firm is headed by founder and Chief Executive Officer Robert LoCascio, who is active in various charity organizations in New York City.

The company’s primary offerings include:

• Conversational Cloud

• Voice

• BELLA Health (being discontinued)

• GainShare managed contact center

The firm acquires customers via direct sales and marketing efforts and has customers from smaller mid-market firms to large enterprises.

LivePerson’s Market & Competition

According to a 2020 market research report by Grand View Research, the market for Web real-time communications products was an estimated $2.3 billion in 2019 and is expected to reach $41 billion by 2027.

This represents a forecast extremely high CAGR of 43.4% from 2020 to 2027.

The main drivers for this expected growth are the need for a better user experience, reduced costs and an increase in work from home employee work environments.

Also, the chart below shows the historical and projected future growth trajectory of the N. America WebRTC market through 2027:

Major competitive or other industry participants include:

• Amazon

• Google

• Facebook

• Cisco

• Oracle

• Ribbon

• Avaya

• Apidaze

• Dialogic

• Plivo

• Quobois

LivePerson’s Recent Financial Performance

• Total revenue by quarter has grown moderately, although unevenly:

• Gross profit by quarter has appeared to plateau in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have risen in recent quarters, as the chart shows below:

• Operating losses have worsened dramatically in recent quarters:

• Earnings per share (Diluted) have followed the same trajectory as operating losses:

(All data in above charts is GAAP)

In the past 12 months, LPSN’s stock price has dropped 78.2 percent vs. the U.S. S&P 500 index’ fall of around 10.2 percent, as the chart below indicates:

Valuation And Other Metrics For LivePerson

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

LPSN’s most recent GAAP Rule of 40 calculation was only 5% as of Q1 2022, so the firm needs improvement in this regard per the table below:

(Source - Seeking Alpha)

Commentary On LivePerson

In its last earnings call (Source - Seeking Alpha ), covering Q1 2022’s results, management highlighted its focus on building up its sales team for its ‘land and expand’ strategy, which is not uncommon for enterprise SaaS companies seeking to grow their revenue efficiently.

The firm is also advancing machine learning-enhanced communications via its Conversational Cloud offering, which has seen 34% growth for its ‘AI-based messaging conversations’ year-over-year.

LPSN has also had some traction with Web3 firms such as ConsenSys and crypto exchanges in need of smarter customer service bots for their online-centric environments.

As to its financial results, revenue grew 21% year-over-year to $130.2 million, exceeding its previous guidance.

However, GAAP gross profit has plateaued for the last 4 quarters at around $80 million.

Selling, G&A expenses have risen as a percentage of total revenue, indicating the company is getting less efficient at generating revenue growth.

Overall, operating losses worsened sharply, along with increasingly negative earnings.

For the balance sheet, the firm ended the quarter with only $1 million in cash and equivalents, an extremely low figure.

Looking ahead, management reaffirmed forward revenue guidance at an 18% midpoint growth rate, while raising its adjusted EBITDA guidance due to lowered costs.

The firm expects to generate positive free cash flow in Q4 2022.

Regarding valuation, the market is valuing LPSN at an EV/Sales multiple of around 2.7x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 7.5x at June 30, 2022, as the chart shows here:

So, by comparison, LPSN is currently valued by the market at a discount to the SaaS Capital Index, at least as of June 30, 2022.

The primary risk to the company’s outlook is a potential macroeconomic slowdown or recession, which may slow sales cycles and reduce its revenue growth estimates.

An upside catalyst could be faster revenue growth, perhaps from integrating its VoiceBase and Tenfold acquisitions in late 2021.

While LPSN is valued cheaply by the market, management needs to prove that it can make a meaningful turn toward operating breakeven before the market will lessen its punishment.

Money-losing technology companies have had their valuations dramatically reduced in a rising cost of capital interest rate environment.

LPSN has a growth story with its recent acquisitions and revenue growth in the conversational AI automation space, but I’m on Hold until we see evidence of better operating results.

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