What happened

LivePerson (LPSN 2.36%) investors had a great morning on Tuesday. The cloud software specialist's stock had jumped 17% by 12:30 p.m. ET, compared to a 1.2% spike in the S&P 500. That surge just erased a small portion of recent losses for the stock, though, which remains down by over 60% so far in 2022.

It was powered by a well-received earnings report.

So what

LivePerson said sales of its artificial intelligence (AI) communications platform rose 10% in the selling period that ended in late September, easily beating management's early August forecast. The software-as-a-service specialist made progress at building up its client base, expanding the size of its renewed contracts, and adding value to the platform. Average annual contract size rose 18% to $675,000.

LivePerson remains unprofitable, and in fact operating loss more than doubled year over year to $49 million. Yet the company said its restructuring process is moving it toward positive free cash flow by next year. "We're making durable changes to our operating model," CFO John Collins said in a press release.

Now what

The short-term outlook is brightening, too. LivePerson is now expecting sales to grow by between 10% and 11% in 2022, up from the prior forecast of between 8% and 10%. Yes, investors had been enjoying much faster sales gains as recently as the first quarter. But it is still good news that LivePerson isn't seeing a further deterioration in demand as IT budgets become more stressed.

Management's focus now is on adding value to the conversational AI platform so that more large enterprises consider it a necessary cost-saving expense rather than a discretionary purchase.

Progress here, combined with a push toward more high-value contracts, could allow LivePerson to achieve positive cash flow soon, with sustainable earnings growth likely after that. In the meantime, look for continued volatility in this small-cap stock.