LIVEPERSON INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations General You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.” Overview LivePerson is a leading Conversational AI company creating digital experiences that are Curiously Human. Conversational AI allows humans and machines to interact using natural language, including speech or text. During the past decade, consumers have made mobile devices the center of their digital lives, and they have made mobile messaging the center of communication with friends, family and peers. This trend has been significantly accelerated by the COVID-19 pandemic and we believe can now be viewed as a permanent, structural shift in consumer behavior. Our technology enables consumers to connect with businesses through these same preferred conversational interfaces, including Facebook Messenger, SMS, WhatsApp, Apple Business Chat, Google Rich Business Messenger and Alexa. These messaging conversations harness human agents, bots and AI to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, from discovery and research, to sales, service and support, and increasingly marketing, social, and brick and mortar engagements. For example, consumers can look up product info like ratings, images and pricing, search for stores, see product inventory, schedule appointments, apply for credit, approve repairs, and make purchases or payments - all without ever leaving the messaging channel. These AI and human-assisted conversational experiences constitute the Conversational Space, within which LivePerson has strategically developed one of the industry’s largest ecosystems of messaging endpoints and use cases. The Conversational Cloud, our enterprise-class cloud-based platform, enables businesses to become conversational by securely deploying AI-powered messaging at scale for brands with tens of millions of customers and many thousands of agents. The Conversational Cloud powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, SMS, social media and third-party consumer messaging platforms. Brands can also use the Conversational Cloud to message consumers when they dial a 1-800 number instead of forcing them to navigate IVRs and wait on hold. Similarly, the Conversational Cloud can ingest traditional emails and convert them into messaging conversations, or embed messaging conversations directly into web advertisements, rather than redirect consumers to static website landing pages. Agents can manage all conversations with consumers through a single console interface, regardless of where the conversations originated. LivePerson’s robust, cloud-based suite of rich messaging, real-time chat, AI and automation offerings features consumer and agent facing bots, intelligent routing and capacity mapping, real-time intent detection and analysis, queue prioritization, customer sentiment, analytics and reporting, content delivery, PCI compliance, co-browsing and a sophisticated proactive targeting engine. An extensible API stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. More than 40 APIs and software development kits are available on the Conversational Cloud. For your reference: • Conversational AI: Conversational AI allows humans and machines to interact using natural language, including speech or text. • Conversational Space: In the Conversational Space, consumers message with brands on their own schedule, using natural language, to resolve their intents - all on their preferred messaging service. The core capabilities of the Conversational Space are voice and text-based interfaces, powered by AI and humans working together. Conversational Space is the simplest, most intuitive interface of all. • Conversational Cloud: LivePerson’s enterprise-class, AI-powered Conversational Cloud platform empowers consumers to message their favorite brands, just as they do with friends and family. LivePerson’s Conversational AI offerings put the power of bot development, training, management and analysis into the hands of the contact center and its agents, the teams most familiar with how to structure sales and service conversations to drive successful outcomes. The platform enables what we call “the tango” of humans, AI and bots, whereby human agents act as bot 56 managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work, so that the agent can focus on relationship building. By seamlessly integrating messaging with our proprietary Conversational AI, as well as third-party bots, the Conversational Cloud offers brands a comprehensive approach to scaling automations across their millions of customer conversations. Complementing our proprietary messaging and Conversational AI offerings are teams of technical, solutions and consulting professionals that have developed deep domain expertise in the implementation and optimization of conversational services across industries and messaging endpoints. We are a leading authority in the Conversational Space. LivePerson’s products, coupled with our domain knowledge, industry expertise and professional services, have been proven to maximize the effectiveness of the Conversational Space and deliver measurable return on investment for our customers. Certain of our customers have achieved the following advantages from our offerings: • the ability for each agent to manage as many as 40 messaging conversations at a time, as compared to one at a time for a voice agent and two to four at a time for a good chat agent. Adding AI and bots provides even greater scale to the number of conversations managed; • labor efficiency gains of at least two times that of voice agents, effectively cutting labor costs by at least 50%; • improving the overall customer experience, thereby fueling customer satisfaction score increases of up to 20 percentage points, and enhancing retention and loyalty; • more convenient, personalized and content-rich conversations that increase sales conversion by up to 20%, increase average order value and reduce abandonment; • more satisfied contact center agents, thereby reducing agent churn by up to 50%; • a valued connection with consumers via mobile devices, either through native applications, websites, text messages, or third-party messaging platforms; • leveraged spending that drives visitor traffic by increasing visitor conversions; • refining and improving performance by understanding which initiatives deliver the highest rate of return; and • increased lead generation by providing a single platform that engages consumers through advertisements and listings on branded and third-party websites. As a “cloud computing” or SaaS provider, LivePerson provides solutions on a hosted basis. This model offers significant benefits over premise-based software, including lower up-front costs, faster implementation, lower total cost of ownership, scalability, cost predictability, and simplified upgrades. Organizations that adopt a fully-hosted, multi-tenant architecture that is maintained by LivePerson eliminate the majority of the time, server infrastructure costs, and IT resources required to implement, maintain, and support traditional on-premise software. To further enhance our platform, in September 2020 we signed a partnership with a digital services and consulting company to transform our technology infrastructure on the public cloud, to build integrated solutions and a global practice around our Conversational Cloud to sell into this company’s channels and global enterprise customer base, and to redefine how the world’s top brands communicate. More than 18,000 businesses, including HSBC, Orange, and GM Financial use our conversational solutions to orchestrate humans and AI, at scale, and create a convenient, deeply personal relationship with their customers. LivePerson’s consumer services offering is an online marketplace that connects Experts who provide information and knowledge for a fee via mobile and online messaging with Users. Users seek assistance and advice in various categories including personal counseling and coaching, computers and programming, education and tutoring, spirituality and religion, and other topics. The key elements of LivePerson’s business solutions strategy include: Build awareness and drive adoption of the Conversational Space. LivePerson brought our first customer live on messaging in June 2016. Since that time, we have been focused on building awareness for conversational experiences and driving adoption. We have educated businesses on the financial and operational transformation that occurs when a contact center shifts to an asynchronous messaging environment, where the consumer controls the pace of the conversation, which can 57 last minutes, hours or days, from a synchronous call or chat center, where conversations occur in real-time and have a distinct start and end. A key component of our industry awareness marketing strategy has been to hold multiple global customer summits each year (events in 2020 were held virtually in light of the COVID-19 pandemic) that target executives from enterprise customers and prospects, and feature a key theme within the Conversational Space, such as Apple Business Chat, Google Rich Business Messenger, IVR deflection or AI. LivePerson customers are the center point of these summits, presenting why they chose LivePerson for conversational experiences, how they achieved success, and what type of ROI they have realized. Each attendee then receives a blueprint for how they can pursue similar outcomes. We have found this strategy to drive strong results for LivePerson, as we have seen a greater than 40% conversion rate on opportunities that were created or advanced as part of the customer summits. By year-end 2021, nearly 75% of messaging conversations had automation attached. We will continue to focus on building awareness for the Conversational Space and driving adoption of messaging and AI across our customer base. Increase messaging volumes by developing a broad ecosystem, expanding customer use cases, and focusing on AI and automation. Our strategy is to drive higher messaging volumes by going both wide across messaging endpoints, deep across consumer use cases, and focusing on AI and automation as the means to deliver powerful scale. LivePerson offers a platform usage pricing model, where customers are offered access to