LivePerson - Earnings Call - Q4 2016
February 8, 2017
Transcript
Speaker 0
Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the LivePerson Fourth Quarter twenty sixteen Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
You. On the call today are LivePerson's Founder and CEO, Rob LoCascio and CFO, Dan Murphy. You may begin.
Speaker 1
Thanks very much. Before we begin, please note that we will make forward looking statements during today's call, which are predictions, projections or 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, in the comments made during this conference call and 10 Ks and 10 Qs and other 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 certain non GAAP financial measures. A reconciliation of GAAP to non GAAP financial measures is included in today's earnings press release, which is available in the Investor Relations section of our website. I will now turn the meeting over to Robert Macascio, CEO and Founder of LivePerson. Thanks, Dan. Thank you for joining LivePerson's fourth quarter twenty sixteen conference call.
2016 was a pivotal year for our company. It was the year we validated our vision that LiveEngage, our new business messaging platform, will help the world's largest brands reinvent customer care. It's also the year we accelerate our migration to LiveEngage, setting us up in 2017 with a very clear picture of our future. Barring any unforeseen changes, we expect to end with approximately 95% of our revenue on LiveEngage by the third quarter. 93% of the customer base is already in the migration funnel, representing almost 60% of revenue.
When including our migration funnel, which represents the remaining revenue from brands who have already started moving on to LiveEngage, we have visibility into 84% of recurring software revenue today. As we discussed last year, there would be a group of customers not likely to come along for the journey as end of life nears for our legacy offering. Today, we have identified that risk, approximately $15,000,000 of revenue will not migrate to LiveEngage as associated with customers that are not aligned to a digital strategy. These contracts will not renew, and we will start taking the revenue impact primarily in Q1. We have been able, though, to offset this impact by targeting between 16,000,000 and $19,000,000 of savings in 2017, excluding onetime restructuring and noncash expenses.
Eliminating the migration overhang enables us to fast forward the winding down of the legacy infrastructure in order to gain meaningful operational efficiencies and strategic focus. In the third quarter, we'll be left with around $10,000,000 of revenues that will remain on the legacy platform. These are mostly mid market customers and a few enterprises that are digitally aligned but not appropriate to move to LiveEngage in the 2017 because of timing of features that are not on the near term road map. We've executed a strategy that maximizes the profitability of these customers by minimizing their ongoing support and technology costs, and this is tied to the savings in the 16,000,000 to $19,000,000 We hope to retain and even convert them, to portion them into the LiveEngage platform and on to being active revenue. We can now focus as a company on growth and selling.
We're in a strong position to become the dominant player in transforming relationships that a brand has digitally with its consumers over messaging. LiveEngage will support that vision and allow us to do something even greater than we did in the past. So let me tell you about the new chapter, the one where we're focused on signing 100 of the world's leading brands to messaging deals over the next twenty four months, one where we take aim at a multibillion dollar market opportunity and transform customer care, all of LivePerson is now focused on this chapter. Our strategy is clear. Across the globe, we are targeting a small group of brands, many of them already customers that hold the power to change the face of customer care.
These enterprises have thousands of agents in their contact centers and connect with billions of consumers each year. Over the next few years, we expect virtually every one of them to begin shifting voice agents and even store based employees to messaging. What's exciting is how clearly we can validate LivePerson's unique position within the marketplace. A year ago, we were talking about the early signs that LiveEngage will deliver on our vision. Today, we have the proof points.
We exited 2016 as a clear front runner in enterprise messaging with a large reference brand at scale and LiveEngage in each region of the globe. We turned on T Mobile in North America in the second quarter. LiveEngage messaging is already on millions of their devices, and we're still scaling. We turned on another major telco in Asia in the third quarter and in the fourth quarter, a leading brand in EMEA went live. We have leveraged our unique position these past few months by holding a series of high touch summits across The United States, Europe, APAC and Israel.
