2014 Q3 LivePerson 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 000-30141
LIVEPERSON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
13-3861628
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
475 Tenth Avenue, 5th Floor
New York, New York
 
10018
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 609-4200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer ¨
Accelerated filer ý
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
On November 3, 2014, 54,653,337 shares of the registrant’s common stock were outstanding.

1



LIVEPERSON, INC.
September 30, 2014
FORM 10-Q
INDEX

 
 
PAGE
Part I.
Financial Information

 
 
 
Item 1.
Financial Statements

 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

 
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

 
 
 

 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)

 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

 
 
 
Item 4.
Controls and Procedures

 
 
 
Part II.
Other Information

 
 
 
Item 1.
Legal Proceedings

 
 
 
Item 1A.
Risk Factors

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

 
 
 

Item 3.
Defaults Upon Senior Securities

 
 
 

Item 4.
Mine Safety Disclosures

 
 
 

Item 5.
Other Information

 
 
 

Item 6.
Exhibits

 
 
 
Signatures
 
37


2



FORWARD-LOOKING STATEMENTS
 
STATEMENTS IN THIS REPORT ABOUT LIVEPERSON, INC. THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT LIVEPERSON AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE EVENTS OR RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. ANY SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IT IS ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE YEAR OR EACH QUARTER IN THE YEAR PROGRESSES, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD THAT THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE EXPECTATIONS MAY CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO. OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS OR FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN PART II, ITEM 1A, “RISK FACTORS.”

3



Part I. Financial Information
Item 1. Financial Statements
LIVEPERSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
(Note 1)
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
87,111

 
$
91,906

Accounts receivable, net of allowance for doubtful accounts of $948 and $1,165 as of September 30, 2014 and December 31, 2013, respectively
32,386

 
29,489

Prepaid expenses and other current assets
9,620

 
6,361

Deferred tax assets, net
2,628

 
5,426

Total current assets
131,745

 
133,182

Property and equipment, net
18,763

 
17,618

Intangibles, net
14,020

 
13,088

Goodwill
35,783

 
32,724

Deferred tax assets, net
9,064

 
6,243

Other assets
2,342

 
2,235

Total assets
$
211,717

 
$
205,090

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
8,932

 
$
10,139

Accrued expenses
29,752

 
25,419

Deferred revenue
14,022

 
8,747

Total current liabilities
52,706

 
44,305

Deferred revenue, net of current

 
468

Other liabilities
768

 
1,264

Total liabilities
53,474

 
46,037

 
 
 
 
Commitments and contingencies (See Note 11)


 


STOCKHOLDERS’ EQUITY (See Note 12):
 

 
 

Common stock
55

 
54

Additional paid-in capital
246,906

 
244,621

Treasury stock
(1
)
 

Accumulated deficit
(88,425
)
 
(85,279
)
Accumulated other comprehensive loss
(292
)
 
(343
)
Total stockholders’ equity
158,243

 
159,053

Total liabilities and stockholders’ equity
$
211,717

 
$
205,090

 
See Notes to Condensed Consolidated Financial Statements (unaudited).

4



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenue
 
$
52,787

 
$
45,192

 
$
151,702

 
$
130,917

Costs and expenses (1) (2)
 
 

 
 

 
 

 
 

Cost of revenue
 
13,304

 
10,597

 
38,200

 
31,342

Sales and marketing
 
20,978

 
16,141

 
59,449

 
46,118

Product development
 
9,712

 
10,023

 
27,999

 
27,091

General and administrative
 
8,787

 
9,508

 
28,074

 
29,581

Amortization of purchased intangibles
 
407

 
224

 
803

 
672

Total costs and expenses
 
53,188

 
46,493

 
154,525

 
134,804

Loss from operations
 
(401
)
 
(1,301
)
 
(2,823
)
 
(3,887
)
Other income, net
 
223

 
209

 
184

 
264

Loss before provision for (benefit from) income taxes
 
(178
)
 
(1,092
)
 
(2,639
)
 
(3,623
)
Provision for (benefit from) income taxes
 
962

 
(362
)
 
507

 
(832
)
Net loss
 
$
(1,140
)
 
$
(730
)
 
$
(3,146
)
 
$
(2,791
)
 
 
 
 
 
 
 
 
 
Net loss per share of common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.06
)
 
$
(0.05
)
Diluted
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.06
)
 
$
(0.05
)
 
 
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
 
53,868,124

 
54,046,161

 
54,238,536

 
54,898,974

Diluted
 
53,868,124

 
54,046,161

 
54,238,536

 
54,898,974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Amounts include stock compensation expense, as follows:
 
 
 
 
 
 
 
Cost of revenue
 
$
365

 
$
635

 
$
1,209

 
$
1,557

Sales and marketing
 
1,030

 
844

 
2,766

 
2,159

Product development
 
1,171

 
1,241

 
2,783

 
2,922

General and administrative
 
1,088

 
1,078

 
2,800

 
3,111

 
 
 
 
 
 
 
 
 
(2) Amounts include depreciation expense, as follows:
 
 
 
 
 
 
 
Cost of revenue
 
$
1,732

 
$
1,445

 
$
4,776

 
$
4,565

Sales and marketing
 
195

 
23

 
603

 
68

Product development
 
180

 
166

 
529

 
526

General and administrative
 
237

 
368

 
651

 
891

See Notes to Condensed Consolidated Financial Statements (unaudited).


5



LIVEPERSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(1,140
)
 
$
(730
)
 
$
(3,146
)
 
$
(2,791
)
Foreign currency translation adjustment
(387
)
 
358

 
51

 
(29
)
Comprehensive loss
$
(1,527
)
 
$
(372
)
 
$
(3,095
)
 
$
(2,820
)
 
See Notes to Condensed Consolidated Financial Statements (unaudited).


6



LIVEPERSON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 

 
 

Net loss
$
(3,146
)
 
$
(2,791
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
9,558

 
9,749

Depreciation
6,559

 
6,050

Amortization of purchased intangibles
3,461

 
1,575

Deferred income taxes and other non-cash tax items
(1,067
)
 
(1,700
)
Provision for doubtful accounts, net
1,096

 

 
 
 
 
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(4,337
)
 
(7,395
)
Prepaid expenses and other current assets
(4,390
)
 
(1,523
)
Other assets
538

 
79

Accounts payable
(2,248
)
 
(3,523
)
Accrued expenses
3,873

 
2,978

Deferred revenue
5,003

 
261

Other liabilities
(469
)
 
(112
)
Net cash provided by operating activities
14,431

 
3,648

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment, including capitalized software
(6,644
)
 
(6,638
)
Investment in technology licenses
(3,451
)
 

Acquisition of Synchronite
(2,300
)
 

Acquisition of NexGraph
(125
)
 

Acquisition of domains
(27
)
 
(50
)
Acquisition costs - Engage, net of cash

 
(79
)
Net cash used in investing activities
(12,547
)
 
(6,767
)
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

Excess tax benefit from the exercise of employee stock options

 
135

Proceeds from issuance of common stock in connection with the exercise of options
6,109

 
3,737

Repurchase of common stock
(12,980
)
 
(26,716
)
Net cash used in financing activities
(6,871
)
 
(22,844
)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
192

 
3

CHANGE IN CASH AND CASH EQUIVALENTS
(4,795
)
 
(25,960
)
CASH AND CASH EQUIVALENTS - Beginning of the period
91,906

 
103,339

CASH AND CASH EQUIVALENTS - End of the period
$
87,111

 
$
77,379

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION: 
 
 
 
Cash paid for income taxes
$
2,182

 
$
151

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Contingent earn-out in connection with the acquisition of Synchronite recorded in accrued expenses
$
1,810

 
$

Purchase of property and equipment recorded in accounts payable
$
1,840

 
$
720

Acquisition cost in connection with NexGraph recorded in accrued expenses
$
125

 
$

 
See Notes to Condensed Consolidated Financial Statements (unaudited).