our entire suite of messaging technologies across their entire agent pool for a pre-negotiated cost per interaction. We believe that over time this model will drive higher revenue for LivePerson by reducing barriers to adoption of new messaging endpoints and use cases. In order to drive broad messaging adoption, it is imperative that the Conversational Cloud integrates to all of the messaging apps that consumers prefer to use for communication and addresses all key use cases. For example, if a consumer is an avid WhatsApp user, and a brand only offers SMS as a messaging option, that consumer may be reluctant to try messaging the brand. Therefore, a key strategy of ours has been to build one of the industry’s broadest ecosystems of messaging endpoints and use cases. In June 2016, we launched with In-App messaging. In 2017, we introduced Facebook Messenger, SMS, Web messaging and IVR deflection integrations. In 2018, we added Apple Business Chat, Google Rich Business Messenger, Line, WhatsApp, Alexa, Google Home, Google Ad Lingo and Twitter. In 2019, we added email, allowing brands to manage emails through the same console they use for messaging, and to convert legacy emails into messaging conversations. We also added social monitoring and conversational tools for Twitter and Facebook, and introduced proactive messaging, allowing brands to transform traditional one-way notifications such as flight cancellations or phone plan overage alerts into two-way conversations. Finally, we connected to Facebook and WhatsApp digital advertisements, enabling consumers to initiate messaging conversations for marketing and customer care directly within the advertisement. In 2020, we added Instagram and Google’s Business Messages, allowing brands to bring customer-initiated conversations into the Conversational Cloud directly from Instagram, Google Search, and Google Maps. Each channel and use case added opens the door to new consumers, providing brands a greater opportunity to shift share away from their legacy contact center channels into messaging. For example, in 2019, leading airlines launched on WhatsApp and Apple Business Chat with the ability to make secure payments; a baseball stadium launched an automated conversational concierge providing answers to a wide range of questions from restroom locations to player stats; and a multinational telecommunications company used proactive two-way messaging for outbound campaigns. In 2020, one of the largest Telcos in Australia fully virtualized their contact centers, a leading U.S. quick-serve restaurant launched on Facebook Messenger to help customers order meals, one of the biggest banks in the world launched an Apple Business Chat channel to provide a secure way to perform day-to-day banking, and one of the world’s largest jewelry retailers used the Conversational Cloud and QR codes to sell millions of dollars of product. LivePerson makes the management of all these disparate channels seamless to the brand. AI-based intelligent routing, queuing and prioritization software orchestrates these conversations at scale, regardless of which messaging endpoint they originated from, so that human and bot agents can engage with all customers through just one console. We believe LivePerson is leading the structural shift to Conversational AI. In the wake of the COVID-19 pandemic, leading brands are turning to LivePerson’s AI-powered messaging to overcome a capacity gap created by voice call agent work-from-home measures and increased demand for digital engagement as consumers practice social distancing. LivePerson is powering Conversational AI, automation and messaging strategies across a growing number of use cases from care and sales, to marketing, social, conversational advertising and brick and mortar. Our Conversational AI leadership and the increase in adoption have influenced LivePerson’s enterprise and mid-market revenue retention rate, (the trailing-twelve-month change in total revenue from existing customers after upsells, downsells and attrition) which exceeded the high end of our target range of 105% to 115% for 2021. The benefit can also be seen in LivePerson’s ARPU for our enterprise and mid-market customers, 58 which increased approximately 31% in 2021 to $610,000 from approximately $465,000 in 2020. We believe these ARPU trends are a clear indication of how LivePerson’s strategy to drive messaging adoption has successfully influenced our revenue growth by taking share from legacy communication channels. Attract the industry’s best AI, machine learning and conversational talent. We believe that AI and machine learning are critical to successfully scaling in the Conversational Space, and that in order to develop the industry’s leading technology, we need to attract the industry’s best talent. Since 2018, LivePerson hired more than 437 of the industry’s brightest data scientists, machine learning engineers and automation engineers, many from firms such as Nike, Amazon.com, Microsoft and Target, who are working exclusively on applying AI to the Conversational Space. LivePerson also expanded its development talent base in Germany, and added key development talent through the acquisitions of BotCentral in Mountain View, California; Tenfold in Austin, Texas; e-bot7 in Munich, Germany; and VoiceBase in San Francisco, California. Bring to market best-in-class AI and machine learning technologies designed for the Conversational Space. We believe that in the last decade many vendors introduced AI and bot offerings that created frustrating experiences for consumers and businesses alike, which in turn has eroded trust in automation. Many of these solutions have proven difficult to build and scale, and have been limited by stand-alone implementations that lacked the measurement, reporting and human oversight of conversational platforms such as the Conversational Cloud. In December 2018, LivePerson announced its patent-pending AI engine that is designed to overcome these shortcomings and help brands rapidly bring to market conversational AI that can scale to millions of interactions, while increasing customer satisfaction and conversion rates. Unlike alternative solutions designed solely for IT departments, LivePerson’s Conversational AI was built to be used by developers and contact center agents. By putting the power of conversational design and bot management in the hands of contact center agents, LivePerson’s Conversational AI gives brands the ability to leverage the employees closest to the customer, those who are most versed in the voice of the brand, and with the most expertise in how to craft successful outcomes for customer service and sales journeys. Some of the key innovations behind LivePerson’s Conversational AI include: • a holistic approach to scaling AI by combining consumer facing bots, agent facing bots, intelligent routing and real-time intent understanding, with an analytics dashboard that helps users focus on the intents that are impacting their business and prioritize which intents to automate next; • bot building software that is based on dialogue instead of workflow or code, so non-technical employees like contact center agents can design automations; • leveraging a data moat from hundreds of millions of conversations to feed the machine learning that rapidly and accurately detects consumer sentiment and intents in real-time. Customers of LivePerson can use intent understanding for advanced routing, next-best actions, and to fully contain conversations with automation; • the establishing of contact center agents as bot managers, ensuring that every conversation is safeguarded by a human and that agents are continuously training the AI to be smarter and drive more successful outcomes; • powerful Assist technology that multiplies the efficiency of agents by analyzing intents in real time and then suggesting next best actions, predefined content, and bots that can take over transactional work; • pre-built templates for target verticals that provide out of the box support for the top intents and back-end integrations; • the ability to bootstrap conversations with existing transcripts, reducing design effort and speeding time to market; • third-party AI NLU integration, so customers are not boxed into one vendor; and • AI analytics and reporting tailored to the Conversational Space, providing brands with immediate, actionable insights about their businesses and contact center operations. Our strategy is to continue to enhance the Conversational AI engine and related products, by leveraging our global R&D footprint and substantial library of mobile and online conversational data, with the aim of increasing agent efficiency, decreasing customer care costs, improving the customer experience and increasing customer lifetime value. 