Our own customers are the highlight of the events presenting the case for messaging and live person. Through these summits, we have engaged with senior leaders and our targeted enterprise brands. Our strategy is working as we are seeing powerful customer momentum around our vision. Telstra, the largest telco in Australia, expanded and extended its contract with us in the fourth quarter. Telstra signed a five year, 8 figure deal to deploy LiveEngage across their entire enterprise.
Messaging is in the next twelve months of that road map and is the focus of that deal. Foxtel, Australia's largest paid TV provider, attended the messaging summit. Last month, we launched their app with LiveEngage messaging in it. Messaging is the only human assisted channel now they are providing in their app. There's no voice or email offered anymore.
In EMEA, a leading financial services firm expanded their contract with us. They signed an 8 figure, three year contract with plans to deploy messaging in 2017. We also signed a high 6 figure expansion with a major telco in EMEA to deploy messaging in early In North America, a leader in real time communication software chose to embed LiveEngage into their platform, and we're now integrating into one of the largest CRM platforms in the market. They will now be a reseller of our technology. And also in North America, one of the leading automotive portals went live with messaging instantly turning on thousands of dealerships with SMS.
I want to share two anecdotes that demonstrate how our vision resonates. One relates to a prospect that was a former customer. This prospect actually canceled about twenty four months ago after on the old platform after concluding the chat was not right for their organization. We are now engaged in a 7 figure sales deal, which is strategic to their organization. This, I think, is a really interesting customer.
It's a very large customer. And once again, they embrace messaging and the same decision maker who looked at chat as maybe not strategic went ahead and embraced messaging and is gonna scale with that as the strategy for care. We're just getting started, and we have more wins to share in future quarters. The shift to LiveEngage marks the most important product launch in our history as it pivots us to be the lead player in what will be what I believe is the third wave of digital, which is digitizing the relationships between brands and consumers. The first wave was digitizing the world's information and the second was social.
But really, the relationship today that a brand has with the consumers is predominantly still analog voice. And commerce, e commerce accounts for less than 10%, unless Amazon, of course. In the third wave, you know, consumers, they won't be forced anymore to call an 800 number, to be put on hold and have a terrible experience. Instead, consumers can be connected to their favorite brands the way they're connected to their friends and family. They'll carry those favorite brands in their pocket and always have a relationship that's convenient and on their time.
This is a game changing opportunity for LivePerson. By our estimate, the total addressable market for LiveEngage solely among our base today is approaching about 2,000,000,000. Not only do we have multiple offerings to sell, including messaging, mobile chat, content, analytics services, but our open architecture because we we built our platform on the latest technologies. It's an open platform that allows partners and even our customers to take a rich set of APIs and do many of the integrations. For example, there's a lot going on right now on our platform around bots.
We just actually put up a bot yesterday. Customer in Japan put one up and is now using it on top of LiveEngage. It's very easy and and especially on the bot side, which I think will become more and more talk more about it in future calls. The open APIs allow richness to that type of self-service artificial intelligence. Our field org is now focused on capturing this activity.
What's also exciting is that we've already seen great results on LiveEngage even before the impact of messaging materializes and even before every single LivePerson employee shifts focus, to driving renewed growth, which is happening today as we are finishing the migrations. Brands are embracing the platform. We are seeing strong mobile adoption out of the gate, accounting for 30% of total interactions of LiveEngage in the fourth quarter versus less than 10% than what we had on our legacy system. It's not just mobile messaging or chat. Brands are adopting multiple interaction types, including co browse, content, and and a very powerful analytics package that comes with the product.
In fact, 25% of our customers use more than just desktop chat in the fourth quarter versus less than 10% historically. Year over year, same customer usage growth exceeded 10% in the fourth quarter. That is the beauty of LiveEngage, and brands can quickly and easily adopt additional capabilities. Steady usage growth should ultimately translate into revenue and upsells. And although it was still a small sample set for year over year comparison, we're seeing indications of that trend within our existing customer base.
Dollar retention on LiveEngage in 2016 is greater than 100%. For the customers that are on LiveEngage, the revenue impact is greater than 100% on renewals. The path towards translating our vision into renewed growth and higher profitability is clear. In 2017, our entire organization is seeking to capitalize on the momentum we are building around live engagement messaging, and LiveVerse has once again captured the pole position in the pioneering industry. We will leverage the unique position we have built around our proven platform, referenceable customer base and a rich history of digital transformation.