7



LIVEPERSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Description of Business and Basis of Presentation
LivePerson, Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998. In April 2000, the Company completed an initial public offering and is currently traded on the Nasdaq Global Select Market and the Tel Aviv Stock Exchange. LivePerson is headquartered in New York City with offices in Amsterdam, Atlanta, London, Melbourne, San Francisco, Tokyo and Tel Aviv.
LivePerson provides online engagement solutions offering a cloud-based platform which enables businesses to proactively connect with consumers through chat, voice and content delivery, across multiple channels and screens, including websites, social media, tablets and mobile devices. The Company’s engagements are driven by insights derived from a broad set of consumer and business data, including historical, behavioral, operational, and third party data. Each engagement is based on proprietary analytics and a real-time understanding of consumer needs and business objectives. The Company’s products, coupled with its domain knowledge and industry expertise, have been proven to maximize the effectiveness of the online channel — by increasing sales, as well as consumer satisfaction and loyalty ratings for its customers, while also enabling its customers to reduce consumer service costs.
LivePerson monitors and analyzes valuable online consumer behavioral data on behalf of its customers. Spanning the breadth of an online visitor session, starting from an initial keyword search through actions on their customer’s website, and even into a shopping cart and an executed sale, this data enables the Company to develop unique insights into consumer behavior during specific transactions within a customer’s user base.
The Company’s primary revenue source is from the sale of LivePerson services to businesses of all sizes. The Company also offers an online marketplace that connects independent service providers (“Experts”) who provide information and knowledge for a fee via real-time chat with individual consumers (“Users”).
Basis of Presentation
The accompanying condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of September 30, 2014, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended September 30, 2014 and 2013. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at December 31, 2013 has been derived from audited consolidated financial statements at that date.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2014.
Reclassification
For comparability, certain 2013 amounts have been reclassified where appropriate, to conform to the financial presentation in 2014.
Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.

8



Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which it will adopt the standard in 2017.
2.
Revenue Recognition 
The majority of the Company’s revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. Because the Company provides its application as a service, the Company follows the provisions of FASB Accounting Standards Codification (“ASC”) 605-10-S99, “Revenue Recognition” and ASC 605-25, “Revenue Recognition with Multiple-Element Arrangements.” The Company charges a monthly fee, which varies by type of service, the level of customer usage and website traffic, and in some cases, the number of orders placed via the Company’s online engagement solutions.
For certain of the Company’s larger customers, the Company may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company’s online engagement solutions. For these Pay for Performance (“PFP”) arrangements, in accordance with ASC 605-45, “Principal Agent Considerations,” the Company records revenue for transactions in which it acts as an agent on a net basis, and revenue for transactions in which it acts as a principal on a gross basis.
The Company also sells certain of the LivePerson services directly via Internet download.  These services are marketed as LiveEngage for small to medium-sized businesses (“SMBs”), and are paid for almost exclusively by credit card.  Credit card payments accelerate cash flow and reduce the Company’s collection risk, subject to the merchant bank's right to hold back cash pending settlement of the transactions.  Sales of LiveEngage may occur with or without the assistance of an online sales representative, rather than through face-to-face or telephone contact that is typically required for traditional direct sales.
The Company recognizes monthly service revenue based upon the fee charged for the LivePerson services, provided that there is persuasive evidence of an arrangement, no significant Company obligations remain, collection of the resulting receivable is probable and the amount of fees to be paid is fixed or determinable. The Company’s service agreements typically have twelve month terms and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice without penalty. When professional service fees add value to the customer on a standalone basis, the Company recognizes professional service fees upon completion and customer acceptance in accordance with FASB Accounting Standards Update 2009-13. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) best estimated selling price. If a professional services arrangement does not qualify for separate accounting, the Company recognizes the fees, and the related labor costs, ratably over the contracted period.
For revenue generated from online transactions between Experts and Users, the Company recognizes revenue net of the Expert fees in accordance with ASC 605-45, “Principal Agent Considerations,” due primarily to the fact that the Expert is the primary obligor. Additionally, the Company performs as an agent without any risk of loss for collection, and is not involved in selecting the Expert or establishing the Expert’s fee. The Company collects a fee from the User and retains a portion of the fee, and then remits the balance to the Expert. Revenue from these transactions is recognized when there is persuasive evidence of an arrangement, no significant Company obligations remain, collection of the resulting receivable is probable and the amount of fees to be paid is fixed and determinable.
3.
Net Loss Per Share
The Company calculates earnings per share (“EPS”) in accordance with the provisions of ASC 260-10 and the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 98. Under ASC 260-10, basic EPS excludes dilution for common stock equivalents and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. All options, warrants or other potentially dilutive instruments issued for nominal consideration

9



are required to be included in the calculation of basic and diluted net income attributable to common stockholders. Diluted EPS is calculated using the treasury stock method and reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock.
Diluted net loss per common share for the three and nine months ended September 30, 2014 does not include the effect of options to purchase 11,127,640 shares of common stock as the effect of their inclusion is anti-dilutive. Diluted net loss per common share for the three and nine months ended September 30, 2013 does not include the effect of options to purchase 10,132,045 shares of common stock as the effect of their inclusion is anti-dilutive.
A reconciliation of shares used in calculating basic and diluted earnings per share follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Basic
53,868,124

 
54,046,161

 
54,238,536

 
54,898,974

Effect of assumed exercised options

 

 

 

Diluted
53,868,124

 
54,046,161

 
54,238,536

 
54,898,974

4.
Segment Information
The Company accounts for its segment information in accordance with the provisions of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company is organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment facilitates real-time online interactions – chat, voice and content delivery across multiple channels and screens for global corporations of all sizes. The Consumer segment facilitates online transactions between Experts and Users and sells its services to consumers. Both segments currently generate their revenue primarily in the United States. The chief operating decision makers evaluate performance, make operating decisions, and allocate resources based on the operating income of each segment. The reporting segments follow the same accounting polices used in the preparation of the Company’s condensed consolidated financial statements which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no inter-segment sales.
Summarized financial information by segment for the three months ended September 30, 2014, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
43,702

 
$

 
$

 
$
43,702

Hosted services – Consumer

 
3,992

 

 
3,992

Professional services
5,093

 

 

 
5,093

Total revenue
48,795

 
3,992

 

 
52,787

Cost of revenue
12,679

 
625

 

 
13,304

Sales and marketing
19,488

 
1,490

 

 
20,978

Amortization of purchased intangibles
407

 

 

 
407

Unallocated corporate expenses

 

 
18,499

 
18,499

Operating income (loss)
$
16,221

 
$
1,877

 
$
(18,499
)
 
$
(401
)

10



Summarized financial information by segment for the three months ended September 30, 2013, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
38,007

 
$

 
$

 
$
38,007

Hosted services – Consumer

 
3,828

 

 
3,828

Professional services
3,357

 

 

 
3,357

Total revenue
41,364

 
3,828

 

 
45,192

Cost of revenue
10,014

 
583

 

 
10,597

Sales and marketing
14,664

 
1,477

 

 
16,141

Amortization of purchased intangibles
224

 

 

