LivePerson Inc. - The Future of B2C Communication
Chris Hemmelgarn
Portfolio Manager
LivePerson Inc (LPSN) is the leader in text based business-to-consumer (B2C) interaction. Initially with web chat and today via mobile messaging as well, LPSN solves major business and consumer pain points (e.g. waiting on hold) at a much lower cost and is investing to drive rapid growth in a $60B market opportunity.
Company Background
LPSN first came to prominence in the early days of the internet as a pioneer of webchat for business-to-consumer (B2C) communication. CEO Robert LoCascio founded the company in 1995 after needing to dial a phone number and wait on hold to get a simple product question answered on a website. He created a webchat platform to allow consumers to quickly connect with businesses online and took the company public in 2000. As one of the last dotcom IPOs, the company was forced to rapidly cut costs to stay afloat. Unlike many others, LPSN survived the downturn and grew revenue at a 20%+ CAGR from 2007-2015 as web-commerce truly took off.
Reinventing B2C Communication Again
Despite the success, the management team surveyed the landscape and concluded that with the rise of the smartphone, mobile messaging was the true future of B2C communication. Compared to traditional solutions (call centers, email, web-chat) it offered both greater immediacy and flexibility by allowing customers to respond to messages on their own schedule. It also offered a major opportunity to deliver AI driven interactions thanks to LPSNs 20+ year database of webchats and the greater ease of interpreting and managing text vs. voice interactions. With an eye towards the future, the company made the hard choice to rebuild its platform from the ground up to support all the new possibilities enabled by mobile messaging.
Growth (and the stock price) suffered as customers were transitioned to the new LiveEngage platform in 2016-17, but in 2018 revenue re-accelerated and the company is investing heavily to drive 20%+ top-line growth in the coming years. Even though we are in the early days of the transition to messaging, the benefits are already crystal clear. Agents are 2-4x more efficient with 50% lower agent attrition and 50% lower labor cost per interaction. Sales conversions have also increased 4x and customer churn has dropped by 20%. In short there is substantial opportunity to grow with both new and existing customers as multiple forms of messaging are adopted.
AI Opportunity Grows by the Day
One of the core advantages of messaging based B2C interaction vs. traditional voice calls is the ability to seamlessly shift between humans and AI powered bots. You never need to repeatedly say “agent” to get to a human – if the AI is unsure what to do, it turns the conversation over to an agent with the customer never noticing a change. Typed messages are much easier for a computer to interpret than spoken words, and LPSN has over two decades of chats to feed into machine learning algorithms. This translates to better accuracy and the ability to easily and quickly create sophisticated AI bots for new customers. This large and growing data set also creates a moat that will make it very difficult for competitors to replicate LPSN’s capabilities.
LiveEngage Platform
At the core of LPSN’s service is the LiveEngage Platform. This provides a unified tool that allows customers to seamlessly interact using multiple different communication forms (and even easily switch between them). On the agent side, it provides bots designed to fully contain conversations to solve simple problems, but also escalate to a human and provide suggestions as to how to best meet the customers needs. Managers are able to track individual and company wide analytics even on issues like customer mood based on the tone of their messages. Finally, LiveEngage integrates key 3rd party services such as CRM, Work Force Management, Google, Microsoft, etc.
Source: Company Reports and Shaker Investments
The Power of a SaaS Business Model
Historically, software firms sold customers a one-time license to use a specific version of a program and earned some small ongoing revenue from providing maintenance and support. If the customer was happy with the product, they might never provide any further revenue to the company. In recent years, many companies have transitioned to a “Software-as-a-Service” (SaaS) model where customers pay a modest annual fee for as long as they want to use the software, and they are assured that they will receive support as well as the latest and greatest version of the platform. This has radically changed the value proposition of customers who have gone from one-time buyers to effective perpetuities if the product is embedded as a core part of their business operations. This strong recurring revenue has made it (a) much easier to predict future results, (b) dramatically increased the value of obtaining a new customer, and (c) made software businesses much more attractive investments than in the past.
Source: Company Reports, Thomson Reuters Consensus Estimates, & Shaker Investments
Risks
•While Operating CF is positive, positive earnings are not expected until 2020 as the company is investing heavily to drive future growth.
•The clear leader today, but competition is increasing in this nascent and fast growing market. LPSN will need to continue to innovate to succeed.
•Valuation looks high relative to many conventional companies. However, compared to other high growth SaaS peers, LPSN is attractively priced.
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