LivePerson - Q1 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LivePerson's first quarter 2023 earnings conference call. My name is John and I'll be your conference operator today. At this time, all participants are in a listen only mode. After the prepared remarks, the management team from LivePerson will conduct a question and answer session, and conference participants will be given instructions at that time. To give everyone the opportunity to participate, please limit yourself to one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Chad Cooper, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Chad Cooper (SVP of Investor Relations)

Thank you, John. Good afternoon, everyone, and thank you for joining us today. On the call with me today are Rob LoCascio, LivePerson's Founder and CEO, and John Collins, Chief Financial Officer. Please note that during today's call, we will make forward-looking statements, which are predictions, projections, and other statements about future results. These statements are based on our current expectations and assumptions as of today and are subject to risks and uncertainties. Actual results may differ materially due to various factors, including those described in today's earnings press release and the comments made during this conference call and in 10-Ks, 10-Qs, and other re-reports we file from time to time with the SEC. We assume no obligation to update any forward-looking statements. Also, during this call, we will discuss non-GAAP financial measures.

Reconciliations of GAAP to non-GAAP financial measures are included in today's earnings press release and the supplemental slides where applicable. Both the press release and supplemental slides, which include highlights of the quarter, are available on the investor relations section of LivePerson's website. I'd like to remind everyone that we are here today to talk about our first quarter of fiscal year 2023. As you may be aware, a shareholder has announced its intent to nominate candidates for election as directors at the company's 2023 Annual Meeting of Stockholders. The company intends to file definitive proxy materials related to the 2023 annual meeting in due course. Stockholders of the company are strongly encouraged to read the company's definitive proxy statement, the accompanying proxy card, and all other documents filed with the SEC carefully and in their entirety as they contain important information.

Information regarding the identity of the company's participants and their direct or indirect interests by security holdings or otherwise will be set forth in the definitive proxy statement and other materials filed by the company with the SEC. Stockholders may obtain copies of these documents for free through the company's website or through the SEC's website at sec.gov. We will not comment further on this matter on this call. We appreciate you keeping your questions focused on LivePerson's performance and results. With that, I will turn the call over to Rob. Rob.

Rob LoCascio (Founder and CEO)

Thanks, Chad. Good afternoon, and thank you for joining us for our first quarter 2023 earnings call. LivePerson had a really good quarter, generating revenue of $108 million while narrowing our EBITDA loss to $1 million as we continue to execute on our profitability goals. Total revenue was at the high end of the range, and adjusted EBITDA was well ahead of the guidance range. We continue progressing on the business initiatives crucial for our next phase of growth, including a narrowed focus on our B2B core and rightsizing our expenses. We are reaffirming total revenue and adjusted EBITDA guidance for the full-year, and John will provide more detail on the financials shortly. For the company, our employees and our customers, May second was the start of the next leg of our journey with the launch of our new generative AI products and platforms.

The changes we implemented over the past five quarters, including removing non-core revenue, divesting of our consumer business, gives us a solid operating foundation to support our growth and focus on the opportunity we see from the core business. We've also completed the consolidation of certain go-to-market functions, which will meaningfully improve our P&L going forward. Our company is at an inflection point. With the changes we have implemented, we are poised to accelerate profitable growth in the periods ahead. We have set our sights on becoming one of the largest and most effective enterprise AI companies as we have the advantage of our early entrance into AI five years ago. We believe that generative AI will significantly accelerate our existing traction in delivering high quality automation and business outcomes to the enterprise.

Most AI models are trained with tens of thousands of AI-generated conversations labeled by employees or freelancers. LivePerson hosts billions of conversation with our enterprises and consumer conversations with the input of 350,000 live experts on our platform. Coupled with 250,000 API endpoints that enable not only engagements but also transactions, this approach is imperative to enable generative AI in the enterprise. Our generative AI advantages are rooted in our precision data set, 350,000 customer service agents on our platform generating the quality data, our secure guardrails protecting our customers and their data, and integrations into our customers' back-end systems, which allows us to do transactions and outcomes. Those of you who joined our product launch event last week saw that LivePerson could customize and tailor responses to suit the situation and reflect the brand's voice.