 
224

Unallocated corporate expenses

 

 
19,531

 
19,531

Operating income (loss)
$
16,462

 
$
1,768

 
$
(19,531
)
 
$
(1,301
)
Summarized financial information by segment for the nine months ended September 30, 2014, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
125,378

 
$

 
$

 
$
125,378

Hosted services – Consumer

 
12,441

 

 
12,441

Professional services
13,883

 

 

 
13,883

Total revenue
139,261

 
12,441

 

 
151,702

Cost of revenue
36,306

 
1,894

 

 
38,200

Sales and marketing
55,203

 
4,246

 

 
59,449

Amortization of purchased intangibles
803

 

 

 
803

Unallocated corporate expenses

 

 
56,073

 
56,073

Operating income (loss)
$
46,949

 
$
6,301

 
$
(56,073
)
 
$
(2,823
)
Summarized financial information by segment for the nine months ended September 30, 2013, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):
 
Business
 
Consumer
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Hosted services – Business
$
110,785

 
$

 
$

 
$
110,785

Hosted services – Consumer

 
11,223

 

 
11,223

Professional services
8,909

 

 

 
8,909

Total revenue
119,694

 
11,223

 

 
130,917

Cost of revenue
29,524

 
1,818

 

 
31,342

Sales and marketing
42,113

 
4,005

 

 
46,118

Amortization of purchased intangibles
672

 

 

 
672

Unallocated corporate expenses

 

 
56,672

 
56,672

Operating income (loss)
$
47,385

 
$
5,400

 
$
(56,672
)
 
$
(3,887
)

11



Geographic Information
The Company is domiciled in the United States and has international operations in the United Kingdom, Asia-Pacific, Latin America and Western Europe, particularly France and Germany. The following table presents the Company’s revenues attributable to domestic and foreign operations for the periods presented (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014

2013
 
2014
 
2013
United States
$
34,409

 
$
28,947

 
$
99,273

 
$
86,553

Other Americas (1)
2,936

 
2,353

 
7,259

 
6,145

Total Americas
37,345

 
31,300

 
106,532

 
92,698

EMEA (2)
11,049

 
9,600

 
32,618

 
25,572

APAC (3)
4,393

 
4,292

 
12,552

 
12,647

Total revenue
$
52,787

 
$
45,192

 
$
151,702

 
$
130,917

(1) Canada, Latin America and South America
(2) Europe, the Middle East and Africa (“EMEA”)
(3) Asia-Pacific (“APAC”)
The following table presents the Company's long-lived assets by geographic region for the periods presented (amounts in thousands):
 
September 30,
 
December 31,
 
2014
 
2013
United States
$
42,066

 
$
34,422

Israel
19,700

 
22,580

Australia
8,858

 
9,827

Netherlands
7,687

 
3,540

Other (1)
1,661

 
1,539

Total long-lived assets
$
79,972

 
$
71,908

(1) United Kingdom, Germany and Japan
No individual customer accounted for 10% or more of consolidated revenue for any of the periods presented. One customer accounted for approximately 22% and 12% of accounts receivable as of September 30, 2014 and December 31, 2013, respectively.
5.
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows (amounts in thousands):
 
Business
 
Consumer
 
Total
Balance as of December 31, 2013
$
24,700

 
$
8,024

 
$
32,724

Adjustments to goodwill:
 
 
 
 
 
NexGraph acquisition
400

 

 
400

Synchronite acquisition
2,659

 

 
2,659

Balance as of September 30, 2014
$
27,759

 
$
8,024

 
$
35,783


12



The changes in the carrying amount of goodwill for the year ended December 31, 2013 are as follows (amounts in thousands):
 
Business
 
Consumer
 
Total
Balance as of December 31, 2012
$
24,621

 
$
8,024

 
$
32,645

Adjustments to goodwill:
 
 
 
 
 
Adjustments to Engage acquisition
79

 

 
79

Balance as of December 31, 2013
$
24,700

 
$
8,024

 
$
32,724

Intangible Assets
Intangible assets are summarized as follows (see Note 8 and Note 10) (amounts in thousands):
 
As of September 30, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
19,615

 
$
(10,320
)
 
$
9,295

 
4.1 years
Customer relationships
5,308

 
(3,658
)
 
1,650

 
3.7 years
Trade names
787

 
(730
)
 
57

 
2.8 years
Non-compete agreements
646

 
(551
)
 
95

 
1.3 years
Patents
3,290

 
(416
)
 
2,874

 
9.9 years
Other
312

 
(263
)
 
49

 
3.0 years
Total
$
29,958

 
$
(15,938
)
 
$
14,020

 
 
 
As of December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted
Average
Amortization
Period
Amortizing intangible assets:
 
 
 
 
 
 
 
Technology
$
18,533

 
$
(7,678
)
 
$
10,855

 
3.8 years
Customer relationships
5,061

 
(3,148
)
 
1,913

 
3.5 years
Trade names
725

 
(725
)
 

 
2.7 years
Non-compete agreements
486

 
(486
)
 

 
1.2 years
Patents
475

 
(189
)
 
286

 
11.0 years
Other
285

 
(251
)
 
34

 
3.0 years
Total
$
25,565

 
$
(12,477
)
 
$
13,088

 
 
 

13



Amortization expense is calculated on a straight-line basis over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $1.3 million and $3.5 million for the three and nine months ended September 30, 2014, respectively. Aggregate amortization expense for intangible assets was $0.7 million and $1.6 million for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2014, a portion of this amortization is included in cost of revenue. Estimated amortization expense for the next five years are as follows (amounts in thousands):  
 
Estimated Amortization Expense
2014
$
1,135

2015
4,267

2016
3,805

2017
2,205

2018
485

Thereafter
2,123

Total
$
14,020

6.
Property and Equipment
The following table presents the detail of property and equipment for the periods presented (amounts in thousands):
 
September 30,
2014
 
December 31,
2013
Computer equipment and software
$
52,322

 
$
45,790

Furniture, equipment and building improvements
9,078

 
7,906

 
61,400

 
53,696

Less: accumulated depreciation
(42,637
)
 
(36,078
)
Total
$
18,763

 
$
17,618

7.
Accrued Liabilities
The following table presents the detail of accrued liabilities for the periods presented (amounts in thousands):
 
September 30,
2014
 
December 31,
2013
Payroll and other employee related costs
$
12,310

 
$
13,090

Professional services and consulting and other vendor fees
9,427

 
6,769

Sales commissions
2,733

 
1,778

Contingent earnout (Note 8)
2,970

 
1,660

Other
2,312

 
2,122

Total
$
29,752

 
$
25,419

8.
Acquisitions
Amadesa Ltd.
On May 31, 2012, the Company acquired technology assets from Amadesa, Ltd., an Israeli-based start-up, for aggregate cash consideration of approximately $10.3 million. The acquisition provides the Company with sophisticated, machine-learning predictive modeling that it expects to leverage across multiple engagement channels, enhancing its real-time intelligent engagement platform. The asset was allocated to “Intangibles, net” on the Company’s condensed consolidated balance sheet and is being amortized over its expected period of benefit. The acquisition did not have a material impact on the Company’s reported operating results. Total acquisition costs incurred were approximately $0.5 million and are included in “Intangibles, net” on the Company’s condensed consolidated balance sheet.

