Live Person ( LPSN - Nasdaq ) - Follow-up Report

Live Person (LPSN $9.25) reported excellent on target Q3 results.  Earnings improved 17% to $.07 a share, excluding non cash stock option and intangible amortization expenses.  (Refer to "Accounting Notes.")  Revenues advanced 27% to $28.2 million.  Eighteen large new accounts were added.  Existing relationships were expanded.  And the fledgling mid-market unit built momentum, widening its percentage of total revenue.  We continue to estimate full year earnings will reach $.30 a share on sales of $110 million.

Above average growth is likely to be maintained in 2011.  But it now appears the pace may be less robust than previously thought.  Live Person expanded its sales force earlier in 2010.  The benefits from that investment are starting to materialize.  Competition is becoming more prominent, though.  And that trend may continue in upcoming periods.  We are reducing our 2011 sales estimate to $140 million from $150 million.  That still represents growth of 27% year to year.  Expenses are likely to increase less rapidly than sales, enabling income to outpace the improvement in sales.  Nonetheless, we are reducing our earnings estimate by a nickel to $.40 a share (+33%).

Live Person remains a prospective takeover candidate.  It's unclear how large a premium the company might command from the stock's current level, though.  Downside risk appears limited if an offer fails to emerge, assuming financial performance is consistent with our estimates.  Upside potential could be constrained, too, by an already lofty valuation combined with increasing competition and the possibility of a slowdown in capital spending by corporations next year.  Note - Live Person's President announced yesterday that he plans to leave the company in early 2011.  He might just see the handwriting on the wall, concluding the company is certain to be acquired and that he might as well get a jump on his next career.  Or, maybe he envisions a more difficult environment on the horizon.  Aggressive investors are advised to reduce or eliminate positions, at least for the time being.

Live Person ( LPSN - Nasdaq ) - Follow-up Report

Live Person (LPSN $8.50) appears on track to report excellent on target Q3 results.  The company entered the period with 85%-90% of revenue already lined up.  And bookings have continued to climb, fueled by the core enterprise (large customer) segment.  Investments in the sales force and product development that were made in prior periods have begun to bear fruit.  Spending has begun to level off, allowing margins to widen as revenues keep building.  The emphasis on R&D promises to bolster Live Person's competitive advantage in upcoming quarters.  One area that holds substantial potential is proactive website response.  Software tracks each visitor and estimates what his frame of mind is, to determine if it makes sense to jump in and engage the user with some type of communication.  Up to now Live Person has limited those interruptions to an offer to chat with somebody.  Several additional techniques are being rolled out.  Those promise to make it easier for visitors to do what they want to do.  From the website operator's viewpoint, it should increase the sales closing rate.  We are maintaining our 2010 earnings estimate at $.30 a share (excluding non cash stock option and amortization costs).  Next year $.45 a share remains a realistic target.

Live Person (LPSN - Nasdaq)

Live Person (LPSN - $7.00) is the leading provider of click-to-chat software used by websites to improve communication with online visitors, and boost transaction volume.  The company originated the technology more than a decade ago.  The basic click-to-chat functionality now has become a commodity item.  But Live Person has fine tuned the technology with proprietary diagnostics and rule based systems that allow operators to jump in with a chat feature at the optimum moment, to maximize sales conversions while keeping costs under control.  ("Click-to-chat" enables website visitors to talk with a real person to help them navigate the site.  Conversations can be conducted by typing back and forth, or the two sides can pick up a phone and talk directly.)

The emphasis on analytics is boosting the software's performance.  Website operators increasingly let Live Person embed tracking devices inside their web pages.  Those results are analyzed using a variety of proprietary tools to predict the visitor's frame of mind.  That helps websites strike while the iron is hot, opening up a click-to-chat box when it appears that human intervention might seal the deal.  The software  gives workers a heads up as to what's going on, so they can hit the ground running.  Results vary by type of website (phone service and financial products are Live Person's two largest markets).  On average the company estimates that transaction volume is 20% greater than what it would be without assistance.  Live Person prices its products based on volume, so the financial risk assumed by customers is limited.  The company sells one-year subscriptions to its software, so recurring revenue is high.  The company usually has 85%-90% of each quarter's revenue lined up on the first day of the period.  Revenue visibility is high.  The renewal rate is close to 100%, as well.  In fact, many customers initially deploy the software on a small scale and buy more to cover additional websites as time goes on.

Sales advanced 28% during the six month period ended June to $51.7 million.  Q2 sales rose 29% to $26.4 million.  Excluding non cash stock option and intangible amortization expenses, six-month earnings rose 38% to $.13 a share.  They were $.06 a share in Q2 alone.  Margins narrowed in the June quarter due to a significant expansion of the sales force, plus increased hiring in R&D and administration to lay the groundwork for faster growth beyond.  Rising costs probably will keep a lid on margins during the remainder of 2010.  We estimate full year sales will reach $110 million to produce earnings of $.30 a share.

Next year sales growth could exceed the 2010 pace.  We estimate revenues will advance 35% to $150 million.  Margins promise to rebound since much of the new hiring is behind the company now.  Sales should increase more rapidly than costs.  Earnings could reach $.45 a share, up 50%.

In 2-3 years sales could reach $200-$250 million, to produce earnings of $.65-$.85 a share.    Diversification into related areas is likely, moreover, either as a result of internal product development or acquisitions.  So a stronger performance is possible.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $15 a share, potential appreciation of 115%  from the current quote.  Live Person itself could become an acquisition candidate.  Should a bidding war break out a higher valuation could emerge, since the company faces little direct competition and would be the only game in town.