We expect to exit 2017 with a revenue run rate that points us towards renewed growth in 2018. And as messaging adoption spreads through our customer base, we will be in a position to accelerate upsells and capture the multibillion dollar market opportunity that is in front of us. With that, I will turn the call over to Dan, who will discuss our second quarter results and outlook in more detail. Thanks, Rob. 2016 was a year of significant accomplishments for LivePerson.
We accelerated the migration to LiveEngage and are now on target to have 95% of our revenue on the platform by the third quarter. We are excited to end our transition in 2017 and start a new chapter with a strong, profitable base of revenue to build upon as we complete the migration, drive messaging adoption and refocus our field organization on growth. Early data points from LiveEngage verify the potential of the platform. We had a greater than 100% dollar retention rate from full service customers on LiveEngage in 2016. Same customer usage on LiveEngage exceeded 10% year over year growth in the fourth quarter.
And LiveEngage customers are embracing mobile as mobile accounted for approximately 30% of interactions in the fourth quarter. Equally important, as we were able to fast forward plans to operationalize cost savings tied to moving brands off legacy and realigning our go to market strategy around LiveEngage. Excluding onetime restructuring and noncash charges, we are now targeting $16,000,000 to $19,000,000 of savings in 2017, following the nearly $15,000,000 of savings realized in 2016. The breakdown of the 2017 savings are as follows: an approximate 7,000,000 to $8,000,000 reduction in cost of goods sold as we were able to fast forward the wind down of our legacy operations Gross margin was 61.9% in the 2015, 73.4% in the 2016 and projected at approximately 75% in the 2017. An approximate 9,000,000 to $10,000,000 reduction in sales and marketing, we are running a leaner, more nimble field organization as our approach to LiveEngage is to target the world's largest brands, those with the potential to change the pace of customer care.
And approximate $1,000,000 to $2,000,000 reduction in general and administrative expenses as we leverage system investments made over the past few years used to operate more efficiently. Conversely, we're increasing our R and D investment by approximately $1,000,000 in 2017 as we focus resources on extending our lead with LiveEngage and messaging. I will now review our fourth quarter operating results and then discuss our 2017 financial guidance. Total revenue of $56,100,000 was within our guidance range and considered and consisted of B2B revenue of $51,900,000 and consumer revenue of $4,200,000 Trailing twelve month average revenue per enterprise and mid market customer was just over $200,000 in the fourth quarter, in line with prior periods in 2016. We signed 93 deals in the 2016 as compared to 83 in the 2016 and one hundred and 22 in the 2015.
As we have guided, in 2016, LivePerson focused on migration instead of upsells with existing customers. The trailing twelve month customer renewal rate held at 83% throughout 2016 for all of LivePerson, although we expect the rate will rebound to our 90% plus target once all brands are on LiveEngage. The B2B revenue breakdown by industry was retail 24% financial services 26% telecommunications 15% technology 9% and other 26%. International operations accounted for approximately 37% of total revenue in the fourth quarter. As I mentioned earlier, we were able to move more quickly to operationalize savings tied to the wind down of our legacy offering and realignment of our field organization.
We recorded 7,200,000 or 13% per share of charges in the fourth quarter. These charges were comprised of $2,800,000 of write down of costs related to shutting down the legacy platform and alignment around our LiveEngage strategy, a $2,600,000 write off related to a previous investment and $1,800,000 of litigation fees. Gross margin in the fourth quarter increased three fifty basis points year over year to 73.4%. This improvement primarily reflects the diminishing cost of our legacy operations and lower production costs for LiveEngage as the platform matures at the enterprise level. Fourth quarter GAAP net loss per share of $0.17 was below previously issued guidance due to restructuring and onetime charges.