14



LookIO, Inc.
On June 13, 2012, the Company acquired LookIO, Inc., a start-up that provides mobile engagement solutions. The transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of LookIO, Inc. were included in the Company’s consolidated results of operations from the date of acquisition. The acquisition did not have a material impact on the Company’s reported operating results. 
The purchase price was approximately $2.9 million, which included the issuance of 109,517 shares of the Company’s common stock valued at approximately $2.0 million, based on the quoted market price of the Company’s common stock on the day of closing, and a cash payment of $0.9 million. Total acquisition costs incurred were approximately $0.2 million and were included in general and administrative expenses in the Company’s condensed consolidated statements of operations. The acquisition adds plug-and-play mobile engagement capabilities to LivePerson’s platform allowing its customers to connect with consumers on mobile devices. All 109,517 shares are included in the weighted average shares outstanding used in basic and diluted net income (loss) per share as of the acquisition date. The purchase price was allocated based on management’s estimate of fair values, taking into account all relevant information available. A substantial amount of the purchase price was allocated to intangibles (technology) and the excess was allocated to goodwill. The goodwill is not deductible for income tax purposes. The intangible asset is being amortized over its expected period of benefit. In addition to the purchase price, certain founders can earn an additional 30,422 shares of LivePerson common stock by achieving an employment milestone by providing continued services through a specified date, of which 25,961 shares were earned. The Company valued these potential earn-out shares at approximately $0.6 million, based on the quoted market price of the Company’s common stock on the day of closing.
Management’s allocation of the purchase price in connection with the LookIO acquisition is as follows (amounts in thousands):
Intangible assets (technology)
$
767

Goodwill
2,405

 
3,172

Deferred tax liability
(288
)
Total purchase price consideration
$
2,884

Engage Pty Ltd.
On November 9, 2012, the Company acquired all outstanding shares of Engage Pty Ltd. (“Engage”), an Australian provider of cloud-based customer contact solutions. The transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of Engage were included in the Company’s consolidated results of operations from the date of acquisition. The acquisition did not have a material impact on the Company’s reported operating results.
The purchase price was approximately $10.6 million. The total acquisition costs incurred in the year ended December 31, 2012 were approximately $0.5 million and are included in general and administrative expenses in the Company’s condensed consolidated statements of operations for the same period. The acquisition enhances the Company’s ability to offer intelligent engagement solutions to businesses in the Asia Pacific region. Of the total purchase price, $0.8 million was allocated to the net book values of the acquired assets and assumed liabilities. The historical carrying amounts of such assets and liabilities approximated their fair values. All receivables acquired are expected to be collectible. The purchase price in excess of the fair value of the net book values of the assets acquired and liabilities assumed was allocated to intangible assets based on management’s best estimate of fair values, taking into account all relevant information available at the time of acquisition, and the excess was allocated to goodwill. The goodwill is not deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. The purchase price includes approximately $1.6 million of potential earn-out consideration for the shareholders if certain revenue targets are achieved. The earn-out is payable in shares of LivePerson common stock. The Company recorded the contingent earn-out as part of the purchase price. In accordance with ASC 480, the Company has classified this amount as a liability and the amount is included in accrued expenses in the September 30, 2014 balance sheet, due to the variable number of shares that will be issued if and when the targets are achieved. During 2014, the Company paid $0.5 million of the total potential earn-out consideration amount. The Company will assess the earn-out calculation in future periods and any future adjustments will affect operating income.

15



Management’s preliminary allocation of the purchase price in connection with the Engage acquisition is as follows (amounts in thousands):
Cash
$
386

Accounts receivable
3,454

Other current assets
57

Property and equipment
432

Other assets
104

Intangible assets
3,600

Goodwill
6,152

 
14,185

Liabilities assumed
(2,632
)
Deferred tax liability
(962
)
Total purchase price consideration
$
10,591

The components of the intangible assets listed in the above table are as follows (amounts in thousands): 
 
Weighted
Average Useful
Life (Months)
 
Amount
Technology
36
 
$
768

Trade-name
12
 
95

Customer relationships
48
 
2,661

Non-compete agreements
12
 
76

 
 
 
$
3,600

NexGraph LLC
In March 2014, the Company acquired all the outstanding shares of NexGraph LLC (“NexGraph”), a company focused on analytic solutions, in exchange for aggregate cash consideration of $0.5 million. This transaction was accounted for as an asset purchase. The $0.1 million was allocated to Intangibles, net and $0.4 million was allocated to Goodwill.
Synchronite LLC
On June 2, 2014, the Company acquired Synchronite LLC (“Synchronite”), a German based start-up that provides co-browsing technology. The transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of Synchronite were included in the Company’s consolidated results of operations from the date of acquisition. The acquisition did not have a material impact on the Company’s reported operating results.
The allocation of the total purchase price of approximately $4.1 million was based upon the estimated fair value of Synchronite's net tangible and identifiable intangible assets as of the date of acquisition. The total acquisition costs incurred were approximately $0.4 million and are included in general and administrative expenses in the Company’s condensed consolidated statements of operations. Of the total purchase price, $45,000 was allocated to the net book values of the acquired assets and assumed liabilities. The historical carrying amounts of such assets and liabilities approximated their fair values. All receivables acquired are expected to be collectible. The purchase price includes approximately $2.7 million of goodwill and approximately $1.5 million of intangible assets. The goodwill is not deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. The purchase price includes $1.8 million of potential earn-out consideration for the shareholders if complete product integration is achieved. The earn-out is payable in shares of LivePerson common stock and cash. The Company recorded the contingent earn-out as part of the purchase price. In accordance with ASC 480, the Company has classified this amount as a liability and the amount is included in accrued expenses in the September 30, 2014 condensed consolidated balance sheet, due to the variable number of shares that will be issued if and when the targets are achieved. The Company will assess the earn-out calculation in future periods and any future adjustments will affect operating income.

16



The components of the intangible assets are as follows (amounts in thousands): 
 
Weighted
Average Useful
Life (Months)
 
Amount
Technology
120
 
$
1,082

Trade-name
48
 
62

Customer relationships
84
 
247

Non-compete agreements
36
 
60

 
 
 
$
1,451

9.
Fair Value Measurements
The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The Company's assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 30, 2014 and December 31, 2013, are summarized as follows (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
12,608

 
$

 
$

 
$
12,608

 
$
13,674

 
$

 
$

 
$
13,674

Total assets
$
12,608

 
$

 
$

 
$
12,608

 
$
13,674

 
$

 
$

 
$
13,674

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent earn-out
$

 
$

 
$
2,970

 
$
2,970

 
$

 
$

 
$
1,660

 
$
1,660

Total liabilities
$

 
$

 
$
2,970

 
$
2,970

 
$

 
$

 
$
1,660

 
$
1,660

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions based on the best information available.
The Company's only asset that is measured at fair value on a recurring basis is money market funds, based on quoted market prices in active markets and therefore classified as level 1 within the fair value hierarchy. The Company's only liability that is measured at fair value on a recurring basis is the contingent earn-out and is classified as level 3 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated

17



fair value. The Company uses an income approach and inputs that constitute level 3.  During the third quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses a combination of discounted cash flows and other qualitative factors in accordance with ASU No. 2011-08 to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  This measurement is classified based on level 3 input.
The contingent earn-out in connection with the acquisition of Engage is $1.2 million and $1.7 million as of September 30, 2014 and December 31, 2013, respectively, and is recorded in accrued expenses in the condensed consolidated balance sheets. The earn-out is based on the potential earn-out consideration if certain revenue targets are achieved. The total contingent earn-out was increased by $1.8 million in June 2014 in connection with the acquisition of Synchronite and is also recorded in accrued expense on the condensed consolidated balance sheet as of September 30, 2014. The contingent earn-out is based on the fulfillment of a complete product integration and a minimum number of “Co-Browse” interactions per month.
The changes in fair value of the Level 3 liabilities are as follows (amounts in thousands):
 