With the largest customer conversational data set and a very strong platform for handling the data. Additionally, the voice-based acquisition has been a key accelerant to driving the efficacy of our data and allowing it to be prepared to scale with the new AI large language models. LivePerson is a global leader in conversational AI. Hundreds of the world's leading brands, including HSBC, Virgin Media, Chipotle, use our Conversational Cloud. We power nearly one billion conversation interactions every month, providing a uniquely rich data set to build connections that reduce costs, increase revenue, and are anything but artificial. We use this data set and expertise to act as the assembler so that the responses are grounded and the large language models only use these to generate high quality responses. It can't be overstated how important it is that LivePerson can leverage the humans in the loop on our platform.

Over 300,000-350,000 skilled humans are using the LivePerson platform, continually training and refining answers to provide the risk mitigation or guardrails necessary to help enterprises safely leverage generative AI. This ensures that all AI conversations are grounded in facts and relevant to our brands, that we reduce what they call hallucinations. I really feel that one day, if we look at the asset value of the company, our data set alone has such a tremendous value because of its uniqueness in providing high quality outcomes. One of the most important aspects of our platform is that they combine high quality conversation using large language models and AI actions that generate sales and service outcomes due to our deep integration to the back-end systems. Our Tenfold acquisition also supports these integrations as a key pillar.

When we look at working with brands, I've been out with them recently, many of them talking about this. The biggest part they're looking for is the outcome or the action. What we're seeing in most things when it comes to large language models is we see that the conversation is natural and it gives good responses, but we don't see usually an outcome like a sale or service outcome. That's where we really shine. We have over 250,000 APIs integrated into our system today that provide those outcomes. As many of you watched on May second, you may have also saw that we have plans to deliver AI in a different way, in which we call an EAI framework. The E indicates our commitment to AI that is equal, enterprise grade, and for everyone.

Unlike what we talk about with OpenAI, and just openness as a general term, we think EAI is much more focused on what our customers want in the enterprise. It takes the power of generative AI and large language models, but assembles them with the right data set and training that allows us to deliver outcomes in a safe and responsible way. With the release now of our Voice AI platform, we can integrate all of that into voice platforms like a Genesys or Amazon Connect or Five9. This will help us accelerate what we set out to do seven years ago. As you know, I fundamentally believe that traditional voice calls with agents was never the way of the future. Now we will accelerate those conversations to get automated at a very high rate.

It's about a $60 billion TAM. What I could see now is I think we can get to a place where 80% of those conversations can get automated, that we don't need human beings anymore, taking those calls. I think that'll happen over the next five years. We're really excited about the opportunities. Obviously, all the work we did in the last couple of months is really about restructuring the business to be able to focus on this big opportunity. Obviously, we had to put a lot of effort into that restructuring, but now we can put 100% of our focus into growth, and that's where we are today.

When we look at the quarter, we signed 70 new deals in the quarter, including four 7-figure deals, 50 expansions renewals, 20 new logo deals, and we completed the restructuring of our go-to-market teams in Q1. We did put a focus on more and higher quality logos than we usually do in the mid-market and small business. We're shifting in that area 'cause we see with this technology now, we can do a lot more transformation. We are focused on that during the quarter, and that'll continue forth into Q2. We did sign a four-year 7-figure deal with Europe's largest bank and financial services company. Our immediate goal with this brand is to plan a generative AI strategy that puts LP at the core of everything, how they engage with their customers and their employees. They serve 23 markets today.

I think what's interesting about this deal, it's our third, I believe, second or third renewal with them. Even in the face of everything going on with generative AI, they wanna put it on a platform that can allow them to do it in a way that generates the outcome in a safe and secure way. I think it's just a testament, once again, of how are we playing in the market with this new shiny object, and how do we make it real when it comes to bringing it to the enterprise. We also signed a s-figure renewal deal with one of the largest multinational telecommunications companies in the world. This brand increased customer adoption of messaging with comprehensive use of our AI suite, like Conversation Builder, Conversation Assist, and Proactive Messaging.

We're now going across care, obviously sales, retention complaints, and we're expanding our relationship with them, once again, as we expand using this new technology. We also landed a 7-figure renewal deal with a multinational financial service company and the largest bank in Canada. This brand doubled its LP investment in the spring of last year, leveraging our automation services. In four months, our automation already powers 35% of all their conversations, which is climbing daily as we optimize the operation with our dedicated automation team. Volume is critical for them, but also the quality of the conversations is what we deliver on a day-by-day basis. In that deal, we beat out Salesforce and Genesys for this engagement and are pleased what we're doing with them on deployment so far.

