LivePerson: Turning online window shoppers into buyers
It will be a long time before investors forget the dot-com meltdown that started in April of 2000. But there was a problem with the young, overly exuberant dot-com industry. You cannot ship pet supplies or groceries through the internet.
The technology community has gotten smarter. Most are now selling bits, not atoms, through the Internet. One of the hottest categories is providing software as a service (SaaS). Companies such as SalesForce.com (NYSE: CRM) host their software on their own large computers. Instead of shoving software into a box and shipping it, they lease it out as a service—kind of like subscribing to a movie channel instead of buying DVDs. This not only simplifies things for the customer, it provides a more predictable revenue stream.
One dot-com company, LivePerson Inc. (Nasdaq: LPSN), barely survived its trial by fire in the crash. Launched in 1995 to provide text-based chat software for corporate Web sites, it went public in April 2000 at nearly $10, and by mid-2001 was trading at $0.11.
But LivePerson is now coming back to life with a hosted service that does a very neat trick. Its software, Timpani, helps convert people who visit a vendor’s site into paying customers. Timpani can analyze the “click stream” of anyone visiting a site to identify which are potential buyers.
For example, some visitors might look at the products, but then hesitate as they compare prices. Or they might get hung up when they look at delivery times. Sales and support staff can identify these wavering customers and start a text or voice chat session to help them with their decision.
LivePerson is emerging singed but stronger. Its first-quarter 2007 revenues increased 60% from a year ago, to $11.0 million, while EBITDA earnings doubled to $2.0 million. Its stock reached a 52-week peak of $7.93 in late March, and now trades at about $6.60.
In that quarter it added major new clients, including DaimlerChrysler’s Dodge brand, auto parts supplier JC Whitney and what it lists only as “the world’s largest information technology company.” It also expanded its relationship with companies including Bell Canada and “a leading global financial services firm,” which analysts believe is Bank of America.
Timpani has enormous potential. Online advertising is growing at about 40% a year. But when someone clicks on an ad and is sent to a vendor’s site, there is only a 2% chance that person will buy anything. So any service that increases buying provides a huge benefit. “I’ve talked to several Timpani customers, and most say the product pays for itself,” says Raghavan Sarathy, an analyst with Ferris Baker Watts Inc.
LivePerson has the market almost to itself. Competitors such as Kana Software Inc (OTCBB: KANA) offer chat and email services, and RightNow Technologies Inc (Nasdaq: RNOW) provides software to improve customer relations, but neither offers Timpani’s ability to instantly identify potential customers and chat with them. “You cannot get this proactive chat engine from any other company,” says Michael Shonstrom at Emerging Growth Equities Ltd., who has a “Strong Buy” recommendation on LivePerson.
But that could change. The technology is not so unique that it cannot be duplicated, and LivePerson is sure to face competition from small companies to giants such as Google, Microsoft, or Yahoo, all anxious to improve the performance of their advertising systems. Of course, that also makes LivePerson a strong acquisition candidate.
LivePerson still faces bottom-line challenges. While first-quarter 2007 results matched analysts’ expectations, earnings were boosted by the unexpected continuation of a 0% tax rate that quarter. Cash flow is positive, but its rate of growth decreased through 2006. The company’s guidance for the second quarter of 2007, at 6% sequential growth, is lower than most analysts were expecting. For these reasons, Sarathy has a “Neutral” rating on Live Person.
Its market cap, at $273 million or about 25 times quarterly revenues, may be a little high. Kana’s multiple is nine times revenues, while RightNow is at 18—but neither of these companies has yet turned a profit.
The company’s future is now all about management execution. Bradley L. Mook at Boenning & Scattergood is willing to take that bet. He believes Live Person will beat management’s guidance for the second half of this year and will see double-digit sequential growth. “They have a very good chance of fighting off any potential competition,” he says. “It’s the strongest player in the industry.”
LivePerson has several new products in the pipeline, more strong customers joining up, and it announced last November that its small-to-medium business product, released a year ago, had reached $1 million in monthly revenues. Mook sees a $1 billion market opportunity and a $9 stock price in the second half of this year.
If LivePerson can keep its momentum going, it will emerge from the fire as a very hot commodity.
