Description of Business and Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2013

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, Santa Monica 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, 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 their customers, while also enabling their 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”).

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 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, 2013, and the consolidated results of operations, comprehensive (loss) income and cash flows for the interim periods ended September 30, 2013 and 2012. 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, 2012 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, 2012, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2013.

RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Issued Accounting Standards

Comprehensive Income

In February 2013, the FASB issued ASU No. 2013-2, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1, 2013, did not have an impact on the Company’s condensed consolidated financial statements

REVENUE RECOGNITION

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 Financial Accounting Standards Board (“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, the Company recognizes revenue net of the labor provider’s fee in accordance with ASC 605-45, “Principal Agent Considerations,” due primarily to the fact that the call center labor vendor is the primary obligor with respect to the labor services provided. Additionally, the Company performs as an agent without risk of loss for collection and does not bear inventory risk with respect to the outsourced labor services. Finally, the Company does not provide any part of the labor services, has no latitude in establishing prices for the labor services and generally does not have discretion in selecting the vendor.

The Company also sells certain of the LivePerson services directly via Internet download. These services are marketed as LivePerson Pro and LivePerson Contact Center for small and mid-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 LivePerson Pro and LivePerson Contact Center 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) estimates. If a professional services arrangement does not qualify for separate accounting, the Company recognizes the fees, and the related labor costs, ratably over a period of 48 months, representing the Company’s current estimate of the term of the customer relationship.

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.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

Net Income (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 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, 2013 does not include the effect of options to purchase 2,945,414 and 3,084,345, respectively, of common stock as the effect of their inclusion is anti-dilutive. Diluted net income per common share for the three and nine months ended September 30, 2012 includes the effect of options to purchase 5,413,038 and 5,015,988, respectively, shares of common stock with a weighted average exercise price of $7.20 and $6.82.

A reconciliation of shares used in calculating basic and diluted earnings per share follows:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Basic	54,046,161	55,688,824	54,898,974	55,087,109
Effect of assumed exercised options	—	2,072,044	—	1,900,193
Diluted	54,046,161	57,760,868	54,898,974	56,987,302

SEGMENT REPORTING

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 U.S. 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, 2013, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):



	Consolidated			Corporate			Business		Consumer
Revenue:
Hosted services – Business	$	38,007		$	—		$	38,007	$	—
Hosted services – Consumer	3,828			—			—		3,828
Professional services	3,357			—			3,357		—
Total revenue	45,192			—			41,364		3,828
Cost of revenue	10,597			—			10,014		583
Sales and marketing	16,141			—			14,664		1,477
Amortization of purchased intangibles	224			—			224		—
Unallocated corporate expenses	19,531			19,531			—		—
Operating (loss) income	$	(1,301	)	$	(19,531	)	$	16,462	$	1,768

Summarized financial information by segment for the three months ended September 30, 2012, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):



	Consolidated		Corporate			Business		Consumer
Revenue:
Hosted services – Business	$	33,245	$	—		$	33,245	$	—
Hosted services – Consumer	3,577		—			—		3,577
Professional services	2,848		—			2,848		—
Total revenue	39,670		—			36,093		3,577
Cost of revenue	9,036		—			8,539		497
Sales and marketing	12,713		—			11,502		1,211
Amortization of purchased intangibles	11		—			11		—
Unallocated corporate expenses	15,321		15,321			—		—
Operating income (loss)	$	2,589	$	(15,321	)	$	16,041	$	1,869

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):



	Consolidated			Corporate			Business		Consumer
Revenue:
Hosted services – Business	$	110,785		$	—		$	110,785	$	—
Hosted services – Consumer	11,223			—			—		11,223
Professional services	8,909			—			8,909		—
Total revenue	130,917			—			119,694		11,223
Cost of revenue	31,342			—			29,524		1,818
Sales and marketing	46,118			—			42,113		4,005
Amortization of purchased intangibles	672			—			672		—
Unallocated corporate expenses	56,672			56,672			—		—
Operating (loss) income	$	(3,887	)	$	(56,672	)	$	47,385	$	5,400

