LivePerson(LPSN) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents LivePerson's unaudited condensed consolidated financial statements and management's discussion for Q3 2022 Item 1. Financial Statements (Unaudited) LivePerson's unaudited condensed consolidated financial statements for Q3 2022, including balance sheets, operations, comprehensive loss, equity, and cash flows Condensed Consolidated Balance Sheets Snapshot of LivePerson's financial position, detailing assets, liabilities, and equity as of September 30, 2022 and December 31, 2021 Condensed Consolidated Balance Sheets (In thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------------- | :----------- | :----------- | | ASSETS | | | | Cash and cash equivalents | $393,330 | $521,846 | | Accounts receivable, net | $100,741 | $93,804 | | Total current assets | $525,990 | $636,276 | | Property and equipment, net | $135,830 | $124,726 | | Goodwill | $300,578 | $291,215 | | Total assets | $1,097,078 | $1,186,656 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $11,975 | $16,942 | | Accrued expenses and other current liabilities | $118,421 | $104,297 | | Deferred revenue (current) | $103,219 | $98,808 | | Total current liabilities | $236,836 | $223,427 | | Convertible senior notes, net | $736,475 | $574,238 | | Total liabilities | $1,007,567 | $837,219 | | Total stockholders' equity | $89,511 | $349,437 | | Total liabilities and stockholders' equity | $1,097,078 | $1,186,656 | - Total assets decreased by approximately $89.6 million from December 31, 2021, to September 30, 2022, primarily due to a significant reduction in cash and cash equivalents[13] - Total liabilities increased by approximately $170.3 million, largely driven by an increase in convertible senior notes, net, and accrued expenses[13] - Total stockholders' equity saw a substantial decrease of approximately $259.9 million, indicating a significant reduction in shareholder value[13] Condensed Consolidated Statements of Operations LivePerson's financial performance, presenting revenues, expenses, and net loss for Q3 and nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $129,561 | $118,327 | $392,323 | $345,823 | | Total costs and expenses | $178,075 | $139,106 | $575,271 | $393,809 | | Loss from operations | $(48,514) | $(20,779) | $(182,948) | $(47,986) | | Total other income (expense), net | $5,515 | $(9,490) | $195 | $(24,850) | | Loss before provision for income taxes | $(42,999) | $(30,269) | $(182,753) | $(72,836) | | Provision for income taxes | $249 | $2,538 | $1,270 | $2,285 | | Net loss | $(43,248) | $(32,807) | $(184,023) | $(75,121) | | Basic Net loss per share | $(0.56) | $(0.47) | $(2.39) | $(1.09) | | Diluted Net loss per share | $(0.56) | $(0.47) | $(2.39) | $(1.09) | - Revenue increased by 9.5% for the three months ended September 30, 2022, and by 13.4% for the nine months ended September 30, 2022, compared to the respective prior periods[16] - Net loss significantly widened, increasing by 31.8% for the three-month period and by 145% for the nine-month period, primarily due to higher operating costs and expenses[16] - Total costs and expenses rose sharply by 28% for the three-month period and 46% for the nine-month period, with notable increases in sales and marketing, general and administrative, and restructuring costs[16] Condensed Consolidated Statements of Comprehensive Loss Details LivePerson's comprehensive loss, including net loss and other comprehensive income (loss) items, for Q3 and nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Comprehensive Loss (In thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(43,248) | $(32,807) | $(184,023) | $(75,121) | | Foreign currency translation adjustment | $(5,026) | $(3,056) | $(11,524) | $(4,237) | | Comprehensive loss | $(48,274) | $(35,863) | $(195,547) | $(79,358) | - Comprehensive loss increased significantly, reaching $(48.3) million for the three months and $(195.5) million for the nine months ended September 30, 2022, primarily driven by the net loss and negative foreign currency translation adjustments[19] Condensed Consolidated Statements of Stockholders' Equity Tracks changes in LivePerson's stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit, for the nine months ended September 30, 2022 Key Changes in Stockholders' Equity (In thousands, except share data) | Metric | Balance as of Dec 31, 2021 | Balance as of Sep 30, 2022 | | :----------------------------------- | :------------------------- | :------------------------- | | Common