59 Sustain our leadership position by aligning brands to a vision that transforms how they communicate with consumers and delivers a superior return on brands’ investment. Over the past four years we have made good progress in developing our conversational AI platform and within the next 12 months, we expect to have a solution in place for our automations to self-heal, which is the ultimate goal of any AI platform. Our acquisitions of VoiceBase and Tenfold provide us with a mechanism for data capture in the voice channel. This additional data and the associated analytics and system integration give us an even greater ability to scale the usage of our platforms, by building on our strength in messaging. Brands must adapt their contact centers to an asynchronous messaging environment and leverage a combination of human agents, bots, and AI to achieve scale and efficiencies. When done correctly, the entire consumer lifecycle with a brand will be maintained within the Conversational Space, and traffic will steadily shift away from lower returning traditional voice calls, websites, emails, and apps to higher returning messaging endpoints. We believe that LivePerson is uniquely positioned to deliver this transformation due to our technology and expertise: • The Conversational Cloud, LivePerson’s enterprise-class, automation-first, cloud-based platform, was designed for AI-assisted and human-powered messaging in mobile and online channels. The platform offers best-in-class security and scalability, offers the broadest ecosystem of messaging endpoints, is designed for ease of use, and features an AI engine custom built for the Conversational Space, intent recognition, robust real-time reporting, role-based real-time analytics, predictive intelligence, and innovations in customer satisfaction and connection measurement. Additionally, the Conversational Cloud is an open platform with pre-built, enterprise-grade integrations into back-end systems as well as the ability to work across NLU providers. • The Company believes it has a data moat built on hundreds of millions of conversations across industries, geographies and use cases that is feeding the machine learning engines that power intent understanding. • The platform has expanded to power conversations across a broad spectrum of channels and use cases, from traditional sales and customer service, to marketing, social, email, advertising and brick and mortar. • LivePerson has deep domain expertise across verticals and messaging endpoints, a global footprint, referenceable enterprise brands and a team of technical, solutions and consulting professionals to assist customers along their transformational journeys. We are positioned as an authority in the Conversational Space. We have developed a Transformation Model that is introduced to existing and prospective customers to help guide them on their journeys from legacy and oftentimes inefficient legacy voice, email and chat solutions to modern conversational ones powered by messaging and AI. • The Company has developed Gainshare - a Transformation Model that is introduced to existing and prospective customers to help guide them on their journeys from legacy and oftentimes inefficient legacy voice, email, and chat solutions to modern conversational ones powered by messaging and AI. Gainshare is a fully managed solution where LivePerson not only provides the messaging and AI automation technology, but also the labor, automation, and end-to-end program management, leveraging the Company’s expertise with Conversational AI and messaging operations. Gainshare is an option for brands that want to accelerate a transformation to Conversational AI, or that want a worry-free solution where LivePerson manages the entire operation, from staffing to automation building and optimization, to conversation design and consumer experience. Gainshare pricing is bespoke, and is typically structured around a brand’s desired goals, whether driving incremental revenue or reducing operational costs. We believe that LivePerson’s differentiated approach to the Conversational Space, combined with our unique technology and expertise has established us as a market leader, with an ability to deliver superior returns on investment. LivePerson customers manage as many as 40 messaging conversations at a time, as compared to one at a time for a voice agent and two to four at a time for a good chat agent. Adding AI and bots provides even greater scale to the number of conversations managed. Our customers often see labor efficiency gains of at least two times that of voice agents, effectively cutting labor costs by at least 50%. Furthermore, our ability to deliver more convenient, personalized and content-rich conversations often drives increases in customer satisfaction of up to 20 percentage points and increases in sales conversions of up to 20%, while enhancing average order value, customer retention and loyalty. Strengthen our position in both existing and new industries. We plan to continue to develop our market position by increasing our customer base, and expanding within our installed base. We plan to continue to focus primarily on key target markets: consumer/retail, telecommunications, financial services, travel/hospitality, technology and automotive within both our enterprise and mid-market sectors, as well as the SMB sector. In 2019, we made strong inroads into new verticals with key wins in the airline, food service and healthcare industries. In 2020, we strengthened our presence in key markets including travel/hospitality and retail, and opened new verticals like healthcare and government. In 2021, we continued to grow in verticals such 60 as healthcare and financial services, and expanded into new industries. We are experimenting with new conversational businesses, including some that are in regulated industries, like online banking and healthcare. We are increasingly structuring our field organization to emphasize our domain expertise and strengthen customer relationships across target industries. Continue to build our international presence. We are focused on building our international presence and expanding our international revenue contribution, which accounted for 35% and 38% of total revenue in 2021 and 2020, respectively. We are generating positive results from our recent investments in the Asia Pacific, Europe, and Latin America regions. Expanding go-to-market capacity in international theaters is one of our key strategic focuses and also part of our motivation for our recent acquisition of e-bot7. Leverage our open architecture to support partners and developers. In addition to developing our own applications, we continue to cultivate a partner eco-system capable of offering additional applications and services to our customers. We integrate into third-party messaging endpoints including SMS, Facebook Messenger, Apple Business Chat, Google Rich Business Messenger, Line, WhatsApp, Alexa, Google Home, WeChat, Google Ad Lingo, Google Search, Google Maps, Instagram and Twitter, multiple IVR vendors, and dozens of branded apps. The Conversational Cloud integrates our proprietary messaging and Conversational AI with third-party bot offerings, empowering our customers to manage a mix of different bots, human agents and technologies from one control panel, thereby optimizing contact center efficiency. LivePerson’s proprietary and third-party AI/bots enable brands to partially or fully automate communications with their customers. In addition, we have opened up access to our platform and our products with more than 40 APIs and software development kits that allow customers and third parties to develop on top of our platform. Customers and partners can utilize these APIs to build our capabilities into their own applications and to enhance our applications with their services. In 2019, we launched LivePerson Functions, a serverless FaaS integration which enables brands to develop custom behaviors within LivePerson’s conversational platform to easily and rapidly tailor conversation flows to their specific needs. Expand sales partnerships to broaden our presence and accelerate sales cycles. We are focused on broadening our market reach and accelerating sales cycles by partnering with systems integrators, technology providers, business process outsourcers, value added resellers and other sales partners. We formalized a relationship with IBM Global Business Services in 2017 and Accenture in 2018. In 2019, we announced strategic partnerships with TTEC, a leading BPO focused on customer experience, and DMI, a digital transformation company, to redefine the customer experience with digital engagement, messaging, and AI-driven automation. In 2020, a digital services and consulting company joined LivePerson’s network with a first-of-its-kind 360 degree partnership focusing not only on capturing the global rising demand for conversational commerce and building a personalized experience for customers, but also driving the transformation for internal corporate messaging and the employee experience through Conversational AI. In 2021, we announced strategic integration partnerships with Google Cloud, Adobe and Medallia to help brands make contact center agents more efficient and effective, and empower and enrich the management of customer and employee experience through the power of AI. Our network also expanded with the Tech Mahindra partnership to help brands deliver personalized conversational experiences to consumers at scale. Maintain market leadership in technology and security expertise. As described above, we are devoting significant resources to creating new products and enabling technologies designed to accelerate innovation. We evaluate emerging technologies and industry standards and continually update our technology in order to retain our leadership position in each market we serve. We monitor legal and technological developments in the area of information security and confidentiality to ensure our policies and procedures meet or exceed the demands of the world’s largest and most demanding corporations. We believe that these efforts will allow us to effectively anticipate changing customer and consumer requirements in our rapidly evolving industry. Evaluate strategic alliances and acquisitions when appropriate. In July 2021, we acquired German conversational AI company e-bot7, which propels our self-service capabilities and continued growth across Europe. In October 2021, we acquired VoiceBase, a leader in real-time speech recognition and conversational analytics; and Tenfold, an advanced customer engagement platform for integrating communication systems with leading CRM and support services. Once fully integrated, we expect these acquisitions to allow LivePerson to deliver our AI and automation capabilities, insights, and integration as a single integrated product offering across all channels including voice and messaging. 