Excluding these charges, we would have been in line with our previous guidance. Adjusted net loss per share of $04 was below previously issued guidance due primarily to noncash tax effect on non GAAP ADX, which I will discuss in more detail. Diluted adjusted EBITDA per share of $09 was within our guidance range. The company held $54,900,000 or approximately $1 per share of cash, including restricted cash, at the end of fourth quarter, which was in line with the year ago period. LivePerson generated cash from operations of $24,600,000 in 2016 as compared to $21,800,000 in 2015.
Cash flow continues to benefit from our lower cost structure and our ability to move customers to cash payments in advance on annual billings. Deferred revenue nearly doubled to $27,100,000 in the fourth quarter from $13,900,000 a year ago. Capital expenditures totaled $12,300,000 in 2016, and the company also spent approximately $10,000,000 to repurchase 1,500,000.0 shares of its common stock in 2016. An additional $20,000,000 remained available under the share repurchase authorization. For 2017, we anticipate starting the year at a low run rate of revenue, reflecting the last stages of our transition from legacy to live engagement.
We project in the 2017 of $50,000,000 to $51,000,000 as compared to $56,100,000 of revenue generated in the 2016. The guidance incorporates the $15,000,000 of annualized attrition that we're recognizing starting primarily in the first quarter tied to the transition to LiveEngage from legacy. Also recall that due to our focus on migration versus upselling existing customers in 2016, we exited the year at a lower recurring revenue run rate than when we started. Finally, the guidance incorporates the typical seasonality we recognize in our variable revenue streams as we move from the fourth quarter to the first quarter. We are targeting second half twenty seventeen revenue higher than the first half.
This will position us for a renewed growth in 2018. Our success in leveraging LiveEngage recent growth, reducing attrition post migration and spreading messaging adoption offers upside to that run rate in 2018. The intent is to maintain, if not improve, our non GAAP margins in 2017 relative to 2016 and position LivePerson with a leaner and more nimble footprint as we prepare for growth in the years ahead. I will now review our detailed first quarter twenty seventeen and full year 2017 expectations, which with the exception of GAAP earnings guidance, exclude the following estimated restructuring and onetime charges for 2017. Estimated charges of 400,000 to $600,000 or $01 per share in the first quarter and $2,300,000 to $2,500,000 or zero four dollars per share in the third quarter, related primarily to the further cost reductions of our legacy platform.
Estimated onetime legal expense of $6,000,000 to $6,500,000 or $0.11 per share tied to litigation. For the 2017, we expect revenue of $50,000,000 to $51,000,000 GAAP net loss per share of $0.12 to $0.10 adjusted net income per share of $0 to $02 adjusted EBITDA of $2,900,000 to $3,900,000 or $05 to $07 per share. For the full year 2017, our expectations are as follows: revenue of $2.00 $1,000,000 to $2.00 9,000,000 Revenue guidance includes a negative foreign cash foreign currency impact of $3,000,000 a GAAP net loss per share of $0.40 to $0.31 adjusted net income per share of $07 to $0.12 and adjusted EBITDA of $17,300,000 to $21,300,000 or $0.30 to $0.37 per share. Furthermore, as a percent of revenue for the year, excluding onetime charges, we anticipate gross profit to be approximately 73.5% sales and marketing of 38.5%, G and A of 16.5% and R and D to be 20%. Also note that we have updated the methodology for calculating adjusted net profit per share, Where we previously incorporated the GAAP tax rate into our calculation, we now start with GAAP pretax profit, add back restructuring, onetime and noncash expenses and then apply a standardized 35% tax rate.
The goal of this revised calculation is to limit the volatility of GAAP tax rate fluctuations and to more closely align non GAAP taxes with cash taxes. A full reconciliation of twenty sixteen adjusted EPS under the historical and updated methodology is available on the supplemental fourth quarter earnings presentation that you may find on the Investor Relations section of the company's website. In addition, two is preferred to LivePerson's earnings release issued earlier today for details on our full year 2017 assumptions. We've also published a supplemental presentation in the Investor Relations page of our website to review key points from the earnings call. I'll close with what I view as a summary of our key takeaways.