Contingent Earn-Out
 
September 30, 2014
 
December 31, 2013
Balance, Beginning of Period
$
1,660

 
$
1,660

Synchronite addition (see Note 8)
1,810

 

Cash payment
(500
)
 

Balance, End of Period
$
2,970

 
$
1,660

10.
Investments
In February 2014, the Company purchased technology licenses and consulting services at fair value from a company in the amount of $3.5 million. The Company will receive access to the company's patents as well as certain consulting services. During the three months ended September 30, 2014, the Company allocated approximately $2.8 million to intangible assets, which is being amortized over the life of the patents. The remaining amount was allocated to other assets.
11.
Commitments and Contingencies
Contractual Obligations
The Company leases facilities and certain equipment under agreements accounted for as operating leases. These leases generally require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases for the three and nine months ended September 30, 2014 was approximately $2.3 million and $6.9 million, respectively. Rental expense for operating leases for the three and nine months ended September 30, 2013 was approximately $2.2 million and $6.9 million, respectively.
Employee Benefit Plans
The Company has a 401(k) defined contribution plan covering all eligible employees. The Company provides for employer matching contributions equal to 50% of employee contributions, up to the lesser of 5% of eligible compensation or $6,000. Matching contributions are deposited into the employee’s 401(k) account and are subject to 5 year graded vesting. Salaries and related expenses include $0.2 million and $0.8 million of employer matching contributions for the three and nine months ended September 30, 2014, respectively. Salaries and related expenses include $0.2 million and $0.7 million of employer matching contributions for the three and nine months ended September 30, 2013, respectively.
12.
Stockholders' Equity
Common Stock
As of September 30, 2014, there were 100,000,000 shares of common stock authorized, and 54,584,170 shares issued and outstanding. As of December 31, 2013, there were 100,000,000 shares of common stock authorized, and 54,484,760 shares issued and outstanding. The par value for common shares is $0.001.

18



Preferred Stock
As of September 30, 2014 and December 31, 2013, there were 5,000,000 shares of preferred stock authorized, and zero shares issued and outstanding. The par value for preferred shares is $0.001.
Stock Repurchase Program
On December 10, 2012, the Company’s Board of Directors approved a stock repurchase program through June 30, 2014. Under the stock repurchase program, the Company is authorized to repurchase shares of its common stock, in the open market or privately negotiated transactions, at times and prices considered appropriate by the Board of Directors depending upon prevailing market conditions and other corporate considerations. On March 13, 2014, the Company's Board of Directors increased the aggregate purchase price of the stock repurchase program from $30.0 million to $40.0 million. On July 23, 2014, the Company's Board of Directors extended the expiration date of the program out to December 31, 2014 and also increased the aggregate purchase price of the stock repurchase program from $40.0 million to $50.0 million. There were 1,195,185 shares repurchased under this program during 2014, of which 544,396 shares were recorded in treasury stock at par on the condensed consolidated balance sheets as of September 30, 2014. As of September 30, 2014, approximately $10.3 million remained available for purchase under the program.
Stock-Based Compensation
The Company follows FASB ASC 718-10, “Stock Compensation,” which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The following table summarizes stock-based compensation expense related to employee stock options under ASC 718-10 included in Company’s statements of operations for the periods presented (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Cost of revenue
$
365

 
$
635

 
$
1,209

 
$
1,557

Sales and marketing expense
1,030

 
844

 
2,766

 
2,159

Product development expense
1,171

 
1,241

 
2,783

 
2,922

General and administrative expense
1,088

 
1,078

 
2,800

 
3,111

Total stock based compensation included in costs and expenses
$
3,654

 
$
3,798

 
$
9,558

 
$
9,749

The per share weighted average fair value of stock options granted during the three and nine months ended September 30, 2014 was $4.57 and $4.99, respectively. The per share weighted average fair value of stock options granted during the three and nine months ended September 30, 2013 was $4.82 and $5.25, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Dividend yield
0.0%
 
0.0%
 
0.0%
 
0.0%
Risk-free interest rate
1.7%
 
1.4%
 
1.5% - 1.7%
 
0.7% - 1.4%
Expected life (in years)
5
 
5
 
5
 
5
Historical volatility
50.9%
 
59.8% - 59.9%
 
50.9% - 53.7%
 
56.7% - 60.1%
A description of the methods used in the significant assumptions used to estimate the fair value of stock-based compensation awards follows:
Dividend yield – The Company uses 0% as it has never issued dividends and does not anticipate issuing dividends in the near term.
Risk-free interest rate – The Company uses the market yield on U.S. Treasury securities at five years with constant maturity, representing the current expected life of stock options in years.
Expected life – The Company uses historical data to estimate the expected life of a stock option.
Historical volatility – The Company uses a trailing five year from grant date to determine volatility.

19



Stock Option Plans
During 1998, the Company established the Stock Option and Restricted Stock Purchase Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue incentive stock options or nonqualified stock options to purchase up to 5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000 Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing the number of shares available for issuance under the plan by approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in the aggregate.
The Company established the 2009 Stock Incentive Plan (as amended and restated, the “2009 Plan”) as a successor to the 2000 Plan. Under the 2009 Plan, the options which had been outstanding under the 2000 Plan were incorporated into the 2009 Plan and the Company increased the number of shares available for issuance under the plan by 6,000,000. The Company amended the 2009 stock incentive plan (the “Amended 2009 Plan”) effective June 7, 2012. The Amended 2009 Plan increased the number of shares authorized for issuance under the plan by an additional 4,250,000, thereby reserving for issuance 23,817,744 shares of common stock in the aggregate. Options to acquire common stock granted thereunder have 10-year terms. As of September 30, 2014, approximately 13,995,000 shares of common stock were reserved for issuance under the 2009 Plan (taking into account all option exercises through September 30, 2014).
Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. As of September 30, 2014, approximately 582,000 shares of common stock were reserved for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through September 30, 2014).
Stock Option Activity
A summary of the Company’s stock option activity and weighted average exercise prices follows:
 
Stock Option Activity
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
 
Options
 
Weighted
Average
Exercise Price
 
 
Balance outstanding at December 31, 2013
9,724,193

 
$
10.86

 
 
 
 
Granted
3,289,700

 
10.63

 
 
 
 
Exercised
(565,668
)
 
7.77

 
 
 
 
Cancelled or expired
(1,320,585
)
 
12.80

 
 
 
 
Balance outstanding at September 30, 2014
11,127,640

 
$
10.68

 
7.14
 
$
29,989

Options vested and expected to vest at September 30, 2014
9,300,501

 
$
10.64

 
6.78
 
$
26,214

Options exercisable at September 30, 2014
5,034,974

 
$
9.69

 
5.33
 
$
19,268

The total fair value of stock options exercised during the nine months ended September 30, 2014 was approximately $2.5 million. As of September 30, 2014, there was approximately $30.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 2.8 years.
A summary of the status of the Company’s nonvested shares as of December 31, 2013, and changes during the nine months ended September 30, 2014 is as follows:
 
Options
 
Weighted
Average Grant-
Date Fair Value
Nonvested Shares at December 31, 2013
5,633,701

 
$
6.90

Granted
3,289,700

 
4.99

Vested
(1,510,150
)
 
6.09

Cancelled or expired
(1,320,585
)
 
6.49

Nonvested Shares at September 30, 2014
6,092,666

 
$
5.65


20



13.
Legal Matters
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
From time to time, the Company is involved in or subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
14.
Subsequent Event
Contact At Once!, LLC
On November 5, 2014, the Company entered into a definitive agreement to acquire the outstanding equity interest of Contact At Once!, LLC (“Contact At Once!”), a software company with a cloud-based platform that instantly connects consumers with businesses through instant messaging, text messaging, chat, social media and video over the internet for consumer-to-business sales conversions, for approximately $70.0 million, which includes approximately $43.0 million in cash, approximately $22.0 million in shares of common stock and $5.0 million of potential earn-out consideration in cash or shares of common stock. The earn-out is contingent upon achieving certain targeted financial, strategic and integration objectives and milestones and is included as part of the purchase price. The acquisition enhances the Company’s network chat expertise and market growth across various verticals.
The transaction will be accounted for under the purchase method of accounting and, accordingly, the operating results of Contact At Once! will be included in the Company’s consolidated results of operations from the date of acquisition. The Company is in process of finalizing all fair value and purchase accounting adjustments.