Stock Shares | 74,980,546 | 77,934,440 | | Common Stock Amount | $75 | $78 | | Additional Paid-in Capital | $871,788 | $757,162 | | Accumulated Deficit | $(516,859) | $(650,638) | | Accumulated Other Comprehensive Loss | $(5,564) | $(17,088) | | Total Equity | $349,437 | $89,511 | - Total stockholders' equity decreased from $349.4 million at December 31, 2021, to $89.5 million at September 30, 2022, a reduction of approximately $259.9 million[23] - The accumulated deficit increased significantly from $(516.9) million to $(650.6) million, reflecting the net losses incurred during the period[23] - Additional paid-in capital decreased by $114.6 million, partly due to a cumulative adjustment from the adoption of ASU 2020-06 and other equity-related transactions[23] Condensed Consolidated Statements of Cash Flows LivePerson's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, In thousands) | Metric | 2022 | 2021 | | :----------------------------------- | :----------- | :----------- | | Net cash (used in) provided by operating activities | $(79,471) | $35,642 | | Net cash used in investing activities | $(44,057) | $(60,721) | | Net cash (used in) provided by financing activities | $(1,547) | $10,521 | | Effect of foreign exchange rate changes on cash and cash equivalents | $(4,713) | $(5,072) | | Net decrease in cash, cash equivalents, and restricted cash | $(129,788) | $(19,630) | | Cash, cash equivalents, and restricted cash - end of period | $393,744 | $634,522 | - Operating activities shifted from providing $35.6 million in cash in 2021 to using $79.5 million in 2022, primarily due to increased net loss and changes in working capital[28][314] - Investing activities used $44.1 million in 2022, a decrease from $60.7 million in 2021, mainly driven by acquisition costs for WildHealth and capital expenditures[28][316] - Financing activities used $1.5 million in 2022, a significant change from providing $10.5 million in 2021, due to principal payments for finance leases and lower proceeds from stock option exercises[28][317] Notes to Condensed Consolidated Financial Statements Detailed explanations supporting financial statements, covering accounting policies, revenue, segments, and other financial matters Note 1. Description of Business and Basis of Presentation Describes LivePerson's Conversational AI business and the basis for preparing its unaudited condensed consolidated financial statements - LivePerson, Inc. is a leading Conversational AI company, providing digital experiences through its Conversational Cloud platform, which enables businesses to interact with consumers using natural language across various messaging interfaces[32][33] - The company's technology integrates human agents, bots, and AI to manage customer interactions across the entire consumer lifecycle, including sales, service, and support[32][35] - The financial statements are unaudited and prepared in accordance with GAAP, with certain information condensed or omitted per SEC regulations, and the company consolidates wholly-owned subsidiaries and variable interest entities where it is the primary beneficiary[39][40][41][45] - The company adopted ASU 2020-06 on January 1, 2022, simplifying accounting for convertible instruments, resulting in a $50.2 million decrease to accumulated deficit, a $209.7 million decrease to additional paid-in capital, and a $159.4 million increase to convertible senior notes, net[59] Note 2. Revenue Recognition Details LivePerson's revenue recognition policies, disaggregated by source and geographic location - Revenue is primarily generated from monthly service revenues, including a platform usage pricing model, and related professional services, recognized when control of services is transferred to customers[61] Disaggregated Revenue by Source (In thousands) | Revenue Source | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Hosted services – Business | $89,491 | $93,234 | $290,671 | $271,966 | | Hosted services – Consumer | $9,460 | $9,123 | $27,711 | $27,944 | | Professional services – Business | $30,610 | $15,970 | $73,941 | $45,913 | | Total revenue | $129,561 | $118,327 | $392,323 | $345,823 | Revenue by Geographic Location (In thousands) | Geographic Region | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $89,619 | $80,096 | $267,189 | $229,802 | | Other Americas | $2,470 | $4,009 | $10,484 | $11,917 | | EMEA | $16,107 | $23,399 | $57,890 | $68,092 | | APAC | $21,365 | $10,823 | $56,760 | $36,012 | | Total revenue | $129,561 | $118,327 | $392,323 | $345,823 | - As of September 30, 2022, the aggregate amount of total transaction price allocated to remaining performance obligations for contracts with original duration of one year or greater was $430.5 million, with approximately 88% expected to be recognized within the next 24 months[66] Note 3. Net Loss Per Share Presents LivePerson's basic and diluted net loss per share, along with anti-dilutive securities excluded from EPS Net Loss Per Share (In thousands, except share and per share amounts) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(43,248) | $(32,807) | $(184,023) | $(75,121) | | Weighted average shares outstanding, basic and diluted | 77,784,346 | 69,798,839 | 76,969,629 | 68,926,203 | | Net loss per share, basic and diluted | $(0.56) | $(0.47) | $(2.39) | $(1.09) | - Basic and diluted net loss per share increased to $(0.56) for the three months ended September 30, 2022, from $(0.47) in the prior year, and to $(2.39) for the nine months, from $(1.09) in the prior year[79] Anti-Dilutive Securities Excluded from Diluted EPS (As of September 30, In thousands) | Security Type | 2022 | 2021 | | :----------------------------------- | :----------- | :----------- | | Shares subject to outstanding common stock options and ESPP | 4,514,229 | 4,291,829 | | Restricted stock units | 5,246,300 | 3,063,156 | | Fair value of earn-outs | 11,996,072 | 697,133 | | Conversion option of 2024 Notes | 5,961,186 | 5,961,186 | | Conversion option of 2026 Notes | 6,879,283 | 6,879,283 | | Total Anti-Dilutive Securities | 34,597,070 | 20,892,587 | Note 4. Segment Information Provides financial data for LivePerson's Business and Consumer segments, detailing revenue and operating income (loss) - The company operates in two segments: Business (Conversational Cloud for brands) and Consumer (online marketplace for Experts and Users), with performance evaluated based on operating income (loss) for each segment[80] Segment Revenue and Operating Income (Loss) (Three Months Ended Sep 30, In thousands) | Metric | Business 2022 | Consumer 2022 | Corporate 2022 | Consolidated 2022 | Business 2021 | Consumer 2021 | Corporate 2021 | Consolidated 2021 | | :-------------------------- | :-------------- | :-------------- | :--------------- | :---------------- | :-------------- | :-------------- | :--------------- | :---------------- | | Total revenue | $120,101 | $9,460 | $0 | $129,561 | $109,204 | $9,123 | $0 | $118,327 | | Operating income (loss) | $33,963 | $1,549 | $(84,026) | $(48,514) | $37,019 | $1,173 | $(58,971) | $(20,779) | Segment Revenue and Operating Income (Loss) (Nine Months Ended Sep 30, In thousands) | Metric | Business 2022 | Consumer 2022 | Corporate 2022 | Consolidated 2022 | Business 2021 | Consumer 2021 | Corporate 2021 | Consolidated 2021 | | :-------------------------- | :-------------- | :-------------- | :--------------- | :---------------- | :-------------- | :-------------- | :--------------- | :---------------- | | Total revenue | $364,612 | $27,711 | $0 | $392,323 | $317,879 | $27,944 | $0 | $345,823 | | Operating income (loss) | $79,271 | $4,450 | $(266,669) | $(182,948) | $112,952 | $2,830 | $(163,768) | $(47,986) | - Business segment revenue increased by 10% for the three months and 15% for the nine months ended September 30, 2022, while Consumer segment revenue saw a slight increase of 4% for the three months and a decrease of 1% for the nine months[83][85] Note 5. Goodwill and Intangible Assets, Net Details LivePerson's goodwill and intangible assets, including amortization, as of September 30, 2022 Goodwill Carrying Amount (In thousands) | Segment | Dec 31, 2021 | Sep 30, 2022 | | :-------- | :----------- | :----------- | | Business | $283,191 | $292,554 | | Consumer | $8,024 | $8,024 | | Consolidated | $291,215 | $300,578 | - Goodwill increased by $9.4 million to $300.6 million as of September 30, 2022, primarily due to acquisitions, partially offset by foreign exchange adjustments[88] Intangible Assets, Net (As of September 30, 2022, In thousands) | Asset Type | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period | | :-------------------- | :-------------------- | :----------------------- | :------------------ | :----------------------------------- | | Technology | $97,143 | $(41,938) | $55,205 | 5.0 years | | Customer relationships | $31,795 | $(16,795) | $15,000 | 10.0 years | | Patents | $10,234 | $(1,332) | $8,902 | 12.8 years | | Trademarks | $1,275 | $(312) | $963 | 5.0 years | | Trade names | $1,040 | $(273) | $767 | 