Important to note that one of our large Fortune 500 health insurance providers set a global goal to shift 50% of their call volume to messaging to achieve further operational efficiencies, providing meaningful upside to our engagement with the client. This is also with. We're taking that volume out of one of the traditional contact center players. We landed a 7-figure deal with a large healthcare service provider, will begin their journey with web messaging and move quickly into IVR deflection and Proactive Messaging. A large, retailer in the U.K. has embarked on a five-year transformational plan, with digital technology playing a key component.

Phase 1 is to deploy our technology for care, focusing on reducing the contact center costs. Then Phase 2 is to remove, one of the, you know, ticketing, platforms and turn that into an asynchronous, in-integration where we're delivering the large language models and delivering a better consumer experience than, you know, traditional ticketing. The final restructuring in Q1 enables us to focus on driving profitable growth at a scale that will match the demand now in the market for enterprise AI. Now that we have that, you know, restructuring behind us, we can return to focusing on all efforts on engaging the growth engines and bringing our new products and platforms to our brands.

We're in a really unique position right now when it comes to generative AI and bringing it to the enterprise because of our history with them and our trust with them. They've used these tools with us, so now they just want to accelerate the use of these technologies when it comes to scaling their operations, especially in the contact center. It's not only limited there. There's already a bunch of customers that are using us for, like, HR use cases and IT use cases. I think as we see, where we wanna go with the platform, we will continue to expand into use cases that leverage what we've learned in the contact center to go after other business units. With that, let me now turn the call over to John, who will discuss the financial results. John?

John Collins (CFO)

Thank you, Rob. The 1st quarter of 2023 was a transformative one for LivePerson's financial profile and growth strategy. As we committed last quarter, we completed one of the largest restructuring events in the company's history, enabling us to enter the 2nd quarter with a profitable run rate and a focused go-to-market strategy for accelerating growth within the B2B core. Significantly, our restructuring plan did not simply pare back spend for the traditional enterprise sales model. Instead, we eliminated redundancies across sales and customer success and combined those roles with product and engineering talent to ensure the needs of our customers could be efficiently solutioned. By bringing customers close, closer to code, we reduced the meetings, ticketing, and scoping that were previously necessary.

We sharpened our focus on the B2B core by providing transparency into recurring revenue and winding down non-core business lines, including divesting Kasamba, which was the business underlying our consumer segment since 2007. We also strengthened the balance sheet by retiring at a significant discount, $157.5 million in principal amount of the $230 million in convertible notes maturing in the first quarter of 2024. As Rob discussed, our market is evolving rapidly, driven in part by the transformative capabilities of generative AI. The strategy and P&L changes that I just described have also enabled us to reallocate resources in this direction to significantly enhance our broader platform and immediately deliver better business outcomes for our customers.

With the generative AI products we launched last week, the rate at which we can automate the consumer experience and reduce costs for our brands in both voice and messaging channels is incredibly exciting. Turning to first quarter and our results. In the first quarter, we generated revenue of $107.7 million, which was within our guidance range of $106 million-$109 million. However, as discussed last quarter, and in Rob's remarks, we divested Kasamba, the business unit underlying the consumer segment, on March twenty, which means we'd not recognize a full quarter of revenue for Kasamba as contemplated in our prior guidance. Had we recognized the full quarter of Kasamba revenue, our total revenue in the first quarter would have been $109 million, at the high end of our guidance range.

Given the divestiture, we will discuss expectations for the year on a normalized basis, that is, without the impact from Kasamba. Excluding revenue from Kasamba, we recognized $100.5 million, consistent with the high end of our normalized guidance range, which would have been $98.4 million-$100.4 million. B2B core recurring revenue was approximately 82% of total revenue in the first quarter and also consistent with the high end of our expectations. The improvement in revenue was primarily due to higher B2B core professional services and certain one-time contributions. Adjusted EBITDA was a loss of $1.3 million, which was better than our expected loss of $8 million-$6 million.

In addition to higher B2B revenue, the overperformance in adjusted EBITDA was driven in part by the timing of expenses for sales and marketing and cloud migration, which we do expect to incur in future quarters. It was also driven in part by solid execution of our restructuring plan. Before turning to our standard reporting segments for the first quarter, note that these segments still reflect declining revenue contributions from non-core business lines. With a B2B core revenue and expense trough in the first quarter and our restructuring plan fully executed, we expect an inflection point in the second quarter and sequential improvements for the B2B core for the remainder of the year.