With migration ending in 2017, we now have the visibility to target the bottom in revenue for LivePerson's transition. Our forecast for $2.00 $1,000,000 to $2.00 $9,000,000 in revenue in 2017 provides a solid base to build upon in future periods. We successfully protected cash flow and on target to shed approximately $16,000,000 to $19,000,000 in 2017 expenses. This is in addition to the $15,000,000 in 2016, but excluding onetime restructuring and noncash costs. By 2017, we expect to have increased our gross margin by 500 basis points to 75% as compared to 2015.
With $55,000,000 or nearly $1 per share in cash and no debt, we have a healthy capital structure in place to execute on our vision. Deferred revenue nearly doubled to $27,100,000 in 2016. And although early, we're seeing greater than 100% dollar retention rate on LiveEngage for full service customers. With that, I'll open the call to questions. Operator?
Speaker 0
And your first question comes from the line of Richard Baldry from ROTH Capital. Your line is open.
Speaker 2
Thanks. Can you talk a bit about the difference in the go to market between customers who you know you're targeting upfront for messaging opportunities versus the ones that are more applicable across the LiveEngage platform? Do you have different people going after those very narrow messaging types of opportunities? Or is it really everyone selling across the board?
Speaker 1
It's it's everyone selling across the board. Although the Target, there's a there's a big focus on a very small group of customers that have very large contact centers. We have about 23% of the total Target that we're going after right now because that's where we think we can have the greatest impact. And we're seeing with, like, the T Mobile's, the impact we can have on these large enterprises and the scale of it is what is what the platform is all about. With that said, we have small business and mid market customers that have gone live also on messaging.
They've also done messaging in Google and Facebook and and as front end, some in app. But we're very targeted on the enterprise, which allows us to focus and have a very, very small enterprise team going after this group of customers. And can you talk a
Speaker 2
little bit about the deployments and how the revenues are recognized in those deals? When you think about either large 6 figure or low 7 figure deals? Do they ramp pretty quickly and the revenue is recognized ratably? Does the revenues come in sort of at a hockey stick as they deploy, but it takes a while to get it out into the customers to get an active set of users?
Speaker 1
Yes. So from a messaging perspective, although it's still early on the deals that we sold, we expect it to increase over time. So from the initial contract date, there's an implementation period of time, and that's a little bit longer than just the normal Wattling Beach piece, but not much. And then over time, we recognize a little bit more revenue as they roll out to the business. And we're deploying both care and sales.
So and we're obviously doing integrations into their back end and into their apps. So there's a little bit of an integration piece that's a little stickier than even in chat.
Speaker 2
So, you know, with the sort of customers identified that you think you're gonna, you know, maintain on the platform versus, you know, the the stub customers that you don't think are gonna come. How much of your sales time now on a, you know, or your your bandwidth can be reallocated to to growth? Is it really now it's a 100% they can focus, or is there still, a you certain amount of handholding the sales force has to do as they finish that migration through Q3?
Speaker 1
It's pretty much it's almost 100% of their time now can be focused on selling. We did as you can see, we sort of took a there's a large there's an impact on revenue, about $15,000,000 of those customers we thought weren't going to convert for many reasons, some strategic, some product gaps, some things, but we just wanted to move on. And now we, as a company, can be out there focused on selling. I know for my time, I'm spending 90% of my time out with customers talking about messaging and focused on supporting the sales team as they go to market. So we're getting back that capacity.
In the R and D, we're about, I would say, 50% to 60% is focused on features that are not related to the legacy, but we're still finishing up some for the customers that are going live right now or migrating to LiveEngage. So but the organization is we've we've shifted, and we want to sort of start the year with that shift. And as a company, we can focus on growing and executing on our plan.
Speaker 2
The last thing would be, could you talk in the messaging space specifically in the larger deals? Who do you see as sort of last vendor or two standing competitively? And why do you think you win when you do go head to head?
Speaker 1
There's a host it's a hot space. There's a handful of startups that are out there. Salesforce bought a small startup. Globalstar has been around for a while and kinda tucked it into the service cloud. So a couple of perspectives on that.