2.8 years | | Other | $914 | $(294) | $620 | 4.1 years | | Total | $142,401 | $(60,944) | $81,457 | | - Total intangible assets, net, decreased to $81.5 million as of September 30, 2022, from $85.6 million at December 31, 2021, with amortization expense of $4.8 million for the three months and $13.8 million for the nine months ended September 30, 2022[91] Note 6. Property and Equipment, Net Breakdown of LivePerson's property and equipment, net, including software and lease assets, as of September 30, 2022 Property and Equipment, Net (In thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------------- | :----------- | :----------- | | Computer equipment and software | $123,237 | $120,685 | | Internal-use software development costs | $150,831 | $122,479 | | Finance lease right of use assets | $3,998 | $6,797 | | Furniture, equipment, and building improvements | $519 | $258 | | Property and equipment, at cost | $278,585 | $250,219 | | Less: accumulated depreciation | $(142,755) | $(125,493) | | Property and equipment, net | $135,830 | $124,726 | - Property and equipment, net, increased by $11.1 million to $135.8 million as of September 30, 2022, primarily driven by an increase in internal-use software development costs[93] Note 7. Accrued Expenses and Other Current Liabilities Details LivePerson's accrued expenses and other current liabilities, including earn-outs and restructuring costs Accrued Expenses and Other Current Liabilities (In thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------------- | :----------- | :----------- | | Professional services and consulting and other vendor fees | $42,381 | $58,811 | | Payroll and other employee related costs | $22,373 | $29,855 | | Short-term contingent earn-out | $36,109 | $0 | | Sales commissions | $2,010 | $4,269 | | Finance lease liability | $3,412 | $3,738 | | Unrecognized tax benefits | $2,377 | $2,424 | | Restructuring | $5,710 | $1,694 | | Taxes other than income tax | $1,196 | $918 | | Other | $2,853 | $2,588 | | Total | $118,421 | $104,297 | - Total accrued expenses and other current liabilities increased by $14.1 million to $118.4 million as of September 30, 2022, primarily due to the recognition of a short-term contingent earn-out liability of $36.1 million and increased restructuring costs, partially offset by decreases in professional services and payroll-related costs[95] Note 8. Convertible Senior Notes, Net and Capped Call Transactions Describes LivePerson's convertible senior notes and related capped call option transactions - The company has $230.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2024 and $517.5 million aggregate principal amount of 0% Convertible Senior Notes due 2026[96][107] - Following the adoption of ASU 2020-06, the 2024 Notes are accounted for as a single liability with a carrying amount of $227.5 million, and the 2026 Notes as a single liability with a carrying amount of $509.0 million as of September 30, 2022[105][117] Interest Expense Related to Convertible Senior Notes (In thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Contractual interest expense | $431 | $431 | $1,294 | $1,294 | | Amortization of issuance costs | $946 | $630 | $2,831 | $1,858 | | Amortization of debt discount | $0 | $8,396 | $0 | $24,770 | | Total interest expense | $1,377 | $9,457 | $4,125 | $27,922 | - Capped call option transactions were entered into for both the 2024 and 2026 Notes to reduce potential dilution, with net costs of $23.2 million and $46.1 million, respectively, recorded as a reduction to additional paid-in capital[106][118] Note 9. Acquisitions Details LivePerson's acquisition of WildHealth, Inc., including purchase price, goodwill, intangible assets, and earn-out arrangements - In February 2022, LivePerson acquired 100% of WildHealth, Inc., a precision medicine company, for $22.3 million, consisting of cash and common stock, aiming to accelerate technology-driven healthcare offerings[121] - The acquisition resulted in $15.5 million of goodwill and $8.3 million of intangible assets, primarily attributed to synergies and enhanced revenue growth[123] - Former WildHealth stockholders are eligible for up to $120.0 million in earn-out payments, accounted for as a compensation arrangement, with $14.7 million and $38.2 million accrued for the three and nine months ended September 30, 2022, respectively[122] Note 10. Leases Outlines LivePerson's operating and finance lease arrangements, including right-of-use assets and lease liabilities - The company holds operating