LPSN - LivePerson: Undergoing A Fundamental Correction

2023-04-01 00:34:59 ET

Summary

• LivePerson has seen revenues drop off materially over the last several quarters, along with posting an unsteady and lower-than-average gross margin.
• Additionally, LPSN has a much-weakened balance sheet and a net debt position, something not seen throughout its operating history.
• The company has begun cutting costs through headcount reduction and appears to be reorienting itself, although it is doing so at a difficult time. It has not been profitable before.
• While the picture looks bleak, the stock has already sold off so much that I would be hesitant to sell off shares at this price.
• This is very much a SaaS company on its back foot and worth watching to see if it can stabilize revenues before anything else.

Overview

LivePerson ( LPSN ) is a software company that sells a ‘conversational AI’ solution. It is a platform offering in that it can be used for more than one use case, although the platform is primarily leveraged for customer service and the early stages of sales processes. The company’s technology takes the form of a chatbot that a customer interacts with, automating away some or all of the responsibilities of a person.

The company also provides its customers with an analytics dashboard that allows them to track exactly what’s occurring across its platform. Their offering works across both voice and text, although the service transcribes voice conversations into text for processing. A full voice/audio processing service is presently in the works.

Even though AI has been in the news quite a bit lately, it’s worth noting that LivePerson has been in this business for some time. Founded back in 1995 and first going public in 2000, it’s safe to say that LivePerson was leveraging LLM (large language models) before it was the talk of the town. As such they certainly have the accrued benefit of experience and the more tangible accrued resource of user data. Given the direct reliance of artificial intelligence on data, it would be safe to say that this company has one of the higher quality chatbots in the market today.

Nonetheless, this stock has been sold off recently and is now trading at a discount to its IPO price of $8 per share. While flying high and outperforming the NASDAQ Composite significantly, LivePerson is now only $4.41 per share as of this article. While the technology sector has been relatively choppy in general, this depreciation is quite significant and is due to deteriorating fundamentals. This article will review the firm’s financials as well as its valuation to see whether LPSN stock may constitute a good purchase now that it is trading so cheaply.

Financials

Off the bat we can see what the problem is with this stock: revenues. Revenues have dropped $10M in just two quarters – certainly not something any investor – or executive – likes to see. This is also a significant drawdown in terms of percentage, representing a 7.47% decrease in revenue over two quarters.

Adding to bad news here we see that LivePerson also posted a relatively low gross margin in its recent quarter. While there has been some fluctuation with this figure, the gross margin of 62.11% for Q4 2022 is still its 2 ^nd lowest over the last 10 quarters. That is made doubly worse by the fact that revenue declined so much, but it also makes sense – management has not yet executed cost cuts in the face of declining revenues. This means that they were perhaps taken by surprise or still remain optimistic for the future; in either case, we should pay attention to what happens with this percentage going forward.

Revenue is of course never the full story, and this is a mature software company; let’s look at the profits. Here the picture is also poor; LivePerson has continued to lose money every quarter for the last 10. While this number has fluctuated a lot, what I find disconcerting is the fact that they had their greatest loss in the quarter where they had the greatest revenue number – Q2 2022. This is something that we usually see in much earlier stage companies. It implies that the firm is spending a lot on sales and marketing (SG&A) in order to move its product. Yet, this business is almost 30 years old – why would they need to be doing that? A quality product, it is said, sells itself; word of mouth should have taken the reigns by now. Yet it hasn’t.

We can corroborate this by looking at the proportional spend on SG&A; indeed, Q2 2022 had the highest percentage of revenues in recent history for SG&A. The other element of this that I would like to note is the fact that there has been an uptick in SG&A spend overall, although it appears that it has moderated somewhat in the most recent quarter. To me it looks like this company has a high correlation between sales & marketing spend and revenues. I would reiterate that this is a concern for a company with this length of operating history.

It is worth expanding our lens and looking at this company’s financials over a longer time span in order to contextualize these recent difficulties. Looking at the prior decade for its cash flow statement, several things make themselves clear. The first is that the firm has begun paying interest whereas it had not seemingly paid any before; it has taken on debt. Additionally, its cash flows are highly variable but generally positive. This actually looks to be a bright spot relative to the other financials in that the prior year’s cash flows were negative but not quite as negative as they had been previously. Nonetheless this metric also appears to be taking a turn for the worse, and the company lost 34.5% of its present share price in cash flow last year. Certainly, the firm appears to be in ‘correction’ mode for the time being – this makes its balance sheet all the more important.

The balance sheet appears to be a mixed bag but also contains some red flags. The firm’s debt has more than tripled in the last 10 quarters, and its debts are now significantly higher than its assets (positive net debt). Book value has also fallen off significantly. It’s clear that LivePerson has saddled itself up with debt in order to continue operating throughout the current period, but that has led to a deterioration in its balance sheet and the risks associated with that. Since revenues have also begun to decline, it will be increasingly difficult to service the debt and generate a profit unless other changes are made. Here we can note that management has actually shed a significant amount of headcount in order to cut costs. The efficacy of this remains to be seen.

Conclusion

LivePerson looks to me to be a lifelong growth stock that has not faced profitability pressures before. The sell-off has created what it is a very cheap stock on a sales basis, trading at nearly an 80% discount to the overall IT sector. Yet, it is a company that has never been profitable. The upshot here is that it has been able to generate positive cash flows before, albeit in an unsteady fashion. The company also appears to be cutting costs, but it is unfortunately having to reorient itself even as its revenues decline. This makes me skeptical that it can turn things around anytime soon; I think this correction will take some time, and I would need to see revenues stabilizing at the minimum. Since the stock has already sold off a good bit, I wouldn’t call this a sell – but resoundingly a hold for the time being.

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