Summarized financial information by segment for the nine months ended September 30, 2012, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision makers, follows (amounts in thousands):



	Consolidated		Corporate			Business		Consumer
Revenue:
Hosted services – Business	$	96,634	$	—		$	96,634	$	—
Hosted services – Consumer	11,387		—			—		11,387
Professional services	6,913		—			6,913		—
Total revenue	114,934		—			103,547		11,387
Cost of revenue	25,450		—			23,845		1,605
Sales and marketing	36,820		—			32,616		4,204
Amortization of purchased intangibles	98		—			98		—
Unallocated corporate expenses	44,665		44,665			—		—
Operating income (loss)	$	7,901	$	(44,665	)	$	46,988	$	5,578

Geographic Information

The Company is domiciled in the United States and has international operations in the United Kingdom, Australia, 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,
	2013		2012		2013		2012
United States	$	30,879	$	29,531	$	91,397	$	86,909
United Kingdom	8,554		5,898		22,501		16,017
Other countries	5,759		4,241		17,019		12,008
Total revenue	$	45,192	$	39,670	$	130,917	$	114,934

The following table presents the Company's long-lived assets by geographic region for the periods presented (amounts in thousands):



	September 30,		December 31,
	2013		2012
United States	$	36,042	$	35,711
Israel	23,790		23,750
Australia	10,124		10,361
United Kingdom	1,633		2,600
Netherlands	556		—
Total long-lived assets	$	72,145	$	72,422

GOODWILL AND INTANGIBLE ASSETS

Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows (amounts in thousands):



	Total		Business		Consumer
Balance as of December 31, 2012	$	32,645	$	24,621	$	8,024
Adjustments to goodwill:
Engage acquisition (see Note 8)	79		79		—
Balance as of September 30, 2013	$	32,724	$	24,700	$	8,024

The changes in the carrying amount of goodwill for the year ended December 31, 2012 are as follows (amounts in thousands):



	Total		Business		Consumer
Balance as of December 31, 2011	$	24,090	$	16,066	$	8,024
Adjustments to goodwill:
Engage acquisition	6,073		6,073		—
LookIO acquisition	2,405		2,405		—
Contingent earnout payments (see Note 8)	77		77		—
Balance as of December 31, 2012	$	32,645	$	24,621	$	8,024

Intangible assets are summarized as follows (see Note 8) (amounts in thousands):

Acquired Intangible Assets



	As of September 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Amortization Period
Amortizing intangible assets:
Technology	$	18,533	$	(6,808	)	$	11,725	3.8 years
Customer relationships	5,061		(2,982		)	2,079		3.5 years
Trade names	725		(716		)	9		2.7 years
Non-compete agreements	486		(478		)	8		1.2 years
Patents	475		(178		)	297		11.0 years
Other	285		(247		)	38		3.0 years
Total	$	25,565	$	(11,409	)	$	14,156



	As of December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Amortization Period
Amortizing intangible assets:
Technology	$	18,533	$	(5,904	)	$	12,629	3.8 years
Customer relationships	5,061		(2,485		)	2,576		3.5 years
Trade names	725		(644		)	81		2.7 years
Non-compete agreements	486		(421		)	65		1.2 years
Patents	475		(145		)	330		11.0 years
Other	235		(235		)	—		3.0 years
Total	$	25,515	$	(9,834	)	$	15,681

Amortization expense is calculated on a straight-line basis over the estimated useful life of the asset. 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, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively. Estimated amortization expense for the next five years are as follows (amounts in thousands):



	Estimated Amortization Expense
2013	$	1,078
2014	4,133
2015	3,771
2016	3,316
2017	1,746
Thereafter	112
Total	$	14,156