and finance leases for corporate offices and service agreements, with remaining lease terms of less than one to four years[128] Lease-Related Balances (In thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Operating right of use assets | $2,270 | $1,977 | | Finance right of use assets | $3,998 | $6,797 | | Operating lease liability (current) | $3,221 | $3,380 | | Finance lease liability (current) | $3,412 | $3,738 | | Operating lease liability (non-current) | $698 | $2,733 | | Finance lease liability (non-current) | $277 | $2,780 | - Cash paid for operating leases increased to $3.6 million for the nine months ended September 30, 2022, from $1.9 million in the prior year, reflecting ongoing lease obligations[134] Note 11. Fair Value Measurements Describes LivePerson's fair value measurements for financial assets and liabilities, including cash equivalents and contingent earn-out liabilities - The company measures cash equivalents at fair value using Level 1 inputs (quoted market prices) and contingent earn-out liabilities using Level 3 inputs (unobservable inputs)[137][139][140] Fair Value of Financial Assets and Liabilities (As of September 30, 2022, In thousands) | Metric | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------- | :------ | :------ | :------ | :------ | | Assets | | | | | | Money market funds | $321,553 | $0 | $0 | $321,553 | | Liabilities | | | | | | Earn-outs treated as contingent consideration | $0 | $0 | $23,282 | $23,282 | | Earn-outs treated as liability awards | $0 | $0 | $41,843 | $41,843 | | Total liabilities | $0 | $0 | $65,125 | $65,125 | - The fair value of the Convertible Senior Notes was approximately $486.9 million as of September 30, 2022, determined using a Level 2 fair value measurement[143] - Changes in Level 3 liabilities include additions from acquisitions and changes in fair value of contingent consideration and liability awards, totaling $65.1 million at September 30, 2022[143] Note 12. Commitments and Contingencies Details LivePerson's commitments, including 401(k) plan contributions, letters of credit, and sales tax liabilities - The company's 401(k) plan includes a Safe Harbor match of 100% on the first 3% of eligible compensation and 50% on the next 2%, with immediate vesting, and employer matching contributions were $2.8 million for the three months and $5.8 million for the nine months ended September 30, 2022[145] - As of September 30, 2022, the company had a $0.9 million letter of credit as a security deposit for a supply contract[146] - An accrual balance of $1.1 million for sales tax liabilities exists as of September 30, 2022, down from an initial estimate of $2.5 million in March 2020, due to payments made[147] Note 13. Stockholders' Equity Information on LivePerson's common stock, stock incentive plan, and stock-based compensation expense - As of September 30, 2022, 77,934,440 shares of common stock were issued and 75,188,197 shares were outstanding, with 200,000,000 shares authorized[149] - The 2019 Stock Incentive Plan has 40,067,744 shares authorized for issuance, with approximately 2.0 million shares remaining available as of September 30, 2022[151] Stock-Based Compensation Expense (In millions) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $31.9 | $18.3 | | Nine Months Ended Sep 30 | $100.3 | $48.0 | - Total unrecognized compensation cost related to nonvested share-based arrangements was approximately $24.8 million, expected to be recognized over 2.6 years, and $130.1 million for nonvested RSUs, expected over 2.8 years[157][158] Note 14. Restructuring Details LivePerson's Q2 2022 restructuring initiatives and associated severance and compensation costs - LivePerson initiated a restructuring in Q2 2022 to realign its cost structure, reorienting its global product and engineering organization and reallocating spending to customer success and go-to-market initiatives[163] Restructuring Costs (In thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Lease restructuring costs | $0 | $44 | $339 | $594 | | Severance and other compensation associated costs | $7,111 | $0 | $17,610 | $2,675 | | Total restructuring costs | $7,111 | $44 | $17,949 | $3,269 | - Restructuring costs for the nine months ended September 30, 2022, totaled $17.9 million, a significant increase from $3.3 million in the prior year, primarily due to severance and compensation costs[165] Note 15. Legal Matters Update on LivePerson's intellectual property lawsuit against [24]7 Customer, Inc., including jury awards and