With that said, within total revenue for the first quarter, the B2B core recurring revenue component of hosted declined approximately 4% year-over-year. Revenue for the total B2B segment declined 17% year-over-year, revenue from hosted software declined 25%. As discussed last quarter, the primary drivers of these declines are non-core business lines, including COVID-19 testing, gainshare labor, and pandemic-driven gainshare variable revenue. Professional services revenue grew 38% year-over-year, driven in part by the diagnostics project for the JV that we discussed last quarter. The consumer segment declined 21%. Had we recognized a full quarter of revenue from Kasamba, revenue for the consumer segment would have declined 6.8% year-over-year. Given the divestiture, we do not expect to report on the consumer segment in future quarters.

Again, we will discuss expectations for the year on a normalized basis without the impact from Kasamba in the first quarter. Note that a full reconciliation is provided in the press release. From a geographic perspective, U.S. revenue declined 21% year-over-year, and international revenue declined 9% year-over-year. Again, the primary drivers for these declines are the non-core business lines that we are winding down. Net revenue retention was below our target range of 105%-115%, due in part to our focus on restructuring the first quarter and increased downsells in our SMB and MMB market segments. Again, we expect sequential improvement in the second quarter and going forward.

RPO decreased 18% year-over-year to $368 million, due primarily to the wind down of non-core business lines, including professional services for the JV. Average revenue per customer was $665,000, up 3% year-over-year. Note that this metric is based on total revenue, so the sequential decline from last quarter is again attributable to the wind down of non-core business lines, including Gainshare labor and professional services for the JV. In terms of guidance, we achieved our expectations for the first quarter and we remain on target for the year. Given our current visibility into the macro environment, we are reaffirming full-year revenue guidance range.

Inclusive of Kasamba revenue, the guidance range for the full-year is $394 million-$408 million, or a decline of 23%-21% year-over-year. Note that this growth compares to a full-year of Kasamba revenue last year. Normalizing for Kasamba in both periods, removing its impact, our revenue guidance range is $387 million-$401 million, or a decline of 19%-16% year-over-year. We expect B2B core recurring revenue to be approximately 86%-87% of total revenue for the full-year. For full-year adjusted EBITDA, we are reaffirming our previous guidance range of $15 million-$32 million.

As a reminder, part of the overperformance in the first quarter was due to the timing of certain expenses that we expect to recognize later in the year. It is not necessary to normalize our Adjusted EBITDA range for the impact of Kasamba because no material contribution was originally expected. As for the second quarter, our guidance range for revenue is $95 million-$99 million, or a decline of 23%-20% year-over-year. Note that the recurring revenue component of total revenue in the second quarter is expected to be approximately 87%. This implies a 2% positive growth sequentially from the first quarter. As a reminder, the sequential decline in total revenue from the first quarter is due primarily to professional services revenue for the JV that is not expected to continue, in addition to lower Gainshare labor revenue.

As for adjusted EBITDA in the second quarter, our guidance range is $3 million-$7 million, or a margin of 3%-7%. Once again, with the restructuring behind us, we have reached an inflection point in the second quarter and expect sequential improvement in profitability for the remainder of the year. Wild Health growth rate in the first quarter was consistent with the expectations we set last quarter for its core revenue to double for the full-year of 2023. Before taking questions, I'd like to emphasize several key themes. Solid execution of the restructuring plan that we discussed last quarter has enabled us to reach an inflection point for the B2B core revenue and profitability. After troughing in the first quarter, we expect profitable growth in the second quarter and sequential improvement going forward.

Our line of sight to profitable growth is a function of three primary factors. First, a narrowed focus on our B2B core, coupled with rapidly growing enterprise demand for AI-driven transformation. Second, a more efficient and capable sales and marketing organization with integrated product and engineering support to deliver hands-on AI expertise to our customers. Third, generative AI enhancements across the platform, including in both voice and messaging channels, with the necessary guardrails and back-end integrations to deliver better business outcomes for the enterprise today. With that, operator, I'll pass it back to you for questions.

Operator (participant)

Thank you, sir. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, in the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from the line of Siti Panigrahi with Mizuho. Please proceed with your question.

Speaker 7

Hey, this is actually Dan on for Siti. Can you just provide some additional color on the magnitude of the expense timing impact in Q1 and perhaps what that relates to?