STOCK-BASED COMPENSATION

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 three and nine months ended September 30, 2013 and 2012 (amounts in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of revenue	$	635	$	428	$	1,557	$	1,130
Sales and marketing expense	844		822		2,159		2,113
Product development expense	1,241		807		2,922		2,206
General and administrative expense	1,078		795		3,111		2,197
Total stock based compensation included in costs and expenses	$	3,798	$	2,852	$	9,749	$	7,646

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 per share weighted average fair value of stock options granted during the three and nine months ended September 30, 2012 was $8.78 and $8.23, 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,
	2013		2012		2013		2012
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Risk-free interest rate	1.38% - 1.39%		0.58% - 0.62%		0.65% - 1.39%		0.58% - 0.87%
Expected life (in years)	5		5		5		5
Historical volatility	59.84% - 59.85%		59.7% - 60.3%		56.68% - 60.06%		59.7% - 60.8%

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.

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 ten-year terms. As of September 30, 2013, approximately 15,000,000 shares of common stock were reserved for issuance under the 2009 Plan (taking into account all option exercises through September 30, 2013). As of September 30, 2013, there was approximately $33.4 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 2.0 years.

In March 2000, the Company adopted the 2000 Employee Stock Purchase Plan with 450,000 shares of common stock initially reserved for issuance (the “2000 ESPP”). The 2000 ESPP expired on its terms on the last day of April 2010.

In June 2010, our stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. As of September 30, 2013, approximately 726,000 shares of common stock were reserved for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through September 30, 2013).

A summary of the Company’s stock option activity and weighted average exercise prices follows:



	Options		Weighted Average Exercise Price
Options outstanding at December 31, 2012	9,841,479		$	11.06
Options granted	2,121,200		10.38
Options exercised	(446,107	)	5.94
Options cancelled	(1,384,530	)	13.05
Options outstanding at September 30, 2013	10,132,042		10.87
Options exercisable at September 30, 2013	4,451,913		$	8.54

The total value of stock options exercised during the nine months ended September 30, 2013 was approximately $2.1 million. The total intrinsic value of options exercisable at September 30, 2013 was approximately $11.9 million. The total intrinsic value of nonvested options at September 30, 2013 is approximately $0.5 million. The total intrinsic value of all outstanding options at September 30, 2013 is $12.5 million.

A summary of the status of the Company’s nonvested shares as of December 31, 2012, and changes during the nine months ended September 30, 2013 is as follows:



	Options		Weighted Average Grant- Date Fair Value
Nonvested Shares at December 31, 2012	6,621,251		$	6.84
Granted	2,121,200		5.25
Vested	(1,677,792	)	6.03
Cancelled	(1,384,530	)	6.72
Nonvested Shares at September 30, 2013	5,680,129		$	6.90

- Definition

Disclosure of accounting policy for computing basic and diluted earnings or loss per share for each class of common stock and participating security. Addresses all significant policy factors, including any antidilutive items that have been excluded from the computation and takes into account stock dividends, splits and reverse splits that occur after the balance sheet date of the latest reporting period but before the issuance of the financial statements.

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- Definition

Disclosure of accounting policy for goodwill and intangible assets. This accounting policy also may address how an entity assesses and measures impairment of goodwill and intangible assets.

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- Definition

Disclosure of accounting policy for revenue recognition. If the entity has different policies for different types of revenue transactions, the policy for each material type of transaction is generally disclosed. If a sales transaction has multiple element arrangements (for example, delivery of multiple products, services or the rights to use assets) the disclosure may indicate the accounting policy for each unit of accounting as well as how units of accounting are determined and valued. The disclosure may encompass important judgment as to appropriateness of principles related to recognition of revenue. The disclosure also may indicate the entity's treatment of any unearned or deferred revenue that arises from the transaction.

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- Definition

Disclosure of accounting policy for stock option and stock incentive plans. This disclosure may include (1) the types of stock option or incentive plans sponsored by the entity (2) the groups that participate in (or are covered by) each plan (3) significant plan provisions and (4) how stock compensation is measured, and the methodologies and significant assumptions used to determine that measurement.

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