appeals - LivePerson is involved in an intellectual property suit against [24]7 Customer, Inc., where a jury awarded LivePerson approximately $30.3 million in May 2021, including $6.7 million in compensatory damages and $23.6 million in punitive damages[168] - On July 28, 2022, the Court denied [24]7's post-trial motions and granted LivePerson's motion for interest, awarding an additional $4.3 million, but [24]7 appealed these matters on August 26, 2022, so no amounts have been reflected in LivePerson's financial statements[169] - The company accrues for liabilities when a loss is probable and estimable, and continuously reviews and adjusts these estimates based on new information[170] Note 16. Income Taxes LivePerson's accounting for income taxes, deferred tax assets, liabilities, and impact of recent tax legislation - Income taxes are accounted for using the asset and liability method, recognizing deferred tax assets and liabilities for future tax consequences[171] - The company recorded a tax provision of $0.2 million for the three months and $1.3 million for the nine months ended September 30, 2022, which includes operating earnings and stock compensation tax deficiencies, partially offset by a tax benefit from a valuation allowance release related to the WildHealth acquisition[174] - A valuation allowance was recorded against U.S. and Germany deferred tax assets due to cumulative losses, while deferred tax assets in Australia, UK, Israel, and Japan are expected to be realized[172][265] - The Inflation Reduction Act of 2022, establishing a 15% corporate minimum tax and 1% excise tax on stock repurchases, is not expected to have a material impact on the company's financial results[176][267] Note 17. Equity Method Investment Describes LivePerson's joint venture with Pasaca Capital Inc. to form Claire, detailing investment and proportionate losses - On February 13, 2022, LivePerson entered a joint venture with Pasaca Capital Inc. to form Claire, a marketplace for health and well-being diagnostic testing, agreeing to contribute $19.0 million over five years for a 19.2% ownership interest[177] - As of September 30, 2022, $10.6 million remained to be contributed to Claire, and the company recorded its proportionate share of Claire's losses as $0.6 million for the three months and $0.7 million for the nine months ended September 30, 2022[177] - The equity method investment in Claire was $4.0 million as of September 30, 2022[178] Note 18. Variable Interest Entities Explains LivePerson's consolidation of Professional Corporations as VIEs through its WildHealth acquisition - In February 2022, LivePerson acquired WildHealth, which includes variable interests in four Professional Corporations (PCs), with WildHealth consolidating these PCs as VIEs and LivePerson determined to be the primary beneficiary[180] - The assets, liabilities, revenues, and operating results of these VIEs were not material for the three and nine months ended September 30, 2022[181] Note 19. Related Parties Details LivePerson's transactions with related parties, specifically services provided to Claire, an equity method affiliate - LivePerson provides services to Claire, an equity method affiliate, through a Master Service Agreement, including marketing, software development, and business/management services[183] - Revenues from related parties were $12.9 million for the three months and $26.2 million for the nine months ended September 30, 2022[183] - Deferred revenues for related parties were $20.7 million, and accounts receivable were $13.9 million as of September 30, 2022[183] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on LivePerson's financial condition and operational results, highlighting its Conversational AI business model and Q3 2022 performance Overview Introduces LivePerson as a Conversational AI leader, outlining its platform, strategic focus on messaging, and innovations in AI and automation - LivePerson is a leading Conversational AI company, offering the Conversational Cloud platform to enable businesses to engage with consumers via natural language across various messaging channels (e.g., Facebook Messenger, SMS, WhatsApp)[187][188] - The company's strategy focuses on building awareness and adoption of the Conversational Space, increasing messaging volumes through a broad ecosystem of endpoints and use cases, and investing in AI and automation[198][200][201] - Key innovations in Conversational AI include dialogue-based bot building, leveraging conversational data