21



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from other sources. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. These estimates and assumptions relate to estimates of the carrying amount of goodwill, intangibles, stock based-compensation, valuation allowances for deferred income taxes, accounts receivable, the expected term of a customer relationship, accruals and other factors. We evaluate these estimates on an ongoing basis. Actual results could differ from those estimates under different assumptions or conditions, and any differences could be material.
Overview
LivePerson provides online engagement solutions offering a cloud-based platform which enables businesses to proactively connect with consumers through chat, voice and content delivery, across multiple channels and screens, including websites, social media, tablets and mobile devices.  We are organized into two operating segments: Business and Consumer. The Business segment facilitates real-time online interactions — chat, voice and content delivery, across multiple channels and screens for global corporations of all sizes. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via real-time chat. We were incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced initially in November 1998.
In order to sustain growth in these segments, our strategy is to expand our position as the leading provider of online engagement solutions that facilitate real-time assistance and expert advice. To accomplish this, we are focused on the following current initiatives:
Expanding Business with Existing Customers and Adding New Customers. We are expanding our sales capacity by adding enterprise and midmarket sales agents. We have also expanded our efforts to retain existing SMB customers through increased interaction with them during the early stages of their usage of our services.
Introducing New Products and Capabilities.   We are investing in product marketing, research and development and executive personnel to support our expanding efforts to build and launch new products and capabilities to support existing customer deployments, and to further penetrate our total addressable market. These investments are initially focused in the areas of online marketing engagement and chat transcript text analysis. Over time, we expect to develop and launch additional capabilities that leverage our existing market position as a leader in proactive, intelligence-driven online engagement.
Expanding our International Presence. We continue to increase our investment in sales and support personnel in the United Kingdom, Asia-Pacific, Latin America and Western Europe, particularly France and Germany. We are also working with sales and support partners as we expand our investment in the Asia-Pacific region. We continue to improve the multi-language and translation capabilities within our hosted solutions to further support international expansion.
Key Metrics
Financial overview of the three months ended September 30, 2014 compared to the three months ended September 30, 2013:
Total revenue increased 17% to $52.8 million from $45.2 million.
Revenue from our Business segment increased 18% to $48.8 million from $41.4 million.
Gross profit margin decreased to 74.8% from 76.6%.
Cost and expenses increased 14% to $53.2 million from $46.5 million.
Net loss increased to $1.1 million from net loss of $0.7 million.
Bookings increased 4% and 23% to $10.6 million and $30.3 million in the three and nine months ended September 30, 2014, respectively, from $10.2 million and $24.7 million in the comparable periods in 2013. We include in our bookings metrics new or incremental contractual commitments for the first year of the contractual relationship from either new or existing customers for recurring subscription based fees, but exclude from such

22



amounts non-recurring fees such as one time implementation costs or one time consulting fees. The bookings metric generally does not include or represent usage based and/or pay-for-performance based contracts, month-to-month contracts, transaction-based services or subsequent years of multi-year contractual agreements. Accordingly, while we believe that bookings is a relevant metric in providing management with insight into certain recent activity in our business, there is no assurance that bookings amounts will be recognized as revenue in future periods, based on our revenue recognition policy, potential customer cancellations, delays in implementations or otherwise.
Average deal size for new bookings in the three and nine months ended September 30, 2014 was $67,800 and $79,400, respectively, with average deal size for new customers of $78,400 and $100,800, respectively, and average deal size for existing customers requesting additional products or expanded access to current products of $64,000 and $71,700, respectively.  Average deal size for new bookings in the three and nine months ended September 30, 2013 was $62,300 and $54,800, respectively, with average deal size for new customers of $53,300 and $50,900, respectively, and average deal size for existing customers requesting additional products or expanded access to current products of $66,900 and $56,500, respectively. Similar to our bookings metric, average deal size generally represents new contractual arrangements with committed subscription or base fees from new or existing mid-market or enterprise customers, and does not capture usage and/or pay-for-performance based contracts or fees. Management uses average deal size, being a subset of bookings, as a relevant metric in providing management with insight into certain recent activity in our business.
Adjusted EBITDA and Adjusted Net Income
To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA and adjusted net income which are non-GAAP financial measures. The tables below present a reconciliation of adjusted EBITDA and adjusted net income to net loss, the most directly comparable GAAP financial measures.
We have included adjusted EBITDA and adjusted net income in this Quarterly Report on Form 10-Q because these are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA and adjusted net income can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA and adjusted net income provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (amounts in thousands):

23



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Reconciliation of Adjusted EBITDA
 
 
 
 
 
 
 
Net loss
$
(1,140
)
 
$
(730
)
 
$
(3,146
)
 
$
(2,791
)
Amortization of purchased intangibles
1,328

 
691

 
3,461

 
1,575

Stock-based compensation
3,654

 
3,798

 
9,558

 
9,749

Depreciation
2,344

 
2,002

 
6,559

 
6,050

Provision for (benefit from) income taxes
962

 
(362
)
 
507

 
(832
)
Other income, net
(223
)
 
(209
)
 
(184
)
 
(264
)
Adjusted EBITDA
$
6,925

 
$
5,190

 
$
16,755

 
$
13,487

Our use of adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although amortization are non-cash charges, the assets being amortized may have to be replaced in the future, and adjusted net income does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted net income does not consider the potentially dilutive impact of equity-based compensation;
other companies, including companies in our industry, may calculate adjusted net income differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of adjusted net income for each of the periods indicated (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Reconciliation of Adjusted Net Income
 
 
 
 
 
 
 
Net loss
$
(1,140
)
 
$
(730
)
 
$
(3,146
)
 
$
(2,791
)
Amortization of purchased intangibles
1,328

 
691

 
3,461

 
1,575

Stock-based compensation
3,654

 
3,798

 
9,558

 
9,749

Adjusted net income
$
3,842

 
$
3,759

 
$
9,873

 
$
8,533


Critical Accounting Policies and Estimates
The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating the reported consolidated financial results include the following:
Revenue Recognition
The majority of our revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. Because we provide our application as a service, we follow the provisions of ASC 605-10-S99, “Revenue Recognition” and ASC 605-25, “Revenue Recognition with Multiple-Element Arrangements.” We charge a monthly fee, which varies by type of service, the level of customer usage and website traffic, and in some cases, the number of orders placed via our online engagement solutions.
For certain of our larger customers, we may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, we pass the fee we incur with the labor provider and our fee for the hosted services through to our customers in the form of a fixed fee for each order placed via our online engagement solutions. For these Pay for Performance (“PFP”) arrangements, in accordance with ASC 605-45, “Principal Agent Considerations,” we record revenue for transactions in which we act as an agent on a net basis, and revenue for transactions in which we act as a principal on a gross basis.
We also sell certain of the LivePerson services directly via Internet download.  These services are marketed as LiveEngage for small to medium-sized businesses (“SMBs”), and are paid for almost exclusively by credit card.  Credit card payments accelerate cash flow and reduce our collection risk, subject to the merchant bank's right to hold back cash pending settlement of the transactions. 