61 Key Metrics Financial overview of the three and twelve months ended December 31, 2021 compared to the comparable periods in 2020 is as follows: • Revenue increased 21% and 28% to $123.8 million and $469.6 million in the three and twelve months ended December 31, 2021, respectively, from $102.1 million and $366.6 million in the comparable periods in 2020. • Revenue from our Business segment increased 21% and 28% to $114.1 million and $431.9 million in the three and twelve months ended December 31, 2021, respectively, from $94.1 million and $336.9 million in the comparable periods in 2020. • Gross profit margin decreased to 64% in the three months ended December 31, 2021 from 73% in the comparable period in 2020. Gross profit margin decreased to 67% in the twelve months ended December 31, 2021 from 71% in the comparable period in 2020. • Cost and expenses increased 55% and 23% to $169.1 million and $562.9 million in the three and twelve months ended December 31, 2021, respectively, from $108.8 million and $456.1 million in the comparable periods in 2020. • Net loss increased to $49.9 million and to $125.0 million in the three and twelve months ended December 31, 2021, respectively, from net loss of $13.3 million and $107.6 million for the three and twelve months ended December 31, 2020, respectively. • Trailing-twelve-month average revenue per enterprise and mid-market customer was approximately $610,000 in 2021, as compared to approximately $465,000 in 2020. • Revenue retention rate for enterprise and mid-market customers on Conversational Cloud exceeded the high end of our target range of 105% to 115% in 2021 and 2020. Adjusted EBITDA and Adjusted Operating Income (Loss) To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA and adjusted operating income (loss) which are non-GAAP financial measures. The tables below present a reconciliation of adjusted EBITDA and adjusted operating income (loss) to net loss, the most directly comparable GAAP financial measures. We have included adjusted EBITDA and adjusted operating income (loss) in this Annual Report on Form 10-K 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 operating income (loss) 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 operating income (loss) 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 impact of acquisition related costs; • adjusted EBITDA does not consider the impact of restructuring costs; • adjusted EBITDA does not consider the impact of other costs; • adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and 62 • 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 pre-tax GAAP loss and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated: Year Ended December 31, 2021 2020 2019 2018 2017 (In thousands) Reconciliation of Adjusted EBITDA: GAAP net loss $ (124,974) $ (107,594) $ (96,071) $ (25,032) $ (18,191) Amortization of purchased intangibles and finance leases 9,327 3,552 2,932 2,813 4,682 Stock-based compensation 69,656 65,946 44,105 14,841 8,944 Contingent earn-out adjustments 132 263 — — — Restructuring costs (1) 3,397 29,420 2,043 4,468 2,594 Depreciation 27,423 22,826 16,366 14,188 12,358 Other litigation and consulting costs (2) 6,665 5,375 7,974 5,928 7,648 (Benefit from) provision for income taxes (2,404) 2,466 2,845 858 501 Acquisition costs 5,808 — — 555 — Interest expense (income), net 37,406 14,334 7,407 (22) (26) Other (income) expense, net (3) (3,294) 1,343 (1,213) 493 (110) Adjusted EBITDA (loss) $ 29,142 $ 37,931 $ (13,612) $ 19,090 $ 18,400 —————————————— (1) Includes severance costs and other compensation related costs of $2.7 million and lease restructuring costs of $0.7 million for the year ended December 31, 2021. Includes lease restructuring costs of $24.3 million and severance and other compensation related costs of $5.1 million for the year ended December 31, 2020. Includes severance and associated costs of $2.0 million for the year ended December 31, 2019. Includes severance costs of $4.5 million for the year ended December 31, 2018. Includes wind down costs of legacy platform of $1.9 million and severance costs of $0.7 million for the year ended December 31, 2017. The restructuring costs relate to resource reallocation for the Company’s platform transformation. (2) Includes litigation costs of $4.1 million, employee benefit costs of $0.5 million, consulting costs of $2.4 million, and a reversal of reserve for sales and use tax liability of $0.3 million for the year ended December 31, 2021. Includes other litigation costs of $5.4 million for the year ended December 31, 2020. Includes other litigation costs of $4.4 million relating to the Company’s intellectual property lawsuit against [24]7 Customer, Inc., consulting costs of $3.2 million, and fair value earn-out adjustment of $0.3 million for the year ended December 31, 2019. Includes litigation costs of $4.1 million, consulting costs of $1.3 million, executive recruitment costs of $0.3 million, and executive relocation costs of $0.2 million for the year ended December 31, 2018. Includes litigation costs of $6.2 million, executive one-time compensation payment of $1.0 million, and executive separation cost of $0.5 million for the year ended December 31, 2017. Other litigation costs relate to lease restructuring costs, along with other general legal matters. (3) Includes $3.5 million of other income related to the settlement of leases for the year ended December 31, 2021. The remaining amount of other (income) expense is attributable to currency rate fluctuations. Our use of adjusted operating income (loss) 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 is a non-cash charge, the assets being amortized may have to be replaced in the future, and adjusted operating income (loss) does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; • adjusted operating income (loss) does not consider the impact of acquisition related costs; • adjusted operating income (loss) does not consider the impact of restructuring costs; • adjusted operating income (loss) does not consider the impact of other costs; and • other companies, including companies in our industry, may calculate adjusted operating income (loss) differently, which reduces its usefulness as a comparative measure. 63 Because of these limitations, you should consider adjusted operating income (loss) alongside other financial performance measures, including various pre-tax GAAP loss and our other GAAP results. The following table presents a reconciliation of adjusted operating income (loss) for each of the periods indicated: Year Ended December 31, 2021 2020 2019 2018 2017 (In thousands) Reconciliation of Adjusted Operating Income (Loss) Loss before provision for income taxes $ (127,378) $ (105,128) $ (93,226) $ (24,174) $ (17,690) Amortization of purchased intangibles and finance leases 9,327 3,552 2,932 2,813 4,682 Stock-based compensation 69,656 65,946 44,105 14,841 8,944 Restructuring costs (1) 3,397 29,420 2,043 4,468 2,594 Other litigation and consulting costs (2) 6,665 5,375 7,974 5,928 7,648 Contingent earn-out adjustments 132 263 — — — Acquisition costs 5,808 — — 555 — Interest expense (income), net 37,406 14,334 7,407 (22) (26) Other expense (income), net (3) (3,294) 1,343 (1,213) 493 (110) Adjusted operating income (loss) $ 1,719 $ 15,105 $ (29,978) $ 4,902 $ 6,042 —————————————— (1) Includes severance costs and other compensation related costs of $2.7 million and lease restructuring costs of $0.7 million for the year ended December 31, 2021. Includes lease restructuring costs of $24.3 million and severance and other compensation related costs of $5.1 million for the year ended December 31, 2020. Includes severance and associated costs of $2.0 million for the year ended December 31, 2019. Includes severance costs of $4.5 million for the year ended December 31, 2018. Includes wind down costs of legacy platform of $1.9 million and severance costs of $0.7 million for the year ended December 31, 2017. The restructuring costs relate to resource reallocation for the Company’s platform transformation. (2) Includes litigation costs of $4.1 million, employee benefit costs of $0.5 million, consulting costs of $2.4 million, and a reversal of reserve for sales and use tax liability of $0.3 million for the year ended December 31, 2021. Includes other litigation costs of $5.4 million for the year ended December 31, 2020. Includes other litigation costs of $4.4 million relating to the Company’s intellectual property lawsuit against [24]7 Customer, Inc., consulting costs of $3.2 million, and fair value earn-out adjustment of $0.3 million for the year ended December 31, 2019. Includes litigation costs of $4.1 million, consulting costs of $1.3 million, executive recruitment costs of $0.3 million, and executive relocation costs of $0.2 million for the year ended December 31, 2018. Includes litigation costs of $6.2 million, executive one-time compensation payment of $1.0 million, and executive separation cost of $0.5 million for the year ended December 31, 2017. Other litigation costs relate to lease restructuring costs, along with other general legal matters. (3) Includes $3.5 million of other income related to the settlement of leases for the year ended December 31, 2021. The remaining amount of other (income) expense is attributable to currency rate fluctuations. . Critical Accounting Policies and Estimates Our consolidated financial statements 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We believe that the assumptions and estimates associated with revenue recognition, depreciation, stock-based compensation, accounts receivable, the valuation of goodwill and intangible assets, income taxes and legal contingencies have the greatest potential impact on our consolidated financial statements. 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. For further information on all of our significant accounting policies, see Note 1 – Description of Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. Revenue Recognition The majority of our revenue is generated from hosted service revenues, which is inclusive of our platform usage pricing model, and related professional services from the sale of our services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. 