for intent detection, establishing agents as bot managers, and powerful Assist technology for agent efficiency[208][211] - LivePerson aims to sustain leadership by transforming how brands communicate, expanding into new industries like healthcare and financial services, building international presence, and leveraging open architecture for partners and developers[210][214][215][216] Key Metrics Presents LivePerson's key financial and operational metrics, including revenue, gross profit margin, net loss, and average revenue per customer Key Financial Metrics (Three Months Ended Sep 30) | Metric | 2022 | 2021 | Change (%) | | :----------------------------------- | :----------- | :----------- | :--------- | | Total revenue | $129.6 million | $118.3 million | 9% | | Business segment revenue | $120.1 million | $109.2 million | 10% | | Gross profit margin | 66% | 67% | -1% | | Cost and expenses | $178.1 million | $139.1 million | 28% | | Net loss | $43.2 million | $32.8 million | 32% | | Average annual revenue per enterprise and mid-market customer (TTM) | $675,000 | $570,000 | 18% | | Adjusted EBITDA (loss) | $9,105 | $6,860 | 33% | | Adjusted operating income (loss) | $2,042 | $(33) | N/A | - Average annual revenue per enterprise and mid-market customer increased by approximately 18% year-over-year to $675,000 for the trailing twelve months ended September 30, 2022[225] - Revenue retention rate for enterprise and mid-market customers on the Conversational Cloud was just below the target range of 105% to 115% for Q3 2022 and Q3 2021[225] Critical Accounting Policies and Estimates Discusses LivePerson's significant accounting policies and estimates, including revenue recognition, goodwill valuation, and legal contingencies - Critical accounting policies and estimates include revenue recognition, depreciation, stock-based compensation, accounts receivable, valuation of goodwill and intangible assets, income taxes, and legal contingencies[237] - Revenue recognition involves identifying contracts and performance obligations, determining transaction price, allocating it, and recognizing revenue as obligations are satisfied, with contract acquisition costs (sales commissions) deferred and amortized over 3-5 years[238][240][241] - Goodwill is tested for impairment annually or when circumstances indicate potential impairment, comparing fair value to carrying value, with no goodwill impairment charges recorded for any period presented[260][261][262] - The company maintains an allowance for doubtful accounts based on credit risk, historical trends, and current expectations, with a significant increase in the allowance during the nine months ended September 30, 2022[256][257] Results of Operations Detailed analysis of LivePerson's revenue and expense performance by segment for Q3 and nine months ended September 30, 2022 Revenue by Segment (In thousands) | Segment | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :-------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Business | $120,101 | $109,204 | 10% | $364,612 | $317,879 | 15% | | Consumer | $9,460 | $9,123 | 4% | $27,711 | $27,944 | (1)% | | Total | $129,561 | $118,327 | 10% | $392,323 | $345,823 | 13% | - Business revenue growth was primarily driven by increases in professional services ($14.6 million for three months, $28.0 million for nine months) and variable revenue from interaction and usage ($11.5 million for three months, $12.5 million for nine months)[274][275] Key Expense Categories (Three Months Ended Sep 30, In thousands) | Expense Category | 2022 | 2021 | Change (%) | | :----------------------------------- | :----------- | :----------- | :--------- | | Cost of revenue - business | $42,392 | $37,057 | 14% | | Cost of revenue - consumer | $1,289 | $1,738 | (26)% | | Sales and marketing - business | $42,826 | $34,640 | 24% | | Sales and marketing - consumer | $6,622 | $6,212 | 7% | | General and administrative | $32,171 | $17,193 | 87% | | Product development | $44,744 | $41,734 | 7% | | Restructuring costs | $7,111 | $44 | 16061% | | Amortization of purchased intangibles | $920 | $488 | 89% | - General and administrative expenses increased significantly by 87% for the three months and 93% for the nine months, mainly due to increases in contingent compensation ($10.3 million for three months, $30.5 million for nine months) and legal services[293][294] Item 3. Quantitative and Qualitative Disclosures about Market Risk Outlines LivePerson's exposure to market risks, including foreign currency