John Collins (CFO)

The restructuring event that occurred in the first quarter was the largest over the course of the last 12 months. As you may know, we've been rationalizing our cost structure since we entered 2022, and that culminated really in the first quarter. The key areas of consolidation and expense reduction were in our go-to-market organization and in part, our technology organization as it relates to areas of the platform that we no longer need to support. The effective run rate for us in the second quarter, again, as a result of that restructuring, flipped us from a loss to a gain going forward.

Speaker 7

Gotcha. I guess just on the go-to-market consolidation, is it possible to provide more detail on that, maybe your sales capacity going forward, and if that will allow you to re-accelerate revenue growth beyond this transition period?

John Collins (CFO)

Yeah. I think broadly... Go ahead, Rob.

Rob LoCascio (Founder and CEO)

No, go ahead, John.

John Collins (CFO)

Broadly, the restructuring allowed us to right-size the organization, and we have come away with a more efficient sales and marketing organization coupled with our product and engineering resources that allow us to be more responsive to the demands of our base today. I think as we look forward, we'll hire, we'll hire according to the rate at which we continue to build pipe and respond to demand. I think we're well positioned today to be responsive.

Rob LoCascio (Founder and CEO)

Yeah. We also, because of the nature of where the business is and our focus on, you know, the acceleration of AI, obviously we did messaging then five years ago, we added the automation, but now it's all AI, and I can double-click on what that really means for us as a company. We did a heavy restructuring around the customer success org, and we ended up creating a new org. It's called LP One, and it's led by product and engineering. In the past, we had more relationship managers. Our customers want experts around AI and automation. We did this big restructuring and removed a lot of those pieces, and then we took, you know, product heads that are, you know, really key to the company, but now they're running customer-facing operations.

We're pairing that with client partners that are really instrumental in driving revenue. I think we're gonna have a much better, you know, result in driving usage on the platform. The bottom line is, if you're gonna show up as an AI company, you got to show up with product and engineering folks versus the traditional customer success folks.

Speaker 7

Okay. Thank you.

Rob LoCascio (Founder and CEO)

Thank you.

Operator (participant)

The next question comes from the line of Peter Levine with Evercore ISI. Please proceed with your question.

Chirag Ved (VP of Enterprise Software)

Hey, this is Chirag Ved on for Peter Levine. Thanks so much for taking the question. I wanted to ask how you might be thinking about capital allocation for the remainder of the 2024 convertible notes as well as the longer-term notes you have. Thanks so much.

John Collins (CFO)

Sure. Again, we retired all but about $73 million of the 2024 notes. As we discussed in the prepared remarks, we expect to continue to accelerate profitability going forward, and be cash flow positive exiting the year. The balance of cash that we expect to end the year with will be more than adequate to both satisfy the remaining, $73 million in notes and of course, have ample operating capital to run the business.

Chirag Ved (VP of Enterprise Software)

Okay. That's all from me. Thank you.

John Collins (CFO)

Did you have a follow-up?

Chirag Ved (VP of Enterprise Software)

No. That's. Thank you so much.

Operator (participant)

The next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital. Please proceed with your question.

Jeff Van Rhee (Partner and Equity Research Analyst)

Great. A couple questions for me. I guess, Rob, one of the questions I get quite often, I know you're focusing more on the core businesses and trying to get away from distractions, and one of the businesses that I think most people I speak with don't find a tight fit with is Wild Health. When you look at that business, you know, different end users, different sales model, et cetera. I didn't hear a lot in the prepared script here this quarter, but just talk about your thinking and how that remains a core product, given the differences between that and say, the core messaging, B2B customer care offering.

Rob LoCascio (Founder and CEO)

Yeah. I mean, we have a large group of healthcare companies in our core. If you go back to what that is, it's a platform play. As a matter of fact, they're working on some larger deals with healthcare providers to use that platform to drive scale in healthcare outcomes. It was always looked at as like, you know, if you want to go into healthcare, there's a lot of expertise you need in that area, especially around regulatory and things. They built a pretty tremendous platform. Now we've incorporated all the large language models so we can scale, you know, how a doctor or a healthcare coach can service, you know, customers at a different scale than normal. For us, you know, obviously it's growing, it's growing very, very large.

Healthcare and AI, if you look at any other company out there on the tech side, they've got an investment in healthcare, almost all of them. It's important, as an investment, and I think in the future, we'll see some pretty, massive returns with that product. Once again, We should look at it as a vertical play today. I think later on in the year we'll be able to give some perspective on doing deals with these larger healthcare providers. Which I think will, you know, allow the shareholders to get a better sense of how it plays into our overall strategy.