24



Sales of LiveEngage may occur with or without the assistance of an online sales representative, rather than through face-to-face or telephone contact that is typically required for traditional direct sales.
We recognize monthly service revenue based upon the fee charged for the LivePerson services, provided that there is persuasive evidence of an arrangement, no significant Company obligations remain, collection of the resulting receivable is probable and the amount of fees to be paid is fixed or determinable. Our service agreements typically have twelve month terms and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice without penalty. When professional service fees add value to the customer on a standalone basis, we recognize professional service fees upon completion and customer acceptance in accordance with FASB Accounting Standards Update 2009-13. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates.  If a professional services arrangement does not qualify for separate accounting, we recognize the fees, and the related labor costs, ratably over the contracted period.
For revenue generated from online transactions between Experts and Users, we recognize revenue net of Expert fees in accordance with ASC 605-45, “Principal Agent Considerations,” due primarily to the fact that the Expert is the primary obligor. Additionally, we perform as an agent without any risk of loss for collection, and are not involved in selecting the Expert or establishing the Expert’s fee.  We collect a fee from the consumer and retain a portion of the fee, and then remit the balance to the Expert. Revenue from these transactions is recognized when there is persuasive evidence of an arrangement, no significant Company obligations remain, collection of the resulting receivable is probable and the amount of fees to be paid is fixed or determinable.
Stock-Based Compensation
We follow ASC 718-10, “Stock Compensation,” which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
As of September 30, 2014, there was approximately $30.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 2.8 years.
Accounts Receivable
Our customers are located primarily in the United States. We perform ongoing credit evaluations of our customers’ financial condition (except for customers who purchase the LivePerson services by credit card via Internet download) and have established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information that we believe to be reasonable, although they may change in the future. If there is a deterioration of a customer’s credit worthiness or actual write-offs are higher than our historical experience, our estimates of recoverability for these receivables could be adversely affected. Although our large number of customers limits our concentration of credit risk we do have several large customers. If we experience a significant write-off from one of these large customers, it could have a material adverse impact on our condensed consolidated financial statements. No single customer accounted for or exceeded 10% of our total revenue in the three and nine months ended September 30, 2014. One customer accounted for approximately 22% and 12% of accounts receivable as of September 30, 2014 and December 31, 2013, respectively. We increased our allowance for doubtful accounts by $0.1 million in the three months ended September 30, 2014.
A large portion of receivables are due from larger corporate customers that typically have longer payment cycles.
Goodwill
In accordance with ASC 350, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are not amortized, but reviewed for impairment upon the occurrence of events or changes in circumstances that would reduce the fair value below its carrying amount. Goodwill is required to be tested for impairment at least annually. In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other (Topic 350). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. If it is determined that the fair value of a reporting unit is more likely than not to be less than its carrying value (including unrecognized intangible assets) than it is necessary to perform the second step of the goodwill impairment test. The second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. We perform internal valuation analysis and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions including projected future cash

25



flows (including timing), discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.
In the third quarter of 2014, we determined that it was not more-likely that the fair value of the reporting units are less than their carrying amount. Accordingly, we did not perform the two-step goodwill impairment test.
Impairment of Long-Lived Assets
In accordance with ASC 360-10, “Accounting for the Impairment or Disposal of Long-lived Assets,” long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. The Company does not have any long-lived assets, including intangible assets, which it considered to be impaired.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
Revenue
The majority of our revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. We charge a monthly fee, which varies by service and customer usage. The majority of our larger customers also pay a professional services fee related to implementation. A large proportion of our revenue from new customers comes from large corporations. These companies typically have more significant implementation requirements and more stringent data security standards. Such customers also have more sophisticated data analysis and performance reporting requirements, and are likely to engage our professional services organization to provide such analysis and reporting on a recurring basis.
Revenue from our Business segment accounted for 92% of total revenue for the three and nine months ended September 30, 2014, respectively. Revenue attributable to our monthly hosted Business services accounted for 90% of total Business revenue for the three and nine months ended September 30, 2014, respectively. Revenue from our Business segment accounted for 92% and 91% of total revenue for the three and nine months ended September 30, 2013, respectively. Revenue attributable to our monthly hosted Business services accounted for 92% and 93% of total Business revenue for the three and nine months ended September 30, 2013, respectively. Our service agreements typically have twelve month terms and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice without penalty. Given the time required to schedule training for our customers’ operators and our customers’ resource constraints, we have historically experienced a lag between signing a customer contract and recognizing revenue from that customer. Although this lag typically ranges from 30 to 90 days, it may take more time between contract signing and recognizing revenue in certain situations.
Revenue from our Consumer segment is generated from online transactions between Experts and Users and is recognized net of Expert fees and accounted for approximately 8% of total revenue for the three and nine months ended September 30, 2014, respectively.  Revenue generated from online transactions between Experts and Users, net of Expert fees, accounted for approximately 8% and 9% of total revenue for the three and nine months ended September 30, 2013, respectively.  
We also have entered into contractual arrangements that complement our direct sales force and online sales efforts. These are primarily with call center service companies, pursuant to which LivePerson is paid a commission based on revenue generated by these service companies from our referrals. To date, revenue from such commissions has not been material.
Costs and Expenses
Our cost of revenue consists of:
compensation costs relating to employees who provide customer support and implementation services to our customers;

26



compensation costs relating to our network support staff;
depreciation of certain hardware and software;
allocated occupancy costs and related overhead;
the cost of supporting our infrastructure, including expenses related to server leases, infrastructure support costs and Internet connectivity;
the credit card fees and related payment processing costs associated with the consumer and SMB services; and
amortization of certain intangibles.
Our product development expenses consist primarily of compensation and related expenses for product development personnel, allocated occupancy costs and related overhead, outsourced labor and expenses for testing new versions of our software. Product development expenses are charged to operations as incurred.
Our sales and marketing expenses consist of compensation and related expenses for sales and marketing personnel, online marketing, allocated occupancy costs and related overhead, advertising, sales commissions, public relations, promotional materials, travel expenses and trade show exhibit expenses.
Our general and administrative expenses consist primarily of compensation and related expenses for executive, accounting, legal and human resources personnel, allocated occupancy costs and related overhead, professional fees, provision for doubtful accounts and other general corporate expenses.
During the nine months ended September 30, 2014, we decreased our allowance for doubtful accounts by approximately $0.2 million to approximately $0.9 million. During 2013, we increased our allowance for doubtful accounts by $0.5 million to approximately $1.2 million, principally due to an increase in the proportion of receivables due from customers with greater credit risk. A larger proportion of receivables are due from larger corporate customers that typically have longer payment cycles. We base our allowance for doubtful accounts on specifically identified credit risks of customers, historical trends and other information that we believe to be reasonable. We adjust our allowance for doubtful accounts when accounts previously reserved have been collected.
Non-Cash Compensation Expense
The net non-cash compensation amounts are as follows:
 
Three Months Ended

Nine Months Ended
 
September 30,

September 30,
 
2014
 
2013

2014
 
2013
 
(in thousands)
 
(in thousands)
Stock-based compensation expense related to ASC 718-10
$
3,654

 
$
3,798

 
$
9,558

 
$
9,749


Results of Operations
The Company is organized into two operating segments: Business and Consumer. The Business segment facilitates real-time online interactions — chat, voice and content delivery, across multiple channels and screens for global corporations of all sizes. The Consumer segment facilitates online transactions between Experts and Users seeking information and knowledge for a fee via real-time chat.