First, our focus on the enterprise and what we do at scale is very unique, and we've done that with chat. We have the security and scalability. Just handling payments through messaging and securing a payment is is actually a very hard thing to do, but we do it. And so and we can handle thousands And our uptime is, you know, like enterprise grade, obviously.
When it comes to Salesforce, they have a small acquisition. I think it's like Chad. It's a feature in Service Cloud. We know something now that this is a platform, and it's a platform for creating a digital connection with consumers, and we treat it as a platform. So right now, we are just executing and having that poll position.
And I think the most important part is we now have, a handful of enterprise customers that are live, that are referenceable for scale. And being the first to go out and announce T Mobile, last time on this call, And that's a great lead for us and shows the capabilities of our platform. So that that's really the game we're after today. And and we put three years of development into it. Obviously, you know what we took to get here.
And everything we're doing is really focused on that scale, and that's what we've built. Thanks.
Speaker 0
Your next question comes from the line of Brian Schwartz from Oppenheimer. This
Speaker 3
is Koji Ikeda sitting in for Brian Schwartz. One quick one for me on the cost savings in 2017. Great color there on the breakdown of the potential cost savings. But and I think I have a pretty good idea of how to think about the legacy wind down. I was just wondering if you could get a little bit more color about how we should be thinking about the cadence of the other cost savings and the other line items?
I mean, is it a first half? Is it more in the first half or more in the second half? Or is it more of a linear type savings environment in 2017?
Speaker 1
Yes. So it's a good question. So we've we're aggressive and as we talked about this before, we're aggressive in our migrations in getting customers off the legacy platform on the LiveEngage. And as we came to the end of the fourth quarter, we were actually able to fast forward some of those savings. So that's one of the reasons that you see the charge being taken in 2016.
We're actually able to shut down some of our legacy operations, little operations related to our legacy platform. So we're able to actually fast forward that. And I talked a little bit about in the call is we'll have another charge in Q1, primarily related to the legacy platform of between 400 and $600,000 and then we'll have another charge in Q3. So what I would expect, Koji, is that we'll start off the year with fees and cost savings, but they will continue to grow as we finish off the migration and take some of those charges. So we saved about $15,000,000 year over year in in 2016, and we're targeting 16,000,000 to $19,000,000 in 2017.
So that give or take 30,000,000 to $35,000,000 over a two year period. And that's related to the focus on LiveEngage, which we've always talked about and having our resources focused on one platform and our vision for opportunity messaging and growth. So that's kind of one aspect. And the second aspect is we know that the LiveEngage platform is cheaper for us to support than the legacy ones. So we're starting to see some of those benefits.
And and as you think about going into 2,017 and the $15,000,000 worth of customers that aren't going to migrate traded off of $16,000,000 to $19,000,000 worth of savings, for us, a pretty good trade off and a pretty good opportunity as we move into 2017 and beyond.
Speaker 3
Great. Thanks for that color. Thank you very much.
Speaker 0
Your next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is open.
Speaker 4
Hi, good afternoon. The statistic on the percent in the migration funnel, 84%. It's nice to see that tick up. But did you give us maybe I missed it. Did you give us a time frame on when you expect I think in the past, you said 80% converted by 2Q twenty seventeen.
Is that the 84% now to that same date? Is it
Speaker 1
So the 84% we're just talking about is that we have line of sight. And what we're clearly outlining is we'll be 95% of the revenue will be on by on LiveEngage by the end of Q2, 2017. And there'll be about $10,000,000, right, sitting on legacy that we've optimized from a cost perspective. And, you know, some will be a risk and some will have the opportunity to move over as we continue to develop them on the LiveEngage platform, and those customers are ready to move over. Some of those customers had things in their business around their strategy or direction that they were going, but they need a little bit more time.
So that's about $10,000,000 sitting on the legacy. 95% will be over by the 2017, which is, Glenn, where you see the charge that we're taking for the next big chunk of writing down the legacy platform.