Jeff Van Rhee (Partner and Equity Research Analyst)

Okay. On the core business around the core B2B, understanding you're really leaning in on the AI side. Until that takes hold, and as I look at like the Q1 performance, talk about the competitive landscape for the core B2B messaging offering. You know, you were early to get there with automations. It looks like the AI/automation rates were relatively flat this quarter. That for a while felt like you had clear sort of best in class platform. The momentum on the booking side, revenue growth, I think you gave the NRR was below the 105-115 this quarter. Just talk more in detail about what's going on with that. Are you winning your share? Are you just not getting it in enough deals? Why is that business not growing more?

Rob LoCascio (Founder and CEO)

I think it comes down to our focus. You know, if I can go back and, you know, change things, obviously the things our customers got us into and we unwound and the restructurings that we did to get profitable, it's the focus, you know, to take out, you know, the amount of expenses we took out in 12 months to be here, and the team did a great job at that, and that wasn't easy. Obviously the focus now is growth again. We're still signing large logos and large banks and all that. We sign renewals with some of the largest banks in the world, even though we're in the middle of generative AI and, you know, it's because they trust us. I think what we need to just show the world is that we'll get back to growth.

We shouldn't marginalize all the efforts it took to restructure the business over the last 12 months and the focus it took to do that and to execute on that. Obviously the quarters going forward will be the judgment, you know, on how we can execute and grow the company. I think we're in the right place, and we still have the gold standard of that platform. Now, you know, adding in all that technology we just launched, which is GA, will help us sort of grow. That's our focus now. That's our one focus. We don't have to worry about, you know, restructuring anything anymore. We're done with that. That's behind us.

John Collins (CFO)

Hey, Jeff, I just wanna add to the NRR comment that while we're below the range, the primary reason for that was increased attrition down-market in small business and mid-market segments in particular. As we restructured and focused on the demands of enterprise and of course, made it through the distraction of the restructuring. We think going forward that the down market, that lower end of the market would be better served by the enhanced product usability and platform self-service that you may have seen we launched last week. We think there's upside there as we move forward down market and of course, within the core of enterprise, it remains strong.

Jeff Van Rhee (Partner and Equity Research Analyst)

Mm-hmm. Given the scale really lies in the enterprises, would you expect the automation rates, the percent of messages being automated to rise, or how should we think about that number going forward?

Rob LoCascio (Founder and CEO)

Yeah, that's.

John Collins (CFO)

Yeah.

Rob LoCascio (Founder and CEO)

That's the big thing. There's no more bot building. Like, as of, you know, last week, we don't have to build bots anymore. The ability to automate conversations, especially the long tail, is there. I think I gave an example maybe on the last call. I didn't, but we looked at all the airlines that we have, and we started to use the large language models to look at conversations that were happening with agents. Believe it or not, there are a bunch of conversations about bringing like an iguana on a plane. Now, you would never build a bot around the intent iguana, but on our airlines, people are asking, "Can I bring an iguana?" And we can handle that now with the models because it basically is just looking at the data set.

The rate of automation is gonna really increase. The second part of that is that the actions that we can do on the platform, the automations are only as good as they do actions, and we've got all these integrations already, so, you know, these should be done at a very high rate, especially on the voice side. I wanna finish what we set out to do, which is get rid of traditional voice. With our Voice AI launch, that's what we'll be focused on.

Jeff Van Rhee (Partner and Equity Research Analyst)

Okay, the last one, just John, I think you mentioned you covered a lot of ground there really quickly, but I think you mentioned there were some one-time items that affected revenues, and I think you were talking about B2B.

John Collins (CFO)

In general, those are pretty small. The largest contribution for the first quarter was really core B2B professional services being up. In terms of one-time items, there's some catch-ups normal to big enterprise deals that we also recognized in the quarter.

Jeff Van Rhee (Partner and Equity Research Analyst)

Got it. Okay. Thanks for taking my question.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on the telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove any question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Zach Cummins with B. Riley. Please proceed with your question.

Zach Cummins (Senior Equity Research Analyst)

Hi, good afternoon, thanks for taking my questions. John, could you talk a little bit more about the adjusted EBITDA upside here in Q1? It sounds like there were maybe some costs that were delayed versus when you were previously expecting.

