LivePerson Stock shows promise of growth but operating results deteriorate (NASDAQ: LPSN)

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grinvalds

A quick overview of LivePerson

Live person (NASDAQ: LPSN) recently released its first quarter 2022 financial results on May 9, 2022, beating revenue estimates and losing less money than expected.

The company provides online messaging and communication technologies to businesses and consumers around the world.

LPSN has a history of growth with its recent acquisitions and revenue potential in the conversational AI automation space, but I’m on hold until we see evidence of better operating results.

Introducing Live Person

New York-based LivePerson was founded in 1995 to provide what it calls conversational commerce software to businesses and consumers.

The company is led by founder and CEO Robert LoCascio, who is active in various charities in New York.

The company’s main offerings include:

  • Conversational Cloud

  • Voice

  • BELLA Health (being discontinued)

  • Contact center operated by GainShare

The company acquires customers through direct sales and marketing efforts and has customers ranging from small mid-market businesses to large enterprises.

LivePerson Market and Competition

According to a 2020 market research report by Grand View Research, the market for real-time web communication products was estimated at $2.3 billion in 2019 and is expected to reach $41 billion by 2027.

This represents an extremely high projected CAGR of 43.4% from 2020 to 2027.

The main drivers of this expected growth are the need for a better user experience, cost reduction and an increase in work-from-home employee environments.

Additionally, the graph below shows the historical and projected future growth trajectory of the North America WebRTC market through 2027:

North America real-time communications market

North America real-time communications market (Grand View Research)

Major competitors or other industry participants include:

  • Amazon

  • Google

  • Facebook

  • Cisco

  • Oracle

  • Ribbon

  • Avaya

  • Apidaze

  • dialogical

  • Plivo

  • Quobois

Recent financial performance of LivePerson

  • Total revenue per quarter saw moderate, albeit uneven, growth:

Total turnover over 5 quarters

Total turnover over 5 quarters (Looking for Alpha)

  • Gross margin per quarter seemed to level off in recent quarters:

Gross profit over 5 quarters

Gross profit over 5 quarters (Looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have increased over the past few quarters, as shown in the chart below:

Sales over 5 quarters, G&A % of turnover

Sales over 5 quarters, G&A % of turnover (Looking for Alpha)

  • Operating losses have worsened significantly in recent quarters:

Operating result for the 5 quarters

Operating result for the 5 quarters (Looking for Alpha)

  • Earnings per share (diluted) followed the same trajectory as operating losses:

5 quarters of earnings per share

5 quarters of earnings per share (Looking for Alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past 12 months, LPSN’s stock price has fallen 78.2% compared to the US S&P 500 index’s fall of around 10.2%, as shown in the chart below :

52 week stock prices

52 week stock prices (Looking for Alpha)

Rating and other metrics for LivePerson

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Rising

Enterprise value

$1,350,000,000

Market capitalization

$1,080,000,000

Enterprise Value / Sales [TTM]

2.74

Price / Sales [TTM]

2.12

Revenue growth rate [TTM]

24.09%

Operating cash flow [TTM]

-$44,850,000

Earnings per share (fully diluted)

-$2.34

(Source – Alpha Research)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

LPSN’s most recent GAAP Rule 40 calculation was only 5% in Q1 2022, so the company needs improvements in this regard, as per the table below:

GAAP Rule of 40

Calculation

Recent Rev. Growth %

24%

% EBITDA GAAP

-19%

Total

5%

(Source – Alpha Research)

Comment on LivePerson

In its latest earnings call (Source – Seeking Alpha), covering first quarter 2022 results, management emphasized that it was focused on building its sales team for its “dig in and expand” strategy, which is not uncommon for SaaS companies looking to effectively increase revenue. .

The company is also advancing machine learning-enhanced communications through its Conversational Cloud offering, which saw 34% growth for its “AI-powered messaging conversations” year-over-year.

LPSN has also had some influence on Web3 companies like ConsenSys and crypto exchanges that need smarter customer service bots for their internet-centric environments.

As for its financial results, revenue rose 21% year-over-year to $130.2 million, beating its previous forecast.

However, GAAP gross profit has plateaued for the past 4 quarters at around $80 million.

Selling, G&A expenses have increased as a percentage of total revenue, indicating that the business is becoming less efficient at generating revenue growth.

Overall, operating losses worsened sharply, accompanied by increasingly negative results.

For the balance sheet, the firm ended the quarter with just $1 million in cash and cash equivalents, an extremely low number.

Looking ahead, management reaffirmed its revenue guidance at a median growth rate of 18%, while raising its adjusted EBITDA guidance due to lower costs.

The company expects to generate positive free cash flow in the fourth quarter of 2022.

Regarding valuation, the market values ​​LPSN at an EV/Sales multiple of around 2.7x.

The SaaS Capital Index of publicly held SaaS software companies had an EV/Average Revenue multiple of approximately 7.5x as of June 30, 2022, as shown in the chart below:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

Thus, by comparison, LPSN is currently valued by the market at a discount to the SaaS Capital Index, at least as of June 30, 2022.

The main risk to the company’s outlook is a potential macroeconomic slowdown or recession, which could slow sales cycles and lower its revenue growth estimates.

A catalyst on the upside could be faster revenue growth, perhaps thanks to the integration of its VoiceBase and Tenfold acquisitions in late 2021.

While LPSN is priced cheap by the market, management needs to prove that it can make a significant shift to operational equilibrium before the market reduces its punishment.

Money-losing tech companies have seen their valuations drastically reduced amid rising cost of capital interest rates.

LPSN has a history of growth with its recent acquisitions and revenue growth in the conversational AI automation space, but I’m on hold until we see evidence of better operating results.

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