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 64 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. We determine revenue recognition through the following steps: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, we satisfy a performance obligation. Total revenue of $469.6 million, $366.6 million, and $291.6 million was recognized during the years ended December 31, 2021, December 31, 2020, and December 31, 2019, respectively. We defer all incremental commission costs to obtain the contract (contract acquisition costs). The contract acquisition costs consist of prepaid sales commissions and have balances as of December 31, 2021 and December 31, 2020 of $40.7 million and $41.0 million, respectively. We amortize these costs over the related period of benefit using the expected life of the customer contract, which we determine to be three to five years, consistent with the transfer to the customer of the services to which the asset relates. We classify contract acquisition costs as long-term unless they have an original amortization period of one year or less. Hosted Services - Business Revenue Hosted services - Business revenue is reported at the amount that reflects the ultimate consideration expected to be received and primarily consist of fees that provide customers access to the Conversational Cloud. We have determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. We recognize this revenue over time on a ratable basis over the contract term, beginning on the date that access to the Conversational Cloud platform is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by our performance. Subscription contracts are generally one year or longer in length, billed monthly, quarterly or annually in advance. Additionally, 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 its 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 Gainshare arrangements, we act as a principal in a transaction if we control the specified goods or services before they are transferred to the customer. Revenue attributable to our monthly hosted Business services accounted for 78% of total revenue for the years ended December 31, 2021 and 2020, and 77% of total revenue for the year ended December 31, 2019. Professional Services Revenue Professional Services revenue primarily consists of fees for deployment and optimization services, as well as training delivered on an on-demand basis which is deemed to represent a distinct stand-ready performance obligation and is recognized at a point in time. Professional Services revenue is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for such services. Control for the majority of our Professional Services contracts passes over time to the customer and is recognized ratably over the contracted period, as the passage of time is deemed to be the most faithful depiction of the transfer of control. For certain deployment services, which are not deemed to represent a distinct performance obligation, revenue will be recognized in the same manner as the fee for access to the Conversational Cloud platform, and as such will be recognized on a straight-line basis over the contract term. For services billed on a fixed price basis, revenue is recognized over time based on the proportion performed using time and materials as the measure of progress toward complete satisfaction of the performance obligation. Our Professional Services contracts are generally one year or longer in length, billed monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements. Revenue attributable to Professional Services accounted for 14% of total revenue for the years ended December 31, 2021, 2020, and 2019. 65 Contracts with Multiple Performance Obligations Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the cloud applications sold, and the number and types of users within our contracts. Hosted Services- Consumer Revenue For revenue from our Consumer segment generated from online transactions between Experts and Users, revenue is recognized at an amount net of Expert fees primarily because the Expert is the primary obligor. We do not act as a principal in a transaction since we do not control the specified goods or services before they are transferred to the customer. Additionally, we perform as an agent without any risk of loss for collection, and we 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 at the point in time when the transaction is complete and no significant performance obligations remain. Revenue from our Consumer segment accounted for approximately 8% of total revenue for each of the years ended December 31, 2021, 2020, and 2019, respectively. Remaining Performance Obligation As of December 31, 2021, the aggregate amount of the total transaction price allocated in contracts with original duration of one year or greater to the remaining performance obligations was $362.8 million. Approximately 94% of our remaining performance obligations is expected to be recognized during the next 24 months, with the balance recognized thereafter. The aggregate balance of unsatisfied performance obligations represents contracted revenue that has not yet been recognized, and does not include contract amounts that are cancellable by the customer, amounts associated with optional renewal periods, and any amounts related to performance obligations, which are billed and recognized as they are delivered. We have elected the optional exemption, which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of less than one year. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligations pursuant to ASC 606. Deferred Revenues We record deferred revenues when cash payments are received or due in advance of our performance. The increase of $9.6 million in the deferred revenue balance for the year ended December 31, 2021 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, partially offset by approximately $75.5 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2020. Costs and Expenses Our cost of revenue consists of: • compensation costs relating to employees who provide customer support and implementation services to our customers; • outside labor provider costs; • 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. 66 Our sales and marketing expenses consist of compensation and related expenses for sales personnel and marketing personnel, online marketing, allocated occupancy costs and related overhead, advertising, sales commissions, public relations, promotional materials, travel expenses, global customer summits and trade show exhibit expenses. Our general and administrative expenses consist primarily of compensation and related expenses for executive, accounting, legal, information technology and human resources personnel, allocated occupancy costs and related overhead, litigation, professional fees, provision for doubtful accounts and other general corporate expenses. 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. During 2021, we increased our allowance for doubtful accounts from approximately $5.3 million to approximately $6.3 million. During 2020, we increased our allowance for doubtful accounts from approximately $3.1 million to approximately $5.3 million. We perform a detailed assessment of the collectability of our accounts receivable. In estimating the allowance for doubtful accounts, management considers, among other factors, the aging of the accounts receivable, historical write-offs and the creditworthiness of each customer. A large proportion of receivables are due from larger corporate customers that typically have longer payment cycles. Non-Cash Compensation Expense The net non-cash compensation amounts are as follows: Year Ended December 31, 2021 2020 2019 (In thousands) Stock-based compensation expense $ 69,656 $ 65,946 $ 44,105 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. Our forfeiture rate assumptions, which estimate the share-based awards that will ultimately vest, requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period of change and could be materially different from share-based compensation expense recorded in prior periods. For the year ended December 31, 2021, we accrued approximately $18.4 million for cash awards related to bonus to be settled in shares of our stock and recorded a corresponding expense, which is included as a component of stock-based compensation expense in the accompanying consolidated financial statements. For the year ended December 31, 2020, we accrued approximately $20.4 million and $8.9 million for cash awards related to bonus and for the achievement of long term incentive plan awards, respectively, to be settled in shares of our stock and recorded a corresponding expense, which is included as a component of stock-based compensation expense in the accompanying consolidated financial statements. As of December 31, 2021, there was approximately $44.8 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted average period of approximately 2.7 years. As of December 31, 2021, there was approximately $141.9 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over the remaining weighted average period of approximately 3.2 years. 67 Accounts Receivable 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, if we experience a significant write-off from one of our large customers, it could have a material adverse impact on our consolidated financial statements. No single customer accounted for or exceeded 10% of our total revenue in 2021, 2020 and 2019. During 2021, we increased our allowance for doubtful accounts from approximately $5.3 million to approximately $6.3 million. A large proportion of receivables are due from larger corporate customers that typically have longer payment cycles. Accounts receivable is presented net of an allowance for doubtful accounts and sales reserve of $6.3 million and $4.1 million as of December 31, 2021, respectively, and $5.3 million and $3.4 million as of December 31, 2020, respectively. An allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Judgment is required in the estimation of the allowance and we evaluate the collectability of our accounts receivable based on a combination of factors. If we become aware of a customer’s inability to meet its financial obligations, a specific allowance is recorded to reduce the net receivable to the amount reasonably believed to be collectible from the customer. For all other customers, we use an aging schedule and recognize allowances for doubtful accounts based on the creditworthiness of the debtor, the age and status of outstanding receivables, the current business environment and our historical collection experience adjusted for current expectations for the customer or industry. Accounts receivable are written off against the allowance for uncollectible accounts when we determine amounts are no longer collectible. Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. During 2021, we added $198.2 million to goodwill with the acquisition of e-bot7, VoiceBase, Inc., and Tenfold. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we operates as two reporting units and have selected September 30 as the date to perform our annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from our business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. We have the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, we may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment tests. The impairment test involves comparing the fair value of the reporting unit to its carrying value, including goodwill. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. The impairment is limited to the carrying amount of goodwill. No goodwill impairment charges have been recorded for any period presented. Impairment of Long-Lived Assets The carrying amounts of our long-lived assets, including property and equipment, lease right-of-use assets, capitalized internal-use software, costs to obtain customer contracts, and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful lives are shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future undiscounted net cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life. There was a loss on disposal of approximately $5.1 million in October 2020. We recognized accelerated depreciation of fixed assets that were determined to no longer be of future economic benefit to us based on the decision to vacate the leased office space. 68 Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company includes interest accrued on the underpayment of income taxes in interest expense and penalties, if any, related to unrecognized tax benefits in general and administrative expenses. The Company recorded a valuation allowance against its U.S. and Germany deferred tax assets as it considered its cumulative loss in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated on a jurisdiction by jurisdiction basis, we believe that the deferred tax assets related to LivePerson Australia, LivePerson UK, Kasamba Israel, LivePerson Japan and LivePerson LTD Israel are more likely than not to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and one-time items. During the year ended December 31, 2021, there was an increase in the valuation recorded of $51.7 million. Legal Contingencies We are subject to legal proceedings and litigation arising in the ordinary course of business. Periodically, we evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential liability and the amount of accruals recorded are based only on the information available at the time. As additional information becomes available, we reassess the potential liability related to the legal proceeding or litigation, and may revise our estimates. Any revisions could have a material effect on our results of operations. See Note 15 – Legal Matters in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for additional information on our legal proceedings and litigation. Recently Issued Accounting Standards See Note 1 – Description of Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for a full description of recently issued accounting standards. Recently Adopted Accounting Pronouncements See Note 1 – Description of Business and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for a full description of recently adopted accounting pronouncements. Results of Operations We are organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage the Conversational Cloud sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between Experts and Users seeking information and knowledge for a fee via mobile and online messaging. 69 Revenue The following tables set forth our results of operations for the years presented and as a percentage of our revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Revenue by Segment: Business $ 431,929 $ 336,856 28 % $ 336,856 $ 267,129 26 % Consumer 37,695 29,764 27 % 29,764 24,480 22 % Total $ 469,624 $ 366,620 28 % $ 366,620 $ 291,609 26 % Business revenue increased by 28% to $431.9 million for the year ended December 31, 2021, from $336.9 million for the year ended December 31, 2020. This increase in Business revenue is driven primarily by increases in hosted services of approximately $77.6 million and an increase in Professional Services of approximately $17.4 million. Included in hosted services is an increase in revenue that is variable based on interactions and usage of approximately $37.6 million. Business revenue increased by 26% to $336.9 million for the year ended December 31, 2020, from $267.1 million for the year ended December 31, 2019. This increase in Business revenue is primarily attributable to an increase in hosted services of approximately $60.9 million and an increase in Professional Services of approximately $8.8 million. Included in hosted services is an increase in revenue that is variable based on interactions and usage of approximately $30.1 million. The increase in Business revenue was driven in nearly equal parts by existing and new customers as we generated greater demand for its Conversational Commerce software and Gainshare solutions. In the wake of the COVID-19 pandemic, leading brands are turning to our AI-powered messaging to overcome a capacity gap created by voice call agent work-from-home measures and increased demand for digital engagement as consumers practice social distancing. We are powering Conversational AI, automation and messaging strategies across a growing number of use cases from care and sales, to marketing, social, conversational advertising, and brick and mortar. As adoption increases, we are seeing higher revenue per customer. However, in the fourth quarter of 2021, we observed that pandemic-specific shopping trends began to normalize within the Gainshare portfolio, including the type and frequency of purchases and a more balanced interest in physical, in-store experiences. Our ARPU for our enterprise and mid-market customers was approximately $610,000 in 2021, as compared to approximately $465,000 in 2020. Similarly, we are seeing strong revenue retention rates. Revenue retention rate for enterprise and mid-market customers on Conversational Cloud exceeded the high end of our target range of 105% to 115% in 2021 and 2020. Consumer revenue increased by 26.6% to $37.7 million for the year ended December 31, 2021, from $29.8 million for the year ended December 31, 2020. This improvement was driven by an increasingly effective user value and higher demand by consumers to engage with experts and advisors through conversational messaging channels. Consumer revenue increased by 22% to $29.8 million for the year ended December 31, 2020, from $24.5 million for the year ended December 31, 2019. This increase is primarily attributable to an increase in chat minutes and price per minute. Cost of Revenue - Business Cost of revenue - business consists of compensation costs relating to employees who provide customer service to our customers, compensation costs relating to our network support staff, outside labor provider costs, the cost of supporting our server and network infrastructure, and allocated occupancy costs and related overhead. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Cost of revenue - business $ 149,983 $ 99,394 51 % $ 99,394 $ 74,460 33 % Percentage of total revenue 32 % 27 % 27 % 26 % Headcount (at period end) 280 245 14 % 245 257 (5) % 70 Cost of revenue increased by 51% to $150.0 million for the year ended December 31, 2021, from $99.4 million for the year ended December 31, 2020. This increase in expense is primarily attributable to an increase in business services and outsourced subcontracted labor of approximately $30.5 million driven by Health and Gainshare services, which power Conversational Commerce programs on behalf of customers. We also recognized an increase in expenses for backup server facilities of approximately $11.2 million, in salary and employee related expenses of approximately $3.0 million, and in amortization expense of approximately $5.4 million. Cost of revenue increased by 33% to $99.4 million for the year ended December 31, 2020, from $74.5 million for the year ended December 31, 2019. This increase in expense is primarily attributable to an increase in business services and outsourced subcontracted labor of approximately $17.0 million as the Company saw a significant increase in demand for its Gainshare services, which power Conversational Commerce programs on behalf of customers. The Company also recognized an increase in salary and employee related expenses of approximately $5.0 million, in expenses for backup server facilities of approximately $1.6 million, in depreciation expense of approximately $1.2 million, and in amortization expense of approximately $0.8 million. Cost of Revenue - Consumer Cost of revenue - consumer 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. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Cost of revenue - consumer $ 6,897 $ 6,874 — % $ 6,874 $ 4,418 56 % Percentage of total revenue 1 % 2 % 2 % 2 % Headcount (at period end) 15 21 (29) % 21 17 24 % Cost of revenue - consumer remained flat at $6.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. Cost of revenue - consumer increased by 56% to $6.9 million for the year ended December 31, 2020, from $4.4 million for the year ended December 31, 2019. This increase in expense is primarily related to an increase in outsourcing subcontracted labor of approximately $1.3 million is due to the investment in technology infrastructure. We increased outside labor to accelerate a technology change which assisted us in the rollout of HeyExpert, a leading platform for online expert guidance. In addition, there was an increase in salary and employee related expenses of approximately $0.4 million, in credit card processing fees of approximately $0.3 million, in depreciation expense of approximately $0.3 million, and backup server facilities of approximately $0.1 million. Sales and Marketing - Business Our Sales and marketing - business expenses consist of compensation and related expenses for sales and marketing personnel, as well as advertising, marketing events, public relations, trade show exhibit expenses and allocated occupancy costs and related overhead. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Sales and marketing - business $ 139,866 $ 128,752 9 % $ 128,752 $ 140,880 (9) % Percentage of total revenue 30 % 35 % 35 % 48 % Headcount (at period end) 460 309 49 % 309 449 (31) % Sales and marketing - business expenses increased by 9% to $139.9 million for the year ended December 31, 2021, from $128.8 million for the year ended December 31, 2020. This is primarily related to an increase in salary and employee related expenses of approximately $7.7 million, an increase in marketing events, advertising, and public relations of approximately 71 $6.6 million, and an increase in depreciation expense of approximately $0.2 million, partially offset by a decrease in business services and outsourcing subcontracted labor of approximately $3.4 million. We have adjusted our marketing and hiring efforts to account for the impact of the COVID-19 pandemic. In particular, we have adapted our marketing strategy to include targeted digital experiences that emphasize the unique positioning of our messaging and AI offerings to help brands succeed in this new environment. Our marketing message has shifted to include business continuity and virtualization of the contact center in addition to business improvement. Sales and marketing - business expenses decreased by 9% to $128.8 million for the year ended December 31, 2020, from $140.9 million for the year ended December 31, 2019. This is primarily related to a decrease in salary and employee related expenses of approximately $7.5 million, a decrease in marketing events, advertising, public relations, and trade show exhibit expenses of approximately $3.3 million, and a decrease in business services and outsourcing subcontracted labor of approximately $2.6 million. These decreases were offset in part by an increase in backup server facilities of approximately $0.7 million and in depreciation expense of approximately $0.6 million. Sales and Marketing - Consumer Our Sales and marketing - consumer expenses consist of compensation and related expenses for marketing personnel, as well as online promotion, public relations, and allocated occupancy costs and related overhead. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Sales and marketing - consumer $ 25,555 $ 21,021 22 % $ 21,021 $ 15,934 32 % Percentage of total revenue 5 % 6 % 6 % 5 % Headcount (at period end) 17 19 (11) % 19 18 6 % Sales and marketing - consumer expenses increased by 22% to $25.6 million for the year ended December 31, 2021, from $21.0 million for the year ended December 31, 2020. This increase is primarily attributable to an increase in marketing expense of approximately $4.2 million, an increase in outsourcing subcontracted labor of approximately $0.2 million, and an increase in salary and employee related expenses of approximately $0.2 million. Sales and marketing - consumers expenses increased by 32% to $21.0 million for the year ended December 31, 2020, from $15.9 million for the year ended December 31, 2019. This increase is primarily attributable to an increase in marketing expense of approximately $4.8 million, in outsourcing subcontracted labor of approximately $0.2 million, and credit card processing fees of approximately $0.1 million. General and Administrative Our general and administrative expenses consist of compensation and related expenses for executive, accounting, legal, human resources and administrative personnel, professional fees and other general corporate expenses. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) General and administrative $ 76,757 $ 60,557 27 % $ 60,557 $ 56,967 6 % Percentage of total revenue 16 % 17 % 17 % 20 % Headcount (at period end) 166 140 19 % 140 149 (6) % General and administrative expenses increased by 27% to $76.8 million for the year ended December 31, 2021, from $60.6 million for the year ended December 31, 2020. This is primarily related to an increase in in business services and outsourced labor of approximately $7.1 million, an increase in acquisition related costs of $5.8 million, an increase in one time charges of $3.9 million, an increase in salary and employee related expenses of approximately $0.2 million, and an increase in amortization of approximately $0.4 million. These increases were offset in part by a decrease in facilities of approximately $1.1 million and depreciation expense of approximately $0.1 million. 72 General and administrative expenses increased by 6% to $60.6 million for the year ended December 31, 2020, from $57.0 million for the year ended December 31, 2019. This is primarily related to an increase in salary and employee related expenses of approximately $4.3 million and in business services and outsourced labor of approximately $2.6 million. These increases were offset in part by a decrease in facilities of approximately $2.7 million and depreciation expense of approximately $0.7 million. Product Development Our product development expenses consist 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. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Product development $ 158,390 $ 108,414 46 % $ 108,414 $ 82,145 32 % Percentage of total revenue 34 % 30 % 30 % 28 % Headcount (at period end) 602 467 29 % 467 451 4 % Product development costs increased by 46% to $158.4 million for the year ended December 31, 2021, from $108.4 million for the year ended December 31, 2020. This is primarily related to an increase in salaries and employee related expenses of approximately $34.4 million, in business services and outsourcing subcontracted labor of approximately $7.6 million, in backup server facilities of approximately $3.5 million related to costs supporting our backup servers and in depreciation expense of approximately $4.4 million. We continued to make investments in public cloud migration, and in enhancing and expanding new features of the Conversational Cloud, including Voice. Also, we continued to invest in bringing more data scientists and machine learning engineers to focus on Conversational Al. Product development costs increased by 32% to $108.4 million for the year ended December 31, 2020, from $82.1 million for the year ended December 31, 2019. This is primarily related to an increase in salaries and employee related expenses of approximately $11.9 million, in business services and outsourcing subcontracted labor of approximately $8.6 million, in backup server facilities of approximately $1.1 million related to costs supporting our backup servers and in depreciation expense of approximately $5.0 million. We made investments in public cloud migration, and in enhancing and expanding new features of the Conversational Cloud. Also, we invested in bringing more data scientists and machine learning engineers to focus on Conversational Al. We continue to invest in new product development efforts to expand the capability of the Conversational Cloud. In accordance with ASC 350-40, “Internal-Use Software”, as new projects are initiated that provide functionality to the Conversational Cloud platform, the associated development and employee costs will be capitalized. Upon completion, the project costs will be depreciated over five years. During the years ended December 31, 2021, 2020, and 2019, $36.1 million, $33.9 million, and $29.1 million was capitalized, respectively. Restructuring Costs Restructuring costs consist of reprioritizing and reallocating resources to focus on areas believed to show high growth potential. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Restructuring Costs $ 3,397 $ 29,420 (89) % $ 29,420 $ 2,043 1,340 % Percentage of total revenue 1 % 8 % 8 % 1 % Restructuring costs decreased by 89% to $3.4 million for the year ended December 31, 2021, from $29.4 million for the year ended December 31, 2020. This decrease is attributable primarily as a result of a decrease in restructuring costs related to lease abandonment recorded in 2020. 73 Restructuring costs increased by 1,340% to $29.4 million for the year ended December 31, 2020, from $2.0 million for the year ended December 31, 2019. This increase is attributable to an increase in restructuring costs related to lease abandonment of approximately $24.1 million, along with severance and other compensation costs of approximately $5.3 million. In response to the COVID-19 pandemic, the Company went through a re-evaluation of our real estate needs. In connection with this re-evaluation, and the success we have had working remotely, it was decided in July 2020 that we would significantly reduce the real estate space we lease. This decision resulted in the significant reduction of the real estate space we lease and the removal of the associated right of use assets (“ROU assets”). Furthermore, this resulted in various one-time expenses in connection with the abandonment of the majority of our leased facilities. The lease restructuring costs noted above are a result of this transition to an employee-centric workforce model that does not rely on traditional offices. During the second quarter of 2021, the Company decided to reoccupy some of its leased space to provide its employees with the option of working in an office space environment if they choose to do so. Amortization of Purchased Intangibles Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Amortization of purchased intangibles $ 2,045 $ 1,639 25 % $ 1,639 $ 1,794 (9) % Percentage of total revenue — % — % — % 1 % Amortization expense for purchased intangibles increased by 25% to $2.0 million for the year ended December 31, 2021, from $1.6 million for the year ended December 31, 2020, and decreased by 9% to $1.6 million for the year ended December 31, 2020, from $1.8 million for the year ended December 31, 2019. The year over year variance is primarily attributable to amortization of patents and customer relationships as well as the intangible assets acquired in the three acquisitions that occurred in 2021. Additional amortization expense in the amount of $7.3 million, $1.9 million, and $1.1 million for the years ended December 31, 2021, 2020, and 2019, respectively, is included in cost of revenue. The increase from 2020 to 2021 was due to the three acquisitions that occurred in 2021. See Note 9 – Acquisitions in the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for a full description of the acquisitions. Other Expense, net Other expense, net consists of interest income on cash and cash equivalents, investment income, and financial (expense) income which is a result of currency rate fluctuations associated with exchange rate movement of the U.S. dollar against the New Israeli Shekel, British Pound, Euro, Australian Dollar, and Japanese Yen. Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Interest expense $ (37,406) $ (14,334) 161 % $ (14,334) $ (7,407) 94 % Other income (expense) 3,294 (1,343) 345 % (1,343) 1,213 (211) % Other expense, net $ (34,112) $ (15,677) 118 % $ (15,677) $ (6,194) 153 % Other expense, net increased by $18.4 million to an expense of $34.1 million for the year ended December 31, 2021, from an expense of $15.7 million for the year ended December 31, 2020. This increase was primarily attributable to an increase in interest expense attributable to the 2024 Notes and the 2026 Notes, partially offset by interest income on cash and cash equivalents and financial income which is attributable to currency rate fluctuations. Other expense, net increased by $9.5 million to an expense of $15.7 million for the year ended December 31, 2020, from an expense of $6.2 million for the year ended December 31, 2019. This increase was primarily attributable to an increase in interest expense attributable to the 2024 Notes, partially offset by interest income on cash and cash equivalents and financial income which is attributable to currency rate fluctuations. 74 (Benefit From) Provision For Income Taxes Year Ended December 31, Year Ended December 31, 2021 2020 % Change 2020 2019 % Change (Dollars in thousands) Provision for (benefit from) income taxes $ (2,404) $ 2,466 (198) % $ 2,466 $ 2,845 (13) % We had a tax benefit from income taxes of $2.4 million for the year ended December 31, 2021 and a provision for income taxes of $2.5 million for the year ended December 31, 2020. Our consolidated effective tax rate was impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. During 2021, the Company recorded a benefit of $3.2 million for a release of valuation allowance on certain LivePerson, Inc. net operating losses in connection with the acquisitions of Tenfold and VoiceBase. The decrease in tax expense is primarily due to these factors. Income tax expense decreased by 13% to $2.5 million for the year ended December 31, 2020, from $2.8 million for the year ended December 31, 2019. Our consolidated effective tax rate was impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. During 2020, we recognized a benefit of $0.6 million due to net operating loss and research and development credits carryback resulting from the CARES Act. The decrease in tax expense is primarily due to these factors. Net Loss We had a net loss of $125.0 million for the year ended December 31, 2021 compared to a net loss of $107.6 million for the year ended December 31, 2020. Revenue increased approximately $103.0 million, operating expenses increased by approximately $106.8 million, the benefit from income taxes increased approximately $4.9 million, and other expense, net increased by $18.4 million, contributing to a net increase in net loss of approximately $17.4 million. We had a net loss of $107.6 million for the year ended December 31, 2020 compared to a net loss of $96.1 million for the year ended December 31, 2019. Revenue increased approximately $75.0 million, operating expenses increased by approximately $77.4 million, the provision for income taxes decreased approximately $0.4 million, and other expense, net increased by approximately $9.5 million, contributing to a net increase in net loss of approximately $11.5 million. Liquidity and Capital Resources Year Ended December 31, 2021 2020 2019 (In thousands) Consolidated Statements of Cash Flows Data: Cash flows provided by (used in) operating activities $ 3,247 $ 33,605 $ (59,158) Cash flows used in investing activities (140,249) (43,476) (48,506) Cash flows provided by financing activities 11,843 483,843 217,851 As of December 31, 2021, we had approximately $521.8 million in cash and cash equivalents, a decrease of approximately $130.6 million from December 31, 2020. The decrease is primarily attributable to cash used in investing activities related to the acquisitions of e-bot7, VoiceBase, and Tenfold partially offset by proceeds from issuance of common stock in connection with the exercise of options and the ESPP. Net cash provided by operating activities was $3.2 million in the year ended December 31, 2021. Our net loss was $125.0 million, which includes the effect of non-cash expenses related to stock-based compensation, amortization of purchased intangibles and finance leases, depreciation, provision for doubtful accounts, and gain on termination of lease, as well as increases in accrued expenses and deferred revenue. This was partially offset by increases in accounts receivable, prepaid expenses and decrease in operating lease liability. Net cash provided by operating activities was $33.6 million in the year ended December 31, 2020. Our net loss was $107.6 million, which includes the effect of non-cash expenses related to stock-based compensation, amortization of purchased intangibles and finance leases, depreciation, and provision for doubtful accounts, as well as increases in operating lease liability due to the transition to an employee centric model under which employees will 75 work remotely, and increase in accrued expenses and decrease in accounts receivable. This was partially offset by increases in prepaid expenses and other current assets and decrease in deferred revenue. Net cash used in investing activities was $140.2 million in the year ended December 31, 2021 was driven primarily by the acquisition costs related to goodwill for the purchase of e-bot7, VoiceBase, and Tenfold, the purchase of fixed assets for our co-location facilities, capitalization of internally developed software, and the repayment of the indebtedness acquired with e-bot7, VoiceBase, and Tenfold. Net cash used in investing activities was $43.5 million in the year ended December 31, 2020 due primarily to the purchase of fixed assets for our co-location facilities and capitalization of internally developed software. Net cash provided by financing activities was $11.8 million in the year ended December 31, 2021 due primarily to the proceeds from issuance of common stock in connection with the exercise of stock options by employees partially offset by the finance lease payment. Net cash provided by financing activities was $483.8 million in the year ended December 31, 2020 due primarily to the proceeds from issuance of the 2026 Notes and proceeds from issuance of common stock in connection with the exercise of stock options by employees. This was partially offset by purchases of capped calls, debt issuance costs, and payment of our finance lease. The net proceeds of the 2026 Notes was approximately $506.6 million, after deducting initial purchaser debt issuance costs paid or payable by us, from issuance of the 2026 Notes, as described in Note 8 – Convertible Senior Notes and Capped Call Transactions of the Notes to the Consolidated Financial Statements. We have incurred significant expenses to develop our technology and services, to hire employees in our customer service, sales, marketing and administration departments, and for the amortization of purchased intangible assets, as well as non-cash compensation costs. Historically, we have incurred net losses and negative cash flows for various quarterly and annual periods since our inception, including during numerous quarters and annual periods in the past several years. As of December 31, 2021, we had an accumulated deficit of approximately $516.9 million. In response to the COVID-19 pandemic, we had undertaken a re-evaluation of our real estate needs. In connection with this re-evaluation, and the success we have had working remotely for the past several months, we significantly reduced the real estate space we lease. This resulted in various one-time cash expenses in connection with early termination of some of our leases. During the second quarter of 2021, we decided to reoccupy some of our leased space to provide our employees with the option of working in an office space environment if they choose to do so as well as provide some remote shared space working locations globally. Our principal sources of liquidity are the net proceeds from the issuance of our convertible senior notes, after deducting purchaser discounts and debt issuance costs paid by us, issuance of common stock in connection with the exercise of options, and payments received from customers using our products. We anticipate that our current cash and cash equivalents will be sufficient to satisfy our working capital and capital requirements for at least the next 12 months. However, we cannot assure you that we will not require additional funds prior to such time, and we would then seek to sell additional equity or debt securities through public financings, or seek alternative sources of financing. We cannot assure you that additional funding will be available on favorable terms, when needed, if at all. If we are unable to obtain any necessary additional financing, we may be required to further reduce the scope of our planned sales and marketing and product development efforts, which could materially adversely affect our financial condition and operating results. In addition, we may require additional funds in order to fund more rapid expansion, to develop new or enhanced services or products, or to invest in or acquire complementary businesses, technologies, services or products. Capital Expenditures Total capital expenditures in 2021 were approximately $45.7 million, primarily related to software capitalization and to the continued expansion of our co-location facilities. Our total capital expenditures are not currently expected to exceed $49.5 million in 2022. We anticipate that our current cash and cash equivalents and cash from operations will be sufficient to fund these capital expenditures. Indemnifications We enter into service and license agreements in the ordinary course of business. Pursuant to some of these agreements, we agree to indemnify certain customers from and against certain types of claims and losses suffered or incurred by them as a result of using our products. 76 We also have agreements whereby our executive officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Currently, we have no liabilities recorded for these agreements as of December 31, 2021. Off Balance Sheet Arrangements We do not engage in off-balance sheet financing arrangements.