John Collins (CFO)

Sure, hey, Zach. In the first quarter, we had previously expected more marketing expense, for example, which ended up not being necessary for a variety of reasons that we fully expect to deploy later in the year. That's a significant component. Then as we continue what is a complex migration to the cloud, there is expense that we expect to hit later in the year as well, that did not occur in the first quarter. Those are the two primary drivers.

Zach Cummins (Senior Equity Research Analyst)

Got it. Understood. Rob, just from your launch event of all your new AI solutions, it sounds like some pretty interesting opportunities, if you can expand into HR and IT use cases. It sounds like you have a few customers that have gone down that route. Can you give any sort of early feedback that you've gotten from customers as you expand beyond just customer care with your AI platform?

Rob LoCascio (Founder and CEO)

Yeah. One of the There's two parts to our platform. One is called KnowledgeAI, the other one is obviously the large language models and the ability to generate the outcomes. We now have the ability to put in, like, PDF documents, knowledge base. We've had this previously, we enhanced it for the models. You can take in all that data. It could be an employee handbook, it can be all of that, you can put it into our platform, instantly it gets prepared for the models. When you look at all the tooling that you have to do to make generative AI work, it's real tooling, especially around the data side. If you just put the data in it, the data could be formatted in a way that the model won't understand it.

We built a process for the model to understand that. It opens up those use cases, and we already have a handful of large customers who use it for that, who built automations on that. I think the power, and if you were watching the event last week, the journey to be an AI company from a conversational AI company is one. The first thing we're gonna release in about eight weeks from now is a new interface to the data set. This will allow anyone in the company to ask questions of the conversational data that we store.

Imagine a person in marketing can say, like, "Tell me why people are not happy with this product today." "Tell me, like, what's the best marketing campaign that I could build to sell this type of product?" That access to that data, and then what we're hearing is our customers wanna put more data inside there, maybe Medallia surveys and other things. This kinda shifts us into a different place when it comes to our to doing AI in the enterprise. That, that could be in the HR side, it could be in the IT helpdesk side. Obviously, we have a focus on continuing down the path of customer engagement, but that data set is important, and the ability to put more data into the platform to grow other use cases is also important. That's what they can do today.

That's what's exciting about our strategy and what I think is very different from what people are trying to do out there.

Zach Cummins (Senior Equity Research Analyst)

Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter.

Rob LoCascio (Founder and CEO)

Thank you.

Operator (participant)

The next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Speaker 8

Hi. Thanks. This is Chris on for Arjun. Thanks again for taking the question. The first one for me, I wanted to get your take on the evolution of the competitive landscape going forward with generative AI becoming more and more common. How to think about LivePerson's source of competitive advantage as LLMs make interacting with businesses through chat and natural language more accessible than ever.

Rob LoCascio (Founder and CEO)

Yeah. If you look at how I think it's gonna play out, we'll take the next couple of months and then years. What the enterprise is looking for right now is safety and security. They wanna start using this stuff tomorrow, but they need it on platforms that will allow them to adhere to the ideas of data sovereignty and security around that. We've already provided that. For us, it's kinda like one click, and we're guaranteeing that using these models are gonna be done in a way that adheres to the principles of the enterprise, especially around data. That's the one part. The second part is what is an enterprise AI company and what is it gonna look like?

I think that play is interesting, which is that there'll be these desktops in the entire organization, and they're gonna use this technology to generate business outcomes. What I believe could win the day, this is our strategy, is that it starts with the data set. OpenAI gives you the data set of the Internet, that's there. The most valuable data set to the enterprise is the customers and the customer conversations. We go to work to understand our customers better. What I see in the upcoming years is the data set. If you wanna judge who could potentially win this horse race, it's who's got the best data set to generate a business outcome. For us, we're sitting on one of the best data sets.

You can ask the customers questions. It's interesting, like in real-time, you can say, like, ask the customers, "What do you want from me?" You know, and I think that has a power to it, and it's unique to us. There's other. You have Salesforce out there now, obviously, you know, using it, what they're doing with their data set, which is CRM data. They have a lot of that. They do have some customer care. They have very limited conversational data like we do. There are voice companies out there, and I think they're the most susceptible for change because they have voice data. Some of it's transcripted, but a lot of it just remains in the voice, you know, in voice files.

