Unboxing Earnings: LivePerson 2Q20 Results (NASDAQ:LPSN)


The earnings report is like opening a present and confetti shoots off in all different directions and sparkles majestically fall down glimmering off the high summer sun. Sorry for the vivid opening, I felt inspired after reading Orange World (no free ads!) LivePerson (LPSN) recently released its second quarter earnings results. Man-o-Man it was spectacular. LPSN beat on revenue and adjusted revenue handily. While it is great to see LivePerson perform admirably, there are a few items to tick off. I am curious about revenue growth, profitability, retention rate and average revenue per user (APRU), and what effect these have on updating my price target from my previous article.

Quick Overview

LPSN crushed earnings. It is as simple as that. Revenue was $91.6MM or 29% higher than the prior year and adjusted EBITDA was $9.3MM compared to $(5.3MM) in 2Q19. Financial performance crushed guidance provided during the last conference call. Management guided for revenue between $83MM-$85MM and adjusted EBITDA between $1MM-$2MM. The main reason for this -like many tech companies- is that customers are accelerating their technology plans and capital spending due to COVID-19.

CEO and Founder, Rob LoCascio stated:

With work from home and social distancing the new normal, the concept of the traditional voice call center has become obsolete. Demand for our platform rose significantly in the second quarter as brands rushed to fill the void with AI-powered messaging. In fact, bot-powered conversations on our platform have doubled since year end.

This statement was further bolstered by Rob saying that this is not a one-time hot quarter.

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.

Revenue Growth

Q2 revenue growth was amazing. It was strong, it was organic, it was in all segments. Even better, it is expected to continue. Q3 revenue is guided to be around the same as this quarter, between $92MM-$93MM. FY20 revenue was increased to $357MM-$361MM from $340MM-$355MM. That equates to ~3.5% increase from the midpoint from previous guidance. Even more spectacular is that the new revenue guidance equates to year-over-year revenue growth between 22% and 24%. They are signing up more customers and improving on their cross-sell.

Profitability

Adjusted was awesome as it grew to $9.3MM. It was the return to profitability in some time and the first double digit margin in three years! This is a direct result of the newer CFO, John Collins. He was brought on to manage expenses and aim for profitable growth. We witnessed some of this in the last earnings call where he talked about monitoring expenses and discussed some of the low hanging fruit.

John Collins said:

Our strategy to protect our customer base and move upstream to larger opportunities paid off in the second quarter, as a greater than 25% increase in enterprise and mid-market ARPU and a revenue retention rate above our target range more than offset fewer planned deal signings. We also proved the leverage of our financial model, as internal automation initiatives and a healthy expense rigor helped the Company return to adjusted EBITDA profitability and deliver its first double-digit adjusted EBITDA margin in three years. With these favorable operating tailwinds, our outlook is strengthening, and we are raising guidance for 2020.

Just to add to this, some of the expense control came from the impact of COVID-19 as there was less T&E. Nonetheless, based on the higher revenue guidance, the excess revenue is expected to flow down the income statement. Adjusted EBITDA is guided to $3.5MM-$10.5MM and represents a large increase from the original FY20 guidance of $(3MM)-$3MM.

This has also helped its cash on hand. The Company is looking to reduce cash burn and to self-fund as opposed to raising additional capital and financing through A/R turns.

Retention Rate & APRU

These are important metrics for a few reasons: 1. It is less expensive to maintain your customer base than to find new customers; and 2. once you have a customer locked in, LPSN can check in to a friendly face and try to cross-sell.

LPSN experienced ~25% yoy APRU growth between 2Q19 and 2Q20. This is up from 20% in the last quarter.

This is great to see. Along with improving operating efficiency, achieving their Adjusted EBITDA goal is reasonable and sets a runaway for further EBITDA growth.

Guidance

We touched upon some of these areas already, but it is always a good idea to review. Revenue is expected to improve as technology spending is pulled forward. Many of their customers have their employees working from home including customer service, and LPSN products offer an alternative. LPSN has increased their retention rate and APRU should promote cross-sell opportunities and operating leverage. On top of this, management has been negotiating with their landlords to either reduce their rent and/or space. Due to LPSN’s success during this work-for-home period, they are exploring options to keep their employees home and reduce their real estate presence. Now, they will have some type of office space, but at a much lower level. This could be a further catalyst to improve margins.

Source: 2Q20 Earnings Presentation

Mr. Locasio summed this up nicely during the conference call:

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.

I do want to mention some hesitations. I applaud their financial performance, but can they keep it up? I think that they can sustain this level, but I am unsure of ramping up to the next step. LPSN did hire a small army of salespeople and they had a tough time integrating and helping them leave the nest. The next step up may provide challenges.

Estimated Stock Price

Here is my quote from my first article on LPSN:

If we look at price targets based on price-to-sales and EV-to-sales, I think the stock can get to ~$55 per share based on my projected FY21 revenue of $395 million (based on a very manageable 15% revenue growth over the next two years). I think this is revenue target is feasible due to the historical performance, the market opportunity, the technology and the return on investment on the recent hiring of salespeople.

Currently, LPSN is trading around $57 per share, so my target has been met. The 15% revenue growth looks a little sluggish. Based on 22% growth in FY20 and 20% in FY21 and a blend between updated P/S and EV/Sales multiples, the stock price should be ~$60 per share. Now there is not much upside from the current stock price. With its catalysts, I would not be surprised if it traded higher. If it continues to trade at a 10x P/S multiple, a ~$70 target is reasonable.

Conclusion

LivePerson had a strong quarter due to the secular shift to conversational technology and the acceleration in technology spend due to the pandemic. Management made us well aware that this is not a one-time thing. This is supported by the retention rate remaining over 100% and the yoy growth in APRU increasing to 25%. John Collins is monitoring the P&L and is improving operating efficiency and promoting profitable growth. We can see the operating leverage as incremental revenue growth is falling down to adjusted EBITDA. The Company is growing fast and is profitable leading to a higher valuation. I think there is room for the stock price to continue appreciating.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.


*