Speaker 4
Okay. And maybe just a little color on Salesforce now that it seems that they've shifted towards being able to sell new again as opposed to conversion. Is there kind of enthusiasm there in general in the sales force? And what's the headcount there? And just some general color on the tone in the sales organization.
Speaker 1
Yes. There's we sort of have the sales team now split into two areas. One is focusing on the enterprise and new sales, and then we got a group that's doing because if you're on LiveEngage, you have a lot to use on LiveEngage, including messaging. There's a lot of what we call green space on it. So, we have a group that's just focused on making sure that the customers understand all the new things they can get on the platform.
And then the other guys are basically focused on hunting the very large enterprises. We have a target list. We're doing a lot of marketing, to drive interest, being thought leaders, actually. And and, we've been doing some good events and and bringing our customers together to talk about this, to meet with the customers that are live. So that's how we're sort of going to market right now.
But they're enthusiastic because they got you got a shiny new object called LiveEngage. It's working really well. You got referenceable customers on it. So, you know, that's what we've been waiting for. And their focus is not telling someone why it's good to get on LiveEngage.
The focus is you're on LiveEngage, now you can do these 10 great things plus get the vision of messaging. So that gives a lot of excitement on it.
Speaker 3
Great. About Thanks for that
Speaker 1
45 people quota carrying in direct sales headcount today.
Speaker 4
Okay. Thanks again.
Speaker 0
Your next question comes from the line of Jeff Van Rhee from Craig Hallum. Your line is open.
Speaker 5
Hey guys, good evening. This is Ryan sitting in
Speaker 1
for you. Hey Jeff. Hey Jeff.
Speaker 5
On the big renewals you saw in the quarter, can you just go over and give us a little more color on the renewals? What happened there? What was the incremental piece of revenue? What did they take? Just any other color and explanation you give would be great.
Speaker 1
I'm sorry. I'm having a little bit trouble hearing you. You said something about renewal?
Speaker 5
Yeah. On the two big renewals that you mentioned, the 8 figure multiyear deals, can you just go over them in little bit more in-depth and describe what was the incremental piece of revenue there? Is it a larger deal because they're taking more or going broader or just a longer duration? What drove that?
Speaker 1
So the one in Australia, the big part of it was is messaging. That's actually the and they're actually on a legacy voice platform, and they had chat on that voice platform from that legacy provider. And they they actually wanna get off of it, And so, we're focused on messaging, and that's that's the deal today. So that's what we're focused on in in that one. All of them are messaging driven today.
So all those deals are driven by messaging, going live in app, and transforming the voice platforms to reduce those voice calls.
Speaker 5
Great. And then just, on the 10% or exceeding 10% same store usage increase, what's your confidence that, that will ultimately drive ARPU uplift and kind of your time line for that?
Speaker 1
Yes. So I mean, we're excited about the 10%, and we've got programs in place to continue to drive it. But remember, in the early, the one step that I referred to is just the dollar retention rate is greater than 100% for customers that have been on LiveEngage. Now granted, it's a small population, but as we go throughout the year in 2017, that implies that usage is continuing to increase, and revenue is continuing to increase from those existing customers. We're pretty confident that, that usage will turn into upsells and more usage of the platform.
I think one of the unknowns is that, it's like a new it's it's obviously a we have a strategy behind the platform because we built it. But there's a lot of there's an unknown about and it's an unknown, which is we've got this new platform. They're using a piece that usually they're on chat, and there's a whole range of things they can do on it now and obviously then and get the messaging. So I don't think we know what we what we don't know yet. We also built the platform to be self-service.
You remember, if you get went back three years ago and and read some read some of the transcripts from what we were speaking about is we're building a platform that as we scaled, we could see in the old platform is costly. We needed PS. So people are setting themselves up on stuff. They're like, we'll send a marketing campaign. There's something cool on the platform for you, and then we see a reaction where they implement.
People have gone live by themselves on messaging without even talking to us. So we don't know what we don't know yet because we built the platform in self-service. We're seeing those early indicators that they're using it. And then we're obviously focused on marketing the capabilities. Like I said, we've got a lot of green space.