I think you gotta think about, the large language models become not commoditized, but I believe we'll have our own soon. We're using others. I think the brands will create their own, depending on the data set, and then the data sets themselves become the competitive weapon to being pervasive. I think over the next, you know, five years or so, the winners could be these people who have these data sets. I also think the acquisition model, there may be M&A in the future around data sets. Where do we get our hands on better data sets to generate those business outcomes? That's kinda how I see it playing out.

John Collins (CFO)

Yeah, Chris, I just wanna underscore a key point that Rob made, which is that today there's billions of dollars spent by our enterprise brands on agents to field voice calls. That's often the case because the intent, the desire that the consumer has to get resolved with the brand is in the long tail, not easily automated on yesterday's technology. That's no longer the case, and we're very well-positioned given our platform that's heavily integrated into the back-end systems of the brands today to deploy generative AI to drive business outcomes today, to kinda transform the cost structure that our brands currently have to run these service centers and even, to provide support and on sales.

The positioning we have at this moment in time is the data, as Rob said, but also the integrations and the processes that we've been refining for decades to help brands take costs out of their contact centers. That's something that we can deploy and have deployed already as of last week.

Speaker 8

Got it. Just one other thing I wanted to touch on, the generative AI topic. Where do you expect that you would see kind of a short-term tailwind show up in the business? I know last quarter you talked a little bit about an uptick in demo volumes kind of as customer attention has shifted towards things like OpenAI. Have you seen that translate to increased deal flow or sustained pipeline growth? Thanks.

Rob LoCascio (Founder and CEO)

Yeah. The short-term wins I see is that obviously the one we're turning on, like, immediately is what we call, you know, making the agents more efficient so the agents don't have to type anymore. That's actually the easiest, safest way to deploy this technology, and we're opening that up. You know, that's on the platform now, and every customer can do that. Also, there's like summarizations of conversations. Normally that's a manual process, so now it automatically happens so that agents spend 45 minutes to one hour a day basically summarizing the conversations they had. We already have this technology, but it's enhanced with the large language model. That's the easiest one. The second one is automating the conversations fully, that's the next part.

That's also, there's some low-hanging fruit in there. Then I actually think the greatest low-hanging fruit, which will be out in a couple weeks, is this concept that more than a is the platform we're putting out, we call Bella for Business, which is the ability for the organization to ask questions of their data. That's a, that's a safe, you know, thing to do. Like, you can just ask questions and get outcomes, and a marketer could ask questions of their conversational data to understand how to market better. That's, that's an easy no-brainer. I think there's some sort of base hits that we can get.

Ultimately, the home run is we automate the contact center at, like, an 80% volume, and there's only 20% of that's with humans or humans in the loop. Then the other part is we become very pervasive in providing the generative AI platform that every organization can use to do business outcomes like HR and all that. That's what we're playing for right now.

Operator (participant)

We have reached the end of our call today, I'll now turn the call back over to Rob LoCascio for any closing remarks.

Rob LoCascio (Founder and CEO)

Yeah. You know, I, obviously I started the company in 1995 and in 1997 invented chat and, you know, obviously it's ChatGPT, and everything is around this interface. The vision of the company has always been around that these conversational interfaces would power commerce, care, and everything else, and we've been singularly focused on it for many years. Our time has sort of come, and I know we're all trying to figure out we I wish we were here without all the restructuring. That creates a certain noise and uncertainty. We're here, and we bet to be here, and there's probably a handful of us in the world, when you think about it, there's probably 10 of us in the world that actually can say that they can deliver this technology and this revolution into brands.

Like I said, in one way, I wish we didn't have to do the restructuring, and a lot of companies went through this, 'cause it'd be a cleaner story, but we're here. We're here with one of the best products in the world and platforms. We've always been a leader at that. Right now, you know, when I think about our focus, it's really in two areas. One is we need to finish up what we started. I talked about killing the 800 number and all of that, and we need to complete that mission, and we will now with our Voice AI products. The second is we need to take this platform and use our data set as a way to leverage and apply it to other business areas like marketing and sales, even HR.

That's what we're focused on as a company. The large language models and generative AI just gives us an accelerant, but we always had the vision. We're not chasing something right now. We were one of the pioneers in how this could work. As shareholders, you know, I'm excited for the next couple quarters and how our company will get focused back on growth, how we'll get focused on, you know, continuing our missions of providing conversational AI and then generative AI to the enterprise. Ultimately, I think that leads us to being, you know, the largest enterprise AI company in the world. That's the bet we're making right now. Thank you for the support and we'll see you next quarter. Thank you, operator.

Operator (participant)

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.