27



Comparison of the Three and Nine Months Ended September 30, 2014 and 2013
Revenue
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenue by Segment:
 
 
 
 
 
 
 
 
 
 
 
Business
$
48,795

 
$
41,364

 
18
%
 
$
139,261

 
$
119,694

 
16
%
Consumer
3,992

 
3,828

 
4
%
 
12,441

 
11,223

 
11
%
Total
$
52,787

 
$
45,192

 
17
%
 
$
151,702

 
$
130,917

 
16
%
Our business revenue growth has traditionally been driven by a mix of revenue from new customers as well as expansion from existing customers. The mix of revenue between new and existing customers has been consistent with prior quarters. Business revenue increased by 18% and 16% to $48.8 million and $139.3 million in the three and nine months ended September 30, 2014, respectively, from $41.4 million and $119.7 million in the comparable periods in 2013. This increase is primarily attributable to increased revenue from existing customers who increased their use of our services in the amount of approximately $4.7 million and $10.4 million, respectively, net of cancellations; revenue from new customers in the amount of approximately $1.4 million and $5.7 million, respectively; and to professional services revenue of approximately $1.3 million and $3.5 million, respectively.
Consumer revenue increased by 4% to $4.0 million in the three months ended September 30, 2014, from $3.8 million in the comparable period in 2013. This increase is primarily attributable to a increase in chat minutes, partially offset by a decrease in price charged per minute. Consumer revenue increased by 11% to $12.4 million in the nine months ended September 30, 2014, from $11.2 million in the comparable period in 2013. This increase is primarily attributable to a increase in gross revenue as a result of an increase in the price charged per minute, partially offset by an decrease in chat minutes.
Cost of Revenue - Business
Cost of revenue consists of compensation costs relating to employees who provide customer service to our customers, compensation costs relating to our network support staff, the cost of supporting our server and network infrastructure, and allocated occupancy costs and related overhead.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
 
($ in thousands)
 

 
($ in thousands)
 

Cost of revenue - business
$
12,679

 
$
10,014

 
27
%
 
$
36,306

 
$
29,524

 
23
%
Percentage of total revenue
24
%
 
22
%
 

 
24
%
 
23
%
 

Headcount (at period end):
232

 
214

 
8
%
 
232

 
214

 
8
%
Cost of revenue increased by 27% to $12.7 million in the three months ended September 30, 2014, from $10.0 million in the comparable period in 2013. This increase in expense is primarily attributable to an increase for primary and backup server facilities and allocated overhead related to costs of supporting our server and network infrastructure of approximately $1.2 million as a result of increased revenue, an increase in total compensation and related costs for additional and existing customer service and network operations personnel in the amount of approximately $0.7 million and an increase in amortization of purchased intangibles of approximately $0.6 million. This increase in cost of revenue was due to increased investment in enhancing our business continuity capabilities at our hosting facilities. Additionally, data collection and storage costs have increased in support of expanded scope and quality of the analytical reporting to our customers.
Cost of revenue increased by 23% to $36.3 million in the nine months ended September 30, 2014, from $29.5 million in the comparable period in 2013. This increase in expense is primarily attributable to an increase for primary and backup server facilities and allocated overhead related to costs of supporting our server and network infrastructure of approximately $3.1 million as a result of increased revenue, an increase in total compensation and related costs for additional and existing customer service and network operations personnel in the amount of approximately $2.1 million and an increase in amortization of purchased intangibles of approximately $1.3 million. This increase in cost of revenue was due to increased investment in enhancing our business continuity capabilities at our hosting facilities. Additionally, data collection and storage costs have increased in support of expanded scope and quality of the analytical reporting to our customers.

28



Cost of Revenue - Consumer
Cost of revenue consists of compensation costs relating to employees who provide customer service to Experts and Users, compensation costs relating to our network support staff, the cost of supporting our server and network infrastructure, credit card and transaction processing fees and related costs, and allocated occupancy costs and related overhead.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
 
($ in thousands)
 

 
($ in thousands)
 

Cost of revenue - consumer
$
625

 
$
583

 
7
%
 
$
1,894

 
$
1,818

 
4
%
Percentage of total revenue
1
%
 
1
%
 

 
1
%
 
1
%
 

Headcount (at period end)
16

 
16

 
%
 
16

 
16

 
%
Cost of revenue increased by 7% to $0.6 million in the three months ended September 30, 2014, from $0.6 million in the comparable period in 2013. This increase in expense is due to an increase in allocated occupancy costs and related overhead of approximately $66,000.
Cost of revenue increased by 4% to $1.9 million in the nine months ended September 30, 2014, from $1.8 million in the comparable period in 2013. This increase in expense is due to an increase in allocated occupancy costs and related overhead of approximately $0.2 million.
Product Development
Our product development expenses consist primarily of compensation and related expenses for product development personnel as well as allocated occupancy costs and related overhead and outsourced labor and expenses for testing new versions of our software.

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2014
 
2013
 
% Change
 
2014
 
2013
 
% Change

($ in thousands)
 

 
($ in thousands)
 

Product development
$
9,712

 
$
10,023

 
(3
)%
 
$
27,999

 
$
27,091

 
3
%
Percentage of total revenue
18
%
 
22
%
 

 
18
%
 
21
%
 

Headcount (at period end):
221

 
214

 
3
 %
 
221

 
214

 
3
%
Product development costs decreased by 3% to $9.7 million in the three months ended September 30, 2014, from $10.0 million in the comparable period in 2013.  This decrease relates to a decrease in outsourced labor expense of approximately $0.4 million as a result of the launch of the LiveEngage 2.0 platform, offset by an increase in compensation and associated costs for additional and existing product development personnel of approximately $0.1 million to expand our product offerings. We continue to increase our investment investment in new product development efforts to expand future product offerings. We are also investing in partner programs that enable third-parties to develop value-added software applications for our existing and future customers.
Product development costs increased by 3% to $28.0 million in the nine months ended September 30, 2014, from $27.1 million in the comparable period in 2013.  This increase relates to an increase in compensation and associated costs for additional and existing product development personnel of approximately $1.5 million to expand our product offerings, offset by a decrease in outsourced labor expense of approximately $0.5 million as a result of the launch of the LiveEngage 2.0 platform. We continue to increase our investment in new product development efforts to expand future product offerings. We are also investing in partner programs that enable third-parties to develop value-added software applications for our existing and future customers.

29



Sales and Marketing - Business
Our sales and marketing expenses consist of compensation and related expenses for sales and marketing personnel, as well as advertising, public relations, trade show exhibit expenses and allocated occupancy costs and related overhead.

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2014
 
2013
 
% Change
 
2014
 
2013
 
% Change

($ in thousands)
 

 
($ in thousands)
 

Sales and marketing - business
$
19,488

 
$
14,664

 
33
%
 
$
55,203

 
$
42,113

 
31
%
Percentage of total revenue
37
%
 
32
%
 

 
36
%
 
32
%
 

Headcount (at period end):
284

 
250

 
14
%
 
284

 
250
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