exchange, accounts receivable collection, and interest rate fluctuations - The company faces foreign currency exchange risk, particularly from the U.S. dollar's movement against the NIS, British Pound, Euro, Australian Dollar, and Japanese Yen, with Israeli operations' expenses totaling $13.8 million (three months) and $46.2 million (nine months) ended September 30, 2022[322] - Collection risks for accounts receivable are regularly assessed, with the allowance for doubtful accounts increasing by $2.2 million to approximately $8.5 million during the nine months ended September 30, 2022[323] - The company's investments primarily consist of cash and cash equivalents, limiting material exposure to interest rate fluctuations[326] - Inflation has not had a material effect on the business, but significant inflationary pressures could impact financial condition if not offset by price increases[327] Item 4. Controls and Procedures Evaluation of LivePerson's disclosure controls and procedures, confirming effectiveness as of September 30, 2022, with no material changes - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022, ensuring timely and accurate reporting of information required under the Exchange Act[330] - No material changes in internal control over financial reporting were identified during the three months ended September 30, 2022[331] - The company acknowledges the inherent limitations of any internal control system, which can only provide reasonable, not absolute, assurance[332] PART II. OTHER INFORMATION Covers additional information not in financial statements, such as legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Update on LivePerson's legal proceedings, particularly the intellectual property suit against [24]7 Customer, Inc., detailing the jury award and subsequent appeal - A jury awarded LivePerson approximately $30.3 million in an intellectual property suit against [24]7 Customer, Inc. in May 2021, including $6.7 million in compensatory and $23.6 million in punitive damages[335] - On July 28, 2022, the Court denied [24]7's post-trial motions and granted LivePerson's motion for interest, awarding an additional $4.3 million, but [24]7 appealed these matters on August 26, 2022, and thus no amounts have been reflected in LivePerson's financial statements[335] - The company accrues for legal liabilities when a loss is probable and reasonably estimable, continuously evaluating and adjusting estimates based on new information[336] Item 1A. Risk Factors Refers to comprehensive risk factors in the Annual Report on Form 10-K, stating no material changes have occurred - The company's operations and financial results are subject to various risks and uncertainties detailed in its Annual Report on Form 10-K filed on February 28, 2022[341] - No material changes to the previously described risk factors have occurred[341] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Confirms no unregistered sales or repurchases of equity securities by LivePerson during Q3 2022 - There were no unregistered sales of equity securities by the issuer during the three months ended September 30, 2022[343] - There were no repurchases of equity securities by the issuer during the three months ended September 30, 2022[344] Item 3. Defaults Upon Senior Securities States LivePerson experienced no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred during the period[346] Item 4. Mine Safety Disclosures Indicates that mine safety disclosures are not applicable to LivePerson, Inc - Mine safety disclosures are not applicable to LivePerson, Inc[347] Item 5. Other Information States that there is no other information to report for the period - No other information is reported in this section[348] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including certifications, an amended offer letter, and Inline XBRL documents - Exhibits include certifications by the Chief Executive Officer and Chief Financial Officer (pursuant to Exchange Act Rule 13a-14(a) and 18 U.S.C. Section 1350)[350] - An Amended and Restated Offer Letter between LivePerson and John D. Collins, dated August 9, 2022, is filed[350] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents, and Cover Page Interactive Data File) are included[350] Signatures Official signatures of LivePerson's CEO and CFO, certifying the report's submission - The report is duly signed on behalf of LivePerson, Inc. by Robert P. LoCascio, Chief Executive Officer, and John D. Collins, Chief Financial Officer, on November 8, 2022[354]