Description of Business and Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2014

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, 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

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 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 June 30, 2014, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended June 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.

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 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.

NET LOSS PER SHARE

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 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 six months ended June 30, 2014 does not include the effect of options to purchase 11,434,227 shares of common stock as the effect of their inclusion is anti-dilutive. Diluted net loss per common share for the three and six months ended June 30, 2013 does not include the effect of options to purchase 9,344,220 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		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Basic	54,189,722	54,806,694	54,766,811	55,332,449
Effect of assumed exercised options	—	—	—	—
Diluted	54,189,722	54,806,694	54,766,811	55,332,449

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 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 June 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	$	41,996	$	—	$	—		$	41,996
Hosted services – Consumer	—		4,539		—			4,539
Professional services	4,552		—		—			4,552
Total revenue	46,548		4,539		—			51,087
Cost of revenue	12,483		678		—			13,161
Sales and marketing	18,799		1,278		—			20,077
Amortization of purchased intangibles	206		—		—			206
Unallocated corporate expenses	—		—		19,124			19,124
Operating income (loss)	$	15,060	$	2,583	$	(19,124	)	$	(1,481	)

Summarized financial information by segment for the three months ended June 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	$	36,634	$	—	$	—		$	36,634
Hosted services – Consumer	—		3,776		—			3,776
Professional services	2,819		—		—			2,819
Total revenue	39,453		3,776		—			43,229
Cost of revenue	9,974		638		—			10,612
Sales and marketing	14,243		1,256		—			15,499
Amortization of purchased intangibles	224		—		—			224
Unallocated corporate expenses	—		—		18,882			18,882
Operating income (loss)	$	15,012	$	1,882	$	(18,882	)	$	(1,988	)

Summarized financial information by segment for the six months ended June 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	$	81,677	$	—	$	—		$	81,677
Hosted services – Consumer	—		8,448		—			8,448
Professional services	8,790		—		—			8,790
Total revenue	90,467		8,448		—			98,915
Cost of revenue	23,627		1,269		—			24,896
Sales and marketing	35,717		2,755		—			38,472
Amortization of purchased intangibles	396		—		—			396
Unallocated corporate expenses	—		—		37,573			37,573
Operating income (loss)	$	30,727	$	4,424	$	(37,573	)	$	(2,422	)

Summarized financial information by segment for the six months ended June 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	$	72,778	$	—	$	—		$	72,778
Hosted services – Consumer	—		7,395		—			7,395
Professional services	5,552		—		—			5,552
Total revenue	78,330		7,395		—			85,725
Cost of revenue	19,510		1,236		—			20,746
Sales and marketing	27,449		2,528		—			29,977
Amortization of purchased intangibles	448		—		—			448
Unallocated corporate expenses	—		—		37,140			37,140
Operating income (loss)	$	30,923	$	3,631	$	(37,140	)	$	(2,586	)

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				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
United States	$	33,765	$	28,966	$	64,865	$	57,606
Other Americas ⁽¹⁾	2,172		1,825		4,321		3,792
Total Americas	35,937		30,791		69,186		61,398
EMEA ⁽²⁾	11,055		8,051		21,569		15,972
APAC ⁽³⁾	4,095		4,387		8,160		8,355
Total revenue	$	51,087	$	43,229	$	98,915	$	85,725

⁽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):



	June 30,		December 31,
	2014		2013
United States	$	39,347	$	34,422
Israel	20,551		22,580
Australia	9,058		9,827
Netherlands	7,696		3,540
United Kingdom	1,423		1,539
Total long-lived assets	$	78,075	$	71,908

GOODWILL AND INTANGIBLE ASSETS

Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 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 June 30, 2014	$	27,759	$	8,024	$	35,783

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) (amounts in thousands):



	As of June 30, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Amortization Period
Amortizing intangible assets:
Technology	$	19,615	$	(9,416	)	$	10,199	4.1 years
Customer relationships	5,308		(3,480		)	1,828		3.7 years
Trade names	787		(725		)	62		2.8 years
Non-compete agreements	646		(519		)	127		1.3 years
Patents	475		(210		)	265		11.0 years
Other	312		(260		)	52		3.0 years
Total	$	27,143	$	(14,610	)	$	12,533



	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

Amortization expense is calculated on a straight-line basis over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $1.1 million and $2.1 million for the three and six months ended June 30, 2014, respectively. Aggregate amortization expense for intangible assets was $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 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	$	2,182
2015	3,976
2016	3,514
2017	1,915
2018	194
Thereafter	752
Total	$	12,533

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 periods presented (amounts in thousands):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Cost of revenue	$	484	$	501	$	844	$	922
Sales and marketing expense	923		569		1,737		1,315
Product development expense	931		812		1,611		1,681
General and administrative expense	869		1,019		1,712		2,034
Total stock based compensation included in costs and expenses	$	3,207	$	2,901	$	5,904	$	5,952

The per share weighted average fair value of stock options granted during the three and six months ended June 30, 2014 was $4.76 and $5.06, respectively. The per share weighted average fair value of stock options granted during the three and six months ended June 30, 2013 was $5.72 and $6.16, 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		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
Dividend yield	0.0%	0.0%	0.0%	0.0%
Risk-free interest rate	1.6% - 1.7%	0.7% - 1.0%	1.5% - 1.7%	0.7% - 1.0%
Expected life (in years)	5	5	5	5
Historical volatility	52.6% - 53.2%	56.7% - 60.1%	52.6% - 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.

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 June 30, 2014, approximately 14,300,000 shares of common stock were reserved for issuance under the 2009 Plan (taking into account all option exercises through June 30, 2014).

As of June 30, 2014, there was approximately $33.7 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 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 June 30, 2014, approximately 615,000 shares of common stock were reserved for issuance under the Employee Stock Purchase Plan (taking into account all share purchases through June 30, 2014).

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, 2013	9,724,193		$	10.86
Options granted	2,833,500		10.72
Options exercised	(286,553	)	8.40
Options cancelled	(836,916	)	13.27
Options outstanding at June 30, 2014	11,434,224		10.71
Options exercisable at June 30, 2014	4,512,864		$	9.15

The total value of stock options exercised during the six months ended June 30, 2014 was approximately $1.0 million. The total intrinsic value of options exercisable at June 30, 2014 was approximately $12.3 million. The total intrinsic value of nonvested options at June 30, 2014 is approximately $1.7 million. The total intrinsic value of all outstanding options at June 30, 2014 is $14.0 million.

A summary of the status of the Company’s nonvested shares as of December 31, 2013, and changes during the six months ended June 30, 2014 is as follows:



	Options		Weighted Average Grant- Date Fair Value
Nonvested Shares at December 31, 2013	5,633,701		$	6.90
Granted	2,833,500		5.06
Vested	(708,925	)	5.79
Cancelled	(836,916	)	6.73
Nonvested Shares at June 30, 2014	6,921,360		$	5.80

- 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 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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