And, the most important thing is just allowing the organization to be free to focus on the opportunity and no longer it's the hardest thing is focusing on customers that maybe won't come and won't transfer to the new platform. We spend a lot of time with them. We may have to do features we don't want to build. And we kind of said enough is enough. It's time to move on.
And for the revenue trade and the cost savings of winding that platform down, we said it's time now. And now it frees us to expand. So we're kind of getting going with the new car here.
Speaker 5
Got it. Great. And then just lastly for me. Any thoughts on cash and cash flow, free cash flow going through 2017? How should we think about that?
Speaker 1
Yes. Mean from our perspective, on operating cash flow, we generated about $25,000,000 this year. I'd expect to do roughly the same, if not slightly better, as we go into next year.
Speaker 3
Great. Thanks.
Speaker 0
And your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.
Speaker 6
Yeah. Hey, guys. This is Nick Altman on for Mike. Thanks for taking my questions. Just in regards to your relationship with T Mobile, do do you guys have any idea how many T Mobile subscribers are using their mobile app?
Speaker 1
Yes. I can't tell you, but yes, we do. Yes. So we know exactly we have all the metrics because so we know what the opportunity is. Right now, we're at about, I would say, let me add it up, 20% of what we could penetrate.
Speaker 6
Okay. And then guess if you could, can you kind of talk about what would be the next steps there in terms of adding more subscribers?
Speaker 1
It's just it's a function of time. We're just it's a function of time. You scale at a certain pace with a certain amount of labor. There's sales and there's service use cases that are on the platform. So it's it's just a function of time.
We've moved very quickly, where we started to where we are today, and it continues to grow. Obviously, they're a dynamic organization, and they're growing they're also growing, and it's great to have them as a customer. So it's just a function of time.
Speaker 6
Got it. Got it. Okay, thanks.
Speaker 0
Your next question comes from the line of Mark Chappell from Benchmark. Your line is open.
Speaker 7
Hi, good evening. Robert, for you, in your prepared remarks, you noted that there may be about revenue in the legacy platform by the end of the third quarter here. I was just wondering if you could just clarify your comments around those customers. And are those customers planning to eventually get off of the legacy platform? And if so, what kind of time frame are you looking for?
Speaker 1
Yeah. Those customers, there's actually one or two enterprises that timing wise, for specific reasons, we are not forcing them that they want to go. They're digitally aligned with us. They're excited about messaging, but there's some timing issues on their side. And then there's mid market customers and there's a partner on there too, that needs beyond a feature or capability in the platform that we're aligning with messaging, that we don't have right now in the platform because there's so much we're doing to just handle the messaging demand we have.
So those are sort of the, I would say, the two big flavors of customers that are on there. Obviously, there's always a risk with revenue not migrating off the platform. We feel like we can migrate that revenue. Like I said, there's a risk that something happens because they're on the old platform, but it's manageable now. It's $10,000,000 I have a $200,000,000 P and L, which is the risk risk in our business now.
And so, and I know we can get a portion of that, if not all of it, back to the LiveEngage platform.
Speaker 7
Okay, great. And then, Dan, I was wondering if you could just repeat your gross margin expectations for Q1 and for next year.
Speaker 1
Sure. Just give me a second. So for Q4, we said we would be at 75% gross margin for 2017. I don't think I gave a margin expectation for the year. The margin the gross margin expectation for the year is 73.5%, and the expectation in Q4 is to be at 75% gross margin.
And for 2016, we're at about 73.5. So for Q1, would expect to be in that neighborhood of 73.5%, if not slightly better margin in Q1. And then expect it to be roughly flat into Q2 and then growing on the back half of Q3 and Q4 as we finalize the migration.
Speaker 2
Great. Thank you. That's all for me.
Speaker 1
Okay. Thank you.
Speaker 0
And there are currently no other questions in the queue at this time. I will now turn the call back over to the presenters.
Speaker 1
Thank you, and we will see you on the Q1 call. Thank you. Thanks, everybody.
Speaker 0
This concludes today's conference call. You may now disconnect.